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Groco Buys Inventory on Credit and Assembles and Sells Mountain Bikes
Terms in this set (28)
issued by a bank or other financial institution to honor payment.
definite undertaking that satisfies the requirements of Section
5-104 by an issuer to a beneficiary at the request or for the account of an applicant or, in
the case of a financial institution, to itself or for its own account, to honor a documentary
presentation by payment or delivery of an item of value.
bill of lading defined
document evidencing the receipt of goods for shipment issued by a person engaged in the business of transporting or forwarding goods.
issued to Stingray from a carrier as soon as the carrier puts the widgets on the truck. That Bill of Lading is then given to the Bank, who will then pay Stingray.
a way to assure the beneficiary that the applicant will comply with its obligations in a certain agreement - only honored if applicant default
never drawn upon if the transaction runs smoothly.
But if something happens, like if the customer defaults, then the bank must seek reimbursement from the customer or enforce its security interest
Parties might employ a SL/C to ensure that any money it advances is actually used for the purpose described
a person at whose request or for whose account a letter of credit is issued.
includes a person who requests an issuer to issue a L/C on behalf of another if the person making the request undertakes an obligation to reimburse the issuer.
a person who under the terms of a letter of credit is entitled to have its complying presentation honored
includes a person to whom drawing rights have been transferred under a transferable L/C
the rights of a beneficiary can be transferred or assigned
a bank or other person that issues a letter of credit, but does not include an individual who makes an engagement for personal, family, or household purposes.
ex: FNB Durham
nominated person who undertakes, at the request of or with the consent of, the issuer, to honor a presentation of a letter of credit issued by another
A confirmer is directly obligated on a L/C and has the rights and obligations of an issuer to the extent of its confirmation.
The confirmer also has rights against and obligations to the issuer as if the issuer were an applicant and the confirmer had issued the L/C at the request and for the account of the issuer.
ex: Groco could bring in Sun Bank as a confirmer.
if the buyer doesn't want the seller to be paid until the goods arrive, what can the buyer do?
make the L/C payable at a later date
The L/C, as a negotiable instrument, would still be binding if it sets a definite time in the future to pay
an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it is payable on demand or at a definite time; and
meets 6 requirements:
- promise/order must be unconditional;
- amount of money must be a fixed amount;
- promise/order must be payable to bearer or to order;
- promise/order must be payable upon demand or at a specified time; and
- promise/order must not state any other undertaking/instruction by a person
- promising/ordering payment to do an act other than payment of money.
applicant cannot sue the confirmer
Groco (Applicant) cannot sue Sunbank (Confirmer/Issuer) for honoring the L/C.
The L/C represents a separate obligation between Sunbank and Stingray that is subject only to strict compliance [5-108(a)] by the beneficiary (Stingray) to the terms set forth specifically for honoring in the L/C - here, the delivery of the B/L.
issuer is not responsible for
(1) the performance or nonperformance of the underlying contract, arrangement, or transaction,
(2) an act or omission of others, or
(3) observance or knowledge of the usage of a particular trade other than the standard practice referred to in subsection (e).
amendment, cancellation of L/C
After a letter of credit is issued,
rights and obligations of a beneficiary, applicant, confirmer, and issuer are not affected by
an amendment or cancellation to which that person has not consented except to the
extent the letter of credit provides that it is revocable or that the issuer may amend or
cancel the letter of credit without that consent.
once the confirmer and issuer has performed their roles, who can they look to?
Confirmer (SB) turns to the issuer (FNB) it confirmed to receive reimbursements even if beneficiary (Stingray) committed the fraud.
FNB Durham would be entitled to reimbursement by the applicant, or Groco, in immediately available funds not later than the date of its payment of funds.
which article governs L/C?
UCP if international or specified
(i) a draft, other than a documentary draft, payable on demand and drawn on a bank or (ii) a cashier's check or teller's check
2 kinds of negotiable instruments
A note promises and states whom you're paying to the order of; promising to pay directly.
A draft orders the bank to pay an amount to someone else; it's indirect.
how does a bank accept a draft?
(a) Drawee's [bank's] signed agreement to pay a draft must be written on the draft (signature)
(d) "Certified check" means a check pre-accepted by the bank on which it is drawn. The bank can pre-sign or writing certified on the check. The bank has no obligation to certify, but when it does, then it has to honor it.
a signature or accompanying words on an instrument that
either (1) negotiates it, (2) restricts its payment, or (3) incurs indorser liability on the instrument.
effect of presence of an indorsement
does not prevent a purchaser of the instrument from becoming a holder in due course of the instrument unless the purchaser is a converter under subsection (c) or has notice or knowledge of breach of fiduciary duty as stated in subsection (d).
similarities between check and L/C
The independence principle applies to both Drafts and L/Cs.
The bank has discretion and does not have to pay until it agrees to accept the check or issue the L/C
differences between check and L/C
Negotiability - L/C non-negotiable, notes and drafts are
Order v. Promise
- Once accepted, a check is an order and the bank must pay.
- Once issued, a L/C is a conditional promise and the bank promises to pay if it receives conforming documents
- L/Cs themselves are not transferable (though their proceeds likely are); L/Cs require unique and specific conditions that a third party cannot complete
- A check is like money and is transferable with minimum limitations
holder in due course
holder on an instrument that is not clearly a forgery and the holder took the instrument:
- For value;
- In good faith;
- Without notice that the instrument is overdue, has been dishonored, or there is an uncured default
- Without notice that the instrument has an unauthorized signature or alternation;
- Without notice that the instrument is subject to a claim per 3-306;
- Without notice of any party's defense
defenses to a holder in due course
Acceptance and Effect of Acceptance by Beneficiary's Bank—Acceptance happens when:
(1) Y's bank pays Y or notifies Y of receipt of the payment order; or
(2) Y's bank receives actual payment from the bank that issued a payment order to Y's bank.
electronic/wire fund transfers
Rather than checks, companies usually use "wire transfers."
The UCC calls them "funds transfers" - which is what Article 4A discusses.
Like with a draft, when the second bank (the drawee) is ordered by the wire transfer to pay, it's not obligated to do so until it accepts
examples of transfer covered by Art 4A
X, debtor, wants to pay an obligation owed to Y
X transmits an instruction to X's bank to credit a sum of money to the bank account of Y "Payment Order"
- X is the "sender" of the payment order
- X's bank is the "receiving bank" with respect to X's order
- Y is the "beneficiary" of X's order; Y's bank is the "beneficiary bank"
- When X's bank issues an instruction to Y's bank to carry out the payment order, X's bank "executes" X's order
- The instruction of X's bank to Y's bank is also a "payment order" - where X's bank is the sender, Y's bank is the receiving bank, and Y is the beneficiary
- X is the "originator"; X's bank is "originator's bank"; Y is the "beneficiary"; Y's bank is the "beneficiary's bank"
characteristics of funds transfers
- Large amounts of money;
- Sophisticated business or financial organizations;
- High speed; highly efficient substitute for payments made by the delivery of paper instruments;
- Low costs
- Risk of loss to banks—may arise from a variety of causes:
o Very large amounts of credit;
o Risk of timing of transaction;
o Error in payment order in amount / identity.
Art 4A addresses 2 business problems
(1) Unauthorized Payment: payment to the wrong person
The receiving bank is liable for damages if it fails to execute a payment order it was obligated by express agreement to execute. If the wrong beneficiary is paid, the bank that executed it has the burden of recovering the mistaken payment
(2) Creditor Insolvency when you accept before receiving the money - that's a credit risk. Occurs over the CHIPS system; when Y's bank accepts before the money is received, happens due to timing issues (Fedwire is more immediate)
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