PRINTER'S NO. 983
No. 871 Session of 1991
INTRODUCED BY LLOYD, CALTAGIRONE, McNALLY, DeWEESE, PICCOLA,
HAGARTY, FARGO, STISH, CAPPABIANCA, THOMAS, PESCI, DALEY,
HAYDEN, MELIO, KUKOVICH, SAURMAN, HECKLER AND G. SNYDER,
APRIL 2, 1991
REFERRED TO COMMITTEE ON BUSINESS AND COMMERCE, APRIL 2, 1991
AN ACT
1 Amending Title 13 (Commercial Code) of the Pennsylvania
2 Consolidated Statutes, conforming the text of the title to
3 the current official text of the Uniform Commercial Code
4 relating to leases, negotiable instruments, bank deposits and
5 collections, funds transfers and uncertificated securities;
6 repealing provisions relating to bulk transfers; and making
7 editorial changes.
8 The General Assembly of the Commonwealth of Pennsylvania
9 hereby enacts as follows:
10 Section 1. This act shall be known and may be cited as the
11 Uniform Commercial Code Modernization Act.
12 Section 2. Sections 1101, 1105(b), 1201, 1207, 2101,
13 2103(c), 2403(d) and 2511(c) of Title 13 of the Pennsylvania
14 Consolidated Statutes are amended to read:
15 § 1101. Short title of title.
16 This title shall be known and may be cited as the ["]Uniform
17 Commercial Code.["]
18 § 1105. Territorial application of title; power of parties to
19 choose applicable law.
1 * * *
2 (b) Limitations on power of parties to choose applicable
3 law.--Where one of the following provisions of this title
4 specifies the applicable law, that provision governs and a
5 contrary agreement is effective only to the extent permitted by
6 the law (including the conflict of laws rules) so specified:
7 Section 2402 (relating to rights of creditors of seller
8 against sold goods).
9 Sections 2A105 (relating to territorial application of
10 division to goods covered by certificate of title) and 2A106
11 (relating to limitation on power of parties to consumer lease
12 to choose applicable law and judicial forum).
13 Section 4102 (relating to applicability of division on
14 bank deposits and collections).
15 [Section 6102 (relating to bulk transfers subject to
16 division on bulk transfers).]
17 Section 4A507 (relating to choice of law).
18 Section 8106 (relating to applicability of division on
19 investment securities).
20 Section 9103 (relating to perfection provisions of
21 division on secured transactions).
22 § 1201. General definitions.
23 Subject to additional definitions contained in the subsequent
24 provisions of this title which are applicable to specific
25 provisions of this title, the following words and phrases when
26 used in this title shall have, unless the context clearly
27 indicates otherwise, the meanings given to them in this section:
28 "Action." In the sense of a judicial proceeding includes
29 recoupment, counterclaim, set-off, suit in equity and any other
30 proceedings in which rights are determined.
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1 "Aggrieved party." A party entitled to resort to a remedy.
2 "Agreement." The bargain of the parties in fact as found in
3 their language or by implication from other circumstances
4 including course of dealing or usage of trade or course of
5 performance as provided in this title (sections 1205 and 2208).
6 Whether an agreement has legal consequences is determined by the
7 provisions of this title, if applicable; otherwise by the law of
8 contracts (section 1103 (relating to supplementary general
9 principles of law applicable)). (Compare definition of
10 "contract".)
11 "Airbill." A document serving for air transportation as a
12 bill of lading does for marine or rail transportation, and
13 includes an air consignment note or air waybill.
14 "Bank." Any person engaged in the business of banking.
15 "Bearer." The person in possession of an instrument,
16 document of title, or certificated security payable to bearer or
17 indorsed in blank.
18 "Bill of lading." A document evidencing the receipt of goods
19 for shipment issued by a person engaged in the business of
20 transporting or forwarding goods, and includes an airbill.
21 "Branch." Includes a separately incorporated foreign branch
22 of a bank.
23 "Burden of establishing a fact." The burden of persuading
24 the triers of fact that the existence of the fact is more
25 probable than its nonexistence.
26 "Buyer in ordinary course of business." A person who in good
27 faith and without knowledge that the sale to him is in violation
28 of the ownership rights or security interest of a third party in
29 the goods buys in ordinary course from a person in the business
30 of selling goods of that kind but does not include a pawnbroker.
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1 All persons who sell minerals or the like (including oil and
2 gas) at wellhead or minehead shall be deemed to be persons in
3 the business of selling goods of that kind.
4 "Buying." Buying may be for cash or by exchange of other
5 property or on secured or unsecured credit and includes
6 receiving goods or documents of title under a preexisting
7 contract for sale but does not include a transfer in bulk or as
8 security for or in total or partial satisfaction of a money
9 debt.
10 "Conspicuous." A term or clause is conspicuous when it is so
11 written that a reasonable person against whom it is to operate
12 ought to have noticed it.
13 A printed heading in capitals (as: NONNEGOTIABLE BILL OF
14 LADING) is conspicuous.
15 Language in the body of a form is conspicuous if it is in
16 larger or other contrasting type or color. But in a telegram
17 any stated term is conspicuous.
18 Whether a term or clause is conspicuous or not is for
19 decision by the court.
20 "Contract." The total legal obligation which results from
21 the agreement of the parties as affected by this title and any
22 other applicable rules of law. (Compare definition of
23 "agreement".)
24 "Creditor." Includes:
25 a general creditor;
26 a secured creditor;
27 a lien creditor; and
28 any representative of creditors, including an assignee
29 for the benefit of creditors, a trustee in bankruptcy, a
30 receiver in equity and an executor or administrator of an
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1 insolvent debtor's or assignor's estate.
2 "Defendant." Includes a person in the position of defendant
3 in a cross-action or counterclaim.
4 "Delivery." With respect to instruments, documents of title,
5 chattel paper or certificated securities, means voluntary
6 transfer of possession.
7 "Discover." See definition of "notice."
8 "Document of title." Includes:
9 a bill of lading;
10 a dock warrant;
11 a dock receipt;
12 a warehouse receipt or order for the delivery of goods;
13 and
14 any other document which in the regular course of
15 business or financing is treated as adequately evidencing
16 that the person in possession of it is entitled to receive,
17 hold and dispose of the document and the goods it covers.
18 To be a document of title a document must purport to be
19 issued by or addressed to a bailee and purport to cover goods in
20 the possession of the bailee which are either identified or are
21 fungible portions of an identified mass.
22 "Fault." Wrongful act, omission or breach.
23 "Fungible." With respect to goods or securities, means goods
24 or securities of which any unit is, by nature or usage of trade,
25 the equivalent of any other like unit. Goods which are not
26 fungible shall be deemed fungible for the purpose of this title
27 to the extent that under a particular agreement or document
28 unlike units are treated as equivalents.
29 "Genuine." Free of forgery or counterfeiting.
30 "Good faith." Honesty in fact in the conduct or transaction
19910H0871B0983 - 5 -
1 concerned.
2 "Holder." [A person who is in possession of a document of
3 title or an instrument or an investment security drawn, issued
4 or indorsed to him or to his order or to bearer or in blank.]
5 (1) With respect to a negotiable instrument, the person
6 in possession if the instrument is payable to bearer or, in
7 the case of an instrument payable to an identified person, if
8 the identified person is in possession.
9 (2) With respect to a document of title, the person in
10 possession if the goods are deliverable to bearer or to the
11 order of the person in possession.
12 "Honor." To pay or to accept and pay, or where a credit so
13 engages to purchase or discount a draft complying with the terms
14 of the credit.
15 "Insolvency proceedings." Includes any assignment for the
16 benefit of creditors or other proceedings intended to liquidate
17 or rehabilitate the estate of the person involved.
18 "Insolvent." A person is insolvent who either has ceased to
19 pay his debts in the ordinary course of business or cannot pay
20 his debts as they become due or is insolvent within the meaning
21 of the Federal bankruptcy law.
22 "Knows" or "knowledge." See definition of "notice."
23 "Learn." See definition of "notice."
24 "Money." A medium of exchange authorized or adopted by a
25 domestic or foreign government [as a part of its currency.] and
26 includes a monetary unit of account established by an
27 intergovernmental organization or by agreement between two or
28 more nations.
29 "Notice." A person has "notice" of a fact when:
30 (1) he has actual knowledge of it;
19910H0871B0983 - 6 -
1 (2) he has received a notice or notification of it; or
2 (3) from all the facts and circumstances known to him at
3 the time in question he has reason to know that it exists.
4 A person "knows" or has "knowledge" of a fact when he has
5 actual knowledge of it. "Discover" or "learn" or a word or
6 phrase of similar import refers to knowledge rather than to
7 reason to know. The time and circumstances under which a notice
8 or notification may cease to be effective are not determined by
9 this title.
10 A person "notifies" or "gives" a notice or notification to
11 another by taking such steps as may be reasonably required to
12 inform the other in ordinary course whether or not such other
13 actually comes to know of it. A person "receives" a notice or
14 notification when:
15 (1) it comes to his attention; or
16 (2) it is duly delivered at the place of business
17 through which the contract was made or at any other place
18 held out by him as the place for receipt of such
19 communications.
20 Notice, knowledge or a notice or notification received by an
21 organization is effective for a particular transaction from the
22 time when it is brought to the attention of the individual
23 conducting that transaction, and in any event from the time when
24 it would have been brought to his attention if the organization
25 had exercised due diligence. An organization exercises due
26 diligence if it maintains reasonable routines for communicating
27 significant information to the person conducting the transaction
28 and there is reasonable compliance with the routines. Due
29 diligence does not require an individual acting for the
30 organization to communicate information unless such
19910H0871B0983 - 7 -
1 communication is part of his regular duties or unless he has
2 reason to know of the transaction and that the transaction would
3 be materially affected by the information.
4 "Organization." Includes a corporation, government or
5 governmental subdivision or agency, business trust, estate,
6 trust, partnership or association, two or more persons having a
7 joint or common interest, or any other legal or commercial
8 entity.
9 "Party." As distinct from "third party," means a person who
10 has engaged in a transaction or made an agreement within this
11 title.
12 "Person." Includes an individual or an organization. See
13 section 1102 (relating to purposes; rules of construction;
14 variation by agreement).
15 "Presumption" or "presumed." Either means that the trier of
16 fact must find the existence of the fact presumed unless and
17 until evidence is introduced which would support a finding of
18 its nonexistence.
19 "Purchase." Includes taking by sale, discount, negotiation,
20 mortgage, pledge, lien, issue or reissue, gift or any other
21 voluntary transaction creating an interest in property.
22 "Purchaser." A person who takes by purchase.
23 "Remedy." Any remedial right to which an aggrieved party is
24 entitled with or without resort to a tribunal.
25 "Representative." Includes an agent, an officer of a
26 corporation or association, and a trustee, executor or
27 administrator of an estate, or any other person empowered to act
28 for another.
29 "Rights." Includes remedies.
30 "Security interest."
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1 [A security interest means an interest in personal
2 property or fixtures which secures payment or performance of
3 an obligation.
4 The retention or reservation of title by a seller of
5 goods notwithstanding shipment or delivery to the buyer
6 (section 2401) is limited in effect to a reservation of a
7 "security interest."
8 The term also includes any interest of a buyer of
9 accounts or chattel paper which is subject to Division 9
10 (relating to secured transactions).
11 The special property interest of a buyer of goods on
12 identification of such goods to a contract for sale under
13 section 2401 (relating to passing of title; reservation for
14 security) is not a "security interest," but a buyer may also
15 acquire a "security interest" by complying with Division 9.
16 Unless a lease or consignment is intended as security,
17 reservation of title thereunder is not a "security interest"
18 but a consignment is in any event subject to the provisions
19 on consignment sales (section 2326).
20 Whether a lease is intended as security is to be
21 determined by the facts of each case; however:
22 (1) the inclusion of an option to purchase does not
23 of itself make the lease one intended for security; and
24 (2) an agreement that upon compliance with the terms
25 of the lease the lessee shall become or has the option to
26 become the owner of the property for no additional
27 consideration or for a nominal consideration does make
28 the lease one intended for security.]
29 (1) General definition.--A security interest means an
30 interest in personal property or fixtures which secures
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1 payment or performance of an obligation.
2 (2) Retention or reservation of title to delivered
3 goods.--The retention or reservation of title by a seller of
4 goods notwithstanding shipment or delivery to the buyer
5 (section 2401) is limited in effect to a reservation of a
6 "security interest."
7 (3) Buyers of accounts or chattel paper.--The term
8 "security interest" also includes any interest of a buyer of
9 accounts or chattel paper which is subject to Division 9
10 (relating to secured transactions).
11 (4) Buyer's interest in identified goods.--The special
12 property interest of a buyer of goods on identification of
13 those goods to a contract for sale under section 2401
14 (relating to passing of title; reservation for security;
15 limited application of section) is not a "security interest,"
16 but a buyer may also acquire a "security interest" by
17 complying with Division 9.
18 (5) Consignments.--Unless a consignment is intended as
19 security, reservation of title thereunder is not a "security
20 interest," but a consignment in any event is subject to the
21 provisions on consignment sales (section 2326).
22 (6) Determination of lease or security interest.--
23 Whether a transaction creates a lease or security interest is
24 determined by the facts of each case; however:
25 (i) A transaction creates a security interest if the
26 consideration the lessee is to pay the lessor for the
27 right to possession and use of the goods is an obligation
28 for the term of the lease not subject to termination by
29 the lessee and:
30 (A) the original term of the lease is equal to
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1 or greater than the remaining economic life of the
2 goods;
3 (B) the lessee is bound to renew the lease for
4 the remaining economic life of the goods or is bound
5 to become the owner of the goods;
6 (C) the lessee has an option to renew the lease
7 for the remaining economic life of the goods for no
8 additional consideration or nominal additional
9 consideration upon compliance with the lease
10 agreement; or
11 (D) the lessee has an option to become the owner
12 of the goods for no additional consideration or
13 nominal additional consideration upon compliance with
14 the lease agreement.
15 (ii) A transaction does not create a security
16 interest merely because it provides that:
17 (A) the present value of the consideration the
18 lessee is obligated to pay the lessor for the right
19 to possession and use of the goods is substantially
20 equal to or is greater than the fair market value of
21 the goods at the time the lease is entered into;
22 (B) the lessee assumes risk of loss of the
23 goods, or agrees to pay taxes, insurance, filing,
24 recording or registration fees, or service or
25 maintenance costs with respect to the goods;
26 (C) the lessee has an option to renew the lease
27 or to become the owner of the goods;
28 (D) the lessee has an option to renew the lease
29 for a fixed rent that is equal to or greater than the
30 reasonably predictable fair market rent for the use
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1 of the goods for the term of the renewal at the time
2 the option is to be performed; or
3 (E) the lessee has an option to become the owner
4 of the goods for a fixed price that is equal to or
5 greater than the reasonably predictable fair market
6 value of the goods at the time the option is to be
7 performed.
8 (iii) For purposes of determining whether the
9 transaction is a lease or a security interest:
10 (A) Additional consideration is not nominal if:
11 (I) when the option to renew the lease is
12 granted to the lessee, the rent is stated to be
13 the fair market rent for the use of the goods for
14 the term of the renewal determined at the time
15 the option is to be performed; or
16 (II) when the option to become the owner of
17 the goods is granted to the lessee, the price is
18 stated to be the fair market value of the goods
19 determined at the time the option is to be
20 performed.
21 Additional consideration is nominal if it is less
22 than the lessee's reasonably predictable cost of
23 performing under the lease agreement if the option is
24 not exercised.
25 (B) "Reasonably predictable" and "remaining
26 economic life of the goods" are to be determined with
27 reference to the facts and circumstances at the time
28 the transaction is entered into.
29 (C) "Present value" means the amount as of a
30 date certain of one or more sums payable in the
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1 future, discounted to the date certain. The discount
2 is determined by the interest rate specified by the
3 parties if the rate is not manifestly unreasonable at
4 the time the transaction is entered into; otherwise,
5 the discount is determined by a commercially
6 reasonable rate that takes into account the facts and
7 circumstances of each case at the time the
8 transaction was entered into.
9 "Send." In connection with any writing or notice, means to
10 deposit in the mail or deliver for transmission by any other
11 usual means of communication with postage or cost of
12 transmission provided for and properly addressed and in the case
13 of an instrument to an address specified thereon or otherwise
14 agreed, or if there be none to any address reasonable under the
15 circumstances. The receipt of any writing or notice within the
16 time at which it would have arrived if properly sent has the
17 effect of a proper sending.
18 "Signed." Includes any symbol executed or adopted by a party
19 with present intention to authenticate a writing.
20 "Surety." Includes guarantor.
21 "Telegram." Includes a message transmitted by radio,
22 teletype, cable, any mechanical method of transmission, or the
23 like.
24 "Term." That portion of an agreement which relates to a
25 particular matter.
26 "Unauthorized signature [or indorsement]." A signature [or
27 indorsement] made without actual, implied or apparent authority
28 and includes a forgery.
29 "Value." Except as otherwise provided with respect to
30 negotiable instruments (section 3303) and bank collections
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1 [(sections 4208 and 4209)] (sections 4210 and 4211), a person
2 gives "value" for rights if he acquires them:
3 (1) in return for a binding commitment to extend credit
4 or for the extension of immediately available credit whether
5 or not drawn upon and whether or not a chargeback is provided
6 for in the event of difficulties in collection;
7 (2) as security for or in total or partial satisfaction
8 of a preexisting claim;
9 (3) by accepting delivery pursuant to a preexisting
10 contract for purchase; or
11 (4) generally, in return for any consideration
12 sufficient to support a simple contract.
13 "Warehouse receipt." A receipt issued by a person engaged in
14 the business of storing goods for hire.
15 "Written" or "writing." Includes printing, typewriting or
16 any other intentional reduction to tangible form.
17 § 1207. Performance or acceptance under reservation of rights.
18 (a) General rule.--A party who with explicit reservation of
19 rights performs or promises performance or assents to
20 performance in a manner demanded or offered by the other party
21 does not thereby prejudice the rights reserved. Such words as
22 "without prejudice," "under protest" or the like are sufficient.
23 (b) Exception.--Subsection (a) does not apply to an accord
24 and satisfaction.
25 § 2101. Short title of division.
26 This division shall be known and may be cited as the
27 ["]Uniform Commercial Code[--], Article 2, Sales.["]
28 § 2103. Definitions and index of definitions.
29 * * *
30 (c) Index of definitions in other divisions.--The following
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1 definitions in other divisions apply to this division:
2 "Check." Section 3104.
3 "Consignee." Section 7102.
4 "Consignor." Section 7102.
5 "Consumer goods." Section 9109.
6 "Dishonor." [Section 3507] Section 3502.
7 "Draft." Section 3104.
8 * * *
9 § 2403. Power to transfer; good faith purchase of goods;
10 "entrusting."
11 * * *
12 (d) Rights of other purchasers and lien creditors.--The
13 rights of other purchasers of goods and of lien creditors are
14 governed by [Division 6 (relating to bulk transfers),] Division
15 7 (relating to documents of title) and Division 9 (relating to
16 secured transactions).
17 § 2511. Tender of payment by buyer; payment by check.
18 * * *
19 (c) Payment by check.--Subject to the provisions of this
20 title on the effect of an instrument on an obligation [(section
21 3802)] (section 3310), payment by check is conditional and is
22 defeated as between the parties by dishonor of the check on due
23 presentment.
24 Section 3. Title 13 is amended by adding a division to read:
25 DIVISION 2A
26 LEASES
27 Chapter
28 2A1. General Provisions
29 2A2. Formation and Construction of Lease Contract
30 2A3. Effect of Lease Contract
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1 2A4. Performance of Lease Contract: Repudiated, Substituted
2 and Excused
3 2A5. Default
4 CHAPTER 2A1
5 GENERAL PROVISIONS
6 Sec.
7 2A101. Short title of division.
8 2A102. Scope.
9 2A103. Definitions and index of definitions.
10 2A104. Leases subject to other law.
11 2A105. Territorial application of division to goods covered by
12 certificate of title.
13 2A106. Limitation on power of parties to consumer lease to
14 choose applicable law and judicial forum.
15 2A107. Waiver or renunciation of claim or right after default.
16 2A108. Unconscionability.
17 2A109. Option to accelerate at will.
18 § 2A101. Short title of division.
19 This division shall be known and may be cited as the Uniform
20 Commercial Code, Article 2A, Leases.
21 § 2A102. Scope.
22 This division applies to any transaction, regardless of form,
23 that creates a lease.
24 § 2A103. Definitions and index of definitions.
25 (a) Definitions.--The following words and phrases when used
26 in this division shall have, unless the context clearly
27 indicates otherwise, the meanings given to them in this
28 subsection:
29 "Buyer in ordinary course of business." A person who, in
30 good faith and without knowledge that the sale to him is in
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1 violation of the ownership rights or security interest or
2 leasehold interest of a third party in the goods, buys in
3 ordinary course from a person in the business of selling goods
4 of that kind but does not include a pawnbroker. "Buying" may be
5 for cash or by exchange of other property or on secured or
6 unsecured credit and includes receiving goods or documents of
7 title under a preexisting contract for sale but does not include
8 a transfer in bulk or as security for or in total or partial
9 satisfaction of a money debt.
10 "Cancellation." Occurs when either party puts an end to the
11 lease contract for default by the other party.
12 "Commercial unit." Such a unit of goods as by commercial
13 usage is a single whole for purposes of lease and division of
14 which materially impairs its character or value on the market or
15 in use. A commercial unit may be a single article, as a machine,
16 or a set of articles, as a suite of furniture or a line of
17 machinery, or a quantity, as a gross or carload, or any other
18 unit treated in use or in the relevant market as a single whole.
19 "Conforming." Conforming goods or performance under a lease
20 contract means goods or performance that are in accordance with
21 the obligations under the lease contract.
22 "Consumer lease." A lease that a lessor regularly engaged in
23 the business of leasing or selling makes to a lessee who is an
24 individual and who takes under the lease primarily for a
25 personal, family or household purpose, if the total payments to
26 be made under the lease contract, excluding payments for options
27 to renew or buy, do not exceed $25,000.
28 "Fault." Wrongful act, omission, breach or default.
29 "Finance lease." A lease with respect to which:
30 (1) the lessor does not select, manufacture or supply
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1 the goods;
2 (2) the lessor acquires the goods or the right to
3 possession and use of the goods in connection with the lease;
4 and
5 (3) one of the following occurs:
6 (i) the lessee receives a copy of the contract by
7 which the lessor acquired the goods or the right to
8 possession and use of the goods before signing the lease
9 contract;
10 (ii) the lessee's approval of the contract by which
11 the lessor acquired the goods or the right to possession
12 and use of the goods is a condition to effectiveness of
13 the lease contract;
14 (iii) the lessee, before signing the lease contract,
15 receives an accurate and complete statement designating
16 the promises and warranties, and any disclaimers of
17 warranties, limitations or modifications of remedies, or
18 liquidated damages, including those of a third party,
19 such as the manufacturer of the goods, provided to the
20 lessor by the person supplying the goods in connection
21 with or as part of the contract by which the lessor
22 acquired the goods or the right to possession and use of
23 the goods; or
24 (iv) if the lease is not a consumer lease, the
25 lessor, before the lessee signs the lease contract,
26 informs the lessee, in writing:
27 (A) of the identity of the person supplying the
28 goods to the lessor, unless the lessee has selected
29 that person and directed the lessor to acquire the
30 goods or the right to possession and use of the goods
19910H0871B0983 - 18 -
1 from that person;
2 (B) that the lessee is entitled under this
3 division to the promises and warranties, including
4 those of any third party, provided to the lessor by
5 the person supplying the goods in connection with or
6 as part of the contract by which the lessor acquired
7 the goods or the right to possession and use of the
8 goods; and
9 (C) that the lessee may communicate with the
10 person supplying the goods to the lessor and receive
11 an accurate and complete statement of those promises
12 and warranties, including any disclaimers and
13 limitations of them or of remedies.
14 "Goods." All things that are movable at the time of
15 identification to the lease contract, or are fixtures (section
16 2A309), but the term does not include money, documents,
17 instruments, accounts, chattel paper, general intangibles, or
18 minerals or the like, including oil and gas, before extraction.
19 The term also includes the unborn young of animals.
20 "Installment lease contract." A lease contract that
21 authorizes or requires the delivery of goods in separate lots to
22 be separately accepted, even though the lease contract contains
23 a clause "each delivery is a separate lease" or its equivalent.
24 "Lease." A transfer of the right to possession and use of
25 goods for a term in return for consideration, but a sale,
26 including a sale on approval or a sale or return, or retention
27 or creation of a security interest is not a lease. Unless the
28 context clearly indicates otherwise, the term includes a
29 sublease.
30 "Lease agreement." The bargain, with respect to the lease,
19910H0871B0983 - 19 -
1 of the lessor and the lessee in fact as found in their language
2 or by implication from other circumstances including course of
3 dealing or usage of trade or course of performance as provided
4 in this division. Unless the context clearly indicates
5 otherwise, the term includes a sublease agreement.
6 "Lease contract." The total legal obligation that results
7 from the lease agreement as affected by this division and any
8 other applicable rules of law. Unless the context clearly
9 indicates otherwise, the term includes a sublease contract.
10 "Leasehold interest." The interest of the lessor or the
11 lessee under a lease contract.
12 "Lessee." A person who acquires the right to possession and
13 use of goods under a lease. Unless the context clearly indicates
14 otherwise, the term includes a sublessee.
15 "Lessee in ordinary course of business." A person who, in
16 good faith and without knowledge that the lease to him is in
17 violation of the ownership rights or security interest or
18 leasehold interest of a third party in the goods, leases in
19 ordinary course from a person in the business of selling or
20 leasing goods of that kind but does not include a pawnbroker.
21 "Leasing" may be for cash or by exchange of other property or on
22 secured or unsecured credit and includes receiving goods or
23 documents of title under a preexisting lease contract but does
24 not include a transfer in bulk or as security for or in total or
25 partial satisfaction of a money debt.
26 "Lessor." A person who transfers the right to possession and
27 use of goods under a lease. Unless the context clearly indicates
28 otherwise, the term includes a sublessor.
29 "Lessor's residual interest." The lessor's interest in the
30 goods after expiration, termination or cancellation of the lease
19910H0871B0983 - 20 -
1 contract.
2 "Lien." A charge against or interest in goods to secure
3 payment of a debt or performance of an obligation, but the term
4 does not include a security interest.
5 "Lot." A parcel or a single article that is the subject
6 matter of a separate lease or delivery, whether or not it is
7 sufficient to perform the lease contract.
8 "Merchant lessee." A lessee that is a merchant with respect
9 to goods of the kind subject to the lease.
10 "Present value." The amount as of a date certain of one or
11 more sums payable in the future, discounted to the date certain.
12 The discount is determined by the interest rate specified by the
13 parties if the rate was not manifestly unreasonable at the time
14 the transaction was entered into; otherwise, the discount is
15 determined by a commercially reasonable rate that takes into
16 account the facts and circumstances of each case at the time the
17 transaction was entered into.
18 "Purchase." Includes taking by sale, lease, mortgage,
19 security interest, pledge, gift or any other voluntary
20 transaction creating an interest in goods.
21 "Sublease." A lease of goods the right to possession and use
22 of which was acquired by the lessor as a lessee under an
23 existing lease.
24 "Supplier." A person from whom a lessor buys or leases goods
25 to be leased under a finance lease.
26 "Supply contract." A contract under which a lessor buys or
27 leases goods to be leased.
28 "Termination." Occurs when either party pursuant to a power
29 created by agreement or law puts an end to the lease contract
30 otherwise than for default.
19910H0871B0983 - 21 -
1 (b) Index of other definitions in division.--Other
2 definitions applying to this division and the sections in which
3 they appear are:
4 "Accessions." Section 2A310(a).
5 "Construction mortgage." Section 2A309(a).
6 "Encumbrance." Section 2A309(a).
7 "Fixture filing." Section 2A309(a).
8 "Fixtures." Section 2A309(a).
9 "Purchase money lease." Section 2A309(a).
10 (c) Index of definitions in other divisions.--The following
11 definitions in other divisions apply to this division:
12 "Account." Section 9106.
13 "Between merchants." Section 2104.
14 "Buyer." Section 2103(a).
15 "Chattel paper." Section 9105(a).
16 "Consumer goods." Section 9109(1).
17 "Document." Section 9105(a).
18 "Entrusting." Section 2403(c).
19 "General intangibles." Section 9106.
20 "Good faith." Section 2103(a).
21 "Instrument." Section 9105(a).
22 "Merchant." Section 2104.
23 "Mortgage." Section 9105(a).
24 "Pursuant to commitment." Section 9105(a).
25 "Receipt." Section 2103(a).
26 "Sale." Section 2106(a).
27 "Sale on approval." Section 2326.
28 "Sale or return." Section 2326.
29 "Seller." Section 2103(a).
30 (d) Applicability of general definitions and principles.--In
19910H0871B0983 - 22 -
1 addition Division 1 (relating to general provisions) contains
2 general definitions and principles of construction and
3 interpretation applicable throughout this division.
4 § 2A104. Leases subject to other law.
5 (a) General rule.--A lease, although subject to this
6 division, is also subject to any applicable:
7 (1) certificate of title statute of this Commonwealth;
8 (2) certificate of title statute of another jurisdiction
9 (section 2A105); or
10 (3) consumer protection statute of this Commonwealth.
