March 25th Negotiable Instruments 04 01 2015 I Negotiable Instruments The law governing this is in article 3 of commercial code 1 Substitute for cash most of us don t have enough cash to buy things like cars or kitchen appliances Ex check 2 Method to extend credit to debtors like a promissory note 3 A way to increase business because if you ask them to only pay in cash a lot of people probably won t shop with you Negotiable means it can be transferred to someone else and they can get value from it Different types of instruments Orders to pay 3 party instruments checks and drafts Draft legally binding order to pay a fixed sum of money Can be paid currently or in the future This is not a check because a check isn t payable in the future 3 parties The drawee of a draft can be a bank institution credit union corporation or individual o Site draft one that requires immediate payment Ex cashiers check The drawee and the drawer are both the bank there is guaranteed payment o Bill of exchange to accommodate people engaging in international transactions Check a type of draft but more limited payable on demand can t be in the future the drawee has to be a bank or a financial institution 3 parties Promises to pay Two party instruments notes and deposits Note most common You promise to repay someone x amount of money probably with interest and it specifies the time period and what is to be paid when o Collateral note promissory note but personal property is used as collateral o Real estate mortgage note real estate is used as collateral o Installment note one that you repay the debt you owe somebody in periodic payments o Balloon note one where you only pay interest along a time period and at the end of the time period the principal is paid Certificate of deposit something a bank or financial institution typically issues Promises to repay you what you lent them with a specified interest Bearer whoever has it in their hands can negotiate it and get value for it Most risky in terms of the person who writes it like a check you don t want to write a check for someone and then it end up being cashed by someone else 3 parties in a negotiable instrument 1 Drawer the person who issues or creates the document The person who writes the check 2 Drawee the party that agrees to make the payment The bank has to make the payment so they re the drawee 3 Payee the person who is going to get paid There are certain requirements in order to be a negotiable instrument 1 Has to be in writing 2 Unconditional order to pay check or a promise to pay promissory note 3 Has to be signed by the drawer or the maker 4 Instrument has to be either payable on demand or at a specifiable time in the future 5 Has to be made out to the order of or to bear 6 Has to stay to some certain amount of money Just because you hold a negotiable instrument doesn t mean that you can get paid Ex forged signature Holder and due course part of article 3 none of those defenses will keep you from getting paid If someone provides value for the negotiable instrument and has no idea that the instrument is non transferrable then you are protected More protected status than just the typical holder credit card is not a negotiable instrument but it has replaced the use of checks in a lot of situations II Credit Principal reason that it s used in business is because it increases business Creditor the person who is lending someone money or selling merchandise on credit Debtor the person who is borrowing money and owes it to the creditor Two types of financing Credit borrowing money You have an obligation to pay them back interest Equity financing selling stock to shareholders Credit policy US businesses have to figure out who to sell to on credit and who not to who is a good credit risk and who isn t Does the debtor have a salary regular source of income What s the debtor s financial condition do they have a lot of other liabilities Do they have personal property to seize as collateral What s the debtor s reputation Have they filed for bankruptcy before From the answers to these questions you can determine how much you want to lend Big companies typically have their own credit departments that can do credit searches on prospective debtors Smaller companies who don t have these departments can pay a fee to a credit agency to get a report on the person you re thinking of selling lending to Types of credit accounts Open account where you sell to someone on credit and full payment is expected within a certain period of time Installment credit account people make periodic equal payments towards the principal interest Revolving credit account credit cards The amount you owe goes up and down you make different payments and charge different amounts Credit terms Businesses have to decide what terms to offer their collections policy if someone doesn t pay back their debts how you want to deal with that Credit with security security means collateral Used a lot with small businesses with no credit history Surety suretor promises to pay someone else s obligation Primarily liable for that payment Can be sued directly as soon as payments aren t made Defenses if you can show fraud or undue direst that the contract was illegal Bankruptcy does not defend you from liability Rights against the person who bought it if you re forced to pay Exoneration you re able to pay but you refuse the suretor can go to court and get an order to make you pay Subrogation if the suretor is forced to pay for example a car dealership they then assume the rights of that car dealership and can sue the person who initially bought the car to try to get their money back Guarantor someone who also agrees to pay someone s debt if they don t but only is secondarily liable Secured transactions occur when someone buys something on credit and you get a security interest in whatever they re buying so you can seize it if they don t pay Security agreement is then signed by the person paying on credit and they have to perfect file the financing statement with the secretary of state so that it s now on record the security interest If it s inventory the UCC says you get a floating lean which means that you have a security interest for X of whatever inventory they have This is because inventory turns over too much for you to be able to point to a specific item and say it s the security The person with the security has priority the person who only paid on open credit unsecured no collateral gets second priority