Law Final Exam Review

Chapter 25
U.C.C covers anything that is a negotiable instrument. A negotiable
instrument is also called commercial paper. Cash currency is a form of
commercial paper. (Non-negotiable=contract law)
Historical Origins Law merchants were developing their own set of
rules and eventually England codified this into Article 3 of the UCC
Recent Revisions
1. E-Commerce
2. Electronic Checks
3. Modify aspects for negotiability concepts
Bills of Exchange were the first and earliest forms of commercial
paper and are now called drafts.
4 Types of negotiable instruments:
1. Drafts unconditional written order that involves 3 parties
a. Drawer party creating the draft
b. Drawee party paying the money (the bank)
c. Payee party receiving the money
2. Checks
-

demand instruments
most common type of draft is a check
all checks are drafts
all drafts are not checks, however

3. Promissory Notes written promise made by one person to pay

another
- can be made a definite time or on demandpayed
specifically or paid to bearer
a. Maker
b. Payee
4. Certificates of Deposit type of note issued when a party
deposits funds with a bank, and the bank promises to repay
funds with interest on a certain debt
- bank is maker of note, and depositer is the payee
- time deposits so the payee is typically not allowed to
withdraw before date of maturity
Trade Acceptance The seller of the goods is both the drawer and the
payee (seller-buyer-seller) **type of draft, not a check

Requirements for Negotiability **everything has to be on the front**

1. Be in writing - (easily transferrable/permanent)
2. Be signed by the maker or the drawer
3. Be an unconditional promise or order to pay - (IOU or I wish to
pay is insufficient)
4. State a fixed amount of money (has to be currency, not
something like gold)
5. Be payable on demand or at a definite time has to be on or
before date
6. Be payable to order or to bearer
Ch 26
You can either transfer or negotiate a negotiable instrument. If you
transfer it correctly it is a negotiation. Everything else is an assignment
(non-negotiable)
Assignment under contract law, an assignee only receives rights in
the instrument that the assignor had
Negotiation under the U.C.C, transferee becomes a holder, who can
receive more rights than the prior possessor had
Negotiating order instruments requires delivery AND endorsement
Negotiating bearer instruments requires only delivery
4 Types of Endorsements:
1. Blank only has a signaturebecomes a bearer instrument
2. Special Pay A followed by signaturebecomes order
instrument
3. Qualified Pay A, without recourse followed by signature,
means endorser isnt liable
4. Restrictive Pay A if followed by signature
a. For deposit only (allows bank to be a collecting agent of
indorser)
b. Conditional (pay to A if she completes kitchen renos by
June 1 + signature)
c. Prohibitive (Pay A only + signature)
d. Trust endorsement Pay to A as agent for B + signature)
Allonge paper attached to original document firmly with an
endorsement

Holder subject to the same defenses that could be asserted against

the transferor
- Personal Defenses AND Universal defenses can be used
against a holder

Holder in Due Course takes an instrument FREE of defenses and

claims that could be asserted against transferor
1. For value
o Gift or inherits do not count
o Cant promise to give value in future
o If its purchased at a judicial sale for bankruptcy
or credit, than holder will not become HDC)
o Not if bulk transfer
o Not an HDC if you acquire by taking over trust or
estate as administration or apart of corporate
purchase of assets
o Cant become an HDC with a promise to pay
2. Good Faith
o Must have acted honestly in the process of
acquiring the instrument
o Applies only to the holder
3. Without notice of defect
o Cant be an HDC if you know an instrument is
defective
o Dont buy a promissory note after maturity
o Demand instruments are overdue after 90 days
o Time instruments overdue day after due date
o Instrument is dishonored when party to whom
instrument is presented is refusing to pay
o If it has INF written on it, it is a bounced check
o If the instrument is incomplete, thats a notice of
defect
Holder through and HDC (HHDC) shelter rule protects the HHDC
because the HDC earned it and then the person they transfer to does
not have to meet the 3 requirements again.
- only Universal defenses can be used against HDCs
and HHDCs
Shelter Rule - If A is holder, B earns HDC, C will automatically be an
HHDC

