COPYRIGHT © 2011 South-Western/Cengage Learning. 1 Click your mouse anywhere on the screen to advance the text in each slide. After the starburst appears, click a blue triangle to move to the next slide or previous slide.

COPYRIGHT © 2011 South-Western/Cengage Learning. 2 Quote of the Day “A commodity appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing, abounding in metaphysical subtleties and theological niceties.” Karl Marx, German political philosopher

COPYRIGHT © 2011 South-Western/Cengage Learning. 3 Negotiable Instruments  Commercial paper is a contract to pay money.  It can be: A Substitute for Money A Loan of Money  Types of Negotiable Instruments Note (also called a promisory note) is a promise to pay money. Draft is an order directing someone else to pay money for you (e.g., checks).

COPYRIGHT © 2011 South-Western/Cengage Learning. 4 Fundamental Rule of Commercial Paper  The possessor of a piece of commercial paper has an unconditional right to be paid, as long as: (1) the paper is negotiable (2) it has been negotiated to the possessor (3) the possessor is a holder in due course; and (4) the issuer cannot claim a valid defense.

COPYRIGHT © 2011 South-Western/Cengage Learning. 5 Negotiability  The possessor of non-negotiable commercial paper has the same rights-- no more, no less--as the person who made the original contract.  The possessor of negotiable commercial paper has more rights than the person who made the original contract.

COPYRIGHT © 2011 South-Western/Cengage Learning. 6 Requirements for Negotiability  The Instrument Must: Be in Writing. Be Signed by the Maker or Drawer. Contain an Unconditional Promise or Order to Pay. State a Definite Amount of Money. Be Payable on Demand or at a Definite Time. Be Payable to Order or to Bearer.

COPYRIGHT © 2011 South-Western/Cengage Learning. Interpretation of Ambiguities  When terms contradict, three rules apply: Words take precedence over numbers. Handwritten terms prevail over typewritten terms. Typed terms prevail over printed terms. 7

COPYRIGHT © 2011 South-Western/Cengage Learning. 8 Negotiation  Negotiation means that an instrument has been transferred to the holder by someone other than the issuer. To be negotiated, order paper must first be indorsed and then delivered to the transferee. Bearer paper must simply be delivered to the transferee; no indorsement is required.  An indorsement is the signature of the payee.

COPYRIGHT © 2011 South-Western/Cengage Learning. 9 Holder in Due Course  A holder in due course has an automatic right to receive payment for a negotiable instrument (unless issuer can claim one of a few “real” defenses).  Requirements for Holder in Due Course Under §3-302 of the UCC, a holder in due course is a holder who have given value for the instrument, in good faith, without notice of outstanding claims or other defects.

COPYRIGHT © 2011 South-Western/Cengage Learning. 10 Notice of Outstanding Claims or Other Defects  The instrument is overdue  The instrument is dishonored  The instrument is altered, forged, or incomplete  The holder has notice of certain claims or disputes

COPYRIGHT © 2011 South-Western/Cengage Learning. 11 Defenses  The issuer of a negotiable instrument is not required to pay, even a holder in due course, if: His signature on the instrument is forged After signing, his debts are discharged in bankruptcy He was a minor at the time of signing The amount of the instrument was altered after he signed it (unless he left the amount blank) He signed under duress, while incapacitated, or as part of an illegal transaction, or He was tricked into signing without any reasonable way to know what he was signing

COPYRIGHT © 2011 South-Western/Cengage Learning. 12 Consumer Exception  A consumer credit contract is one in which the seller is also the lender.  In such cases, the Federal Trade Commission requires a specifically- worded notice to be included on the contract, making it non-negotiable.

COPYRIGHT © 2011 South-Western/Cengage Learning. Bank’s Duty to Provide Information  A bank is not required to provide a monthly statement, but most do.  A statement (if provided) must disclose: Interest rate paid Amount of interest earned Fees imposed by the bank The number of days covered by the statement  When an account is opened (and in ads), the bank must disclose: Interest rate paid How long this rate will be in effect Requirements to earn the advertised rate Fees or penalties imposed by the bank

COPYRIGHT © 2011 South-Western/Cengage Learning. The Bank’s Duty to Pay  A bank must pay a check if the check is authorized by the customer and complies with the terms of the checking account agreement.  A bank is not required to pay a check on an overdrawn account, but may choose to do so. It is then allowed to either repay itself out of the next deposit or demand immediate payment of the overdraft.

