Report Title:

Commercial Paper

Description:

Amends articles 3 and 4 of the uniform commercial code relating to commercial paper.

THE SENATE

S.B. NO.

1203

TWENTY-SECOND LEGISLATURE, 2003

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO THE UNIFORM COMMERCIAL CODE.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. Section 490:3-103, Hawaii Revised Statutes, is amended by amending subsections (a), (b), and (c) to read as follows:

"(a) In this Article:

(1) "Acceptor" means a drawee that has accepted a draft.

(2) "Consumer account" means an account established by an individual primarily for personal, family, or household purposes.

(3) "Consumer transaction" means a transaction in which an individual incurs an obligation primarily for personal, family, or household purposes.

[(2)] (4) "Drawee" means a person ordered in a draft to make payment.

[(3)] (5) "Drawer" means a person who signs or is identified in a draft as a person ordering payment.

[(4)] (6) "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing.

[(5)] (7) "Maker" means a person who signs or is identified in a note as a person undertaking to pay.

[(6)] (8) "Order" means a written instruction to pay money signed by the person giving the instruction. The instruction may be addressed to any person, including the person giving the instruction, or to one or more persons jointly or in the alternative but not in succession. An authorization to pay is not an order unless the person authorized to pay is also instructed to pay.

[(7)] (9) "Ordinary care" in the case of a person engaged in business means observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business in which the person is engaged. In the case of a bank that takes an instrument for processing for collection or payment by automated means, reasonable commercial standards do not require the bank to examine the instrument if the failure to examine does not violate the bank's prescribed procedures and the bank's procedures do not vary unreasonably from general banking usage not disapproved by this Article or Article 4.

[(8)] (10) "Party" means a party to an instrument.

(11) "Principal obligor", with respect to an instrument, means the accommodated party or any other party to the instrument against whom a secondary obligor has recourse under this Article.

[(9)] (12) "Promise" means a written undertaking to pay money signed by the person undertaking to pay. An acknowledgment of an obligation by the obligor is not a promise unless the obligor also undertakes to pay the obligation.

[(10)] (13) "Prove" with respect to a fact means to meet the burden of establishing the fact (section 490:1-201(8)).

(14) "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

[(11)] (15) "Remitter" means a person who purchases an instrument from its issuer if the instrument is payable to an identified person other than the purchaser.

(16) "Remotely created consumer item" means an item drawn on a consumer account, which is not created by the payor bank and does not bear a handwritten signature purporting to be the signature of the drawer.

(17) "Secondary obligor", with respect to an instrument, means (A) an indorser or an accommodation party, (B) a drawer having the obligation described in section 490:3-414(d), or (C) any other party to the instrument that has recourse against another party to the instrument pursuant to section 490:3-116(b).

(b) Other definitions applying to this Article and the sections in which they appear are:

"Acceptance". Section 490:3-409.

"Accommodated party". Section 490:3-419.

"Accommodation party". Section 490:3-419.

"Account". Section 490:4-104.

"Alteration". Section 490:3-407.

"Anomalous indorsement". Section 490:3-205.

"Blank indorsement". Section 490:3-205.

"Cashier's check". Section 490:3-104.

"Certificate of deposit". Section 490:3-104.

"Certified check". Section 490:3-409.

"Check". Section 490:3-104.

"Consideration". Section 490:3-303.

"Demand draft". Section 490:3-104.

"Draft". Section 490:3-104.

"Holder in due course". Section 490:3-302.

"Incomplete instrument". Section 490:3-115.

"Indorsement". Section 490:3-204.

"Indorser". Section 490:3-204.

"Instrument". Section 490:3-104.

"Issue". Section 490:3-105.

"Issuer". Section 490:3-105.

"Negotiable instrument". Section 490:3-104.

"Negotiation". Section 490:3-201.

"Note". Section 490:3-104.

"Payable at a definite time". Section 490:3-108.

"Payable on demand". Section 490:3-108.

"Payable to bearer". Section 490:3-109.

"Payable to order". Section 490:3-109.

"Payment". Section 490:3-602.

"Person entitled to enforce". Section 490:3-301.

"Presentment". Section 490:3-501.

"Reacquisition". Section 490:3-207.

"Special indorsement". Section 490:3-205.

"Teller's check". Section 490:3-104.

"Transfer of instrument". Section 490:3-203.

