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Negotiable Instruments Secured Transactions Class 5

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1 Negotiable Instruments Secured Transactions Class 5
UCC 3 & 9A Negotiable Instruments Secured Transactions Class 5

2 Borrowing Money Most businesses rely on credit to buy supplies or equipment. The business will use Negotiable instruments (sometimes called commercial paper) or Secured transactions Both are governed by the Uniform Commercial Code

3 Negotiable Instruments
A contract to pay money A negotiable instrument is used as A substitute for money A loan of money Money is not a negotiable instrument Article 3 of the UCC (RCW 62A.3) applies

4 Purpose UCC 3 is designed to facilitate commerce – to make pieces of paper into something that is almost as reliable and transferable as money.

5 Foundation The fundamental rule of negotiable instruments:
The possessor of a piece of commercial paper has an unconditional right to be paid, as long as The paper is negotiable It has been negotiated to the possessor The possessor is a holder in due course The issuer cannot claim any of a limited number of “real” defenses

6 Types Four specific types of negotiable instruments
Notes (promissory notes) Certificates of Deposit Drafts Checks

7 Promissory Note A 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).

8 Certificate of Deposit
If a note is made by a bank, it is called a certificate of deposit.

9 Draft and Checks A draft is a three-party instrument in which the drawer orders the drawee to pay money to the payee.

10 Negotiability Six requirements – Must be In writing
Signed by the maker or drawing An unconditional promise or order to pay For a stated fixed amount of money Payable on demand or at a definite time Payable to bearer or order

11 Transfer Transfer creates a holder, who at the very least receives the rights of a previous possessor.

12 The 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 endorsed A holder takes the instrument subject to all of the defenses that could have been brought against the original payee.

13 Holder in Due Course A 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.

14 Holder in Due Course There are 5 requirements that must be satisfied to be a holder in due course Must be a holder Of a negotiable instrument Who took for value In good faith Without notice of any outstanding claims or other defects

15 Taking for Value Holder can take value by:
Performing the instrument’s promise Acquiring a security interest or other lien in the instrument Taking instrument in payment for an antecedent debt Giving a negotiable instrument as payment Giving irrevocable commitment as payment

16 Good 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

17 Taking Without Notice Holder is on notice that an instrument has an outstanding claim or defect if there is reason to know: Instrument is overdue Instrument has been dishonored Actual knowledge or any suspicious event That a claim or defense exists Instrument is altered forged or incomplete

18 Holder 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.

19 Payment Process Presentment – holder demands payment from one who is obligated to pay Must exhibit the instrument Show identification Surrender the instrument (if paid in full) or give a receipt (if only partially paid)

20 Payment 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”)

21 Liability There are two kinds of liability associated with negotiable instruments: Signature liability Warranty liability

22 The 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 forged The drawee bank is liable if it pays a check on which the drawer’s name is forged In other cases, a person who first acquires an instrument from a culprit is liable to anyone else who pays value for it.

23 Transfer Warranties A person who transfers an instrument warrants that: She is a holder of the instrument All signatures are authentic and authorized The instrument has not been altered No defense can be asserted against her The issuer is solvent

24 Presentment Warranties
Anyone who presents a check warrants that He is a holder The check has not be altered He has no reason to believe the drawer’s signature is forged Anyone who presents a promissory note for payment warrants only that he is a holder of the instrument

25 Defenses Universal (or real) and personal defenses are valid against any ordinary holder Only real defenses can be used against a holder in due course

26 Real Defenses Forgery Bankruptcy Minority Alteration Mental incapacity
Duress Illegality Fraud in the execution

27 Personal Defenses Breach of contract Lack of consideration
Prior Payment Unauthorized completion Fraud in the inducement

28 Consumer Paper Notes 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

29 Discharge Discharge from the obligation or from liability occurs in one of 5 ways Proper payment Agreement Cancellation Certification Alteration

30 Ambiguities UCC favors negotiability. In interpreting negotiable instruments, courts should construe the paper so that Words take precedence over numbers Handwritten terms prevail over typed and printed terms Typed terms win over printed terms

31 The Bank’s Duties A 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.

32 Secured Transactions Article 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”

33 Purpose 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?

34 The Property Article 9A applies to any transaction intended to create a security interest in personal property or fixtures. This could include Goods Inventory Negotiable instruments Investment property Other intangible property

35 Attachment “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 and Must have given something of value The debtor must have rights in the collateral

36 Security Agreement The security agreement must contain a description of the collateral and must be signed by the debtor.

37 Perfection In order for a creditor to have priority over other creditors, the creditor must have a perfected security interest. This requires: Possession of the collateral or Filing of a financing statement or Giving money for the purchase of consumer goods (purchase money security interest)

38 Possession The 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

39 Filing The most common way of perfecting Financing statement provides
File financing statement with appropriate state agency Financing statement provides Name of debtor Name of secured party Identification of collateral

40 Purchase Money A 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.

41 Buyer of Secured Goods A buyer in the ordinary course of business has the highest right to the goods.

42 Priority The general order of priority among creditors and buyers is:
Buyer in the ordinary course of business Perfected purchase money security interest Perfected security interest Lien creditors Unperfected security interests General creditors

43 Default If the debtor defaults, the secured party may take possession of the collateral without any court order The secured party may sell or otherwise dispose of the collateral in any commercially reasonable manner May retain the collateral as satisfaction of the debt

44 Termination Once the debt is paid in full, the secured party must complete a termination statement Document indicating that secured party no longer claims an interest in the collateral.

45 Bankruptcy Federal law Purposes: Rehabilitation of the debtor
Liquidation Fairly divide debtor’s assets

46 Common Options Chapter 7 - Liquidation of all existing assets Chapter 11 - Business reorganization Chapter 13 – Individual reorganization

47 Process Petition Trustee is appointed to gather and distribute assets
Voluntary (by debtor) Involuntary (by creditors) Trustee is appointed to gather and distribute assets Meeting of creditors Payment of Claims Discharge

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