2Borrowing MoneyMost businesses rely on credit to buy supplies or equipment. The business will useNegotiable instruments (sometimes called commercial paper) orSecured transactionsBoth are governed by the Uniform Commercial Code
3Negotiable Instruments A contract to pay moneyA negotiable instrument is used asA substitute for moneyA loan of moneyMoney is not a negotiable instrumentArticle 3 of the UCC (RCW 62A.3) applies
4PurposeUCC 3 is designed to facilitate commerce – to make pieces of paper into something that is almost as reliable and transferable as money.
5Foundation The fundamental rule of negotiable instruments: The possessor of a piece of commercial paper has an unconditional right to be paid, as long asThe paper is negotiableIt has been negotiated to the possessorThe possessor is a holder in due courseThe issuer cannot claim any of a limited number of “real” defenses
6Types Four specific types of negotiable instruments Notes (promissory notes)Certificates of DepositDraftsChecks
7Promissory NoteA promise to pay money, whereby the maker signs the instrument, promising to pay money to the payee.The note can be collectable either on a specific date in the future (time note) or at any time the payee decides to collect (demand note).
8Certificate of Deposit If a note is made by a bank, it is called a certificate of deposit.
9Draft and ChecksA draft is a three-party instrument in which the drawer orders the drawee to pay money to the payee.
10Negotiability Six requirements – Must be In writing Signed by the maker or drawingAn unconditional promise or order to payFor a stated fixed amount of moneyPayable on demand or at a definite timePayable to bearer or order
11TransferTransfer creates a holder, who at the very least receives the rights of a previous possessor.
12The Holder A holder of a negotiable instrument is a person who Has bearer paper (payable to bearer)Has order paper (payable to the order of a specific person) which is properly endorsedA holder takes the instrument subject to all of the defenses that could have been brought against the original payee.
13Holder in Due CourseA holder in due course has an automatic right to receive payment for a negotiable instrument – this may even be more than the previous possessor.A holder in due course takes free of most claims against payment.The holder in due course is exempt from defenses that could have been made against the original payee.
14Holder in Due CourseThere are 5 requirements that must be satisfied to be a holder in due courseMust be a holderOf a negotiable instrumentWho took for valueIn good faithWithout notice of any outstanding claims or other defects
15Taking for Value Holder can take value by: Performing the instrument’s promiseAcquiring a security interest or other lien in the instrumentTaking instrument in payment for an antecedent debtGiving a negotiable instrument as paymentGiving irrevocable commitment as payment
16Good Faith The holder must meet both of these tests: Subjective test. Did the holder believe the transaction was honest in fact?Objective test. Did the transaction appear to be commercially reasonable?Only applies to holder, not the transferor
17Taking Without NoticeHolder is on notice that an instrument has an outstanding claim or defect if there is reason to know:Instrument is overdueInstrument has been dishonoredActual knowledge or any suspicious eventThat a claim or defense existsInstrument is altered forged or incomplete
18Holder through an HDC Shelter Rule A transferor of an instrument passes on all of his rights. When a holder in due course transfers an instrument, the recipient acquires all the same rights – even if he is not a holder in due course himself.Limitations on the shelter principle if new holder engaged in fraud or illegality.
19Payment ProcessPresentment – holder demands payment from one who is obligated to payMust exhibit the instrumentShow identificationSurrender the instrument (if paid in full) or give a receipt (if only partially paid)
20Payment Process Dishonor – The maker or drawee refuses to pay Notice of Dishonor – Given to those who are secondarily liable (i.e., check stamped “insufficient funds”)
21LiabilityThere are two kinds of liability associated with negotiable instruments:Signature liabilityWarranty liability
22The Basic Rules The culprit is always liable If a forger signs someone else’s name to an instrument, that signature counts as the forger’s signature, not as that of the person whose signature was forgedThe drawee bank is liable if it pays a check on which the drawer’s name is forgedIn other cases, a person who first acquires an instrument from a culprit is liable to anyone else who pays value for it.