11 (b) Conflict between division and statute.--In case of
12 conflict between this division, other than sections 2A105
13 (relating to territorial application of division to goods
14 covered by certificate of title), 2A304(c) (relating to
15 subsequent lease of goods by lessor) and 2A305(c) (relating to
16 sale or sublease of goods by lessee), and a statute referred to
17 in subsection (a), the statute controls.
18 (c) Noncompliance with applicable law.--Failure to comply
19 with an applicable law has only the effect specified therein.
20 § 2A105. Territorial application of division to goods covered
21 by certificate of title.
22 Subject to the provisions of sections 2A304(c) (relating to
23 subsequent lease of goods by lessor) and 2A305(c) (relating to
24 sale or sublease of goods by lessee), with respect to goods
25 covered by a certificate of title issued under a statute of this
26 Commonwealth or of another jurisdiction, compliance and the
27 effect of compliance or noncompliance with a certificate of
28 title statute are governed by the law (including the conflict of
29 laws rules) of the jurisdiction issuing the certificate until
30 the earlier of:
19910H0871B0983 - 23 -
1 (1) surrender of the certificate; or
2 (2) four months after the goods are removed from that
3 jurisdiction and thereafter until a new certificate of title
4 is issued by another jurisdiction.
5 § 2A106. Limitation on power of parties to consumer lease to
6 choose applicable law and judicial forum.
7 (a) Choice of law.--If the law chosen by the parties to a
8 consumer lease is that of a jurisdiction other than a
9 jurisdiction in which the lessee resides at the time the lease
10 agreement becomes enforceable or within 30 days thereafter or in
11 which the goods are to be used, the choice is not enforceable.
12 (b) Choice of judicial forum.--If the judicial forum chosen
13 by the parties to a consumer lease is a forum that would not
14 otherwise have jurisdiction over the lessee, the choice is not
15 enforceable.
16 § 2A107. Waiver or renunciation of claim or right after
17 default.
18 Any claim or right arising out of an alleged default or
19 breach of warranty may be discharged in whole or in part without
20 consideration by a written waiver or renunciation signed and
21 delivered by the aggrieved party.
22 § 2A108. Unconscionability.
23 (a) Unconscionable lease.--If the court as a matter of law
24 finds a lease contract or any clause of a lease contract to have
25 been unconscionable at the time it was made, the court may
26 refuse to enforce the lease contract, or it may enforce the
27 remainder of the lease contract without the unconscionable
28 clause, or it may so limit the application of any unconscionable
29 clause as to avoid any unconscionable result.
30 (b) Unconscionable conduct.--With respect to a consumer
19910H0871B0983 - 24 -
1 lease, if the court as a matter of law finds that a lease
2 contract or any clause of a lease contract has been induced by
3 unconscionable conduct or that unconscionable conduct has
4 occurred in the collection of a claim arising from a lease
5 contract, the court may grant appropriate relief.
6 (c) Evidence by parties.--Before making a finding of
7 unconscionability under subsection (a) or (b), the court, on its
8 own motion or that of a party, shall afford the parties a
9 reasonable opportunity to present evidence as to the setting,
10 purpose and effect of the lease contract, or clause thereof, or
11 of the conduct.
12 (d) Award of attorney fees.--In an action in which the
13 lessee claims unconscionability with respect to a consumer
14 lease:
15 (1) If the court finds unconscionability under
16 subsection (a) or (b), the court shall award reasonable
17 attorney fees to the lessee.
18 (2) If the court does not find unconscionability and the
19 lessee claiming unconscionability has brought or maintained
20 an action he knew to be groundless, the court shall award
21 reasonable attorney fees to the party against whom the claim
22 is made.
23 (3) In determining attorney fees, the amount of the
24 recovery on behalf of the claimant under subsections (a) and
25 (b) is not controlling.
26 § 2A109. Option to accelerate at will.
27 (a) General rule.--A term providing that one party or his
28 successor in interest may accelerate payment or performance or
29 require collateral or additional collateral "at will" or "when
30 he deems himself insecure" or in words of similar import must be
19910H0871B0983 - 25 -
1 construed to mean that he has power to do so only if he in good
2 faith believes that the prospect of payment or performance is
3 impaired.
4 (b) Burden of proof.--With respect to a consumer lease, the
5 burden of establishing good faith under subsection (a) is on the
6 party who exercised the power; otherwise, the burden of
7 establishing lack of good faith is on the party against whom the
8 power has been exercised.
9 CHAPTER 2A2
10 FORMATION AND CONSTRUCTION OF LEASE CONTRACT
11 Sec.
12 2A201. Statute of frauds.
13 2A202. Final written expression: parol or extrinsic evidence.
14 2A203. Seals inoperative.
15 2A204. Formation in general.
16 2A205. Firm offers.
17 2A206. Offer and acceptance in formation of lease contract.
18 2A207. Course of performance or practical construction.
19 2A208. Modification, rescission and waiver.
20 2A209. Lessee under finance lease as beneficiary of supply
21 contract.
22 2A210. Express warranties.
23 2A211. Warranties against interference and against
24 infringement; lessee's obligation against
25 infringement.
26 2A212. Implied warranty of merchantability.
27 2A213. Implied warranty of fitness for particular purpose.
28 2A214. Exclusion or modification of warranties.
29 2A215. Cumulation and conflict of warranties express or
30 implied.
19910H0871B0983 - 26 -
1 2A216. Third party beneficiaries of express and implied
2 warranties.
3 2A217. Identification.
4 2A218. Insurance and proceeds.
5 2A219. Risk of loss.
6 2A220. Effect of default on risk of loss.
7 2A221. Casualty to identified goods.
8 § 2A201. Statute of frauds.
9 (a) General rule.--A lease contract is not enforceable by
10 way of action or defense unless:
11 (1) the total payments to be made under the lease
12 contract, excluding payments for options to renew or buy, are
13 less than $1,000; or
14 (2) there is a writing, signed by the party against whom
15 enforcement is sought or by that party's authorized agent,
16 sufficient to indicate that a lease contract has been made
17 between the parties and to describe the goods leased and the
18 lease term.
19 (b) Description of goods or term.--Any description of leased
20 goods or of the lease term is sufficient and satisfies
21 subsection (a)(2), whether or not it is specific, if it
22 reasonably identifies what is described.
23 (c) Omitted or incorrectly stated terms.--A writing is not
24 insufficient because it omits or incorrectly states a term
25 agreed upon, but the lease contract is not enforceable under
26 subsection (a)(2) beyond the lease term and the quantity of
27 goods shown in the writing.
28 (d) Enforceability of lease not satisfying general
29 requirements.--A lease contract that does not satisfy the
30 requirements of subsection (a), but which is valid in other
19910H0871B0983 - 27 -
1 respects, is enforceable:
2 (1) if the goods are to be specially manufactured or
3 obtained for the lessee and are not suitable for lease or
4 sale to others in the ordinary course of the lessor's
5 business, and the lessor, before notice of repudiation is
6 received and under circumstances that reasonably indicate
7 that the goods are for the lessee, has made either a
8 substantial beginning of their manufacture or commitments for
9 their procurement;
10 (2) if the party against whom enforcement is sought
11 admits in that party's pleading, testimony or otherwise in
12 court that a lease contract was made, but the lease contract
13 is not enforceable under this provision beyond the quantity
14 of goods admitted; or
15 (3) with respect to goods that have been received and
16 accepted by the lessee.
17 (e) Term of lease not satisfying general requirements.--The
18 lease term under a lease contract referred to in subsection (d)
19 is:
20 (1) if there is a writing signed by the party against
21 whom enforcement is sought or by that party's authorized
22 agent specifying the lease term, the term so specified;
23 (2) if the party against whom enforcement is sought
24 admits in that party's pleading, testimony or otherwise in
25 court a lease term, the term so admitted; or
26 (3) a reasonable lease term.
27 § 2A202. Final written expression: parol or extrinsic evidence.
28 Terms with respect to which the confirmatory memoranda of the
29 parties agree or which are otherwise set forth in a writing
30 intended by the parties as a final expression of their agreement
19910H0871B0983 - 28 -
1 with respect to such terms as are included therein may not be
2 contradicted by evidence of any prior agreement or of a
3 contemporaneous oral agreement but may be explained or
4 supplemented:
5 (1) by course of dealing or usage of trade or by course
6 of performance; and
7 (2) by evidence of consistent additional terms unless
8 the court finds the writing to have been intended also as a
9 complete and exclusive statement of the terms of the
10 agreement.
11 § 2A203. Seals inoperative.
12 The affixing of a seal to a writing evidencing a lease
13 contract or an offer to enter into a lease contract does not
14 render the writing a sealed instrument, and the law with respect
15 to sealed instruments does not apply to the lease contract or
16 offer.
17 § 2A204. Formation in general.
18 (a) General rule.--A lease contract may be made in any
19 manner sufficient to show agreement, including conduct by both
20 parties which recognizes the existence of a lease contract.
21 (b) Effect of undetermined time of making agreement.--An
22 agreement sufficient to constitute a lease contract may be found
23 although the moment of its making is undetermined.
24 (c) Effect of open terms.--Although one or more terms are
25 left open, a lease contract does not fail for indefiniteness if
26 the parties have intended to make a lease contract and there is
27 a reasonably certain basis for giving an appropriate remedy.
28 § 2A205. Firm offers.
29 An offer by a merchant to lease goods to or from another
30 person in a signed writing that by its terms gives assurance it
19910H0871B0983 - 29 -
1 will be held open is not revocable, for lack of consideration,
2 during the time stated or, if no time is stated, for a
3 reasonable time, but in no event may the period of
4 irrevocability exceed three months. Any such term of assurance
5 on a form supplied by the offeree must be separately signed by
6 the offeror.
7 § 2A206. Offer and acceptance in formation of lease contract.
8 (a) General rule.--Unless otherwise unambiguously indicated
9 by the language or circumstances, an offer to make a lease
10 contract must be construed as inviting acceptance in any manner
11 and by any medium reasonable in the circumstances.
12 (b) Beginning requested performance without notice.--If the
13 beginning of a requested performance is a reasonable mode of
14 acceptance, an offeror who is not notified of acceptance within
15 a reasonable time may treat the offer as having lapsed before
16 acceptance.
17 § 2A207. Course of performance or practical construction.
18 (a) Relevancy of accepted performance.--If a lease contract
19 involves repeated occasions for performance by either party with
20 knowledge of the nature of the performance and opportunity for
21 objection to it by the other, any course of performance accepted
22 or acquiesced in without objection is relevant to determine the
23 meaning of the lease agreement.
24 (b) Construction of express terms and performance.--The
25 express terms of a lease agreement and any course of
26 performance, as well as any course of dealing and usage of
27 trade, must be construed whenever reasonable as consistent with
28 each other; but if that construction is unreasonable, express
29 terms control course of performance, course of performance
30 controls both course of dealing and usage of trade, and course
19910H0871B0983 - 30 -
1 of dealing controls usage of trade.
2 (c) Waiver or modification of terms inconsistent with
3 performance.--Subject to the provisions of section 2A208
4 (relating to modification, rescission and waiver), course of
5 performance is relevant to show a waiver or modification of any
6 term inconsistent with the course of performance.
7 § 2A208. Modification, rescission and waiver.
8 (a) Consideration unnecessary for modification.--An
9 agreement modifying a lease contract needs no consideration to
10 be binding.
11 (b) Writing excluding modification or rescission.--A signed
12 lease agreement that excludes modification or rescission except
13 by a signed writing may not be otherwise modified or rescinded,
14 but, except as between merchants, such a requirement on a form
15 supplied by a merchant must be separately signed by the other
16 party.
17 (c) Ineffective modification or rescission as waiver.--
18 Although an attempt at modification or rescission does not
19 satisfy the requirements of subsection (b), it may operate as a
20 waiver.
21 (d) Retraction of waiver.--A party who has made a waiver
22 affecting an executory portion of a lease contract may retract
23 the waiver by reasonable notification received by the other
24 party that strict performance will be required of any term
25 waived, unless the retraction would be unjust in view of a
26 material change of position in reliance on the waiver.
27 § 2A209. Lessee under finance lease as beneficiary of supply
28 contract.
29 (a) General rule.--The benefit of a supplier's promises to
30 the lessor under the supply contract and of all warranties,
19910H0871B0983 - 31 -
1 whether express or implied, including those of any third party
2 provided in connection with or as part of the supply contract
3 extends to the lessee to the extent of the lessee's leasehold
4 interest under a finance lease related to the supply contract,
5 but subject to the terms of the warranty and of the supply
6 contract and all defenses or claims arising therefrom.
7 (b) Effect of extension of benefits.--The extension of the
8 benefit of a supplier's promises and warranties to the lessee
9 (subsection (a)) does not:
10 (1) modify the rights and obligations of the parties to
11 the supply contract, whether arising therefrom or otherwise;
12 or
13 (2) impose any duty or liability under the supply
14 contract on the lessee.
15 (c) Modification or rescission by supplier and lessor.--Any
16 modification or rescission of the supply contract by the
17 supplier and the lessor is effective between the supplier and
18 the lessee unless, before the modification or rescission, the
19 supplier has received notice that the lessee has entered into a
20 finance lease related to the supply contract. If the
21 modification or rescission is effective between the supplier and
22 the lessee, the lessor is deemed to have assumed, in addition to
23 the obligations of the lessor to the lessee under the lease
24 contract, promises of the supplier to the lessor and warranties
25 that were so modified or rescinded as they existed and were
26 available to the lessee before modification or rescission.
27 (d) Additional rights of lessee.--In addition to the
28 extension of the benefit of the supplier's promises and of
29 warranties to the lessee under subsection (a), the lessee
30 retains all rights that the lessee may have against the supplier
19910H0871B0983 - 32 -
1 which arise from an agreement between the lessee and the
2 supplier or under other law.
3 § 2A210. Express warranties.
4 (a) General rule.--Express warranties by the lessor are
5 created as follows:
6 (1) Any affirmation of fact or promise made by the
7 lessor to the lessee which relates to the goods and becomes
8 part of the basis of the bargain creates an express warranty
9 that the goods will conform to the affirmation or promise.
10 (2) Any description of the goods which is made part of
11 the basis of the bargain creates an express warranty that the
12 goods will conform to the description.
13 (3) Any sample or model that is made part of the basis
14 of the bargain creates an express warranty that the whole of
15 the goods will conform to the sample or model.
16 (b) Formal words or specific intent unnecessary.--It is not
17 necessary to the creation of an express warranty that the lessor
18 use formal words, such as "warrant" or "guarantee," or that the
19 lessor have a specific intention to make a warranty, but an
20 affirmation merely of the value of the goods or a statement
21 purporting to be merely the lessor's opinion or commendation of
22 the goods does not create a warranty.
23 § 2A211. Warranties against interference and against
24 infringement; lessee's obligation against
25 infringement.
26 (a) General rule.--There is in a lease contract a warranty
27 that for the lease term no person holds a claim to or interest
28 in the goods that arose from an act or omission of the lessor,
29 other than a claim by way of infringement or the like, which
30 will interfere with the lessee's enjoyment of its leasehold
19910H0871B0983 - 33 -
1 interest.
2 (b) Warranty of merchant regularly dealing in goods.--Except
3 in a finance lease, there is in a lease contract by a lessor who
4 is a merchant regularly dealing in goods of the kind a warranty
5 that the goods are delivered free of the rightful claim of any
6 person by way of infringement or the like.
7 (c) Obligation of lessee against infringement.--A lessee who
8 furnishes specifications to a lessor or a supplier shall hold
9 the lessor and the supplier harmless against any claim by way of
10 infringement or the like that arises out of compliance with the
11 specifications.
12 § 2A212. Implied warranty of merchantability.
13 (a) General rule.--Except in a finance lease, a warranty
14 that the goods will be merchantable is implied in a lease
15 contract if the lessor is a merchant with respect to goods of
16 that kind.
17 (b) Merchantability standards for goods.--Goods to be
18 merchantable must be at least such as:
19 (1) pass without objection in the trade under the
20 description in the lease agreement;
21 (2) in the case of fungible goods, are of fair average
22 quality within the description;
23 (3) are fit for the ordinary purposes for which goods of
24 that type are used;
25 (4) run, within the variation permitted by the lease
26 agreement, of even kind, quality and quantity within each
27 unit and among all units involved;
28 (5) are adequately contained, packaged and labeled as
29 the lease agreement may require; and
30 (6) conform to any promises or affirmations of fact made
19910H0871B0983 - 34 -
1 on the container or label.
2 (c) Course of dealing or usage of trade.--Other implied
3 warranties may arise from course of dealing or usage of trade.
4 § 2A213. Implied warranty of fitness for particular purpose.
5 Except in a finance lease, if the lessor at the time the
6 lease contract is made has reason to know of any particular
7 purpose for which the goods are required and that the lessee is
8 relying on the lessor's skill or judgment to select or furnish
9 suitable goods, there is in the lease contract an implied
10 warranty that the goods will be fit for that purpose.
11 § 2A214. Exclusion or modification of warranties.
12 (a) Construction of words or conduct creating or limiting
13 warranties.--Words or conduct relevant to the creation of an
14 express warranty and words or conduct tending to negate or limit
15 a warranty must be construed wherever reasonable as consistent
16 with each other; but, subject to the provisions of section 2A202
17 (relating to final written expression: parol or extrinsic
18 evidence), negation or limitation is inoperative to the extent
19 that the construction is unreasonable.
20 (b) Implied warranties of merchantability and fitness;
21 specific language.--Subject to subsection (c), to exclude or
22 modify the implied warranty of merchantability or any part of
23 it, the language must mention "merchantability," be by a writing
24 and be conspicuous. Subject to subsection (c), to exclude or
25 modify any implied warranty of fitness, the exclusion must be by
26 a writing and be conspicuous. Language to exclude all implied
27 warranties of fitness is sufficient if it is in writing, is
28 conspicuous and states, for example, "There is no warranty that
29 the goods will be fit for a particular purpose."
30 (c) Implied warranties of merchantability and fitness;
19910H0871B0983 - 35 -
1 alternative methods.--Notwithstanding subsection (b), but
2 subject to subsection (d):
3 (1) unless the circumstances indicate otherwise, all
4 implied warranties are excluded by expressions like "as is"
5 or "with all faults" or by other language that in common
6 understanding calls the lessee's attention to the exclusion
7 of warranties and makes plain that there is no implied
8 warranty, if in writing and conspicuous;
9 (2) if the lessee before entering into the lease
10 contract has examined the goods or the sample or model as
11 fully as desired or has refused to examine the goods, there
12 is no implied warranty with regard to defects that an
13 examination ought in the circumstances to have revealed; and
14 (3) an implied warranty may also be excluded or modified
15 by course of dealing, course of performance or usage of
16 trade.
17 (d) Warranties against interference and infringement.--To
18 exclude or modify a warranty against interference or against
19 infringement (section 2A211) or any part of it, the language
20 must be specific, be by a writing and be conspicuous, unless the
21 circumstances, including course of performance, course of
22 dealing, or usage of trade, give the lessee reason to know that
23 the goods are being leased subject to a claim or interest of any
24 person.
25 § 2A215. Cumulation and conflict of warranties express or
26 implied.
27 Warranties, whether express or implied, must be construed as
28 consistent with each other and as cumulative, but if that
29 construction is unreasonable, the intention of the parties
30 determines which warranty is dominant. In ascertaining that
19910H0871B0983 - 36 -
1 intention, the following rules apply:
2 (1) Exact or technical specifications displace an
3 inconsistent sample or model or general language of
4 description.
5 (2) A sample from an existing bulk displaces
6 inconsistent general language of description.
7 (3) Express warranties displace inconsistent implied
8 warranties other than an implied warranty of fitness for a
9 particular purpose.
10 § 2A216. Third party beneficiaries of express and implied
11 warranties.
12 A warranty to or for the benefit of a lessee under this
13 division, whether express or implied, extends to any natural
14 person who is in the family or household of the lessee or who is
15 a guest in the lessee's home if it is reasonable to expect that
16 such person may use, consume or be affected by the goods and who
17 is injured in person by breach of the warranty. This section
18 does not displace principles of law and equity that extend a
19 warranty to or for the benefit of a lessee to other persons. The
20 operation of this section may not be excluded, modified or
21 limited, but an exclusion, modification or limitation of the
22 warranty, including any with respect to rights and remedies,
23 effective against the lessee is also effective against any
24 beneficiary designated under this section.
25 § 2A217. Identification.
26 Identification of goods as goods to which a lease contract
27 refers may be made at any time and in any manner explicitly
28 agreed to by the parties. In the absence of explicit agreement,
29 identification occurs:
30 (1) when the lease contract is made, if the lease
19910H0871B0983 - 37 -
1 contract is for a lease of goods that are existing and
2 identified;
3 (2) when the goods are shipped, marked or otherwise
4 designated by the lessor as goods to which the lease contract
5 refers, if the lease contract is for a lease of goods that
6 are not existing and identified; or
7 (3) when the young are conceived, if the lease contract
8 is for a lease of unborn young of animals.
9 § 2A218. Insurance and proceeds.
10 (a) Insurable interest of lessee.--A lessee obtains an
11 insurable interest when existing goods are identified to the
12 lease contract even though the goods identified are
13 nonconforming and the lessee has an option to reject them.
14 (b) Substitution of goods by lessor.--If a lessee has an
15 insurable interest only by reason of the lessor's identification
16 of the goods, the lessor, until default or insolvency or
17 notification to the lessee that identification is final, may
18 substitute other goods for those identified.
19 (c) Duration of insurable interest of lessor.--
20 Notwithstanding a lessee's insurable interest under subsections
21 (a) and (b), the lessor retains an insurable interest until an
22 option to buy has been exercised by the lessee and risk of loss
23 has passed to the lessee.
24 (d) Other insurable interests unimpaired.--Nothing in this
25 section impairs any insurable interest recognized under any
26 other statute or rule of law.
27 (e) Agreement to determine obligations of parties.--The
28 parties by agreement may determine that one or more parties have
29 an obligation to obtain and pay for insurance covering the goods
30 and by agreement may determine the beneficiary of the proceeds
19910H0871B0983 - 38 -
1 of the insurance.
2 § 2A219. Risk of loss.
3 (a) General rule.--Except in the case of a finance lease,
4 risk of loss is retained by the lessor and does not pass to the
5 lessee. In the case of a finance lease, risk of loss passes to
6 the lessee.
7 (b) Time of passage to lessee.--Subject to the provisions of
8 this division on the effect of default on risk of loss (section
9 2A220), if risk of loss is to pass to the lessee and the time of
10 passage is not stated, the following rules apply:
11 (1) If the lease contract requires or authorizes the
12 goods to be shipped by carrier:
13 (i) and it does not require delivery at a particular
14 destination, the risk of loss passes to the lessee when
15 the goods are duly delivered to the carrier; but
16 (ii) if it does require delivery at a particular
17 destination and the goods are there duly tendered while
18 in the possession of the carrier, the risk of loss passes
19 to the lessee when the goods are there duly so tendered
20 as to enable the lessee to take delivery.
21 (2) If the goods are held by a bailee to be delivered
22 without being moved, the risk of loss passes to the lessee on
23 acknowledgment by the bailee of the lessee's right to
24 possession of the goods.
25 (3) In any case not within paragraph (1) or (2), the
26 risk of loss passes to the lessee on the lessee's receipt of
27 the goods if the lessor or, in the case of a finance lease,
28 the supplier is a merchant; otherwise, the risk passes to the
29 lessee on tender of delivery.
30 § 2A220. Effect of default on risk of loss.
19910H0871B0983 - 39 -
1 (a) Default by lessor.--Where risk of loss is to pass to the
2 lessee and the time of passage is not stated:
3 (1) If a tender or delivery of goods so fails to conform
4 to the lease contract as to give a right of rejection, the
5 risk of their loss remains with the lessor or, in the case of
6 a finance lease, the supplier until cure or acceptance.
7 (2) If the lessee rightfully revokes acceptance, he, to
8 the extent of any deficiency in his effective insurance
9 coverage, may treat the risk of loss as having remained with
10 the lessor from the beginning.
11 (b) Default by lessee.--Whether or not risk of loss is to
12 pass to the lessee, if the lessee as to conforming goods already
13 identified to a lease contract repudiates or is otherwise in
14 default under the lease contract, the lessor or, in the case of
15 a finance lease, the supplier, to the extent of any deficiency
16 in his effective insurance coverage, may treat the risk of loss
17 as resting on the lessee for a commercially reasonable time.
18 § 2A221. Casualty to identified goods.
19 If a lease contract requires goods identified when the lease
20 contract is made, and the goods suffer casualty without fault of
21 the lessee, the lessor or the supplier before delivery, or the
22 goods suffer casualty before risk of loss passes to the lessee
23 pursuant to the lease agreement or section 2A219 (relating to
24 risk of loss), then:
25 (1) if the loss is total, the lease contract is avoided;
26 and
27 (2) if the loss is partial or the goods have so
28 deteriorated as to no longer conform to the lease contract,
29 the lessee may nevertheless demand inspection and at his
30 option either treat the lease contract as avoided or, except
19910H0871B0983 - 40 -
1 in a finance lease that is not a consumer lease, accept the
2 goods with due allowance from the rent payable for the
3 balance of the lease term for the deterioration or the
4 deficiency in quantity but without further right against the
5 lessor.
6 CHAPTER 2A3
7 EFFECT OF LEASE CONTRACT
8 Sec.
9 2A301. Enforceability of lease contract.
10 2A302. Title to and possession of goods.
11 2A303. Alienability of party's interest under lease contract or
12 of lessor's residual interest in goods; delegation of
13 performance; transfer of rights.
14 2A304. Subsequent lease of goods by lessor.
15 2A305. Sale or sublease of goods by lessee.
16 2A306. Priority of certain liens arising by operation of law.
17 2A307. Priority of liens arising by attachment or levy on,
18 security interests in, and other claims to goods.
19 2A308. Special rights of creditors.
20 2A309. Lessor's and lessee's rights when goods become fixtures.
21 2A310. Lessor's and lessee's rights when goods become
22 accessions.
23 2A311. Priority subject to subordination.
24 § 2A301. Enforceability of lease contract.
25 Except as otherwise provided in this division, a lease
26 contract is effective and enforceable according to its terms
27 between the parties, against purchasers of the goods and against
28 creditors of the parties.
29 § 2A302. Title to and possession of goods.
30 Except as otherwise provided in this division, each provision
19910H0871B0983 - 41 -
1 of this division applies whether the lessor or a third party has
2 title to the goods, and whether the lessor, the lessee or a
3 third party has possession of the goods, notwithstanding any
4 statute or rule of law that possession or the absence of
5 possession is fraudulent.
6 § 2A303. Alienability of party's interest under lease contract
7 or of lessor's residual interest in goods; delegation
8 of performance; transfer of rights.
9 (a) Definition.--As used in this section, the term "creation
10 of a security interest" includes the sale of a lease contract
11 that is subject to Division 9 (relating to secured transactions)
12 by reason of section 9102(a)(2) (relating to policy and subject
13 matter of division).
14 (b) General rule.--Except as provided in subsections (c) and
15 (d), a provision in a lease agreement which:
16 (1) prohibits the voluntary or involuntary transfer,
17 including a transfer by sale, sublease, creation or
18 enforcement of a security interest, or attachment, levy or
19 other judicial process, of an interest of a party under the
20 lease contract or of the lessor's residual interest in the
21 goods; or
22 (2) makes such a transfer an event of default;
23 gives rise to the rights and remedies provided in subsection
24 (e), but a transfer that is prohibited or is an event of default
25 under the lease agreement is otherwise effective.
26 (c) Certain provisions in lease agreement not enforceable.--
27 A provision in a lease agreement which prohibits the creation or
28 enforcement of a security interest in an interest of a party
29 under the lease contract or in the lessor's residual interest in
30 the goods, or makes such a transfer an event of default, is not
19910H0871B0983 - 42 -
1 enforceable unless, and then only to the extent that, there is
2 an actual transfer by the lessee of the lessee's right of
3 possession or use of the goods in violation of the provision or
4 an actual delegation of a material performance of either party
5 to the lease contract in violation of the provision. Neither the
6 granting nor the enforcement of a security interest in the
7 lessor's interest under the lease contract or the lessor's
8 residual interest in the goods is a transfer that materially
9 impairs the prospect of obtaining return performance by,
10 materially changes the duty of or materially increases the
11 burden or risk imposed on the lessee within the purview of
12 subsection (e) unless, and then only to the extent that, there
13 is an actual delegation of a material performance of the lessor.
14 (d) Transfer of right to damages.--A provision in a lease
15 agreement which:
16 (1) prohibits a transfer of a right to damages for
17 default with respect to the whole lease contract or of a
18 right to payment arising out of the transferor's due
19 performance of the transferor's entire obligation; or
20 (2) makes such a transfer an event of default;
21 is not enforceable, and such a transfer is not a transfer that
22 materially impairs the prospect of obtaining return performance
23 by, materially changes the duty of or materially increases the
24 burden or risk imposed on the other party to the lease contract
25 within the purview of subsection (e).
26 (e) Certain rights and remedies.--Subject to subsections (c)
27 and (d):
28 (1) If a transfer is made which is made an event of
29 default under a lease agreement, the party to the lease
30 contract not making the transfer, unless that party waives
19910H0871B0983 - 43 -
1 the default or otherwise agrees, has the rights and remedies
2 described in section 2A501(b) (relating to default:
3 procedure).
