Term
| 2 Party Negotiable Instruments |
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Definition
1. Promissory Note - maker promises to pay money to the payee
2. Certificate of Deposit (CD) - bank promises to repay with interest |
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Term
| 3 Party Negotiable Instruments |
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Definition
1. Draft - drawer orders drawee to pay to payee
2. Check - the bank is the drawee |
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Term
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Definition
| As soon as it's issued the payee can collect |
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Term
| 9 Elements of Negotiable Instruments |
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Definition
1. In writing
2. Signed by the issuer (note: maker; draft/check: drawer)
3. Promise or order to pay
4. Unconditional
5. Fixed Sum
6. Of Money (can't be commodities)
7. No other promise or undertaking (only $ and/or interest rate)
8. Payable on demand or at a definite time
9. Payable to "bearer" or "to the order of (named person)" |
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Term
| Old Article 3; Re: "Unconditional" element of N.I. |
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Definition
Can reference the obligation, but still has to pay (Ex: parking ticket - write violation #)
*Particular Fund Doctrine (old article 3): "limited to bank acct #328" - **destroys negotiability
- Under revised article 3 it does not. 45/50 states use the revised version |
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Term
| Old Article 3; Re: "Fixed Sum" element of N.I. |
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Definition
Old Article 3 (NY): making reference to an established interest rate (Federal, Prime, etc) destroys negotiability
New Article 3 - that does not destroy negotiability |
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Term
| Old Article 3; Re: "Payable to..." element of N.I. |
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Definition
Old Article 3 (NY): checks have to say "to the order of"
New: can just say "pay" |
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Term
| To be a Holder in Due Course |
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Definition
1. Is the instrument negotiable? (9 Elements)
2. Is the person with the instrument a holder?
3. Is ... a holder in due course? |
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Term
| Transfer (determines "holder" status) |
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Definition
1. instrument was issued to you (payee)
2. instrument was negotiated to you (bearer/order status) - if transfer ISN'T negotiated it becomes an assignment |
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Term
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Definition
1. Bearer (possession alone)
2. Order (valid indorsement + possession) |
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Term
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Definition
Anamolous indorser signs it (outside the chain of title). Direct beneficiary of value received. Primary/Secondary liability depends on whether the party signs as a a maker or anomolous indorser.
Ex: Donald Trump co-signs a check to ensure its value - guarentor |
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Term
| Dimensions of Indorsements |
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Definition
1. Special or Blank
2. Restrictive or Nonrestrictive
3. Qualified or Unqualified |
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Term
| Special vs. Blank Indorsement |
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Definition
Special - specifying transfer "Pay to Pete. -Eric"
Blank - just a signature "Eric" |
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Term
| Types of Restrictive Indorsements |
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Definition
1. Collection or deposit only - not transferable...has to go into banking system
2. Indorsement in trust - (exec of state, trustee, agent) **Party is only responsible if they had reason to know the trustee was trouble
3. Conditional
Old Article 3 (NY) -only valid on the indorsement, NOT on the face value of the note
Revised Art. 3 - can't make indorsement subject to a condition
4. Restricting Future Indorsements - "Pay to Carol only"...the "only" doesn't stick; not valid |
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Term
| Qualified vs. Unqualified |
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Definition
Qualified - "w/o recourse" the indorser is not contractually responsible. **Can still be liable for breach of warranty (Very few people accept)
** Can't indorse w/o recourse on drawer (check) notes |
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Term
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Definition
| if the bank accepts a check with a forged indorsement it can't debit the drawer's account and has to take the loss |
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Term
| Exception 1: Impostor Rule |
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Definition
| the drawer bears the loss if he issued the check to someone posing as someone else. Rationale: should have asked for ID/been more careful |
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Term
| Exception 2: Ficticious Payee Rule |
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Definition
| The drawer bears the loss if trustee (accountant, payroll, etc) writes fictitious checks. Rationale: drawer entrusted that person - gave them the ability to forge |
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Term
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Definition
1. Holder
2. Gave value
