Chapter 13 - Negotiable Instruments, Credit, and Bankruptcy

Someone who receives a promissory note has the option to sell it to another party

Acknowledge

Know what results when a negotiable instrument is transferred by negotiation

The transferee takes the instrument free of any of the transferor’s contract obligation

If an instrument turns out to be nonnegotiable, what law applies to disputes regarding the instrument?

Common Contract Law

Know the requirements to be a holder in due course

• Give value for the negotiable instrument

• Take the instrument without knowledge that it is overdue or defective

• Take the instrument in good faith

*Pay value

*Have no notice of the problems

Know the four types of negotiable instruments

• Drafts

• Checks

• Notes

• Certificates of Deposits

CASH IS NOT A NEGOTIABLE INSTRUMENT

Know what the Whitaker v. Wedbush Securities, Inc. court said regarding the defendant brokerage firm was a bank under the UCC.

Background: Whitaker had a trading account with Wedbush securities. Wedbush used BMO Harris Bank to transfer money in-out of client accounts. A hacker in Poland used Whitaker’s email account to request wire transfers to be sent to an account in Poland. When Whitaker saw the shortage in the account, he demanded the funds subject to unauthorized transfers to be returned. Wedbush refused stating his account was not subject to UCC rules.

Key Takeaway: Under UCC rules, Wedbush was effectively a bank and responsible for the loss

Know the UCC definition of a note

A written promise by one party (the maker) to pay money to another party (the payee) or to bearer; a two-party negotiable instrument

*Involves two people

Know the UCC definition of a draft

A written order signed by a party (the drawer), instructing another party (the drawee, usually a bank) to pay a certain sum of money, on demand, to a 3rd-party (the payee)

*Involves three people

What do you call an agreement to provide security in real property?

Mortgage

What do you call a pledge of personal assets as security for the debt of a business?

Guaranty or Suretyship

Know what the General Electric Business Financial Services v. Silverman court said about asserting defenses based on oral agreements that modified the written guaranty contract

Key Takeaway: Defendant’s cannot rely on oral promises that contradict the original terms of the written contract

*GE brought up UCC rule that oral agreements cannot change any written agreement

If a surety pays the principal’s debt, what rights does the surety have against the principal?

The surety is entitled to be subrogated.

Subrograted: The substitution of one party in place of another with respect to a lawful claim, so that the party to substituted succeeds to the rights of the other ins elation to the debt or claim and its rights and remedies.

Know which part of the UCC regulates credit and financing for personal property

Article 9 of the UCC

Know what perfection means under UCC Art 9.

The validation of a security interest as against other creditors; normally accomplished by filing a statement with some public office or possibly by taking possession of the collateral

*You let the rest of the world know you have this security interest

Know how to perfect a security interest

In a secured transaction, the process by which a security interest is protected against competing claims to the collateral

Usually requires the secured party to give notice of the interest by filing it in the appropriate government office, usually the Secretary of State

*If the asset has a title, you hold the title

*Hold the physical doc/thing

*record with the Secretary of State

Know the holding of Fordyce Bank and Trust v. Bean Timberland about buyers in the ordinary course of business

Background: Fordyce Bank lent money to Bean Timberland and secured a perfected interest in Bean’s timber and its proceeds. When Bean sold timber to Potlatch and Idaho Forest Group, Fordyce claimed the proceeds due to its security interest. The trial court ruled for Potlatch and Idaho Forest, considering them “buyers in the ordinary course,” but this decision was later reversed on appeal, favoring Fordyce.

Key Takeaway: Bank gets nothing from the lumber mills, they were not responsible for the security interests and breached no duty for the bank

To qualify as buyers in the ordinary course, they would have needed to buy the timber from someone in the business of selling that type of collateral.

Know the definition of mechanic’s lien

A claim under state law to secure priority of payments for the value of work performed and materials supplied in building on or improving land and buildings

Example: Real Estate

*If you provide labor/materials to improve real estate and the owner of the land doesn’t pay you, you can put a mechanic’s lien

Know what the court in Cit Bank, N.A. v. Heirs said about priority of liens based on perfection

Background: Golf course, Falconhead, was created. Property was subject to easements… liens. McGees bought property. It provided lien to secure payment of any charges by Falconhead Owners. McGees got a mortgage on their property assigned to CIT Bank. Bank sued because McGees defaulted on loan. Falconhead contended McGees failed to pay monthly assessments. Trial court held in favor of both liens but subordinated the Falconhead lien to the bank’s lien. Falconhead appealed.

Key Takeaway: The priority of liens is generally determined by the timing of the perfection under the UCC’s “first-to-file” rule

People with higher than average income have to file Chapter 13 instead of Chapter 7 bankruptcies

Acknowledge

Chapter 13 is a payment plan

Chapter 7 is an attorney fee/filing fee only, no debts paid

Know what the In the Matter of Kmart Corp. court held regarding paying some critical-vendor creditors in full while not paying other creditors

Initially Kmart was allowed to prioritize critical vendors, in the appeals, Kmart could not selectively pay certain creditors without a valid legal basis under the bankruptcy code.

*Kmart’s plan did not follow the bankruptcy creditors schedule, so the appellate court threw it out