CommercialPaper-KilbTeorn1

8/13/2019 CommercialPaper-KilbTeorn1

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Commercial Paper: Outline

Overview:............................................................................................................................4

The Checking System:........................................................................................................4

Assignment 1: Relationship b/w the Drawer & The Bank! 4-401 When bank may charge Customers Account:...................................................................54-403 Customers Rght to !to" #ayment:......................................................................................5

Assignment ": The Bank#s Obligation to Pa$ Checks%When may a bank check account $or su$$cent $un%s to "ay check&.....................................................'(m"ortant: When %oes the money ha)e to be ma%e a)a*ab*e a$ter you make a "ayment& ...................'

Regu*aton CC -- +un%s A)a*ab*ty Ru*es.......................................................................................'

Assignment : Collection o' Checks(Check c*earng "rocess:..........................................................................................................................,3 ste"s common to any n%rect "ayment metho%...................................................................................,#ayor anks tme *nes $or %shonor:................................................................................................../

NEGOTIABLE INSTRUENTS:.....................................................................................!

Re)uirements to be a *egotiable +nstrument: Alwa$s on Bar ,u%ty: ................................................................................................................................................2

Assignment "1: *egotiable +nstruments 1-What s a negotab*e nstrument& #rmar*y n 3-304...........................................................................10

Wrtten: ust be a tangb*e %ocument. ost m"ortant conce"t here............................. ............106ncon%tona*: .................................................................................................................................107$ money: ust be a "romse to "ay money8 not to %e*)er cgars8 etc...........................................119o earer or to or%er;: ust use these "hraseso ?=traneous un%ertakngs: ..........................................................................................................1Assignment "": Trans'er & .n'orcement o' *egotiable +nstruments 1"

nstruments: earer #a"er an% 7r%er #a"er ......................................................................................1@o to negotate an nstrument: ..........................................................................................................13 ays to n%orse an nstrument: *ank8 !"eca*8 Restrct)e8 Anamou*ous.......................................13ene$tsB A%)antages o$ eng a @o*%er: ............................................................................................13ab*ty $or a Check not shonore% n me:.....................................................................................14Accor% an% !ats$acton. aka +u** #ayment checks...........................................................................14

ol0ers in Due Course 1Reurements $or becomng ho*%er n %ue course:...............................................................................15What are the a%)antages o$ beng a ho*%er n %ue course& ..................................................................1'

.2tinguishing obligation through pa$ment: 1%

!he*ter #rnc"a*: ($ you %ont meet reurements o$ ho*%er n %ue course8 you can *ook to someonee*se ho as.........................................................................................................................................1,

Assignment 4: Risk "# L"ss in the Checking System: ....................................................$%

3hat are the rights o' the 0rawer against the pa$or bank4 1(

5oss a'ter Dishonor: 1(


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5oss Due to a 6orge0 Drawer#s 7ignature: 6orge0 7ignature 8 not properl$ pa$able 1(

Presentment 3arranties: 9now 'or .2am1

Trans'er warranties: *O trans'er warrant$ is ma0e to the Pa$or Bank; 9now 'or .2am;

1

5oss Due to 6orge0 .n0orsement: 6orge0 .n0orsement 8 *ot properl$ pa$able1,5oss Due to Alteration: "-

O etc: "

Dishonor o' AC Transactions "

7topping Pa$ment on AC Transactions: "%

.rror in AC Transactions:"%

Assignment $0: The 1ire Tr(ns#er System....................................................................)&

=enerall$:"%

Assignment 11: .rrors in the 3ire Trans'er 7$stem "(Denera**y:.............................................................................................................................................., ru*es $ the 7rgnator g)es the rong name or account number are g)en:.....................................,ank ?rror: ...........................................................................................................................................,!tatement Re)e Ru*e:......................................................................................................................../Reurement o$ H7r%nary Care; $or !en%er !ee 4A-304.................................................................2#o*cy Cons%eratons: Why ank Wont #ut oss on 7rgnator......................................................2

Assignment $): Ch"ice "# L(w.......................................................................................)!


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Domestic choice o' law:",

Assignment $-: Letters "# Cre'it.....................................................................................-0

=enerall$:-

ow the process 3orks: 1

roles the Bene'iciar$#s/7eller#s Bank will take on:"

" sets o' rules that go


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St(n',y Letters "# Cre'it..................................................................................................4%

Clean 7tan0b$ 5etters o' Cre0it!

Problem 'rom issuer bank o' 7tan0b$ 5etter !

+ssuer o' 7tan0b$ 0oes ha


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3e are all cre0itors o' the bank;($ e ha)e checkng accounts8 etc. When you%e"ost money you become the bankLs cre%tor8 an% they are your %ebtor.

Relationship between Drawer & Bank:

#rmar*y the account agreement. 6CC 3 an% 4 are n% regu*aton that go)erns

negotab*e nstruments. 9he bank may "ay a check as *ong as t s propert$ pa$able.9

o (tLs "ro"er*y "ayab*e $ account agreement says t can "ay t.

o ank rtes the account agreement8 so the bank has much $*e=b*ty.

Denera**y8 the anser s yes the ank can "ay

Bank to Bank Relationship:

+e%era* a *arge*y regu*ates ho banks can %o busness th other banks8 rather

than the re*atonsh" bB the bank an% ts customers.

*ote: Beware o' Comments @@ The$ are not law Onl$ illustrates or e2plains the law

8 4940$ 1hen ,(nk m(y ch(rge C7st"mer;s Acc"7nt:

A When an tem s properl$ pa$ableauthoriHe0 b$ customer I in

accor0ance with an$ agreement b/w customer & bank

Customer not liable$ 0i0n#t sign E 0i0n#t bene'it$rom "rocee%s.

C ank ma$ chargeaccount e)en though "ayment as ma%e be'ore the 0ate o'

the check> unless the customer has gi


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Assignment ": The Bank#s Obligation to Pa$ Checks

3hen ma$ a bank check account 'or su''icient 'un0s to pa$ check4

At an$ point a'ter it has been presente0 'or pa$ment.

(t can re*y on the ba*ance hene)er t checks8 e)en $ t ats a cou"*e o$ %ays

be$ore t %shonors. But> i' check more than once @@ the last time $ou check isthe check upon which $ou rel$

+mportant: 3hen 0oes the mone$ ha J1-- 1st0a$> & the rest

the ne2t

5ocal-- check %ran on a bank that s a member o$ the +e%era*Reser)e !ystem8 the regon o$ hch your bank s a member. 6!s %)%e% nto many regons -- n t regons there s a centra*reser)e bank branch. A** the banks n that regon are n one *oca*

regon. (tLs *oca* $ tLs thn the same regon.o 6or 5ocal Checks @@ +' cash> then 1@"@ rule

J1-- 1st 0a$> J!-- "n0 an0 Rest the r0

o ! *on@5ocal Deposit L ank has 3 more %ays to g)e you access than

un%er Ru*es E 3.

6or check @- J1-- 1st0a$ & Rest the th0a$

6or Cash @@ J1-- 'irst 0a$> J!-- the th> an0 the Rest on the %th

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J>--- 0eposit limit: .2cepte0 'rom 6un0s A


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!ma** on anks n same ton: ost ha)e agreements among themse*)es --

agree to sen% checks by a certan tme8 an% sen% by courer. Wou*% be moree$$cent $ e got r% o$ courer.

>on-*oca* checks -- banks onLt ha)e these agreements.

o 7o> 6e0eral Reser


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6sua**y uck enough so that %e"ostary %oesnLt ha)e to re*ease$un%s be$ore they a*rea%y kno.

7r8 you can use the same "rocess $ you the "ayor bank here the%e"ostary bank -- essenta**y you ** "ut (CR *ne ta"e% to thebottom. When %e"ostary bank gets back8 t ** kno tLs been

%shonore%8 usua**y ha""ens much more uck*y than to 4 %ays. ?ost important wa$ it changes/a00s to CC 0ea0line: +' pa$or

misses 0ea0line to sen0> Reg CC sa$s i' $ou can still compl$

with " to ! 0a$ rule then weKll suspen0 the CC 0ea0line

WeL** a%% e=tra %ay to 6CC %ea%*ne as *ong as you can get tthere by to 4. A%%s one %ay n any case. ($ the "ayor uses hgh*ye="e%te% means to return check then 6CC %ea%*ne ** be a)e%entre*y.

