SB358: Bill Text

LRB-2874/1

KSH&JJL:skg:kaf

1995 - 1996 LEGISLATURE

1995 Senate BILL 358

September 28, 1995 - Introduced by Senators George and Huelsman, cosponsored by Representatives Hubler and Prosser. Referred to Committee on Education and Financial Institutions.

SB358,2,10 An Act to repeal 404.101, 404.104 (1) (i), 404.104 (2) (f), 404.104 (3) (c), (e), (i) and (j), 404.105 (6), 404.109, 404.202 (1) (d), 404.211, 404.212 (1m), 404.213 (1) (c), 404.213 (1a) and 404.303 (1) (d); to renumber the unnumbered subchapter title preceding 404.101, 404.104 (1) (k), the unnumbered subchapter title preceding 404.201 and 404.202 (1) (e); to renumber and amend 401.207, 404.104 (1) (g), (h) and (j), 404.104 (2) (a) to (e), 404.104 (3) (b), (d), (f), (g) and (h), 404.105 (1) to (5), 404.106 to 404.108, 404.208, 404.209, 404.210, 404.212 (title), (1) and (2) to (5), 404.213 (title) and (1) (intro.), (a), (b) and (d), 404.213 (2) to (4), (4m) and (5), 404.214, the unnumbered subchapter title preceding 404.301, 404.302, 404.303 (1) (e), the unnumbered subchapter title preceding 404.401, 404.401 (2), 404.402, 404.406 (2) and (4) and the unnumbered subchapter title preceding 404.501; to amend 401.201 (20), 401.201 (24), 401.201 (43), 401.201 (44) (intro.), 402.103 (3) (e), 402.511 (3), 404.102, 404.103, 404.104 (1) (intro.) and (a) to (f), 404.104 (3) (a), 404.104 (4), 404.105 (intro.), 404.201, 404.202 (title) and (1) (intro.) and (a) to (c), 404.202 (2) and (3), 404.203, 404.204, 404.206, 404.301, 404.302 (title), 404.303 (title) and (1) (intro.) and (a) to (c), 404.303 (2), 404.401 (1), 404.402 (title), 404.403 (1) and (3), 404.405, 404.407, 404.501, 404.502, 404.503, 404.504, 409.203 (1) (intro.), 409.302 (1) (f), 409.312 (1), 410.105 (3) (b), 410.105 (3) (c) and 706.07 (2) (e); to repeal and recreate chapter 403, 404.205, 404.207, 404.403 (2), 404.406 (1), 404.406 (3) and (5) and 405.103 (3) (a); and to create 401.207 (2), 404.104 (1) (g) and (h), 404.104 (2) (a), (b) and (h), 404.104 (3) (b), (c), (e), (g), (i), (k) to (m) and (p) to (s), 404.105 (1), 404.106, 404.110, 404.111, 404.208, 404.209, 404.213, 404.214 (2), 404.215 (2), 404.302 (2), 404.303 (1) (e), 404.401 (2) and (3), 404.402 (1) and (3) and 404.406 (2) of the statutes; relating to: revising the negotiable instruments chapter and the bank deposits and collection chapter of the uniform commercial code.

Analysis by the Legislative Reference Bureau

This bill repeals and recreates the chapter in Wisconsin's uniform commercial code (UCC) that governs negotiable instruments. The bill also makes certain conforming and miscellaneous changes to the chapter in the uniform commercial code governing bank deposits and collections. The bill is patterned after 2 uniform acts: UCC Revised Article 3 - Negotiable Instruments and UCC Article 4 Conforming and Miscellaneous Amendments. These acts were prepared under the joint sponsorship of the National Conference of Commissioners on Uniform State Laws and the American Law Institute. The revised articles 3 and 4 were approved and promulgated by those organizations in 1990.

