Negotiable Instrument Steps
Step 1 - What Type of Paper?
Step 2 - Is instrument Negotiable?
Step 3 - Rights of HDC?
Step 4 - Defenses
Article 3 vs. Article 7
Article 3 = Commercial paper
Article 7 = Documents of Title
Notes
Promise to pay
- Two-way party commercial paper
- Promise by the "Maker" to pay the "Payee" or bearer
Certificates of Deposit
- Type of note
- Issued by the bank acknowledging receipt of money and promises to repay at a future date
Drafts
- 3 party commercial paper
- "Order" by the "Drawer" to the "Drawee" demanding the Drawee pay the "Payee
Drawer
Owns the funds
Drawee
In possession of the funds
Checks
- Type of Draft
- Drawee = Bank
- Must be payable On Demand
Trade Acceptances
- Type of Draft
- Drawn by the Payee (seller) on the Drawee (buyer) and accepted by the Drawee
Negotiability Requirements
i. Writing
ii. Signed by maker or drawer
iii. Unconditional Promise to pay
iv. Fixed amount of money
v. On Demand or at specific time
vi. payable to order or to bearer; exception of checks
---NOTHING ON THE BACK CAN CREATE/DESTROY NEGOTIABILITY
Unconditional Promise Requirement
- Payment cannot be conditional
- No express terms
- Cannot be subject to or governed by another instrument
On Demand vs. Definite Time
1. ON DEMAND
-- do not have to be dated
2. DEFINITE TIME
-- On or before a stated date OR at at fixed pd. after date
-- Not certain to Happen? Non-negotiable
-- Uncertain time it will happen? Non-negotiable
-- Acceleration Clause = OK
-- Extension Clause
Constructing the Instrument
1. Handwritten > Typewritten > Printed Terms
2. Words > Figures
---"five hundred" > "$5,000
Non-Negotiable Instrument
- Can be no holder in due course
Negotiation Process to become a Holder
1. Bearer Paper = Delivery
2. Order Paper = Delivery and Endorsement
3. Last Endorsement controls Order vs. Bearer
Special Endorsement
- Names a specific 3rd party
- Requires signature to further negotiation
- " Pay to ____
Blank Endorsement
- Does not name a 3rd party
- Requires signature to further negotiation
Chain of Title
- If a necessary endorsement is missing, ____ is broken and no subsequent transferee can become a holder
- Thus, subject to all defenses
Forged Signature
- Treat as legit signature by the forger
- Does not constitute a break in the chain of title, because on the front
Qualified Endorsement w/out Recourse
- No guarantee of payment by the endorser
=== No Contract Liability
- Still have Warranty Liability
GR: Endorsers are guarantors of payment
Restrictive Endorsement
- Only or "For Deposit" or "For Collection
Holder in Due Course
Takes negotiable instrument in:
-- Value,
-- Good faith, &
-- Without notices of any defenses or claims
-- MUST BE NEGOTIABLE INSTRUMENT
- Free from personal defenses
- Missing any of the 4? Same rights as Transferor
Value
Includes:
---- performance of agreed consideration
---- acquisition of lien or security interest
---- taking instrument as payment
- Executory Promise NOT Value
- Value NOT be equal
Facts Constituting Notice
- purchaser knows that any part of the principal is overdue
- visible evidence of forgery or alteration (irregular)
- purchaser knows obligation is voidable in whole or part
Facts NOT Constituting Notice
- Antedated or Postdated
- Purchase at a Discount
The Shelter Doctrine
Non HDC gets an Instrument from an HDC"
- Transferee alone may not qualify as HDC, they can claim rights of an HDC who held paper before them
Real Defenses (FAIDS)
- Maker or drawer does not have to pay anymore
1. (F) Fraud in the execution
2. (F) Forgery
3. (A)Material Alteration
4. (A) Adjudicated Insanity
5. (I) Infancy (Minor)
6. (I) Illegality
7. (D) Duress
8. (D) Discharge in Bankruptcy
9. (S) Suretyship
10. (
Note/CD Liability
1) Maker
2) Endorsers
Draft/Check Liability
1) Drawee if accepted - Must sign
2) Drawer and Endorsers
Warranty Liability
- Exists even if you do not sign and put w/out recourse
Forgery Liability