"1 ?=ce"ton: ($ "ayor bank ants to %shonor check $or J"-- or more8 an% e)enthough that check ** *ke*y get back uck*y8 e ant %e"ostary to kno. Re)uire

electronic notice to bank b$ ! pm on "n0 0a$ a'ter presentment .

*.=OT+AB5. +*7TR?.*T7:

Alwa$s on Bar .2am;

Re)uirements to be a *egotiable +nstrument: Alwa$s on Bar

1 6ncon%tona* Wrtten "romse or or%er to "ay

3 o Hbearor; or Hor%er;

4 A $=e% amount

5 7$ money

'At a %e$nte tme

, Wth

5i)ui0it$:

A measure o$ ho uck*y an% eas*y you can turn some har% thng nto money.

?=. !tocks E on%s -- negotab*e nstrument.

hngs that ha)e a recognGe% market that you can turn )ery uck*y nto money.?=. ( stock

>on-*u% thngs K har% assets *ke machnery. ?=. car.

#ure *u%ty K %o**ar b**s. o**ars are *u% because e)eryone n socety agrees

that ts money. ?$$ect)eness o$ "ayment system s gauge% by ho *u% thngs you tra%e are.

2


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arter K **u% system eggs $or a""*es >ot sure ho many o$ the other thngs

youLre gong to get -- ha)e to barter to %etermne that. >ot certanty that the other"erson ** acce"t the a""*es ths month. onger "rocess.

Checks K n the m%%*eP Re*at)e*y *u% "robab*y on*y because system e=sts.

Wthout *a8 the check ou*% be Iust a "ece o$ "a"er. he system o$ negotab*ty

--can a** but guarantee you that the "ece o$ "a"er ** be turne% nto money.Dreases the hee*s o$ commerce.

Assignment "1: *egotiable +nstruments

($ you %onLt meet the , reurements $or negotab*e nstrument8 %oesnLt mean that

t snLt *u%8 necessar*y. Qust means that t %oesnt ua*$y $or s"eca* ru*es n6CC8 but tLs st** an ob*gaton $or somebo%y to "ay somethng.

ut $ %ont meet , reurements8 6CC %oesnt a""*y8 so ** ha)e to resort to

contract *a to en$orce the ob*gaton.

3hat is a negotiable instrument4 Primaril$ in @-!

1 6ncon%tona* Wrtten "romse or or%er to "ay3 o bearer or or%er4 A $=e% amount5 7$ money' At a %e$nte tme, Wth no e=traneous un%ertakngs.

?=am"*es o$ >egotab*e (nstruments: Check8 #romssory >otes

". 40 -- goo% tab*e o$ authortes an% reurements:

1ritten: 7st ,e ( t(ngi,6e '"c7ment. ="st im"rt(nt c"ncet here.@

#romse or 7r%er to #ay

7r%er K Check #ay to the or%er o$...

Unc"n'iti"n(6:

When you "ut n con%tons8 t becomes a contract -- an% shou*% %ea* th n

contract *a.

ou make a negotab*e nstrument a$ter a** the con%tons ha)e been agree% to ?ust be> F+ promise to pa$G Perio0o ?=. Cant say nstrument s subIect to or go)erne% by the terms o$ another

agreement. Can make re$erence to another %ocument8 but canLt make noteor or%er con%tona* or go)erne% by the other %ocument.

o *ote: This requirement makes most promissory notes non-negotiable

instruments. ecause they ha)e a *ot o$ con%tons.

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?inor e2ception: #romssory note can an% )ery o$ten %oes re$erto another *oan agreement or securty agreement. he ob*gatonto "ay on ths note s secure% by...P makng re$erence to e=tra rghtsthat the ho*%er o$ nstrument has s $ne. ($ t states e=tra rghtsokay8 but canLt be here ho*%er %oesnLt kno hat hs rghts are.

?=. +or nstance8 $ you say the ho*%er may acce*erate "aymentsthatLs ok. n% -- note can say that the "rocee%s that ** be "a% onthe note ** on*y come $rom a s"ec$c source seems to con%tonthe "ayment8 but $or some reason "eo"*e ha)e %eeme% that s not acon%ton. ou can con%ton to a "artcu*ar $un% -- but that Ls theon*y con%ton.

O# m"ney: 7st ,e ( r"mise t" (y m"ney3 n"t t" 'e6iver cig(rs3 etc.

T" Be(rer "r t" "r'er: 7st 7se these hr(ses

#ayab*e Hto bearer; n "ays;o 1 #ut the or% 9bearer9 on the "ayment *ne. Anyone ho ho*%s ths

check s entt*e% to en$orce --e)en a the$.o ea)e "ayment *ne b*ank or rght to Cash hen "ayab*e to bearer.

#ayab*e Hto or%er; ost Commor

o 1stE ost Common: ( "romse to "ay to the or0er o'or ( or%er the

bank to 9"ay to the or%er o$9 an% then name "ayee.o n%-- ( "romse to "ay to or ( or%er someone to "ay to a "artcu*ar "erson

or or%er. + pa$ to Mason 9ilborn or Or0er>ot an nstrument $ t says"ay to Qason F*born. @a)e to use to the 7r%er o$ Qason F*born or toQason F*born or 7r%er. est ths on the bar


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($ no %ate -- then check s "ayab*e u"on %eman%.

N" EDtr(ne"7s 7n'ert(kings:

CanLt "romse to g)e money an% "er$orm a ser)ce akes t a *tt*e too uncertanan% makes t *ook more *ke contract.

1st -- a note can contan an e=tra "romse to mantan or get co**atera*. ( "romse

to take care o$ or g)e you a securty nterest n "ro"erty. !o tes to note that s** be acce"te%.

n% -- can "romse to a**o you to %s"ose o$ co**atera* no. &&&

3r% -- >ote can ha)e a "romse a)ng "rotectons $or "erson ob*gaton

nstrument &&&

*ote: An nstrument can state cons"cuous*y that s not-negotab*e. ut a check s

negotab*e hether you ant t to be or not. hs cons"cuous ru*e %oesnLt a""*y tochecks.

Assignment "": Trans'er & .n'orcement o' *egotiable +nstruments

Primar$ Concept:ol0er 8Ks possession I entitlement to en'orce

(%ent$y the ho*%er8 because the hol0er has all the rights

@o*%s the nstrument "hysca**y

he "ersona**y *ega**y entt*e% to en$orce the nstrument.

Only a holder can enforce an instrument. ($ negotaton %oesnLt take "*ace "ro"er*y8 the orgna* ho*%er may reman the

ho*%er or $ he no *onger has "ossesson8 there may not be a ho*%er at a**.

" instruments: Bearer Paper an0 Or0er Paper

Bearer Paper-- #ayab*e 9to bearer9 or to no one or Hto cash.;

o Anyone n "ossesson K a ho*%er E s entt*e% to en$orce8 e)en a the$.

ut8 e)en though the$ s entt*e% to en$orce nstrument8 %oesntmean he ont be *ab*e n con)erson.

Or0er Paper L H#ay to the 7r%er o$ U; or H#ay to Qason F*born or 7r%er.;

o 7n*y the "erson i0enti'ie0 in the or0er to pa$s entt*e% to en$orce E

on*y the %ent$e% "erson may be the ho*%er.o ust use the magc or%s 7pecial> Restricti Anamoulous

Blank en0orsement

o @o*%er or "erson entt*e% to en$orce sgns the back.

o !gnng automatca**y turns t $rom or%er "a"er to bearer "a"er.o Bearer paper is essentiall$ like cash Thie' can take

7pecial en0orsement L

o !"ec$ca**y %ent$y someone e*se ho shou*% be the on*y one to en%orse

o 9#ay to Qack *son sgne% ara ontgomery.9

o ont nee% magc or%s $or en%orsement to be or%er "a"er.

o he "erson name% n the Hs"eca* en%orsement; s not the on*y one

entt*e% to en$orce the nstrument.o *ote: ou can "ut a s"eca* en%orsement on bearer "a"er. Can $*e=b*y

change status $rom bearer to or%er an% back an% $orth.

Restrictio genera**y recognGe% $ tLs Iust your sgnature then on*y the bank s

the "ro"er ho*%er.

Anomalous en0orsement rarel$ aske0 on Bar L

o ctonary meanng: e=treme*y rare an% sur"rsng

o ?n%orsement by someone ho %oesnLt a""ear to be the maker o$ the

nstrument or the "erson to hom tLs "ayab*e.

