Funds Transfers under UCC Article 4A: What is a ...

1 332 QUARTERLY REPORT. Funds Transfers under UCC Article 4A: What is a commercially reasonable security system ? By Stuart R. Hene [Ed. note: The Oklahoma Bar As- cash, but obviously coin and currency sociation (OBA) inancial Institutions are not practical in these circumstances. and Commercial Law Section, through Instead, a transfer of Funds between its Legislative Review Subcommit- two bank accounts and probably two tee, reviews prospective legislation in different banks will be needed. Among Oklahoma to assess and better assure the basic alternatives are: (1) the use its fit into other, related Oklahoma of a negotiable instrument governed law.]

2 The Section also participates in by Uniform Commercial Code (UCC). writing, in conjunction with the OBA Articles 3 and 4; or (2) a Funds transfer Uniform Laws Committee, reports on governed by UCC Article 4A. Today, new legislation and Oklahoma Com- the option chosen is increasingly likely ments for publication in the Oklahoma to be the latter. This Article analyzes the Statutes Annotated, once the legislation security system needs that should be passes, to explain the impact of the bill considered in order to ensure a safe and on Oklahoma law and cases. See, , non-fraudulent transfer of the Funds from red H. Miller & Alvin C. Harrell, The one bank to another under Article 4A.

3 Stuart R. Hene graduated from Oklahoma City Work of the Oklahoma Bar Uniform Laws Article 4A Funds Transfers may be University School of Law and was admitted to the Committee: Oklahoma Enacts UCC Ar- originated in numerous ways; , a State Bar of Texas in 2009. He is an associate attor- ticle 3 and 4 and 4A Amendments, 63 telephone call, a facsimile ( AX) mes- ney with lowers Davis, , in Tyler, Texas Consumer in. Rep. 29 (2009). sage, or an internet Many of where he handles mostly oil and gas and insurance defense matters. However, Mr. Hene has a varied The members of the Section are these Transfers are now originated over practice involving other areas of business law, oil among Oklahoma's top specialists the internet, and at the core of this in- & gas law, personal injury defense and insurance in the field.

4 To encourage new, and formation infrastructure is cyberspace:2. law. He is a member of: the State Bar of Texas; the younger, members, the Section also Oil, Gas, and Energy Resource Law Section of the State Bar of Texas; the American Bar Association sponsors a writing contest for law stu- Cyberspace is [the] nervous sys- (ABA); the ABA Section of Environment, Energy, dents at Oklahoma law schools. This tem--the control system of our and Resources; the ABA Young Lawyers Division; Article is derived from a paper that won country. Cyberspace is composed of the Smith County Bar Association; and the Tyler the writing contest. It is presented as hundreds of thousands of intercon- Young Lawyers Association.

5 Mr. Hene serves on the Board of Directors for the Smith County a result of the work of the Section.] nected computers, servers, routers, Young Lawyers Association; and on The Bridge switches, and fiber optic cables that Campaign for St. Paul's Children oundation. I. Introduction allow our critical infrastructures to Stuart completed his undergraduate studies work. Thus, the healthy functioning at Baylor University in Waco, Texas where he earned a Bachelor of Arts in Political Science. Af- Suppose you are the owner of a multi- of cyberspace is essential to our ter graduating from Baylor, he worked in Austin million dollar construction company and economy and our national for State Representative Rob Eissler and then later you want to obtain a new fleet of con- as a campaign consultant for political campaigns struction equipment vehicles.

6 The sales in East Texas. He then attended Oklahoma City University School of Law where he received price and other terms of the sales contract his Juris Doctor and a Certificate in Business have been duly negotiated. inancing has Law inancial Services and Commercial Law been arranged (as needed), and now it is Concentration in May 2009. During law school, time for the sale to be completed. This 1. See UCC Article 4A 4A-103(a)(1), and id. 4A-104, Official Mr. Hene was: President of his class in 2006 2007; Comments 5 and 6. Section numbers cited herein reference a member of the Texas Legal Society; a member of means it is time to transmit the payment UCC Article 4A unless otherwise noted.

7 The ABA Law Student Division, where he served as for the vehicles and equipment. At that 2. See Executive Branch of the Government, The National Lt. Governor of Legislative Affairs for the Tenth moment the buyer and seller face a choice Strategy to Secure Cyberspace 6 (2003), available at http: Circuit from 2007 2008; and a member of the //www . Cyberspace_Strategy. among alternative payment systems. The pdf. Energy Law Society and the ederalist Society, serving as President of the latter from 2007 2009. seller wants to receive the equivalent of 3. Id. at vii. QUARTERLY REPORT 333. Because of the vast reliance on cyber- a payment order, is given to a If recovery is unavailable for some space for commerce in modern society, The payment order will call for the bank reason against the wrongdoer, then security in the transmission of financial to transfer Funds to a The one of the parties to the payment information is a critical legal In Funds transfer is complete when the transaction will bear that risk, even many cases, all of a company's daily beneficiary's account receives a deposit if that party acted innocently and transactions and all of its key records representing the payment order from the with all due care.

8 The risk of this are created, used, communicated, and beneficiary's More specifically, type of fraud could rest on the stored in electronic form using networked payee, the payee's bank, the pur- computer technology. 5 Electronic com- [ ]unds Transfers are credit trans- ported payor, or the payor munication of such information is also fers that work by pushing Funds essential to the functioning of electronic from the bank account of an origina- The risk of a fraudulent transfer re- payment systems. A payment system is tor for credit to a beneficiary. They mains one of the greatest risks for parties a system that is used to transfer value differ from debit Transfers , such engaged in payment transactions.

9 In an from one person to another in order as checks, which authorize a payee effort to address the risks of unauthor- to pay for goods, services, real estate, or holder to pull Funds from the ized access and use, various laws and or other desired items. A functioning drawer's account by presenting regulations have been enacted or payment system is a necessary com- the check for payment or furnish- However, [m]any transactions in which ponent of economic development, 6 ing other evidence of authority to the payor's instruction to its bank is made as well as individual transactions. cause an account to be through some mechanism other than a A primary example of a modern, func- check are governed by UCC Article 4A, tioning electronic payment system is the The Article 4A Funds transfer system or [related] Funds -transfer system rules.

10 17. Article 4A Funds transfer. Such Transfers has made it faster and easier for individu- can be used for multiple purposes and are als and companies to quickly and safely II. EFTA and the UCC. commonly relied on in commercial trans- transfer large dollar amounts to a benefi- actions. A Funds transfer should not be ciary's account. However, a Funds transfer A. Scope of the EFTA. confused with a money transfer.' [That still poses multiple potential risks to the is ] where currency is exchanged from parties involved in a payment transaction. The Electronic und Transfer Act of one person to another. Instead, a Funds These risks include, but are not lim- 1978 (E TA)18 governs electronic Funds transfer is the transfer of bank credit.