4 (2) If paragraph (1) is not applicable and if a transfer
5 is made that is prohibited under a lease agreement or
6 materially impairs the prospect of obtaining return
7 performance by, materially changes the duty of or materially
8 increases the burden or risk imposed on the other party to
9 the lease contract, unless the party not making the transfer
10 agrees at any time to the transfer in the lease contract or
11 otherwise, then, except as limited by contract, the
12 transferor is liable to the party not making the transfer for
13 damages caused by the transfer to the extent that the damages
14 could not reasonably be prevented by the party not making the
15 transfer and a court having jurisdiction may grant other
16 appropriate relief, including cancellation of the lease
17 contract or an injunction against the transfer.
18 (f) Effect and enforceability of general transfer.--A
19 transfer of "the lease" or of "all my rights under the lease" or
20 a transfer in similar general terms is a transfer of rights,
21 and, unless the language or the circumstances, as in a transfer
22 for security, indicate the contrary, the transfer is a
23 delegation of duties by the transferor to the transferee.
24 Acceptance by the transferee constitutes a promise by the
25 transferee to perform those duties. The promise is enforceable
26 by either the transferor or the other party to the lease
27 contract.
28 (g) Effect of delegation of performance.--Unless otherwise
29 agreed by the lessor and the lessee, a delegation of performance
30 does not relieve the transferor as against the other party of
19910H0871B0983 - 44 -
1 any duty to perform or any liability for default.
2 (h) Requirements for written prohibition of transfer in
3 consumer lease.--In a consumer lease, to prohibit the transfer
4 of an interest of a party under the lease contract or to make a
5 transfer an event of default, the language must be specific, by
6 a writing and conspicuous.
7 § 2A304. Subsequent lease of goods by lessor.
8 (a) General rule.--Subject to section 2A303 (relating to
9 alienability of party's interest under lease contract or of
10 lessor's residual interest in goods; delegation of performance;
11 transfer of rights), a subsequent lessee from a lessor of goods
12 under an existing lease contract obtains, to the extent of the
13 leasehold interest transferred, the leasehold interest in the
14 goods that the lessor had or had power to transfer, and, except
15 as provided in subsection (b) and section 2A527(d) (relating to
16 lessor's rights to dispose of goods), takes subject to the
17 existing lease contract. A lessor with voidable title has power
18 to transfer a good leasehold interest to a good faith subsequent
19 lessee for value, but only to the extent set forth in the
20 preceding sentence. If goods have been delivered under a
21 transaction of purchase the lessor has that power even though:
22 (1) the lessor's transferor was deceived as to the
23 identity of the lessor;
24 (2) the delivery was in exchange for a check which is
25 later dishonored;
26 (3) it was agreed that the transaction was to be a "cash
27 sale"; or
28 (4) the delivery was procured through fraud punishable
29 as larcenous under the criminal law.
30 (b) Merchants regularly dealing in goods.--A subsequent
19910H0871B0983 - 45 -
1 lessee in the ordinary course of business from a lessor who is a
2 merchant dealing in goods of that kind to whom the goods were
3 entrusted by the existing lessee of that lessor before the
4 interest of the subsequent lessee became enforceable against
5 that lessor obtains, to the extent of the leasehold interest
6 transferred, all of that lessor's and the existing lessee's
7 rights to the goods, and takes free of the existing lease
8 contract.
9 (c) Goods covered by certificate of title.--A subsequent
10 lessee from the lessor of goods that are subject to an existing
11 lease contract and are covered by a certificate of title issued
12 under a statute of this Commonwealth or of another jurisdiction
13 takes no greater rights than those provided both by this section
14 and by the certificate of title statute.
15 § 2A305. Sale or sublease of goods by lessee.
16 (a) General rule.--Subject to the provisions of section
17 2A303 (relating to alienability of party's interest under lease
18 contract or of lessor's residual interest in goods; delegation
19 of performance; transfer of rights), a buyer or sublessee from
20 the lessee of goods under an existing lease contract obtains, to
21 the extent of the interest transferred, the leasehold interest
22 in the goods that the lessee had or had power to transfer, and,
23 except as provided in subsection (b) and section 2A511(d)
24 (relating to merchant lessee's duties as to rightfully rejected
25 goods), takes subject to the existing lease contract. A lessee
26 with a voidable leasehold interest has power to transfer a good
27 leasehold interest to a good faith buyer for value or a good
28 faith sublessee for value, but only to the extent set forth in
29 the preceding sentence. When goods have been delivered under a
30 transaction of lease, the lessee has that power even though:
19910H0871B0983 - 46 -
1 (1) the lessor was deceived as to the identity of the
2 lessee;
3 (2) the delivery was in exchange for a check which is
4 later dishonored; or
5 (3) the delivery was procured through fraud punishable
6 as larcenous under the criminal law.
7 (b) Merchants regularly dealing in goods.--A buyer in the
8 ordinary course of business or a sublessee in the ordinary
9 course of business from a lessee who is a merchant dealing in
10 goods of that kind to whom the goods were entrusted by the
11 lessor obtains, to the extent of the interest transferred, all
12 of the lessor's and lessee's rights to the goods, and takes free
13 of the existing lease contract.
14 (c) Goods covered by certificate of title.--A buyer or
15 sublessee from the lessee of goods that are subject to an
16 existing lease contract and are covered by a certificate of
17 title issued under a statute of this Commonwealth or of another
18 jurisdiction takes no greater rights than those provided both by
19 this section and by the certificate of title statute.
20 § 2A306. Priority of certain liens arising by operation of law.
21 If a person in the ordinary course of his business furnishes
22 services or materials with respect to goods subject to a lease
23 contract, a lien upon those goods in the possession of that
24 person given by statute or rule of law for those materials or
25 services takes priority over any interest of the lessor or
26 lessee under the lease contract or this division unless the lien
27 is created by statute and the statute provides otherwise or
28 unless the lien is created by rule of law and the rule of law
29 provides otherwise.
30 § 2A307. Priority of liens arising by attachment or levy on,
19910H0871B0983 - 47 -
1 security interests in, and other claims to goods.
2 (a) Creditor of lessee.--Except as otherwise provided in
3 section 2A306 (relating to priority of certain liens arising by
4 operation of law), a creditor of a lessee takes subject to the
5 lease contract.
6 (b) Creditor of lessor.--Except as otherwise provided in
7 subsections (c) and (d) and in sections 2A306 and 2A308
8 (relating to special rights of creditors), a creditor of a
9 lessor takes subject to the lease contract unless:
10 (1) the creditor holds a lien that attached to the goods
11 before the lease contract became enforceable;
12 (2) the creditor holds a security interest in the goods
13 and the lessee did not give value and receive delivery of the
14 goods without knowledge of the security interest; or
15 (3) the creditor holds a security interest in the goods
16 which was perfected (section 9303) before the lease contract
17 became enforceable.
18 (c) Lessee in ordinary course of business.--A lessee in the
19 ordinary course of business takes the leasehold interest free of
20 a security interest in the goods created by the lessor even
21 though the security interest is perfected (section 9303) and the
22 lessee knows of its existence.
23 (d) Lessee not in ordinary course of business.--A lessee
24 other than a lessee in the ordinary course of business takes the
25 leasehold interest free of a security interest to the extent
26 that it secures future advances made after the secured party
27 acquires knowledge of the lease or more than 45 days after the
28 lease contract becomes enforceable, whichever first occurs,
29 unless the future advances are made pursuant to a commitment
30 entered into without knowledge of the lease and before the
19910H0871B0983 - 48 -
1 expiration of the 45-day period.
2 § 2A308. Special rights of creditors.
3 (a) Creditor of lessor.--A creditor of a lessor in
4 possession of goods subject to a lease contract may treat the
5 lease contract as void if as against the creditor retention of
6 possession by the lessor is fraudulent under any statute or rule
7 of law, but retention of possession in good faith and current
8 course of trade by the lessor for a commercially reasonable time
9 after the lease contract becomes enforceable is not fraudulent.
10 (b) Nonimpairment of rights of creditor of lessor.--Nothing
11 in this division impairs the rights of creditors of a lessor if
12 the lease contract:
13 (1) becomes enforceable, not in current course of trade
14 but in satisfaction of or as security for a preexisting claim
15 for money, security or the like; and
16 (2) is made under circumstances which under any statute
17 or rule of law apart from this division would constitute the
18 transaction a fraudulent transfer or voidable preference.
19 (c) Creditor of seller.--A creditor of a seller may treat a
20 sale or an identification of goods to a contract for sale as
21 void if as against the creditor retention of possession by the
22 seller is fraudulent under any statute or rule of law, but
23 retention of possession of the goods pursuant to a lease
24 contract entered into by the seller as lessee and the buyer as
25 lessor in connection with the sale or identification of the
26 goods is not fraudulent if the buyer bought for value and in
27 good faith.
28 § 2A309. Lessor's and lessee's rights when goods become
29 fixtures.
30 (a) Definitions.--As used in this section, the following
19910H0871B0983 - 49 -
1 words and phrases shall have the meanings given to them in this
2 subsection:
3 "Construction mortgage." A mortgage is a construction
4 mortgage to the extent it secures an obligation incurred for the
5 construction of an improvement on land, including the
6 acquisition cost of the land, if the recorded writing so
7 indicates.
8 "Encumbrance." Includes real estate mortgages and other
9 liens on real estate and all other rights in real estate that
10 are not ownership interests.
11 "Fixture filing." The filing, in the office where a mortgage
12 on the real estate would be filed or recorded, of a financing
13 statement covering goods that are or are to become fixtures and
14 conforming to the requirements of section 9402(e) (relating to
15 formal requisites of financing statement; amendments; mortgage
16 as financing statement).
17 "Fixtures." Goods are fixtures when they become so related
18 to particular real estate that an interest in them arises under
19 real estate law.
20 "Purchase money lease." A lease is a purchase money lease
21 unless the lessee has possession or use of the goods or the
22 right to possession or use of the goods before the lease
23 agreement is enforceable.
24 (b) Lease of goods that are fixtures.--Under this division,
25 a lease may be of goods that are fixtures or may continue in
26 goods that become fixtures, but no lease exists under this
27 division of ordinary building materials incorporated into an
28 improvement on land.
29 (c) Lease under real estate law.--This division does not
30 prevent creation of a lease of fixtures pursuant to real estate
19910H0871B0983 - 50 -
1 law.
2 (d) Priority of perfected interest of lessor of fixtures.--
3 The perfected interest of a lessor of fixtures has priority over
4 a conflicting interest of an encumbrancer or owner of the real
5 estate if:
6 (1) the lease is a purchase money lease, the conflicting
7 interest of the encumbrancer or owner arises before the goods
8 become fixtures, the interest of the lessor is perfected by a
9 fixture filing before the goods become fixtures or within ten
10 days thereafter, and the lessee has an interest of record in
11 the real estate or is in possession of the real estate; or
12 (2) the interest of the lessor is perfected by a fixture
13 filing before the interest of the encumbrancer or owner is of
14 record, the lessor's interest has priority over any
15 conflicting interest of a predecessor in title of the
16 encumbrancer or owner, and the lessee has an interest of
17 record in the real estate or is in possession of the real
18 estate.
19 (e) Priority of interest of lessor of fixtures whether or
20 not perfected.--The interest of a lessor of fixtures, whether or
21 not perfected, has priority over the conflicting interest of an
22 encumbrancer or owner of the real estate if:
23 (1) the fixtures are readily removable factory or office
24 machines, readily removable equipment that is not primarily
25 used or leased for use in the operation of the real estate,
26 or readily removable replacements of domestic appliances that
27 are goods subject to a consumer lease, and before the goods
28 become fixtures the lease contract is enforceable;
29 (2) the conflicting interest is a lien on the real
30 estate obtained by legal or equitable proceedings after the
19910H0871B0983 - 51 -
1 lease contract is enforceable;
2 (3) the encumbrancer or owner has consented in writing
3 to the lease or has disclaimed an interest in the goods as
4 fixtures; or
5 (4) the lessee has a right to remove the goods as
6 against the encumbrancer or owner.
7 If the lessee's right to remove terminates, the priority of the
8 interest of the lessor continues for a reasonable time.
9 (f) Subordination to construction mortgage.--Notwithstanding
10 subsection (d)(1) but otherwise subject to subsections (d) and
11 (e), the interest of a lessor of fixtures, including the
12 lessor's residual interest, is subordinate to the conflicting
13 interest of an encumbrancer of the real estate under a
14 construction mortgage recorded before the goods become fixtures
15 if the goods become fixtures before the completion of the
16 construction. To the extent given to refinance a construction
17 mortgage, the conflicting interest of an encumbrancer of the
18 real estate under a mortgage has this priority to the same
19 extent as the encumbrancer of the real estate under the
20 construction mortgage.
21 (g) Priority of interest in other cases.--In cases not
22 within the preceding subsections, priority between the interest
23 of a lessor of fixtures, including the lessor's residual
24 interest, and the conflicting interest of an encumbrancer or
25 owner of the real estate who is not the lessee is determined by
26 the priority rules governing conflicting interests in real
27 estate.
28 (h) Removal of goods if interest of lessor has priority.--If
29 the interest of a lessor of fixtures, including the lessor's
30 residual interest, has priority over all conflicting interests
19910H0871B0983 - 52 -
1 of all owners and encumbrancers of the real estate, the lessor
2 or the lessee may:
3 (1) on default, expiration, termination or cancellation
4 of the lease agreement but subject to the lease agreement and
5 this division; or
6 (2) if necessary to enforce other rights and remedies of
7 the lessor or lessee under this division;
8 remove the goods from the real estate, free and clear of all
9 conflicting interests of all owners and encumbrancers of the
10 real estate, but the lessor or lessee must reimburse any
11 encumbrancer or owner of the real estate who is not the lessee
12 and who has not otherwise agreed for the cost of repair of any
13 physical injury, but not for any diminution in value of the real
14 estate caused by the absence of the goods removed or by any
15 necessity of replacing them. A person entitled to reimbursement
16 may refuse permission to remove until the party seeking removal
17 gives adequate security for the performance of this obligation.
18 (i) Perfection of interest of lessor.--Even though the lease
19 agreement does not create a security interest, the interest of a
20 lessor of fixtures, including the lessor's residual interest, is
21 perfected by filing a financing statement as a fixture filing
22 for leased goods that are or are to become fixtures in
23 accordance with the relevant provisions of Division 9 (relating
24 to secured transactions).
25 § 2A310. Lessor's and lessee's rights when goods become
26 accessions.
27 (a) Definition.--Goods are "accessions" when they are
28 installed in or affixed to other goods.
29 (b) Priority of interest before accession.--The interest of
30 a lessor or a lessee under a lease contract entered into before
19910H0871B0983 - 53 -
1 the goods became accessions is superior to all interests in the
2 whole except as stated in subsection (d).
3 (c) Priority of interest on or after accession.--The
4 interest of a lessor or a lessee under a lease contract entered
5 into at the time or after the goods became accessions is
6 superior to all subsequently acquired interests in the whole
7 except as stated in subsection (d) but is subordinate to
8 interests in the whole existing at the time the lease contract
9 was made unless the holders of such interests in the whole have
10 in writing consented to the lease or disclaimed an interest in
11 the goods as part of the whole.
12 (d) Subordination to interest in the whole.--The interest of
13 a lessor or a lessee under a lease contract described in
14 subsection (b) or (c) is subordinate to the interest of:
15 (1) a buyer in the ordinary course of business or a
16 lessee in the ordinary course of business of any interest in
17 the whole acquired after the goods became accessions; or
18 (2) a creditor with a security interest in the whole
19 perfected before the lease contract was made to the extent
20 that the creditor makes subsequent advances without knowledge
21 of the lease contract.
22 (e) Removal of goods if interest has priority.--When under
23 subsections (b) or (c) and (d) a lessor or a lessee of
24 accessions holds an interest that is superior to all interests
25 in the whole, the lessor or the lessee may:
26 (1) on default, expiration, termination or cancellation
27 of the lease contract by the other party but subject to the
28 provisions of the lease contract and this division; or
29 (2) if necessary to enforce his other rights and
30 remedies under this division;
19910H0871B0983 - 54 -
1 remove the goods from the whole, free and clear of all interests
2 in the whole, but he must reimburse any holder of an interest in
3 the whole who is not the lessee and who has not otherwise agreed
4 for the cost of repair of any physical injury but not for any
5 diminution in value of the whole caused by the absence of the
6 goods removed or by any necessity for replacing them. A person
7 entitled to reimbursement may refuse permission to remove until
8 the party seeking removal gives adequate security for the
9 performance of this obligation.
10 § 2A311. Priority subject to subordination.
11 Nothing in this division prevents subordination by agreement
12 by any person entitled to priority.
13 CHAPTER 2A4
14 PERFORMANCE OF LEASE CONTRACT: REPUDIATED,
15 SUBSTITUTED AND EXCUSED
16 Sec.
17 2A401. Insecurity: adequate assurance of performance.
18 2A402. Anticipatory repudiation.
19 2A403. Retraction of anticipatory repudiation.
20 2A404. Substituted performance.
21 2A405. Excused performance.
22 2A406. Procedure on excused performance.
23 2A407. Irrevocable promises: finance leases.
24 § 2A401. Insecurity: adequate assurance of performance.
25 (a) General rule.--A lease contract imposes an obligation on
26 each party that the other's expectation of receiving due
27 performance will not be impaired.
28 (b) Demand for adequate assurance of performance.--If
29 reasonable grounds for insecurity arise with respect to the
30 performance of either party, the insecure party may demand in
19910H0871B0983 - 55 -
1 writing adequate assurance of due performance. Until the
2 insecure party receives that assurance, if commercially
3 reasonable the insecure party may suspend any performance for
4 which he has not already received the agreed return.
5 (c) Failure to provide adequate assurance of performance.--A
6 repudiation of the lease contract occurs if assurance of due
7 performance adequate under the circumstances of the particular
8 case is not provided to the insecure party within a reasonable
9 time, not to exceed 30 days after receipt of a demand by the
10 other party.
11 (d) Reasonableness and adequacy between merchants.--Between
12 merchants, the reasonableness of grounds for insecurity and the
13 adequacy of any assurance offered must be determined according
14 to commercial standards.
15 (e) Effect of acceptance of nonconforming delivery or
16 payment.--Acceptance of any nonconforming delivery or payment
17 does not prejudice the aggrieved party's right to demand
18 adequate assurance of future performance.
19 § 2A402. Anticipatory repudiation.
20 If either party repudiates a lease contract with respect to a
21 performance not yet due under the lease contract, the loss of
22 which performance will substantially impair the value of the
23 lease contract to the other, the aggrieved party may:
24 (1) for a commercially reasonable time, await retraction
25 of repudiation and performance by the repudiating party;
26 (2) make demand pursuant to section 2A401 (relating to
27 insecurity: adequate assurance of performance) and await
28 assurance of future performance adequate under the
29 circumstances of the particular case; or
30 (3) resort to any right or remedy upon default under the
19910H0871B0983 - 56 -
1 lease contract or this division, even though the aggrieved
2 party has notified the repudiating party that the aggrieved
3 party would await the repudiating party's performance and
4 assurance and has urged retraction.
5 In addition, whether or not the aggrieved party is pursuing one
6 of the foregoing remedies, the aggrieved party may suspend
7 performance or, if the aggrieved party is the lessor, proceed in
8 accordance with the provisions of this division on the lessor's
9 right to identify goods to the lease contract notwithstanding
10 default or to salvage unfinished goods (section 2A524).
11 § 2A403. Retraction of anticipatory repudiation.
12 (a) When allowable.--Until the repudiating party's next
13 performance is due, the repudiating party can retract the
14 repudiation unless, since the repudiation, the aggrieved party
15 has canceled the lease contract or materially changed the
16 aggrieved party's position or otherwise indicated that the
17 aggrieved party considers the repudiation final.
18 (b) Method.--Retraction may be by any method that clearly
19 indicates to the aggrieved party that the repudiating party
20 intends to perform under the lease contract and includes any
21 assurance demanded under section 2A401 (relating to insecurity:
22 adequate assurance of performance).
23 (c) Effect on contract rights.--Retraction reinstates a
24 repudiating party's rights under a lease contract with due
25 excuse and allowance to the aggrieved party for any delay
26 occasioned by the repudiation.
27 § 2A404. Substituted performance.
28 (a) Manner of delivery.--If, without fault of the lessee,
29 the lessor and the supplier, the agreed berthing, loading or
30 unloading facilities fail or the agreed type of carrier becomes
19910H0871B0983 - 57 -
1 unavailable or the agreed manner of delivery otherwise becomes
2 commercially impracticable, but a commercially reasonable
3 substitute is available, the substitute performance must be
4 tendered and accepted.
5 (b) Manner of payment.--If the agreed means or manner of
6 payment fails because of domestic or foreign governmental
7 regulation:
8 (1) the lessor may withhold or stop delivery or cause
9 the supplier to withhold or stop delivery unless the lessee
10 provides a means or manner of payment that is commercially a
11 substantial equivalent; and
12 (2) if delivery has already been taken, payment by the
13 means or in the manner provided by the regulation discharges
14 the lessee's obligation unless the regulation is
15 discriminatory, oppressive or predatory.
16 § 2A405. Excused performance.
17 Subject to section 2A404 (relating to substituted
18 performance), the following rules apply:
19 (1) Delay in delivery or nondelivery in whole or in part
20 by a lessor or a supplier who complies with paragraphs (2)
21 and (3) is not a default under the lease contract if
22 performance as agreed has been made impracticable by the
23 occurrence of a contingency the nonoccurrence of which was a
24 basic assumption on which the lease contract was made or by
25 compliance in good faith with any applicable foreign or
26 domestic governmental regulation or order, whether or not the
27 regulation or order later proves to be invalid.
28 (2) If the causes mentioned in paragraph (1) affect only
29 part of the lessor's or the supplier's capacity to perform,
30 he shall allocate production and deliveries among his
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1 customers but at his option may include regular customers not
2 then under contract for sale or lease as well as his own
3 requirements for further manufacture. He may so allocate in
4 any manner that is fair and reasonable.
5 (3) The lessor seasonably shall notify the lessee and in
6 the case of a finance lease the supplier seasonably shall
7 notify the lessor and the lessee, if known, that there will
8 be delay or nondelivery and, if allocation is required under
9 paragraph (2), of the estimated quota thus made available for
10 the lessee.
11 § 2A406. Procedure on excused performance.
12 (a) Right of lessee to terminate or modify contract.--If the
13 lessee receives notification of a material or indefinite delay
14 or an allocation justified under section 2A405 (relating to
15 excused performance), the lessee may by written notification to
16 the lessor as to any goods involved, and with respect to all of
17 the goods if under an installment lease contract the value of
18 the whole lease contract is substantially impaired (section
19 2A510):
20 (1) terminate the lease contract (section 2A505(b)); or
21 (2) except in a finance lease that is not a consumer
22 lease, modify the lease contract by accepting the available
23 quota in substitution, with due allowance from the rent
24 payable for the balance of the lease term for the deficiency
25 but without further right against the lessor.
26 (b) Time limitation on modification.--If, after receipt of a
27 notification from the lessor under section 2A405, the lessee
28 fails so to modify the lease agreement within a reasonable time
29 not exceeding 30 days, the lease contract lapses with respect to
30 any deliveries affected.
19910H0871B0983 - 59 -
1 § 2A407. Irrevocable promises: finance leases.
2 (a) General rule.--In the case of a finance lease that is
3 not a consumer lease, the lessee's promises under the lease
4 contract become irrevocable and independent upon the lessee's
5 acceptance of the goods.
6 (b) Effect of irrevocable and independent promise.--A
7 promise that has become irrevocable and independent under
8 subsection (a):
9 (1) is effective and enforceable between the parties,
10 and by or against third parties, including assignees of the
11 parties; and
12 (2) is not subject to cancellation, termination,
13 modification, repudiation, excuse or substitution without the
14 consent of the party to whom the promise runs.
15 (c) Limitation on applicability of section.--This section
16 does not affect the validity under any other law of a covenant
17 in any lease contract making the lessee's promises irrevocable
18 and independent upon the lessee's acceptance of the goods.
19 CHAPTER 2A5
20 DEFAULT
21 Subchapter
22 A. In General
23 B. Default by Lessor
24 C. Default by Lessee
25 SUBCHAPTER A
26 IN GENERAL
27 Sec.
28 2A501. Default: procedure.
29 2A502. Notice after default.
30 2A503. Modification or impairment of rights and remedies.
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1 2A504. Liquidation of damages.
2 2A505. Cancellation and termination and effect of cancellation,
3 termination, rescission or fraud on rights and
4 remedies.
5 2A506. Statute of limitations.
6 2A507. Proof of market rent: time and place.
7 § 2A501. Default: procedure.
8 (a) Determination of default.--Whether the lessor or the
9 lessee is in default under a lease contract is determined by the
10 lease agreement and this division.
11 (b) Available rights and remedies.--If the lessor or the
12 lessee is in default under the lease contract, the party seeking
13 enforcement has rights and remedies as provided in this division
14 and, except as limited by this division, as provided in the
15 lease agreement.
16 (c) Methods of enforcement of contract.--If the lessor or
17 the lessee is in default under the lease contract, the party
18 seeking enforcement may reduce the party's claim to judgment, or
19 otherwise enforce the lease contract by self-help or any
20 available judicial procedure or nonjudicial procedure, including
21 administrative proceeding, arbitration or the like, in
22 accordance with this division.
23 (d) Rights and remedies cumulative.--Except as otherwise
24 provided in section 1106(a) (relating to remedies to be
25 liberally administered) or this division or the lease agreement,
26 the rights and remedies referred to in subsections (b) and (c)
27 are cumulative.
28 (e) Agreements covering real property and goods.--If the
29 lease agreement covers both real property and goods, the party
30 seeking enforcement may proceed under this chapter as to the
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1 goods, or under other applicable law as to both the real
2 property and the goods in accordance with that party's rights
3 and remedies in respect of the real property, in which case this
4 chapter does not apply.
5 § 2A502. Notice after default.
6 Except as otherwise provided in this division or the lease
7 agreement, the lessor or lessee in default under the lease
8 contract is not entitled to notice of default or notice of
9 enforcement from the other party to the lease agreement.
10 § 2A503. Modification or impairment of rights and remedies.
11 (a) Provisions in lease agreements.--Except as otherwise
12 provided in this division, the lease agreement may include
13 rights and remedies for default in addition to or in
14 substitution for those provided in this division and may limit
15 or alter the measure of damages recoverable under this division.
16 (b) Specified remedy construed as optional.--Resort to a
17 remedy provided under this division or in the lease agreement is
18 optional unless the remedy is expressly agreed to be exclusive.
19 If circumstances cause an exclusive or limited remedy to fail of
20 its essential purpose, or provision for an exclusive remedy is
21 unconscionable, remedy may be had as provided in this division.
22 (c) Consequential damages.--Consequential damages may be
23 liquidated under section 2A504 (relating to liquidation of
24 damages), or may otherwise be limited, altered or excluded
25 unless the limitation, alteration or exclusion is
26 unconscionable. Limitation, alteration or exclusion of
27 consequential damages for injury to the person in the case of
28 consumer goods is prima facie unconscionable but limitation,
29 alteration or exclusion of damages where the loss is commercial
30 is not prima facie unconscionable.
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1 (d) Other rights and remedies unimpaired.--Rights and
2 remedies on default by the lessor or the lessee with respect to
3 any obligation or promise collateral or ancillary to the lease
4 contract are not impaired by this division.
5 § 2A504. Liquidation of damages.
6 (a) General rule.--Damages payable by either party for
7 default, or any other act or omission, including indemnity for
8 loss or diminution of anticipated tax benefits or loss or damage
9 to lessor's residual interest, may be liquidated in the lease
10 agreement but only at an amount or by a formula that is
11 reasonable in light of the then anticipated harm caused by the
12 default or other act or omission.
13 (b) Invalidity or failure of purpose of remedy.--If the
14 lease agreement provides for liquidation of damages, and such
15 provision does not comply with subsection (a), or such provision
16 is an exclusive or limited remedy that circumstances cause to
17 fail of its essential purpose, remedy may be had as provided in
18 this division.
19 (c) Right of lessee to restitution.--If the lessor
20 justifiably withholds or stops delivery of goods because of the
21 lessee's default or insolvency (section 2A525 or 2A526), the
22 lessee is entitled to restitution of any amount by which the sum
23 of his payments exceeds:
24 (1) the amount to which the lessor is entitled by virtue
25 of terms liquidating the lessor's damages in accordance with
26 subsection (a); or
27 (2) in the absence of those terms, 20% of the then
28 present value of the total rent the lessee was obligated to
29 pay for the balance of the lease term, or, in the case of a
30 consumer lease, the lesser of such amount or $500.
19910H0871B0983 - 63 -
1 (d) Restitution subject to offset.--A lessee's right to
2 restitution under subsection (c) is subject to offset to the
3 extent the lessor establishes:
4 (1) a right to recover damages under the provisions of
5 this division other than subsection (a); and
6 (2) the amount or value of any benefits received by the
7 lessee directly or indirectly by reason of the lease
8 contract.
9 § 2A505. Cancellation and termination and effect of
10 cancellation, termination, rescission or fraud on
11 rights and remedies.
12 (a) Cancellation of contract.--On cancellation of the lease
13 contract, all obligations that are still executory on both sides
14 are discharged, but any right based on prior default or
15 performance survives, and the canceling party also retains any
16 remedy for default of the whole lease contract or any
17 unperformed balance.
