Business Law Test 5

Front 1

A negotiable instrument

Back 1

a signed writing (or record) that contains an unconditional promise or order to pay an exact amount, either on demand or at a specific future time

Front 2

orders to pay

Back 2

drafts and checks: Unconditional order involves three parties: Drawer (creator of draft), Drawee (financial institution) and Payee.

Front 3

promises to pay

Back 3

promissory notes and CDs

Front 4

demand instrument

Back 4

payable immediately after it is issued and thereafter for a reasonable period of time.

Front 5

draft

Back 5

an unconditional written order that involves three parties. The party creating the draft (the drawer ) orders another party (the drawee ) to pay money, usually to a third party (the payee ).

Front 6

time draft

Back 6

payable at a definite future time

Front 7

sight draft

Back 7

(or demand draft) is payable on sight—that is, when it is presented to the drawee (usually a bank or financial institution) for payment. May be payable on acceptance (drawee’s written promise to pay the draft when due).

Front 8

trade acceptances

Back 8

the seller of the goods is both the drawer and the payee. The buyer of the goods is the drawee

Front 9

Checks

Back 9

Three parties: Writer of the check is drawer, the bank is drawee, and person to whom check is made is payee. Checks are payable on demand.

Front 10

banker's acceptance

Back 10

When a draft orders the buyer's bank to pay

Front 11

promissory note

Back 11

a written promise made by one person (the maker of the promise) to pay another (usually a payee) a specified sum

Front 12

certificate of deposit (CD )

Back 12

a type of note issued when a party deposits funds with a bank, and the bank promises to repay the funds, with interest, on a certain date. Bank is maker, and Depositor is Payee.

Front 13

Negotiable Instrument Requirements (6)

Back 13

1. Be in writing.
2. Be signed by the maker or the drawer.
3. Be an unconditional promise or order to pay.
4. State a fixed amount of money.
5. Be payable on demand or at a definite time.
6. Be payable to order or to bearer, unless it is a check.

Front 14

signature

Back 14

Almost any symbol executed or adopted by a person with the intent to authenticate a written or electronic document

Front 15

Presentment

Back 15

a demand made by or on behalf of a person entitled to enforce an instrument to either pay or accept the instrument. Thus, presentment occurs when a person brings the instrument to the appropriate party for payment or acceptance.

Front 16

acceleration clause

Back 16

allows a payee or other holder of a time instrument to demand payment of the entire amount due, with interest, if a certain event occurs, such as a default in payment of an installment when due.

Front 17

extension clause

Back 17

allows the date of maturity to be extended into the future. To keep the instrument negotiable, the interval of the extension must be specified if the right to extend the time of payment is given to the maker or the drawer of the instrument. If, however, the holder of the instrument can extend the time of payment, the extended maturity date need not be specified.

Front 18

order instrument

Back 18

an instrument that is payable (1) "to the order of an identified person" or (2) "to an identified person or order"

Front 19

indorsement

Back 19

Signature with or without additional words or comments.

Front 20

bearer instrument

Back 20

an instrument that does not designate a specific payee

Front 21

bearer

Back 21

a person in possession of an instrument that is payable to bearer or indorsed in blank

Front 22

Examples of Bearer instruments (5)

Back 22

"Payable to the order of bearer."
"Payable to Simon Reed or bearer."
"Payable to bearer."
"Pay cash."
"Pay to the order of cash."

Front 23

Factors that do no affect negotiability

Back 23

Omission of Date.
-Postdating or Antedating.
-Handwritten Terms outweigh typewritten and preprinted terms.
-Words outweigh figures
-If instrument states “with interest” but doesn’t specify the rate, it is the judgment rate of interest.
-Check is negotiable even if there is a “nonnegotiable” note on it.