3. Taken in good faith
4. With no notice (notification/should have known) or knowledge that instrument was:
- overdue (checks have a 90 day life) or dishonored (stamped "insufficient funds")
- has an unauthorized signature or alteration
- is subject to any claims or defenses
- has any other irregularity |
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Term
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Definition
| trumps other claims of ownership unless HDC has REASON TO KNOW that the instrument was lost, stolen, etc |
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Term
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Definition
| A person who buys/receives something from a HDC gets the rights of a HDC regardless of whether that person met any of the HDC points. Creates maximum liquidity and protects everyone down the line of exchange. Protects good faith of the HDC |
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Term
| Example of the Shelter Rule |
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Definition
| Manny and Brent are partners. Manny pays Rob what they owe him, but Rob tricks Brent into paying him as well. Rob sold the note to John who becomes a HDC. Nikki knows that the check was stolen, but still becomes a HDC if John sells/gives her the check |
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Term
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Definition
| Manny and Shannon have a contract for him to deliver beams. Manny innocently installs inferior beams (his supplier tricked him), but the note was already issued. Manny is a HDC |
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Term
| (HDC is subject to) Real Defenses |
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Definition
1. Minority (under 18 years)
2. Defenses that makes the agreement void (**Duress**, illegality)
3. Fraud in execution (Ex: someone unknowingly signs a note hidden under a receipt)
4. Discharge in insolvency proceeding or bankruptcy
5. Other discharge of which holder has notice
6. Unauthorized signature
7. Material alteration |
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Term
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Definition
1. Innocent - (filled in incorrect amount in good faith) must be paid according to the terms. HDC can collect the full amount from anyone in the chain of title
2. Fraudulent - Holders are discharged b/c check is null, but an HDC can collect the correct (unaltered) amount.
**Can collect the true amount ($2,000) from issuer et. al AND can make claims for the balance of the fraudulent alteration ($20,000) from the person who made the change AND sometimes from the payor if it's his/her fault for not filling it out completely |
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Term
Federal Trade Commission (FTC) rule
???????? |
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Definition
In a consumer credit transaction for goods/services, if a negotiable instrument is transferred to another party, the party (HDC) becomes subject to all claims and defenses of the consumer
Ex: subprime crisis - Companies sell all debt notes to banks. If payer defaults = bank's problem |
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Term
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Definition
based on signature (drawer, maker, indorser)
Agent signing for principal is not liable if he signed it properly (Prince, principal, by Adams, agent) |
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Term
| 2 Kinds of Primary Liability |
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Definition
(first person you go to for payment)
1. 2 Party Paper (note)
2. 3 Party Paper (draft/check): no one is unconditionably liable |
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Term
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Definition
(liable only after primary person was sought after)
Liability arises on the signature (makers, drawers, drawees, indorsers) |
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Term
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Definition
| Name for the drawee once he accepts the draft and becomes primarily liable for it. Refusal to accept a demand instrument is not dishonor unless it's payable at a certain time period after (aka if it's contingent on) acceptance |
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Term
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Definition
| if a drawee accepts a draft IN WRITING ON THE DRAFT then he/she/it becomes primarily and unconditionably liable. Has to state the amount or else HDC can have a claim against amount if it was later raised |
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Term
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Definition
| Drawer ORDERS drawee to pay draft. Only obligated to pay if drawee fails to pay |
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Term
| Drawer Liability - Unaccepted draft (aka drawee doesn't write on it) |
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Definition
| obligated to pay instrument upon its dishonor. Contingent on DISHONOR alone |
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Term
| Drawer Liability - Accepted Draft (aka drawee writes on it) |
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Definition
| drawer liability is contingent on DISHONOR and NOTICE of dishonor |
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Term
| Drawer obligation - Certified Check |
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Definition
*Drawee bank has no obligation to certify a check and its refusal doesn't make instrument dishonored
Drawer has no liability and bank's refusal to pay may result in drawer's suing it for breach of contract |
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Term