"Traveler's check". Section 490:3-104.

"Value". Section 490:3-303.

(c) The following definitions in other Articles apply to this Article:

["Bank". Section 490:4-105.]

"Banking day". Section 490:4-104.

"Clearing-house". Section 490:4-104.

"Collecting bank". Section 490:4-105.

"Depositary bank". Section 490:4-105.

"Documentary draft". Section 490:4-104.

"Intermediary bank". Section 490:4-105.

"Item". Section 490:4-104.

"Payor bank". Section 490:4-105.

"Suspends payments". Section 490:4-104."

SECTION 2. Section 490:3-106, Hawaii Revised Statutes, is amended by amending subsections (a) and (b) to read as follows:

"(a) Except as provided in this section, for the purposes of section 490:3-104(a), a promise or order is unconditional unless it states (i) an express condition to payment, (ii) that the promise or order is subject to or governed by another [writing,] record, or (iii) that rights or obligations with respect to the promise or order are stated in another [writing.] record. A reference to another [writing] record does not of itself make the promise or order conditional.

(b) A promise or order is not made conditional (i) by a reference to another [writing] record for a statement of rights with respect to collateral, prepayment, or acceleration, or (ii) because payment is limited to resort to a particular fund or source."

SECTION 3. Section 490:3-116, Hawaii Revised Statutes, is amended to read as follows:

"§490:3-116 Joint and several liability; contribution. (a) Except as otherwise provided in the instrument, two or more persons who have the same liability on an instrument as makers, drawers, acceptors, indorsers who indorse as joint payees, or anomalous indorsers are jointly and severally liable in the capacity in which they sign.

(b) Except as provided in section [490:3-419(e)] 490:3-419(f) or by agreement of the affected parties, a party having joint and several liability that pays the instrument is entitled to receive from any party having the same joint and several liability contribution in accordance with applicable law.

[(c) Discharge of one party having joint and several liability by a person entitled to enforce the instrument does not affect the right under subsection (b) of a party having the same joint and several liability to receive contribution from the party discharged.]"

SECTION 4. Section 490:3-119, Hawaii Revised Statutes, is amended to read as follows:

"§490:3-119 Notice of right to defend action. In an action for breach of an obligation for which a third person is answerable over pursuant to this Article or Article 4, the defendant may give the third person [written] notice of the litigation[,] in a record, and the person notified may then give similar notice to any other person who is answerable over. If the notice states (i) that the person notified may come in and defend and (ii) that failure to do so will bind the person notified in an action later brought by the person giving the notice as to any determination of fact common to the two litigations, the person notified is so bound unless after seasonable receipt of the notice the person notified does come in and defend."

SECTION 5. Section 490:3-305, Hawaii Revised Statutes, is amended to read as follows:

"§490:3-305 Defenses and claims in recoupment[.]; claims in consumer transactions. (a) Except as [stated in subsection (b),] otherwise provided in this section, the right to enforce the obligation of a party to pay the instrument is subject to the following:

(1) A defense of the obligor based on (i) infancy of the obligor to the extent it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (iii) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (iv) discharge of the obligor in insolvency proceedings;

(2) A defense of the obligor stated in another section of this Article or a defense of the obligor that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract; and

(3) A claim in recoupment of the obligor against the original payee of the instrument if the claim arose from the transaction that gave rise to the instrument; but the claim of the obligor may be asserted against a transferee of the instrument only to reduce the amount owing on the instrument at the time the action is brought.

(b) The right of a holder in due course to enforce the obligation of a party to pay the instrument is subject to defenses of the obligor stated in subsection (a)(1), but is not subject to defenses of the obligor stated in subsection (a)(2) or claims in recoupment stated in subsection (a)(3) against a person other than the holder.

(c) Except as stated in subsection (d), in an action to enforce the obligation of a party to pay the instrument, the obligor may not assert against the person entitled to enforce the instrument a defense, claim in recoupment, or claim to the instrument (section 490:3-306) of another person, but the other person's claim to the instrument may be asserted by the obligor if the other person is joined in the action and personally asserts the claim against the person entitled to enforce the instrument. An obligor is not obliged to pay the instrument if the person seeking enforcement of the instrument does not have rights of a holder in due course and the obligor proves that the instrument is a lost or stolen instrument.

