2025 Colorado Revised Statutes
Title 4 - Uniform Commercial Code (Arts. 1 - 13)
Article 3 - Negotiable Instruments (Pts. 1 - 6)

Annotations

Commentary

Revised Article 3 (with miscellaneous and conforming amendments to Articles 1 and 4) is a companion undertaking to Article 4A (numbered as article 4.5 in C.R.S.) on funds transfers. Both efforts were undertaken for the purpose of accommodating modern technologies and practices in payment systems and with respect to negotiable instruments. Both efforts were drafted by the same committee over essentially the same period of time. The work on Article 4A was accorded priority and completed in 1989, and revised Article 3 was completed in 1990.

Revised Article 3 may, not inappropriately, be regarded as the latest effort in the progressive codification of the common law of negotiable instruments that began with the English Bills of Exchange Act enacted by Parliament in 1882. The Uniform Negotiable Instruments Law was promulgated by the Conference in 1896, and it in turn was reorganized and modernized by original Article 3 - Commercial Paper as part of the Uniform Commercial Code jointly promulgated in 1952 by the Conference and the American Law Institute. Revised Article 3 in 1990 modernizes, reorganizes, and clarifies the law.

Purpose of Drafting Effort

The original Articles 3 and 4 and their predecessors were based upon a paper payment system. Literally, there has been an explosion in the volume of paper to process since Articles 3 and 4 were first promulgated. In the early ’50s, around 7 billion checks were processed annually. Correctly anticipating an increase in check volume as the result of a retail approach taken by bankers at that time, the American Bankers Association in 1954 placed a team on a research and development project to identify the most efficient method of processing checks mechanically. The eminently successful MICR line technology was the result. Upon its implementation, checks were processed at high rates of speed. In major part as a result of this technology, a seven-fold explosion in check volume has occurred between the ‘50s and 1988. In 1988, the Federal Reserve estimated check volume at 48 billion written annually. In 1987, Congress enacted the “Expedited Funds Availability Act”, and the Federal Reserve Board implemented it in 1988 with Regulation CC. Regulation CC covers many aspects of the forward check collection process and all aspects of the return process.

Present Articles 3 and 4, written for a paper-based system, do not adequately address the issues of responsibility and liability as they relate to modern technologies now employed and the procedures required by the current volume of checks and by the “Expedited Funds Availability Act ” and Regulation CC. While agreements among parties to particular transactions have provided some relief, such stop-gap measures are no longer adequate.

In addition, practices have developed which are not easily accommodated within existing Article 3. For example, variable rate notes were unknown when Article 3 first was promulgated; they are common today. Questions about the ”cash equivalency ” of cashier’s checks and money orders have arisen as banks have sought to raise defenses to the payment of these instruments.

The revision of Article 3 and Article 4 to update, improve, and maintain the viability of it is necessary to accommodate these changing practices and modern technologies, the needs of a rapidly expanding national and international economy, the requirement for more rapid funds availability, and the need for more clarity and certainty. Absent such an update, further Federal preemption of state law may likely occur.

Uniformity is Essential

Traditionally, the legal structures for payments have been regulated by state law through the Uniform Commercial Code. In recent years, however, the Federal government has established regulations for credit and debit cards, and for the availability of funds in a way that regulates much of the check collection process.

With respect to wholesale funds transfers, on an average day two trillion dollars is transferred. Article 4A of the UCC promulgated in 1989 provides the governing comprehensive rules. In 1990, 12 states enacted Article 4A including California, New York, and Illinois. In 1991, Article 4A has been introduced in the legislatures of most of the other states, and it is anticipated that most, if not all, will enacted Article 4A uniformly. Within a short time, perhaps by 1992, the law of wholesale funds transfers should be uniform throughout the 50 states.

The law for payments through checks and which governs other negotiable instruments similarly should be uniform and up-to-date, either through state enactments or Federal preemption. Otherwise, checks as a viable payment system in international and national transactions will be severely hampered and the utility of other negotiable instruments impaired.

Process of Achieving Uniformity

The essence of uniform law revision is to obtain a sufficient consensus and balance among the interests of the various participants so that universal and uniform adoption by the legislatures of all 50 states may be achieved. As is the practice of the Conference, announcement of the drafting undertaking for Articles 3, 4, and 4A was widely circulated in 1985. Anyone who so requested, received notice of all meetings and was invited to attend. Upon request, names were put on a mailing list to receive copies of drafts as they progressed. In addition, the American Bar Association Ad Hoc Committee on Payment Systems closely followed the work of the Conference and widely circulated the drafts.

