3 25 15 3 30 15 Chapter 12 Negotiable Instruments Law most states have adopted o Functions Negotiable Instruments covered in Article 3 of Uniform Commercial Code Federal Substitute for cash for Major purchases with high prices Increases the ability for US businesses to sell to customers allows people to buy with credit instead of with cash since most people don t have a lot of extra cash o Negotiability you can transfer to someone else and they can get value for it o Requirements Article 3 To qualify for a negotiable Instrument section 104 in text book Has to be in writing written instrument Unconditional order like a check or promise like a note to pay Has to be signed by the maker or the drawer Has to be payable on demand a check or at a specified date in the future a draft Instrument has to be made out to the order of like a check or to bearer whoever has their hands on it possesses it can cash it in Instrument has to state a certain sum of money If there are nay defenses against something being a negotiable instrument fake signature o Preferred protection status holder in due course pretty much guaranteed to get value out of instrument Article 3 says you had to have given value for the negotiable instrument Article 3 says you had to have taken it in good faith and have no knowledge of any fraud o Types Orders to Pay Three Party Instruments Three parties o A drawer issues or creates the document who writes the check o A drawee agrees to make the payment under the instrument the bank for a check o A payee person who gets paid Drafts a three party instrument that is an order to pay someone Can be payable on demand or in the future o Drawee of a draft can be a bank an institution an individual pretty much any entity liable for the payment o Other drafts Sight draft guarantees payment Example is cashiers check from a bank Taken out of your Ch 12 pg 1 3 25 15 3 30 15 account and the bank is both the drawer and the drawee no concept of insufficient funds Bill of Exchange Guarantees payment for goods in international transactions Gets bank involved and negotiated for value at that moment Checks a type of draft with two limitations that broad Drafts don t have the future o A check can only be payable on demand not written in o The entity that is going to make payment drawee can only be a bank or a financial institution o Historically used a lot to make payments bills stores Credit cards or debit cards have replaced Cards are easier to carry around From merchant s point of view cards are better because checks can t come back as insufficient funds don t have to have the cash in account to buy something expands sales for merchants o Promissory Note Lend someone 100 or sell something on credit Make them sign a note saying that they ll pay you back o Collateral note Personal property is used as Collateral to back up a Loan or promise to pay o Real Estate Mortgage Notes Not covered in Article 3 real property so covered by common law o Installment Note you repay what you owe in equal periodic payments like a monthly car payment o Balloon Note Under article 3 by definition any note where the principle payment with maturity is at least half of the face of the loan Certificates of Deposit issued by a bank or financial institution by a depositor o If you invest money lend it to the bank the bank will give you a certificate of deposit They promise to repay you the amount plus interest periodically o Note called a certificate of deposit because you ve deposited it in the bank Promises to pay Two Party Instruments Notes Credit way to expand your business gets more customers and then more profit Businesses need an amount of operating capital Two basic ways they raise money to get going Debt Financing borrow money pay back interest or Equity Financing no obligation to pay back that amount o Terms Businesses have to think about this if they re going to sell on credit Ch 12 pg 2 3 25 15 3 30 15 Who am I going to extend credit to Large Business has Credit Department how do they determine who to extend credit to or how much to extend Look up people and learn their credit history good credit risk Is the person currently employed Any assets to secure the loan collateral secure promise to Reputation defaulted on loans slow payments filed for repay bankruptcy Credit Agency for smaller businesses They can provide credit reports for customers for a fee Goes through same type of search Collections policy for customers late in paying or not paying at all Look at how good the customer has been in the past Just a slow down right now but good in past less aggressive New customer have less to lose Collection Efforts o Letter or phone call to person or company that s late Friendly reminder of what they owe o Letter from company s attorney or calls from a collection agency once it s so much overdue cheaper to turn over to collections agency or litigate sue and go to court to try and collect it Open Account payment is expected in full at a certain point in time Installment Account Larger dollar purchases monthly payments Revolving Account Credit cards Account goes up and down up until maximum Make monthly payments and continue to buy things So Merchants have to decide payment terms Not uncommon for businesses to make sales on 30 60 day payment terms Not uncommon for a 1 2 discount if paid really quickly o Credit Policy o Credit Accounts Types o Secured Creditors Business needs capital to get started Borrow money or Sell shares of stock Smaller new business o Collateral pledge personal property to get a loan car o Co signer get someone with assets or net worth to co house stock sign for you Ch 12 pg 3 3 25 15 3 30 15 Surety 3rd party who promises to be primarily liable for the debt if the person who borrowed the money doesn t make the payments Child wants to buy the car They sign the promissory note and the parent signs as a co signer Surety co signer parent is primarily responsible for the debt Guarantor secondarily liable in the contractual liability If you co sign something as a guarantor dealer ahs to sue the primary person before suing the guarantor Defenses of Sureties Subject matter of contract is illegal If primary signer under undue duress to sign contract Doesn t serve as a defense if primary files for bankruptcy surety still liable Surety s Rights Against Principal Principal person who borrowed the money that you agreed to insure Exoneration Principal is able to make payments but refuses to the surety can