Commercial Paper

1. Commercial Paper Basic Types of Commercial Paper Specialized Types of Commercial Paper Chapter 29

2. ACTIVATOR • If you were a diamond broker in New York City, would you take a personal check for the purchase of several fine stones from a vendor in Los Angeles whom you had never met? • If you owned a restaurant, would you take a personal check from a French tourist for the dinner she’d just had in your restaurant? Chapter 29

3. WHAT IS COMMERCIAL PAPER? • Unconditional written orders or promises to pay money • Demand instrument Chapter 29

4. TYPES OF COMMERCIAL PAPER • Drafts • Checks • Honor and dishonor • Stop-payment orders • Precautions and care • Promissory notes • Certificates of deposit Chapter 29

5. DRAFTS Chapter 29

6. Drafts • Bill of Exchange (Draft) -an unconditional written order by one person that directs another person to pay money to a third. • Drawer-the person who executes or “draws” the draft and orders payment to be made. • Drawee-the party ordered to pay the draft. • Payee-the party to whom commercial paper is made payable. • Sight Draft-presented to the drawee by the one holding the draft. • Time Draft-a draft that is payable on a set date, at the end of a specified period after sight, or at the end of a specified period after the date of the draft. • Acceptance-the drawee’s promise to pay the draft when due. Chapter 29

7. CHECKS Chapter 29

8. Checks- type of draft by which a bank depositor orders the bank to pay money, usually to a third party. • Honor: the bank will pay when due each check as long as sufficient funds remain in the depositor’s account. • Dishonor: the bank will refuse to pay when due the instrument and the payee or current owner of the check will not get money for it from that source. • Stop-Payment Orders: When a check is lost or stolen, the drawer should direct the bank not to pay it. • Precautions and Care: Care that must be taken to prevent checks from being altered. Chapter 29

9. PROMISSORY NOTES Chapter 29

10. Promissory Notes: An unconditional written promise by a person or persons to pay money according to the payee’s order or to pay money to the bearer of the instrument. • Maker-the person who executes a promissory note • Collateral Note-personal property that is offered as security and so indicated on the face of the note. • Mortgage Note-when real property is security for payment Chapter 29

11. CERTIFICATES OF DEPOSIT Chapter 29

12. Notes • Certificates of Deposit: An instrument bearing a bank’s written acknowledgement of the receipt of money, together with an unconditional promise to repay it at a definite future time. Chapter 29

13. SPECIALIZED TYPES OF COMMERCIAL PAPER • Certified checks • Teller’s check • Cashier’s check • Money orders • Traveler’s checks Chapter 29

14. Specialized Types of Commercial Paper • Certified Checks: A personal check that has been accepted by a bank before payment. • Teller’s Check: A draft drawn by a bank on funds that it has on deposit at another bank. • Cashier’s Check: A check that a bank draws on itself. • Money Orders: A draft issued by a post office, bank, express company, or telegraph company for use in paying or transferring funds for the purchaser. • Traveler’s Check: A draft drawn by a well-known financial institution on itself or its agent. Chapter 29

15. PREVENT LEGAL DIFFICULTIES In dealing with commercial paper . . . • Be focused when you are drawing or making commercial paper. • Giving in to distractions can lead to mistakes that invalidate the paper or make it subject to forgery. Continued on the next slide Chapter 29

16. PREVENT LEGAL DIFFICULTIES • Specific errors in issuing commercial paper include leaving enough blank space for someone to insert figures and words that would change the face amount of an instrument or failing to have one portion of the paper agree with another, such as the amount in numbers with the written amount. • If you lend a significant amount of money, get a promissory note in return. Continued on the next slide Chapter 29

17. PREVENT LEGAL DIFFICULTIES • If practical, ask for security for a loan and identify the collateral on the face of the instrument. • Use traveler’s checks and credit cards on long trips. Do not carry a lot of cash. • Never sign a blank piece of commercial paper. Take care not to let your blank checks be stolen. Any negligence you contribute to the theft may make you liable for any forgeries that occur. Continued on the next slide Chapter 29

18. PREVENT LEGAL DIFFICULTIES • Remember that an oral stop-payment order is good for only 14 days unless confirmed in writing. A written stop-payment order is good for six months and can be renewed. Chapter 29

19. Teller’s Check 5 Key Specialized Forms of Commercial Paper Traveler’s Checks Certified Checks Cashier’s Check Money Orders Chapter 29

20. Traveler’s Checks Flyer • Directions: Using your newly found understanding of traveler’s checks, you will create a flyer to hang in a local bank to advertise the benefits of traveler’s checks. Included in your flyer: at a minimum, the advantages of traveler’s checks, the process for acquiring and using them, and the advantages of this type of commercial paper over cash. Be as creative as possible but remember the objective is to create a flyer that explains about traveler’s checks. Add at least 2 images! A page border too…  Chapter 29

