Test 2 Flashcards
Types of Negotiable Instruments
Drafts and Notes
an order by a drawer directing the drawee to pay the payee
Drafts
a draft drawn on a bank
Checks
- Most checks are demand instruments
- Checking accounts are often called demand deposits
The three parties that are involved in drafts
Drawer, Payee, Drawee
Person who signs the order to pay
Drawer
Person identified to get paid
Payee
Person who is ordered to pay
Drawee
a promise by one party to pay money to another party or bearer
Note
a note made by bank, where the bank is the maker of the note
Certificate of Deposit
• Certificates of deposit are a type of note
Parties involved in two-party instruments
Maker and payee
The person who promises to pay
Maker
The person to whom the promise is made
Payee
5 Requirements for an Instrument to be Negotiable
- Be in writing
- Be signed by the maker or the drawer
- Be an unconditional promise or order to pay to order or bearer
- A sum certain in money
- Be payable on demand or at a definite time
5 Types of Endorsements
- Blank Endorsement
- Restrictive (For Deposit Only)
- Special Endorsement
- Qualified Endorsement
- Combination Endorsement
an instrument payable to order and indorsed in _______ becomes a bearer instrument and can be negotiated by delivery alone. Converts an order instrument into a bearer instrument
Blank Endorsement
4 Rules and Requirements for HIDC Status
- Must be a holder
- Must take for value
- Must take in good faith
- Must take without notice
The result of being a HIDC is that…
you eliminate personal defenses
(note: cannot get rid of real defenses, unless you are holding cash).
*See also Shelter Principle.
5 Transfer Warranties
Real Defenses 1. No knowledge of bankruptcy 2. No material alterations 3. All signatures are authentic Personal Defenses 4. Transferor can enforce the instrument 5. There are no claims or defenses
5 Real Defenses (aka Universal Defenses)
- Bankruptcy
- Forgery
- Material Alteration
- Extreme mental incapacity
- Fraud in the Execution
*CANNOT ELIMINATE
You can eliminate Personal Defenses if…
holder in due corse (HIDC)
5 Personal Defenses
- Breach of Contract
- Failed Consideration
- Fraud in the Inducement
- Wrongful Completion
- Duplicate payment
Even if forgery, you have 30 days to notify the bank of forgeries from constructive notice
30 Day Rule
If there is a forged drawer signature than the ___________________ is liable
Drawee Bank
If there is a forged endorsement than the _________________ is liable
Depository Bank
3 Requirements to create a security interest (conjunctive - must have all 3)
- Must be a written security agreement in most cases (exception: pawn).
- Debtor must own the asset
- Creditor must give value
a statutory right giving creditor right in the debtor’s property. Must be satisfied before the property (or its proceeds) is available to satisfy the claims of other creditors. Examples: Labor/Material
Lien
attach real property to a debt by using _______ instrument
Mortgage
Can be verbal and the creditor can sue the debtor directly
Surety
Must be in writing and suit must attempt to collect from the debtor prior to bringing action against the guarantor
Guarantor
Compare/Contrast Lien Holder vs. PMSI (Purchase Money Security Interest)
Lien Holder
- By statute, get super priority
- Non-consensual achieved by statute
PMSI
- Finance the purchase and get a super priority
- This is by consent and achieved by getting a security agreement in the asset that was financed by the creditor and filing the F/S within 20 days. Otherwise, you are just secured and perfected.
- There is no special documentation required to get a PMSI
Two examples when a financing statement is not needed
Pawn and retail sale
2 examples of “Auto-perfected” situations…
- when creditor takes possession (i.e., a pawn)
2. when a consumer good is secured by a valid security agreement.
Five Benefits of Bankruptcy
- Centralized litigation
- Stay on all pending litigation against debtor - automatic
- Discharge debt
- Exempt some assets
- Uniform process
Some Assets That Can be Exempted in Bankruptcy (11)
- Homestead
- Vehicle
- Household goods, clothes, and etc…
- Jewelry
- Personal Property
- Tools of the trade
- Unmatured life insurance (no cap)
- Accrued dividends under life insurance contracts owned by debtor
- Prescribed health aids (no cap)
- Right to receive social security, welfare, alimony, and etc…
- Right to receive certain personal injury awards
Some Debts That Cannot be Discharged (12)
- Back taxes
- Amounts borrowed to pay federal taxes
- Claims against property or funds obtained by false representation
- Claims of creditors not listed and notified of bankruptcy
- Claims based on fraud or misuse of funds by debtor
- Alimony, child support
- Claims based on malicious conduct by the debtor
- Certain government fines and penalties
- Certain student loans
- Debts on luxury goods purchased within so many days of filing
- Certain Amount of Cash advances obtained within so many days of filing
- DUI debts
5 Types of Bankruptcy
Chapter 7 – Liquidation Chapter 9 – Municipalities Chapter 11 – Reorganization Chapter 12 – Farmers Chapter 13 – Individual/Personal
Employer-Employee Relationship
Respondeat Superior
Employer/Employee liability based on whether tort committed within the scope of employment.
Only party that is primarily liable
Maker
Order of precedence/priority of negotiable instruments
CASH > NI & HIDC > NI > NON-NI > VERBAL PROMISE
Two parties involved in notes
Maker and Payee
Go from S + UP to S + P when …
creditor takes possession OR files financing statement
Five ways to pierce the corporate veil
- Used for personal use
- Thinly capitalized
- Not actively managed
- Books and records are not kept separate
- To perpetuate fraud
The transfer of an instrument in such form that the transferee becomes a holder
Negotiation
Type of instrument that required BOTH endorsement and delivery.
Order Paper
Type of instrument that ONLY requires delivery. No endorsement required.
Bearer paper
validates forged payee’s endorsement, and an innocent holder can hold the maker or drawer liable on the instrument
Fictitious Payee Rule
A person who does not qualify as a HIDC but who derives his or her title through a HIDC can acquire the rights and privileges of an HIDC. Transferee cannot be engages in fraud or illegality.
Shelter Principle
transfer of property or payment that favors one creditor over another
Preferential transfer
trustee goes back 2 years (donations to charities)
Fraudulent transfers
If third party contract must be in writing, so does the authorization granting agent/manager authority to act on behalf of company.
Equal Dignity Doctrine
Governs IPO (Initial Public Offering) Purpose is to require disclosure. Section 5 requires securities to be registered before IPO unless exempt. Registrants must file a registration statement with the SEC and must provide investors with a prospectus. Do not have to prove scienter
1933 Act
Secondary Market. Foundation for Sarbanes Oxley. 10Q Quarterly and 10K Annually. Must prove scienter.
1934 Act
a fungible, negotiable financial instrument that represents some type of financial value
security
exempt securities
government issued
bank and financial institution securities
short term notes and drafts
securities of nonprofit organizations
securities issued by common careers
insurance, endowment or annuity contracts
corporate reorg securities
stock dividend and stock split securities
