business law -- week 7 negotiable instruments: a contract to pay money (commercial paper) checks...

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Business Law -- week 7 Negotiable Instruments: a contract to pay money (commercial paper) Checks Cashier’s checks Promissary Notes Certificate of Deposit

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Page 1: 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

Negotiable Instruments: a contract to pay money

(commercial paper)• Checks• Cashier’s checks• Promissary Notes• Certificate of Deposit

Page 2: 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

Page 3: 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

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

Page 4: 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

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

Page 5: 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

Rules about contradictions on checks

Order of precedence:–Words over numbers–Handwritten over typed–Typed over printed

Page 6: 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

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”

Page 7: 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

What is a “holder in due course” and what are these “real defenses?”

Page 8: 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

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

Page 9: 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

Defenses• Real or personal

Page 10: Business Law -- week 7 Negotiable Instruments: a contract to pay money (commercial paper) Checks Cashier’s checks Promissary Notes Certificate of Deposit

Busiess Law -- week 7

Real Defenses• Forgery• Bankruptcy• Minority• Alteration• Mental incapacity• Fraud

Page 11: 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

Personal Defenses• Breach• Lack of consideration• Prior payment• Unauthorized completion• Fraud• Non-delivery

Page 12: 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

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.

Page 13: 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

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

Page 14: 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

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

Page 15: 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

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

Page 16: 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

A note is discharged …

• Payment

• Agreement

• Cancellation

• Certification by bank

• Alteration

Page 17: 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

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

Page 18: 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

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

Page 19: 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

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