Ch 27
The general rule is that every party, except a qualified endorser, who
signs a negotiable instrument, is either primarily or secondarily liable
for payment of that instrument when it comes due
Primary Liable person who is absolutely required to pay the
instrument unless they have a valid defenseMAKERS AND
ACCEPTORS
- acceptor drawee such as a bank that promises to pay
an instrument when it is presented for payment
Secondary Liable contingent liability so they will be liable only if the
party that is primarily liable defaultsDRAWERS AND INDORSERS
Legal signature includes any name, word, mark, symbol that is
executed or adopted by a person and makes someone either primarily
or secondarily liable
Warranty Liability arises even when a transferor does not indorse the
instrumentunlike secondary liability, warranty liability is not subject
to the conditions of proper presentment, dishonor, or notice of
dishonor
Transfer Warranties a person who transfers and
instrument makes the following 5 warranties to all
subsequent transferees and holders who take the
instrument in good faith
1. Transferor is entitled to enforce instrument
2. All signatures are authentic and authorized
3. Instrument has not been altered
4. Instrument not subject to defense or claim of
any party that can be asserted against
transferor
5. Transferor has no knowledge of bankruptcy
against maker, acceptor, or drawer of
instrument
Presentment Warranties a person who presents
instrument for payment or acceptance makes the
following presentment warranties to any other person
who in good faith pays or accepts instrument
o Person obtaining payment is entitled to enforce
instrument or obtain on behalf of someone else
o Instrument has not been altered

o Person obtaining payment has no knowledge

signature is unauthorized
Stop Payment Order order to bank not to pay a certain check
- any customer or person authorized to draw on the
account can order bank to pay or not pay check
- customer has no right to stop payment on a check that
has already been certified or accepted
- customer must have valid, legal reason or holder can
sure
- written order is effective for 6 months
- oral order is effective for 14 days
- bank is required to repay customers account if they pay
check when there is a stop payment order
Death of a Customer checks can be payed by bank if they are
unaware of death and bank will have no liability
- when bank is aware of death, they can pay up to 10
days after date of death
- exception is if person (heir/executor) orders bank to
stop payment right away
Forgery Bank suffers the loss (UNLESS CUSTOMER HAS BEEN
NEGLIGENT OR THEY FIND FORGER)
- customer must discover and report 1st forged check to
bank within 30 calendar days or they are liableif bank
failed to show ordinary care then they share liability
- If customer doesnt report forgery in one year then they
are solely liable
Imposter if through deception, someone forces a maker or drawer to
write a check to them even though they arent who they say they are,
the person cant get their money back **Not technically a forgery
customer will be liable**
Depository Bank- 1st bank to receive check for payment
Payor bank bank on which a check is drawn
Collecting bank any bank except payor bank that handles a check
Intermediary bank any bank in between pay/depository bank
Electronic Find Transfer Act transfer of funds made by the use of an
electronic terminal, a telephone, a computer, or magnetic tape
1. ATM
2. Point of sale system (terminals for debit card)
3. Direct deposits and withdrawls
4. Internet payment systems

Unsecured Hope theyre going to pay (handshake or promise)

DONT DO THIS BECAUSE IT DOESNT HOLD UP
Secured If you default, I get your car
Perfected If there is a promissory note with 3 people saying If I
default you get my carif the person defaults on all three debts then
all three couldnt get the carto have perfected status it says that you
are the first one to get itYou have to make it known.
**ARTISANS AND MECHANIC LIENS ARE BETTER THAN BEING
PERFECTED**
Artisans liens when debtor fails to pay for labor and materials
furnished for the repair or improvement of personal propertyyou
MUST have possessionafter enough time goes by the place who did
work on your car could sell it
Mechanics liens REAL property like land, homes, deck, if you dont
pay the person who did your deck for example, if enough time goes by
they could put a lien on it and sell your house to get paid (harder than
artisan)
Inkeeper hotels keep what you left behind
Judicial Liens when debt is past due, creditor can bring legal action
against debtor
After Acquired property anything new that comes in and that you
have now can be used as collateral if you have new inventory
Garnished can take only 30% of pay awaydecided by state
Surety promise made by a 3rd person to be responsible for the
debtors obligationa COSIGNER that is primary liable **doesnt need
to be written
Guarunty secondary liable only after debtor defaults HAS to be in
writing
Creditors Composition Agreement Make a deal saying ill pay you 25%
today if you forgive the rest of the debtused when companys are
going to fild for bankruptcy soon