23Transfer WarrantiesA person who transfers an instrument warrants that:She is a holder of the instrumentAll signatures are authentic and authorizedThe instrument has not been alteredNo defense can be asserted against herThe issuer is solvent
24Presentment Warranties Anyone who presents a check warrants thatHe is a holderThe check has not be alteredHe has no reason to believe the drawer’s signature is forgedAnyone who presents a promissory note for payment warrants only that he is a holder of the instrument
25DefensesUniversal (or real) and personal defenses are valid against any ordinary holderOnly real defenses can be used against a holder in due course
26Real Defenses Forgery Bankruptcy Minority Alteration Mental incapacity DuressIllegalityFraud in the execution
27Personal Defenses Breach of contract Lack of consideration Prior PaymentUnauthorized completionFraud in the inducement
28Consumer PaperNotes labeled “consumer paper” (consumer credit contracts) are not negotiable instruments because they are nonnegotiable.A holder (even an HDC) has the same rights as the person who made the contract
29DischargeDischarge from the obligation or from liability occurs in one of 5 waysProper paymentAgreementCancellationCertificationAlteration
30AmbiguitiesUCC favors negotiability. In interpreting negotiable instruments, courts should construe the paper so thatWords take precedence over numbersHandwritten terms prevail over typed and printed termsTyped terms win over printed terms
31The Bank’s DutiesA bank must pay a check if it is authorized by the customer and complies with the terms of the checking account agreement.If a bank wrongfully dishonors an authorized check, it is liable to the customer for all actual and consequential damages.
32Secured TransactionsArticle 9A of the UCC governs secured transactions.In a secured transaction, the debtor’s promise to pay is “secured” by something of value that the creditor can seize if the debtor fails to make good on his or her promise to pay.The valued property is “collateral”
33Purpose UCC 9A addresses the creditor’s two concerns Can the collateral be seized if the debtor defaults?Will the creditor have priority over other creditors with rights to the same property?
34The PropertyArticle 9A applies to any transaction intended to create a security interest in personal property or fixtures. This could includeGoodsInventoryNegotiable instrumentsInvestment propertyOther intangible property
35Attachment“Attachment” is the UCC’s term for describing the enforceability of the creditor’s right to seize collateral. Three steps are required:The creditor must have a signed security agreement andMust have given something of valueThe debtor must have rights in the collateral
36Security AgreementThe security agreement must contain a description of the collateral and must be signed by the debtor.
37PerfectionIn order for a creditor to have priority over other creditors, the creditor must have a perfected security interest. This requires:Possession of the collateral orFiling of a financing statement orGiving money for the purchase of consumer goods (purchase money security interest)
38PossessionThe secured party may take possession of the goods (this may or may not be in conjunction with filing).Must use reasonable care in the custody and preservation of the collateral
39Filing The most common way of perfecting Financing statement provides File financing statement with appropriate state agencyFinancing statement providesName of debtorName of secured partyIdentification of collateral
40Purchase MoneyA purchase money security interest is the interest taken by the person who sells the collateral or by the person who advances the money so the debtor can by the collateral.This interest is perfected automatically, without filing.
41Buyer of Secured GoodsA buyer in the ordinary course of business has the highest right to the goods.
42Priority The general order of priority among creditors and buyers is: Buyer in the ordinary course of businessPerfected purchase money security interestPerfected security interestLien creditorsUnperfected security interestsGeneral creditors
43DefaultIf the debtor defaults, the secured party may take possession of the collateral without any court orderThe secured party may sell or otherwise dispose of the collateral in any commercially reasonable mannerMay retain the collateral as satisfaction of the debt
44TerminationOnce the debt is paid in full, the secured party must complete a termination statementDocument indicating that secured party no longer claims an interest in the collateral.
45Bankruptcy Federal law Purposes: Rehabilitation of the debtor LiquidationFairly divide debtor’s assets
46Common OptionsChapter 7 - Liquidation of all existing assets Chapter 11 - Business reorganization Chapter 13 – Individual reorganization
47Process Petition Trustee is appointed to gather and distribute assets Voluntary (by debtor)Involuntary (by creditors)Trustee is appointed to gather and distribute assetsMeeting of creditorsPayment of ClaimsDischarge