The Drafting Committee had three or four meetings each year and, by August 1990, had held 20 meetings. The drafting meetings began on Friday morning and ended on Sunday at noon. All the meetings were well attended, and the average attendance was 50 or more. The discussion of the drafts was open for comment by all those who attended. In addition, the reporters received a substantial amount of comment and suggestions by written and other communications between meetings of the Drafting Committee. The work product was read line for line at the Annual Meetings of the Conference three different years. In addition, the American Law Institute circulated the drafts two or three times to its entire membership. The ALI consultative group also held a meeting to comment and make suggestions on the draft. In addition, progress reports were published annually in The Business Lawyer from 1985 through 1990.

The consensus, balance, and quality achieved in this lengthy deliberative process is a product not only of the fine work of the reporters and the Drafting Committee, but also the faithful and energetic participation of the advisors and participants in the drafting meetings. The advisors representing a variety of interests were:

Thomas C. Baxter, Jr., Federal Reserve Bank of New York

Roland E. Brandel, American Bar Association

Leon P. Ciferni, National Westminster Bank USA

William B. Davenport, American Bar Association, Section of Business Law, Ad Hoc Committee on Payment Systems

Carl Felsenfeld, Association of the Bar of the City of New York

Thomas J. Greco, American Bankers Association

Oliver I. Ireland, Board of Governors of Federal Reserve System

John R.H. Kimball, Federal Reserve Bank of Boston

John F. Lee, New York Clearing House Association

Norman R. Nelson, New York Clearing House Association

Ernest T. Patrikis, Federal Reserve Bank of New York

Anne B. Pope, National Corporate Cash Management Association

Paul S. Turner, Occidental Petroleum Corporation and National Corporate Cash Management Association

Stanley M. Walker, Exxon Company, U.S.A. and National Corporate Cash Management Association

Other participants who regularly attended drafting meetings were:

Henry N. Dyhouse, U.S. Central Credit Union

Robert Egan, Chemical Bank

Paul T. Even, National Gypsum Corporation

James Foorman, First Chicago Corporation

J. Kevin French, Exxon Company, U.S.A.

Richard M. Gottlieb, Manufacturers Hanover Trust Company

Douglas E. Harris, National Corporate Cash Management Association

Arthur L. Herold, National Corporate Cash Management Association

Shirley Holder, Atlantic Richfield Company

Paul E. Homrighausen, Bankers Clearing House Association

Gail M. Inaba, Morgan Guaranty Trust Company of New York

Richard P. Kessler, Jr., Credit Union National Association

James W. Kopp, Shell Oil Company

Donald R. Lawrence, Citibank, N.A.

Robert M. McAllister, Chase Manhattan Bank, N.A.

Thomas E. Montgomery, California Bankers Association

W. Robert Moore, American Bankers Association

Samuel Newman, Manufacturers Hanover Trust Company

Nena Nodge, National Corporate Cash Management Association

Robert J. Pisapia, Occidental Petroleum Corporation

Deborah S. Prutzman, Arnold & Porter

James S. Rogers, Professor of Law, Newton, Massachusetts

Robert M. Rosenblith, Manufacturers Hanover Trust Company

Jamileh Soufan, American General Corporation

Irma Villarreal, Aon Corporation

Balance Achieved

The consensus reflected in Revised Article 3 and in the conforming amendments to Articles 1 and 4 is supported by the participants from the banking community, the users, and the Federal regulators because it reflects a balance that each interest can reasonably embrace. Some of the benefits of the Revision include:

A. Benefits in the Public Interest

Certainty - Revised Articles 3 and 4 remove numerous uncertainties that exist in the current provisions and thus reduce risk to the payment system and allow appropriate planning by its users and operators.

Speed and Reliability - The Revision removes impediments to the use of automation, and better conforms to Regulation CC to expedite the availability of funds to customers and to reduce risks to banks.

Lower Costs - The Revision, by providing for modern technologies, lowers costs to banks and thus to their customers.

Reduced Litigation - By clarification of troublesome issues, and by the provisions of Section 3-404 through 3-406 which reform rules for allocation of loss from forgeries and alterations, the Revision should significantly reduce litigation.

B. Benefits to Users

“Good Faith ” - The definition of good faith under Sections 3-103(a)(4) and 4-104(c) is expanded to include observance of reasonable commercial standards of fair dealing. This objective standard for good faith applies to the performance of all duties and obligations established under Articles 3 and 4.