18 (b) Termination of contract.--On termination of the lease
19 contract, all obligations that are still executory on both sides
20 are discharged, but any right based on prior default or
21 performance survives.
22 (c) Damage claim for antecedent default.--Unless the
23 contrary intention clearly appears, expressions of
24 "cancellation," "rescission" or the like of the lease contract
25 may not be construed as a renunciation or discharge of any claim
26 in damages for an antecedent default.
27 (d) Misrepresentation or fraud.--Rights and remedies for
28 material misrepresentation or fraud include all rights and
29 remedies available under this division for default.
30 (e) Inconsistency of claim or remedy.--Neither rescission
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1 nor a claim for rescission of the lease contract nor rejection
2 or return of the goods may bar or be deemed inconsistent with a
3 claim for damages or other right or remedy.
4 § 2A506. Statute of limitations.
5 (a) General rule.--An action for default under a lease
6 contract, including breach of warranty or indemnity, must be
7 commenced within four years after the cause of action accrued.
8 By the original lease contract the parties may reduce the period
9 of limitation to not less than one year.
10 (b) Accrual of cause of action.--A cause of action for
11 default accrues when the act or omission on which the default or
12 breach of warranty is based is or should have been discovered by
13 the aggrieved party, or when the default occurs, whichever is
14 later. A cause of action for indemnity accrues when the act or
15 omission on which the claim for indemnity is based is or should
16 have been discovered by the indemnified party, whichever is
17 later.
18 (c) New action after termination of another.--If an action
19 commenced within the time limited by subsection (a) is so
20 terminated as to leave available a remedy by another action for
21 the same default or breach of warranty or indemnity, the other
22 action may be commenced after the expiration of the time limited
23 and within six months after the termination of the first action
24 unless the termination resulted from voluntary discontinuance or
25 from dismissal for failure or neglect to prosecute.
26 (d) Unaffected laws and actions.--This section does not
27 alter the law on tolling of the statute of limitations nor does
28 it apply to causes of action that have accrued before this
29 division becomes effective.
30 § 2A507. Proof of market rent: time and place.
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1 (a) Rent prevailing; general rule.--Damages based on market
2 rent (section 2A519 or 2A528) are determined according to the
3 rent for the use of the goods concerned for a lease term
4 identical to the remaining lease term of the original lease
5 agreement and prevailing at the times specified in sections
6 2A519 (relating to lessee's damages for nondelivery,
7 repudiation, default and breach of warranty in regard to
8 accepted goods) and 2A528 (relating to lessor's damages for
9 nonacceptance, failure to pay, repudiation or other default).
10 (b) Rent prevailing at other times.--If evidence of rent for
11 the use of the goods concerned for a lease term identical to the
12 remaining lease term of the original lease agreement and
13 prevailing at the times or places described in this division is
14 not readily available, the rent prevailing within any reasonable
15 time before or after the time described or at any other place or
16 for a different lease term which in commercial judgment or under
17 usage of trade would serve as a reasonable substitute for the
18 one described may be used, making any proper allowance for the
19 difference, including the cost of transporting the goods to or
20 from the other place.
21 (c) Admissibility of new prevailing rent.--Evidence of a
22 relevant rent prevailing at a time or place or for a lease term
23 other than the one described in this division offered by one
24 party is not admissible unless and until he has given the other
25 party notice the court finds sufficient to prevent unfair
26 surprise.
27 (d) Admissibility of market quotations.--If the prevailing
28 rent or value of any goods regularly leased in any established
29 market is in issue, reports in official publications or trade
30 journals or in newspapers or periodicals of general circulation
19910H0871B0983 - 66 -
1 published as the reports of that market are admissible in
2 evidence. The circumstances of the preparation of the report may
3 be shown to affect its weight but not its admissibility.
4 SUBCHAPTER B
5 DEFAULT BY LESSOR
6 Sec.
7 2A508. Lessee's remedies.
8 2A509. Lessee's rights on improper delivery; rightful
9 rejection.
10 2A510. Installment lease contracts: rejection and default.
11 2A511. Merchant lessee's duties as to rightfully rejected
12 goods.
13 2A512. Lessee's duties as to rightfully rejected goods.
14 2A513. Cure by lessor of improper tender or delivery;
15 replacement.
16 2A514. Waiver of lessee's objections.
17 2A515. Acceptance of goods.
18 2A516. Effect of acceptance of goods; notice of default;
19 burden of establishing default after acceptance;
20 notice of claim or litigation to person answerable
21 over.
22 2A517. Revocation of acceptance of goods.
23 2A518. Cover; substitute goods.
24 2A519. Lessee's damages for nondelivery, repudiation, default
25 and breach of warranty in regard to accepted goods.
26 2A520. Lessee's incidental and consequential damages.
27 2A521. Lessee's right to specific performance or replevin.
28 2A522. Lessee's right to goods on lessor's insolvency.
29 § 2A508. Lessee's remedies.
30 (a) General rule.--If a lessor fails to deliver the goods in
19910H0871B0983 - 67 -
1 conformity to the lease contract (section 2A509) or repudiates
2 the lease contract (section 2A402), or a lessee rightfully
3 rejects the goods (section 2A509) or justifiably revokes
4 acceptance of the goods (section 2A517), then with respect to
5 any goods involved, and with respect to all of the goods if
6 under an installment lease contract the value of the whole lease
7 contract is substantially impaired (section 2A510), the lessor
8 is in default under the lease contract and the lessee may:
9 (1) cancel the lease contract (section 2A505(a));
10 (2) recover so much of the rent and security as has been
11 paid and is just under the circumstances;
12 (3) cover and recover damages as to all goods affected,
13 whether or not they have been identified to the lease
14 contract (sections 2A518 and 2A520), or recover damages for
15 nondelivery (sections 2A519 and 2A520); and
16 (4) exercise any other rights or pursue any other
17 remedies provided in the lease contract.
18 (b) Recovery of nondelivered goods.--If a lessor fails to
19 deliver the goods in conformity to the lease contract or
20 repudiates the lease contract, the lessee may also:
21 (1) if the goods have been identified, recover them
22 (section 2A522); or
23 (2) in a proper case, obtain specific performance or
24 replevy the goods (section 2A521).
25 (c) Rights and remedies for other defaults.--If a lessor is
26 otherwise in default under a lease contract, the lessee may
27 exercise the rights and pursue the remedies provided in the
28 lease contract, which may include a right to cancel the lease,
29 and in section 2A519(c) (relating to lessee's damages for
30 nondelivery, repudiation, default and breach of warranty in
19910H0871B0983 - 68 -
1 regard to accepted goods).
2 (d) Damages for breach of warranty.--If a lessor has
3 breached a warranty, whether express or implied, the lessee may
4 recover damages (section 2A519(d)).
5 (e) Security interest in goods in lessee's possession.--On
6 rightful rejection or justifiable revocation of acceptance, a
7 lessee has a security interest in goods in the lessee's
8 possession or control for any rent and security that has been
9 paid and any expenses reasonably incurred in their inspection,
10 receipt, transportation, and care and custody and may hold those
11 goods and dispose of them in good faith and in a commercially
12 reasonable manner, subject to section 2A527(e) (relating to
13 lessor's rights to dispose of goods).
14 (f) Deduction of damages from rent due.--Subject to the
15 provisions of section 2A407 (relating to irrevocable promises:
16 finance leases), a lessee, on notifying the lessor of the
17 lessee's intention to do so, may deduct all or any part of the
18 damages resulting from any default under the lease contract from
19 any part of the rent still due under the same lease contract.
20 § 2A509. Lessee's rights on improper delivery; rightful
21 rejection.
22 (a) General rule.--Subject to the provisions of section
23 2A510 (relating to installment lease contracts: rejection and
24 default) on default in installment lease contracts, if the goods
25 or the tender or delivery fail in any respect to conform to the
26 lease contract, the lessee may reject or accept the goods or
27 accept any commercial unit or units and reject the rest of the
28 goods.
29 (b) Effectiveness of rejection.--Rejection of goods is
30 ineffective unless it is within a reasonable time after tender
19910H0871B0983 - 69 -
1 or delivery of the goods and the lessee seasonably notifies the
2 lessor.
3 § 2A510. Installment lease contracts: rejection and default.
4 (a) General rule.--Under an installment lease contract, a
5 lessee may reject any delivery that is nonconforming if the
6 nonconformity substantially impairs the value of that delivery
7 and cannot be cured or the nonconformity is a defect in the
8 required documents; but if the nonconformity does not fall
9 within subsection (b) and the lessor or the supplier gives
10 adequate assurance of its cure, the lessee must accept that
11 delivery.
12 (b) Impairment of contract as a whole.--Whenever
13 nonconformity or default with respect to one or more deliveries
14 substantially impairs the value of the installment lease
15 contract as a whole, there is a default with respect to the
16 whole. But, the aggrieved party reinstates the installment lease
17 contract as a whole if the aggrieved party accepts a
18 nonconforming delivery without seasonably notifying of
19 cancellation or brings an action with respect only to past
20 deliveries or demands performance as to future deliveries.
21 § 2A511. Merchant lessee's duties as to rightfully rejected
22 goods.
23 (a) General rule.--Subject to any security interest of a
24 lessee (section 2A508(e)), if a lessor or a supplier has no
25 agent or place of business at the market of rejection, a
26 merchant lessee, after rejection of goods in his possession or
27 control, shall follow any reasonable instructions received from
28 the lessor or the supplier with respect to the goods. In the
29 absence of those instructions, a merchant lessee shall make
30 reasonable efforts to sell, lease or otherwise dispose of the
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1 goods for the lessor's account if they threaten to decline in
2 value speedily. Instructions are not reasonable if on demand
3 indemnity for expenses is not forthcoming.
4 (b) Reimbursement of expenses and commission.--If a merchant
5 lessee (subsection (a)) or any other lessee (section 2A512)
6 disposes of goods, he is entitled to reimbursement either from
7 the lessor or the supplier or out of the proceeds for reasonable
8 expenses of caring for and disposing of the goods and, if the
9 expenses include no disposition commission, to such commission
10 as is usual in the trade, or if there is none, to a reasonable
11 sum not exceeding 10% of the gross proceeds.
12 (c) Good faith conduct.--In complying with this section or
13 section 2A512 (relating to lessee's duties as to rightfully
14 rejected goods), the lessee is held only to good faith. Good
15 faith conduct hereunder is neither acceptance or conversion nor
16 the basis of an action for damages.
17 (d) Rights of good faith purchaser.--A purchaser who
18 purchases in good faith from a lessee pursuant to this section
19 or section 2A512 takes the goods free of any rights of the
20 lessor and the supplier even though the lessee fails to comply
21 with one or more of the requirements of this division.
22 § 2A512. Lessee's duties as to rightfully rejected goods.
23 (a) General rule.--Except as otherwise provided with respect
24 to goods that threaten to decline in value speedily (section
25 2A511) and subject to any security interest of a lessee (section
26 2A508(e)):
27 (1) the lessee, after rejection of goods in the lessee's
28 possession, shall hold them with reasonable care at the
29 lessor's or the supplier's disposition for a reasonable time
30 after the lessee's seasonable notification of rejection;
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1 (2) if the lessor or the supplier gives no instructions
2 within a reasonable time after notification of rejection, the
3 lessee may store the rejected goods for the lessor's or the
4 supplier's account or ship them to the lessor or the supplier
5 or dispose of them for the lessor's or the supplier's account
6 with reimbursement in the manner provided in section 2A511
7 (relating to merchant lessee's duties as to rightfully
8 rejected goods); but
9 (3) the lessee has no further obligations with regard to
10 goods rightfully rejected.
11 (b) Action of lessee not acceptance or conversion.--Action
12 by the lessee pursuant to subsection (a) is not acceptance or
13 conversion.
14 § 2A513. Cure by lessor of improper tender or delivery;
15 replacement.
16 (a) General rule.--If any tender or delivery by the lessor
17 or the supplier is rejected because nonconforming and the time
18 for performance has not yet expired, the lessor or the supplier
19 may seasonably notify the lessee of the lessor's or the
20 supplier's intention to cure and may then make a conforming
21 delivery within the time provided in the lease contract.
22 (b) Substitution of conforming tender.--If the lessee
23 rejects a nonconforming tender that the lessor or the supplier
24 had reasonable grounds to believe would be acceptable with or
25 without money allowance, the lessor or the supplier may have a
26 further reasonable time to substitute a conforming tender if he
27 seasonably notifies the lessee.
28 § 2A514. Waiver of lessee's objections.
29 (a) General rule.--In rejecting goods, a lessee's failure to
30 state a particular defect that is ascertainable by reasonable
19910H0871B0983 - 72 -
1 inspection precludes the lessee from relying on the defect to
2 justify rejection or to establish default:
3 (1) if, stated seasonably, the lessor or the supplier
4 could have cured it (section 2A513); or
5 (2) between merchants if the lessor or the supplier
6 after rejection has made a request in writing for a full and
7 final written statement of all defects on which the lessee
8 proposes to rely.
9 (b) Payment against defective documents.--A lessee's failure
10 to reserve rights when paying rent or other consideration
11 against documents precludes recovery of the payment for defects
12 apparent on the face of the documents.
13 § 2A515. Acceptance of goods.
14 (a) General rule.--Acceptance of goods occurs after the
15 lessee has had a reasonable opportunity to inspect the goods
16 and:
17 (1) the lessee signifies or acts with respect to the
18 goods in a manner that signifies to the lessor or the
19 supplier that the goods are conforming or that the lessee
20 will take or retain them in spite of their nonconformity; or
21 (2) the lessee fails to make an effective rejection of
22 the goods (section 2A509(b)).
23 (b) Part of commercial unit.--Acceptance of a part of any
24 commercial unit is acceptance of that entire unit.
25 § 2A516. Effect of acceptance of goods; notice of default;
26 burden of establishing default after acceptance;
27 notice of claim or litigation to person answerable
28 over.
29 (a) Payment for accepted goods.--A lessee must pay rent for
30 any goods accepted in accordance with the lease contract, with
19910H0871B0983 - 73 -
1 due allowance for goods rightfully rejected or not delivered.
2 (b) Effect of acceptance on remedies for default.--A
3 lessee's acceptance of goods precludes rejection of the goods
4 accepted. In the case of a finance lease, if made with knowledge
5 of a nonconformity, acceptance cannot be revoked because of it.
6 In any other case, if made with knowledge of a nonconformity,
7 acceptance cannot be revoked because of it unless the acceptance
8 was on the reasonable assumption that the nonconformity would be
9 seasonably cured. Acceptance does not of itself impair any other
10 remedy provided by this division or the lease agreement for
11 nonconformity.
12 (c) Notice of default and burden of proof.--If a tender has
13 been accepted:
14 (1) within a reasonable time after the lessee discovers
15 or should have discovered any default, the lessee shall
16 notify the lessor and the supplier, if any, or be barred from
17 any remedy against the party not notified;
18 (2) except in the case of a consumer lease, within a
19 reasonable time after the lessee receives notice of
20 litigation for infringement or the like (section 2A211), the
21 lessee shall notify the lessor or be barred from any remedy
22 over for liability established by the litigation; and
23 (3) the burden is on the lessee to establish any
24 default.
25 (d) Notice of litigation to person answerable over.--If a
26 lessee is sued for breach of a warranty or other obligation for
27 which a lessor or a supplier is answerable over, the following
28 apply:
29 (1) The lessee may give the lessor or the supplier
30 written notice of the litigation. If the notice states that
19910H0871B0983 - 74 -
1 the person notified may come in and defend and that if the
2 person notified does not do so that person will be bound in
3 any action against that person by the lessee by any
4 determination of fact common to the two litigations, then,
5 unless the person notified after seasonable receipt of the
6 notice does come in and defend, that person is so bound.
7 (2) The lessor or the supplier may demand in writing
8 that the lessee turn over control of the litigation,
9 including settlement, if the claim is one for infringement or
10 the like (section 2A211) or else be barred from any remedy
11 over. If the demand states that the lessor or the supplier
12 agrees to bear all expense and to satisfy any adverse
13 judgment, then, unless the lessee after seasonable receipt of
14 the demand does turn over control, the lessee is so barred.
15 (e) Obligation of lessee to hold lessor or supplier
16 harmless.--Subsections (c) and (d) apply to any obligation of a
17 lessee to hold the lessor or the supplier harmless against
18 infringement or the like (section 2A211).
19 § 2A517. Revocation of acceptance of goods.
20 (a) General rule.--A lessee may revoke acceptance of a lot
21 or commercial unit whose nonconformity substantially impairs its
22 value to the lessee if the lessee has accepted it:
23 (1) except in the case of a finance lease, on the
24 reasonable assumption that its nonconformity would be cured
25 and it has not been seasonably cured; or
26 (2) without discovery of the nonconformity if the
27 lessee's acceptance was reasonably induced either by the
28 lessor's assurances or, except in the case of a finance
29 lease, by the difficulty of discovery before acceptance.
30 (b) Revocation of acceptance if lessor defaults under lease
19910H0871B0983 - 75 -
1 contract.--Except in the case of a finance lease that is not a
2 consumer lease, a lessee may revoke acceptance of a lot or
3 commercial unit if the lessor defaults under the lease contract
4 and the default substantially impairs the value of that lot or
5 commercial unit to the lessee.
6 (c) Revocation for other defaults by lessor.--If the lease
7 agreement so provides, the lessee may revoke acceptance of a lot
8 or commercial unit because of other defaults by the lessor.
9 (d) Time and notice of revocation.--Revocation of acceptance
10 must occur within a reasonable time after the lessee discovers
11 or should have discovered the ground for it and before any
12 substantial change in condition of the goods which is not caused
13 by the nonconformity. Revocation is not effective until the
14 lessee notifies the lessor.
15 (e) Rights and duties of revoking lessee.--A lessee who so
16 revokes has the same rights and duties with regard to the goods
17 involved as if the lessee had rejected them.
18 § 2A518. Cover; substitute goods.
19 (a) Right and manner of cover.--After default by a lessor
20 under the lease contract of the type described in section
21 2A508(a) (relating to lessee's remedies) or, if agreed, after
22 other default by the lessor, the lessee may cover by making any
23 purchase or lease of or contract to purchase or lease goods in
24 substitution for those due from the lessor.
25 (b) Damages recoverable.--Except as otherwise provided with
26 respect to damages liquidated in the lease agreement (section
27 2A504) or otherwise determined pursuant to agreement of the
28 parties (sections 1102(c) and 2A503), if a lessee's cover is by
29 lease agreement substantially similar to the original lease
30 agreement and the new lease agreement is made in good faith and
19910H0871B0983 - 76 -
1 in a commercially reasonable manner, the lessee may recover from
2 the lessor as damages:
3 (1) the present value, as of the date of the
4 commencement of the term of the new lease agreement, of the
5 rent under the new lease agreement applicable to that period
6 of the new lease term which is comparable to the then
7 remaining term of the original lease agreement minus the
8 present value as of the same date of the total rent for the
9 then remaining lease term of the original lease agreement;
10 and
11 (2) any incidental or consequential damages less
12 expenses saved in consequence of the lessor's default.
13 (c) Recovery in other cases.--If a lessee's cover is by
14 lease agreement that for any reason does not qualify for
15 treatment under subsection (b), or is by purchase or otherwise,
16 the lessee may recover from the lessor as if the lessee had
17 elected not to cover and section 2A519 (relating to lessee's
18 damages for nondelivery, repudiation, default and breach of
19 warranty in regard to accepted goods) governs.
20 § 2A519. Lessee's damages for nondelivery, repudiation, default
21 and breach of warranty in regard to accepted goods.
22 (a) Measure of damages for nondelivery or rejection.--Except
23 as otherwise provided with respect to damages liquidated in the
24 lease agreement (section 2A504) or otherwise determined pursuant
25 to agreement of the parties (sections 1102(c) and 2A503), if a
26 lessee elects not to cover or a lessee elects to cover and the
27 cover is by lease agreement that for any reason does not qualify
28 for treatment under section 2A518(b) (relating to cover;
29 substitute goods), or is by purchase or otherwise, the measure
30 of damages for nondelivery or repudiation by the lessor or for
19910H0871B0983 - 77 -
1 rejection or revocation of acceptance by the lessee is the
2 present value as of the date of the default of the then market
3 rent minus the present value as of the same date of the original
4 rent, computed for the remaining lease term of the original
5 lease agreement together with incidental and consequential
6 damages, less expenses saved in consequence of the lessor's
7 default.
8 (b) Determination of market rent.--Market rent is to be
9 determined as of the place for tender or, in cases of rejection
10 after arrival or revocation of acceptance, as of the place of
11 arrival.
12 (c) Measure of damages for nonconforming tender or delivery
13 or other default.--Except as otherwise agreed, if the lessee has
14 accepted goods and given notification (section 2A516(c)), the
15 measure of damages for nonconforming tender or delivery or other
16 default by a lessor is the loss resulting in the ordinary course
17 of events from the lessor's default as determined in any manner
18 that is reasonable together with incidental and consequential
19 damages, less expenses saved in consequence of the lessor's
20 default.
21 (d) Measure of damages for breach of warranty.--Except as
22 otherwise agreed, the measure of damages for breach of warranty
23 is the present value at the time and place of acceptance of the
24 difference between the value of the use of the goods accepted
25 and the value if they had been as warranted for the lease term,
26 unless special circumstances show proximate damages of a
27 different amount, together with incidental and consequential
28 damages, less expenses saved in consequence of the lessor's
29 default or breach of warranty.
30 § 2A520. Lessee's incidental and consequential damages.
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1 (a) Incidental damages.--Incidental damages resulting from a
2 lessor's default include expenses reasonably incurred in
3 inspection, receipt, transportation, and care and custody of
4 goods rightfully rejected or goods the acceptance of which is
5 justifiably revoked, any commercially reasonable charges,
6 expenses or commissions in connection with effecting cover, and
7 any other reasonable expense incident to the default.
8 (b) Consequential damages.--Consequential damages resulting
9 from a lessor's default include:
10 (1) any loss resulting from general or particular
11 requirements and needs of which the lessor at the time of
12 contracting had reason to know and which could not reasonably
13 be prevented by cover or otherwise; and
14 (2) injury to person or property proximately resulting
15 from any breach of warranty.
16 § 2A521. Lessee's right to specific performance or replevin.
17 (a) Specific performance.--Specific performance may be
18 decreed if the goods are unique or in other proper
19 circumstances.
20 (b) Terms and conditions of decree for specific
21 performance.--A decree for specific performance may include any
22 terms and conditions as to payment of the rent, damages or other
23 relief that the court deems just.
24 (c) Replevin or other similar remedy.--A lessee has a right
25 of replevin, detinue, sequestration, claim and delivery, or the
26 like for goods identified to the lease contract if after
27 reasonable effort the lessee is unable to effect cover for those
28 goods or the circumstances reasonably indicate that the effort
29 will be unavailing.
30 § 2A522. Lessee's right to goods on lessor's insolvency.
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1 (a) General rule.--Subject to subsection (b) and even though
2 the goods have not been shipped, a lessee who has paid a part or
3 all of the rent and security for goods identified to a lease
4 contract (section 2A217) on making and keeping good a tender of
5 any unpaid portion of the rent and security due under the lease
6 contract may recover the goods identified from the lessor if the
7 lessor becomes insolvent within ten days after receipt of the
8 first installment of rent and security.
9 (b) Goods to conform to contract.--A lessee acquires the
10 right to recover goods identified to a lease contract only if
11 they conform to the lease contract.
12 SUBCHAPTER C
13 DEFAULT BY LESSEE
14 Sec.
15 2A523. Lessor's remedies.
16 2A524. Lessor's right to identify goods to lease contract.
17 2A525. Lessor's right to possession of goods.
18 2A526. Lessor's stoppage of delivery in transit or otherwise.
19 2A527. Lessor's rights to dispose of goods.
20 2A528. Lessor's damages for nonacceptance, failure to pay,
21 repudiation or other default.
22 2A529. Lessor's action for the rent.
23 2A530. Lessor's incidental damages.
24 2A531. Standing to sue third parties for injury to goods.
25 2A532. Lessor's rights to residual interest.
26 § 2A523. Lessor's remedies.
27 (a) General rule.--If a lessee wrongfully rejects or revokes
28 acceptance of goods or fails to make a payment when due or
29 repudiates with respect to a part or the whole, then, with
30 respect to any goods involved, and with respect to all of the
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1 goods if under an installment lease contract the value of the
2 whole lease contract is substantially impaired (section 2A510),
3 the lessee is in default under the lease contract and the lessor
4 may:
5 (1) Cancel the lease contract (section 2A505(a)).
6 (2) Proceed respecting goods not identified to the lease
7 contract (section 2A524).
8 (3) Withhold delivery of the goods and take possession
9 of goods previously delivered (section 2A525).
10 (4) Stop delivery of the goods by any bailee (section
11 2A526).
12 (5) Dispose of the goods and recover damages (section
13 2A527), or retain the goods and recover damages (section
14 2A528), or in a proper case recover rent (section 2A529).
15 (6) Exercise any other rights or pursue any other
16 remedies provided in the lease contract.
17 (b) When lessor does not fully exercise right or obtain
18 remedy.--If a lessor does not fully exercise a right or obtain a
19 remedy to which the lessor is entitled under subsection (a), the
20 lessor may recover the loss resulting in the ordinary course of
21 events from the lessee's default as determined in any reasonable
22 manner, together with incidental damages, less expenses saved in
23 consequence of the lessee's default.
24 (c) Other rights and remedies.--If a lessee is otherwise in
25 default under a lease contract, the lessor may exercise the
26 rights and pursue the remedies provided in the lease contract,
27 which may include a right to cancel the lease. In addition,
28 unless otherwise provided in the lease contract:
29 (1) if the default substantially impairs the value of
30 the lease contract to the lessor, the lessor may exercise the
19910H0871B0983 - 81 -
1 rights and pursue the remedies provided in subsection (a) or
2 (b); or
3 (2) if the default does not substantially impair the
4 value of the lease contract to the lessor, the lessor may
5 recover as provided in subsection (b).
6 § 2A524. Lessor's right to identify goods to lease contract.
7 (a) General rule.--A lessor aggrieved under section 2A523(a)
8 (relating to lessor's remedies) may:
9 (1) identify to the lease contract conforming goods not
10 already identified if at the time the lessor learned of the
11 default they were in the lessor's or the supplier's
12 possession or control; and
13 (2) dispose of goods (section 2A527(a)) that
14 demonstrably have been intended for the particular lease
15 contract even though those goods are unfinished.
16 (b) Unfinished goods.--If the goods are unfinished, in the
17 exercise of reasonable commercial judgment for the purposes of
18 avoiding loss and of effective realization, an aggrieved lessor
19 or the supplier may either complete manufacture and wholly
20 identify the goods to the lease contract or cease manufacture
21 and lease, sell or otherwise dispose of the goods for scrap or
22 salvage value or proceed in any other reasonable manner.
23 § 2A525. Lessor's right to possession of goods.
24 (a) Insolvency of lessee.--If a lessor discovers the lessee
25 to be insolvent, the lessor may refuse to deliver the goods.
26 (b) Default by lessee.--After a default by the lessee under
27 the lease contract of the type described in section 2A523(a) or
28 (c)(1) (relating to lessor's remedies) or, if agreed, after
29 other default by the lessee, the lessor has the right to take
30 possession of the goods. If the lease contract so provides, the
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1 lessor may require the lessee to assemble the goods and make
2 them available to the lessor at a place to be designated by the
3 lessor which is reasonably convenient to both parties. Without
4 removal, the lessor may render unusable any goods employed in
5 trade or business, and may dispose of goods on the lessee's
6 premises (section 2A527).
7 (c) Method of proceeding on default.--The lessor may proceed
8 under subsection (b) without judicial process if it can be done
9 without breach of the peace or the lessor may proceed by action.
10 § 2A526. Lessor's stoppage of delivery in transit or otherwise.
11 (a) General rule.--A lessor may stop delivery of goods in
12 the possession of a carrier or other bailee if the lessor
13 discovers the lessee to be insolvent and may stop delivery of
14 carload, truckload, planeload or larger shipments of express or
15 freight if the lessee repudiates or fails to make a payment due
16 before delivery, whether for rent, security or otherwise under
17 the lease contract, or for any other reason the lessor has a
18 right to withhold or take possession of the goods.
19 (b) When lessor loses right.--In pursuing its remedies under
20 subsection (a), the lessor may stop delivery until:
21 (1) receipt of the goods by the lessee;
22 (2) acknowledgment to the lessee by any bailee of the
23 goods, except a carrier, that the bailee holds the goods for
24 the lessee; or
25 (3) such an acknowledgment to the lessee by a carrier
26 via reshipment or as warehouseman.
27 (c) Notice and compliance.--
28 (1) To stop delivery, a lessor shall so notify as to
29 enable the bailee by reasonable diligence to prevent delivery
30 of the goods.
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1 (2) After notification, the bailee shall hold and
2 deliver the goods according to the directions of the lessor,
3 but the lessor is liable to the bailee for any ensuing
4 charges or damages.
5 (3) A carrier who has issued a nonnegotiable bill of
6 lading is not obliged to obey a notification to stop received
7 from a person other than the consignor.
8 § 2A527. Lessor's rights to dispose of goods.