Article 3 of the UCC governs negotiable instruments. A negotiable instrument is an unconditional promise or order to pay a fixed amount of money, that meets certain specified criteria. If the instrument is an unconditional promise to pay it is called a "note" and if it is an unconditional order to pay it is a called a "draft". A common type of draft is the bank check. In order to be a negotiable instrument, the draft or note must be payable to the bearer (where no specific payee is indicated) or to "order" (where a specific payee is indicated). A negotiable instrument is an instrument that a person, called a "holder in due course", who is not one of the persons who created the instrument, may "negotiate" or transfer to another person without difficulty and who may enforce the instrument according to its terms. Article 4 of the UCC governs bank deposits and collections. Because many instruments, such as a bank check, are governed by provisions in both articles 3 and 4, a number of conforming changes were made to article 4 to reflect the revisions made by article 3.

The changes made by this bill include the following:

1. Scope. The bill makes a number of changes to the scope of articles 3 and 4. Under current law, article 3 applies to instruments that have certain characteristics of negotiable instruments, even if the instruments are not made out to "order" or "bearer". Although these instruments are covered by article 3, no holder of these instruments may be a "holder in due course". Under the bill, the only type of instrument that is not made out to "order" or "bearer" that is covered under article 3 is a check. Under current law, in order for an instrument to be negotiable it must be for a sum certain. This bill eliminates this requirement and, as a result, permits variable interest bearing notes to be covered under article 3. The scope of article 4 is also amended by the bill. Under current law, a bank is defined a any person engaged in the business of banking. This bill amends the definition of bank in article 4 to specifically include "a savings bank, savings and loan association, credit union, or trust company."

2. Definition of ordinary care. This bill creates a definition of "ordinary care" for purposes of articles 3 and 4. Under the definition, "ordinary care" means, in the case of a person engaged in business, observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged. In the case of a bank that takes an instrument for processing, for collection or for payment by automated means, the definition provides that "reasonable commercial standards" do not require the bank to examine the instrument if the failure to examine does not violate the bank's prescribed procedures and the bank's procedures do not vary unreasonably from general banking usage.

3. Contribution rules. Under current law, if more than one person signs an instrument in the same capacity, they are jointly and severally liable in that capacity. This bill creates a right of contribution for parties who satisfy an instrument against co-parties signing the instrument in the same capacity. If a party is insolvent, contribution is divided among the solvent co-parties.

4. Statute of limitations. Although current article 3 contains provisions for determining when a cause of action arises or accrues under the article, article 3 does not contain specific statute of limitation provisions. This bill creates specific statute of limitations provisions under both article 3 and article 4. Although the bill provides for different statutes of limitations for different situations, generally, under article 3 as amended by the bill, an action to enforce the obligation of a party to pay a note payable at a definite time must be commenced within 6 years of the due date. Generally, under article 3 as amended by the bill, an action to enforce the obligation of a party to an unaccepted draft to pay the draft must be commenced within 3 years after the dishonor of the draft, or 10 years after the date of the draft, whichever period expires first. The bill provides that an action to enforce an obligation, duty or right arising under article 4 must be commenced within 3 years after the cause of action accrues.

5. Restrictive endorsements. In order to negotiate an instrument that is made out "to order", such as a personal check, an endorsement is required. A restrictive endorsement is an endorsement that seeks to impose a condition on the instrument's negotiation. Under current article 3, most endorsements that seek to prohibit further transfer or negotiation are treated as ineffective, although certain restrictive endorsements are given effect. Under the bill, conditional language does not make an endorsement "restrictive" under article 3 and an endorsement conditioning the right to receive payment does not affect the right of the endorsee to enforce the instrument. Under both current law and the bill, certain restrictive endorsements like "for deposit only" and "pay any bank" are honored, except for intermediary banks, acting as conduits to the depositary bank. Under the bill, nondepositary payor banks, as well as intermediary banks, are expressly exempted from liability with respect to these restrictive endorsements.