Front 24

Negotiating Order Instruments

Back 24

Requires both indorsement and delivery

Front 25

Negotiating Bearer Instruments

Back 25

Delivery only. Indorsement is not necessary

Front 26

Blank Indorsements

Back 26

Does not specify a particular indorsee and may consist of a mere signature

Front 27

Special Indorsements

Back 27

Contains signature and identifies payee

Front 28

Qualified Indorsements

Back 28

Indorser who does not wish to be liable ("without recourse")

Front 29

Restrictive Indorsements

Back 29

Requires indorsee to comply with certain instructions regarding funds.
-Indorsements Prohibiting Further Indorsement
-Conditional Indorsements.
-Indorsements for Deposit or Collection.

Front 30

Restrictive Indorsements

Back 30

Requires indorsee to comply with certain instruments regarding funds. How Indorsements can Convert Order Instruments to Bearer Instruments and Vice Versa.

Front 31

Miscellaneous Indorsement Problems

Back 31

-Misspelled Names
-Instruments Payable to Legal Entities
-Alternative or Joint Payees

Front 32

Holder

Back 32

Holder possess an order or bearer paper and the instrument is drawn or indorsed to the holder.

Front 33

Holder in Due Course

Back 33

holder plus takes for value, takes in good faith, and without notice of defense to payment

Front 34

Taking “For Value”

Back 34

No value if gift or inheritance. Not the same as consideration.

Front 35

Holder can take for value by

Back 35

-Performing the instrument’s promise.
-Acquiring a security interest or other lien in the instrument
-Taking instrument in payment for an antecedent debt.
-Giving a negotiable instrument as payment.
-Giving irrevocable commitment as payment.

Front 36

Taking in "Good Faith"

Back 36

Honesty in fact and observance of reasonable commercial standards of fair dealing.
-Only applies to holder, not transferor.

Front 37

HDC "Taking With Notice"

Back 37

Holder takes the instrument with notice if he knows/has reason to know:
-Instrument is overdue.
-Instrument has been dishonored.
-Actual knowledge or any suspicious event.
-There is a claim or defense to the instrument.
-The instrument is so irregular, incomplete, or bears such evidence of forgery, that its authenticity is called into question.
-Overdue Demand Instruments.
-Overdue Time Instruments.
-Dishonored Instruments.
-Notice of Claims or Defenses
-Incomplete Instruments.
-Irregular Instruments.

Front 38

Shelter Principle

Back 38

A person who does not qualify to be a HDC but who derives her title through an HDC can acquire the rights and defenses of an HDC.

Front 39

Purpose of the Shelter Principle

Back 39

Extends benefits of HDC and allows HDC to dispose of instrument

Front 40

Limitations on the Shelter Principle

Back 40

No fraud, illegality, claim or defense

Front 41

Negotiable Instruments liability (2)

Back 41

-Signature
-Warranty

Front 42

Signature Liability

Back 42

Signers of negotiable instruments are potentially liable for amount stated on instrument.
-Primary Liability: Makers/Acceptors. 
-Secondary Liability: Drawers/Indorsers.

Front 43

Primary Liability (2)

Back 43

Makers
-Promises to pay the note.
-Obligated to pay terms of instrument at time of signing.

Acceptors
-Drawee promises to pay an instrument when presented for payment.

Front 44

Secondary Liability

Back 44

-Proper Presentment.
Must be timely (checks w/in 30 days).
-Dishonor.
-Proper Notice.
Manner of Notice in any Reasonable manner.
Notice to Indorsers.

Front 45

Accommodation Parties

Back 45

-Signs instrument to lend name as credit to another party on the instrument.
-Makers v. Indorsers.

Front 46

Authorized Agents' Signatures

Back 46

Agent acts for Principal, and can hold Principal liable if authorized to sign for Principal.

Front 47

Liability of Principal

Back 47

Principal must be clearly named

Front 48

Liability of the Agent

Back 48

Agent is personally liable with Principal is not named or disclosed, unless check is drawn on Principal's account

Front 49

Checks Signed by Agents

Back 49

if the agent signs his own name on a check and the principal is identified, the agent is not personally liable.

Front 50

Forgery

Back 50

does not bind Principal but Bank may be liable if negligent

Front 51

Unauthorized Signature

Back 51

Agent is personally liable, but Principal is not, unless ratified.