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Definition
| demand made by person entitled to enforce the instrument either for PAYMENT on the draft or ACCEPTANCE by the drawee |
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Term
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Definition
| Refusal to pay an instrument when it's presented or on its due date |
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Term
| Conditions that have to be met to trigger DRAWER liability |
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Definition
1. Dishonor by the bank (ie check bounces)
2. Dishonor of notice
(Unaccepted drafts just need dishonor)
3. ???? |
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Term
| Conditions that have to be met to trigger INDORSER liability |
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Definition
1. Dishonor
2. Notice of Dishonor |
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Term
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Definition
How? written or oral
When? within 30 days of prior notice
Who? notice by one is notice for all |
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Term
| Dishonor of a Demand Note/Draft |
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Definition
| on the day that the payment was refused on presentation |
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Term
| Dishonor of a Time NOTE (requiring presentation) |
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Definition
| payable at bank and dishonored if not paid on due date or date of presentment, whichever is later |
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Term
| Dishonoring all other time notes |
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Definition
| if not paid on due date regardless of presentment |
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Term
| Dishonor of a time draft for PAYMENT |
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Definition
| On due date or date of presentment, whichever is later |
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Term
| Dishonor of a time draft for ACCEPTANCE |
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Definition
| dishonored if not accepted on the day it's presented even if it's PRIOR to the due date |
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Term
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Definition
on the day of presentment or after 90 days
- has to go from depository bank to payor bank and often goes thru intermediary banks first. Each bank has 2 days to dishonor a check
- If you deposit after 2pm that day is not counted
- If the bank doesn't dishonor the check on time it has to pay |
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Term
| 2 Types of Warranty Liability |
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Definition
1. Transfer
2. Presenter
both are effective whether the transferor/presenter signs the instrument or not & "w/o recourse" is an ineffective defense against both warranty liabilities |
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Term
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Definition
| for any person who transfers an instrument whether by negotiation or assignment and receives consideration sufficient to support a contract. "Transfer" also means that the delivery is voluntary |
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Term
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Definition
1. Entitlement to enforce
2. No unauthorized signatures
3. No alterations to the document
4. No defenses to the document
5. No knowledge of insolvency (bankruptcy) |
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Term
Entitlement to enforce
(transfer) |
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Definition
the transferor is a person entitled to enforce the instrument - guards against forgeries.
Ex: Mitch makes note payable to Penelope. Thief steals it, forges her name, and sells to Aaron. Aaron is not entitled to enforce the instrument b/c the forged endorsent. AARON IS NOT A HOLDER. If he transfers it to Julie for consideration she can hold him liable for a breach of warranty |
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Term
| Authentic and authorized signatures |
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Definition
| just broadens "entitlement to enforce" by including signatures from ppl outside chain of title (accomodating parties) |
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Term
No alterations to the document
(transfer) |
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Definition
| Even if someone buys an instrument w/o knowing that it's altered, they are still liable to the person they transferred it to for the difference (b/c obv the maker would only agree to pay original amount) |
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Term
| No defenses to the document |
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Definition
| Ex: note made by a minor and then indorsed/transfered/negotiated down a line of people. Everyone is still liable for everyone else for payment IF they all indorsed it. If someone only transfered it by delivery that person is ONLY liable to the person they transferred it to |
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Term
| Warranties on Presentment |
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Definition
| protects people in regards to incorrect payments. Warranties are determine by whether we're dealing with a drawee of an unaccepted draft OR all other payors |
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Term
Warranties on Presentment;
re: Drawees of Unaccepted Drafts |
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Definition
1. Entitlement to enforce
2. No alteration
