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Commentary 4a 502 d and 4a 503 Final

Commentary 4a 502 d and 4a 503 Final

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Published by: Cairo Anubiss on Dec 12, 2011
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 Permanent Editorial Board for the Uniform Commercial CodePEB COMMENTARY NO. 16SECTIONS 4A-502(d) and 4A-503July 1, 2009
________________________________________________© 2009 by The American Law Institute and theNational Conference of Commissioners on Uniform State Laws.All rights reserved.
 
 
 
PREFACE TO PEB COMMENTARY
The Permanent Editorial Board (PEB) for the Uniform Commercial Code (UCC) acts under theauthority of The American Law Institute and the Uniform Law Commission (also known as theNational Conference of Commissioners on Uniform State Laws). In March 1987, the PEB re-solved to issue from time to time supplementary commentary on the UCC to be known as
PEBCommentary
. These
PEB Commentaries
seek to further the underlying policies of the UCC byaffording guidance in interpreting and resolving issues raised by the UCC and/or the OfficialComments. The Resolution states that:“A
PEB Commentary
should come within one or more of the following specificpurposes, which should be made apparent at the inception of the Commentary:(1) to resolve an ambiguity in the UCC by restating more clearly what the PEBconsiders to be the legal rule; (2) to state a preferred resolution of an issue onwhich judicial opinion or scholarly writing diverges; (3) to elaborate on the appli-cation of the UCC where the statute and/or the Official Comment leaves doubt asto inclusion or exclusion of, or application to, particular circumstances or transac-tions; (4) consistent with UCC § 1-102(2)(b),
*
to apply the principles of the UCCto new or changed circumstances; (5) to clarify or elaborate upon the operation of the UCC as it relates to other statutes (such as the Bankruptcy Code and variousfederal and state consumer protection statutes) and general principles of law andequity pursuant to UCC § 1-103;
or (6) to otherwise improve the operation of theUCC.”For more information about the PEB, visitwww.ali.orgorwww.nccusl.org.
*
Current UCC § 1-103(a)(2).
Current UCC § 1-103(b).
© 2009 by The American Law Institute and the National Conference of Commissioners on Uniform State Laws
 
PEB COMMENTARY NO. 16SECTIONS 4A-502(d) and 4A-503
 
INTRODUCTION
A funds transfer is a series of payment orders starting with an originator’s order to theoriginator’s bank to cause a sum certain amount of money to be paid to a beneficiary. The seriesof payment orders culminates with a beneficiary bank crediting the account of a beneficiary forthat sum certain. U.C.C. § 4A-104(a) (definition of funds transfer). The series of payment ordersis a mechanism used to make a transfer of value through the debiting and crediting of bank ac-counts from the originator to the beneficiary. The funds transfer often involves one or more in-termediary banks that receive a payment order from the originator’s bank or another bank. Thereceiving intermediary bank then issues its own payment order to another intermediary bank orthe beneficiary’s bank. Several cases have raised the issue of whether a creditor of the benefici-ary may serve creditor process on an intermediary bank and thus “capture” the value transferwhile it is in process.Article 4A provides that the creditor of the beneficiary may not serve creditor process onany bank other than the beneficiary’s bank. U.C.C. § 4A-502(d). Official Comment 4 to § 4A-502 further explains the concept, and does so in relation to a creditor of either the beneficiary orthe originator:A creditor of the originator can levy on the account of the originator in the origi-nator’s bank before the funds transfer is initiated . . . [but] cannot reach any otherfunds
because no property of the originator is being transferred 
. A creditor of thebeneficiary cannot levy on property of the originator and until the funds transfer iscompleted by acceptance by the beneficiary’s bank of a payment order for thebenefit of the beneficiary,
the beneficiary has no property interest in the fundstransfer which the beneficiary’s creditor can reach
(emphasis supplied).Official Comment to § 4A-503 further explains both § 4A-502(d) and § 4A-503 are designed toprevent interruption of a funds transfer after it has been set in motion and that, in particular, in-termediary banks are protected.A funds transfer is a series of payment orders that create contractual obligations only asto the sender and receiver of each payment order. Those contractual obligations are not the prop-erty of either the originator or the beneficiary. In a simple funds transfer, the originator instructsits bank, the originator’s bank, to debit the originator’s account and order the beneficiary’s bank to credit the beneficiary. Those instructions are payment orders. U.C.C. § 4A-103 (definition of “payment order,” “beneficiary,” and “beneficiary’s bank”; § 4A-104 (definition of “funds trans-fer,” “originator,” and “originator’s bank”). See also Regulation J, 12 C.F.R. § 210.26 (govern-ing payment orders issued to or by a federal reserve bank). The originator is the “sender” of thepayment order and the originator’s bank is the “receiving bank.” U.C.C. § 4A-103 (definitions of “sender” and “receiving bank”). If the originator’s bank accepts the originator’s payment order,the originator owes an obligation to the originator’s bank to pay the amount of the payment or-
© 2009 by The American Law Institute and the National Conference of Commissioners on Uniform State Laws

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