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LAW 332 Final Review
Terms in this set (56)
U.C.C. Application Settings VS non-U.C.C. Settings (Commercial paper/negotiable instruments Better than money in three ways)
Safety, convenience, credit
Historical origins of the U.C.C. / Earliest forms of commercial paper (bills of exchange)
- In medieval times, merchants used bills of exchange to finance and conduct their affairs rather than transporting gold or coins, developed their own set of rules/laws known as the Lex Mercatoria(Law Merchant). This later was established in England and is the forerunner of Article 3 of the UCC
Recent revisions designed to update the law in order to cover additional areas of concern (3)
1. E-commerce (paypal etc)
2. Paperless checks(electronic check)
3. Negotiability (1st needs to be in writing)
4 types of negotiable instruments
- CD's (Certificates of Deposit
- An unconditional written order that involves 3 parties
- Drawer(creates the draft)->Drawee(ordered to pay the money)->Payee(recipient of money)
- Most common type of draft
- Drawer(writes the check)->Drawee(the bank which the check is drawn on)->Payee(whoever the check is made payable to) 1. always demand instrument 2. always drawn on a bank for savings and loans.
- A written promise made by one person to pay another a specified sum.
2 parties Maker (person promising to pay)
Payee(person getting paid 1. Mortgage note which is backed by real property, Collateral Note- backed by personal property
Certificates of deposit
- Type of note issued when a party deposits funds with a bank, and the bank promises to repay the funds, with interest, on a certain date.
- Bank is the maker of the note and the depositor is the payee Bank is also be all three (Drawer, Drawee, Payee)
Typical parties involved with a draft vs. a promissory note
- Drafts - 3 parties - Drawer-Drawee-Payee
- Promissory note - 2 parties - maker-Payee
How instruments work
- Signed writing that contains an unconditional promise or order to pay an exact amount
Uses and applications of a Trade Acceptance & parties involved
- Type of draft used in the sale of goods
- Seller of the goods is both the drawer and the payee
- The buyer to whom credit is extended is the drawee Used by someone who is an everyday customer who forgets their money.
Negotiable Vs. Non-negotiable Instruments
- Negotiable goes through the system cleanly - non-negotiable will not, Negotiable is Called a transfer coverd by UCC and Non Negotiable is called assignment covered by K
- Negotiable has low/no risk - non-negotiable creates high risk
Six elements of negotiability
1. Be in writing- A.Easily transferable (big checks are not) B. needs to be permanant
2. Be signed by the maker or the drawer -any mark would work as long as they tried, anywhere on front
3. Be an unconditional promise or order to pay- IOU is non negotiable, As per has nothing to do with negotiability, Subject to makes it non negotiable because you have to go off the front or face of document
4. Stated a fixed amount of money- Account for tvm, They don't discriminate foreign currency. ACCELERATION clause does nothing to negotiability, THINGS are not currency
5. Be payable on demand or at a definite time- No start non negotiable, If you botch definitive time you can't use default
6. MAGIC WORDS-For checks (order instruments)-(Pay to order of NAME) For (bearer instruments) - (pay to order of __)(also pay to cash/Self) Be payable to order or to bearer unless it is a check-
-- Does not specify a particular indorsee, can consist of just a signature
- Becomes a bearer instrument
- Can be negotiated on delivery alone These can easily be stolen and are risky
- Contains the signature of the indorser and identifies the person to whom the indorser intends to make the instrument payable
For check to Matt Potzman Pay to Chris Branch
signed- Matt Potzman
- Becomes an order instrument. More protected
- An indorser who does not wish to be liable on an instrument can write "without recourse" to disclaim liability.
- Often used by persons acting in a representative capacity
Pay to Chris Branch
Without recourse Matt Potzman. You have no responsibility when something goes wrong, If you receive a paycheck from a company going under.