Chapter 31 Bankruptcy
Goals of bankruptcy
1. Help the debtor
2. Help the creditors
Bankruptcy Chapters 7,11,12,13 are the big 4 chapters in bankruptcy
code
-There are others but these are the biggest
Ch 7 meanest, most common bankruptcy chapter they have
- straight bankruptcy/liquidation
- killer whale of bankruptcy
- Trustee employee of bankruptcy court they manage and
control the bankruptcy, and comes up with workable plan
because debtor lacks motivationThey basically work out a plan
for the entire bankruptcy
- Debtor doesnt have a fair amount of control b/c theyre giving
up
- can be Voluntary things are so bad you file for bankruptcy by
yourself
- or Involuntary drags you kicking and screaming into bankruptcy
so you get at least some of your money before you lose
everything
o only concerned with qualified creditors(you owe someone
at least $14,000 or more)
If you have 11 or fewer qualified creditors, it only
takes one of them to drag you into bankruptcythe
one who you owe the most money too is probably
going to champion the cause
If you have 12 or more qualified creditors, you have
to have 3 of them to petition for bankruptcy
Ch 11 Reorganization
- forces your creditors to reorganize your loans and get lower
interest rates
- means your debt load is killing you and you need it changed
- not throwing in the towel or giving up, you just need help with
loans
- Voluntary or involuntary
- Debtor usually has a fair amount of control
o D.I.P Debtor In Possession they are still in control and
running their company
- Trustee Is an advisor or a supervisor to help
Ch 13 Wage Earner Filing
- employee spends more money than you make

the bankruptcy that employees/consumers will file

Strictly Voluntaryyou cannot drag someone into a 13
Unsecured Debts need to be less than $336,900
Secured Debts need to be less than $1,010,650
o If you are above either of these than you need to file for Ch
7 bankruptcy

Ch 12 Agricultural (Farming food stuff and Ranching live stock)

- Strictly Voluntarycannot drag a farmer into bankruptcy
- Foreclose on a family farm if they wont go voluntarily into
bankruptcy
- To file a 12, 50% of your income needs to come from agriculture
- And 50% of your debt comes from farming and ranching
o have to meet both of these
Automatic stay/stop When you file for protection the first thing the
court does is say all other efforts to collect from this group should stop
now until the bankruptcy courts come up with a workable planmakes
it easy to solidify numbers and then decide who gets paid and what to
do/etc
Exemptions you wont lose everything or have it all takenyou get to
keep some stuff (feds set minimums) State sometimes adds to
different categoriestough to lose real property in texas because the
state always adds to it.
- if you have a house you get to keep equity up to 20,200 dollars
- Feds let you keep a car as long as its value does not exceed 3225
dollarsif its worth more they will sell your car
- You can keep your pets as long as their value doesnt exceed 200
dollars
- Awards you may win for injury you keep
Preferential Transfers If you pay one person off and not anyone else
then file for bankruptcy, then people can grab money back from the
person who got it and spread it out to all creditors
Fraudulent Transfers ask someone they know to buy boat, trailer,
truck, etc for $1, but person who bought it gets to use it any time
they want and then file for bankruptcybankruptcy court looks for this
stuff about a year back
Debtor in Possession on entry of the order for relief, the debtor
generally continues to operate the business as a debtor in possession
50 all multiple choice