Fiduciary Provisions - Section 3-307 protects drawers and persons owed a fiduciary responsibility by imposing stricter standards for obtaining holder in due course rights by a person dealing with the defaulting agent or fiduciary. It also spells out the circumstances under which a person receiving funds has notice of a breach of fiduciary duty, and resulting liability.

Accord and Satisfaction - Under Section 3-311 payees can avoid the unintentional accord and satisfaction by returning the funds or by giving a notice that requires checks to be sent to a particular office where such proposals can be handled. On the other hand, the drawer of a full settlement check is protected from the instrument being indorsed with protest and thus losing the money and being liable on the balance of the claim.

Cashier’s Checks - Section 3-411 and related provisions considerably improve the acceptability of bank obligations like cashier’s checks as cash equivalents by providing disincentives to wrongful dishonor, such as the possible recovery of consequential damages.

Indorser Liability - Section 3-415 gives more time to hold a check before the user loses indorser liability.

Reporting Forgeries - Section 4-406 increases the outside time a customer has to report forged checks or alterations to 30 days. It also requires a bank truncating checks to retain the item or the capacity to furnish legible copies for seven years.

Individual Agent and Corporate Liability - Section 3-402, as to corporate instruments signed by agents without adequate indication and representation (except as against a holder in due course), allows a representative to show the parties did not intend individual liability. It affords full protection to the agent that signs a corporate check, even though the check does not show representative status. Also, Section 3-403(b) makes it clear that a signature of an organization is considered unauthorized if more than one signature is required and it is missing.

Direct Suits - Section 3-420 allows a person whose indorsement is forged to sue the depositary bank directly, rather than each drawee of the checks involved.

C. Benefits to the Banking Community

Certainty - Section 3-104 and related provisions clarify what types of contracts are within Article 3 and how they are to be treated, thus promoting certainty of legal rules and reducing litigation costs and risks. Checks that may omit “words of negotiability ” are included as fully negotiable; confusion over travelers checks is eliminated; variable rate instruments are included; and there is clarification of the impact of the FTC “Holder ” Rule, clarification of the ability of parties to an instrument that is not included in Article 3 to contract for the application of its rules to their contract; and clarification of ordinary money orders as checks rather than bank obligations.

“Ordinary Care ” - In Sections 3-103(a)(7) and 4-104(c), ordinary care is defined, making clear that financial institutions taking checks for processing or for payment by automated means need not manually handle each instrument if that is consistent with the institution’s procedures and the procedures used do not vary unreasonably from the general usage of banks. This clarification is designed to accommodate and facilitate efficiency, thus lowering costs and lowering expedited funds availability risks. The definition of ordinary care relates to those specific instances in the Code where the standard of ordinary care is set forth.

Statute of Limitations - Sections 3-118 and 4-111 include statutory periods of limitations which will make the law uniform rather than leaving the topic to widely varying state laws.

Employee Fraud - Section 3-405 expands a per se negligence rule to the case of an indorsement forged by an employee whose duties involve handling checks. It also covers that of a faithless employee who supplies a name and then forges the indorsement, but does not require a precise match between the name of the payee and the indorsement.

Bank Definition - The definition of bank is expanded for the purposes of Articles 3 and 4 to clearly include savings and loans and credit unions so that their checks are directly governed by the Code. Section 4-104 clarifies that checks drawn on credit lines are subject to the rules for checks drawn on deposit accounts.

Truncation - Section 4-110 authorizes electronic presentment of items and related provisions remove impediments to truncation. Truncation will reduce risks from mandated funds availability and improve the check collection process. Section 4-406 allows an institution the benefit of its provisions even though it does not return the checks due to truncation. If both the customer and the institution fail to use ordinary care, a comparative negligence standard is used rather than placing the full loss on the institution.

Research References & Practice Aids

C.R.S. Title 4

State Notes

Notes

This article was numbered as article 3 of chapter 155, C.R.S. 1963. The provisions of this article were repealed and reenacted in 1994, resulting in the addition, relocation, and elimination of sections as well as subject matter. For amendments to this article prior to 1994, consult the Colorado statutory research explanatory note and the table itemizing the replacement volumes and supplements to the original volume of C.R.S. 1973 beginning on page vii in the front of this volume. Former C.R.S. section numbers are shown in editor’s notes following those sections that were relocated.