In the Uniform Commercial Code, Articles 3 and 4 are companion Articles. Article 3 provides for all negotiable instruments, including checks and certificates of deposit. Article 4 is entitled "Bank Deposits and Collections." Most checks are drawn upon bank accounts, and certificates of deposit are banking instruments. Banks, also, conduct transactions in other types of negotiable instruments, as well, and are the central institutions for conducting business in instruments. The close relationship between Articles 3 and 4 is, therefore, quite clear.

In 1990, as a revised Article 3 is complete, amendments to Article 4, also, are offered. A full revision of Article 4 is not offered. Representatives of the Federal Reserve Board announced in 1990 that it was contemplating the assumption of regulatory control over forward collection of checks, and may extend other regulatory control over bank deposits and collections. The Uniform Law Commissioners and the American Law Institute, therefore, have refrained from major revisions of Article 4, preferring to wait until the scope of the Federal Reserve Board's regulations are determined. The wait may be several years.

However, amendments to Article 4 are offered in conjunction with revised Article 3. These amendments take care of the immediate problems that have developed over the time that Article 4 has been in effect, and update the law pertaining to certain banking practices. It is in the amendments to Article 4 that banks are given the opportunity to utilize the best technology in processing checks, for example.

Article 4 establishes the basic rules by which banks handle checks and other "items" in the process of obtaining payment when presented for that purpose by any holder entitled to such payment. The operative term is "item," a term which covers checks or any instrument handled by a bank for collection or payment. A bank is defined, generally, in Article 1 of the UCC as "any person engaged in the business of banking." One of the amendments to Article 4 sharpens the definition by including "a savings bank, savings and loan association, credit union, or trust company." The broad range of institutions that have customers with accounts and checking privileges clearly become included.

Much of Article 4 concerns the obligations of banks in their varying roles in handling "items." Banks act as "depositary" banks, "payor" banks, "intermediary" banks, "collecting" banks, and "presenting" banks. Much of the transactional environment involves banks dealing with each other in obtaining collection and payment of an "item," and Article 4 reflects this fact.

A "depositary" bank is the bank in which an "item" first appears in the process of obtaining collection and payment. When any person deposits a check, for example, in an account, that person's bank is a "depositary" bank. It is also a "collecting" bank, because its role is to send the "item" on its way to the "payor" bank for payment. It is collecting the value of the check deposited in its customer's account. The last "collecting" bank becomes a "presenting" bank, because it is the bank that delivers the instrument (or its representation) to the "payor" bank for payment. The "payor" bank is the bank in which the person who wrote the check has an account, and against whose account payment will be debited. Any bank in any given situation may perform one or more of these prescribed roles.

The fundamental task is, always, to get the "item" presented by somebody's customer to the right bank in a timely manner, so that it can be paid and all participants' books appropriately debited and credited in the process. Article 4, also, deals with the situation in which an "item" is entered into this payment system, and is dishonored. Who carries the loss in such a situation? Who warrants what in the process of transferring an "item" from one person or institution to another person or institution? These are the matters that Article 4 addresses. It has provided satisfactory governance for twenty plus years in all states in the United States.

The large share of amendments are for clarification and do not amount to any substantive change in existing sections of Article 4. There are some key amendments to note. Amended Article 4A permits "truncation" agreements, a concept never contemplated in original Article 4. A truncation agreement between a bank and a customer, allows a bank to present an "item" for payment by "transmission of an image of an item or information describing the item ('presentment notice') rather than delivery of the item itself." Rather than deliver the check itself, an image of the check or encoded information of some sort is transmitted. The technology is available to permit such truncation of actual delivery of an instrument. The use of the technology saves time and money. Amended Article 4 allows agreement to use "truncation."

Amended Article 4 has a statute of limitations upon actions to enforce an obligation, duty or right arising under Article 4. The statute of limitations is three years after the cause of action accrues. Original Article 4 has no express statute of limitations, and this surprising omission is corrected in the amended version.

Original Article 4 provides for warranties of customers and collecting banks to a payor of an item. The warranties include good title, lack of knowledge of an unauthorized signature, and no material alteration of the instrument. There are some exceptions if the customer or collecting bank become a holder in due course.

Further, there are warranties from a customer or collecting bank to a subsequent transferee or collecting bank. In addition to the warranties mentioned above, the subsequent transferee or collecting bank has the advantage of warranted signatures on the instrument, lack of a defense against payment, and lack of knowledge of insolvency of the maker, acceptor, or drawer of an instrument. These warranties constitute the major obligations of persons and banks under Article 4. Each person or bank has certain responsibilities to the person who takes the instrument offered for the validity of that instrument.

Warranties change to a degree under amended Article 4. Transfer warranties to a subsequent transferee or collecting bank remain much the same. Presentment warranties apply with no exception for holder in due course status. Damages are more specific, as well. The major addition, however, comes with "encoding" and "retention" warranties. These are warranties from one who encodes information with respect to an item that the information is correctly encoded. Retention warranties refer to those who present items pursuant to a truncation agreement and retain the original instrument while transmitting an image of it as presentation for payment. This new warranty notion follows from the concept of truncation agreement in amended Article 4.

Another important amendment to Article 4 takes into account the practice of providing customers an itemized statement of items credited and debited against the customer's account in lieu of providing the actual item to the customer with the statement. Original Article 4 keyed the customer's responsibility to report on altered and/or forged items upon the receipt of the items with the customer's statement. Amended Article 4 permits a sufficiently detailed statement to be notification of altered and/or forged items, and keys the customer's responsibility to report such items upon the receipt of the statement, itself.

However, the bank providing such a statement must keep the items or legible copies for at least seven years, and must supply at least legible copies at the customer's request.

These are examples of the amendments to Article 4 that accompany the revised Article 3. These amendments will assure the utility of the banking system for the long foreseeable future. Perhaps at a future date, depending upon federal action, a fully revised Article 4 will be attempted. But that should not occur for many years. In the meantime the banking system needs these amendments.