6. Holder in due course requirements. A "holder in due course" of a draft or note is entitled to payment even when the relationship between the original parties to the instrument would preclude their enforcement of the instrument. A person becomes a "holder in due course" by taking the instrument in good faith from a prior holder for value without knowledge of any defects in the instrument, of any claims against the instrument, or of any defenses that may be asserted against its payment. This bill adds certain additional requirements in order for a person to become a "holder in due course". Under the bill, a person cannot become a "holder in due course" if there is apparent evidence of forgery or alteration. In addition, this bill adds to article 3 standards addressing the issue of when the taker of an instrument has notice of breach of a fiduciary duty and thus notice of a claim to the instrument or its proceeds.

7. Signing negotiable instruments. This bill modifies certain provisions dealing with the liability of the parties to a negotiable instrument. Under current article 4, no person is liable on an instrument unless his or her signature is on it, relieving an undisclosed principle from liability. This bill repeals this provision and recognizes that a person may be liable on an instrument, even without signing the note, if the person is represented by an agent who signed the instrument. The bill further provides that, with respect to corporate instruments signed by agents, a representative may show that the parties did not intend individual liability (except against a "holder in due course"), providing some protection to the agent that signs a corporate check even when the check does not show the agent's status as such. The bill provides that the signature of an organization is unauthorized if more than one signature is required and this requirement is not met.

8. Dishonoring negotiable instruments. Subject to certain exceptions (such as when an endorsement states that it is "without recourse"), if an instrument is dishonored, an endorser of the instrument is obligated to pay the amount due on the instrument. Under current law, this endorser liability is discharged after a reasonable time for presentment, presumed to be 7 days. This bill modifies this provision to provide for a 30-day period and by making the period absolute rather than presumptive. This bill also modifies provisions relating to the wrongful dishonor of cashiers checks. Under the bill, if an "obligated bank" (the acceptor of a certified check or the issuer of a cashier's check or teller's check bought from the issuer) wrongfully refuses to pay a cashiers check or certified check, the person asserting the right to enforce the check is entitled to compensation for expenses and loss of interest resulting from the nonpayment and may recover consequential damages if the bank refuses to pay after receiving notice of particular circumstances giving rise to the damages.

9. Standard for good faith. This bill modifies the definition of good faith under articles 3 and 4 to include a requirement to observe "reasonable commercial standards of fair dealing".

10. Accord and satisfactions. This bill clarifies rules regarding the effect of communications accompanying a check to the effect that the check is offered as full payment for the claim and that obtaining payment of the check is an agreement by the claimant to a settlement of the dispute for the amount tendered. Generally, the bill follows the general common law rule. Except in certain specified situations, a claim is discharged if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction for the claim. Under the bill, the claim is not, however, discharged, if the claimant is an organization and proves that, within a reasonable time before tendering the instrument, the claimant sent a conspicuous statement to the person against whom the claim is asserted that communications concerning disputed debts are to be sent to a designated person, office or place, and that the instrument or accompanying communication was not received by that designated person, office or place. The bill also provides that a claim is not discharged if, within 90 days after payment of the instrument, the claimant tenders repayment of the amount of the instrument to the person against whom the claim is asserted.

11. Truncation agreements. This bill authorizes "truncation agreements", a concept not included in the existing article 4. A truncation agreement between a bank and a customer allows a bank to present an item for payment by "transmission of an image of an item or information describing the item (called a presentment notice) rather than by presenting the item itself. A related change made by the bill recognizes the practice of a bank providing a customer with an itemized statement of items credited to and debited against the customer's account in lieu of providing the actual item to the customer with the statement. Current law ties the customer's responsibility to report altered or forged items upon receipt of the items with the customer's statement. This bill allows a sufficiently detailed statement to constitute notification of altered or forged items and ties the customer's responsibility to report such items to the receipt of the statement, rather than the item. The bill requires a bank that does not provide the items to retain the items or legible copies for at least 7 years and must supply at least legible copies at the customer's request.