COPYRIGHT © 2011 South-Western/Cengage Learning. Wrongful Dishonor  If a bank violates its duty and wrongfully dishonors an authorized check, it is liable to the customer for all actual and consequential damages.

COPYRIGHT © 2011 South-Western/Cengage Learning. Difficult Situations for a Bank  The Death of a Customer Bank may continue to pay checks for ten days after it learns of the death, unless it receives a stop payment order from someone claiming an interest.  Incompetent Customers Once notified that a court has found a customer to be incompetent, the bank is liable if it pays the customer’s checks.

COPYRIGHT © 2011 South-Western/Cengage Learning. Invalid Instruments  Forgery If a bank pays when the issuer’s name is forged, it must recredit the issuer’s account.  Alteration If a check has been altered, the customer is liable only for the original terms of the check, and the bank is liable for the rest.  Completion If an incomplete check is later filled in by someone other than the original issuer, the bank is not liable unless it was on notice that the completion was improper.

COPYRIGHT © 2011 South-Western/Cengage Learning. Dating on Checks  Stale Checks A bank is not required to pay checks that are presented more than six months after their date, but it is not liable if it does pay.  Post-dated Checks A bank is not liable for paying a post-dated check unless the customer has notified the bank in advance that a post-dated check is coming.

COPYRIGHT © 2011 South-Western/Cengage Learning. Stop Payment Orders  As a general rule, if a bank pays a check over a stop payment order, it is liable to the customer for the loss he suffers.  The “bank is subrogated to” the rights of the parties, which means that the bank can substitute for, or take the place of, either party.

COPYRIGHT © 2011 South-Western/Cengage Learning. Electronic Banking  Today’s consumers have options for banking that were barely imagined a generation ago: Automatic Teller Machines (ATMs) that dispense cash, allow transfers and accept deposits Point of Sale terminals that allow the use of debit cards (deducting the funds directly from a checking account) Automatic deposit systems Services that allow bills to be paid over the telephone lines

COPYRIGHT © 2011 South-Western/Cengage Learning. Provisions of the Electronic Fund Transfer Act of 1978  Employers may require all employees to accept payment by electronic transfer (direct deposit), but may not require that it go to a particular bank.  Electronic fund transfer cards (ATM, debit, etc.) sent without a customer’s request must be invalid until the consumer activates it.

COPYRIGHT © 2011 South-Western/Cengage Learning. Electronic Fund Transfer Act (cont’d)  Documentation of electronic transfers must be provided both at the ATM and in monthly or quarterly statements.  Preauthorized transfers (such as an automatic mortgage payment) must be authorized in writing.  Errors If reported within 60 days, a bank must investigate an error within the next 10 days or provisionally credit the account until the investigation can take place.

COPYRIGHT © 2011 South-Western/Cengage Learning. Electronic Fund Transfer Act (cont’d)  Consumer Liability for Unauthorized Transactions (stolen ATM card) If reported within 2 days of theft: consumer liable for $50, bank liable for the rest. If more than 2 days, but within 60 days of theft: consumer liable for up to $500. If not reported within 60 days, consumer is liable for the full amount of loss.  Bank’s Liability If a bank fails to make an authorized electronic fund transfer, it is liable for damages caused by the nonpayment.

COPYRIGHT © 2011 South-Western/Cengage Learning. Electronic Fund Transfer Act (cont’d)  System Malfunctions If a payment cannot be made due to a system malfunction, the obligation is suspended until the malfunction is repaired or the intended recipient has asked, in writing, for a non-electronic payment.  Disclosure The provisions of the EFTA must be disclosed in clear language to a consumer opening an account with electronic fund transfer capability.

COPYRIGHT © 2011 South-Western/Cengage Learning. 25 “The Uniform Commercial Code enables merchants to form contracts more quickly and easily. But along with this increased facility goes greater responsibility, since informal discussions may suddenly turn into… a contract.” “The Uniform Commercial Code enables merchants to form contracts more quickly and easily. But along with this increased facility goes greater responsibility, since informal discussions may suddenly turn into… a contract.”