(d) In an action to enforce the obligation of an accommodation party to pay an instrument, the accommodation party may assert against the person entitled to enforce the instrument any defense or claim in recoupment under subsection (a) that the accommodated party could assert against the person entitled to enforce the instrument, except the defenses of discharge in insolvency proceedings, infancy, and lack of legal capacity.

(e) In a consumer transaction, if law other than this Article requires that an instrument include a statement to the effect that the rights of a holder or transferee are subject to a claim or defense that the issuer could assert against the original payee, and the instrument does not include such a statement:

(1) The instrument has the same effect as if the instrument included such a statement;

(2) The issuer may assert against the holder or transferee all claims and defenses that would have been available if the instrument included such a statement; and

(3) The extent to which claims may be asserted against the holder or transferee is determined as if the instrument included such a statement.

(f) This section is subject to law other than this Article that establishes a different rule for consumer transactions."

SECTION 6. Section 490:3-309, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) A person not in possession of an instrument is entitled to enforce the instrument if [(i) the person was in rightful possession of the instrument and]:

(1) The person seeking to enforce the instrument:

(A) Was entitled to enforce [it] the instrument when loss of possession occurred[, (ii) the]; or

(B) Has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred;

(2) The loss of possession was not the result of a transfer by the person or a lawful seizure[,]; and [(iii) the]

(3) The person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process."

SECTION 7. Section 490:3-312, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) In this section:

(1) "Check" means a cashier's check, teller's check, or certified check.

(2) "Claimant" means a person who claims the right to receive the amount of a cashier's check, teller's check, or certified check that was lost, destroyed, or stolen.

(3) "Declaration of loss" means a [written] statement, made in a record under penalty of perjury, to the effect that (i) the declarer lost possession of a check, (ii) the declarer is the drawer or payee of the check, in the case of a certified check, or the remitter or payee of the check, in the case of a cashier's check or teller's check, (iii) the loss of possession was not the result of a transfer by the declarer or a lawful seizure, and (iv) the declarer cannot reasonably obtain possession of the check because the check was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.

(4) "Obligated bank" means the issuer of a cashier's check or teller's check or the acceptor of a certified check."

SECTION 8. Section 490:3-416, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) A person who transfers an instrument for consideration warrants to the transferee and, if the transfer is by indorsement, to any subsequent transferee that:

(1) The warrantor is a person entitled to enforce the instrument;

(2) All signatures on the instrument are authentic and authorized;

(3) The instrument has not been altered;

(4) The instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor;

(5) The warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer; [and]

(6) With respect to a remotely created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn; and

[(6)] (7) If the instrument is a demand draft, creation of the instrument according to the terms on its face was authorized by the person identified as drawer."

SECTION 9. Section 490:3-417, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft[:

(1) The], the person obtaining payment or acceptance, at the time of presentment[;], and

[(2) A] a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that:

[(A)] (1) The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;

[(B)] (2) The draft has not been altered;

[(C)] (3) The warrantor has no knowledge that the signature of the drawer of the draft is unauthorized; [and]

(4) With respect to any remotely created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn; and

[(D)] (5) If the draft is a demand draft, creation of the demand draft according to the terms on its face was authorized by the person identified as drawer."

SECTION 10. Section 490:3-419, Hawaii Revised Statutes, is amended to read as follows:

"§490:3-419 Instruments signed for accommodation. (a) If an instrument is issued for value given for the benefit of a party to the instrument ("accommodated party") and another party to the instrument ("accommodation party") signs the instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument, the instrument is signed by the accommodation party "for accommodation".

(b) An accommodation party may sign the instrument as maker, drawer, acceptor, or indorser and, subject to subsection (d), is obliged to pay the instrument in the capacity in which the accommodation party signs. The obligation of an accommodation party may be enforced notwithstanding any statute of frauds and whether or not the accommodation party receives consideration for the accommodation.

(c) A person signing an instrument is presumed to be an accommodation party and there is notice that the instrument is signed for accommodation if the signature is an anomalous indorsement or is accompanied by words indicating that the signer is acting as surety or guarantor with respect to the obligation of another party to the instrument. Except as provided in section 490:3-605, the obligation of an accommodation party to pay the instrument is not affected by the fact that the person enforcing the obligation had notice when the instrument was taken by that person that the accommodation party signed the instrument for accommodation.