12. Direct suits for conversion of a negotiable instrument. This bill amends provisions in current article 3 in order to allow a person whose endorsement is forged to sue the depository bank directly. Under current law, the owner of the instrument is generally required to bring multiple actions against the various payor banks and to require those banks to assert warranty rights against the depository bank.

13. Warranties. Under current article 4, there are a number of warranties that customers and collecting banks make to a payor of an item and to a subsequent transferee or collecting bank. In addition to making some modifications to these warranties, this bill adds "encoding" and "retention" warranties. The encoding warranty is a warranty from a person who encodes information with respect to an item that the information is correctly encoded. The retention warranty refers to items that are presented pursuant to a truncation agreement and retain the original instrument while transmitting an image of it as presentation for payment.

For further information see the state and local fiscal estimate, which will be printed as an appendix to this bill.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

SB358, s. 1 Section 1. 401.201 (20) of the statutes is amended to read:

SB358,6,8 401.201 (20) "Holder", with respect to a negotiable instrument, means a the person who is in possession of a document of title or an instrument or a certificated investment security drawn, issued or endorsed to him or her or to his or her order or to bearer or in blank if the instrument is payable to bearer or, in the case of an instrument payable to an identified person, if the identified person is in possession. "Holder", with respect to a document of title, means the person in possession if the goods are deliverable to bearer or to the order of the person in possession.

SB358, s. 2 Section 2. 401.201 (24) of the statutes is amended to read:

SB358,6,13 401.201 (24) "Money" means a medium of exchange authorized or adopted by a domestic or foreign government as a part of its currency and includes a monetary unit of account established by an intergovernmental organization or by agreement between 2 or more nations.

SB358, s. 3 Section 3. 401.201 (43) of the statutes is amended to read:

SB358,6,16 401.201 (43) "Unauthorized" signature or indorsement means one made without actual, implied or apparent authority and includes a forgery.

SB358, s. 4 Section 4. 401.201 (44) (intro.) of the statutes is amended to read:

SB358,7,3 401.201 (44) (intro.) "Value". Except as otherwise provided with respect to negotiable instruments and bank collections (ss. 403.303, 404.208 and 404.209 404.210 and 404.211) a person gives "value" for rights if the person acquires them:

SB358, s. 5 Section 5. 401.207 of the statutes is renumbered 401.207 (1) and amended to read:

SB358,7,9 401.207 (1) A party who, with explicit reservation of rights, performs or promises performance or assents to performance in a manner demanded or offered by the other party does not thereby prejudice the rights reserved. Such words as "without prejudice", "under protest" or the like are sufficient.

SB358, s. 6 Section 6. 401.207 (2) of the statutes is created to read:

SB358,7,11 401.207 (2) Subsection (1) does not apply to an accord and satisfaction.

SB358, s. 7 Section 7. 402.103 (3) (e) of the statutes is amended to read:

SB358,7,13 402.103 (3) (e) "Dishonor" — s. 403.507 403.502.

SB358, s. 8 Section 8. 402.511 (3) of the statutes is amended to read:

SB358,7,17 402.511 (3) Subject to s. 403.802 403.310 on the effect of an instrument on an obligation, payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment.

SB358, s. 9 Section 9. Chapter 403 of the statutes is repealed and recreated to read:

SB358,7,21 Chapter 403 UNIFORM COMMERCIAL CODE — NEGOTIABLE INSTRUMENTS

SB358,7,24 SUBCHAPTER I GENERAL PROVISIONS AND DEFINITIONS

SB358,8,3 403.102 Subject matter. (1) This chapter applies to negotiable instruments. It does not apply to money, to payment orders governed by ch. 410 or to securities governed by ch. 408.

SB358,8,5 (2) If there is a conflict between this chapter and ch. 404 or 409, chs. 404 and 409 govern.

SB358,8,8 (3) Regulations of the board of governors of the federal reserve system and operating circulars of the federal reserve banks supersede any inconsistent provision of this chapter to the extent of the inconsistency.

SB358,8,9 403.103 Definitions. (1) In this chapter: