Ch8. Commercial Law Basics — Checks & Payment Instruments

What Is a Check?

Check (UCC § 3-104(f)):
A draft drawn on a bank, payable on demand.

Distinctive characteristics:
① Payment instrument only: not a credit instrument
② Drawee must be a bank (not available for non-bank drawees)
③ Payable on demand: no maturity date; bank must pay on presentation
④ Short presentment window: generally must be presented within
   6 months to preserve all rights (UCC § 4-404)

Governing law:
UCC Article 3 (negotiable instruments) &
UCC Article 4 (bank deposits and collections)
Many Article 3 rules apply to checks by cross-reference.

Check vs. Promissory Note / Draft

┌──────────────────┬─────────────────────┬───────────────────────┐
│ Feature          │ Check               │ Promissory Note/Draft  │
├──────────────────┼─────────────────────┼───────────────────────┤
│ Drawee           │ Must be a bank      │ Anyone                │
├──────────────────┼─────────────────────┼───────────────────────┤
│ Maturity         │ None (demand only)  │ Fixed date or demand  │
├──────────────────┼─────────────────────┼───────────────────────┤
│ Acceptance       │ Not applicable      │ Required (draft)      │
├──────────────────┼─────────────────────┼───────────────────────┤
│ Primary function │ Payment only        │ Credit + payment      │
├──────────────────┼─────────────────────┼───────────────────────┤
│ Presentment      │ Within 6 months     │ On or around due date │
│ to preserve HDC  │ to preserve rights  │                       │
└──────────────────┴─────────────────────┴───────────────────────┘

Required Elements of a Check

Required elements (UCC § 3-104):
① The word "check" or equivalent words
② Unconditional order to pay a sum certain
③ Drawee identified as a bank
④ Payable on demand (no future date required)
⑤ Payable to order or to bearer
⑥ Signed by the drawer

Optional elements:
Payee name (if blank, payable to bearer)
Memo line
Restrictive legends

Blank / Incomplete Check:
A check with one or more elements left blank may be completed
by the holder within the scope of any authority given — but
unauthorized completion is a real defense against an HDC.

Crossed & Certified Checks

Crossed Check (Restrictive Indorsement):
Two parallel lines drawn across the face of the check.
→ Directs the collecting bank to process through a
  bank account only; limits direct cash payment.

General crossing: lines only → any bank may collect
Special crossing: bank name written between lines →
  only that bank may collect

Purpose of crossing:
Reduces theft / fraud risk after loss or theft
Creates an audit trail (funds must flow through a bank account)

Certified Check:
The drawee bank certifies (accepts) the check and sets aside
the funds, guaranteeing payment.
→ Drawer: released from liability upon certification
→ Bank: primarily liable (analogous to a cashier's check)
→ Highest credit quality among personal checks

Cashier's Check (Official Check):
The bank is both drawer and drawee.
= Equivalent of certified check in practical effect.
Bank's own credit backs the instrument.

Presentment, Dishonor & Recourse

Presentment Period:
Check must be presented within a reasonable time
(presumptively 30 days for recourse against indorsers;
6 months for right to bank payment — UCC § 4-404)

Effect of Late Presentment:
Bank may (but is not required to) dishonor after 6 months.
Indorsers' secondary liability is discharged if presentment
is delayed without excuse.

Dishonored Check (Bounced Check):
Insufficient funds (NSF) or account closed → bank returns check
Holder may pursue:
① Civil claim against drawer for face value + damages
② Statutory damages under state bad-check laws
   (typically 2× to 3× the check amount)
③ Criminal prosecution possible (check fraud / worthless-check statutes)

Stop Payment Order:
Drawer may order the bank to refuse payment on a check.
Bank must comply if stop-payment order is received before
the bank has already paid.
Drawer remains liable to the holder on the underlying debt.

Check = Demand Instrument ★★★★★ : A check has no maturity date; it is payable immediately upon presentment. Notes and drafts may have a future due date. Memory hook: check = pay now; note = pay later

Drawee Must Be a Bank ★★★★★ : A check’s drawee must be a bank. A draft’s drawee can be any person or entity. Memory hook: check = bank only

Crossed Check = Bank Collection Only ★★★★☆ : A crossed check cannot be cashed directly; it must be deposited into a bank account. Protects against fraudulent cash-out after theft. Memory hook: crossed = deposit only

Practice Questions

Q. Why can’t the holder of a crossed check receive cash at a teller window?

A crossed check restricts payment to a collecting bank. The holder must deposit it into an account, and the funds are credited after clearing. The restriction prevents an unauthorized person who finds or steals the check from immediately converting it to cash, and it creates a traceable payment record.

Q. Why is a cashier’s check considered more reliable than a personal check?

A cashier’s check is drawn by the bank on itself — the bank is both drawer and drawee. The bank’s own funds (not the customer’s account balance) back the payment. Because a bank is unlikely to dishonor its own check, cashier’s checks are treated as near-cash equivalents in real estate transactions, large purchases, and other situations where payment certainty is critical.