(d) If the signature of a party to an instrument is accompanied by words indicating unambiguously that the party is guaranteeing collection rather than payment of the obligation of another party to the instrument, the signer is obliged to pay the amount due on the instrument to a person entitled to enforce the instrument only if (i) execution of judgment against the other party has been returned unsatisfied, (ii) the other party is insolvent or in an insolvency proceeding, (iii) the other party cannot be served with process, or (iv) it is otherwise apparent that payment cannot be obtained from the other party.

(e) If the signature of a party to an instrument is accompanied by words indicating that the party guarantees payment or the signer signs the instrument as an accommodation party in some other manner that does not unambiguously indicate an intention to guarantee collection rather than payment, the signer is obliged to pay the amount due on the instrument to a person entitled to enforce the instrument in the same circumstances as the accommodated party would be obliged, without prior resort to the accommodated party by the person entitled to enforce the instrument.

[(e)] (f) An accommodation party who pays the instrument is entitled to reimbursement from the accommodated party and is entitled to enforce the instrument against the accommodated party. In proper circumstances, an accommodation party may obtain relief that requires the accommodated party to perform its obligations on the instrument. An accommodated party who pays the instrument has no right of recourse against, and is not entitled to contribution from, an accommodation party."

SECTION 11. Section 490:3-602, Hawaii Revised Statutes, is amended to read as follows:

"§490:3-602 Payment. (a) Subject to subsection [(b),] (e), an instrument is paid to the extent payment is made [(i)] by or on behalf of a party obliged to pay the instrument, and [(ii)] to a person entitled to enforce the instrument. [To]

(b) Subject to subsection (e), a note is paid to the extent payment is made by or on behalf of a party obliged to pay the note to a person that formerly was entitled to enforce the note only if at the time of the payment the party obliged to pay has not received adequate notification that the note has been transferred and that payment is to be made to the transferee. A notification is adequate only if it is signed by the transferor or the transferee; reasonably identifies the transferred note; and provides an address at which payments subsequently are to be made. Upon request, a transferee shall seasonably furnish reasonable proof that the note has been transferred. Unless the transferee complies with the request, a payment to the person that formerly was entitled to enforce the note is effective for purposes of subsection (c) even if the party obliged to pay the note has received a notification under this subsection.

(c) Subject to subsection (e), to the extent of [the payment,] a payment under subections (a) and (b), the obligation of the party obliged to pay the instrument is discharged even though payment is made with knowledge of a claim to the instrument under section 490:3-306 by another person.

(d) Subject to subsection (e), a transferee, or any party that has acquired rights in the instrument directly or indirectly from a transferee, including any such party that has rights as a holder in due course, is deemed to have notice of any payment that is made under subsection (b) after the date that the note is transferred to the transferee but before the party obliged to pay the note receives adequate notification of the transfer.

[(b)] (e) The obligation of a party to pay the instrument is not discharged under [subsection (a)] subsections (a) through (d) if:

(1) A claim to the instrument under section 490:3-306 is enforceable against the party receiving payment and (i) payment is made with knowledge by the payor that payment is prohibited by injunction or similar process of a court of competent jurisdiction, or (ii) in the case of an instrument other than a cashier's check, teller's check, or certified check, the party making payment accepted, from the person having a claim to the instrument, indemnity against loss resulting from refusal to pay the person entitled to enforce the instrument; or

(2) The person making payment knows that the instrument is a stolen instrument and pays a person it knows is in wrongful possession of the instrument.

(f) As used in this section, "signed," with respect to a record that is not a writing, includes the attachment to or logical association with the record of an electronic symbol, sound, or process to or with the record with the present intent to adopt or accept the record."

SECTION 11. Section 490:3-604, Hawaii Revised Statutes, is amended to read as follows:

"§490:3-604 Discharge by cancellation or renunciation. (a)  A person entitled to enforce an instrument, with or without consideration, may discharge the obligation of a party to pay the instrument (i) by an intentional voluntary act, such as surrender of the instrument to the party, destruction, mutilation, or cancellation of the instrument, cancellation or striking out of the party's signature, or the addition of words to the instrument indicating discharge, or (ii) by agreeing not to sue or otherwise renouncing rights against the party by a signed [writing.] record.

(b) Cancellation or striking out of an indorsement pursuant to subsection (a) does not affect the status and rights of a party derived from the indorsement.

