1. Chapter 24 Negotiable Instruments, Credit, and Bankruptcy
PowerPoint Slides to accompany The Legal Environment of Business and Online Commerce 4E, by Henry R. Cheeseman
Chapter 24
Negotiable Instruments,
Credit, and Bankruptcy
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2. Parties to a Check Drawer
Customer who maintains the checking account and writes checks against the account
Drawee
The bank on which the check is drawn
Payee
The party to whom the check is written
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3. Electronic Funds Transfer Systems
Automated teller machines
Point-of-sale terminals
Direct deposits and withdrawals
Pay-by-telephone systems
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4. Special Types of Checks
Certified checks
Cashier’s checks
Traveler’s checks
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5. Honoring Checks Stale checks Incomplete checks
A check that has been outstanding for more than six months
Incomplete checks
Death or incompetence of the drawer
Stop-payment orders
An order by a drawer of a check to the payor bank not to pay or certify a check
Overdrafts
The amount of money a drawer owes a bank after it has paid a check despite insufficient funds in the drawer’s account
Wrongful dishonor
Occurs when there are sufficient funds in a drawer’s account to pay a properly payable check, but the bank does not pay the check
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6. Forged Signatures and Altered Checks
Forged instrument
Is wholly inoperative as the signature of the drawer
Is not properly payable
Altered check
A check that has been altered without authorization that modifies the legal obligation of a party
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7. Check Collection Process
Drawer issues a check to Payee drawn on Country Bank
Payee deposits the check into his account at Metro Bank
Metro Bank sends the check to City Bank for collection
City Bank sends the check to Country Bank for collection
Drawer has a checking account at Country Bank
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8. Final Settlement Occurs when the payor bank Pays the check in cash
Settles for the check without having a right to revoke the settlement
Fails to dishonor the check within certain statutory time periods
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9. “On Us” v. “On Them” Checks
A check that is presented for payment where the depository bank is also the payor bank, i.e., the drawer and payee or holder have accounts at the same bank
“On them”
A check presented for payment by the payee or holder where the depository bank and payor bank are not the same bank
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10. “Four Legals” that Prevent Payment of a Check
Receipt of a notice affecting the account
Receipt of service or a court order of other legal process that freezes the customer’s account
Receipt of a stop-payment order from the drawer
Payor bank’s exercise of its right of setoff against the customer’s account
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11. Types of Credit Unsecured credit Secured credit
Credit that does not require any security (collateral) to protect the payment of the debt
Secured credit
Credit that requires security (collateral) to secure payment of the loan
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12. Security Interests in Personal Property
Common law lien
Given to artisans, laborers, innkeepers, common carriers, and other service providers on personal property of customers to secure reasonable payment for services rendered
Statutory lien
A lien that codifies by statute a service provider’s common law lien
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13. Parties to a Mortgage Owner- Debtor Mortgagor Creditor Mortgagee
Loan of funds
Owner-
Debtor
Mortgagor
Creditor
Mortgagee
Security interest
in real property
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14. Parties to a Note and Deed of Trust
Loan of funds
Owner-
Debtor
Trustor
Creditor
Beneficiary
Security interest
in real property
Legal
title
If default,
can protect
rights
Trustee
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15. Right of Redemption
The mortgagee has the right to redeem real property after default and before foreclosure
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16. Material Person’s Lien
A contractor’s and laborer’s lien that makes the real property to which improvements are being made become security for the payment of the services and materials for those improvements
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17. Surety and Guaranty Arrangements
Surety arrangement
An arrangement where a third party promises to be primarily liable with the borrower for the payment of the borrower’s debt
Guaranty arrangement
An arrangement where a third party promises to be secondarily liable for the payment of another’s debt
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18. Collection Remedies Attachment
Seizure by the creditor of property in the debtor’s possession in order to collect on a debt while their lawsuit is pending
Execution
Postjudgment seizure and sale of the debtor’s property to satisfy a creditor’s judgment against the debtor
Garnishment
Postjudgment remedy that is directed against property of the debtor that is in the possession of third persons
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19. Fresh Start in Bankruptcy
The goal of federal bankruptcy law is to discharge the debtor from the burdensome debts and allow him or her to begin again
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20. Chapter 7 Bankruptcy Liquidation
Debtor’s nonexempt property is sold for cash
Cash is distributed to creditors
Unpaid debts are discharged
Any person, including individuals, partnerships, and corporations may be debtors in a Chapter 7 proceeding
Debtor gets a fresh start
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21. Federal Exemptions from the Bankruptcy Estate
Exemptions include:
Homestead exemption—interest up to $15,000 in property used as a residence and burial plots
Interest up to $2,400 for one motor vehicle
Interest up to $400 per item for household goods
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22. Voidable Transfers
The bankruptcy code prevents debtors from making unusual payments or transfers of property on the eve of bankruptcy that would unfairly benefit the debtor or some creditors at the expense of others
Preferential transfers within 90 days before bankruptcy
Preferential liens
Preferential transfers to insiders
Fraudulent transfers
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23. Priority of Creditors
Secured creditors have priority over unsecured creditors
Unsecured creditors claims are satisfied out of the bankruptcy estate in order of their statutory priority
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24. Nondischargeable Debts
Nondischargeable debts include:
Claims for taxes accrued within three years prior to bankruptcy filing
Certain fines and penalties payable to federal, state, and local government units
Alimony, maintenance, and child support
Claims based on the consumer-debtor’s purchase of luxury goods of more than $1000 from a single creditor
School loans
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25. Chapter 11 Bankruptcy Reorganization
Reorganizes the debtor's financial affairs under the supervision of the Bankruptcy Court to give the debtor a new capital structure so that it will emerge from bankruptcy as a viable concern
Available to individuals, partnerships, corporations, unincorporated associations, and railroads
May be filed voluntarily by the debtor or involuntarily by its creditors
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26. Rejection of Collective Bargaining Agreements
Companies that file for Chapter 11 reorganization sometimes argue that agreements with labor unions may be rejected in bankruptcy
The U.S. Supreme Court has upheld the right of companies to reject contracts in bankruptcy if necessary for the successful rehabilitation of the debtor
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27. Confirmation Acceptance method Cram-down method
The bankruptcy court must approve a plan of reorganization if
The plan is in the best interests of each class of claims and interests
The plan is feasible
At least one class of claims votes to accept the plan
Each class of claims and interests is nonimpaired
Cram-down method
A method of confirmation of a plan of reorganization where the court forces an impaired class to participate in the plan of reorganization
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28. Chapter 13 Bankruptcy Consumer Debt Adjustment
Permits the courts to supervise the debtor’s plan for the payment of unpaid debts by installments
Debtor retains more property than is exempt under Chapter 7
Less expensive and complicated than Chapter 7
Creditors may recover a greater percentage of debts than under Chapter 7
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29. Chapter 12 Family Farmer Bankruptcy
Chapter 12 allows family farmers to file for a special type of reorganization bankruptcy that gives them added protection not available under Chapter 11 of the Bankruptcy Code
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