Post on 26-Dec-2015
Business Law -- week 7
Negotiable Instruments: a contract to pay money
(commercial paper)• Checks• Cashier’s checks• Promissary Notes• Certificate of Deposit
Business Law -- week 7
Two categories of Negotiable Instruments
• Notes (between 2 people)– Promissary Note– CD
• Drafts (3 people -- drawer, drawee, payee)– Check– Cashier’s check
Business Law -- week 7
Negotiable vs. Non-negotiable– Depends on how you write it
•Pay to the order of ….•Pay to ….
• Why is this important?– UCC vs Common Law– A negotiable instrument can be signed over to a designee
Business Law -- week 7
Requirements of a negotiable instrument– In writing– Signed– Unconditional– Definite $ amount– Payable “on demand” or “specific date”
– Pay to the order of or to bearer
Business Law -- week 7
Rules about contradictions on checks
Order of precedence:–Words over numbers–Handwritten over typed–Typed over printed
Business Law -- week 7
A person who holds a “commercial paper” has the right to be paid if:
• Its negotiable• Its been negotiated to that person• That person is a “holder in due course”
• The issuer cannot claim any “real defenses”
Business Law -- week 7
What is a “holder in due course” and what are these “real defenses?”
Business Law -- week 7
A holder in due course:• In possession of the note that has been signed over “to the order of”
• Has given something of value for the note
• Purchased in “good faith”• Knows of no claims against note
– Exception: Shelter Rule
Business Law -- week 7
Defenses• Real or personal
Busiess Law -- week 7
Real Defenses• Forgery• Bankruptcy• Minority• Alteration• Mental incapacity• Fraud
Business Law -- week 7
Personal Defenses• Breach• Lack of consideration• Prior payment• Unauthorized completion• Fraud• Non-delivery
Business Law -- week 7
Summary of Negotiable InstrumentsNotes are a promise between 2 parties,-- I.e. promissary note or CD
Drafts involve a third party such as a bank -- checks, cashier’s checks.
To be negotiable it must be able to be signed over to someone else and only negotiable instruments are covered under UCC.
Business Law -- week 7
Liability of Negotiable InstrumentsWho pays ….
when you give someone a check?
if there is insufficient funds to
cover the check?
if the signature has been forged?
if the amount has been altered?
if the bank teller suspects fraud
Business Law -- week 7
Who Pays:Bank (drawee) has primary liability - may pay or dishonor
Issuer (drawer) has secondary liability - if bank dishonors must pay
Indorser -- liable after drawee and drawer
Accommodation Party -- a second signature on a note equally liable to first signator
Business Law -- week 7
Who Pays:
Forgery: Bank is responsible
Imposter: Issuer/Drawer responsible
Fictitious Payee: Issuer/Drawer responsible
Employer Indorsment: Issuer/Drawer
responsible
Exception: If bank suspects fraud they have a duty to protect innocent party
Business Law -- week 7
A note is discharged …
• Payment
• Agreement
• Cancellation
• Certification by bank
• Alteration
Business Law -- week 7
Protect yourself from check fraud …
• Don’t give out Checking account # or information
• Report lost/stolen checks
• Check statements and accounts regularly
• Report irregularities immediately
• Give checks time to clear
• More at
http://www.treas.gov/usss/faq.shtml#faq14
Business Law -- week 7
What responsibility does the bank have …
• After wrongfully dishonoring a check
• For checks that come in after death of
customer
• When a customer declared incompetent
• Post-dated checks & Stale checks
• Stop payment orders
Business Law -- week 7
What responsibility does the bank have …
• Make funds available from checks deposited to
customer per EFAA time limits
• Debit -credit cards not active until requested
by customer
• Must provide customers with documentation of
transactions
• Must investigate suspected errors