Article 3 of the Uniform Commercial Code, drafted by the National Conference of Commissioners on Uniform State Laws and adopted in every state except Louisiana, governs the creation and transfer of negotiable instruments. Since checks are negotiable instruments, the provisions in Article 3 apply. Because banks are lending institutions that create notes and other instruments, Article 3 will also apply in other circumstances that do not involve checks.
A person who establishes an account at a bank may make a written order on that account in the form of a check. The account holder is called the drawer, while the person named on the check is called the payee. When the drawer orders the bank to pay the person named in the check, the bank is obligated to do so and reduce the drawer’s account by the amount on the check. A bank ordinarily has no obligation to honor a check from a person other than a depositor. However, both the drawer’s and payee’s banks generally must honor these checks if there are sufficient funds to cover the amount of the check. The payee’s bank must generally honor a check written to the order of the payee if the payee has sufficient funds to cover the amount of the check, in case the drawer of the check does not have sufficient funds. A drawer may request from the bank a certified check, which means the check is guaranteed. Certified checks must be honored by any bank, and, as such, are considered the same as cash.
A customer’s bank has a duty to know each customer’s signature. If another party forges the signature of the customer, the customer is generally not liable for the amount of the check. Banks may recover from the forger but may not generally recover from the innocent customer or a third person who in good faith and without notice of the forgery gave cash or other items of value in exchange for the check. Drawers have the right to inspect all checks charged against their accounts to ensure that no forgeries have occurred. Drawers also have rights to stop payment on checks that have been neither paid nor certified by their banks. This is done through a stop payment order issued by the customer to the bank. If a bank pays a check notwithstanding the stop payment order, the bank is liable to the customer for the value of the check.
Many of the rules applying the checks apply to all negotiable instruments. Banks that serve as lending institutions routinely exchange loans for promissory notes, which are most likely negotiable instruments. These instruments are considered property and may be bought and sold by other entities.