9 (a) General rule.--After a default by a lessee under the
10 lease contract of the type described in section 2A523(a) or
11 (c)(1) (relating to lessor's remedies) or after the lessor
12 refuses to deliver or takes possession of goods (section 2A525
13 or 2A526) or, if agreed, after other default by a lessee, the
14 lessor may dispose of the goods concerned or the undelivered
15 balance thereof by lease, sale or otherwise.
16 (b) Damages recoverable.--Except as otherwise provided with
17 respect to damages liquidated in the lease agreement (section
18 2A504) or otherwise determined pursuant to agreement of the
19 parties (sections 1102(c) and 2A503), if the disposition is by
20 lease agreement substantially similar to the original lease
21 agreement and the lease agreement is made in good faith and in a
22 commercially reasonable manner, the lessor may recover from the
23 lessee as damages:
24 (1) accrued and unpaid rent as of the date of the
25 commencement of the term of the new lease agreement;
26 (2) the present value, as of the same date, of the total
27 rent for the then remaining lease term of the original lease
28 agreement minus the present value, as of the same date, of
29 the rent under the new lease agreement applicable to that
30 period of the new lease term which is comparable to the then
19910H0871B0983 - 84 -
1 remaining term of the original lease agreement; and
2 (3) any incidental damages allowed under section 2A530
3 (relating to lessor's incidental damages), less expenses
4 saved in consequence of the lessee's default.
5 (c) Recovery in other cases.--If the lessor's disposition is
6 by lease agreement that for any reason does not qualify for
7 treatment under subsection (b), or is by sale or otherwise, the
8 lessor may recover from the lessee as if the lessor had elected
9 not to dispose of the goods and section 2A528 (relating to
10 lessor's damages for nonacceptance, failure to pay, repudiation
11 or other default) governs.
12 (d) Rights of good faith buyer or lessee.--A subsequent
13 buyer or lessee who buys or leases from the lessor in good faith
14 for value as a result of a disposition under this section takes
15 the goods free of the original lease contract and any rights of
16 the original lessee even though the lessor fails to comply with
17 one or more of the requirements of this division.
18 (e) Accountability for profits.--The lessor is not
19 accountable to the lessee for any profit made on any
20 disposition. A lessee who has rightfully rejected or justifiably
21 revoked acceptance shall account to the lessor for any excess
22 over the amount of the lessee's security interest (section
23 2A508(e)).
24 § 2A528. Lessor's damages for nonacceptance, failure to pay,
25 repudiation or other default.
26 (a) General rule.--Except as otherwise provided with respect
27 to damages liquidated in the lease agreement (section 2A504) or
28 otherwise determined pursuant to agreement of the parties
29 (sections 1102(c) and 2A523), if a lessor elects to retain the
30 goods or a lessor elects to dispose of the goods and the
19910H0871B0983 - 85 -
1 disposition is by lease agreement that for any reason does not
2 qualify for treatment under section 2A527(b) (relating to
3 lessor's rights to dispose of goods), or is by sale or
4 otherwise, the lessor may recover from the lessee as damages for
5 a default of the type described in section 2A523(a) or (c)(1)
6 (relating to lessor's remedies) or, if agreed, for other default
7 of the lessee:
8 (1) accrued and unpaid rent as of the date of default if
9 the lessee has never taken possession of the goods or, if the
10 lessee has taken possession of the goods, as of the date the
11 lessor repossesses the goods or an earlier date on which the
12 lessee makes a tender of the goods to the lessor;
13 (2) the present value as of the date determined under
14 paragraph (1) of the total rent for the then remaining lease
15 term of the original lease agreement minus the present value
16 as of the same date of the market rent at the place where the
17 goods are located computed for the same lease term; and
18 (3) any incidental damages allowed under section 2A530
19 (relating to lessor's incidental damages), less expenses
20 saved in consequence of the lessee's default.
21 (b) Exception.--If the measure of damages provided in
22 subsection (a) is inadequate to put a lessor in as good a
23 position as performance would have, the measure of damages is
24 the present value of the profit, including reasonable overhead,
25 the lessor would have made from full performance by the lessee,
26 together with any incidental damages allowed under section
27 2A530, due allowance for costs reasonably incurred and due
28 credit for payments or proceeds of disposition.
29 § 2A529. Lessor's action for the rent.
30 (a) General rule.--After default by the lessee under the
19910H0871B0983 - 86 -
1 lease contract of the type described in section 2A523(a) or
2 (c)(1) (relating to lessor's remedies) or, if agreed, after
3 other default by the lessee, if the lessor complies with
4 subsection (b), the lessor may recover from the lessee as
5 damages:
6 (1) for goods accepted by the lessee and not repossessed
7 by or tendered to the lessor, and for conforming goods lost
8 or damaged within a commercially reasonable time after risk
9 of loss passes to the lessee (section 2A219):
10 (i) accrued and unpaid rent as of the date of entry
11 of judgment in favor of the lessor;
12 (ii) the present value as of the same date of the
13 rent for the then remaining lease term of the lease
14 agreement; and
15 (iii) any incidental damages allowed under section
16 2A530 (relating to lessor's incidental damages), less
17 expenses saved in consequence of the lessee's default;
18 and
19 (2) for goods identified to the lease contract if the
20 lessor is unable after reasonable effort to dispose of them
21 at a reasonable price or the circumstances reasonably
22 indicate that effort will be unavailing:
23 (i) accrued and unpaid rent as of the date of entry
24 of judgment in favor of the lessor;
25 (ii) the present value as of the same date of the
26 rent for the then remaining lease term of the lease
27 agreement; and
28 (iii) any incidental damages allowed under section
29 2A530, less expenses saved in consequence of the lessee's
30 default.
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1 (b) Duty of lessor to hold goods.--Except as provided in
2 subsection (c), the lessor shall hold for the lessee for the
3 remaining lease term of the lease agreement any goods that have
4 been identified to the lease contract and are in the lessor's
5 control.
6 (c) Rights of lessor before collection of judgment.--The
7 lessor may dispose of the goods at any time before collection of
8 the judgment for damages obtained pursuant to subsection (a). If
9 the disposition is before the end of the remaining lease term of
10 the lease agreement, the lessor's recovery against the lessee
11 for damages is governed by section 2A527 (relating to lessor's
12 rights to dispose of goods) or 2A528 (relating to lessor's
13 damages for nonacceptance, failure to pay, repudiation or other
14 default), and the lessor will cause an appropriate credit to be
15 provided against a judgment for damages to the extent that the
16 amount of the judgment exceeds the recovery available pursuant
17 to section 2A527 or 2A528.
18 (d) Rights of lessee after payment of judgment.--Payment of
19 the judgment for damages obtained pursuant to subsection (a)
20 entitles the lessee to the use and possession of the goods not
21 then disposed of for the remaining lease term of and in
22 accordance with the lease agreement.
23 (e) Remedy if rent not allowable.--After a lessee has
24 wrongfully rejected or revoked acceptance of goods, has failed
25 to pay rent then due or has repudiated (section 2A402), a lessor
26 who is held not entitled to rent under this section must
27 nevertheless be awarded damages for nonacceptance under sections
28 2A527 and 2A528.
29 § 2A530. Lessor's incidental damages.
30 Incidental damages to an aggrieved lessor include any
19910H0871B0983 - 88 -
1 commercially reasonable charges, expenses or commissions
2 incurred in stopping delivery, in the transportation, care and
3 custody of goods after the lessee's default, in connection with
4 return or disposition of the goods, or otherwise resulting from
5 the default.
6 § 2A531. Standing to sue third parties for injury to goods.
7 (a) General rule.--If a third party so deals with goods that
8 have been identified to a lease contract as to cause actionable
9 injury to a party to the lease contract:
10 (1) the lessor has a right of action against the third
11 party; and
12 (2) the lessee also has a right of action against the
13 third party if the lessee:
14 (i) has a security interest in the goods;
15 (ii) has an insurable interest in the goods; or
16 (iii) bears the risk of loss under the lease
17 contract or has since the injury assumed that risk as
18 against the lessor and the goods have been converted or
19 destroyed.
20 (b) Status of plaintiff as fiduciary.--If at the time of the
21 injury the party plaintiff did not bear the risk of loss as
22 against the other party to the lease contract and there is no
23 arrangement between them for disposition of the recovery, his
24 suit or settlement, subject to his own interest, is as a
25 fiduciary for the other party to the lease contract.
26 (c) Consent of parties as to suing.--Either party with the
27 consent of the other may sue for the benefit of whom it may
28 concern.
29 § 2A532. Lessor's rights to residual interest.
30 In addition to any other recovery permitted by this division
19910H0871B0983 - 89 -
1 or other law, the lessor may recover from the lessee an amount
2 that will fully compensate the lessor for any loss of or damage
3 to the lessor's residual interest in the goods caused by the
4 default of the lessee.
5 Section 4. Division 3 of Title 13 is repealed.
6 Section 5. Title 13 is amended by adding a division to read:
7 DIVISION 3
8 NEGOTIABLE INSTRUMENTS
9 Chapter
10 31. General Provisions and Definitions
11 32. Negotiation, Transfer and Indorsement
12 33. Enforcement of Instruments
13 34. Liability of Parties
14 35. Dishonor
15 36. Discharge and Payment
16 CHAPTER 31
17 GENERAL PROVISIONS AND DEFINITIONS
18 Sec.
19 3101. Short title of division.
20 3102. Subject matter.
21 3103. Definitions and index of definitions.
22 3104. Negotiable instrument.
23 3105. Issue of instrument.
24 3106. Unconditional promise or order.
25 3107. Instrument payable in foreign money.
26 3108. Payable on demand or at definite time.
27 3109. Payable to bearer or to order.
28 3110. Identification of person to whom instrument is payable.
29 3111. Place of payment.
30 3112. Interest.
19910H0871B0983 - 90 -
1 3113. Date of instrument.
2 3114. Contradictory terms of instrument.
3 3115. Incomplete instrument.
4 3116. Joint and several liability; contribution.
5 3117. Other agreements affecting instrument.
6 3118. Statute of limitations.
7 3119. Notice of right to defend action.
8 § 3101. Short title of division.
9 This division shall be known and may be cited as the Uniform
10 Commercial Code, Article 3, Negotiable Instruments.
11 § 3102. Subject matter.
12 (a) Applicability.--This division applies to negotiable
13 instruments. It does not apply to money, to payment orders
14 governed by Division 4A (relating to funds transfer) or to
15 securities governed by Division 8 (relating to investment
16 securities).
17 (b) Conflict.--If there is conflict between this division
18 and Division 4 (relating to bank deposits and collections) or 9
19 (relating to secured transactions), Division 4 and Division 9
20 govern.
21 (c) Federal Reserve regulations and operating circulars.--
22 Regulations of the Board of Governors of the Federal Reserve
23 System and operating circulars of the Federal Reserve banks
24 supersede any inconsistent provision of this division to the
25 extent of the inconsistency.
26 § 3103. Definitions and index of definitions.
27 (a) Definitions.--The following words and phrases when used
28 in this division shall have, unless the context clearly
29 indicates otherwise, the meanings given to them in this
30 subsection:
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1 "Acceptor." A drawee who has accepted a draft.
2 "Drawee." A person ordered in a draft to make payment.
3 "Drawer." A person who signs or is identified in a draft as
4 a person ordering payment.
5 "Good faith." Honesty in fact and the observance of
6 reasonable commercial standards of fair dealing.
7 "Maker." A person who signs or is identified in a note as a
8 person undertaking to pay.
9 "Order." A written instruction to pay money signed by the
10 person giving the instruction. The instruction may be addressed
11 to any person, including the person giving the instruction, or
12 to one or more persons jointly or in the alternative but not in
13 succession. An authorization to pay is not an order unless the
14 person authorized to pay is also instructed to pay.
15 "Ordinary care." In the case of a person engaged in
16 business, means observance of reasonable commercial standards,
17 prevailing in the area in which the person is located, with
18 respect to the business in which the person is engaged. In the
19 case of a bank that takes an instrument for processing for
20 collection or payment by automated means, reasonable commercial
21 standards do not require the bank to examine the instrument if
22 the failure to examine does not violate the bank's prescribed
23 procedures and the bank's procedures do not vary unreasonably
24 from general banking usage not disapproved by this division or
25 Division 4 (relating to bank deposits and collections).
26 "Party." A party to an instrument.
27 "Promise." A written undertaking to pay money signed by the
28 person undertaking to pay. An acknowledgment of an obligation by
29 the obligor is not a promise unless the obligor also undertakes
30 to pay the obligation.
19910H0871B0983 - 92 -
1 "Prove." With respect to a fact means to meet the burden of
2 establishing the fact (section 1201).
3 "Remitter." A person who purchases an instrument from its
4 issuer if the instrument is payable to an identified person
5 other than the purchaser.
6 (b) Index of other definitions in division.--Other
7 definitions applying to this division and the sections in which
8 they appear are:
9 "Acceptance." Section 3409.
10 "Accommodated party." Section 3419.
11 "Accommodation party." Section 3419.
12 "Alteration." Section 3407.
13 "Anomalous indorsement." Section 3205.
14 "Blank indorsement." Section 3205.
15 "Cashier's check." Section 3104.
16 "Certificate of deposit." Section 3104.
17 "Certified check." Section 3409.
18 "Check." Section 3104.
19 "Consideration." Section 3303.
20 "Draft." Section 3104.
21 "Holder in due course." Section 3302.
22 "Incomplete instrument." Section 3115.
23 "Indorsement." Section 3204.
24 "Indorser." Section 3204.
25 "Instrument." Section 3104.
26 "Issue." Section 3105.
27 "Issuer." Section 3105.
28 "Negotiable instrument." Section 3104.
29 "Negotiation." Section 3201.
30 "Note." Section 3104.
19910H0871B0983 - 93 -
1 "Payable at a definite time." Section 3108.
2 "Payable on demand." Section 3108.
3 "Payable to bearer." Section 3109.
4 "Payable to order." Section 3109.
5 "Payment." Section 3602.
6 "Person entitled to enforce." Section 3301.
7 "Presentment." Section 3501.
8 "Reacquisition." Section 3207.
9 "Special indorsement." Section 3205.
10 "Teller's check." Section 3104.
11 "Transfer of instrument." Section 3203.
12 "Traveler's check." Section 3104.
13 "Value." Section 3303.
14 (c) Index of definitions in other divisions.--The following
15 definitions in other divisions of this title apply to this
16 division:
17 "Bank." Section 4105.
18 "Banking day." Section 4104.
19 "Clearing house." Section 4104.
20 "Collecting bank." Section 4105.
21 "Depositary bank." Section 4105.
22 "Documentary draft." Section 4104.
23 "Intermediary bank." Section 4105.
24 "Item." Section 4104.
25 "Payor bank." Section 4105.
26 "Suspends payments." Section 4104.
27 (d) Applicability of general definitions and principles.--In
28 addition, Division 1 (relating to general provisions) contains
29 general definitions and principles of construction and
30 interpretation applicable throughout this division.
19910H0871B0983 - 94 -
1 § 3104. Negotiable instrument.
2 (a) Definition of "negotiable instrument".--Except as
3 provided in subsections (c) and (d), "negotiable instrument"
4 means an unconditional promise or order to pay a fixed amount of
5 money, with or without interest or other charges described in
6 the promise or order, if it:
7 (1) is payable to bearer or to order at the time it is
8 issued or first comes into possession of a holder;
9 (2) is payable on demand or at a definite time; and
10 (3) does not state any other undertaking or instruction
11 by the person promising or ordering payment to do any act in
12 addition to the payment of money, but the promise or order
13 may contain:
14 (i) an undertaking or power to give, maintain or
15 protect collateral to secure payment;
16 (ii) an authorization or power to the holder to
17 confess judgment or realize on or dispose of collateral;
18 or
19 (iii) a waiver of the benefit of any law intended
20 for the advantage or protection of an obligor.
21 (b) Definition of "instrument".--"Instrument" means a
22 negotiable instrument.
23 (c) Negotiable instrument and check.--An order that meets
24 all of the requirements of subsection (a), except paragraph (1),
25 and otherwise falls within the definition of "check" in
26 subsection (f) is a negotiable instrument and a check.
27 (d) When promise or order not an instrument.--A promise or
28 order other than a check is not an instrument if, at the time it
29 is issued or first comes into possession of a holder, it
30 contains a conspicuous statement, however expressed, to the
19910H0871B0983 - 95 -
1 effect that the promise or order is not negotiable or is not an
2 instrument governed by this division.
3 (e) Note and draft.--An instrument is a "note" if it is a
4 promise and is a "draft" if it is an order. If an instrument
5 falls within the definition of both "note" and "draft," a person
6 entitled to enforce the instrument may treat it as either.
7 (f) Definition of "check".--"Check" means:
8 (1) a draft, other than a documentary draft, payable on
9 demand and drawn on a bank; or
10 (2) a cashier's check or teller's check.
11 An instrument may be a check even though it is described on its
12 face by another term, such as "money order."
13 (g) Definition of "cashier's check".--"Cashier's check"
14 means a draft with respect to which the drawer and drawee are
15 the same bank or branches of the same bank.
16 (h) Definition of "teller's check".--"Teller's check" means
17 a draft drawn by a bank:
18 (1) on another bank; or
19 (2) payable at or through a bank.
20 (i) Definition of "traveler's check".--"Traveler's check"
21 means an instrument that:
22 (1) is payable on demand;
23 (2) is drawn on or payable at or through a bank;
24 (3) is designated by the term "traveler's check" or by a
25 substantially similar term; and
26 (4) requires, as a condition to payment, a
27 countersignature by a person whose specimen signature appears
28 on the instrument.
29 (j) Definition of "certificate of deposit".--"Certificate of
30 deposit" means an instrument containing an acknowledgment by a
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1 bank that a sum of money has been received by the bank and a
2 promise by the bank to repay the sum of money. A certificate of
3 deposit is a note of the bank.
4 § 3105. Issue of instrument.
5 (a) Definition of "issue".--"Issue" means the first delivery
6 of an instrument by the maker or drawer, whether to a holder or
7 nonholder, for the purpose of giving rights on the instrument to
8 any person.
9 (b) When certain instruments are binding on maker or
10 drawer.--An unissued instrument, or an unissued incomplete
11 instrument that is completed, is binding on the maker or drawer,
12 but nonissuance is a defense. An instrument that is
13 conditionally issued or is issued for a special purpose is
14 binding on the maker or drawer, but failure of the condition or
15 special purpose to be fulfilled is a defense.
16 (c) Definition of "issuer".--"Issuer" applies to issued and
17 unissued instruments and means a maker or drawer of an
18 instrument.
19 § 3106. Unconditional promise or order.
20 (a) When conditional.--Except as provided in this section,
21 for the purposes of section 3104(a) (relating to negotiable
22 instrument), a promise or order is unconditional unless it
23 states:
24 (1) an express condition to payment;
25 (2) that the promise or order is subject to or governed
26 by another writing; or
27 (3) that rights or obligations with respect to the
28 promise or order are stated in another writing.
29 A reference to another writing does not of itself make the
30 promise or order conditional.
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1 (b) When promise or order not made conditional.--A promise
2 or order is not made conditional:
3 (1) by a reference to another writing for a statement of
4 rights with respect to collateral, prepayment or
5 acceleration; or
6 (2) because payment is limited to resort to a particular
7 fund or source.
8 (c) Promise or order not made conditional when
9 countersignature as condition to payment is required.--If a
10 promise or order requires, as a condition to payment, a
11 countersignature by a person whose specimen signature appears on
12 the promise or order, the condition does not make the promise or
13 order conditional for the purposes of section 3104(a). If the
14 person whose specimen signature appears on an instrument fails
15 to countersign the instrument, the failure to countersign is a
16 defense to the obligation of the issuer, but the failure does
17 not prevent a transferee of the instrument from becoming a
18 holder of the instrument.
19 (d) Promise or order not made conditional by containing
20 certain statements required by law.--If a promise or order at
21 the time it is issued or first comes into possession of a holder
22 contains a statement, required by applicable statutory or
23 administrative law, to the effect that the rights of a holder or
24 transferee are subject to claims or defenses that the issuer
25 could assert against the original payee, the promise or order is
26 not thereby made conditional for the purposes of section
27 3104(a); but, if the promise or order is an instrument, there
28 cannot be a holder in due course of the instrument.
29 § 3107. Instrument payable in foreign money.
30 Unless the instrument otherwise provides, an instrument that
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1 states the amount payable in foreign money may be paid in the
2 foreign money or in an equivalent amount in dollars calculated
3 by using the current bank-offered spot rate at the place of
4 payment for the purchase of dollars on the day on which the
5 instrument is paid.
6 § 3108. Payable on demand or at definite time.
7 (a) Payable on demand.--A promise or order is "payable on
8 demand" if it:
9 (1) states that it is payable on demand or at sight or
10 otherwise indicates that it is payable at the will of the
11 holder; or
12 (2) does not state any time of payment.
13 (b) Payable at a definite time.--A promise or order is
14 "payable at a definite time" if it is payable on elapse of a
15 definite period of time after sight or acceptance or at a fixed
16 date or dates or at a time or times readily ascertainable at the
17 time the promise or order is issued, subject to rights of:
18 (1) prepayment;
19 (2) acceleration;
20 (3) extension at the option of the holder; or
21 (4) extension to a further definite time at the option
22 of the maker or acceptor or automatically upon or after a
23 specified act or event.
24 (c) Payable upon demand made before fixed date.--If an
25 instrument, payable at a fixed date, is also payable upon demand
26 made before the fixed date, the instrument is payable on demand
27 until the fixed date and, if demand for payment is not made
28 before that date, becomes payable at a definite time on the
29 fixed date.
30 § 3109. Payable to bearer or to order.
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1 (a) Payable to bearer.--A promise or order is payable to
2 bearer if it:
3 (1) states that it is payable to bearer or to the order
4 of bearer or otherwise indicates that the person in
5 possession of the promise or order is entitled to payment;
6 (2) does not state a payee; or
7 (3) states that it is payable to or to the order of cash
8 or otherwise indicates that it is not payable to an
9 identified person.
10 (b) Payable to order.--A promise or order that is not
11 payable to bearer is payable to order if it is payable:
12 (1) to the order of an identified person; or
13 (2) to an identified person or order.
14 A promise or order that is payable to order is payable to the
15 identified person.
16 (c) Payable to an identified person.--An instrument payable
17 to bearer may become payable to an identified person if it is
18 specially indorsed pursuant to section 3205(a) (relating to
19 special indorsement; blank indorsement; anomalous indorsement).
20 An instrument payable to an identified person may become payable
21 to bearer if it is indorsed in blank pursuant to section
22 3205(b).
23 § 3110. Identification of person to whom instrument is payable.
24 (a) Intent of issuer.--The person to whom an instrument is
25 initially payable is determined by the intent of the person,
26 whether or not authorized, signing as, or in the name or behalf
27 of, the issuer of the instrument. The instrument is payable to
28 the person intended by the signer even if that person is
29 identified in the instrument by a name or other identification
30 that is not that of the intended person. If more than one person
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1 signs in the name or behalf of the issuer of an instrument and
2 all the signers do not intend the same person as payee, the
3 instrument is payable to any person intended by one or more of
4 the signers.
5 (b) When signature of issuer made by automated means.--If
6 the signature of the issuer of an instrument is made by
7 automated means, such as a checkwriting machine, the payee of
8 the instrument is determined by the intent of the person who
9 supplied the name or identification of the payee, whether or not
10 authorized to do so.
11 (c) Identification of person to whom instrument is payable
12 and rules for determining holder.--A person to whom an
13 instrument is payable may be identified in any way, including by
14 name, identifying number, office or account number. For the
15 purpose of determining the holder of an instrument, the
16 following rules apply:
17 (1) If an instrument is payable to an account and the
18 account is identified only by number, the instrument is
19 payable to the person to whom the account is payable. If an
20 instrument is payable to an account identified by number and
21 by the name of a person, the instrument is payable to the
22 named person, whether or not that person is the owner of the
23 account identified by number.
24 (2) If an instrument is payable to:
25 (i) a trust, an estate or a person described as
26 trustee or representative of a trust or estate, the
27 instrument is payable to the trustee, the representative
28 or a successor of either, whether or not the beneficiary
29 or estate is also named;
30 (ii) a person described as agent or similar
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1 representative of a named or identified person, the
2 instrument is payable to the represented person, the
3 representative or a successor of the representative;
4 (iii) a fund or organization that is not a legal
5 entity, the instrument is payable to a representative of
6 the members of the fund or organization; or
7 (iv) an office or to a person described as holding
8 an office, the instrument is payable to the named person,
9 the incumbent of the office or a successor to the
10 incumbent.
11 (d) Instrument payable to two or more persons.--If an
12 instrument is payable to two or more persons alternatively, it
13 is payable to any of them and may be negotiated, discharged or
14 enforced by any or all of them in possession of the instrument.
15 If an instrument is payable to two or more persons not
16 alternatively, it is payable to all of them and may be
17 negotiated, discharged or enforced only by all of them. If an
18 instrument payable to two or more persons is ambiguous as to
19 whether it is payable to the persons alternatively, the
20 instrument is payable to the persons alternatively.
21 § 3111. Place of payment.
22 Except as otherwise provided for items in Division 4
23 (relating to bank deposits and collections), an instrument is
24 payable at the place of payment stated in the instrument. If no
25 place of payment is stated, an instrument is payable at the
26 address of the drawee or maker stated in the instrument. If no
27 address is stated, the place of payment is the place of business
28 of the drawee or maker. If a drawee or maker has more than one
29 place of business, the place of payment is any place of business
30 of the drawee or maker chosen by the person entitled to enforce
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1 the instrument. If the drawee or maker has no place of business,
2 the place of payment is the residence of the drawee or maker.
3 § 3112. Interest.
4 (a) General rule.--Unless otherwise provided in the
5 instrument:
6 (1) an instrument is not payable with interest; and
7 (2) interest on an interest-bearing instrument is
8 payable from the date of the instrument.
9 (b) Instrument may provide for interest.--Interest may be
10 stated in an instrument as a fixed or variable amount of money
11 or it may be expressed as a fixed or variable rate or rates. The
12 amount or rate of interest may be stated or described in the
13 instrument in any manner and may require reference to
14 information not contained in the instrument. If an instrument
15 provides for interest, but the amount of interest payable cannot
16 be ascertained from the description, interest is payable at the
17 judgment rate in effect at the place of payment of the
18 instrument and at the time interest first accrues.
19 § 3113. Date of instrument.
20 (a) Dated instrument.--An instrument may be antedated or
21 postdated. The date stated determines the time of payment if the
22 instrument is payable at a fixed period after date. Except as
23 provided in section 4401(c) (relating to when bank may charge
24 account of customer), an instrument payable on demand is not
25 payable before the date of the instrument.
26 (b) Undated instrument.--If an instrument is undated, its
27 date is the date of its issue or, in the case of an unissued
28 instrument, the date it first comes into possession of a holder.
29 § 3114. Contradictory terms of instrument.
30 If an instrument contains contradictory terms, typewritten
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1 terms prevail over printed terms, handwritten terms prevail over
2 both, and words prevail over numbers.
3 § 3115. Incomplete instrument.
4 (a) Definition of "incomplete instrument".--"Incomplete
5 instrument" means a signed writing, whether or not issued by the
6 signer, the contents of which show at the time of signing that
7 it is incomplete but that the signer intended it to be completed
8 by the addition of words or numbers.
9 (b) Enforcement.--Subject to subsection (c), if an
10 incomplete instrument is an instrument under section 3104
11 (relating to negotiable instrument), it may be enforced
12 according to its terms if it is not completed or according to
13 its terms as augmented by completion. If an incomplete
14 instrument is not an instrument under section 3104, but, after
15 completion, the requirements of section 3104 are met, the
16 instrument may be enforced according to its terms as augmented
17 by completion.
18 (c) Alteration of incomplete instrument.--If words or
19 numbers are added to an incomplete instrument without authority
20 of the signer, there is an alteration of the incomplete
21 instrument under section 3407 (relating to alteration).
22 (d) Burden of establishing alteration.--The burden of
23 establishing that words or numbers were added to an incomplete
24 instrument without authority of the signer is on the person
25 asserting the lack of authority.
26 § 3116. Joint and several liability; contribution.
27 (a) Joint and several liability.--Except as otherwise
28 provided in the instrument, two or more persons who have the
29 same liability on an instrument as makers, drawers, acceptors,
30 indorsers who indorse as joint payees, or anomalous indorsers
19910H0871B0983 - 104 -
1 are jointly and severally liable in the capacity in which they
2 sign.
3 (b) Contribution.--Except as provided in section 3419(e)
4 (relating to instruments signed for accommodation) or by
5 agreement of the affected parties, a party having joint and
6 several liability who pays the instrument is entitled to receive
7 from any party having the same joint and several liability
8 contribution in accordance with applicable law.
9 (c) Discharge.--Discharge of one party having joint and
10 several liability by a person entitled to enforce the instrument
11 does not affect the right under subsection (b) of a party having
12 the same joint and several liability to receive contribution
13 from the party discharged.
14 § 3117. Other agreements affecting instrument.
15 Subject to applicable law regarding exclusion of proof of
16 contemporaneous or previous agreements, the obligation of a
17 party to an instrument to pay the instrument may be modified,
18 supplemented or nullified by a separate agreement of the obligor
19 and a person entitled to enforce the instrument if the
20 instrument is issued or the obligation is incurred in reliance
21 on the agreement or as part of the same transaction giving rise
22 to the agreement. To the extent an obligation is modified,
23 supplemented or nullified by an agreement under this section,
24 the agreement is a defense to the obligation.