1. Forged Drawee's Name = Drawee Liable if Accepted
2. Forged Payee's Name = Drawee Liable if Accepted
Imposter Rule & Fictitious Payee Rule
- Maker or drawer liable
Methods of Discharge
1. payment/satisfaction/tender
2. holder intentionally destroys instrument
3. Failure to give notice of dishonor
4. Acceptance of a certification of a bank
Secured Transactions
1. Debt secured by Collateral
2. Security Interest = Right of creditor to repossess
3. Effective between Debtor and Creditor upon Attachment
4. Effective Against 3rd parties upon Perfection
Perfection
- form of notice that the creditor has a security interest in the collateral
Article 9
- Personal property and fixtures
EXCEPTIONS
1. Land
2. Wage Claims
3. Statutory Liens
4. Mechanic's Liens
Purchase Money Security Interest (PMSI)
- Priority over ALL other security interests in the same collateral
1. Creditors sells collateral to debtor, and RETAINS A SECURITY INTEREST
2. Creditor ADVANCES FUNDS to be used by the debtor to purchase the collateral
Collateral
1. Goods
----a. Consumer goods = personal use
----b. Inventory
----c. Equipment
2. Intangible Collateral Accounts (AR)
3. Investment Property
4. Proceeds "Trade in
Requisites for Attachment
1. Authenticated Record signed by Debtor
OR
- Creditor takes possession
2. Value given
3. Debtor has rights to the collateral
Methods of Perfection
1. Filing
2. Take possession of collateral
3. Control
4. Automatic (consumer goods)
5. Temporary (20 days from receipt, 4 months from moving to a new state)
Timing of Perfection
- MUST attach before perfecting
Perfection by Filing
- Financing agreement/statement
Elements:
1. Name and mailing address of debtor/secured party
2. Indication of collateral
3. Description if of real property
- Must be authorized by debtor
- Protected for 5 years
Perfection by Possession
- Pawn shops
- Must pledge TANGIBLE property
Perfection by Control
- Investment property interests
Priority Interests
1. Buyer in the ordinary course of business
2. PMSI
3. Perfected secured interest
4. Unperfected security interest (attached only)
5. Debtor
Properly Perfected PMSI
1. Automatic = Consumer Goods
EXCEPTION:
----1. Secondhand Consumer Purchase without Notice
---Can't repossess if sold to another party UNLESS you file --------a Financing Agreement
2. PMSI in Inventory
----Prior Perfection and Notice Required
3. PMSI in
Perfected Security Interests
1. First to File or Perfect wins
2. Bankruptcy trustees subordinate to all PRIOR perfected security interests
Rights upon Default
1. Take Possession
----Self Help or Replevin (judicial action)
2. Sale
---Public or Private
--- Commercially reasonable
--- debtor must have notice
--- Wipes all subordinate debts
--- Debtor has right to redeem buy paying off debt b4 sale
Proceeds of Sale
1. Admin expenses
2. Priority of Holders
3. Surplus to Debtor
- Insufficient to pay Expenses?
-----Secured party may bring action to recover deficiency
Retention of Collateral
- May keep, UNLESS
1. Consumer Goods = > 60% of loans been paid
----Must be sold w/in 90 days of repossession
Types of Bankruptcy
1. Chapter 7 - Liquidation (I,P,C) (NO HOPE)
---Corp Dissolved; Indiv Discharged; TRUSTEES
2. Chapter 13 - Individual Adjustment of Debts (HOPE)
--- TRUSTEES
3. Chapter 11 - Reorganization (I,P,C)
--- NO TRUSTEES
4. Chapter 15 - Ancillary Cases
---coordin
Chapter 7 Dismissal
1. Individual Consumer case may be dismissed or converted to a Chapter 13 bankruptcy
2. Only if relief would constitute ABUSE
---TOO WEALTHY? CHAPTER 13
Calculation of Chapter 7 Dismissal
1. Current Monthly Income = 6 month previous average
== X 12
---a. Equal to or < State Median = CHAPTER 7
---b. Exceeds State median = MEANS TEST
Means Test
1. Avg. Monthly Income - Allowed Expenses (mo.) x 60
2. <$7, 475 = CHAPTER 7
3. > $12,475 = CHAPTER 13 OR DISMISSED
4. $7,475 < X < $12,475 =
......Pay off more than 25% of unsecured debts???