Why ou*% they n%orse then&

#resume% to be guarantor o$ "ossesson8 etc. .e. that that

"erson s guaranteeng that e)eryone ho sgns a$ter sguaranteeng "eo"*e ho sgn ** get money. ?ssenta**yths "erson s takng on ab*ty. a. has stuck th suretysh" artc*es n c)* co%e.

*ote: 3hen $ou 0eposit a check at the bank> $ou 0on#t ha but the$

will o'ten make $ou to 'orce en0orser liabilit$ on $ou

Bene'its/ A0


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one that you ** sue -- $ %onLt "ay on tme then assume they arenLt gongto "ay.

5iabilit$ 'or a Check not Dishonore0 in Time: #erson ho*%ng check s essenta**y %raee.

raer s *ab*e as soon as the check s %shonore%.

ut8 $ ts not %shonore% n tme8 ths ts "resume% that the "ayor bank ** "ay.

(n a%%ton to the %raer8 anyone e*se ho "ut an en%orsement on the check a$ter

the %ra s *ab*e $ the check s %shonore%.o ou cou*% go back to anyone ho sgne% to try to get money back8 an%

can go a** the ay back n the *ne to the %raer8 because the %raer s"rmar*y *ab*e.

o .n0orser 5iabilit$:

An en%orser s *ab*e on*y $ check s %shonore% an% the en%orsergets notce o$ t beng %shonore%.

A*so can esca"e by en%orsng Hthout recourse.; Wrte be*osgnature. But> signing an en0orsement Fwithout recourseGonl$ shiel0s the en0orser 'rom en0orser liabilit$ because other

warranties generall$ can#t be wai


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shou*%nLt ha)e knon these thngs cons%erng $acts an% crcumstances o$hch you ere aare.

3hat are the a0


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7helter Principal: +' $ou 0on#t meet re)uirements o' hol0er in 0ue course> $ou can

look to someone else who was

A "erson can e=ercse the rghts o$ a ho*%er n %ue course e)en $ he %oesnt8 hmse*$8

meet the reurements if he takes the instrument from someone who was a holder in

due course. 7helter principal-- e ant to "ro)%e "ro"erty oners th the broa%est "ossb*e

market $or the "ro"erty they are tryng to se**. We ant them to be ab*e to "ass on a**those rghts to the "erson they are se**ng to -- e)en $ "erson n ther on rghtcou*%nLt be a ho*%er n %ue course.

Assignment !: Risk o' 5oss in the Checking 7$stem:

3hat are the rights o' the 0rawer against the pa$or bank4

Denera**y: #erson n best "oston to a)o% the *oss ** bear the *oss.

5oss a'ter Dishonor:

+' Pa$or Bank misses 0ea0line$or %shonor8 then bank must bear the *oss. ay

be ab*e to "ass on to customer $ ts a >!+ check8 but $ >!+8 then o$ten ** notbe ab*e to reco)er because customer %oesnt ha)e money an% not orth t to sue.

+' Pa$or Bank properl$ 0ishonors-- then sm"*y re)erses "ro)sona* cre%ts

that t has g)en.o he ank that ga)e "ro)sona* sett*ement mere*y re)erses.

o +' a bank has ma0e 'inal pa$ment then en0orser liabilit$ applies an0

anybo%y ho n%orses bears *ab*ty on that check.

?n%orsers on check are *ab*e to e)eryone ho takes the checka$ter them.

+or en%orser *ab*ty to a""*y the #ayor ank must ha)e "ro"er*y%shonore% an% sent "ro"er notce o$ %shonor. Denera**y8 must berece)e% thn 30 %ays o$ en%orsement beng "*ace% on check.+' the check 0oesn#t get presente0 'or pa$ment within - 0a$s>

en0orser liabilit$ ceases & also cease0 i' $ou 0on#t get notice

within - 0a$s o' 0ishonor> i' $ou are a non@bank

>on banks: reures 30 %ay notce. anks: must "ro)%e notce o$ %shonor by the m%nght

%ea%*ne o$ the %shonor. %nght o$ the $rst bankng

%ay a$ter %shonorV( thnk.

5oss Due to a 6orge0 Drawer#s 7ignature: 6orge0 7ignature 8 not

properl$ pa$able

(ts un*ke*y that the "ayor bank ** notce $orgery because t %oesnt *ook at

sgnature8 Iust "uts the check through a machne an% rea%s th (CR *ne. ut8 $ #ayor ank "ays $orge% check8 t ** genera**y bear the *oss un*ess

someone be$ore t as n 9ba% $ath9 or the nstrument as rece)e% thout

1,


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9g)ng )a*ue9 or $ someone be$ore t 9kne9 about the $orgery ba% $atha*rea%y.

o The Drawer#s basic claim is that a check with a 'orge0 signature is not

an FauthoriHe0 signatureG an0 thus is not pa$ableG

o hen "ayor ** Iust ha)e to a%mt ts not "ro"er*y "ayab*e an% "uts

money back n customers account.o ank can go back E reco)er money un*ess Can the bank go back to try E

reco)er the money t *ost& es8 un*ess the "erson that he*% the checkbe$ore took the check not $or )a*ue or n 9ba% $ath Rare*y ** ths occur.

ank ou*% assert to the ho*%er be$ore t that t breache% aarranty. The Pa$or Bank has Presentment 3arrantiesagainst e


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o 1 + am the person entitle0 to en'orcehe $rst "erson ho takes check

$rom $orger8 hether ts a $rau%u*ent en%orsement or $a*se sgnature8 thatLs"erson ho ** bear the *oss.

o All the signatures are


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5oss Due to Alteration:

($ a check s change% $rom ts orgna* terms a$ter ts ssue%8 the check ** be

treate% the same as a $orge% en%orsement. Trans'er an0 Presentment warrant$ 8 there ha


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the %raer. raer s "rec*u%e% $rom any subseuent $rau%s$rom same "erson s not "ro"er*y "ayab*e.

?=. +rau% commtte% by secretary $or 1 1B years -- he %%nLt

get statement because she *ooke% at them. !tatement re)eru*e a**os the bank to *ab*e on*y $or about statement

"ero%s8 rea**y a ma= o$ '0 %ays an% $o**ong that grace"ero%8 e)erythng "a% by same rong%oer the %raer ** be*ab*e $or

o "n0Rule @@ ($ you %onLt catch $rau% thn one year8 regar%*ess o$ ho care$u*

you ere you are *ab*e $or any $rau% a""earng on a statement a$ter a year. ($you rece)e a statement u"on hch $rau% a""ears an% you %onLt not$y n oneyear8 then tLs an abso*ute statute o$ *mtatons.

o r0 speci'ic Rule @@ responsible emplo$ee rule

($ a res"onsb*e em"*oyee $orges the en%orsement8 the em"*oyer **be "rec*u%e% $rom sayng en%orsements arenLt )a*%.

De'inition o' responsible3-405b or a -- ha)ng the

res"onsb*ty to %ea* th checks. An%8 t must be s"ec$ccheck "rocessng res"onsb*ty8 not Iust ha)ng access tochecks or a*ays comng to ork on tme.

.2?m"*oyee can $orge by stea*ng check ma*e% to em"*oyer

an% $orgng the en%orsement or stea*ng checks $rom em"*oyerma%e out to other "eo"*e an% $orgng other "eo"*eLs sgnatures.($ ether ha""ens8 em"*oyer "rec*u%e% $rom gettng %e$ense --"ut *oss on hm ho hre% ths "erson.

o !th Rule @ @!-! @@ +mposter Rule

($ somebo%y %u"es %raer nto ssung a check to them because theyare m"ersonatng someone e*se8 then %raer ** be "rec*u%e% $rom

c*amng that that "ersonL sgnature or anyone e*seLs s not a "ro"eren%orsement.

Drawer is in best position to a rules will come back to slap them

St"6e C(se:

anks genera**y %onLt sue customar*y because ant goo% customer re*atons8 but

cre%t unons **. hey are serous about gettng ther money. Court notes that !to*e s a 9so"hstcate% busness "erson.9 Consumer a*ays ns

%oesnLt a""*y to ths case. 6acts:

o he guy %oesnLt ba*ance checkbook $or 2 months. ra* court sa% he

cou*% get hs money back8 the F*born says $ thats not or%nary care thenhe %oesnt kno hat t.

!tatement about %e$nng reasonab*e "rom"tness s goo%.