Front 52

Exceptions to the General Rule of No Liability

Back 52

1. Ratification of signature
2. Negligence
3. Holder in due course

Front 53

Ratification Signature

Back 53

principal become liable

Front 54

Negligence

Back 54

party who substantially contributed to forgery is liable

Front 55

Holder in Due Course

Back 55

person who forges a check can be held liable for payment by an HDC

Front 56

Special Rules for Unauthorized Indorsements

Back 56

Unauthorized indorsement does not bind maker/drawer except
-Imposters
-"Imposter Rule"
-Fictitious Payees

Front 57

Imposters

Back 57

One who induces a maker to issue an instrument in the name of an impersonated payee

Front 58

Imposter Rule

Back 58

Imposter indorsement will be effective

Front 59

Fictitious Payees

Back 59

Cause an instrument to be issued to a payee who will have no interest in the instrument

Front 60

Warranty Liability (2)

Back 60

-Transfer
-Presentment

Front 61

Transfer Warranties

Back 61

Extend to all subsequent holders
-Transferor is entitled to enforce the instrument.
-Signatures are authentic and authorized
-Instrument has not been altered.
-Instrument not subject to defense.
-Transferor has no notice of insolvency.
-Instrument has not been altered.
-Instrument not subject to defense.
-Transferor has no notice of insolvency

Front 62

Parties to who Warranty Liability Extends

Back 62

Extends warranty to any holder who takes in good faith. Without indorsement, warranties extend only to immediate transferee

Front 63

Recovery of a Breach of Warranty

Back 63

good faith holder can sue for breach of warranty. Notice of the claim within 30 days.

Front 64

Presentment Warranties

Back 64

Person who presents an instrument makes the following presentment warranties:
No missing or unauthorized indorsements.
Instrument has not been altered.
Person obtaining payment has no knowledge signature is unauthorized

Front 65

Defenses and Limitations (2)

Back 65

1. Universal (Real)
2. Personal

Front 66

Universal Defense &6

Back 66

Can be used to defeat a holder and an HDC
1. Forgery
2. Fraud in execution
3. Material in alteration
4. Discharge in bankruptcy
5. Minority, if the contract is voidable
6. Illegality, mental incapacity, or duress, if the contract is void under state law

Front 67

Personal Defense &6

Back 67

Can be used to defeat a holder but not an HDC
1. Breach of contract
2. Lack or failure of consideration
3. Fraud in the inducement (ordinary fraud)
4. Illegality, the mental incapacity, or duress, if the contract is voidable
5. Previous payment or cancellation of the instrument
6. Unauthorized completion of an incomplete instrument and nondelivery of the instrument

Front 68

Forgery

Back 68

of a maker's or drawers signature or if an authorized agent exceeds his authority to the amount which exceeds his authority.

Front 69

Fraud in the excecution

Back 69

The "autograph" situation, not fraud in the inducement

Front 70

Material Alteration

Back 70

Changes the contract terms in any way. Making any changes in the amount, date, or rate of interest is material
-Complete or Partial Defense

Front 71

Complete or Partial Defense

Back 71

material alteration is a complete defense against a holder, partial defense against an HDC.

Front 72

FTC Rule 433

Back 72

Severely limits rights of HDC's in consumer credit transactions

Front 73

Effect of the Rule

Back 73

Allows consumer to assert any defense she might have against the seller of goods or services, against the subsequent HDC as well

Front 74

Discharge

Back 74

-Payment or Tender of Payment.
-Cancellation or Surrender.
-Reacquisition.
-Impairment of Recourse.
-Impairment of Collateral.

