Professional Documents
Culture Documents
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Commercial Paper
Commercial paper is promissory notes (CD’s) or drafts (checks)
The commercial paper laws arose, in part, to provide a convenient and safe substitute for cash
A note – is a two party commercial paper. It is a promise by one party (the maker) to pay money to another
party (the payee)
Certificate of deposit (a bank promissory note) – A CD is a negotiable instrument issued by a bank that
acknowledges receipt of money and promises to repay at a future date
Drafts – is a three party commercial paper. It is an order by one person (the drawer) to another person (the
drawee) demanding that the drawee pay money to a third person (the payee)
Type written terms control over pre-printed terms. Hand written terms control over both
Words controls figures. Pay five dollars and 5,000 is construed as an order to pay 5 dollars
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If an instrument is not negotiable there can be no holder in due course and the holder in due course rule cannot
apply. Thus, transferees of the instrument will take the instrument subject to any defense against payment that a
party might have
The process by which commercial paper is transferred is called “negotiation”, and the persons whom the UCC
seeks to protect are holders in due course (HDC’s) and most transferees of holders in due course
The first step in becoming an HDC is becoming a holder. A holder can be thought of as a person with good title
to the commercial paper
Order paper (commercial paper payable to specific person) requires delivery to that person and the payee’s
endorsement (signature)
Special endorsement – names a particular person as endorsee and always makes the instrument order paper
The UCC treats the forgery as the genuine signature of the forger. Thus, transferees are holders of the forger’s
instrument
Endorsers are secondarily liable (guarantors) (must pay) if primary party defaults
Without recourse means there is no guarantee of payment by the endorser. The without recourse endorser still
has warranty liability
Types of endorsements
• Blank = mere signature of holder; converts to bearer
• Special = pay to specific person; converts to order
• Restrictive = only, or “for deposit” or “for collection”; restrictive order
• Qualified = without recourse; bearer
Holder in due course rule – is a negotiable instrument is negotiated to a holder in due course, the HDC takes
free from personal defenses and claims and is subject to only real defenses (FAIDS2)
If the holder does not have the rights of an HDC, the maker or drawer can successfully assert any defense
Real defenses – may be asserted against both HDC and non-HDC transferees FAIDS2
• Forgery
• Fraud in execution
• Alteration of instrument
• Adjudicated insanity
• Infancy
• Illegality
• Duress
• Discharge in bankruptcy
• Surety defenses
• Statue of limitations
Personal defenses can’t be raised against an HDC or their assignees (shelter doctrine)
- such as: fraud in the inducement, failure of consideration, theft of instrument after signed, breach of
contract, mistake, impossibility, unauthorized completion (giving a party an instrument with the amount
left blank) That’s different then material alteration (changing the amount written on the instrument
without permission)
Forgery
General rule – real defense for the innocent party whose name was forged
Forger is always liable
Forgery of drawers name – the drawee is liable upon acceptance for negligence (should have known the
signature was forged)
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Forgery of the payees name – does not usually pass good title
If a maker or drawer issues an instrument to an imposter, any resulting forgery of the payee’s name will be
effective
Secured Transactions
Secured transactions – debt secured by collateral
When a debtor pledges collateral to multiple parties creditor protects themselves from third parties by “perfect”
security interest
Purchase money security interest (PMSI) – has priority over all other types of security interests in the same
collateral, if the PMSI is properly perfected. A PMSI arises when:
• A creditor sells the collateral to the debtor on credit, retaining a security interest, or
• The creditor advances funds used by the debtor to purchase the collateral
Types of collateral
• Consumer goods – personal use goods
• Inventory – goods held for sale or lease
• Equipment – goods that do not fit into another category
There can be conflicting interests in collateral. Between creditor and debtors; between creditors with a security
interest in the same collateral. The priority ranking is:
1. Buyer in the ordinary course of business (HDC’s and the like)
- even if the buyer has knowledge of the security interest
2. Holder of a properly perfected PMSI in the collateral
- exception: second hand consumer purchase without notice (did not file) would take free of PMSI
- PMSI in inventory – to have priority must be perfect before debtor gets possession and notice must be
given to other perfected parties in same collateral
- PMSI in equipment – has priority is filed anytime within 20 days of the debtor getting possession of
the collateral
3. Holder of a perfected security interest (and judicial lienholders once the lien has attached)
- Two creditors both perfected but neither PMSI, first to file or perfect gets priority (so the party with
the earliest date of the two categories gets priority).
