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P A R T P A R T Commercial Paper Negotiable Instruments Negotiation & Holder in Due Course Liability of Parties Checks and Electronic Transfers 7 McGraw-Hill/Irwin.

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Presentation on theme: "P A R T P A R T Commercial Paper Negotiable Instruments Negotiation & Holder in Due Course Liability of Parties Checks and Electronic Transfers 7 McGraw-Hill/Irwin."— Presentation transcript:

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2 P A R T P A R T Commercial Paper Negotiable Instruments Negotiation & Holder in Due Course Liability of Parties Checks and Electronic Transfers 7 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3 Negotiation & Holder in Due Course PA E TR HC 32 Behind all its global responsibilities and impersonal style banking is still a people business…it may be the most personal business of all for it always depends on the original concept of credit, meaning trust. Anthony Sampson, The Moneylenders: Bankers in a Dangerous World (1981)

4 Learning Objectives Negotiation Indorsements Holder in Due Course & Rights 32 - 4

5 Under UCC Revised Article 3, negotiation is the transfer of voluntary or involuntary possession of a negotiable instrument by a person (other than issuer) to another person who becomes its holder [3–201] Instrument may be: Order paper : to order of named payee Bearer paper : to bearer or to cash Overview 32 - 5

6 Indorsement : Signature, alone or with words, made on an instrument for a specific purpose May not be that of maker, drawer, acceptor Indorsement required for negotiation except in the case of depositary banks Form of indorsement may affect attempts to negotiate the instrument further Indorsement may be subject to rescission due to, e.g., lack of capacity, fraud, illegality Indorsement 32 - 6

7 A special indorsement is indorsers signature and words to whom instrument is payable Instrument indorsed in blank if indorser signs without specifying to whom its payable Restrictive indorsement states purpose of the indorsement or how instrument to be used Kinds of Indorsement 32 - 7

8 Holder in due course: person holds negotiable instrument, taken for value, in good faith, without notice of defects or evidence of apparent forgery or alteration that raise questions about authenticity Takes negotiable instrument free of personal defenses, claims to instrument, and claims in recoupment of obligor or of a third party 32 - 8 Holder in Due Course

9 Overdue, dishonored, or has uncured default Contains unauthorized signature or alteration Has a property or possessory interest claim Has any defense against it or claim in recoupment to it Negotiable Instrument Defects 32 - 9

10 Article 3 shelter rule : instrument transferee obtains all rights transferor had, including right to enforce instrument and any right as holder in due course [3–203(b)] Revised Article 3 establishes four categories of claims and defenses: Real defenses attack instruments validity and may be used as reasons against payment of a negotiable instrument to any holder Holder in Due Course Rights & Limitations 32 - 10

11 Revised Article 3 categories (continued) : Personal defenses : legal reasons to avoid or reduce persons liability for payment of negotiable instrument due to the transaction Claims to an instrument concern property or possessory rights in instrument or proceeds Claims in recoupment arise from transaction that created the instrument and offset, rather than prevent, liability 32 - 11 Holder in Due Course Rights & Limitations

12 32 - 12 Commercial Paper Chart

13 Holder in due course rules may harm consumers, thus some states and the Federal Trade Commission limit holder in due course rule as it affects consumers FTC requires sellers who extend credit by note to include a statement warning of limited holder in due course rights 32 - 13 Consumer Protection Issues

14 Test Your Knowledge True=A, False = B Order paper is a negotiable instrument payable to the order of cash. Indorsement is a signature that is made on an instrument for a specific purpose If Jamil writes a check to Mary, Jamil may indorse the back himself to negotiate it. A check is rendered non-negotiable if it is indorsed on the back, For Deposit to Account #5000005 at First State Bank. 32 - 14

15 Test Your Knowledge True=A, False = B Indorsement is required for negotiation except in the case of depositary banks. The shelter rule states that a transferee of a negotiable instrument obtains all rights that the transferor had. Megan writes Tisha a check dated 1/2/2007. Next day, Tisha indorses the check to Bryans Grocery. Bryans presented the check for payment to Bank on 7/1/2007. Bank must honor the negotiable instrument. 32 - 15

16 Test Your Knowledge Multiple Choice Dan (16 years old) signed an installment note with Dudes for a surfboard. Dudes sold the note at a discount to Factors Co. The board broke after 1 month and Dan stopped paying. Factors Co. is: (a) a holder in due course, but Dan is a minor and may assert his status to void the contract (b) not a holder in due course & has no rights (c) is a holder in due course and Dan must pay on the note or breach the contract 32 - 16

17 Test Your Knowledge Multiple Choice Requirements for holder in due course status include: (a) take a negotiable instrument for value (b) take the instrument in good faith (c) take without notice of defects or claims against the instrument (d) all of the above (e) all of the above plus be in the business of taking negotiable instruments 32 - 17

18 Thought Questions What do you think of the FTC rule limiting the rights of a holder in due course in consumer transactions? Do you think the FTC rule achieves the underlying policy to protect consumers? 32 - 18


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