(c) As used in this section, "signed," with respect to a record that is not a writing, includes the attachment to or logical association with the record of an electronic symbol, sound, or process to or with the record with the present intent to adopt or accept the record."

SECTION 13. Section 490:3-605, Hawaii Revised Statutes, is amended to read as follows:

"§490:3-605 Discharge of [indorsers and accommodation parties. (a) In this section, the term "indorser" includes a drawer having the obligation described in section 490:3-414(d).

(b) Discharge, under section 490:3-604, of the obligation of a party to pay an instrument does not discharge the obligation of an indorser or accommodation party having a right of recourse against the discharged party.

(c) If a person entitled to enforce an instrument agrees, with or without consideration, to an extension of the due date of the obligation of a party to pay the instrument, the extension discharges an indorser or accommodation party having a right of recourse against the party whose obligation is extended to the extent the indorser or accommodation party proves that the extension caused loss to the indorser or accommodation party with respect to the right of recourse.

(d) If a person entitled to enforce an instrument agrees, with or without consideration, to a material modification of the obligation of a party other than an extension of the due date, the modification discharges the obligation of an indorser or accommodation party having a right of recourse against the person whose obligation is modified to the extent the modification causes loss to the indorser or accommodation party with respect to the right of recourse. The loss suffered by the indorser or accommodation party as a result of the modification is equal to the amount of the right of recourse unless the person enforcing the instrument proves that no loss was caused by the modification or that the loss caused by the modification was an amount less than the amount of the right of recourse.

(e) If the obligation of a party to pay an instrument is secured by an interest in collateral and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of an indorser or accommodation party having a right of recourse against the obligor is discharged to the extent of the impairment. The value of an interest in collateral is impaired to the extent (i) the value of the interest is reduced to an amount less than the amount of the right of recourse of the party asserting discharge, or (ii) the reduction in value of the interest causes an increase in the amount by which the amount of the right of recourse exceeds the value of the interest. The burden of proving impairment is on the party asserting discharge.

(f) If the obligation of a party is secured by an interest in collateral not provided by an accommodation party and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of any party who is jointly and severally liable with respect to the secured obligation is discharged to the extent the impairment causes the party asserting discharge to pay more than that party would have been obliged to pay, taking into account rights of contribution, if impairment had not occurred. If the party asserting discharge is an accommodation party not entitled to discharge under subsection (e), the party is deemed to have a right to contribution based on joint and several liability rather than a right to reimbursement. The burden of proving impairment is on the party asserting discharge.

(g) Under subsection (e) or (f), impairing value of an interest in collateral includes (i) failure to obtain or maintain perfection or recordation of the interest in collateral, (ii) release of collateral without substitution of collateral of equal value, (iii) failure to perform a duty to preserve the value of collateral owed, under Article 9 or other law, to a debtor or surety or other person secondarily liable, or (iv) failure to comply with applicable law in disposing of collateral.

(h) An accommodation party is not discharged under subsection (c), (d), or (e) unless the person entitled to enforce the instrument knows of the accommodation or has notice under section 490:3-419(c) that the instrument was signed for accommodation.

(i) A party is not discharged under this section if (i) the party asserting discharge consents to the event or conduct that is the basis of the discharge, or (ii) the instrument or a separate agreement of the party provides for waiver of discharge under this section either specifically or by general language indicating that parties waive defenses based on suretyship or impairment of collateral.] secondary obligors. (a) If a person entitled to enforce an instrument releases the obligation of a principal obligor in whole or in part, and another party to the instrument is a secondary obligor with respect to the obligation of that principal obligor, the following rules apply:

(1) Any obligations of the principal obligor to the secondary obligor with respect to any previous payment by the secondary obligor are not affected. Unless the terms of the release preserve the secondary obligor's recourse, the principal obligor is discharged, to the extent of the release, from any other duties to the secondary obligor under this Article.

(2) Unless the terms of the release provide that the person entitled to enforce the instrument retains the right to enforce the instrument against the secondary obligor, the secondary obligor is discharged to the same extent as the principal obligor from any unperformed portion of its obligation on the instrument. If the instrument is a check and the obligation of the secondary obligor is based on an indorsement of the check, the secondary obligor is discharged without regard to the language or circumstances of the discharge or other release.

(3) If the secondary obligor is not discharged under paragraph (2), the secondary obligor is discharged to the extent of the value of the consideration for the release, and to the extent that the release would otherwise cause the secondary obligor a loss.

