Using Negotiable Instruments to Satisfy Debt — UCC §3-310

Every day, millions of debts are paid with pieces of paper that are not money: personal checks, cashier’s checks, money orders, promissory notes. The law needs a rule for what happens to the original debt at the moment such paper changes hands — and afterwards, if the paper bounces. That rule is UCC §3-310. It is also the provision most often misread by those who claim that a self-drafted “bill of exchange” or “bonded promissory note” can settle a mortgage or credit card account.

The central question

When a negotiable instrument is taken for an obligation, is the obligation paid, postponed, or unaffected — and can a debtor compel a creditor to accept an instrument in place of money?

The statute

UCC §3-310 (1990 revision) provides, in summary:

• (a) Bank-obligated instruments. Unless otherwise agreed, if a certified check, cashier’s check, or teller’s check is taken for an obligation, the obligation is discharged to the same extent discharge would result if an amount of money equal to the amount of the instrument were taken in payment. Discharge of the obligation does not affect liability on the instrument itself.
• (b) Other instruments. Unless otherwise agreed and except as provided in (a), if a note or an uncertified check is taken for an obligation, the obligation is suspended to the same extent it would have been discharged had money been taken. For an uncertified check, suspension continues until the check is dishonored or paid or certified; payment or certification discharges the obligation to the extent of the amount. For a note, suspension continues until dishonor or payment; payment discharges the obligation to that extent. If the instrument is dishonored, the obligee may enforce either the instrument or the obligation.
• (b)(3)–(4) Who may sue after dishonor. The obligee may enforce either the instrument or the obligation only if it is the person entitled to enforce the instrument. If someone else is entitled to enforce it (for example, because the obligee negotiated the check to a third party), the obligee may not enforce the obligation to the extent it is suspended. If the obligee lost the instrument, its rights are limited to enforcing the instrument. Where the obligor negotiated a third person’s instrument to the obligee, discharge of the obligor on the instrument also discharges the obligation.
• (c) Other instruments. If an instrument not described in (a) or (b) is taken, its effect is that of (a) if a bank is liable on it as maker or acceptor, and that of (b) in any other case.

Each state enacts §3-310 in its own commercial code.

Plain-English reading

“Taken for an obligation”

Everything in §3-310 begins with the word taken. The section describes what happens when the creditor accepts an instrument. It does not require any creditor to accept one. Whether a creditor must take a particular form of payment is governed by the contract, by other law (such as legal-tender rules for currency, 31 U.S.C. §5103), and by the creditor’s own choice.

Cashier’s, teller’s and certified checks: discharge

These checks are obligations of a bank. The law treats taking one as equivalent to taking cash: the underlying obligation is discharged to the extent of the amount. If the bank later fails to pay, the creditor’s recourse is against the bank on the instrument.

Ordinary checks and notes: suspension

A personal check is only an order to a bank to pay from an account. Taking one suspends the debt. If the check clears, the debt is discharged to that extent. If it bounces, the suspension ends and the creditor may sue on the debt or on the check. A new promissory note works the same way: a creditor who agrees to take a note for an existing debt suspends the debt until the note is paid or dishonored, unless the parties agree that the new note fully replaces the old obligation.

“Unless otherwise agreed”

Parties can contract around these defaults. A settlement agreement may state that a new note fully extinguishes the old debt (a novation), or that a cashier’s check does not discharge until funds are collected. The written agreement controls.

A hypothetical

Alex owes a contractor $12,000 for a roof.

• Alex hands over a $12,000 cashier’s check and the contractor accepts it. The debt for the roof is discharged.
• Alex instead hands over a personal check. The debt is suspended. Three days later the check clears; the debt is discharged.
• The personal check bounces. The suspension ends, and the contractor may sue on the roofing contract or on the dishonored check.
• Alex offers a $12,000 “private bond” that Alex wrote, stamped and notarized. The contractor declines. Nothing has been taken, so §3-310 does nothing; the debt remains. Even if the contractor took it, a note signed by the debtor is just a new promise to pay — suspension at most, until it too is paid or dishonored.

Why homemade instruments cannot erase debts

A recurring theory holds that a debtor can draft a negotiable instrument — sometimes styled a bill of exchange drawn on the U.S. Treasury or on a supposed account tied to a birth certificate — and that a creditor who receives it must accept it as payment or face discharge of the debt. Article 3 contains no such rule. An instrument drawn on an account that does not exist, or on an entity that has not agreed to pay, will be dishonored. Under §3-310(b), dishonor revives the creditor’s right to enforce the original obligation. Federal agencies, including the Treasury Department and the Federal Reserve, have issued public warnings about these schemes, and federal prosecutors have charged people who passed fictitious financial instruments under 18 U.S.C. §514.

A creditor’s refusal of such paper is also not a refusal of tender under §3-603, because no tender of money occurred. See Tendering Payment.

Limitations and misconceptions

• “Sending an instrument discharges the debt.” Only an instrument taken, and in most cases paid, has that effect.
• “Money orders are cashier’s checks.” Money orders are not named in §3-310(a). Their treatment depends on what they are under §3-104 — who issued them and who is obliged to pay; many are treated like ordinary checks, so suspension rather than discharge may apply.
• “Endorsing a bill ‘accepted for value’ pays it.” Writing on a creditor’s statement does not create a payment instrument backed by any bank.
• “Paid in full” notations. Those are governed by §3-311 and work only for genuinely disputed claims. See Accord and Satisfaction by Instrument.

Questions readers can investigate

• What kind of instrument was given — bank-obligated, personal check, note, or something else?
• Did the creditor actually take it, and was it paid?
• Is there an agreement that changes the default rules?
• If an instrument was dishonored, what was the reason given by the bank?

Records worth preserving

• Copies of the front and back of every check used for payment, and bank clearing records.
• Receipts for cashier’s checks and money orders, with issuer information.
• Any written settlement or payment agreement.
• Notices of dishonor and returned-item records.

Related authorities

UCC §§3-104 (definitions of check, cashier’s check, teller’s check), 3-409 (acceptance and certification), 3-411 (refusal to pay bank-obligated checks), 3-502 (dishonor), 3-601, 3-603; 31 U.S.C. §5103; 18 U.S.C. §514. See the overview Discharging Debt Under UCC Article 3.

Sources

• Uniform Commercial Code §3-310 and Official Comment; §§3-104, 3-409, 3-411, 3-502, via Legal Information Institute, Cornell Law School (law.cornell.edu/ucc/3/3-310).
• 31 U.S.C. §5103; 18 U.S.C. §514.
• U.S. Department of the Treasury, Bureau of the Fiscal Service, and Board of Governors of the Federal Reserve System, public fraud warnings concerning fictitious instruments and “redemption” schemes.

This article is published for educational and research purposes. It is legal information, not legal advice. State enactments vary, and the effect of any payment depends on the instrument, the agreement and the facts. Consult a licensed attorney about any particular debt.