21. Negotiability and Negotiation of Commercial Paper Requirements of Negotiability Proper Indorsement and Negotiation Chapter 30

22. THE IMPORTANCE OF NEGOTIATION • Negotiable instrument • Assigned instrument Chapter 30

23. Importance of Negotiation • Negotiable: Means that it must be in writing, contain an unconditional promise or order payable in a sum certain, be payable on demand or at a definite time, and be payable to the bearer or to someone’s order. • Negotiable Instrument: Commercial paper • Negotiation: means the proper transfer of a negotiable instrument so that the person receiving the instrument has the power to collect on it by overcoming certain defenses of the person who must pay it off. • Antedated: dated earlier than the date of issuance • Postdated: dated later than the date of issuance. Chapter 30

24. 5.2 EQ: What are the 7requirements a bank looks for when cashing a check? Endorsing your check Signature Security Drawee Date Payee Amount Chapter 30

25. WHAT MAKES AN INSTRUMENT NEGOTIABLE? • In writing • signed by the maker or drawer • Unconditional promise or order • Payable in a sum certain in money • Payable on demand or at a definite time • Payable to bearer or to someone’s order Chapter 30

26. To be negotiable, commercial paper must be in writing and signed by the maker or drawer • To be negotiable, a promissory note or a certificate of deposit must contain an unconditional promise or order to pay. Chapter 30

27. Payable in a sum certain in money • Money: Any official currency or coin acceptable as a medium of exchange either in the United States or in any foreign country at the time the commercial paper is written. • Acceleration Clause: Makes the entire balance due and payable upon the happening of a certain event Chapter 30

28. Payable on demand or at a definite time • Payable on Demand: The commercial paper is written so as to be payable immediately upon presentment or at sight • Payable at a Definite Time: The commercial paper is written payable on or before an identified calendar date. Chapter 30

29. Payable to bearer or to someone’s order • Bearer Paper: Commercial paper that is legally collectible by the party in possession of it. • Bearer: The party in possession of bearer paper. • Order Paper: Commercial paper that is made payable to the order of a specified payee Chapter 30

30. Practice Activity • Sam wrote a check to Lee drawn on the C-M National Bank. Lee indorsed the check and gave it to Leland. Leland indorsed the check “Pay to the order of City Bank” and deposited the check onto his account at City Bank. The check was credited to his account and forwarded to C-M Bank where there were insufficient funds on account to cover the check. The check was then mailed back to City Bank, and City Bank mailed it to Leland with a dishonored note attached to it. Leland, however, never received the check in the mail. Someone intercepted the check and cashed it at the C-M Bank. The teller who cashed the check did not require an indorsement by the person who presented it. Was the check considered bearer paper, i.e., payable by the bank without liability, or order paper, in which case the bank would be liable because it could only be negotiated by the written indorsement of the last indorsee? Chapter 30

31. Caltharp v Calcasieu-Marine National Bank, 199 So. 2d 568 • The check was order paper requiring a signature. Because the bank did not acquire a signature, it is liable. The court held that in this case, the bank is in the best position to avoid the loss by requiring an additional indorsement by the person presenting the check. Therefore, the bank is liable here. It should be noted that the check was originally order paper that was transferred into bearer paper by the subsequent blank indorsement of Lee, which was then converted into order paper again by the special indorsement of Leland. Chapter 30

32. Practice Activity • Production Supply Company was a creditor of Equipment Company of America, who was in bankruptcy. When ECA filed for Chapter 11 bankruptcy protection, PSC was holding fifteen post0dated checks totaling $59,206.40 that it had accepted from ECA for materials it had supplied to ECA. ECA attempted to get the bankruptcy judge to void the checks. PSC defended on the ground that the payments were contemporaneous exchanges for goods as defined in the bankruptcy laws, even thought the checks were post-dated by 60 days. Also, PSC claimed that the checks were within the ordinary course of business as required under the same law. If either of those allegations were true, ECA would not be able to void the checks. What effects does the post-dating have on the check and liability for it? Chapter 30

33. Equipment Company of America v Production Supply Company, 135 B.R. 169 • The court ruled that post-dated checks are by their nature not intended to be contemporaneous exchanges. Rather, it is a promise to pay in the future. As to the second point, however, the court found that the law required it to examine the ordinary course of business between the parties. Here, the court found that the ECA had always paid PSC by 60-day post-dated checks, and in fact, that was their agreement in writing. Nothing in the course of their business dealings has changed just prior to ECA filing for bankruptcy protection. Thus, under existing law, ECA could not void the post-dated checks held by PSC, and PSC was entitled to collect under the bankruptcy as a creditor. Chapter 30

