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Prentice Hall © 2005 1
PowerPoint Slides to accompanyThe Legal Environment of Business
and Online Commerce 4E, by Henry R. Cheeseman
Chapter 24Negotiable Instruments, Credit, and Bankruptcy
Prentice Hall © 2005 2
Parties to a Check Drawer
Customer who maintains the checking account and writes checks against the account
DraweeThe bank on which the check is drawn
PayeeThe party to whom the check is written
Prentice Hall © 2005 3
Electronic Funds Transfer Systems Automated teller
machines Point-of-sale
terminals Direct deposits
and withdrawals Pay-by-telephone
systems
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Honoring Checks Stale 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
Prentice Hall © 2005 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
Prentice Hall © 2005 7
Check Collection Process
Coun tryB an k
C ityB an k
M etroB an k
P ayee
D rawer
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
Prentice Hall © 2005 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
Prentice Hall © 2005 9
“On Us” v. “On Them” Checks “On us”
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
Prentice Hall © 2005 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
Prentice Hall © 2005 11
Types of Credit Unsecured 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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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
Prentice Hall © 2005 13
Parties to a Mortgage
Owner-DebtorMortgagor
CreditorMortgagee
Loan of funds
Security interest in real property
Prentice Hall © 2005 14
Parties to a Note and Deed of Trust
Owner-Debtor Trustor
Trustee
Creditor Beneficiary
If default,can protectrights
Legaltitle
Loan of funds
Security interestin real property
Prentice Hall © 2005 15
Right of Redemption The mortgagee has the right to
redeem real property after default and before foreclosure
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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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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
Prentice Hall © 2005 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
Prentice Hall © 2005 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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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
Prentice Hall © 2005 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
Prentice Hall © 2005 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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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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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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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
Prentice Hall © 2005 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
Prentice Hall © 2005 27
Confirmation Acceptance 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
Prentice Hall © 2005 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