3. No knowledge that drawer's signature is a forgery |
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Term
Warranties on Presentment;
re: All other payors |
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Definition
1. Entitlement to enforce
** Don't need protection of "no alteration" b/c the maker WROTE the note so they'd know if there was any alteration
** Don't need warranty of genuine drawer's signature b/c there is no 3rd party drawee. Again, the maker would know if his signature was forged |
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Term
Entitlement to Enforce
(presenter) |
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Definition
warrants that there are no unauthorized or missing indorsements in the chain of title
Ex: John writes a check for Stu and someone steals it and forges Stu's indorsement. The bank can't debit John's account (unless Impostor/Fict Payee rule comes into play) and has to bear the loss. The bank can then assert a breach of this warranty to collect payment from the person who collected on the forged check (whether it's the thief or someone who bought it unknowingly from the thief) |
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Term
No alteration to the document
(presenter) |
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Definition
Essentially this is the same as Entitlement to Enforce only it has to do with altering the CONTENT of the draft/check instead of the indorsements
Ex: Bank can't debit drawer's account $30,000 for a check that was altered from $30. It can assert a breach of this warranty and collect the difference from the presenter |
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Term
| No knowledge that drawer's signature is a forgery |
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Definition
Drawee bears the risk of an unauthorized drawer signature unless there's evidence that the presenter knew it was forged
Justification: drawers/banks should know the signatures of its own customers |
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Term
| SECURED TRANSACTIONS ****FILL IN NOTES***** |
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Definition
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Term
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Definition
| Creation of a security interest. Must be a secured agreement between secure party and debtor |
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Term
| Authenticated Security Agreement |
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Definition
WRITTEN agreement that reasonably identifies the collateral, who the secured party is, and signed by the debtor
*Can have electronic version if encryption or other secured means are used in place of debtor's signature |
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Term
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Definition
| the delivery of personal property to the creditor (secured party) as a collateral for the payment of a debt |
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Term
| Types of collateral that can be pledged |
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Definition
Physical, movable things:
1. Goods
2. Instruments
3. Negotiable documents of title
4. Money
5. Chattel paper
6. Certificated securities (stocks) |
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Term
| Collateral that cannot be pledged |
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Definition
1. Accounts Receivable
2. Other general intangibles |
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Term
| Rule for valid security interests in household goods |
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Definition
Possessory (pledge) - already in secured party's possession Ex: you're not depriving someone of his bed if he CHOSE TO put his bed up as a pledge
2. PMSI |
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Term
| Purchase Money Security Interest (PMSI) |
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Definition
| If a merchant sells a good on credit than that good becomes the collateral |
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Term
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Definition
| The secured party perfects his secured interest in order to be effective against other parties with competeing interests in the collateral |
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Term
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Definition
A. By filing
B. Pledging
C. Temporary
D. Control
E. Automatic |
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Term
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Definition
There's a public index to look up debtor's history and whether or not he/she used the same collateral for other debts. By filing a financing statement, lenders protect their interest in the collateral for 5 years after which they can file a continuation statement to extend the effectiveness for another 5 years
Lenders are REQUIRED to file for a collateral in general intangibles |
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Term
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Definition
| The lender would want to have possession of the collateral and wouldn't be able to if it was pledged to someone else. If the debtor refuses, it puts the lender on notice that something might be wrong (they either don't have it or it is pledged to someone else) |
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Term
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Definition
Security interests in a certificated security or negotiable instrument/document is AUTOMATICALLY perfected for a period of 20 days. Aka you could go 20 days without filing and get priority over someone who gets the interest after you and files right away.