- Requires the indorsee to comply with certain instructions regarding the funds involved but does not prohibit further negotiation of the instrument
- Conditional - pay Y if.... &signature
- Prohibitive - pay Y only ....&signature, Has to be cashed or deposited
- For Deposit Only ...& signature- restrictive to your account
- Trust indorsement - Pay to Y as an agent for/in trust for Z ... & signature This is the place WHERE the funds go
- A piece of paper firmly attached to a negotiable instrument, on which indorsements can be made if there is no room on the instrument
- Person in possession of instrument in their name or bearer
- Gift, inheritance checks
- Protection afforded: scum, subject to the same defenses that could be asserted against the transferor
Holders in Due Course (HDC)
- A holder who takes an instrument free of most of the defenses and claims that could be asserted against the transferor.
- Protection afforded: can acquire a higher level of immunity than an ordinary holder in regard to defenses against payment on the instrument or ownership claims to the instrument by other parties
- Elements required & how court determines:
o Good faith IF:
Acted honestly in the process of acquiring the instrument
o Value IF ANY:
Performed a promise for which the instrument was issued or transferred
Acquired a security interest or lien in the instrument
Taken the instrument in payment of, or as security for, a preexisting obligation(antecedent claim)
Given it as payment
Given for an irrevocable commitment
o No notice of defect INCLUDING:
It has been dishonored
It is part of a series in which at least one instrument has an uncured default
It contains fraud or alteration
There is a defense against the instrument or a claim to the instrument
It is incomplete or irregular
Holders through Holders in Due course (HHDC)
- Obtains instrument through HDC
- Protection afforded: receives all HDC benefits
Three qualifications to become a holder in due course
1.Value-Must give value, Gifts are not value, Payment for work you have not done is not value,Taking over estate or ending business- is not value, Judicial sale or assistance-(You have to go to courthouse to get funds)- not value
Bolt transfer- you buy business you are holder with accounts receivable
2.Good faith- Was it a rip off? Buying a discounted note that was already matured. Illegal.
3. No notice of defect- You know there is a problem (ex the check bounces, promissory note after maturity at discount, erase marks, white out etc)
If you meet these three criteria you are holder in due course.
- A person who does not qualify as a HDC but who derives his or her title through an HDC can acquire the rights and privileges of an HDC.
- To aid the HDC in easily disposing the instrument
-Once it becomes HDC or HHDC it stays HHDC
Universal/Real Defenses: Valid against all holders, including HDC and HHDC ("Really" good)
o Fraud in execution (extreme fraud)
o Material alteration of completed instrument
o Minors/mental capacity
o Illegality (void)
o Extreme duress
Personal/Limited: Valid against ordinary holders not HDC (Personal only you care)
o Breach of contract/warranties (between me and person in contract)
o Lack or failure of consideration
o Fraud in the endorsement (ordinary fraud)
o Illegality(voidable) These are Iffy in legality not a crime.
o Mental incapacity Under influence- Influenced by someone.
o Ordinary duress- (I'm not paid if I strike)
o Previous payment or cancellation on instrument -You have to pay the correct person
o Unauthorized completion of an incomplete instrument/delivery of instrument
Primary Liability on negotiable instruments
Checks-drawers,drawees,payees are ll not primarily responsible. You then can go to acceptors who takes primary liability. Cashiers checks, trailers cheque, certified check we have acceptors. makers (parents on student loan who assume primary liability)(promissory notes) and acceptors of instruments
Accommodation Indorsers-parents on educational loan who are secondarily responsible. drawers of instrument IF:
o The instrument is properly presented OR
o The instrument dishonored OR
o Timely notice of dishonor is given to the secondary liable party
Legal signature and impact on commercial paper
- Every party, except a qualified indorser, who signs a negotiable instrument, is either primarily or secondarily liable for payment of that instrument when it comes due.
1. The transferor is entitled to enforce the instrument
2. All the signatures are authentic and authorized
3. The instrument has not been altered
4. The instrument is not subject to a defense or claim of any party that can be asserted against the transferor.
5. The transferor has no knowledge of any bankrupty proceedings against the maker, the acceptor or the drawer of the instrument. More simple A-B on the street, average person isn't going to know too much about commercial paper. Protects them.