(b) If a person entitled to enforce an instrument grants a principal obligor an extension of the time at which one or more payments are due on the instrument and another party to the instrument is a secondary obligor with respect to the obligation of that principal obligor, the following rules apply:

(1) Any obligations of the principal obligor to the secondary obligor with respect to any previous payment by the secondary obligor are not affected. Unless the terms of the extension preserve the secondary obligor's recourse, the extension correspondingly extends the time for performance of any other duties owed to the secondary obligor by the principal obligor under this Article.

(2) The secondary obligor is discharged to the extent that the extension would otherwise cause the secondary obligor a loss.

(3) To the extent that the secondary obligor is not discharged under paragraph (2), the secondary obligor may perform its obligations to a person entitled to enforce the instrument as if the time for payment had not been extended or, unless the terms of the extension provide that the person entitled to enforce the instrument retains the right to enforce the instrument against the secondary obligor as if the time for payment had not been extended, treat the time for performance of its obligations as having been extended correspondingly.

(c) If a person entitled to enforce an instrument agrees, with or without consideration, to a modification of the obligation of a principal obligor other than a complete or partial release or an extension of the due date and another party to the instrument is a secondary obligor with respect to the obligation of that principal obligor, the following rules apply:

(1) Any obligations of the principal obligor to the secondary obligor with respect to any previous payment by the secondary obligor are not affected. The modification correspondingly modifies any other duties owed to the secondary obligor by the principal obligor under this Article.

(2) The secondary obligor is discharged from any unperformed portion of its obligation to the extent that the modification would otherwise cause the secondary obligor a loss.

(3) To the extent that the secondary obligor is not discharged under paragraph (2), the secondary obligor may satisfy its obligation on the instrument as if the modification had not occurred, or treat its obligation on the instrument as having been modified correspondingly.

(d) If the obligation of a principal obligor is secured by an interest in collateral, another party to the instrument is a secondary obligor with respect to that obligation, and a person entitled to enforce the instrument impairs the value of the interest in collateral, the obligation of the secondary obligor is discharged to the extent of the impairment. The value of an interest in collateral is impaired to the extent the value of the interest is reduced to an amount less than the amount of the recourse of the secondary obligor, or the reduction in value of the interest causes an increase in the amount by which the amount of the recourse exceeds the value of the interest. For purposes of this subsection, impairing the value of an interest in collateral includes failure to obtain or maintain perfection or recordation of the interest in collateral, release of collateral without substitution of collateral of equal value or equivalent reduction of the underlying obligation, failure to perform a duty to preserve the value of collateral owed, under Article 9 or other law, to a debtor or other person secondarily liable, and failure to comply with applicable law in disposing of or otherwise enforcing the interest in collateral.

(e) A secondary obligor is not discharged under subsection (a)(3), (b), (c), or (d) unless the person entitled to enforce the instrument knows that the person is a secondary obligor or has noticed under section 490:3-419(c) that the instrument was signed for accommodation.

(f) A secondary obligor is not discharged under this section if the secondary obligor consents to the event or conduct that is the basis of the discharge, or the instrument or a separate agreement of the party provides for waiver of discharge under this section specifically or by general language indicating that parties waive defenses based on suretyship or impairment of collateral. Unless the circumstances indicate otherwise, consent by the principal obligor to an act that would lead to a discharge under this section constitutes consent to that act by the secondary obligor if the secondary obligor controls the principal obligor or deals with the person entitled to enforce the instrument on behalf of the principal obligor.

(g) A release or extension preserves a secondary obligor's recourse if the terms of the release or extension provide that the person entitled to enforce the instrument retains the right to enforce the instrument against the secondary obligor; and the recourse of the secondary obligor continues as though the release or extension had not been granted.

(h) Except as otherwise provided in subsection (i), a secondary obligor asserting discharge under this section has the burden of persuasion both with respect to the occurrence of the acts alleged to harm the secondary obligor and loss or prejudice caused by those acts.

(i) If the secondary obligor demonstrates prejudice caused by an impairment of its recourse, and the circumstances of the case indicate that the amount of loss is not reasonably susceptible of calculation or requires proof of facts that are not ascertainable, it is presumed that the act impairing recourse caused a loss or impairment equal to the liability of the secondary obligor on the instrument. In that event, the burden of persuasion as to any lesser amount of the loss is on the person entitled to enforce the instrument."