- Dates of attachment are irrelevant
4. Holder of an unperfected security interest
- If there are two unperfected security interests in the same collateral, first to attach has priority
5. The Debtor
Rights on defaults
Self-help – secured party may take possession of collateral without judicial process if the breach is not
breached
After default or repossession, the secured party may sell or lease the collateral. Once the collateral is sold, all
subordinate claims are wiped out and there is no right of redemption by subordinate security interest holders or
the debtor
A secured party may keep the collateral un full or partial satisfaction of the debt
• Exception: in consumer goods cases where the debtor has paid at least 60% of the loan, the secured party
must sell the collateral within 90 days after repossession, unless the debtor waives this right
Future interests – an estate that does not entitle the holder to current possession, but may give the owner
possession in the future
Concurrent estates – any estate in land can be held concurrently by several persons.
• These co-tenants have the right to enjoyement and possession of the jointly owned land
• Because each co-tenant has rights to the whole land, their interests in the land is “undivided”
Joint tenancy
Right of survivorship – In a joint tenancy, when one joint tenant dies, the property passes to the surviving joint
tenants by operation of law. A joint tenant cannot change this by a provision in his or her will
While a joint tenant is alive, he/she may transfer his or her interest without the permission of the other joint
tenants. The transferee become a tenant in common with no right of survivorship.
Tenancy by the entirety – joint tenancy between spouses, with right of survivorship
Tenancy for years – tenancy expires at the end of the stated period without notice to either party
Absent specific restrictions in the lease, a tenant may engage in any lawful activity on the premises.
Assignments by tenants – original tenant transfers all of their interest to the new tenant
• The new tenant is liable to the landlord (for rent)
Sublease – Sublessee is liable to the original lessee but not to the landlord, to the sublessor
To be an enforceable contract for the sale of land – must be in writing and signed by purchaser, contain a
description of the property, the parties, the price, the manner of payment
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Deeds – must be in writing and signed by the grantor, identify the property, identify the parties, and show
intention to transfer realty (price is not required). Must be delivered to be effective (not necessarily physical)
A standard insurance policy insures only a good record title as of the policy’s date
Recording rules apply to all interests in real property. Thus, a subsequent purchaser who records generally will
not be subject to a prior, unrecorded mortgage that he/she is not aware of.
Whether it’s a deed, lease or mortgage it must contain a description of the premises
RESPA is a federal act that requires that certain disclosures be made when a debtor agrees to give a mortgage
on the debtors property
Deficiency – if the sale does not bring a sum sufficient to satisfy the debt for which the mortgage was given,
some states allow the mortgage to bring a deficiency action against the mortgagor to recover the deficiency, but
some state do not allow such an action
Assuming a mortgage – if a buyer assumes an existing mortgage of a seller, the buyer has agree to be liable for
this mortgage. The seller (old mortgagor) is also liable.
Buying subject to an existing mortgage – the buyer is not liable for the existing mortgage. However, buyer runs
the risk of foreclosure if the seller does not pay the mortgage and defaults
A prior recorded mortgage has priority over a second mortgage. So upon default, the first mortgage must be
paid in full before the second mortgage can get anything
The mortgagor has an equitable right of redemption until the foreclosure sale is held and may have a statutory
right to redeem the property after the sales as well (if the state statue permits)
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Additional
Surety – one who is liable for the debt or obligation of another
To make a document of title negotiable, its terms goods are to be delivered to bearer or to the order of a named
person