ONLY applicable if you have (1) an authenticated security agreement for (2) a new value - not previous debt |
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Term
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Definition
Debtor gives creditor control over collateral such as a bank account or investment property
Ex: Davis lends Jim money. Jim uses his savings account as collateral. He gives Davis his passcode and informs his bank in writing that Davis has control over that account |
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Term
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Definition
PMSI in consumer goods are automatically perfected. (Also even in the case of: Doris pays for fridge with cash borrowed from Logan to whom she has a PMSI...doesn't have to just be the store)
Justification: sellers would be less inclined to sell goods on credit unless they're automatically protected. Many choose to file in addition to their automatic perfection |
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Term
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Definition
I. Attached vs. Attached (both unperfected): first to attach gets priority
II. Perfected vs. Attached: perfected gets priority
III. Perfected vs. Perfected: first to perfect gets priority (2 exceptions for PMSI) |
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Term
| 2 Rules for PMSI re: priorities |
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Definition
1. PMSI in non-inventory goods
2. PMSI in inventory goods |
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Term
| PMSI in non-inventory goods |
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Definition
| (Ex: equipment). New creditor gets priority over someone who perfected first (Ex: someone had a perfected interest in all future equipment) if they perfect either when the debtor receives collateral OR w/i a 20 day grace period |
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Term
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Definition
New creditor gets priority over inventory goods IF:
1. The creditor perfects BEFORE the delivery of the goods
2. He sends notice to all holders with a conflicting prior security interest w/i 5 days (book: years???) before delivery to debtor |
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Term
| Buyers of collateral vs. Unperfected security interest |
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Definition
(assuming buyer didn't know about the security interest)
Buyer will win. UNLESS it's proven that the buyer knew about the interest OR did not pay value for it |
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Term
| Buyers vs. Perfected security interest |
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Definition
| Perfected security interest will win regardless of whether buyer knew about it or not |
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Term
| Buyers in the ordinary course of business |
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Definition
Wins even against a perfected security interest
Ex: Davis sells robes to Macy's and has a PMSI. Lena buys a robe. Shortly after, Macy's goes out of business. Davis can go after Macy's to get the robes back, but he's not going to track Lena down for the robe that she bought. |
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Term
| Buyers of consumer goods FROM a consumer |
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Definition
Buyer wins over perfected interests **UNLESS IT WAS FILED** if they purchased it from a consumer for household use
Ex: Tim had a PMSI for the refrigerator he sold to Lauren for $500. Lauren resold the fridge to Mike at a garage sale for $300. Lauren never paid Tim. If Tim just had automatic perfection - Mike would win, but if Tim filed he would get to take it |
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Term
| Bankruptcy claims vs PMSI (non-inventory goods) |
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Definition
| Creditor with the PMSI prevails even if she perfected AFTER bankruptcy claim was filed as long as the interest is perfected w/i the automatic 20 day grace period |
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Term
| Bankruptcy vs. Security Interest (non-inventory goods) |
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Definition
| Creditor with the security interest is protected as long as he perfects BEFORE the date of bankruptcy filing |
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Term
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Definition
| Debtor has a right to pay off the debt until the secured party takes action in regards to the collateral (sells it, etc) |
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Term
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Definition
| Secured party can repossess collateral unless there is a breach of peace (varies by state but Ex: sec party can take debtor's car if that was the collateral) |
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Term
| Acceptance of the Collateral |
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Definition
Secured party can keep the collateral instead of selling it if the debtor agrees to it
*Some col. may be worth more than the loan so this protects the debtor's interest |
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Term
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Definition
| If the sale of the collateral is insufficient to cover the debt, the secured party has an unperfected security interest and has to sue debtor for the balance |
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Term
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Definition
| If the sale of the collateral amounts to more than the debt, the extra money goes back to the debtor. Sec party is also allowed to keep extra money for any expenses that occurred b/c of the default |
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Term
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Definition
1. Liquidation (Chp 7 of UCC)
2. Reorganization (Chp 11 of UCC) |
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Term
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Definition
Liquidate then discharge
Fill out order for relief. A trustee is appointed by creditors to administer the estate.
Goals: help debtor get out of debt and make sure creditors are treated fairly |
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Term
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Definition
Discharge then reorganize debts
Fill out order for relief. Want to reorganize debts to correct or eliminate factors responsible for the distress of a business.