1


22/49

Assignment %: Cre0it Car0 7$stem

=enerall$:

he Cre%t Car% !ystem s the est #ayment !ystem

o Ru*es are ncre%b*y "oer$u* $or consumers.

o Nrtua**y e)eryhere acce"ts )rtua**y e)ery cre%t car%.

Consumers8 (ssung ank an% erchant anks ha)e (ncent)es: (n or%er to

acce"t cre%t car%s8 merchants take on $nanca* res"onsb*ty8 as a resu*t they **on*y get about 2'T o$ hat you s"en%8 the rest ** go to merchant bank an% thebank that ssues cre%t car% ssung bank.

Nsa an% asterCar% are not banks8 but rather are a netork o$ banks. (ts a

netork that e=sts to get "eo"*e to use cre%t car%s. (ts essenta**y a marketnggrou". Charge $ees to a**o members to use ths ser)ce.

Can use cre%t car%s as a negotaton technue -- maybe say (L** "ay th cash8 $

you g)e me a %scount o$ T or 3T. >egotatng e)erage -- there are $nanca*

reasons $or "re$errng cash -- tLs chea"er $or merchant. Cre0it Car0 Regulations

o (A K t*e 1 o$ Consumer Cre%t #rotecton Act tLs n su""*ement

o ruth n en%ng Regu*atons K Reg

o ?*ectronc +un%s rans$ers K Reg ?

o Regu*aton o$ Checks KLs Reg CC

Courts un%erstan% that (A as rtten $or us8 an% $or our bene$t. .e. the

consumers.

Re)uirements 'or going back against the issuer 'or pa$ment:

o erchant must be thn 100 m*es or thn the same state o"en

ueston about here court ** %eem the merchant to be n nternet an%ma* or%er stuatons.o @as to be at *east 50 %o**ars.

o ust make a goo% $ath e$$ort to %ea* th the merchant.

Assignment (: .rror & 6rau0 in Cre0it Car0 Transaction

.rror in Cre0it Car0 Transactions

($ you see an error8 ha)e to not$y the car% ssuer n rtng.

o There is a 7tatement Re


23/49

6rau0 in Cre0it Car0 Transations:

T+5A> section : 9ilborn#s 6a


24/49

6un0amental 0i''erences b/w 0ebit & Cre0it

Cre0it car0:

o #ro)%es a short-term *oan $rom ssung bank at a hgh nterest rate8 an% $

you "ay t o$$ n $u**8 there s no nterest.o Cre%t car%s %ont nter$ere th your checkng account at a**.

o oure on*y *ab*e $or O50. Debit:

o oney s taken %rect*y $rom your checkng account. takes money %rect*y

an% mme%ate*y out o$ bank account that otherse ou*% be a)a*ab*e $or"ayng checks. Cre%t ou*%nLt nter$ere th checks

o Kilborn thinks debit cards are the worst payment system for consumers.

+rau% ru*es are more %$$cu*t $or consumers. !tatement re)e ru*es are more %eman%ng. here s no H$*oat "ero%; *ke you ha)e hen you rte a check.

o erchants *ke %ebt car%s because they get "a% mme%ate*y. A %ebt

system checks your ba*ance mme%ate*y8 ts *ke a check has been

"resente% aganst your account rght no.o Cant assert any (A %e$enses th %ebt car%s.

o ?rrors an% $rau% can be %ea*t th n %ebt -- but $ you ha)e authorGe%8

)rtua**y no ay to get money back.

Applicable Debit Car0 Regulations:

(A Reg K cre%t car%s

?+A -- go)erns %ebts an% a*so Reg ?.ebts an% other consumer e*ectronc trans$ers.

Abo)e s *ab*ty scheme un%er ?+A.

!tate *a can *mt *ab*ty any $urther -- though a %oes not. > may *mt *ab*ty$urther.

N(!A E asterCar%s are "rmary *mters.

Dealing with 6rau0 in the Debit 7$stem:

Do)erne% by the .6TA-- s*ght*y *ess generous than un%er cre%t. ut8 genera**ynot that bg %ea* e=ce"t $ you are the )ctm o$ embeGG*ement.

ebt car% s a m%%*e groun% bB checks E cre%t car%s.

6rau0 3in0ows 'or Debit Car0s: 3ill be on .2am

+' $ou lose 0ebit8 inclu0ing i' someone else got it

o @o*%er s *ab*e $or O50 same as ho*%er o$ cre%t car% $or anythng after

fraud and time the loss is reported.

4


25/49

o ($ you %sco)er8 then you ha)e " 0a$s to report loss.

o ($ you %ont re"ort the *oss8 then ho*%er s *ab*e $or u" to O500 nc*u%ng O50

$ there ere O50 charge ($ no O50 $rst8 then ** be $u** O500.o 7tatement Re


26/49

7topping Pa$ment on AC Transactions:

ecause o$ s"ee% n hch these transactons occur8 there snt a sgn$cant rght

to sto" "ayment. 7nce tLs been rece)e% by orgna* AC@ o"erator bank thatL "uts n moton.

7top onl$ in " circumstances in which a stop pa$ment or0er will be


27/49

g hur%*e s termno*ogy8 $ you can $gure out ho "artes are an% ho 4A

%escrbes8 ru*es are straght$orar% E sm"*e.

Assignment 11: .rrors in the 3ire Trans'er 7$stem

=enerall$:

ost common*y8 $ someone makes mstake o$ g)ng too much money8 then ha)e

to g)e t back. ($ %%nLt sen% t on tme8 shou*% get nterest on money hen %%nLt sen%8 but

shou*% ha)e. 4A -- he who is responsible 'or error will bear the repercussions .

o ost o$ten ** $a** on the orgnator because the orgnator s most *ke*y

to make a mstakeo stakes are )ery rare*y ma%e by the bank8 because they Iust sen% a

com"uter sgna*. he Hbur%ens; are st** *ess sgn$cant than those n the checkng system.

ene$cary genera**y %escrbe% by name an% account number.

" rules i' the Originator gi


28/49

"n0@@($ bank ne)er e=ecutes that or%er that %%nLt sen% on tme

o ank has to re$un% you your e="enses or costs. Fn% o$ *ke Re%hbton

-- Iust has to re$un% the money t charge% $or re trans$er. r0-- ank s *ab*e $or conseuenta* %amages on*y $ t makes tse*$ *ab*e $or

such %amages n a rtten agreement.

o anks ha)e "rotecte% themse*)es aganst the maIor source o$ *ab*ty nthe system -- "re)ents tse*$ $rom beng *ab*e $rom conseuenta* %amageso$ a 1 m**on %o**ar %ea* that %%nLt ha""en because o$ error.

!thL ank cou*% sen% too much money sen%s the same or%er n ra"%

successon.o 7b)ous*y8 the bank that cause% "rob*em can on*y reco)er the amount that

as authorGe% to be sent. ($ sent or%ers8 can on*y reco)er the one.o ?=. @a)e #ayment or%er M18 an% 7rgnators bank res"on%s by sen%ng

"ayments. he orgnator ** on*y be ab*e to get one back. he bene$cary bank ** be ab*e to kee" both "ayments

7rgnator bank can get ts money back n ays.

o A@"11 here s a *mte% rght to %ra back an or%er.

($ both ha)e been rece)e% by bene$caryLs bank -- but$ bene$cary has acce"te% both "ayment or%ers *mte%"ossb*ty than can cance* secon% or%er8 but thebene$cary bank has to agree E one o$ ru*es. 4A-11 c1 E has got to a""*y.

Why ou*% ene$cary agree& aybe %oesntkno "ayment has arr)e% yet or may say thatbene$cary rea**y %oesnLt ha)e a rght to e=tra

"ayment. An% ou*% ha)e goo% case $or unIustenrchment $ ene$cary cause% a stnk.

Agreement is crucial & also has to be

0uplicate> sen0 too much mone$> etc

($ the orgnator %ent$es the rong "erson8 orgnator ants

to "ay 18 but by number %ent$es another. Can orgnator getmoney back&

o 4A %oesnLt say much about t -- basca**y says you can

reco)er but un%er state *a *ke unIust enrchment.