A bank or savings and loan, bank should know a lot more about commercial paper so they aren't as protected as much. Few of these, kinda suck
- Can't make a stop-payment order if it's been cashed, phone it in and it's good for 14 days, fill our paper work and it works for 6 months. Only way to guarantee the check doesn't get cashed is to close the account.
-Know what the banks can do when a customer passes away or is adjudicated mentally incompetent. Understand the time constraints involved and why they are applied
You have 10 days to cash the check after the maker of the check passes away or is ruled mentally incompetent. Mentally incompetent you tend to be notified sooner. (if the bank finds out more than 10 days after the death, i.e. 2 months, they can close it immediately.). Also the heir of the estate can make stop-payment order to the bank
Understand the liability of the bank and the customer when a forgery occurs as contrasted to an imposter situation.
Forgery-Bank must reimburse your account unless they can prove negligence(ie. You left blank checks out for the world).
Impostor-You can say the signature is correct but the person isn't what they said they were. Bank isn't going to reimburse (ie. You give travel sales man a check)
-Be able to list the banks in the collection process (payor, depositary. Collecting, and intermediary) and demonstrate knowledge of how the collection system would work
1. Payor bank- bank that pays (the drawee bank)
2. Depository bank- where the check is deposited (the first bank in the collection system)
3. Intermediary bank- anything that's not the above 2 (assisting)
4. Collection bank- any bank that's collecting (can't be payor bank)
-Know who the Electronic Fund Transfer Act (EFTA) is designed to protect and what applications are covered under the act
-Doesn't cover commercial businesses, covers consumers.
2. Point-of-sales (debit card)-no float
3. Automatic/direct- deposits/withdrawals (Paycheck,rent, mortgage, ect)
4. Pay by computer (utilities, cell phone bill, ect)
o 60 days to bitch to the bank
o 10 days for bank to investigate and files a report
o Must reimburse your account if they can't find the error, or can continue to search for 45 days, then must pay triple if they can't figure it out.
o Report in 2 days- liable for $50 usually bank says don't worry about it.
o Report in 3-59 days- liable for $500
o Report day 60>- unlimited liability
Understand the differences in being unsecured, secured, and holding a perfected interest, on a promissory note. Know how the different ways to protect a creditor can be established and what protection the obtaining of a particular status affords. Give some thought as to why a debtor would allow their property to be subjected to being secured in a financial transaction.
• Unsecured-very risky
o You don't have collateral
• Secured-If you default I get your car
o You have collateral
Perfected- You are worried about multiple creditors so perfected means you get your money first.
1.Security agreement- writing saying "I get your car"
Security interest (by attachment)- must have the following and do it correctly
• Written agreement
• Signed by debitor
• Collateral (be specific)
• Debitor rights (ownership)-personal property
• Must have value!-car represents the loan(value) I gave you
These are all attachments
secured party by collateral-you have the security
personal property can be tangible(cars, guns,etc) or intangible (stocks)
o You are first in line on that property
• Possession (easiest to attain) not most common, Pawn shops love this
• PMSI (purchase money security interest) In house financing
• Filing (important one, most common) - Financing statement (last 5 years)-need to file in the right place.
State statute and law
Artisans Lien (possessory)
Personal Property (cars, guns,etc) important for perfected interest
real property, land, structure of home- mortgage
Hotel or INN Keepers Lien
gets to keep the stuff left behind in a hotel (stupid one)
o Writ of attachment (pre judgment; i.e. they repossesses the debtors boat before they have made a judgment of who gets it)-used if the debtor says I'm gonna sink this boat before you get a judgment, Unconstitutional so you need a lot of evidence.
o Writ of execution (post judgement; they repossess the boat after it has been settled who gets the boat)-you need help with enforcement of the judgment
1. Admin cost get paid first
2. Mechanics and artisans liens get paid second
3. Perfected people next
4. Then secured people
Understand the use of inventory as collateral and how an after-acquired property clause could affect the creditors and debtors rights.
