BLAW 3310 Chp 13

Certificate of Deposit

Acknowledgment by bank that it has received money from customer and will repay money received at a date specified or demand.

Attachment under UCC

Agreement must be signed by customer. Seller must provide value and the customer have legal, transferable rights in the collateral.

Debts Not Extinguished by Bankruptcy

Alimony and child support payments Back taxes Most student loans Some debts incurred immediately before filing bankruptcy debts incurred by fraud against the creditors Fines owed to the government

Note

Business does not pay supplier until after it has sold the goods made from the supplies, notes provide security about payment to be made in the near future

Chapter 11 Bankruptcy Code

Businesses that wish to remain in operation and not be liquidated. They are worth more kept alive generating revenue than being liquidated.

Endorsement Without Delivery of Instrument

Cannot bring about a transfer.

Discharge

nonexempt assets have been liquidated and the proceeds distributed among creditors, who may not ask for more. Debtor gets a fresh start.

Suretyship

owners must provide personal guaranty for debts. If business has poor credit history, one must provide a guaranty by pledging personal assets by owner or a third party.

Sight Draft

requires immediate payment

Default by debtor

security interests helps to protect the interests of the seller in the event the customer defaults. Because seller has a security interest in the product, it has priority to the collateral over all unsecured creditors. Seller may repossess goods without judicial process or notifying parties who also have a security interest in the product. products may be resold

Instrument Made "To Bearer"

Party in possession is required only to deliver the instrument to transfer it.

Draft

Payable at later date. Bank, individual, or corporation as drawee.

Defense of Sureties

Any contract defenses available to principle also are available to surety, including impossibility, illegality, duress, and fraud. But not creditor bankruptcy. Surety is released when creditor releases borrower without the sureties consent.

Interests in Inventory

As collateral, supplies such as equipment, inventory, and raw materials can be classified under tangible property. To protect lender extending credit obtains a security interest called a purchase money security interest. Gives lender rights against the borrower.

Instrument is assigned

Assignee has same contract rights and responsibilities as the assignor.

In The Matter of Kmart Corporation

Bankruptcy court agreed that critical vendors to the business be payed in full, with the argument that if not, it would further hinder their ability to pay other creditors. Some of the Creditors appealed to district court reversing the order. Decision was then appealed to the 7th Circuit, who affirmed. Creditors needed records showing the prospect or benefit to the other creditors, which they had none.

UCC Requirements

Be written. Promise to pay Be signed by maker Be payable on demand Be made out"to order" or "to bearer" State a certain sum of money

Draft

Binding order to pay a fixed sum

Associated Home and RV Sales, INC. V. Bank of Belen

Company Enchantment hires Ramos to assist with bookkeeping. Ramos forged 211 checks payable to herself. Enchantment discover forgeries and notifies bank. Bank refuses to cover losses, stating it sent monthly statements. Trial court granted summary judgment to the bank. Appeals court decision- Customer must discover fraud in 30 day period of receiving bank notices, after than bank is only liable if customer can prove that the bank failed to exercise ordinary care. Ruling reverses motion of summary judgement in favor of bank. Because Enchantment brought fourth evidence lacking ordinary care.

Attachment Lien

Court ordered seizure of goods from a customer from disposing of the goods. Creditor must show the debtor is likely to dispose of the product. If court incurs it issues a writ. Debtor may not pay, causing creditor to file a judgment lien, which provides notice to potential purchasers of the property of the existence of the judgment and lien, which is good for ten years. If debtor does not pay the judgement in given time, the creditor may ask for writ of execution, which directs sheriff to seize and sell any of the debtor's nonexempt real or personal property.

Bearer Instruments

Created by stating, "to bearer", "to the order of bearer," "payable to bearer," "to cash," or "pay to the order of cash". Risky because mere delivery creates a negotiation of transfer.

Priority Classes of Creditors

Creditors take priority over other creditors in receiving debtors assets to pay debts owed to them. 1. Secured Creditors 2. Costs of preserving and administering the debtor's estate 3.Unpaid wage claims 4. Certain claims of farmers and fisherman 5. refund of security deposits 6. Alimony and child support 7.Taxes 8.Unsecured creditors who can file a proof of claim

Cashier's Check

Customer gives money to bank and designates payee. Bank is both drawer and drawee. Transaction where seller demands guaranteed payment.