7tatement Re


29/49

o *ote: ($ sen% "ayments an% take both out o$ orgnators account8 **

a*ays be ab*e to get back 1 "ayment no matter hat8 but $ %onLt re)ean% re"ort then youL** Iust *ose ab*ty to get nterest on money that thebank %ebte% $rom your account erroneous*y. O will alwa$s be able to getmone$ back @@ unless originator 0oesnKt gi8 an% bene$cary s n C>.o he *a shou*% be %entca*8 so shou*%nLt matter hch states )erson o$

art. 42a a""*es. @oe)er8 some states8 *ke *a.8 make changes to un$orm*as. ($ s*ght %$$erence means someone e*se bears *ab*ty8 smeanng$u*.

o Art !,a -(:

B/w an$ sen0er & Recei


30/49

?=. (n a %s"ute beteen a. res%ent E C> res%ent8 >

*a a""*es. Another ?=am"*e o$ anks tryng to mantancontro*.

*ote: There are " sen0ers 'or e


31/49


32/49

the %ocs ( ha)e here see to $u*$** reurements o$ *etter o$ cre%t. ($ there sanythng rong8 the bank ** %shonor the *etter o$ cre%t because%ocuments %onLt strct*y con$orm. 7trict compliance with letter o' cre0itis important But> minor consistencies are common> generall$ some

small 7uisse bank will call applicant an0 ask i'

the$ are willing to wai without that waiALs shoes as the ssuer o$ cre%t8

an% ** take on "ersona* res"onsb*ty to "ay the *etter o$ cre%t. ( agree to take ona""*cant. 3 sets o$ ob*gatons the !usse ank can take on -- !e**er ou*% "re$er t be acon$rmer so then ** ha)e a better chance o$ gettng reco)ery or gettng "a%.

*otes:

F*born sus"ects that most transacton n)o*)e a nomnate% "erson rather than a

con$rmer.

ut8 $ !usse bank takes on as much res"onsb*ty as con$rmer then ** *ke*y

ant to get "a% an% ** ncrease cost o$ transacton.

5etters o' Cre0it ma$ be sent b$ Courier or .lectronicall$:

" sets o' rules that go


33/49

+nternational 5etters o' Cre0itmost common

o ni'orm Customs an0 Practices CP: A set o' mo0el rules that

go7 AW. 6C# ** on*y go)ern a *etter o$ cre%t8 on*y $ *etter o$ cre%t

ncor"orates 6C#8 but ntL* *etters o$ cre%t usua**y ** ncor"orate the6C#. Art. 5 ). 6C#: $$erence are mnor -- $ocus on the 3 or 4 bg ru*es: (n%e"en%ence

#rnc"a*P "ur"ose o$ transacton an% ho %oes t ork )ery mnstera*.

Assignment 1!: 6rau0/.rror in 5.TT.R7 O6 CR.D+T

=enerall$:

($ the bank s aare o$ $rau% n the un%er*yng transacton8 then the banks a**oe% to re*y on t $or *ack o$ "ayment. he stan%ar% s N?R hgh

$or ths a**oance.

?rrors an% +rau%:

Wrong$u* @onor:ocuments %onLt rea**y match8 "resente% a$ter "ayment%ate8 etc... but bank "ays anyay.

Wrong$u* shonor:here are on*y a cou"*e o$ reasons $or %shonor

%ocuments %onLt com"*y8 or $ "resente% a$ter the "ayment %ate. ($ they%shonor t $or any other reason8 then they are scree%.

+RA6:A""*cant bears the *ab*ty $or a $orge% sgnature on a 7C thats e=treme*y rare. What about $ a bene$cary ho has not "er$orme%$orges the %ocuments an% says 9"ay u".9 What $ the a""*cant %sco)ers ntme& hat s un*ke*y. ($ someone s rea**y tryng to "u** a $ast one8they ** be sure that the %ocuments "resente% com"*y th the *etter o$cre%t. A*so8 they ** try to get "ayment as uck*y as "ossb*e so thatthe a""*cant ** not %sco)er n tme. @oe)er8 $ the a""*cant %oes

$n% out n tme8 then the n%e"en%ence "rnc"a* s su"er-ce%e%. he bankcan re$use to "ay base% on that matera* $rau%.

anks canLt Iust say8 hey e sus"ect $rau%.

Ru*e 5-102: ank can honor a %ra$t un*ess t F>7W! that the bene$cary has norght to "ayment. com"*ete $rau%

33


34/49

ank may %shonor base% on the $rau% 7> (+ there s a %ocument thathas been matera**y $orge% or $ "ayment ou*% $ac*tate matera* $rau%.

ank better be "retty %amn sure though8 because $ a bank %shonors then t** be *ab*e...

-on*y *ab*e on the note8 nc%enta* e="enses8 *ayer $ees8 costs ->7 C7>!?Y6?>(A AAD?!

hat s actua**y a "retty com$ortab*e "oston $or the bank8 ho ants tosu""ort ts customer8 the a""*cant& as *ong as t has a strong sus"cono$ a matera* $rau% or a $orge% %ocument.

A!!(D>(>D R(D@ 7 #A?> 6>?R A ??R 7+ CR?(:

!ome assgnments are ok... -assgnng the 7C as a securty on a *oan $or o"eratng ca"ta*

*ke a 6CC securty %e)ce8 or Iust assgnng the rght to co**ect"ayment to the *en%er bank.

Assgnng the rght to co**ect "ayment s 7F. Assgnng the rght to"er$orm on a *etter o$ cre%t8 un*ess the 7C s"ec$ca**y authorGes that8s >7 ok.

Re)e:etters o$ Cre%t -- ?rror an% +rau%($ bank rong$u**y honors8 canLt get remburse% $rom a""*cant8 but thatLs not the en% o$the roa%. Denera**y Iust means you ha)e to *ook to a *ess con)enent an% *ess easy"rocess.($ bene$cary hasnLt "er$orme%8 then maybe can sue $or unIust enrchment.ene$cary has the rght to sue the ssung bank $or actua* en$orcement o$ *etter o$ cre%t-- no conseuenta* %amages8 un*ess bank has agree%8 but bank ** ne)er %o that.

+rau%: Denera**y the a""*cant ** bear *ab*ty $or $rau%.

?)en $ $orges name o$ bene$cary on %ra$t thatLs honore% or $rau% on un%er*yng

transacton $ *etter s "a% -- assumng the n%e"en%ence %octrne are en$orce% --a""*cant ** *ke*y bear that *ab*ty8 e)en $ t turns out the *etter as "a% as aresu*t $or $rau%.

ut8 may be %$$cu*t to co**ect secon% "ayment $rom a""*cant8 but a""*cant **

be *ab*e. (ssung hgh*y encourage% to "ay on *etter o$ cre%t e)en $ sus"ects $rau%: " rules

o 1 ssung bank may "ay *etter o$ cre%t un*ess t knos that the un%er*yng

transacton nc*u%es matera* $rau%o he ssung bank may %shonor a *etter o$ cre%t on*y $ t be*e)es that

there has been matera* $rau% n the un%er*yng transacton8 an% "ayng on*etter o$ cre%t ou*% $ac*tate $rau% or $orgery.

34


35/49

7tan0ar0 o' suspicion is ee% to be care$u*about a%)sng bank to %shonor.

ut8 re*at)e*y *o rsk $or bank to %shonor.

o amages are *mte%.

o ut8 *oers con$%ence n the system hch s )ery m"ortant.

o 6n*ess there s matera* $rau%8 F says the bank shou*% Iust "ay.

Assignment 1: Promissor$ *otes> etc

=enerall$:

Rules concerning Promissor$ *otes will be on .2am> but not much more

Rea**y no reure% $rom $or "romssory notes.

o #robab*y %onLt e)en ha)e to ha)e a rtng e=ce"t $or hat statute o$

$rau%s reureso

6sua**y ha)e %ocument8 an% can come n a *%*y %$$erent seres o$$orms. he $orms that you %ea* th n each transacton ** be %$$erent.

o 9e$ is to un0erstan0 wh$ one is using a particular 'orm an0 whether

each term is appropriate 'or the particular 0eal L ie s the *anguagea""ro"rate $or hat e are tryng to accom"*sh here&

ann E F suggest you *ook at a** the or%s n these %ocuments Emust un%erstan% the terms.

7igning a promissor$ note generall$


36/49

o Prime Rate o' an$ bank: he nterest t ** charge on any *oan to tLs

bggest an% best n%ustra* customer. .ssentiall$ the lowest interest itwill o''er on an$ gi. 2?ssenta**y the *oest rates youL** see $rom bggest an% best banks tothe bggest an% best n%ustra* c*ents. he o$$cers on those banks ** %et.genera**y on a %a*y bass hat ther "rme rate ** be.