Goal: the continuance of the debtor's business and fair treatment of creditors |
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Term
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Definition
| certain property is exempt from being seized so that the debtor can still get a discharge, but isn't left impovershed. Can choose Federal or State exemption |
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Term
| Homestead Exemption (state) |
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Definition
Can't use a state's homestead exemption unless you've been there for at least 10 years.
(Prevents abuse, i.e. OJ's house in FL) |
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Term
| List of some Federal Exemptions |
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Definition
1. Household - $20,000
2. Auto - $3,225
3. Health aids - wheelchair, etc
4. Unemployment compensation
5. Alimony and Child Support
(also partial exemptions for jewelry, tools of debtor's trade, burial plot, all SS/veterans benefits & pension.....) |
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Term
| Debts that CAN'T be Discharged |
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Definition
1. Alimony & Child Support
2. Intentional and malicious tort
3. Most student loans |
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Term
| Automatic order for relief |
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Definition
(voluntary filing)
File a petition for a discharge. Fill out who you owe, what you owe them, list of assets.
**Involuntary filings don't have this order until court rules in favor of a discharge. Debtor may want a chance to fight the claim and new debts may arise during the time it takes the court to review |
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Term
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Definition
| after filing a voluntary/involunary petition this acts as a restraint against all creditors' trying to recover claims from the debtor |
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Term
| Losing the Right to a Discharge |
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Definition
1. Fraudulent or inadequate books and records
2. Defrauding the court
3. Accept/make a bribe
4. 8 year window to file Chp 7 or 11 |
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Term
| Priorities for Unsecured Creditors |
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Definition
1. Alimony and Child Support
2. Trustee and other admins handling the debt - (no one would take trustee position if they thought they wouldn't get paid)
3. Gap creditors
4. Taxes |
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Term
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Definition
Those who provide credit to the debtor during the period where the court is reviewing involuntary bankruptcy file.
**Have a high priority among unsecured creditors b/c involuntary bankruptcy would be the "kiss of death" otherwise b/c no one would sell to you on credit |
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Term
| Filing an Involuntary Bankruptcy Claim |
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Definition
By:
- If 12 or more creditors: 3+ can file if unsecured claims total at least $13,425
- If less than 12 creditors: 1 or more can file if claims are at least $13,425 |
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Term
| Voidable Preference (example) |
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Definition
Debtor can't choose who to pay based on preference
Lisa's business is going under. Ann, a creditor got tough with her on the phone and Lisa paid her back $25k out of the $50k she owes her. If Lisa files for bankruptcy, the trustee can reclaim that $25k back to fairly distribute it among creditors |
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Term
| Elements of a Voidable Preference |
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Definition
1. For a creditor
2. On account of an antecedent debt
3. From someone in debt or insolvent
4. w/i 90 days of bankruptcy filing
5. The payment puts creditor in a better position than they would be under Chapter 7 |
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Term
Contemporaneous Transaction
(ex of a non-antecedent debt) |
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Definition
Nikki's company is going under but she doesn't want to file for bankruptcy yet. She wants to buy beams from Jim but after reading about her misfortune he demands that she pay him in cash.
The trustee CAN'T seize that money from Jim even if it's w/i 90 days of Nikki's filing b/c it wasn't an antecedent debt. Justification: We don't want to push ppl having financial trouble into further debt |
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Term
Payment in the ordinary course of business
(re: Voidable Preferences0 |
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Definition
NOT a voidable preference and can't be seized and redistributed by trustee. Justification: counter-productive...would only add more creditors to the list
*Can be iffy...court can draw the line b/t what qualifies and what doesn't |
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Term
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Definition
(Federal Law: w/i 2 years of filing)
Ex: Sue sells $1mil house to a friend for $1 with the intentions to buy it back for $1 when she comes out of bankruptcy. This way she avoids keeping only $20,000 from the sale and distributing the rest to creditors. |
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