SECTION 14. Section 490:4-104, Hawaii Revised Statutes, is amended by amending subsections (b) and (c) to read as follows:

"(b) Other definitions applying to this Article and the sections in which they appear are:

"Agreement for electronic presentment". Section 490:4-110.

["Bank". Section 490:4-105.]

"Collecting bank". Section 490:4-105.

"Depositary bank". Section 490:4-105.

"Intermediary bank". Section 490:4-105.

"Payor bank". Section 490:4-105.

"Presenting bank". Section 490:4-105.

"Presentment notice". Section 490:4-110.

(c) The following definitions in other Articles apply to this Article:

"Acceptance". Section 490:3-409.

"Alteration". Section 490:3-407.

"Cashier's check". Section 490:3-104.

"Certificate of deposit". Section 490:3-104.

"Certified check". Section 490:3-409.

"Check". Section 490:3-104.

"Good faith". Section 490:3-103.

"Holder in due course". Section 490:3-302.

"Instrument". Section 490:3-104.

"Notice of dishonor". Section 490:3-503.

"Order". Section 490:3-103.

"Ordinary care". Section 490:3-103.

"Person entitled to enforce". Section 490:3-301.

"Presentment". Section 490:3-501.

"Promise". Section 490:3-103.

"Prove". Section 490:3-103.

"Record". Section 490:3-103.

"Remotely created consumer item". Section 490:3-103.

"Teller's check". Section 490:3-104.

"Unauthorized signature". Section 490:3-403."

SECTION 15. Section 490:4-207, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) A customer or collecting bank that transfers an item and receives a settlement or other consideration warrants to the transferee and to any subsequent collecting bank that:

(1) The warrantor is a person entitled to enforce the item;

(2) All signatures on the item are authentic and authorized;

(3) The item has not been altered;

(4) The item is not subject to a defense or claim in recoupment (section 490:3-305(a)) of any party that can be asserted against the warrantor;

(5) The warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer; [and]

(6) With respect to any remotely created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn; and

[(6)] (7) If the item is a demand draft, creation of the item according to the terms on its face was authorized by the person identified as drawer."

SECTION 16. Section 490:4-208, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft[:

(1) The], the person obtaining payment or acceptance, at the time of presentment[;], and

[(2) A] a previous transferor of the draft, at the time of transfer, warrant to the drawee that pays or accepts the draft in good faith that:

[(A)] (1) The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;

[(B)] (2) The draft has not been altered;

[(C)] (3) The warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized; [and]

(4) With respect to any remotely-created consumer item, that the person on whose account the item is drawn; authorized the issuance of the item in the amount for which the item is drawn; and

[(D)] (5) If the draft is a demand draft, creation of the demand draft according to the terms on its face was autorized by the person identified as drawer."

SECTION 17. Section 490:4-212, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) Unless otherwise instructed, a collecting bank may present an item not payable by, through, or at a bank by sending to the party to accept or pay a [written] record providing notice that the bank holds the item for acceptance or payment. The notice must be sent in time to be received on or before the day when presentment is due and the bank must meet any requirement of the party to accept or pay under section 490:3-501 by the close of the bank's next banking day after it knows of the requirement."

SECTION 18. Section 490:4-301, Hawaii Revised Statutes, is amended by amending subsection (a) to read as follows:

"(a) If a payor bank settles for a demand item other than a documentary draft presented otherwise than for immediate payment over the counter before midnight of the banking day of receipt, the payor bank may revoke the settlement and recover the settlement if, before it has made final payment and before its midnight deadline, it:

(1) Returns the item; [or]

(2) Returns an image of the item, if the party to which the return is made has entered into an agreement to accept an image as a return of the item; and the image is returned in accordance with that agreement; or

[(2)] (3) Sends [written] a record providing notice of dishonor or nonpayment if the item is unavailable for return."

SECTION 19. Section 490:4-403, Hawaii Revised Statutes, is amended by amending subsection (b) to read as follows:

"(b) A stop-payment order is effective for six months, but it lapses after fourteen calendar days if the original order was oral and was not confirmed in [writing] a record within that period. A stop-payment order may be renewed for additional six-month periods by a [writing] record given to the bank within a period during which the stop-payment order is effective."

SECTION 20. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 21. This Act shall take effect on July 1, 2003.

INTRODUCED BY:

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