6e0eral 6un0s Rate-- amt +e% reser)e bank charges other banks to *oan $un%s

o)ernght. When Dreens"an %ec%es to cut $e% $un%s rate8 cuts "rme rates an%cuts nterest rates t charges to a** customers. he cuts get "asse% through thesystem.

6i2e0 interest: common.

o ust be a $=e% amount to be negotab*e8 but that %oesnt mean you canL

ha)e a )arab*e or $*oatng nterest rate.

6loating +nterest Rates @@ usua**y base% on a bench market -- 9the "rme rate9 ora "artcu*ar banks 9"rme rate9 or "erha"s an nternatona* benchmark.

o +*oatng rate s genera**y ca*cu*ate% as "rme rate or bor S somethng

e*se hch ** genera**y be the bankLs "ro$t.o Denera**y (7R S a certan "ercentage. ay change %a*y because

(7R changes %a*y.o (n "ractce may here them say (7R S 15 bass "onts. ass "ont KLs

1B100th o$ a "ercent. or .01T 15 bass "onts KLs 1.5T.

5+BOR @@ 5on0on +nterbank O''er Rate-- Iust another bench mark

o +.e. he rate a bunch o$ banks charge each other to *en% money to each

other o)ernght Iust a %$$erent marketo (nterest rate use% to ca*cu*ate nterest a bank ants to charge to a

"artcu*ar customer on a "artcu*ar *oan. Can get ths n$o on Wa** streetDenera* 7n*ne or (n Wa** street Denera*.

o .B+TDA .arnings> Be'ore> ?ssenta**y gross earnngs be$ore

e="enses that busnesses subtract out o$ be$ore re"ort ncome. ?(AIust a so"hstcate% means o$ ca*cu*ate ho a bG s %ong re)enue se.($ you %ont mantan a certan ncome stream8 you may be $oun% to be n%e$au*t

AmortiHation-- a )ery *arge number becomes sma**er o)er tme. (n ths conte=t8

$ bG makes a bg n)estment n somethng that %oesnLt %e"recate .e. goo% **8

the n)estment that the bG ma%e canLt be subtracte% $rame earnngs rght aay8must be subtracte% o)er tme.o 7$ten use% to %escrbe ho stu%ent *oans ** be "a% o$$.

o (n begnnng "ayment a*most a** nterest8 an% "rnc"a* Iust gets a bt

sma**er8 an% then ** "ay more on "rnc"a* an% *ess nterest.

?erger Clause-- sayng ths s the ho*e agreement8 onLt a**o to brng n

other %ocs. "aro*e e)%ence s there to "rotect aganst brngng n ora* e)%ence o$other agreement8 an% merger "rotects aganst other rtten %ocuments.

3'


37/49

?oo0$Ks rates: tr"*e AAA8 then AA8 A8 8

o 6se ratngs to %etermne hether or not they are at cre%t rsk.

o ut8 at some "ont on sca*e you reach a here coLs snLt ute ste**ar

anymore.

Munk Bon0s: means a bon% ssue% by a com"any that has a *oer cre%t ratng.

o Cre%t scores %o "oer$u* thngs $or busnesses. usnesses use thercre%t ratng to make money. When you hear oo%yL has %on*oa%e% toIunk status )ery o$ten s a "recursor o$ bankru"tcy.

?agic wor0s 'or Promissor$ *otes: p -,@1

#ay to or%er

+=e% amount o$ money8 $=e% tme.

6ncon%tona*

>o e=traneous un%ertakng.

Re)e reurements $or negotab*e nstruments an% make sure they are there.

9 sa$s that e


38/49

Depreciation

AmortiHation-- a )ery *arge number becomes sma**er o)er tme. (n ths conte=t8

$ bG makes a bg n)estment n somethng that %oesnLt %e"recate .e. goo% **8

the n)estment that the bG ma%e canLt be subtracte% $rame earnngs rght aay8must be subtracte% o)er tme.

o 7$ten use% to %escrbe ho stu%ent *oans ** be "a% o$$.

o (n begnnng "ayment a*most a** nterest8 an% "rnc"a* Iust gets a bt

sma**er8 an% then ** "ay more on "rnc"a* an% *ess nterest.

3h$ is that proe ork.

anks ** genera**y $n% a sa" "artner to he*" bear the rsk o$ the *oan.

!a" "artners are genera**y hgh rsk n)estors.

o hey ** rece)e $=e% nterest n e=change $or *o )arab*e that they **

"ay out.o ($ rates go u"8 sa" ** ha)e to "ay hgher rate.

o ($ nterest rates go %on8 then sa" "artner ** make a k**ng.

o anks are 9rsk a)erse9 enttes8 so *ke to "ush t a** o$$ on sa" "artners8

ho take a** rsk u"on themse*)es $or a $ee. ann says !a" #artners genera**y ha)e AAA cre%t ratngs.

3/


39/49

Assignment 1%: ?one$ Borrowing 7$stems #romssory >otes "re%omnant*y.

6sury %oesnLt a""*y )ery o$ten8 $ t %oes8 state statues that arenLt 6CC re*ate% are

horrb*y %$$cu*t.

sur$: 9now 'or .2am

A (tern(6istic n"ti"n th(t we '"n;t w(nt e"6e t(king ('v(t(nge "# e(ch

"ther.

@storca**y8 usury as an $ee charge% $or usng money. Re*gous >oton o$

rother*y o)e.

ust be aare o$ 6sury hen the nterest rate $*oats too hgh.

ut8 sur$ o'ten 0oesn#t appl$ But> when it applies the rules are applie0

strictl$;

o 6sury *as %onLt genera**y a""*y to cre%t car% an% other sorts o$ *oans

ssue% by >atL* anks ssue% by states th )ery hgh usury *mts.

e$ore the !u"reme Court8 sort o$. aruette -- e)ery >at* bankmust be ab*e to e="ort usury restrctons or *ack thereo$.

o Biggest limitation:6sury *as most o$ten by ther on terms a""*y to bG

an% commerca* *oans. ($ tLs a commerca* *oan8 the usury statute tse*$** say t %oesnLt a""*y n ths crcumstance.

o #ay ay oans: most *ke*y to trgger usury because the nterest rates are

o$ten ute hgh $ you annua*Ge them8 but o$ten o"erate un%er ther onstatute.

!ee U statute n book - non 6CC statute so ha)e to "ay c*ose attenton to the or%ng. n% hen state *egs*atures go o$$ on ther on an% make statutes8 they en% u"

th r%cu*ous*y com"*cate% statutes. ?)en n states *ke U here there s a usury ce*ng8 an% "rob*em assocates th

usury can be e*mnate% or a)o%e% th care$u* %ra$tng. 1 7b)ous*y )arab*e rate notes mght $*oat abo)e the ma=mum rate. ($ ha)e

$=e% not as much "rob*em8 Iust $= t be*o ce*ng an% youLre ok. Can getaroun% by sayng the ma= rate s the usury rate. !o rate s )arab*e rate or ma= ratea**oe% by *a8 hche)er s *ess. >ote: 6sury most o$ten %oesnLt a""*y tocommerca* *oans.

($ you "ay a *ot o$ u"$ront nertest or $ees that mght be characterGe% as

nterest8 then may ha)e "a% too much an% "ay o$$ ear*y an% $ you reca*cu*atemay en% u" th a *arge number that e=cee%s the usury rate. Doo% %ra$tng takesnto cons%eraton ths "rob*em8 ether takes nto cons%eraton u"$ront $ees nca*cu*atng nterest -- say e)en $ u"$ront $ees are cons%ere% nterest then theyst** shou*%nLt go o)er ma= rate.

3 he amount outstan%ng8 may be outstan%ng $or a short tme8 a$ter borroer

"ays an u"$ront nterest "ayment. ($ that *oan gets "a% o$$ )ery ear*y.... !ame %eaas secon% "rob*em8 but )ery o$ten notes ** say8 $ more nterest as "a% than*a$u**y a**oe% $or any reason that ** be %eeme% a mstake or ca*cu*aton

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error8 an% ** g)e back nterest that e=cee%s ma=mum rate $or hate)er reason.o%ay8 no one rea**y ants to get more nterest than they are entt*e%8 they rea*Gethat they can *en% "ro$tab*y by kee"ng nterest rates be*o the nterest ce*ng.

oan sharks %onLt care about usury. >ee% to be aare that these *as %onLt contro*

the market8 but rather the *egtmate market.