--------YES? Chapter 13 or Dismissed
Allowable Expesnes
1. Living Expenses
2. Insurance
3. Elderly, disabled, chronically ill
Rebutting the Presumption of Abuse
1. Serious illness
2. Call to active military duty
3. Disabled Veteran
Limited Debtors
No "RIBS"
1. Railroads (allowed in Ch. 11)
2. Insurance
3. Banks
4. Savings and loans
Credit Counselign
- w/in 180 days of the filing for bankruptcy
- Ch. 7 and 13 must do a financial management course, too
Debt Relief Agencies
Agency: paid to assist consumer debtors in filing for bankruptcy
- Must have Written Contract
- Cannot advise to incur more debt
Features of Ch. 7 and Ch. 11
1. Voluntary or Involuntary
2. Automatic Stay effective (unless Family or Criminal)
3. Debtor must File:
----a. list of creditors
----b. schedule of assets, liabs, income, and expenditures
----c. copy of tax return from PY
Voluntary Cases (Ch. 7, 11 or 13)
1. Debtor files order for relief
2. Need not be insolvent
3. Constitutes automatic order for relief
Involuntary Cases (Ch. 7 and 11 ONLY)
1. Not paying debts when due
2. Ineligible = Farmers and Charities
3. Must be owed > $15, 325 to file
----a. < 12 creditors = 1 person must file
----b. 12 or more = 3 or more must file
4. Does not constitute order for relief (GAP)
5. Improperly filed = Co
Section 341 - Creditors Meeting
- MUST GIVE NOTICE
- W/in 20 to 40 days of filing
- debtor must attend
Bankruptcy Estate Property
INCLUDED:
1. "owned at the time of filing"
2. DII = Divorce, Inheritance, Insurance (180 days after)
3. Stocks, Bonds = Interest and Dividends
EXCLUDED:
1. Earnings
2. Necessary things to live (unless PMSI, mort, or lien)
Trustee's Powers
1. Hypothetical Creditor as of Filing Date
----Power of all but PMSI previously perfected
2. Fraudulent Transfers (w/in 2 years)
---- intent to hinder, delay or defraud creditors
---- transfer well below FMV was received while insolvent
3. Disaffirm Prefe
Transfers Trustee Cannot set aside
1. Made in ordinary course of business
2. PMSI perfected within 30 days
3. Consumer debts under $600
4. Domestic support obligations
Claims against the estate
- Unsecured Creditors and Equity Holders Must File
2. Fail to timely file = not part of distribution of estate
Chapter 7 Liquidation
1. I, P, C
2. Voluntary or Involuntary
3. Indiv. must satisfy income test
- Discharges debtor from most debts (WAFTED)
- Trustee Is appointed
Objects to Ch. 7 Discharge
1. Debtor not individual
2. Fraud or concealment
3. Unjustifiably failed to keep books or records
4. Prior discharge w/in 8 years
5. Bankruptcy crime
6. Failed to explain loss of assets
7. Refusal to obey orders
8. Insider Case
9. Waiver
10. Fail to compl
Exceptions to Ch. 7 Discharge
WAFTED
1. (W) Willful or malicious injury
2. (A) Alimony support
3. (F) Fines and Panalties
------- Fraud
4. (T) Taxes due w/in 3 years of filing
5. (E) Embezzlement
------- Educational Loans
6. (D) Debts Undisclosed
Reaffirmation of Discharge (CH 7)
- Debtor does not want particular debt discharged in bankruptcy to maintain good relations with creditor
MUST:
1. agree before discharge
2. Debtor has right to rescind
3. Attorney advises debtor reaffirm isn't required by law
Priorities of Chapter 7 Distribution
1. Secured parties
2. Priority Parties (SAG WEG CTI)
3. General creditors
- If a level of creditors cannot be satisfied completely, remaining distribution is pro-rated
Priority Creditors Order (CH 7)
(S) Support Obligations to Spouse/Child
(A) Admin expenses (fees)
(G) GAP Claims
.....
(W) Wage Claims (up to $12,475, w/in 180 days of filing)
(E) Employee Benefit Claims (up to $12,475 - w/ above)
(G) Grain Farmers (up to $6,150)
......
(C) Consumer Dep
Chapter 11 Reorganization
1. I, P, C
2. Voluntary or Involuntary
3. Committee of 7 largest Creditors/shareholders vote on reorganization
-----Consult with debtor, investigate finances, and reorg.
4. Trustee can be appointed if there is Fraud
----NOT GENERALLY REQUIRED
Chapter 11 Reorganization Plan
- No Trustee?? Debtor has right to file w/in 120 days
OTHER PARTIES MAY FILE IF:
1. Trustee appointed
2. debtor has not filed in 120 days
3. debtor's plan wasn't accepted
Acceptance of Reorganization Plan
1. Any creditor can accept or reject
2. Accepted if accepted by creditors with:
----a. 2/3 in amount AND 1/2 in # of claims allowed
Plan Confirmation
- Usually by court
- If accepted by all impaired classes
Effects of Reorganization Confirmation
1. Binding on everyone regardless of who accepted
2. Debtor pays debts according to plan
3. Discharges all pre-confirmation debts
4. Terminates automatic stay
Chapter 15 Bankruptcy
1. Foreign rep. filing a petition for recognition of a foreign proceeding
----Principal door of a foreign rep. to US courts
2. Must show existence of foreign proceeding
3. US Court may authorize prelim relief
4. Foreign Reps can operate debtors business
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