In Re Darby

Darby filed for chapter 13 bankruptcy. Time Warner canceled his service. Darby filed a motion with bankruptcy court to reinstate his service with offering of assurances of future payments. Court held that it was not a necessity under the law. Darby appealed. Court affirmed under the same provision.

Chapter 13 Bankruptcy Code

Debtor files a plan to pay creditors over 5 years usually. Debtor retains property and shares administration of of the bankrupt estate with court appointed trustee. If plan fails its possible to shift to chapter 7 bankruptcy and have financial issues cleared.

Credit Policy Focus

Debtor's ability to pay Debtor's financial condition Debtor's reputation Debtor's assets Economic situation affecting debtor's business

Fordyce Bank and Trust V. Bean Timberland

Fordyce bank made series of loans to Bean Timberland, so it could buy timber to be cut into logs and sold to Potlatch and Idaho Timber. Bean gave bank security interests in the timber. The proceeds went to repaying back bank loans. Bean failed to repay loans and went bankrupt. Bank sues Potlatch and Idaho because bank had priority interest in the timber sale proceeds. Bank alleged they were negligent in their dealing to failing to do a lien search and "failed to exercise good faith". Ruling was they were not negligent. Not required to perform security interest search because it was not customary or usual in the timber business.Ruling affirmed Buyer is free of a security interest created by the buyer's seller, even if it is perfected and buyer knows of its existence.

General Electric Business Financial Services V. Silverman

GE Financed 34.8 million to Warren Park Partners. Loan agreement was made and a guaranty signed that stated "absolutely, unconditionally, and irrevocably guaranteed" the full payment of the principle and interest. Warren Park defaulted on loan agreement and failed to pay. Ge Sued on affirmative action. Silverman's defense claimed affirmative defense of fraud, extortion, theft, and economic duress. They state their was last hour changes to agreement and they had no chance to contest as the loan was needed immediately. Court ruled summary judgement.

Article 9 of the UCC

Goods sold to customer may secure the debtor's obligation to pay. Called Secured Transaction Seller obtains the perfection of security interest in the goods sold to customers as collateral to help secure payment int eh event of default

unsecured creditor

Has customers promise to pay, securing the loan. If unable to pay, business receives nothing. Customer simply does not pay, legal action is required.

Time Drafts or Term Drafts

Hold payment until later, to make sure items have been delivered

Surety's Right Against the Principle

If borrower could pay the creditor but refuses to pay, the surety is entitled to exoneration requiring the principle to pay. Surety entitled to be subrogated to the rights of the creditor against the debtor. Surety can may assert rights that creditor has asserted on debtor, including taking any security interests the creditor obtained from the borrower

Under UCC

Inventory includes goods held for sale as well as raw materials

Lien

Legal right sellers has to product now held by customer. Security obtained by a creditor through the operation of law. Creditor may obtain lien without the debtor's consent by following the statutory procedures.

Non-Recourse Debt

Lender seizes the collateral but does not seek deficiency judgment . Most common mortgage

Reorganization Process

Managers of debtor company are allowed to continue operating business, thus acts as trustee of the operation, called a debtor in possession. Debtor's duty is to act in the best interests of the creditors as well as the owners.

Real Estate Financing

Mortgage is a lien that gives lien holder the right to sell the property and repay the debt from sale proceeds in the even borrower defaults. State common law and real estate statues govern transactions.

Mechanic's Lien

Most common Lien for work performed on real property. Party furnishing material, labor, or services of building or other real property can placed lien on unpaid bills, must be filed within 90 days from date work or services was completed. Should lien not be paid, suit must be brought within 6 months after filing lien.

Requirements for Negotiable Instruments

Negotiable instruments fall under the UCC. Instrument is nonnegotiable it falls under the common law of contracts

credit

Not a negotiable instrument. Lends money to party, specifies interest rate and payment date.