%%*e o$ roa% "eo"*e ho arenLt *egtmate or *oan sharks .e. "ay %ay *en%ersha)e a s"eca* statute as e**. ($ nterest rate ce*ngs kee"s them out o$ *egtmatemarket8 but "eo"*e st** ha)e a *egtmate barganng nee%8 an% *en%ers st** nee% to*en%. #ay%ay *en%ers en% u" chargng hat seems to be a re*at)e*y %ecent"ayment8 but tLs $or eeks8 an% $ you annua*Ge t then you get scree% thhuge amounts o$ nterest.

%%*e manB "ay %ay "eo"*e ante% s"eca* statutes bec. they ha)e s"eca* nee%s

as to ther borroers. We nee% to be ab*e to recou" a sgn$cant amount o$ the*oan8 thout ha)ng to orry about usury -- tLs an e=traor%nary ser)ce "ro)%e%to nee%y "eo"*e.

($ %onLt a**o m%%*e man to %o ths -- the borroer may ha)e to go to *oan sharks

an% get *egs broken8 etc.8 rather than a somehat *egtmate *en%ng bG.

.2ceptions to sur$: Eer$ sel0om applies 'or reasons:

1 7tatutes as well.o asca**y e*mnate% a** usury restrctons.

o !. Ct. sa% they must be ab*e to e="ort usury restrctons $rom home state

to anyhere here they %o bG. Reason hy e)ery cre%t car% ssung banks organGe% n a "*ace here they ha)e )ery hgh or abso*ute*y no usuryrestrctons.

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o F not sure hy tLs be$ore !u"reme Court agan8 because thought

aruette as c*ear.

=enerall$: sury on*y en%s u" a""*yng to n state *en%ers an% on*y n narro

crcumstances an% a narro $e*% o$ transactons.

6N+:Can %stngush $e% chartere% bank an% state chartere% bank by the nta*s >.A. behn%name -- Iust means $e%era**y charter nsttuton.

>.A means natona* assocaton an% ** on*y see that behn% a bank.

here ** be no >.A behn% a state chartere% bank.

To A Prepa$ment & late pa$ment

5ate Pa$ment:

($ borroer "ays back *ate8 ob)ous*y a "rob*em $or the *en%er.

Reactions to 5ate Pa$ment

o 1 Acceleration:

ssng a "ayment E "ayng t a eek or *ate8 mght resu*t n*ate $ees8 an% may g)e the *en%er the o"ton to accelerate theentire amount 0ue. (nstea% o$ a**ong you to make "ayments

month*y8 can make e)erythng %ue no. Purposes to a**o the *en%er to begn to $nsh tLs nteracton

th borroer mme%ate*y. ($ not $or acce*eraton8 the on*y ba%thng about *ate "ayment $or borroer ou*% be *ate $ee or nterest"ena*ty8 an% you cou*% Iust contnue to "ay *ate as some sort o$$nancng technue. ut8 "ossb*ty o$ acce*eraton makes ths a*ot *ess *ke*y.

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The right to accelerate generall$ must be in the contract or

loan

en%er has o"ton to acce*erate8 $ %onLt "ay can sue mme%ate*y8an% then e=ecute Iu%gment. ut8 may not m"ro)e *en%ers "ostonat a**8 may n $act %etract $rom "oston. ($ say you oe the ho*e

thng no8 borroer may not be ab*e to "ay8 an% $ Iu%gment ornot8 %oesnLt matter....st** canLt "ay. !o8 n that case8 acce*eratononLt %o *en%er much goo%.

Onl$ limitationon acce*eraton -- goo% $ath reurement n thee=ercse o$ any rght8 nc*u%ng rght to acce*erate.

o " 5ate 6eeso$ten ca*cu*ate% as a T o$ tota* amount outstan%ng.

5en0er has " reasons to be unhapp$ with late pa$ment

Puniti


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here may be a state statute that restrcts *ate $ees -- not *ke*y8 an% not the case

n a.

*ote: ankng E *en%ng are hgh*y regu*ate%.

Prepa$ment:

en%ers are genera**y ha""y to get "re"ayment $rom consumers8 because

consumers "artcu*ar*y $or unco**aterGe% *oans are re*at)e*y hgh rsk8 but $rombGLs *ke*y *en%ers %onLt ant to get "re"ayments8 because )e *oans to *argecommerca* enttes as n)estments.

6or Commercial 5oans: en%er may m"ose a "re"ayment "ena*ty.

o #re"ayment "ena*tes m"ose the same "rob*ems as *ate "ena*tes -- though

Courts strugg*e more to categorGe "re"ayment "ena*tes.o Courts are much *ess *ke*y to cha**enge "re"ayment "ena*ty than they

ou*% $or *ate "ena*ty8 "rob. bec they so rare*y a""*y to consumer *as.o Denera**y courts ** on*y ste" n $ tLs a consumer transacton8 bec. thnk

commerca* transacton8 then commerca* borroer ** ha)e enoughbarganng "oer.

o ou ** not $n% consumer "ayment "ena*ty n consumer *oans.

5en0ers o'ten label prepa$ment penalties as FNiel0 ?aintenance

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Personal =uarantees

(nstea% o$ the *en%er gettng s"ec$c "ro"erty rght n s"ec$c "ro"erty8 the bank

may choose to *oan to guarantor ho has a goo% asset base.

An%8 $ the borroer ** guarantee that the "erson ** "ay the *oan8 then the

bank ** o$ten make the *oan.

#ersona* guarantee s another securty %e)ce !urety sh" n a.

.2 W** be use% s hen a sma** bG ants to borro money bG s se"arate

entty an% entty tse*$ %oesnLt on a *ot o$ assets8 maybe oners ha)e ke"t assetsthemse*)es8 or %oesnLt ha)e a ho*e *ot o$ assets because hasnLt %one muchborrong8 etc. -- so banks may be *eery o$ makng a *oan. !o8 ** ant to makeshareho*%ers "ersona**y guarantee the *oan because un%er cor". *a8 on*y the bGentty tse*$ ou*% be *ab*e. hat not on*y a**os the *en%er to ha)e a better assetbase% source o$ reco)ery $ bG canLt reco)er an% acts as a maIor ncent)e to makesure that bG gets run n a ay that ** "ro%uce enough re)enue to "ay back *oan.D)es shareho*%ers some ncent)e

7ee =uarantee in the Book;

=uarantees o' Pa$ment

The maorit$ o' =uarantees will be guarantees o' pa$ment

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=uarantor#s Rights Against the Principal obligor:

1 ($ borroer re$uses to "ay8 has a rght to sue an% $orce the "rnc"a* ob*gor to

"ay.o ut8 not )ery *ke*y. Denera**y8 $ borroer snLt "ayng tLs because they

arenLt ab*e to "ay. he borroer ** o$ten be a bG8 an% the guarantor s

o$ten n charge o$ that bG. ($ guarantor %oesnLt "ay8 can $orce you to "ay --but Iust because t theoretca**y e=sts most o$ten onLt be use%.

he guarantor8 $ $orce% to "ay the cre%tor8 can sue the "rnc"a* ob*gor $or

rembursement. ($ at some *ater "ont8 the "rnc"a* ob*gor en%s u" gettng somemoney8 the guarantor can then go8 (L)e a*rea%y "a% o$$ the cre%tor8 but ( am"ursung you to get remburse% $or hat ( "a% on your beha*$. Art. 304, E 3042n a.

3 As soon as ( "ay somethng on your beha*$8 then subrogationcomes u". Arses

hen one "erson "ays o$$ another "ersonLs %ebt.o ($ guarantee "ays ob*gors "ayments8 then guarantor ** be subrogate% to

cre%tors rghts. ?ssenta**y bought the cre%torLs rghts aganst "rnc"a*

ob*gor. Why %o you care $ you ha)e rght to rembursement& ec.cre%tor may ha)e *agna""e rghts that the guarantor can use aganst thecre%tor. ay ha)e some kn% o$ "r)*ege8 securty %e)ce8 etc. (t **a*so guarantor to take a%)antage o$ e=tra rghts that cre%tor mght ha)e.

o *ote: CanKt be subrogate0 a'ter partial pa$mentCan on*y ste" nto

cre%torLs shoes $ "ay the $u** ob*gaton. 7n*y one "erson can earcre%tor shoes at one tme. Arts 304,8304/

Rights against the cre0itor:

A$ter *oan has been ma%e8 an% guarantor contract s n "*ace8 ob*gor an% cre%tor

can %o thngs to change the "oston o$ the guarantor .e. guarantorLs rghts

"artcu*ar*y n commerca* surety sh". " big categories:

o 1 +mpairment o' collateral

Co**atera* s mo)ab*e or mmo)ab*e "ro"erty n hch cre%tor hasa "ro"erty nterest.

he co**atera* s the "ro"erty n hch the cre%tor has ths nterest8$ ob*gor %oesnLt re"ay8 then can e=ercse ths "ro"erty rghtaganst co**atera*.