• Inventory as collateral- Goods held by a person for sale or under a contract of service or lease; raw materials held for production and work in progress, (not sure if this is what he's talking about)- perfection Usually met with filing
• After-Acquired property- The property that the debtor acquired after the execution of the security agreement. Can still have security over any new stuff they get after they acquire their new property. the creditor still has it as collateral
Know what type of property can be used as collateral (personal property)
• Farm products
• Accessions ( I.e. you and a neighbor split a boat)
Be familiar with how wages can be garnished and what body of law primarily pertains to garnishment proceedings
Wages are held out of paycheck in order to be used to pay off a debt
• 30% of wages can be garnised
body of law that pertains is
Be familiar with the use and differences between a suretyship(surety) and a guaranty
• Surety- Both people are liable and don't have to be written (acomadation maker)
• Guaranty- the promissory is secondarily liable- must be written! (Accommodation endorser)
Institutions like surety but will use guaranty because its easier to get cosigners if they know the bank is going to go after A first.
Know what a Creditors composition agreetment is, and how it works.
• It is a short stop to bankruptcy, basically you tell the people you owe money to I'll give you 30% of what I owe you and you let me off the hook, otherwise I'm going bankrupt and you will see even less of that money.
bankruptcy (this is federal)
• Bankruptcy action- 2 goals. 1. helps the debtor (mostly the debtor) and 2. attempts to help the creditor get their money creditors usually get the short end of the deal
Chapter 7. Meanest one -straight liquidation, your giving up on business so Trustee is going to be doing most of the planning and are active, most common. could be involuntary or voluntary
Chapter 11- Reorganization of debt
your services are still sellable (company still has value) Not giving up. Voluntary or involuntary,
DIP-debtor in possession, debtor still possesses the business, and they are active.
Chapter 12- Agricultural
50% income has to come from agriculture 50% of debt has to come from agriculture
If farmer is in trouble they forclose on farm
Chapter 13- Wage earners
spend more than they make
Unsecured debts- need to be less than $336,900 which are iffy debts that you only hope.Thats why this is less
Secured debt- need to be less than $1,010,650 that's why its higher its secured
• Voluntary bankruptcy- formally filing for bankruptcy (must contain the following)
1. A list of both secured and unsecured creditors, their addresses, and amount owed
2. A statement of the financial affairs of the debtor.
3. A list of all property owned by the debtor, including property that the debtor claims is exempt.
4. A list of current income and expenses
5. Certificate of credit counseling
6. Proof of payments received from employers within sixty days pror to filing of the petition
7. Statement of the amount of monthly income itemized to show the amount is calculated
8. A copy of the debtors fedral income tax return for the most recent year ending immediately before the filing petition.
• Involuntary bankruptcy- You are forced into bankruptcy
1. If you owe a creditor more than 14,000 (says 14425 in the book though?) the creditor can bankrupt you 11 or fewer it takes only 1.
2. If you have 12 or more creditors, it takes 3 of them (owing 14000) to drag you in
a suspension of almost all actions by creditors against the debtor. (NOTES) Bankruptcy is stopping, lawsuits to recover, garnisment of wages, etc. Letting everything solidify
(BOOK) The moment a petition (inv or vol) is filed automatic stay (suspension of all actions by creditors) goes into effect. Protects the debtor before all of bankruptcy proceedings happens.
• Different types of bankruptcy chapter filings-
1. Ch. 7- "Liquidation"- file and your company is done.... Voluntary or not
2. Chapter 11- "reorganization" (possible recovery) - DIP (debtor in possession) vol or invol.
3. Ch. 12 -"Agricultural"- voluntary only. Family farm who is 50% dependent and debt is 50% farm related
4. Ch. 13- "wage earner" - spends more than they earn <$360475 unsecured debt, <$1,081,400 secured debt
selling your boat and truck, for way less than it's worth ($1) but you say I get to use it whenever I want. You could also hide stuff from court.
You prefer someone so you pay them off and stiff the rest of the creditors. (ie you owe a friend so you pay him off and the file for bankruptcy) the rest of the creditors money will get taken back and given to everyone equally.If he already sold property that was payment he can be held liable for value.
government official who performs admin tasks that a bankruptcy, such as supervising the work of the bankruptcy trustee, manage the debtors funds.
Debtor in possession
- allows the debtor to continue operating their business, usually with a trustee
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