25 § 3118. Statute of limitations.
26 (a) Note payable at definite time.--Except as provided in
27 subsection (e), an action to enforce the obligation of a party
28 to pay a note payable at a definite time must be commenced
29 within six years after the due date or dates stated in the note
30 or, if a due date is accelerated, within six years after the
19910H0871B0983 - 105 -
1 accelerated due date.
2 (b) Note payable on demand.--Except as provided in
3 subsection (d) or (e), if demand for payment is made to the
4 maker of a note payable on demand, an action to enforce the
5 obligation of a party to pay the note must be commenced within
6 six years after the demand. If no demand for payment is made to
7 the maker, an action to enforce the note is barred if neither
8 principal nor interest on the note has been paid for a
9 continuous period of ten years.
10 (c) Unaccepted draft.--Except as provided in subsection (d),
11 an action to enforce the obligation of a party to an unaccepted
12 draft to pay the draft must be commenced within three years
13 after dishonor of the draft or ten years after the date of the
14 draft, whichever period expires first.
15 (d) Certified check, teller's check, cashier's check and
16 traveler's check.--An action to enforce the obligation of the
17 acceptor of a certified check or the issuer of a teller's check,
18 cashier's check or traveler's check must be commenced within
19 three years after demand for payment is made to the acceptor or
20 issuer, as the case may be.
21 (e) Certificate of deposit.--An action to enforce the
22 obligation of a party to a certificate of deposit to pay the
23 instrument must be commenced within six years after demand for
24 payment is made to the maker, but, if the instrument states a
25 due date and the maker is not required to pay before that date,
26 the six-year period begins when a demand for payment is in
27 effect and the due date has passed.
28 (f) Accepted draft.--An action to enforce the obligation of
29 a party to pay an accepted draft, other than a certified check,
30 must be commenced:
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1 (1) within six years after the due date or dates stated
2 in the draft or acceptance if the obligation of the acceptor
3 is payable at a definite time; or
4 (2) within six years after the date of the acceptance if
5 the obligation of the acceptor is payable on demand.
6 (g) Conversion, breach of warranty and other Division 3
7 actions.--Unless governed by other law regarding claims for
8 indemnity or contribution, an action:
9 (1) for conversion of an instrument, for money had and
10 received or like action based on conversion;
11 (2) for breach of warranty; or
12 (3) to enforce an obligation, duty or right arising
13 under this division and not governed by this section;
14 must be commenced within three years after the cause of action
15 accrues.
16 § 3119. Notice of right to defend action.
17 In an action for breach of an obligation for which a third
18 person is answerable over pursuant to this division or Division
19 4 (relating to bank deposits and collections), the defendant may
20 give the third person written notice of the litigation, and the
21 person notified may then give similar notice to any other person
22 who is answerable over. If the notice states that the person
23 notified may come in and defend and that failure to do so will
24 bind the person notified in an action later brought by the
25 person giving the notice as to any determination of fact common
26 to the two litigations, the person notified is so bound unless
27 after seasonable receipt of the notice the person notified does
28 come in and defend.
29 CHAPTER 32
30 NEGOTIATION, TRANSFER AND INDORSEMENT
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1 Sec.
2 3201. Negotiation.
3 3202. Negotiation subject to rescission.
4 3203. Transfer of instrument; rights acquired by transfer.
5 3204. Indorsement.
6 3205. Special indorsement; blank indorsement; anomalous
7 indorsement.
8 3206. Restrictive indorsement.
9 3207. Reacquisition.
10 § 3201. Negotiation.
11 (a) Definition of "negotiation".--"Negotiation" means a
12 transfer of possession, whether voluntary or involuntary, of an
13 instrument by a person other than the issuer to a person who
14 thereby becomes its holder.
15 (b) Manner of negotiation.--Except for negotiation by a
16 remitter, if an instrument is payable to an identified person,
17 negotiation requires transfer of possession of the instrument
18 and its indorsement by the holder. If an instrument is payable
19 to bearer, it may be negotiated by transfer of possession alone.
20 § 3202. Negotiation subject to rescission.
21 (a) General rule.--Negotiation is effective even if
22 obtained:
23 (1) from an infant, a corporation exceeding its powers
24 or a person without capacity;
25 (2) by fraud, duress or mistake; or
26 (3) in breach of duty or as part of an illegal
27 transaction.
28 (b) Rescission or other remedies.--To the extent permitted
29 by other law, negotiation may be rescinded or may be subject to
30 other remedies, but those remedies may not be asserted against a
19910H0871B0983 - 108 -
1 subsequent holder in due course or a person paying the
2 instrument in good faith and without knowledge of facts that are
3 a basis for rescission or other remedy.
4 § 3203. Transfer of instrument; rights acquired by transfer.
5 (a) When transfer effected.--An instrument is transferred
6 when it is delivered by a person other than its issuer for the
7 purpose of giving to the person receiving delivery the right to
8 enforce the instrument.
9 (b) Rights obtained upon transfer of instrument.--Transfer
10 of an instrument, whether or not the transfer is a negotiation,
11 vests in the transferee any right of the transferor to enforce
12 the instrument, including any right as a holder in due course,
13 but the transferee cannot acquire rights of a holder in due
14 course by a transfer, directly or indirectly, from a holder in
15 due course if the transferee engaged in fraud or illegality
16 affecting the instrument.
17 (c) Right of transferee to demand indorsement.--Unless
18 otherwise agreed, if an instrument is transferred for value and
19 the transferee does not become a holder because of lack of
20 indorsement by the transferor, the transferee has a specifically
21 enforceable right to the unqualified indorsement of the
22 transferor, but negotiation of the instrument does not occur
23 until the indorsement is made.
24 (d) Effect of transfer of less than entire instrument.--If a
25 transferor purports to transfer less than the entire instrument,
26 negotiation of the instrument does not occur. The transferee
27 obtains no rights under this division and has only the rights of
28 a partial assignee.
29 § 3204. Indorsement.
30 (a) Definition of "indorsement".--"Indorsement" means a
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1 signature, other than that of a signer as maker, drawer or
2 acceptor, that alone or accompanied by other words is made on an
3 instrument for the purpose of negotiating the instrument,
4 restricting payment of the instrument or incurring indorser's
5 liability on the instrument, but regardless of the intent of the
6 signer, a signature and its accompanying words is an indorsement
7 unless the accompanying words, terms of the instrument, place of
8 the signature or other circumstances unambiguously indicate that
9 the signature was made for a purpose other than indorsement. For
10 the purpose of determining whether a signature is made on an
11 instrument, a paper affixed to the instrument is a part of the
12 instrument.
13 (b) Definition of "indorser".--"Indorser" means a person who
14 makes an indorsement.
15 (c) When transferee is a holder.--For the purpose of
16 determining whether the transferee of an instrument is a holder,
17 an indorsement that transfers a security interest in the
18 instrument is effective as an unqualified indorsement of the
19 instrument.
20 (d) Wrong name.--If an instrument is payable to a holder
21 under a name that is not the name of the holder, indorsement may
22 be made by the holder in the name stated in the instrument or in
23 the holder's name or both, but signature in both names may be
24 required by a person paying or taking the instrument for value
25 or collection.
26 § 3205. Special indorsement; blank indorsement; anomalous
27 indorsement.
28 (a) Special indorsement.--If an indorsement is made by the
29 holder of an instrument, whether payable to an identified person
30 or payable to bearer, and the indorsement identifies a person to
19910H0871B0983 - 110 -
1 whom it makes the instrument payable, it is a "special
2 indorsement." When specially indorsed, an instrument becomes
3 payable to the identified person and may be negotiated only by
4 the indorsement of that person. The principles stated in section
5 3110 (relating to identification of person to whom instrument is
6 payable) apply to special indorsements.
7 (b) Blank indorsement.--If an indorsement is made by the
8 holder of an instrument and it is not a special indorsement, it
9 is a "blank indorsement." When indorsed in blank, an instrument
10 becomes payable to bearer and may be negotiated by transfer of
11 possession alone until specially indorsed.
12 (c) Conversion of blank indorsement into special
13 indorsement.--The holder may convert a blank indorsement that
14 consists only of a signature into a special indorsement by
15 writing, above the signature of the indorser, words identifying
16 the person to whom the instrument is made payable.
17 (d) Definition of "anomalous indorsement".--"Anomalous
18 indorsement" means an indorsement made by a person who is not
19 the holder of the instrument. An anomalous indorsement does not
20 affect the manner in which the instrument may be negotiated.
21 § 3206. Restrictive indorsement.
22 (a) Indorsement prohibiting further transfer or
23 negotiation.--An indorsement limiting payment to a particular
24 person or otherwise prohibiting further transfer or negotiation
25 of the instrument is not effective to prevent further transfer
26 or negotiation of the instrument.
27 (b) Conditional indorsement.--An indorsement stating a
28 condition to the right of the indorsee to receive payment does
29 not affect the right of the indorsee to enforce the instrument.
30 A person paying the instrument or taking it for value or
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1 collection may disregard the condition, and the rights and
2 liabilities of that person are not affected by whether the
3 condition has been fulfilled.
4 (c) Specified purpose indorsement.--If an instrument bears
5 an indorsement described in section 4201(b) (relating to status
6 of collecting bank as agent and provisional status of credits;
7 applicability of division; item indorsed "pay any bank") or in
8 blank or to a particular bank using the words "for deposit,"
9 "for collection" or other words indicating a purpose of having
10 the instrument collected by a bank for the indorser or for a
11 particular account, the following rules apply:
12 (1) A person, other than a bank, who purchases the
13 instrument when so indorsed converts the instrument unless
14 the amount paid for the instrument is received by the
15 indorser or applied consistently with the indorsement.
16 (2) A depositary bank that purchases the instrument or
17 takes it for collection when so indorsed converts the
18 instrument unless the amount paid by the bank with respect to
19 the instrument is received by the indorser or applied
20 consistently with the indorsement.
21 (3) A payor bank that is also the depositary bank or
22 that takes the instrument for immediate payment over the
23 counter from a person other than a collecting bank converts
24 the instrument unless the proceeds of the instrument are
25 received by the indorser or applied consistently with the
26 indorsement.
27 (4) Except as otherwise provided in paragraph (3), a
28 payor bank or intermediary bank may disregard the indorsement
29 and is not liable if the proceeds of the instrument are not
30 received by the indorser or applied consistently with the
19910H0871B0983 - 112 -
1 indorsement.
2 (d) Indorsement for benefit of indorser or another person.--
3 Except for an indorsement covered by subsection (c), if an
4 instrument bears an indorsement using words to the effect that
5 payment is to be made to the indorsee as agent, trustee or other
6 fiduciary for the benefit of the indorser or another person, the
7 following rules apply:
8 (1) Unless there is notice of breach of fiduciary duty
9 as provided in section 3307 (relating to notice of breach of
10 fiduciary duty), a person who purchases the instrument from
11 the indorsee or takes the instrument from the indorsee for
12 collection or payment may pay the proceeds of payment or the
13 value given for the instrument to the indorsee without regard
14 to whether the indorsee violates a fiduciary duty to the
15 indorser.
16 (2) A subsequent transferee of the instrument or person
17 who pays the instrument is neither given notice nor otherwise
18 affected by the restriction in the indorsement unless the
19 transferee or payor knows that the fiduciary dealt with the
20 instrument or its proceeds in breach of fiduciary duty.
21 (e) Holder in due course.--The presence on an instrument of
22 an indorsement to which this section applies does not prevent a
23 purchaser of the instrument from becoming a holder in due course
24 of the instrument unless the purchaser is a converter under
25 subsection (c) or has notice or knowledge of breach of fiduciary
26 duty as stated in subsection (d).
27 (f) Defense of obligor.--In an action to enforce the
28 obligation of a party to pay the instrument, the obligor has a
29 defense if payment would violate an indorsement to which this
30 section applies and the payment is not permitted by this
19910H0871B0983 - 113 -
1 section.
2 § 3207. Reacquisition.
3 Reacquisition of an instrument occurs if it is transferred to
4 a former holder, by negotiation or otherwise. A former holder
5 who reacquires the instrument may cancel indorsements made after
6 the reacquirer first became a holder of the instrument. If the
7 cancellation causes the instrument to be payable to the
8 reacquirer or to bearer, the reacquirer may negotiate the
9 instrument. An indorser whose indorsement is canceled is
10 discharged, and the discharge is effective against any
11 subsequent holder.
12 CHAPTER 33
13 ENFORCEMENT OF INSTRUMENTS
14 Sec.
15 3301. Person entitled to enforce instrument.
16 3302. Holder in due course.
17 3303. Value and consideration.
18 3304. Overdue instrument.
19 3305. Defenses and claims in recoupment.
20 3306. Claims to an instrument.
21 3307. Notice of breach of fiduciary duty.
22 3308. Proof of signatures and status as holder in due course.
23 3309. Enforcement of lost, destroyed or stolen instrument.
24 3310. Effect of instrument on obligation for which taken.
25 3311. Accord and satisfaction by use of instrument.
26 § 3301. Person entitled to enforce instrument.
27 "Person entitled to enforce" an instrument means:
28 (1) the holder of the instrument;
29 (2) a nonholder in possession of the instrument who has
30 the rights of a holder; or
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1 (3) a person not in possession of the instrument who is
2 entitled to enforce the instrument pursuant to section 3309
3 (relating to enforcement of lost, destroyed or stolen
4 instrument) or 3418(d) (relating to payment or acceptance by
5 mistake).
6 A person may be a person entitled to enforce the instrument even
7 though the person is not the owner of the instrument or is in
8 wrongful possession of the instrument.
9 § 3302. Holder in due course.
10 (a) Definition of "holder in due course".--Subject to
11 subsection (c) and section 3106(d) (relating to unconditional
12 promise or order), "holder in due course" means the holder of an
13 instrument if:
14 (1) the instrument when issued or negotiated to the
15 holder does not bear such apparent evidence of forgery or
16 alteration or is not otherwise so irregular or incomplete as
17 to call into question its authenticity; and
18 (2) the holder took the instrument:
19 (i) for value;
20 (ii) in good faith;
21 (iii) without notice that the instrument is overdue
22 or has been dishonored or that there is an uncured
23 default with respect to payment of another instrument
24 issued as part of the same series;
25 (iv) without notice that the instrument contains an
26 unauthorized signature or has been altered;
27 (v) without notice of any claim to the instrument
28 described in section 3306 (relating to claims to an
29 instrument); and
30 (vi) without notice that any party has a defense or
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1 claim in recoupment described in section 3305(a)
2 (relating to defenses and claims in recoupment).
3 (b) Notice of discharge.--Notice of discharge of a party,
4 other than discharge in an insolvency proceeding, is not notice
5 of a defense under subsection (a), but discharge is effective
6 against a person who became a holder in due course with notice
7 of the discharge. Public filing or recording of a document does
8 not of itself constitute notice of a defense, claim in
9 recoupment or claim to the instrument.
10 (c) When one does not acquire rights of holder in due
11 course.--Except to the extent a transferor or predecessor in
12 interest has rights as a holder in due course, a person does not
13 acquire rights of a holder in due course of an instrument taken:
14 (1) by legal process or by purchase in an execution,
15 bankruptcy or creditor's sale or similar proceeding;
16 (2) by purchase as part of a bulk transaction not in
17 ordinary course of business of the transferor; or
18 (3) as the successor in interest to an estate or other
19 organization.
20 (d) Limited right as holder in due course; partial
21 performance.--If, under section 3303(a)(1) (relating to value
22 and consideration), the promise of performance that is the
23 consideration for an instrument has been partially performed,
24 the holder may assert rights as a holder in due course of the
25 instrument only to the fraction of the amount payable under the
26 instrument equal to the value of the partial performance divided
27 by the value of the promised performance.
28 (e) Limited right as holder in due course; security
29 interest.--If:
30 (1) the person entitled to enforce an instrument has
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1 only a security interest in the instrument; and
2 (2) the person obliged to pay the instrument has a
3 defense, claim in recoupment or claim to the instrument that
4 may be asserted against the person who granted the security
5 interest;
6 the person entitled to enforce the instrument may assert rights
7 as a holder in due course only to an amount payable under the
8 instrument which, at the time of enforcement of the instrument,
9 does not exceed the amount of the unpaid obligation secured.
10 (f) Manner of notice.--To be effective, notice must be
11 received at a time and in a manner that gives a reasonable
12 opportunity to act on it.
13 (g) Applicability of other law.--This section is subject to
14 any law limiting status as a holder in due course in particular
15 classes of transactions.
16 § 3303. Value and consideration.
17 (a) Value.--An instrument is issued or transferred for value
18 if:
19 (1) the instrument is issued or transferred for a
20 promise of performance, to the extent the promise has been
21 performed;
22 (2) the transferee acquires a security interest or other
23 lien in the instrument other than a lien obtained by judicial
24 proceeding;
25 (3) the instrument is issued or transferred as payment
26 of, or as security for, an antecedent claim against any
27 person, whether or not the claim is due;
28 (4) the instrument is issued or transferred in exchange
29 for a negotiable instrument; or
30 (5) the instrument is issued or transferred in exchange
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1 for the incurring of an irrevocable obligation to a third
2 party by the person taking the instrument.
3 (b) Definition of "consideration".--"Consideration" means
4 any consideration sufficient to support a simple contract. The
5 drawer or maker of an instrument has a defense if the instrument
6 is issued without consideration. If an instrument is issued for
7 a promise of performance, the issuer has a defense to the extent
8 performance of the promise is due and the promise has not been
9 performed. If an instrument is issued for value as stated in
10 subsection (a), the instrument is also issued for consideration.
11 § 3304. Overdue instrument.
12 (a) Instrument payable on demand.--An instrument payable on
13 demand becomes overdue at the earliest of the following times:
14 (1) on the day after the day demand for payment is duly
15 made;
16 (2) if the instrument is a check, 90 days after its
17 date; or
18 (3) if the instrument is not a check, when the
19 instrument has been outstanding for a period of time after
20 its date which is unreasonably long under the circumstances
21 of the particular case in light of the nature of the
22 instrument and usage of the trade.
23 (b) Instrument payable at a definite time.--With respect to
24 an instrument payable at a definite time, the following rules
25 apply:
26 (1) If the principal is payable in installments and a
27 due date has not been accelerated, the instrument becomes
28 overdue upon default under the instrument for nonpayment of
29 an installment, and the instrument remains overdue until the
30 default is cured.
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1 (2) If the principal is not payable in installments and
2 the due date has not been accelerated, the instrument becomes
3 overdue on the day after the due date.
4 (3) If a due date with respect to principal has been
5 accelerated, the instrument becomes overdue on the day after
6 the accelerated due date.
7 (c) Instrument not overdue if default in payment of
8 interest.--Unless the due date of principal has been
9 accelerated, an instrument does not become overdue if there is
10 default in payment of interest but no default in payment of
11 principal.
12 § 3305. Defenses and claims in recoupment.
13 (a) General rule.--Except as stated in subsection (b), the
14 right to enforce the obligation of a party to pay an instrument
15 is subject to the following:
16 (1) a defense of the obligor based on:
17 (i) infancy of the obligor to the extent it is a
18 defense to a simple contract;
19 (ii) duress, lack of legal capacity or illegality of
20 the transaction which, under other law, nullifies the
21 obligation of the obligor;
22 (iii) fraud that induced the obligor to sign the
23 instrument with neither knowledge nor reasonable
24 opportunity to learn of its character or its essential
25 terms; or
26 (iv) discharge of the obligor in insolvency
27 proceedings;
28 (2) a defense of the obligor stated in another section
29 of this division or a defense of the obligor that would be
30 available if the person entitled to enforce the instrument
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1 were enforcing a right to payment under a simple contract;
2 and
3 (3) a claim in recoupment of the obligor against the
4 original payee of the instrument if the claim arose from the
5 transaction that gave rise to the instrument, but the claim
6 of the obligor may be asserted against a transferee of the
7 instrument only to reduce the amount owing on the instrument
8 at the time the action is brought.
9 (b) Right of holder in due course to enforce obligation.--
10 The right of a holder in due course to enforce the obligation of
11 a party to pay the instrument is subject to defenses of the
12 obligor stated in subsection (a)(1), but is not subject to
13 defenses of the obligor stated in subsection (a)(2) or claims in
14 recoupment stated in subsection (a)(3) against a person other
15 than the holder.
16 (c) Claims and defenses of person other than obligor on
17 instrument.--Except as stated in subsection (d), in an action to
18 enforce the obligation of a party to pay the instrument, the
19 obligor may not assert against the person entitled to enforce
20 the instrument a defense, claim in recoupment or claim to the
21 instrument (section 3306) of another person, but the other
22 person's claim to the instrument may be asserted by the obligor
23 if the other person is joined in the action and personally
24 asserts the claim against the person entitled to enforce the
25 instrument. An obligor is not obliged to pay the instrument if
26 the person seeking enforcement of the instrument does not have
27 rights of a holder in due course and the obligor proves that the
28 instrument is a lost or stolen instrument.
29 (d) Instrument signed for accommodation.--In an action to
30 enforce the obligation of an accommodation party to pay an
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1 instrument, the accommodation party may assert against the
2 person entitled to enforce the instrument any defense or claim
3 in recoupment under subsection (a) that the accommodated party
4 could assert against the person entitled to enforce the
5 instrument, except the defenses of discharge in insolvency
6 proceedings, infancy and lack of legal capacity.
7 § 3306. Claims to an instrument.
8 A person taking an instrument, other than a person having
9 rights of a holder in due course, is subject to a claim of a
10 property or possessory right in the instrument or its proceeds,
11 including a claim to rescind a negotiation and to recover the
12 instrument or its proceeds. A person having rights of a holder
13 in due course takes free of the claim to the instrument.
14 § 3307. Notice of breach of fiduciary duty.
15 (a) Definitions.--As used in this section, the following
16 words and phrases shall have the meanings given to them in this
17 subsection:
18 "Fiduciary." An agent, trustee, partner, corporate officer
19 or director or other representative owing a fiduciary duty with
20 respect to an instrument.
21 "Represented person." The principal, beneficiary,
22 partnership, corporation or other person to whom the duty stated
23 under the definition of fiduciary is owed.
24 (b) General rule.--If an instrument is taken from a
25 fiduciary for payment or collection or for value, the taker has
26 knowledge of the fiduciary status of the fiduciary and the
27 represented person makes a claim to the instrument or its
28 proceeds on the basis that the transaction of the fiduciary is a
29 breach of fiduciary duty, the following rules apply:
30 (1) Notice of breach of fiduciary duty by the fiduciary
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1 is notice of the claim of the represented person.
2 (2) In the case of an instrument payable to the
3 represented person or the fiduciary as such, the taker has
4 notice of the breach of fiduciary duty if the instrument is:
5 (i) taken in payment of or as security for a debt
6 known by the taker to be the personal debt of the
7 fiduciary;
8 (ii) taken in a transaction known by the taker to be
9 for the personal benefit of the fiduciary; or
10 (iii) deposited to an account other than an account
11 of the fiduciary, as such, or an account of the
12 represented person.
13 (3) If an instrument is issued by the represented person
14 or the fiduciary as such and made payable to the fiduciary
15 personally, the taker does not have notice of the breach of
16 fiduciary duty unless the taker knows of the breach of
17 fiduciary duty.
18 (4) If an instrument is issued by the represented person
19 or the fiduciary as such to the taker as payee, the taker has
20 notice of the breach of fiduciary duty if the instrument is:
21 (i) taken in payment of or as security for a debt
22 known by the taker to be the personal debt of the
23 fiduciary;
24 (ii) taken in a transaction known by the taker to be
25 for the personal benefit of the fiduciary; or
26 (iii) deposited to an account other than an account
27 of the fiduciary, as such, or an account of the
28 represented person.
29 § 3308. Proof of signatures and status as holder in due course.
30 (a) Proof of signatures.--In an action with respect to an
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1 instrument, the authenticity of, and authority to make, each
2 signature on the instrument is admitted unless specifically
3 denied in the pleadings. If the validity of a signature is
4 denied in the pleadings, the burden of establishing validity is
5 on the person claiming validity, but the signature is presumed
6 to be authentic and authorized unless the action is to enforce
7 the liability of the purported signer and the signer is dead or
8 incompetent at the time of trial of the issue of validity of the
9 signature. If an action to enforce the instrument is brought
10 against a person as the undisclosed principal of a person who
11 signed the instrument as a party to the instrument, the
12 plaintiff has the burden of establishing that the defendant is
13 liable on the instrument as a represented person under section
14 3402(a) (relating to signature by representative).
15 (b) Status as holder in due course.--If the validity of
16 signatures is admitted or proved and there is compliance with
17 subsection (a), a plaintiff producing the instrument is entitled
18 to payment if the plaintiff proves entitlement to enforce the
19 instrument under section 3301 (relating to person entitled to
20 enforce instrument), unless the defendant proves a defense or
21 claim in recoupment. If a defense or claim in recoupment is
22 proved, the right to payment of the plaintiff is subject to the
23 defense or claim, except to the extent the plaintiff proves that
24 the plaintiff has rights of a holder in due course which are not
25 subject to the defense or claim.
26 § 3309. Enforcement of lost, destroyed or stolen instrument.
27 (a) Enforcement.--A person not in possession of an
28 instrument is entitled to enforce the instrument if:
29 (1) the person was in possession of the instrument and
30 entitled to enforce it when loss of possession occurred;
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1 (2) the loss of possession was not the result of a
2 transfer by the person or a lawful seizure; and
3 (3) the person cannot reasonably obtain possession of
4 the instrument because the instrument was destroyed, its
5 whereabouts cannot be determined or it is in the wrongful
6 possession of an unknown person or a person that cannot be
7 found or is not amenable to service of process.
8 (b) Proof.--A person seeking enforcement of an instrument
9 under subsection (a) must prove the terms of the instrument and
10 the person's right to enforce the instrument. If that proof is
11 made, section 3308 (relating to proof of signatures and status
12 as holder in due course) applies to the case as if the person
13 seeking enforcement had produced the instrument. The court may
14 not enter judgment in favor of the person seeking enforcement
15 unless it finds that the person required to pay the instrument
16 is adequately protected against loss that might occur by reason
17 of a claim by another person to enforce the instrument. Adequate
18 protection may be provided by any reasonable means.
19 § 3310. Effect of instrument on obligation for which taken.
20 (a) Certified check, cashier's check or teller's check given
21 in payment of obligation.--Unless otherwise agreed, if a
22 certified check, cashier's check or teller's check is taken for
23 an obligation, the obligation is discharged to the same extent
24 discharge would result if an amount of money equal to the amount
25 of the instrument were taken in payment of the obligation.
26 Discharge of the obligation does not affect any liability that
27 the obligor may have as an indorser of the instrument.
28 (b) Note or uncertified check taken for obligation.--Unless
29 otherwise agreed and except as provided in subsection (a), if a
30 note or an uncertified check is taken for an obligation, the
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1 obligation is suspended to the same extent the obligation would
2 be discharged if an amount of money equal to the amount of the
3 instrument were taken, and the following rules apply:
4 (1) In the case of an uncertified check, suspension of
5 the obligation continues until dishonor of the check or until
6 it is paid or certified. Payment or certification of the
7 check results in discharge of the obligation to the extent of
8 the amount of the check.
9 (2) In the case of a note, suspension of the obligation
10 continues until dishonor of the note or until it is paid.
11 Payment of the note results in discharge of the obligation to
12 the extent of the payment.
13 (3) Except as provided in paragraph (4), if the check or
14 note is dishonored and the obligee of the obligation for
15 which the instrument was taken is the person entitled to
16 enforce the instrument, the obligee may enforce either the
17 instrument or the obligation. In the case of an instrument of
18 a third person which is negotiated to the obligee by the
19 obligor, discharge of the obligor on the instrument also
20 discharges the obligation.
21 (4) If the person entitled to enforce the instrument
22 taken for an obligation is a person other than the obligee,
23 the obligee may not enforce the obligation to the extent the
24 obligation is suspended. If the obligee is the person
25 entitled to enforce the instrument but no longer has
26 possession of it because it was lost, stolen or destroyed,
27 the obligation may not be enforced to the extent of the
28 amount payable on the instrument, and to that extent the
29 obligee's rights against the obligor are limited to
30 enforcement of the instrument.
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1 (c) Other instruments taken for obligation.--If an
2 instrument other than one described in subsection (a) or (b) is
3 taken for an obligation, the effect is:
4 (1) that stated in subsection (a) if the instrument is
5 one on which a bank is liable as maker or acceptor; or
6 (2) that stated in subsection (b) in any other case.
7 § 3311. Accord and satisfaction by use of instrument.
8 (a) Requirements.--If a person against whom a claim is
9 asserted proves that:
10 (1) that person in good faith tendered an instrument to
11 the claimant as full satisfaction of the claim;
12 (2) the amount of the claim was unliquidated or subject
13 to a bona fide dispute; and
14 (3) the claimant obtained payment of the instrument;
15 the following subsections apply.
16 (b) Proof of conspicuous statement.--Unless subsection (c)
17 applies, the claim is discharged if the person against whom the
18 claim is asserted proves that the instrument or an accompanying
19 written communication contained a conspicuous statement to the
20 effect that the instrument was tendered as full satisfaction of
21 the claim.