(m"arment occurs $ cre%tor $a*s to %o somethng or %oessomethng that m"ars ther rght to get securty $rom co**atera*.+a*s to "er$ect nterest8 $a*s to "ro"er*y %escrbe8 $a*s to mantan

co**atera* $ tLs n "ossesson8 $a*s to get mortgage $*e "ro"er*y. Anythng cre%tor s %oes to mess u" "ayment or rembursement by

co**atera* s m"arment o$ co**atera*. Duarantors ha)e a %e$ense to e=tent m"arment o$ co**atera* has

m"are% cre%tors rght to see rembursement $rom co**atera*. ($ cre%tor has not scree% u" an% has "ro"er*y "rotecte% tLs

nterest8 then cre%tor can get %rect*y a$ter guarantor8 e)en thought has the guarantee o$ co**atera*. oesnLt ha)e to go to co**atera*

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$rst. ($ cre%tor has m"are% the co**atera*8 the guarantor has a%e$ense to "ayment8 %oesnt e)en ha)e to "ay the cre%tor.

o " ?o0i'ication o' the Obligation

Any mo%$caton that matera**y an% Bout consent o$ the suretychanges the un%er*yng ob*gaton may "ro)%e the guarantor a

%e$ense to "ayment $ mo%$y the un%er*yng ob*gatonB*oanob*gaton8 n a ay thout guarantorLs consent an% n a matera*ay mo%$y ob*gaton he guarantor ** ha)e a %e$ense to"ayment8 genera**y to the e=tent the change %etrmenta**y a$$ectsthe ob*gor. A non commerca* surety can say they are %scharge%.#ero%. ut commerca* guarantor says (Lm %scharge% on*y to thee=tent the mo%$caton a$$ecte% my rghts or re%oun%e% to my%etrment.

?ann breaks 0own into subpart: 1 Cre%tor grants an e=tenson o$ tme borroer has to

re"ay -- may re%oun% to %etrment o$ guarantor $ cre%tor

sa% mme%ate*y a$ter %e$au*t (Lm sung you too guarantor8they cou*% ha)e Iust "a% "rnc"a* an% gotten somereco)ery. ($ e=tenson s grante% $ "rnc"a* st** %oesnLta""*y8 then "oston may be m"are% bec. by thn ob*gormay ha)e *ess assets by hch to "ay back guarantor. aym"ar guarantorLs ab*ty to see re"ayment.

Re*ease -- outs%e a. there s a noton o$ the cre%torcan essenta**y sett*e th "rnc"a* an% go a$ter guarantor$or reman%er. Cre%tor can go to "rnc"a* ob*gor8 an% say( un%erstan% you canLt "ay...but $ you Iust g)e me 0TeL** agree that you ** be re*ease%8 an% (L** seek the rest

$rom the guarantor. 7uts%e a.8 hen that ha""ens8cre%tor has to reser)e tLs rghts aganst guarantor. (n a8e %onLt ha)e ths "rob*em. Art. 30528 says e=tncton o$"rnc"a* ob*gaton e=tngushes the suretysh"8 though F%oesnLt kno $ that means n "art or n ho*e. (nter"rete%genera**y to mean that $ cre%tor sett*es e)en n "art thate=tngushes the ob*gaton an% re*eases the guarantor ntoto. onLt thnk the same "rob*em outs%e o$ *a. e=sts na.

(nn m(kes re#erence t" Artic6e - "# the UCC:

!omeone can guarantee "ayment un%er a note8 sm"*y by sgnng on the note.

($ someones sgnature a""ears on a negotab*e nstrument an% that s not a "ayee

or trans$eree or a ho*%er8 then that s anoma*ous en%orser8 an% thus "resume% to bea guarantor. ($ you sgne% anamous*y an% %%nLt nten% to be "ayee then somereason hy you "ut name on t an% assume% to be the ob*gor. Accommo%aton"arty has surety %e$ense set out n Art. 3 '058 a ahs not a%o"te% Art. 3 '05 o$

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6CC bec. a has tLs on ru*es n C)* Co%e. a. has co%$e% a** *a o$suretysh" n Co%e8 so Art 3 '05 s not necessary n a.

7uret$ship 0e'enses can be waio rea**y no rea**y hy they shou*% no ant guarantor toa)e anymore.

o ($ comes u" n "ractce8 then mght ant to negotate on ths "ont an%argue that there s no "ractca* reason $or bankng antng guarantor toa)e.

7ne reason that banks mght ant to %o ths. ($ guarantor s the oner o$ the bG --

the so*e "ro"retor o$ a sma** cor"8 the bank may say eLre not stu"%8 an% one%e$ense may be mo%$caton o$ agreement an% $ e mo%$y th you as "rnc"a*oner8 you ** return aroun% as guarantor an% say that mo%$caton %scharge%me8 so e are gong to make you a)e that %e$ense. >ot on e=am8 but ** comeu" n "ractce.

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.2Co. ants to get $nancng an% on*y ay to get s to get a *oan E ants to go toChase anhattan.

($ abasco goes an% ants ths huge *oan8 they ** *ke*y say e %onLt kno you8

because you are a a. #r)ate Co. that e kno nothng about t. !o8 essenta**y nee% t co-sgne%.

abasco cou*% get a $am*y member to co sgn8 but they "robab*y %onLt ha)e

enough money to get the *oan ether.

!o8 abasco can go to a bank get a *oan $rom a bank that knos Chase anhattan

)ery e**8 an% ** recognGe bank. asca**y >e (bera bank8 you te** Chase8that (m a goo% cre%tor8 an% they ** "retty much guarantee8 canLt rea**yguarantee8 but ** ssue a stan%by *etter o$ cre%t.

abasco ** be a""*cant an% ** get stan% by *etter $rom >e (bera ank

ssue% to Chase -- says $ abasco %e$au*ts un%er $o**ong cre%t arrangement8u"on "resentaton o$ an a$$%a)t8 by you or one o$ your agents8 e agree to "ay

the 30 m* %o**ars S nterest. ?ssenta**y a guarantee but n the $orm o$ a *etter o$ cre%t.

Clean 7tan0b$ 5etters o' Cre0it

ont reure %oc at a**.

7n*y reures the bene$cary to come nto bank8 an% say that ( ha)e ths *etter an%

a""*cant has %e$au*te% so "ay the 30 m*. Qust say there has been a %e$au*t8 so"ay.

Nery rare8 because n bg commerca* transacton8 *ke to ha)e a %oc.

*ote: >orma* *etters o$ cre%t most o$ten get "a%. !tan%by *etters o$ cre%t areenhancement *etters an% )ery rare*y get "a%. 7n*y $ somethng ba% ha""ens ** stan%by*etter get "a% -- "ayment s e=ce"ton rather than the ru*e.

Problem 'rom issuer bank o' 7tan0b$ 5etter

(.e. (bera anks "ers"ect)e.

6n%er regu*ar guarantee you ha)e a %e$ense8 $or *etter o$ cre%t8 Art. 5 %oesnt

ha)e suretysh" %e$enses. !o canLt say you m"are% my co**atera* or othersemo%$e% my agreement.

+ssuer o' 7tan0b$ 0oes ha


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7ummar$:

Re*at)e*y straght$orar% transacton -- essenta**y a guarantee but %$$erent

because %$$erent ru*es go)ern an% there are no suretysh" agreements. hese"robab*y come u" *ess than guarantees8 bank onLt %o t un*ess rea**y sure that the"rnc"a* ob*gor ** be ab*e to "ay.

($ ne (bera s concerne% that abasco onLt be ab*e to "ay8 ** reure them toha)e some money on reser)e -- bank rea**y s n a senst)e "oston.

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