Types of Negotiable Instruments

Orders to Pay- drafts & checks are three party instruments Promises to Pay- are notes & certificates of deposit, which are 2 party

Check

Paid on demand must have bank as drawee

Creates Confidence for Business Community in Negotiable Instruments

Pam buys car-wash from Tammy. Pay's by cashier's check. Pam learns business is going out of business. Pam tries to stop payments. But Tammy has sent the check to third party who is now the holder in Due Course. Tammy declares bankruptcy and third Party has no obligation to repay Pam.

Holder in Due Course

Person in possession of a negotiable instrument. Instrument may freely be traded in market (if negotiable under UCC) without concern of parties earlier in transaction performed their contract responsibilities, if in possession of (holder in Due Course).

Credit agreement depends on

Personal property(real estate property) is considered goods. Falls under UCC. Requires little or no formal documentation Real property (movable goods) falls under contract and property law. requires documentation before sale is finalized

Default by Mortgagor

Proceeds of the sale of foreclosure are not sufficient, mortgagee may obtain deficiency judgment to recover the loss. If their are surplus, they are given to mortgagor.

Surety

Promise by third promise to be responsible for borrower's fail payments. Debtor is known as principle Created only by surety and creditor. Common form is co-signature on a bank loan

Different Type's of Notes

Promissory note- promise by one party to pay another. Collateral note- Personal property is used as collateral to back up loan. Real estate mortgage note- Real estate is used as collateral to secure loan Balloon note- Provides installment payments

Homestead Law

Provides exemption that allowed the debtor to retain the family home up to a specified amount free from creditors claims.

Guarantor

Provides guarantee of payment to a creditor should principal debtor fail to pay. same as surety In most states the surety and and the borrower are binded by contract.

Possessory Lien

Provides security interest for creditors that add value to or care for personal property. If customer does not pay the creditor they can force the sale of the property.

A "Floating Lien" for Inventory

Security interest in any specific item of inventory ends when the item is sold, but interest attaches to new inventory.

Bankruptcy Proceeding

Some creditors knowing bankruptcy is coming will work with the debtor for favored treatment.

Mortgage

State Statues require that the mortgages be placed in a county office.

Garnishment

Statutory procedure under which a creditor gains the right to attach up to a 25% of a customer's net wages to be applied to an outstanding debt.

Summer Group, INC. V. Tempe Mechanical, LLC

Summer groups sold materials for construction on property owned by Metro Lofts. Summers group recorded a mechanic's lien on Metro Lofts property, other contractors filed lien's as well, for non-payment. All parties agreed bankruptcy court would determine priority of payment of all valid liens. Metro lofts was under control of bankruptcy trustee, ML Manager. Ml Manager argued it stood first to receive payment and that Summers group should pay all attorney fees. Trial court agreed. Summers Appealed. Case was reversed and remanded. Decision was made that all Remaining lien Claimants should be liable for ML Manager's attorney fees award in proportion to their claims against the encumbered property. They also held that the remaining lien claimants caused ML Manager to defend its lien priority, this caused all lienholders to be treated equally with one another.

Instrument Transferred as Negotiation

Transferee (receiving) takes the instrument free of any of the transfer's contract obligations. Transferee has more rights.

Transfer of "Holder in Due Course"

Transferee must: Give value to negotiable instrument Take the instrument without knowledge that it is overdue or defective Take the instrument in good faith

Creditor Committee

Watch over Debtor

Bill of Exchange

When draft is used in international trade

Secured Creditor

When it has the ability to take some of the nonpaying customers property to satisfy the debt, by agreement with the debtor or by operation of law.

Negotiable Instrument

Written promise or order to pay someone. A substitute for cash. (checks) Provides way for credit to be extended to debtor.

Chapter 7 Bankruptcy Code

discharge of most debts after sale and distribution of sale proceeds to the creditors. Considered voluntary bankruptcy filing of this petition means a freeze is imposed on all actions against the debtor and the debtor's property by any creditors. Involuntary bankruptcy- Creditors file a petition with the courts forcing the deceleration of bankruptcy.

Perfection

file the financing statement to secretary of state, so its available to public. The perfection of the interest establishes the date priority took effect. When multiple creditors have claims, the priority order is clear.