34. HOW IS COMMERCIAL PAPER TRANSFERRED? • Indorsement • Indorser • Indorsee • Holder Chapter 30

35. Transferring Commercial Paper • Indorsement- a signature on the back of an instrument. • Indorser- an owner of commercial paper who signs on its reverse indorses the paper • Indorsee- the party to whom the paper is indorsed • Holder- a party who has physical possession of commercial paper that is payable to his or her order or who is in possession of bearer paper. Chapter 30

36. 5.2 EQ: What are the 8 requirements a bank looks for when cashing a check? A very important requirement is endorsing your check. Name the four types of endorsements here, list their differences, and draw an example of each. Endorsement ENDORSEMENT ENDORSEMENT ENDORSEMENT In your own words, explain how each of the endorsements are similar? How are they different? Which two are the most alike? Chapter 30

37. INDORSEMENTS AND THEIR FUNCTIONS • Blank indorsements • Special indorsements • Qualified indorsements • Restrictive indorsements • Accommodation parties Chapter 30

38. BLANK INDORSEMENTSis the least secure of the four main types of endorsements • It is simply the signature of the holder • It will transform order paper into bearer paper. Chapter 30

39. SPECIAL INDORSEMENTS Transfers the check to another party Example: suppose that Gordon Marshall owes his cousin Gloria $100.00. He could just cash the check and hand Gloria the cash. He could also use a special indorsement to transfer the check completely to Gloria • Order paper requires the signature of the party named in the indorsement. Chapter 30

40. Restrictive Indorsement The most common restriction is “For Deposit Only,” which limits the negotiation of the endorsed check to deposit in an account. • The holder of a check may wish to prescribe a little more carefully how the check is negotiated. • Limits the use to the instrument to a means specified by the endorser. Chapter 30

41. Qualified Indorsement Example: A lawyer representing Martina Mills received a check for funds owed to him, the lawyer might simply transfer the check to Martina by endorsing it with a full endorsement but adding the words “without recourse”. If the check were no good, assuming the lawyer had met other legal requirements for indorsement, neither Martina Mills nor any later holder of the check could require the lawyer to make good on the check. • An attempt to limit the liability of the endorser without limiting an instrument’s further negotiability • A qualified indorsement often guarantees payment if the person of primary liability does not pay. • Pay to the order of Martina Millis, • Without recourse • Signature Chapter 30

42. Accommodation Parties • Accommodation Parties: A person who is known and has good credit rating that cosigns a paper in order to allow the first party to borrow money or to cash a check. Chapter 30

43. PREVENT LEGAL DIFFICULTIES In dealing with commercial paper • Remember that even if an instrument is not negotiable commercial paper, it still may be a valuable contract or creditor’s claim and be freely transferable by assignment. • If you issue commercial paper that is payable on demand, be ready to pay at any time. Civil and even criminal penalties may result from your failure to do so. Continued on the next slide Chapter 30

44. PREVENT LEGAL DIFFICULTIES • Learn and utilize the various indorsements. They have been created to fulfill vital purposes. Continued on the next slide Chapter 30

45. PREVENT LEGAL DIFFICULTIES • If you are the payee of commercial paper, try to include a clause for the payment of reasonable attorney’s fees and collection costs by the issuer in case of default. • Do not sign as an accommodation party unless you are prepared to pay the full amount of the instrument or have your credit standing damaged by it going into default before you are requested to pay it. Chapter 30

46. Discharge of Commercial Paper and Electronic Fund Transfers Discharge of Commercial Paper The Law of Electronic Fund Transfers Chapter 31

47. HOW IS COMMERCIAL PAPER DISCHARGED? • By payment • By cancellation • By alteration • By impairment of collateral • As a contract Chapter 31

48. Discharge of Commercial Paper • By Payment • By Cancellation: Consists of any act by the current holder that indicates intent to end the obligation of payment. • By Alteration: A fraudulent change to or fraudulent completion of commercial paper by a party to the instrument will discharge the obligation of the other party. Chapter 31

49. Discharge of Commercial Paper • By Impairment of Collateral: If a holder extends the time of payment, releases the principal debtor, or impairs collateral provided as security for payment of the negotiable instruments, any party whose rights are affected and who did not consent is discharged. • As a Contract: A negotiable instrument may be discharged in the same ways as an ordinary contract for the payment of money. Chapter 31

50. Discharge of Commercial Paper • Holder in Due Course: (HDC) a person must qualify as a holder and, in addition, take the commercial paper in good faith, give value for it, and not have knowledge of any defense, adverse claim to, or dishonor of the instrument. • Holder through a holder in due course: (HHDC) A holder who takes commercial paper anytime after an HDC. • Limited Defenses: Defenses that are good against everyone except an HDC or an HHDC. • Universal Defenses: Defenses that are good against all plaintiffs suing on a negotiable instrument. Chapter 31