22 (c) Designated person, office or place and 90-day
23 limitations.--Subject to subsection (d), a claim is not
24 discharged under subsection (b) if either of the following
25 applies:
26 (1) The claimant, if an organization, proves that:
27 (i) within a reasonable time before the tender, the
28 claimant sent a conspicuous statement to the person
29 against whom the claim is asserted that communications
30 concerning disputed debts, including an instrument
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1 tendered as full satisfaction of a debt, are to be sent
2 to a designated person, office or place; and
3 (ii) the instrument or accompanying communication
4 was not received by that designated person, office or
5 place.
6 (2) The claimant, whether or not an organization, proves
7 that within 90 days after payment of the instrument, the
8 claimant tendered repayment of the amount of the instrument
9 to the person against whom the claim is asserted. This
10 paragraph does not apply if the claimant is an organization
11 that sent a statement complying with paragraph (1)(i).
12 (d) Discharge.--A claim is discharged if the person against
13 whom the claim is asserted proves that within a reasonable time
14 before collection of the instrument was initiated, the claimant,
15 or an agent of the claimant having direct responsibility with
16 respect to the disputed obligation, knew that the instrument was
17 tendered in full satisfaction of the claim.
18 CHAPTER 34
19 LIABILITY OF PARTIES
20 Sec.
21 3401. Signature.
22 3402. Signature by representative.
23 3403. Unauthorized signature.
24 3404. Impostors; fictitious payees.
25 3405. Employer's responsibility for fraudulent indorsement by
26 employee.
27 3406. Negligence contributing to forged signature or alteration
28 of instrument.
29 3407. Alteration.
30 3408. Drawee not liable on unaccepted draft.
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1 3409. Acceptance of draft; certified check.
2 3410. Acceptance varying draft.
3 3411. Refusal to pay cashier's checks, teller's checks and
4 certified checks.
5 3412. Obligation of issuer of note or cashier's check.
6 3413. Obligation of acceptor.
7 3414. Obligation of drawer.
8 3415. Obligation of indorser.
9 3416. Transfer warranties.
10 3417. Presentment warranties.
11 3418. Payment or acceptance by mistake.
12 3419. Instruments signed for accommodation.
13 3420. Conversion of instrument.
14 § 3401. Signature.
15 (a) Nonliability in absence of signature.--A person is not
16 liable on an instrument unless:
17 (1) the person signed the instrument; or
18 (2) the person is represented by an agent or
19 representative who signed the instrument and the signature is
20 binding on the represented person under section 3402
21 (relating to signature by representative).
22 (b) Form of signature.--A signature may be made:
23 (1) manually or by means of a device or machine; and
24 (2) by the use of any name, including a trade or assumed
25 name, or by a word, mark or symbol executed or adopted by a
26 person with present intention to authenticate a writing.
27 § 3402. Signature by representative.
28 (a) Represented person bound by signature.--If a person
29 acting, or purporting to act, as a representative signs an
30 instrument by signing either the name of the represented person
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1 or the name of the signer, the represented person is bound by
2 the signature to the same extent the represented person would be
3 bound if the signature were on a simple contract. If the
4 represented person is bound, the signature of the representative
5 is the "authorized signature of the represented person" and the
6 represented person is liable on the instrument, whether or not
7 identified in the instrument.
8 (b) When representative is bound by signature.--If a
9 representative signs the name of the representative to an
10 instrument and the signature is an authorized signature of the
11 represented person, the following rules apply:
12 (1) If the form of the signature shows unambiguously
13 that the signature is made on behalf of the represented
14 person who is identified in the instrument, the
15 representative is not liable on the instrument.
16 (2) Subject to subsection (c), if the form of the
17 signature does not show unambiguously that the signature is
18 made in a representative capacity or the represented person
19 is not identified in the instrument, the representative is
20 liable on the instrument to a holder in due course that took
21 the instrument without notice that the representative was not
22 intended to be liable on the instrument. With respect to any
23 other person, the representative is liable on the instrument
24 unless the representative proves that the original parties
25 did not intend the representative to be liable on the
26 instrument.
27 (c) Checks.--If a representative signs the name of the
28 representative as drawer of a check without indication of the
29 representative status and the check is payable from an account
30 of the represented person who is identified on the check, the
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1 signer is not liable on the check if the signature is an
2 authorized signature of the represented person.
3 § 3403. Unauthorized signature.
4 (a) Ineffectiveness or ratification.--Unless otherwise
5 provided in this division or Division 4 (relating to bank
6 deposits and collections), an unauthorized signature is
7 ineffective except as the signature of the unauthorized signer
8 in favor of a person who in good faith pays the instrument or
9 takes it for value. An unauthorized signature may be ratified
10 for all purposes of this division.
11 (b) Signature of organization.--If the signature of more
12 than one person is required to constitute the authorized
13 signature of an organization, the signature of the organization
14 is unauthorized if one of the required signatures is lacking.
15 (c) Liability.--The civil or criminal liability of a person
16 who makes an unauthorized signature is not affected by any
17 provision of this division which makes the unauthorized
18 signature effective for the purposes of this division.
19 § 3404. Impostors; fictitious payees.
20 (a) Impostor.--If an impostor, by use of the mails or
21 otherwise, induces the issuer of an instrument to issue the
22 instrument to the impostor, or to a person acting in concert
23 with the impostor, by impersonating the payee of the instrument
24 or a person authorized to act for the payee, an indorsement of
25 the instrument by any person in the name of the payee is
26 effective as the indorsement of the payee in favor of a person
27 who, in good faith, pays the instrument or takes it for value or
28 for collection.
29 (b) Fictitious payee.--If a person whose intent determines
30 to whom an instrument is payable (section 3110(a) or (b)) does
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1 not intend the person identified as payee to have any interest
2 in the instrument or the person identified as payee of an
3 instrument is a fictitious person, the following rules apply
4 until the instrument is negotiated by special indorsement:
5 (1) Any person in possession of the instrument is its
6 holder.
7 (2) An indorsement by any person in the name of the
8 payee stated in the instrument is effective as the
9 indorsement of the payee in favor of a person who, in good
10 faith, pays the instrument or takes it for value or for
11 collection.
12 (c) When indorsement made in name of payee.--Under
13 subsection (a) or (b), an indorsement is made in the name of a
14 payee if:
15 (1) it is made in a name substantially similar to that
16 of the payee; or
17 (2) the instrument, whether or not indorsed, is
18 deposited in a depositary bank to an account in a name
19 substantially similar to that of the payee.
20 (d) Failure to exercise ordinary care.--With respect to an
21 instrument to which subsection (a) or (b) applies, if a person
22 paying the instrument or taking it for value or for collection
23 fails to exercise ordinary care in paying or taking the
24 instrument and that failure substantially contributes to loss
25 resulting from payment of the instrument, the person bearing the
26 loss may recover from the person failing to exercise ordinary
27 care to the extent the failure to exercise ordinary care
28 contributed to the loss.
29 § 3405. Employer's responsibility for fraudulent indorsement by
30 employee.
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1 (a) Definitions.--As used in this section, the following
2 words and phrases shall have the meanings given to them in this
3 subsection:
4 "Employee." Includes an independent contractor and employee
5 of an independent contractor retained by the employer.
6 "Fraudulent indorsement."
7 (1) In the case of an instrument payable to the
8 employer, a forged indorsement purporting to be that of the
9 employer.
10 (2) In the case of an instrument with respect to which
11 the employer is the issuer, a forged indorsement purporting
12 to be that of the person identified as payee.
13 "Responsibility." With respect to instruments means
14 authority:
15 (1) to sign or indorse instruments on behalf of the
16 employer;
17 (2) to process instruments received by the employer for
18 bookkeeping purposes, for deposit to an account or for other
19 disposition;
20 (3) to prepare or process instruments for issue in the
21 name of the employer;
22 (4) to supply information determining the names or
23 addresses of payees of instruments to be issued in the name
24 of the employer;
25 (5) to control the disposition of instruments to be
26 issued in the name of the employer; or
27 (6) to act otherwise with respect to instruments in a
28 responsible capacity.
29 The term does not include authority that merely allows an
30 employee to have access to instruments or blank or incomplete
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1 instrument forms that are being stored or transported or are
2 part of incoming or outgoing mail or similar access.
3 (b) Rights and liabilities.--For the purpose of determining
4 the rights and liabilities of a person who, in good faith, pays
5 an instrument or takes it for value or for collection, if an
6 employer entrusted an employee with responsibility with respect
7 to the instrument and the employee or a person acting in concert
8 with the employee makes a fraudulent indorsement of the
9 instrument, the indorsement is effective as the indorsement of
10 the person to whom the instrument is payable if it is made in
11 the name of that person. If the person paying the instrument or
12 taking it for value or for collection fails to exercise ordinary
13 care in paying or taking the instrument and that failure
14 substantially contributes to loss resulting from the fraud, the
15 person bearing the loss may recover from the person failing to
16 exercise ordinary care to the extent the failure to exercise
17 ordinary care contributed to the loss.
18 (c) Application.--Under subsection (b), an indorsement is
19 made in the name of the person to whom an instrument is payable
20 if:
21 (1) it is made in a name substantially similar to the
22 name of that person; or
23 (2) the instrument, whether or not indorsed, is
24 deposited in a depositary bank to an account in a name
25 substantially similar to the name of that person.
26 § 3406. Negligence contributing to forged signature or
27 alteration of instrument.
28 (a) Failure to exercise ordinary care.--A person whose
29 failure to exercise ordinary care substantially contributes to
30 an alteration of an instrument or to the making of a forged
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1 signature on an instrument is precluded from asserting the
2 alteration or the forgery against a person who, in good faith,
3 pays the instrument or takes it for value or for collection.
4 (b) Allocation of loss.--Under subsection (a), if the person
5 asserting the preclusion fails to exercise ordinary care in
6 paying or taking the instrument and that failure substantially
7 contributes to loss, the loss is allocated between the person
8 precluded and the person asserting the preclusion according to
9 the extent to which the failure of each to exercise ordinary
10 care contributed to the loss.
11 (c) Burden of proof.--Under subsection (a), the burden of
12 proving failure to exercise ordinary care is on the person
13 asserting the preclusion. Under subsection (b), the burden of
14 proving failure to exercise ordinary care is on the person
15 precluded.
16 § 3407. Alteration.
17 (a) Definition of "alteration".--"Alteration" means:
18 (1) an unauthorized change in an instrument that
19 purports to modify in any respect the obligation of a party;
20 or
21 (2) an unauthorized addition of words or numbers or
22 other change to an incomplete instrument relating to the
23 obligation of a party.
24 (b) Fraudulent alteration; discharge.--Except as provided in
25 subsection (c), an alteration fraudulently made discharges a
26 party whose obligation is affected by the alteration unless that
27 party assents or is precluded from asserting the alteration. No
28 other alteration discharges a party, and the instrument may be
29 enforced according to its original terms.
30 (c) Certain persons not affected by discharge.--A payor bank
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1 or drawee paying a fraudulently altered instrument or a person
2 taking it for value, in good faith and without notice of the
3 alteration, may enforce rights with respect to the instrument
4 according to its original terms or, in the case of an incomplete
5 instrument altered by unauthorized completion, according to its
6 terms as completed.
7 § 3408. Drawee not liable on unaccepted draft.
8 A check or other draft does not of itself operate as an
9 assignment of funds in the hands of the drawee available for its
10 payment, and the drawee is not liable on the instrument until
11 the drawee accepts it.
12 § 3409. Acceptance of draft; certified check.
13 (a) Definition of "acceptance".--"Acceptance" means the
14 drawee's signed agreement to pay a draft as presented. It must
15 be written on the draft and may consist of the drawee's
16 signature alone. Acceptance may be made at any time and becomes
17 effective when notification pursuant to instructions is given or
18 the accepted draft is delivered for the purpose of giving rights
19 on the acceptance to any person.
20 (b) Acceptance of incomplete, overdue or dishonored draft.--
21 A draft may be accepted although it has not been signed by the
22 drawer, is otherwise incomplete, is overdue or has been
23 dishonored.
24 (c) Failure to date acceptance of sight draft.--If a draft
25 is payable at a fixed period after sight and the acceptor fails
26 to date the acceptance, the holder may complete the acceptance
27 by supplying a date in good faith.
28 (d) Definition of "certified check".--"Certified check"
29 means a check accepted by the bank on which it is drawn.
30 Acceptance may be made as stated in subsection (a) or by a
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1 writing on the check which indicates that the check is
2 certified. The drawee of a check has no obligation to certify
3 the check, and refusal to certify is not dishonor of the check.
4 § 3410. Acceptance varying draft.
5 (a) Right of holder to refuse acceptance.--If the terms of a
6 drawee's acceptance vary from the terms of the draft as
7 presented, the holder may refuse the acceptance and treat the
8 draft as dishonored. In that case, the drawee may cancel the
9 acceptance.
10 (b) Effect of acceptance designating place of payment.--The
11 terms of a draft are not varied by an acceptance to pay at a
12 particular bank or place in the United States, unless the
13 acceptance states that the draft is to be paid only at that bank
14 or place.
15 (c) Assent of holder to acceptance.--If the holder assents
16 to an acceptance varying the terms of a draft, the obligation of
17 each drawer and indorser that does not expressly assent to the
18 acceptance is discharged.
19 § 3411. Refusal to pay cashier's checks, teller's checks and
20 certified checks.
21 (a) Definition.--As used in this section, the term
22 "obligated bank" means the acceptor of a certified check or the
23 issuer of a cashier's check or teller's check bought from the
24 issuer.
25 (b) Refusal to pay.--If the obligated bank wrongfully:
26 (1) refuses to pay a cashier's check or certified check;
27 (2) stops payment of a teller's check; or
28 (3) refuses to pay a dishonored teller's check;
29 the person asserting the right to enforce the check is entitled
30 to compensation for expenses and loss of interest resulting from
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1 the nonpayment and may recover consequential damages if the
2 obligated bank refuses to pay after receiving notice of
3 particular circumstances giving rise to the damages.
4 (c) Expenses or consequential damages not recoverable under
5 certain circumstances.--Expenses or consequential damages under
6 subsection (b) are not recoverable if the refusal of the
7 obligated bank to pay occurs because:
8 (1) the bank suspends payments;
9 (2) the obligated bank asserts a claim or defense of the
10 bank that it has reasonable grounds to believe is available
11 against the person entitled to enforce the instrument;
12 (3) the obligated bank has a reasonable doubt whether
13 the person demanding payment is the person entitled to
14 enforce the instrument; or
15 (4) payment is prohibited by law.
16 § 3412. Obligation of issuer of note or cashier's check.
17 The issuer of a note or cashier's check or other draft drawn
18 on the drawer is obliged to pay the instrument according to its
19 terms at the time it was issued or, if not issued, at the time
20 it first came into possession of a holder, or if the issuer
21 signed an incomplete instrument, according to its terms when
22 completed, to the extent stated in sections 3115 (relating to
23 incomplete instrument) and 3407 (relating to alteration). The
24 obligation is owed to a person entitled to enforce the
25 instrument or to an indorser who paid the instrument under
26 section 3415 (relating to obligation of indorser).
27 § 3413. Obligation of acceptor.
28 (a) General rule.--The acceptor of a draft is obliged to pay
29 the draft:
30 (1) according to its terms at the time it was accepted,
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1 even though the acceptance states that the draft is payable
2 "as originally drawn" or equivalent terms;
3 (2) if the acceptance varies the terms of the draft,
4 according to the terms of the draft as varied; or
5 (3) if the acceptance is of a draft that is an
6 incomplete instrument, according to its terms when completed,
7 to the extent stated in sections 3115 (relating to incomplete
8 instrument) and 3407 (relating to alteration).
9 The obligation is owed to a person entitled to enforce the draft
10 or to the drawer or an indorser who paid the draft under section
11 3414 (relating to obligation of drawer) or 3415 (relating to
12 obligation of indorser).
13 (b) Certified check or accepted draft.--If the certification
14 of a check or other acceptance of a draft states the amount
15 certified or accepted, the obligation of the acceptor is that
16 amount. If the certification or acceptance does not state an
17 amount, the amount of the instrument is subsequently raised and
18 the instrument is then negotiated to a holder in due course, the
19 obligation of the acceptor is the amount of the instrument at
20 the time it was taken by the holder in due course.
21 § 3414. Obligation of drawer.
22 (a) Scope of section.--This section does not apply to
23 cashier's checks or other drafts drawn on the drawer.
24 (b) Obligation of drawer if unaccepted draft is
25 dishonored.--If an unaccepted draft is dishonored, the drawer is
26 obliged to pay the draft:
27 (1) according to its terms at the time it was issued or,
28 if not issued, at the time it first came into possession of a
29 holder; or
30 (2) if the drawer signed an incomplete instrument,
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1 according to its terms when completed, to the extent stated
2 in sections 3115 (relating to incomplete instrument) and 3407
3 (relating to alteration).
4 The obligation is owed to a person entitled to enforce the draft
5 or to an indorser who paid the draft under section 3415
6 (relating to obligation of indorser).
7 (c) Draft accepted by bank.--If a draft is accepted by a
8 bank, the drawer is discharged, regardless of when or by whom
9 acceptance was obtained.
10 (d) Draft accepted by drawer other than bank.--If a draft is
11 accepted and the acceptor is not a bank, the obligation of the
12 drawer to pay the draft if the draft is dishonored by the
13 acceptor is the same as the obligation of an indorser under
14 section 3415(a) and (c).
15 (e) Disclaimer of liability.--If a draft states that it is
16 drawn "without recourse" or otherwise disclaims liability of the
17 drawer to pay the draft, the drawer is not liable under
18 subsection (b) to pay the draft if the draft is not a check. A
19 disclaimer of the liability stated in subsection (b) is not
20 effective if the draft is a check.
21 (f) Certain protections.--If:
22 (1) a check is not presented for payment or given to a
23 depositary bank for collection within 30 days after its date;
24 (2) the drawee suspends payments after expiration of the
25 30-day period without paying the check; and
26 (3) because of the suspension of payments, the drawer is
27 deprived of funds maintained with the drawee to cover payment
28 of the check;
29 the drawer to the extent deprived of funds may discharge its
30 obligation to pay the check by assigning to the person entitled
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1 to enforce the check the rights of the drawer against the drawee
2 with respect to the funds.
3 § 3415. Obligation of indorser.
4 (a) General rule.--Subject to subsections (b), (c) and (d)
5 and to section 3419(d) (relating to instruments signed for
6 accommodation), if an instrument is dishonored, an indorser is
7 obliged to pay the amount due on the instrument:
8 (1) according to the terms of the instrument at the time
9 it was indorsed; or
10 (2) if the indorser indorsed an incomplete instrument,
11 according to its terms when completed, to the extent stated
12 in sections 3115 (relating to incomplete instrument) and 3407
13 (relating to alteration).
14 The obligation of the indorser is owed to a person entitled to
15 enforce the instrument or to a subsequent indorser who paid the
16 instrument under this section.
17 (b) Disclaimer of liability.--If an indorsement states that
18 it is made "without recourse" or otherwise disclaims liability
19 of the indorser, the indorser is not liable under subsection (a)
20 to pay the instrument.
21 (c) Notice of dishonor.--If notice of dishonor of an
22 instrument is required by section 3503 (relating to notice of
23 dishonor) and notice of dishonor complying with that section is
24 not given to an indorser, the liability of the indorser under
25 subsection (a) is discharged.
26 (d) Draft accepted by bank.--If a draft is accepted by a
27 bank after an indorsement is made, the liability of the indorser
28 under subsection (a) is discharged.
29 (e) Discharge of liability.--If an indorser of a check is
30 liable under subsection (a) and the check is not presented for
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1 payment, or given to a depositary bank for collection, within 30
2 days after the day the indorsement was made, the liability of
3 the indorser under subsection (a) is discharged.
4 § 3416. Transfer warranties.
5 (a) Warranties to transferees.--A person who transfers an
6 instrument for consideration warrants to the transferee and, if
7 the transfer is by indorsement, to any subsequent transferee
8 that:
9 (1) the warrantor is a person entitled to enforce the
10 instrument;
11 (2) all signatures on the instrument are authentic and
12 authorized;
13 (3) the instrument has not been altered;
14 (4) the instrument is not subject to a defense or claim
15 in recoupment of any party which can be asserted against the
16 warrantor; and
17 (5) the warrantor has no knowledge of any insolvency
18 proceeding commenced with respect to the maker or acceptor
19 or, in the case of an unaccepted draft, the drawer.
20 (b) Damages for breach of warranty.--A person to whom the
21 warranties under subsection (a) are made and who took the
22 instrument in good faith may recover from the warrantor as
23 damages for breach of warranty an amount equal to the loss
24 suffered as a result of the breach, but not more than the amount
25 of the instrument plus expenses and loss of interest incurred as
26 a result of the breach.
27 (c) Prohibition against disclaimer of warranties regarding
28 checks.--The warranties stated in subsection (a) cannot be
29 disclaimed with respect to checks. Unless notice of a claim for
30 breach of warranty is given to the warrantor within 30 days
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1 after the claimant has reason to know of the breach and the
2 identity of the warrantor, the liability of the warrantor under
3 subsection (b) is discharged to the extent of any loss caused by
4 the delay in giving notice of the claim.
5 (d) Action for breach of warranty.--A cause of action for
6 breach of warranty under this section accrues when the claimant
7 has reason to know of the breach.
8 § 3417. Presentment warranties.
9 (a) Statement of warranties.--If an unaccepted draft is
10 presented to the drawee for payment or acceptance and the drawee
11 pays or accepts the draft, the person obtaining payment or
12 acceptance, at the time of presentment, and a previous
13 transferor of the draft, at the time of transfer, warrant to the
14 drawee making payment or accepting the draft in good faith that:
15 (1) the warrantor is, or was, at the time the warrantor
16 transferred the draft, a person entitled to enforce the draft
17 or authorized to obtain payment or acceptance of the draft on
18 behalf of a person entitled to enforce the draft;
19 (2) the draft has not been altered; and
20 (3) the warrantor has no knowledge that the signature of
21 the drawer of the draft is unauthorized.
22 (b) Damages for breach of warranty.--A drawee making payment
23 may recover from any warrantor damages for breach of warranty
24 equal to the amount paid by the drawee less the amount the
25 drawee received or is entitled to receive from the drawer
26 because of the payment. In addition, the drawee is entitled to
27 compensation for expenses and loss of interest resulting from
28 the breach. The right of the drawee to recover damages under
29 this subsection is not affected by any failure of the drawee to
30 exercise ordinary care in making payment. If the drawee accepts
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1 the draft, breach of warranty is a defense to the obligation of
2 the acceptor. If the acceptor makes payment with respect to the
3 draft, the acceptor is entitled to recover from any warrantor
4 for breach of warranty the amounts stated in this subsection.
5 (c) Defense.--If a drawee asserts a claim for breach of
6 warranty under subsection (a) based on an unauthorized
7 indorsement of the draft or an alteration of the draft, the
8 warrantor may defend by proving that the indorsement is
9 effective under section 3404 (relating to impostors; fictitious
10 payees) or 3405 (relating to employer's responsibility for
11 fraudulent indorsement by employee) or the drawer is precluded
12 under section 3406 (relating to negligence contributing to
13 forged signature or alteration of instrument) or 4406 (relating
14 to duty of customer to discover and report unauthorized
15 signature or alteration) from asserting against the drawee the
16 unauthorized indorsement or alteration.
17 (d) Statement of warranty in certain other cases.--If a
18 dishonored draft is presented for payment to the drawer or an
19 indorser or any other instrument is presented for payment to a
20 party obliged to pay the instrument and payment is received, the
21 following rules apply:
22 (1) The person obtaining payment and a prior transferor
23 of the instrument warrant to the person making payment in
24 good faith that the warrantor is, or was, at the time the
25 warrantor transferred the instrument, a person entitled to
26 enforce the instrument or authorized to obtain payment on
27 behalf of a person entitled to enforce the instrument.
28 (2) The person making payment may recover from any
29 warrantor for breach of warranty an amount equal to the
30 amount paid plus expenses and loss of interest resulting from
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1 the breach.
2 (e) Prohibition against disclaimer of warranties regarding
3 checks.--The warranties stated in subsections (a) and (d) cannot
4 be disclaimed with respect to checks. Unless notice of a claim
5 for breach of warranty is given to the warrantor within 30 days
6 after the claimant has reason to know of the breach and the
7 identity of the warrantor, the liability of the warrantor under
8 subsection (b) or (d) is discharged to the extent of any loss
9 caused by the delay in giving notice of the claim.
10 (f) Action for breach of warranty.--A cause of action for
11 breach of warranty under this section accrues when the claimant
12 has reason to know of the breach.
13 § 3418. Payment or acceptance by mistake.
14 (a) General rule.--Except as provided in subsection (c), if
15 the drawee of a draft pays or accepts the draft and the drawee
16 acted on the mistaken belief that:
17 (1) payment of the draft had not been stopped pursuant
18 to section 4403 (relating to right of customer to stop
19 payment; burden of proof of loss); or
20 (2) the signature of the drawer of the draft was
21 authorized;
22 the drawee may recover the amount of the draft from the person
23 to whom or for whose benefit payment was made or, in the case of
24 acceptance, may revoke the acceptance. Rights of the drawee
25 under this subsection are not affected by failure of the drawee
26 to exercise ordinary care in paying or accepting the draft.
27 (b) Other cases.--Except as provided in subsection (c), if
28 an instrument has been paid or accepted by mistake and the case
29 is not covered by subsection (a), the person paying or accepting
30 may, to the extent permitted by the law governing mistake and
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1 restitution, recover the payment from the person to whom or for
2 whose benefit payment was made or, in the case of acceptance,
3 may revoke the acceptance.
4 (c) Limitation on remedies.--The remedies provided by
5 subsection (a) or (b) may not be asserted against a person who
6 took the instrument in good faith and for value or who in good
7 faith changed position in reliance on the payment or acceptance.
8 This subsection does not limit remedies provided by section 3417
9 (relating to presentment warranties) or 4407 (relating to right
10 of payor bank to subrogation on improper payment).
11 (d) Under certain circumstances an instrument is deemed
12 dishonored.--Notwithstanding section 4215 (relating to final
13 payment of item by payor bank; when provisional debits and
14 credits become final; when certain credits become available for
15 withdrawal), if an instrument is paid or accepted by mistake and
16 the payor or acceptor recovers payment or revokes acceptance
17 under subsection (a) or (b), the instrument is deemed not to
18 have been paid or accepted and is treated as dishonored, and the
19 person from whom payment is recovered has rights as a person
20 entitled to enforce the dishonored instrument.
21 § 3419. Instruments signed for accommodation.
22 (a) Accommodation party.--If an instrument is issued for
23 value given for the benefit of a party to the instrument
24 ("accommodated party") and another party to the instrument
25 ("accommodation party") signs the instrument for the purpose of
26 incurring liability on the instrument without being a direct
27 beneficiary of the value given for the instrument, the
28 instrument is signed by the accommodation party "for
29 accommodation."
30 (b) Liability of accommodation party.--An accommodation
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1 party may sign the instrument as maker, drawer, acceptor or
2 indorser and, subject to subsection (d), is obliged to pay the
3 instrument in the capacity in which the accommodation party
4 signs. The obligation of an accommodation party may be enforced
5 notwithstanding any statute of frauds and whether or not the
6 accommodation party receives consideration for the
7 accommodation.
8 (c) Presumption.--A person signing an instrument is presumed
9 to be an accommodation party and there is notice that the
10 instrument is signed for accommodation if the signature is an
11 anomalous indorsement or is accompanied by words indicating that
12 the signer is acting as surety or guarantor with respect to the
13 obligation of another party to the instrument. Except as
14 provided in section 3605 (relating to discharge of indorsers and
15 accommodation parties), the obligation of an accommodation party
16 to pay the instrument is not affected by the fact that the
17 person enforcing the obligation had notice when the instrument
18 was taken by that person that the accommodation party signed the
19 instrument for accommodation.
20 (d) Limitation on liability.--If the signature of a party to
21 an instrument is accompanied by words indicating unambiguously
22 that the party is guaranteeing collection rather than payment of
23 the obligation of another party to the instrument, the signer is
24 obliged to pay the amount due on the instrument to a person
25 entitled to enforce the instrument only if:
26 (1) execution of judgment against the other party has
27 been returned unsatisfied;
28 (2) the other party is insolvent or in an insolvency
29 proceeding;
30 (3) the other party cannot be served with process; or
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1 (4) it is otherwise apparent that payment cannot be
2 obtained from the other party.
3 (e) Rights between accommodation and accommodated parties.--
4 An accommodation party who pays the instrument is entitled to
5 reimbursement from the accommodated party and is entitled to
6 enforce the instrument against the accommodated party. An
7 accommodated party who pays the instrument has no right of
8 recourse against, and is not entitled to contribution from, an
9 accommodation party.
10 § 3420. Conversion of instrument.
11 (a) General rule.--The law applicable to conversion of
12 personal property applies to instruments. An instrument is also
13 converted if it is taken by transfer, other than a negotiation,
14 from a person not entitled to enforce the instrument or a bank
15 makes or obtains payment with respect to the instrument for a
16 person not entitled to enforce the instrument or receive
17 payment. An action for conversion of an instrument may not be
18 brought by the issuer or acceptor of the instrument or a payee
19 or indorsee who did not receive delivery of the instrument
20 either directly or through delivery to an agent or a copayee.
