BA 242 Exam 2 (negotiation, notes, drafts, negotiable instruments) - Penn State Harrisburg Notes

Negotiable Instrument

Substitute for cash; written document, containing signature of creator, that makes unconditional promise or order to pay sum certain in money, either on demand or at a definite time

Types of Negotiable Instruments

Drafts and Notes

Note

a promise to pay someone

Draft

an order by a drawer to a drawee to pay a payee

Time vs. Demand Instrument

- notes are time instruments

- checks are demand instruments

Certificate of Deposit

promise from bank to pay a payee

Bearer Instrument

an instrument that does not have a specific person to pay

7 Requirements for Negotiability

1. must be a written document (for proof, portable, permanent)

2. signed by creator of instrument (needs signature)

3. have an unconditional promise / order to pay

4. must be a fixed sum of money (how much money paid)

5. specify payment either on demand or fixed future time (when money is paid)

6. must say, "to the order of"

7. no additional promises (one purpose of check)

Negotiation

transferring an instrument (can be a note or check)

2 Factors when Negotiating

1. Delivery (physical handing of instrument from one to intended person)

2. Endorsement (sender is endorser and endorses check on back)

Types of Endorsements

blank, special, and qualified endorsement

Blank Endorsement

the signature of the payee written exactly as his or her name appears on the front of the check

Special Endorsement

An endorsement indicating a new owner of a check

Qualified Endorsement

an endorsement which limits the liability of the endorser

Restrictive Endorsements

An endorsement restricting further transfer of a check's ownership

Noncriminal Endorsement Problems

1. Misspelled name

2. Payable to legal entity

3. Alternative or joint payee's

Requirements for Holder in Due Course

1. party must be a holder of a complete or authentic negotiable instrument

2. holder must take the instrument for value (both parties benefit or valued)

3. holder must take instrument in good faith

4. holder must take instrument without notice of defects

Difference between Holder and Holder in Due Course

holders have possession of check, holders in due course don't have possession yet but have higher rights to a negotiated instrument

Check Liabilities

banks are liable regardless of who signs or receives check

Note Liabilities

maker and acceptor are both liable

3 Parties to a Draft

1. drawee (bank)

2. maker (promiser to pay)

3. acceptor (signs and receives check)

2 Parties to a Note

maker and payee

Secondary Liability

all signers are considered "secondary liable", bank is primarily liable

Warranty Liability

party may be liable if transfer of instrument breaches a warranty associated with instrument

Presentment

an instrument must be presented in a proper and timely manner

Secured Transactions

transaction where payment of debt is guaranteed by personal property owned by debtor

5 Factors Associated with Secured Transactions

1. Secured Interest (interest in personal properties or fixtures which secure payments)

2. Secured Party (person or party that holds interest in secured property)

3. Debtor (person or party that has an obligation to make payments)

4. Security Agreement (agreement where debtor gives secured interest to secured party)

5. Collateral (property subject to security interest, usually the product bought)

Creation of Secured Interests

1. two parties create a security agreement

2. secured party must give value to get secured agreement AND debtor has right to collateral

Written Agreement

security agreement, must be signed by debtor, agreement must describe collateral

Debtors Rights in Collateral

debtors rights in collateral is necessary for attachment of security interest

Purchase-Money Security Interest

created when debtor uses borrowed money frp, secured party to buy collateral

Perfected Security Interest

perfection is a series of legal steps a secured party takes to protect its right in collateral from other creditors that hope to have their debts satisfied

Contracts

not negotiable instruments, but commercial paper

5 Methods of Perfection

1. filing

2. taking possession

3. automatic perfection

4. movable collateral

5. security interests in automobiles / boats

Perfection by Filing

financing statement which lists names and addresses of all parties involved (place and duration)

Perfection by Possession

perfection of interest by holding collateral of debtor until loan is paid in full (evidence of rights)

Automatic Perfection

perfection that automatically occurs when retailer sells a consumer good

Perfection of Movable Collateral

security interest in collateral that's been perfected in one state transfers to another state for 4 months

Perfection of Security Interests in Automobiles and Boats

almost every state requires certificate of title for motor vehicles

Perfection

the legal process by which secured parties protect themselves against the claims of third parties who may wish to have their debts satisfied out of the same collateral

Scope of Security Interest

- After-Acquired Property

- Proceeds

After-Acquired Property

Property that a debtor acquires after a security agreement is executed

Proceeds

something exchanged for collateral

Termination of a Security Interest

A termination statement is an amendment to a financing statement that provides that the debtor has no obligation to the secured party

Default

failure to pay back a loan

Dishonor

when payment is refused, negotiable instrument has been dishonored

Collateral

something pledged as security for repayment of a loan, to be forfeited in the event of a default.

Security Interest

a legal right or claim a creditor holds over a borrowers assets (collateral) to guarantee repayment of a loan

Merger

occurs when a legal contract combines two or more corporations to exist as one

Consolidation

legally combining two or more corporations, and forms an entirely brand new corporation

Purchase of Assets

One corporation can extend its business operations by purchasing the assets of another company

Takeovers

This is when another business buys out another by purchasing a majority stake in the target company