Front 75

Article 3 (UCC)

Back 75

Covers all negotiable instruments including checks

Front 76

Article 4 (UCC)

Back 76

Establishes a framework for deposit, EFT's and checking agreements between banks and customers

Front 77

Cashier's checks

Back 77

Bank serves as drawer and drawee. bank assumes responsibility

Front 78

Traveler's Checks

Back 78

Must be signed by the drawer again when cashed

Front 79

Certified Checks

Back 79

Check that has been accepted by the bank in which it is drawn

Front 80

Creditor-Debtor

Back 80

Bank owes money to customer and must honor customer's checks

Front 81

Agency Relationship

Back 81

Bank must pay customer's checks and collect for customer if she deposits checks

Front 82

Contractual Relationship

Back 82

Between bank and customer

Front 83

Overdrafts

Back 83

Bank has two options: dishonor, or pay the check and charge the customer's account

Front 84

Overdraft Protection Agreements

Back 84

wrongful dishonor if bank breaches contract

Front 85

Postdated checks

Back 85

Bank can pay unless notified in time to act on it

Front 86

Stale Checks

Back 86

after 6 months, it is bank's choice whether to honor or not

Front 87

Death or Incompetence

Back 87

Neither death nor incompetence revokes bank's authority to pay until it has knowledge up to 10 days after death

Front 88

Stop-Payment Orders

Back 88

Customer can't stop certified checks and must give bank enough time to act. Oral=14 day, Written=6 months. In order to make a stop payment order the customer must have a real or personal defense as needed

Front 89

General Rule

Back 89

Forged signature on a check has no legal effect as signature of the drawer

Front 90

Customer Negligence

Back 90

if customer substantially contributes to loss, bank is not liable. If bank is substantially negligent, it will be liable for loss
-Timely examination of bank statements, and has 30 days from detection of forgery to inform bank

Front 91

Expedited Funds Availability Act of 1987 and Federal Reserve Board’s Regulation CC.

Back 91

Require that checks deposited into banks must be available for withdrawal by check or cash within a certain number of days from the date of deposit.

Front 92

Availability schedule for deposited checks

Back 92

-Local checks: one business day from the date of deposit.
-Non-local checks: five business days from the date of deposit.
-Some deposits must be available the next business day.
-Deposits made in non-proprietary ATMs: 5 business days.
-Some exceptions for new-customer deposits and large deposits.

Front 93

Truth-in-Savings Act of 1991 and Regulation DD

Back 93

require banks to:
-Pay interest based on the full balance of the customer’s interest-bearing account each day.
-Provide customers with certain information concerning balance required, amount of interest on account, fees, charges, penalties, and
-Statement containing certain information on the interest in the account.

Front 94

Designation of Banks Involved in the Collection Process

Back 94

-Depository Bank.
-Payor Bank.
-Intermediary Banks.
-Collecting Banks.

Front 95

Check Collection Between Customers of Different Banks.

Back 95

-Depositary bank must present check to next intermediary or payor bank before midnight of the next banking day following receipt. 
-UCC permits “deferred posting” bank can set a particular time (e.g. 2:00 pm) as cutoff hour. After that hour, items are posted for the next business day.

Front 96

How the Federal Reserve System Clears Checks

Back 96

Fed serves as “clearinghouse” where checks and drafts are exchanged, and drawn on each other’s accounts.

Front 97

Check Clearing and the Check 21 Act.

Back 97

Creates a new negotiable instrument called a substitute check (original is destroyed).

Front 98

Substitute Check

Back 98

-A paper reproduction of the front and back of an original check
-Reduced “Float” Time.
-Faster Access to Funds: As processing time decreases, -Federal Reserve will reduce time banks can hold funds.

Front 99

Types of EFT Systems.

Back 99

ATM’s.
Point-of-Sale Systems.
Direct Deposits and Withdrawals.
Internet Payment Systems

Front 100

Consumer Fund Transfers

Back 100

governed by Electronic Fund Transfer Act of 1978.
-Disclosure Requirements.
-Unauthorized Transfers.
-Violations and Damages.

Front 101

Commercial Fund Transfers

Back 101

transferred “by wire” between commercial entities.

Front 102

Stored Value Cards

Back 102

(magnetic striped, e.g., gift cards).

Front 103

Smart Cards

Back 103

contain microchips

Front 104

Privacy Protection

Back 104

E-Money Issuer’s Financial Records (Financial Privacy Act of 1978).
Consumer Financial Data (Gramm-Leach-Bliley Act of 1999).