21 (b) Measure of damages.--In an action under subsection (a),
22 the measure of liability is presumed to be the amount payable on
23 the instrument, but recovery may not exceed the amount of the
24 plaintiff's interest in the instrument.
25 (c) Limitation on liability.--A representative, other than a
26 depositary bank, who has in good faith dealt with an instrument
27 or its proceeds on behalf of one who was not the person entitled
28 to enforce the instrument is not liable in conversion to that
29 person beyond the amount of any proceeds that it has not paid
30 out.
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1 CHAPTER 35
2 DISHONOR
3 Sec.
4 3501. Presentment.
5 3502. Dishonor.
6 3503. Notice of dishonor.
7 3504. Excused presentment and notice of dishonor.
8 3505. Evidence of dishonor.
9 § 3501. Presentment.
10 (a) Definition of "presentment".--"Presentment" means a
11 demand made by or on behalf of a person entitled to enforce an
12 instrument:
13 (1) to pay the instrument made to the drawee or a party
14 obliged to pay the instrument or, in the case of a note or
15 accepted draft payable at a bank, to the bank; or
16 (2) to accept a draft made to the drawee.
17 (b) Application of certain rules.--The following rules are
18 subject to Division 4 (relating to bank deposits and
19 collections), agreement of the parties and clearinghouse rules
20 and the like:
21 (1) Presentment may be made at the place of payment of
22 the instrument and must be made at the place of payment if
23 the instrument is payable at a bank in the United States; may
24 be made by any commercially reasonable means, including an
25 oral, written or electronic communication; is effective when
26 the demand for payment or acceptance is received by the
27 person to whom presentment is made; and is effective if made
28 to any one of two or more makers, acceptors, drawees or other
29 payors.
30 (2) Upon demand of the person to whom presentment is
19910H0871B0983 - 148 -
1 made, the person making presentment must:
2 (i) exhibit the instrument;
3 (ii) give reasonable identification and, if
4 presentment is made on behalf of another person,
5 reasonable evidence of authority to do so; and
6 (iii) sign a receipt on the instrument for any
7 payment made or surrender the instrument if full payment
8 is made.
9 (3) Without dishonoring the instrument, the party to
10 whom presentment is made may:
11 (i) return the instrument for lack of a necessary
12 indorsement; or
13 (ii) refuse payment or acceptance for failure of the
14 presentment to comply with the terms of the instrument,
15 an agreement of the parties or other applicable law or
16 rule.
17 (4) The party to whom presentment is made may treat
18 presentment as occurring on the next business day after the
19 day of presentment if the party to whom presentment is made
20 has established a cutoff hour not earlier than 2 p.m. for the
21 receipt and processing of instruments presented for payment
22 or acceptance and presentment is made after the cutoff hour.
23 § 3502. Dishonor.
24 (a) Dishonor of note.--Dishonor of a note is governed by the
25 following rules:
26 (1) If the note is payable on demand, the note is
27 dishonored if presentment is duly made to the maker and the
28 note is not paid on the day of presentment.
29 (2) If the note is not payable on demand and is payable
30 at or through a bank or the terms of the note require
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1 presentment, the note is dishonored if presentment is duly
2 made and the note is not paid on the day it becomes payable
3 or the day of presentment, whichever is later.
4 (3) If the note is not payable on demand and paragraph
5 (2) does not apply, the note is dishonored if it is not paid
6 on the day it becomes payable.
7 (b) Dishonor of unaccepted draft.--Dishonor of an unaccepted
8 draft other than a documentary draft is governed by the
9 following rules:
10 (1) If a check is duly presented for payment to the
11 payor bank otherwise than for immediate payment over the
12 counter, the check is dishonored if the payor bank makes
13 timely return of the check or sends timely notice of dishonor
14 or nonpayment under section 4301 (relating to deferred
15 posting; recovery of payment by return of items; time of
16 dishonor; return of items by payor bank) or 4302 (relating to
17 responsibility of payor bank for late return of item) or
18 becomes accountable for the amount of the check under section
19 4302.
20 (2) If a draft is payable on demand and paragraph (1)
21 does not apply, the draft is dishonored if presentment for
22 payment is duly made to the drawee and the draft is not paid
23 on the day of presentment.
24 (3) If a draft is payable on a date stated in the draft,
25 the draft is dishonored if:
26 (i) presentment for payment is duly made to the
27 drawee and payment is not made on the day the draft
28 becomes payable or the day of presentment, whichever is
29 later; or
30 (ii) presentment for acceptance is duly made before
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1 the day the draft becomes payable and the draft is not
2 accepted on the day of presentment.
3 (4) If a draft is payable on elapse of a period of time
4 after sight or acceptance, the draft is dishonored if
5 presentment for acceptance is duly made and the draft is not
6 accepted on the day of presentment.
7 (c) Dishonor of unaccepted documentary draft.--Dishonor of
8 an unaccepted documentary draft occurs according to the rules
9 stated in subsection (b)(2), (3) and (4), except that payment or
10 acceptance may be delayed without dishonor until no later than
11 the close of the third business day of the drawee following the
12 day on which payment or acceptance is required by those
13 paragraphs.
14 (d) Dishonor of accepted draft.--Dishonor of an accepted
15 draft is governed by the following rules:
16 (1) If the draft is payable on demand, the draft is
17 dishonored if presentment for payment is duly made to the
18 acceptor and the draft is not paid on the day of presentment.
19 (2) If the draft is not payable on demand, the draft is
20 dishonored if presentment for payment is duly made to the
21 acceptor and payment is not made on the day it becomes
22 payable or the day of presentment, whichever is later.
23 (e) Certain limitations.--In any case in which presentment
24 is otherwise required for dishonor under this section and
25 presentment is excused under section 3504 (relating to excused
26 presentment and notice of dishonor), dishonor occurs without
27 presentment if the instrument is not duly accepted or paid.
28 (f) Late acceptance cures dishonor.--If a draft is
29 dishonored because timely acceptance of the draft was not made
30 and the person entitled to demand acceptance consents to a late
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1 acceptance, from the time of acceptance the draft is treated as
2 never having been dishonored.
3 § 3503. Notice of dishonor.
4 (a) Requirement of notice.--The obligation of an indorser
5 stated in section 3415(a) (relating to obligation of indorser)
6 and the obligation of a drawer stated in section 3414(d)
7 (relating to obligation of drawer) may not be enforced unless:
8 (1) the indorser or drawer is given notice of dishonor
9 of the instrument complying with this section; or
10 (2) notice of dishonor is excused under section 3504(b)
11 (relating to excused presentment and notice of dishonor).
12 (b) Manner of notice.--Notice of dishonor may be given by
13 any person; may be given by any commercially reasonable means,
14 including an oral, written or electronic communication; and is
15 sufficient if it reasonably identifies the instrument and
16 indicates that the instrument has been dishonored or has not
17 been paid or accepted. Return of an instrument given to a bank
18 for collection is sufficient notice of dishonor.
19 (c) Time of notice.--Subject to section 3504(c), with
20 respect to an instrument taken for collection by a collecting
21 bank, notice of dishonor must be given:
22 (1) by the bank before midnight of the next banking day
23 following the banking day on which the bank receives notice
24 of dishonor of the instrument; or
25 (2) by any other person within 30 days following the day
26 on which the person receives notice of dishonor.
27 With respect to any other instrument, notice of dishonor must be
28 given within 30 days following the day on which dishonor occurs.
29 § 3504. Excused presentment and notice of dishonor.
30 (a) Excused presentment.--Presentment for payment or
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1 acceptance of an instrument is excused if:
2 (1) the person entitled to present the instrument cannot
3 with reasonable diligence make presentment;
4 (2) the maker or acceptor has repudiated an obligation
5 to pay the instrument or is dead or in insolvency
6 proceedings;
7 (3) by the terms of the instrument presentment is not
8 necessary to enforce the obligation of indorsers or the
9 drawer;
10 (4) the drawer or indorser whose obligation is being
11 enforced has waived presentment or otherwise has no reason to
12 expect or right to require that the instrument be paid or
13 accepted; or
14 (5) the drawer instructed the drawee not to pay or
15 accept the draft or the drawee was not obligated to the
16 drawer to pay the draft.
17 (b) Excused notice of dishonor.--Notice of dishonor is
18 excused if:
19 (1) by the terms of the instrument notice of dishonor is
20 not necessary to enforce the obligation of a party to pay the
21 instrument; or
22 (2) the party whose obligation is being enforced waived
23 notice of dishonor.
24 A waiver of presentment is also a waiver of notice of dishonor.
25 (c) Excused delay in notice of dishonor.--Delay in giving
26 notice of dishonor is excused if the delay was caused by
27 circumstances beyond the control of the person giving the notice
28 and the person giving the notice exercised reasonable diligence
29 after the cause of the delay ceased to operate.
30 § 3505. Evidence of dishonor.
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1 (a) Admissible evidence.--The following are admissible as
2 evidence and create a presumption of dishonor and of any notice
3 of dishonor stated:
4 (1) A document regular in form as provided in subsection
5 (b) which purports to be a protest.
6 (2) A purported stamp or writing of the drawee, payor
7 bank or presenting bank on or accompanying the instrument
8 stating that acceptance or payment has been refused unless
9 reasons for the refusal are stated and the reasons are not
10 consistent with dishonor.
11 (3) A book or record of the drawee, payor bank or
12 collecting bank, kept in the usual course of business which
13 shows dishonor, even if there is no evidence of who made the
14 entry.
15 (b) Protest.--A protest is a certificate of dishonor made by
16 a United States consul or vice consul, or a notary public or
17 other person authorized to administer oaths by the law of the
18 place where dishonor occurs. It may be made upon information
19 satisfactory to that person. The protest must identify the
20 instrument and certify either that presentment has been made or,
21 if not made, the reason why it was not made, and that the
22 instrument has been dishonored by nonacceptance or nonpayment.
23 The protest may also certify that notice of dishonor has been
24 given to some or all parties.
25 CHAPTER 36
26 DISCHARGE AND PAYMENT
27 Sec.
28 3601. Discharge and effect of discharge.
29 3602. Payment.
30 3603. Tender of payment.
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1 3604. Discharge by cancellation or renunciation.
2 3605. Discharge of indorsers and accommodation parties.
3 § 3601. Discharge and effect of discharge.
4 (a) Discharge.--The obligation of a party to pay the
5 instrument is discharged as stated in this division or by an act
6 or agreement with the party which would discharge an obligation
7 to pay money under a simple contract.
8 (b) Effect of discharge.--Discharge of the obligation of a
9 party is not effective against a person acquiring rights of a
10 holder in due course of the instrument without notice of the
11 discharge.
12 § 3602. Payment.
13 (a) General rule.--Subject to subsection (b), an instrument
14 is paid to the extent payment is made by or on behalf of a party
15 obliged to pay the instrument and to a person entitled to
16 enforce the instrument. To the extent of the payment, the
17 obligation of the party obliged to pay the instrument is
18 discharged even though payment is made with knowledge of a claim
19 to the instrument under section 3306 (relating to claims to an
20 instrument) by another person.
21 (b) Obligation not discharged.--The obligation of a party to
22 pay the instrument is not discharged under subsection (a) if:
23 (1) a claim to the instrument under section 3306 is
24 enforceable against the party receiving payment and:
25 (i) payment is made with knowledge by the payor that
26 payment is prohibited by injunction or similar process of
27 a court of competent jurisdiction; or
28 (ii) in the case of an instrument other than a
29 cashier's check, teller's check or certified check, the
30 party making payment accepted, from the person having a
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1 claim to the instrument, indemnity against loss resulting
2 from refusal to pay the person entitled to enforce the
3 instrument; or
4 (2) the person making payment knows that the instrument
5 is a stolen instrument and pays a person it knows is in
6 wrongful possession of the instrument.
7 § 3603. Tender of payment.
8 (a) Applicability of contract law.--If tender of payment of
9 an obligation to pay an instrument is made to a person entitled
10 to enforce the instrument, the effect of tender is governed by
11 principles of law applicable to tender of payment under a simple
12 contract.
13 (b) Effect of refusal of tender of payment.--If tender of
14 payment of an obligation to pay an instrument is made to a
15 person entitled to enforce the instrument and the tender is
16 refused, there is discharge, to the extent of the amount of the
17 tender, of the obligation of an indorser or accommodation party
18 having a right of recourse with respect to the obligation to
19 which the tender relates.
20 (c) Obligation to pay interest discharged.--If tender of
21 payment of an amount due on an instrument is made to a person
22 entitled to enforce the instrument, the obligation of the
23 obligor to pay interest after the due date on the amount
24 tendered is discharged. If presentment is required with respect
25 to an instrument and the obligor is able and ready to pay on the
26 due date at every place of payment stated in the instrument, the
27 obligor is deemed to have made tender of payment on the due date
28 to the person entitled to enforce the instrument.
29 § 3604. Discharge by cancellation or renunciation.
30 (a) Methods of discharge.--A person entitled to enforce an
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1 instrument, with or without consideration, may discharge the
2 obligation of a party to pay the instrument:
3 (1) by an intentional voluntary act, such as surrender
4 of the instrument to the party, destruction, mutilation or
5 cancellation of the instrument, cancellation or striking out
6 of the party's signature or the addition of words to the
7 instrument indicating discharge; or
8 (2) by agreeing not to sue or otherwise renouncing
9 rights against the party by a signed writing.
10 (b) Certain rights unaffected.--Cancellation or striking out
11 of an indorsement pursuant to subsection (a) does not affect the
12 status and rights of a party derived from the indorsement.
13 § 3605. Discharge of indorsers and accommodation parties.
14 (a) Definition.--As used in this section, the term
15 "indorser" includes a drawer having the obligation described in
16 section 3414(d) (relating to obligation of drawer).
17 (b) Effect of discharge in certain situation.--Discharge,
18 under section 3604 (relating to discharge by cancellation or
19 renunciation), of the obligation of a party to pay an instrument
20 does not discharge the obligation of an indorser or
21 accommodation party having a right of recourse against the
22 discharged party.
23 (c) Agreement to extension of due date.--If a person
24 entitled to enforce an instrument agrees, with or without
25 consideration, to an extension of the due date of the obligation
26 of a party to pay the instrument, the extension discharges an
27 indorser or accommodation party having a right of recourse
28 against the party whose obligation is extended to the extent the
29 indorser or accommodation party proves that the extension caused
30 loss to the indorser or accommodation party with respect to the
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1 right of recourse.
2 (d) Agreement to material modification.--If a person
3 entitled to enforce an instrument agrees, with or without
4 consideration, to a material modification of the obligation of a
5 party other than an extension of the due date, the modification
6 discharges the obligation of an indorser or accommodation party
7 having a right of recourse against the person whose obligation
8 is modified to the extent the modification causes loss to the
9 indorser or accommodation party with respect to the right of
10 recourse. The loss suffered by the indorser or accommodation
11 party as a result of the modification is equal to the amount of
12 the right of recourse unless the person enforcing the instrument
13 proves that no loss was caused by the modification or that the
14 loss caused by the modification was an amount less than the
15 amount of the right of recourse.
16 (e) Impairment of collateral; discharge of indorser or
17 accommodation party.--If the obligation of a party to pay an
18 instrument is secured by an interest in collateral and a person
19 entitled to enforce the instrument impairs the value of the
20 interest in collateral, the obligation of an indorser or
21 accommodation party having a right of recourse against the
22 obligor is discharged to the extent of the impairment. The value
23 of an interest in collateral is impaired to the extent the value
24 of the interest is reduced to an amount less than the amount of
25 the right of recourse of the party asserting discharge or the
26 reduction in value of the interest causes an increase in the
27 amount by which the amount of the right of recourse exceeds the
28 value of the interest. The burden of proving impairment is on
29 the party asserting discharge.
30 (f) Impairment of collateral; discharge of party jointly and
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1 severally liable.--If the obligation of a party is secured by an
2 interest in collateral not provided by an accommodation party
3 and a person entitled to enforce the instrument impairs the
4 value of the interest in collateral, the obligation of any party
5 who is jointly and severally liable with respect to the secured
6 obligation is discharged to the extent the impairment causes the
7 party asserting discharge to pay more than that party would have
8 been obliged to pay, taking into account rights of contribution,
9 if impairment had not occurred. If the party asserting discharge
10 is an accommodation party not entitled to discharge under
11 subsection (e), the party is deemed to have a right to
12 contribution based on joint and several liability rather than a
13 right to reimbursement. The burden of proving impairment is on
14 the party asserting discharge.
15 (g) Impairing value of an interest in collateral.--Under
16 subsection (e) or (f), impairing value of an interest in
17 collateral includes:
18 (1) failure to obtain or maintain perfection or
19 recordation of the interest in collateral;
20 (2) release of collateral without substitution of
21 collateral of equal value;
22 (3) failure to perform a duty to preserve the value of
23 collateral owed, under Division 9 (relating to secured
24 transactions) or other law, to a debtor or surety or other
25 person secondarily liable; or
26 (4) failure to comply with applicable law in disposing
27 of collateral.
28 (h) Accommodation party not discharged in certain
29 circumstances.--An accommodation party is not discharged under
30 subsection (c), (d) or (e) unless the person entitled to enforce
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1 the instrument knows of the accommodation or has notice under
2 section 3419(c) (relating to instruments signed for
3 accommodation) that the instrument was signed for accommodation.
4 (i) Other limitations on discharge.--A party is not
5 discharged under this section if:
6 (1) the party asserting discharge consents to the event
7 or conduct that is the basis of the discharge; or
8 (2) the instrument or a separate agreement of the party
9 provides for waiver of discharge under this section either
10 specifically or by general language indicating that parties
11 waive defenses based on suretyship or impairment of
12 collateral.
13 Section 6. Sections 4101, 4102, 4103, 4104 and 4105 of Title
14 13 are amended to read:
15 § 4101. Short title of division.
16 This division shall be known and may be cited as the
17 ["]Uniform Commercial Code[--], Article 4, Bank Deposits and
18 Collections.["]
19 § 4102. Applicability.
20 (a) Commercial paper and investment securities.--To the
21 extent that items within this division are also within [the
22 scope of] Division 3 (relating to [commercial paper] negotiable
23 instruments) and Division 8 (relating to investment securities),
24 they are subject to the provisions of those divisions. [In the
25 event of conflict the provisions of this division govern those
26 of Division 3 but the provisions of Division 8 govern those of
27 this division.] If there is conflict, this division governs
28 Division 3, but Division 8 governs this division.
29 (b) [Liability] Law applicable regarding liability of bank
30 with respect to items handled.--The liability of a bank for
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1 action or nonaction with respect to [any] an item handled by it
2 for purposes of presentment, payment or collection is governed
3 by the law of the place where the bank is located. In the case
4 of action or nonaction by or at a branch or separate office of a
5 bank, its liability is governed by the law of the place where
6 the branch or separate office is located.
7 § 4103. Variation by agreement; measure of damages; [certain]
8 action constituting ordinary care.
9 (a) Variation by agreement.--The effect of the provisions of
10 this division may be varied by agreement [except that no
11 agreement can], but the parties to the agreement cannot disclaim
12 the responsibility of a bank for its [own] lack of good faith or
13 failure to exercise ordinary care or [can] limit the measure of
14 damages for [such] the lack or failure[; but]. However, the
15 parties may determine by agreement [determine] the standards by
16 which [such responsibility] the responsibility of the bank is to
17 be measured if [such] those standards are not manifestly
18 unreasonable.
19 (b) Rules and regulations having effect of agreements.--
20 Federal Reserve regulations and operating [letters, clearing
21 house] circulars, clearinghouse rules[,] and the like[,] have
22 the effect of agreements under subsection (a), whether or not
23 specifically assented to by all parties interested in items
24 handled.
25 (c) Certain action constituting ordinary care.--Action or
26 nonaction approved by this division or pursuant to Federal
27 Reserve regulations or operating [letters constitutes] circulars
28 is the exercise of ordinary care and, in the absence of special
29 instructions, action or nonaction consistent with [clearing
30 house] clearinghouse rules and the like or with a general
19910H0871B0983 - 161 -
1 banking usage not disapproved by this division, is prima facie
2 [constitutes] the exercise of ordinary care.
3 (d) Effect of approval of certain procedures by this
4 division.--The specification or approval of certain procedures
5 by this division [does not constitute] is not disapproval of
6 other procedures [which] that may be reasonable under the
7 circumstances.
8 (e) Measure of damages for failure to exercise ordinary
9 care.--The measure of damages for failure to exercise ordinary
10 care in handling an item is the amount of the item reduced by an
11 amount [which] that could not have been realized by the [use]
12 exercise of ordinary care[, and where]. If there is also bad
13 faith it includes any other damages[, if any suffered by] the
14 party suffered as a proximate consequence.
15 § 4104. Definitions and index of definitions.
16 (a) Definitions.--The following words and phrases when used
17 in this division shall have, unless the context clearly
18 indicates otherwise, the meanings given to them in this
19 subsection:
20 "Account." Any deposit or credit account with a bank [and
21 includes a checking, time, interest or savings account.],
22 including a demand, time, savings, passbook, share draft or like
23 account, other than an account evidenced by a certificate of
24 deposit.
25 "Afternoon." The period of a day between noon and midnight.
26 "Banking day." [That] The part of [any] a day on which a
27 bank is open to the public for carrying on substantially all of
28 its banking functions.
29 ["Clearing house." Any] "Clearinghouse." An association of
30 banks or other payors regularly clearing items.
19910H0871B0983 - 162 -
1 "Customer." [Any] A person having an account with a bank or
2 for whom a bank has agreed to collect items [and includes],
3 including a bank [carrying] that maintains an account [with] at
4 another bank.
5 "Documentary draft." [Any negotiable or nonnegotiable draft
6 with accompanying documents, securities or other papers to be
7 delivered against honor of the draft.] A draft to be presented
8 for acceptance or payment if specified documents, certificated
9 securities (section 8102) or instructions for uncertificated
10 securities (section 8308) or other certificates, statements or
11 the like are to be received by the drawee or other payor before
12 acceptance or payment of the draft.
13 "Draft." A draft as defined in section 3104 (relating to
14 negotiable instrument) or an item, other than an instrument,
15 that is an order.
16 "Drawee." A person ordered in a draft to make payment.
17 "Item." [Any instrument for the payment of money even though
18 it is not negotiable but does not include money.] An instrument
19 or a promise or order to pay money handled by a bank for
20 collection or payment. The term does not include a payment order
21 governed by Division 4A (relating to funds transfers) or a
22 credit or debit card slip.
23 "Midnight deadline." With respect to a bank is midnight on
24 its next banking day following the banking day on which it
25 receives the relevant item or notice or from which the time for
26 taking action commences to run, whichever is later.
27 ["Properly payable." Includes the availability of funds for
28 payment at the time of decision to pay or dishonor.]
29 "Settle." To pay in cash, by [clearing house] clearinghouse
30 settlement, in a charge or credit or by remittance, or otherwise
19910H0871B0983 - 163 -
1 as [instructed] agreed. A settlement may be either provisional
2 or final.
3 "Suspends payments." With respect to a bank means that it
4 has been closed by order of the supervisory authorities, that a
5 public officer has been appointed to take it over or that it
6 ceases or refuses to make payments in the ordinary course of
7 business.
8 (b) Index of other definitions in division.--Other
9 definitions applying to this division and the sections in which
10 they appear are:
11 "Agreement for electronic presentment." Section 4110.
12 "Bank." Section 4105.
13 "Collecting bank." Section 4105.
14 "Depositary bank." Section 4105.
15 "Intermediary bank." Section 4105.
16 "Payor bank." Section 4105.
17 "Presenting bank." Section 4105.
18 ["Remitting bank." Section 4105.]
19 "Presentment notice." Section 4110.
20 (c) Index of definitions in other divisions.--The following
21 definitions in other divisions apply to this division:
22 ["Acceptance." Section 3410.
23 "Certificate of deposit." Section 3104.
24 "Certification." Section 3411.
25 "Check." Section 3104.
26 "Draft." Section 3104.
27 "Holder in due course." Section 3302.
28 "Notice of dishonor." Section 3508.
29 "Presentment." Section 3504.
30 "Protest." Section 3509.
19910H0871B0983 - 164 -
1 "Secondary party." Section 3102.]
2 "Acceptance." Section 3409.
3 "Alteration." Section 3407.
4 "Cashier's check." Section 3104.
5 "Certificate of deposit." Section 3104.
6 "Certified check." Section 3409.
7 "Check." Section 3104.
8 "Good faith." Section 3103.
9 "Holder in due course." Section 3302.
10 "Instrument." Section 3104.
11 "Notice of dishonor." Section 3503.
12 "Order." Section 3103.
13 "Ordinary care." Section 3103.
14 "Person entitled to enforce." Section 3301.
15 "Presentment." Section 3501.
16 "Promise." Section 3103.
17 "Prove." Section 3103.
18 "Teller's check." Section 3104.
19 "Unauthorized signature." Section 3403.
20 (d) Applicability of general definitions and principles.--In
21 addition Division 1 contains general definitions and principles
22 of construction and interpretation applicable throughout this
23 division.
24 § 4105. ["Depositary] "Bank"; "depositary bank"; "intermediary
25 bank"; "collecting bank"; "payor bank"; "presenting
26 bank["; "remitting bank]."
27 The following words and phrases when used in this division
28 shall have, unless the context clearly indicates otherwise, the
29 meanings given to them in this section:
30 "Bank." A person engaged in the business of banking,
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1 including a savings bank, savings and loan association, credit
2 union or trust company.
3 "Collecting bank." [Any] A bank handling [the] an item for
4 collection except the payor bank.
5 "Depositary bank." The first bank to [which an item is
6 transferred for collection] take an item even though it is also
7 the payor bank unless the item is presented for immediate
8 payment over the counter.
9 "Intermediary bank." [Any] A bank to which an item is
10 transferred in course of collection except the depositary or
11 payor bank.
12 "Payor bank." A bank [by which an item is payable as drawn
13 or accepted.] that is the drawee of a draft.
14 "Presenting bank." [Any] A bank presenting an item except a
15 payor bank.
16 ["Remitting bank." Any payor or intermediary bank remitting
17 for an item.]
18 Section 7. Title 13 is amended by adding a section to read:
19 § 4106. Payable through or payable at bank; collecting bank.
20 (a) "Payable through" a bank.--If an item states that it is
21 "payable through" a bank identified in the item, the item
22 designates the bank as a collecting bank and does not by itself
23 authorize the bank to pay the item, and the item may be
24 presented for payment only by or through the bank.
25 (b) "Payable at" a bank.--If an item states that it is
26 "payable at" a bank identified in the item, the item is
27 equivalent to a draft drawn on the bank.
28 (c) Draft names nonbank drawee.--If a draft names a nonbank
29 drawee and it is unclear whether a bank named in the draft is a
30 co-drawee or a collecting bank, the bank is a collecting bank.
19910H0871B0983 - 166 -
1 Section 8. Sections 4106, 4107, 4108 and 4109 of Title 13
2 are amended to read:
3 § [4106] 4107. Separate office of a bank.
4 A branch or separate office of a bank is a separate bank for
5 the purpose of computing the time within which and determining
6 the place at or to which action may be taken or notices or
7 orders [shall] must be given under this division and under
8 Division 3 (relating to [commercial paper] negotiable
9 instruments).
10 § [4107] 4108. Time of receipt of items.
11 (a) [Cut-off] Cutoff hour for handling and book entries.--
12 For the purpose of allowing time to process items, prove
13 balances and make the necessary entries on its books to
14 determine its position for the day, a bank may fix an afternoon
15 hour of 2 p.m. or later as a [cut-off] cutoff hour for the
16 handling of money and items and the making of entries on its
17 books.
18 (b) Items or deposits received after [cut-off] cutoff
19 hour.--[Any] An item or deposit of money received on any day
20 after a [cut-off] cutoff hour so fixed or after the close of the
21 banking day may be treated as being received at the opening of
22 the next banking day.
23 § [4108] 4109. Delays.
24 (a) [Delay] Two-banking-day delay permitted in effort to
25 secure payment.--Unless otherwise instructed, a collecting bank
26 in a good faith effort to secure payment [may, in the case of
27 specific items] of a specified item drawn on a payor other than
28 a bank, and with or without the approval of any person involved,
29 may waive, modify or extend time limits imposed or permitted by
30 this title for a period not [in excess of an] exceeding two
19910H0871B0983 - 167 -
1 additional banking [day] days without discharge of [secondary
2 parties and without] drawers or indorsers or liability to its
3 transferor or [any] a prior party.
4 (b) Delay excused by conditions beyond control of bank.--
5 Delay by a collecting bank or payor bank beyond time limits
6 prescribed or permitted by this title, or by instructions is
7 excused if the delay is caused by interruption of communication
8 or computer facilities, suspension of payments by another bank,
9 war, emergency conditions, failure of equipment or other
10 circumstances beyond the control of the bank [provided it] and
11 the bank exercises such diligence as the circumstances require.
12 [§ 4109. Process of posting.
13 The "process of posting" means the usual procedure followed
14 by a payor bank in determining to pay an item and in recording
15 the payment, including one or more of the following or other
16 steps as determined by the bank:
17 (1) Verification of any signature.
18 (2) Ascertaining that sufficient funds are available.
19 (3) Affixing a "paid" or other stamp.
20 (4) Entering a charge or entry to the account of a
21 customer.
22 (5) Correcting or reversing an entry or erroneous action
23 with respect to the item.]
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