Part 2: Ch 26-50: Page 2-805

Part 2: Ch 26-50: Page 2-805 Part 1: Ch 1-25: Page 806-1540 Smith and Roberson’s Business Law 17e Richard Mann, Barry Roberts (Instructor's Manual All Chapters, 100% Original Verified, A+ Grade) 1 / 4

PART FIVE: Negotiable Instruments 1

© 2018Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website or school-approved learning management system for classroom use.

Part Five: Negotiable Instruments

CONTENTS

Chapter 26 Form and Content Chapter 27 Transfer and Holder in Due Course Chapter 28 Liability of Parties Chapter 29 Bank Deposits, Collections, and Funds Transfers

ETHICS QUESTIONS RAISED IN THIS PART

1.Should a customer have the right to stop payment on a check? If so, under what circumstances? Who should

bear the expense of a stop payment order: Why?

2.Who should bear the loss for a forged check–the bank or the account holder? Why? What should be the determining factor(s) in deciding who should bear the risk of loss?

3.What obligations does a bank have to inform its customers of their rights as a depositor? What obligations does a customer have to inform himself of his rights?

4.What essential services should a bank or other financial institution provide for its customers? Should banks be allowed to charge small customers more for financial services than they charge large customers?

5.Should a bank be allowed to "hold" deposited checks before making the funds available to their depositors?If the bank is allowed to "hold" the checks, should the bank be allowed to profit by counting the deposited checks on their books while refusing to allow the customer the use of the funds for check writing purposes?

6.Why would the banks prefer automatic funds transfer over the use of checks? Does a customer who uses automatic funds transfer have the same protections as one who uses a checking account to write checks?What happens if the bank makes a mistake? Who is responsible?

7.Futurists like to talk about a future cashless, checkless society. What ethical issues are raised by a society that operates without cash or checks?

8.From an ethical perspective, is it fair for a holder in due course to protect himself from personal defenses such as failure of consideration or fraud in the inducement? Why?

9.Home mortgage notes are sold on national exchanges similar to the New York Stock Exchange. Does the lending bank have any obligations to the maker of a mortgage note in this regard? Does a large financial institution that holds home mortgage notes have any ethical obligations to the people who made the notes?

ACTIVITIES AND RESEARCH PROBLEMS

1.Has your state adopted Revised Article 3? If so, why? If not, why not?

2.Visit a local bank to see first-hand how the check collection process works, or have someone from the bank visit the class to tell about the process.

3.Have students bring copies of the customer agreements from their own banks and compare the provisions of these agreements. Discuss the obligations of the bank and of the customer. Are the provisions in these agreements in accordance with the provisions in the UCC?

4.Research the role of the Federal Reserve Banks in the check collection system? How important is the Federal Reserve to this system?

5.Research cases in your state involving holders in due course. Do any of these cases involve “unfair” results?Then discuss the policy reasons behind maintaining special protections for holders in due course. Has the FTC’s holder in due course rule had any effect on frauds committed upon consumers?Part 2 2 / 4

CHAPTER 26 FORM AND CONTENT 2

© 2018Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website or school-approved learning management system for classroom use.Chapter 26

FORM AND CONTENT

Negotiability [24-1] Development of Law of Negotiable Instruments [24-1a] Assignment Compared with Negotiation [24-1b] Types of Negotiable Instruments [24-2] Drafts [24-2a] Checks [24-2b] Notes [24-2c] Certificates of Deposit [24-2d] Formal Requirements of Negotiable Instruments [24-3] Writing [24-3a] Signed [24-3b] Promise or Order to Pay [24-3c] Promise to Pay Order to Pay Unconditional [24-3d] Reference to Other Agreements The Particular Fund Doctrine Fixed Amount [24-3e] Money [24-3f] No Other Undertaking or Instruction [24-3g] Payable on Demand or at a Definite Time [24-3h] Demand Definite Time At a Definite Time and On Demand Payable to Order or to Bearer [24-3i] Payable to Order Payable to Bearer Terms and Omissions and Their Effect on Negotiability [24-3j] Dating of the Instrument Incomplete Instruments Ambiguous Instruments Cases in This Chapter Heritage Bank v. Bruha NationsBank of Virginia, N.A. v. Barnes Cooperatieve Centrale Raffeisen-Boerenleenbank B.A. v. Bailey Chapter Outcomes

After reading and studying this chapter, the student should be able to:

•Describe the concept and importance of negotiability.•Identify and describe the types of negotiable instruments involving an order to pay.•Identify and describe the types of negotiable instruments involving a promise to pay.•List and explain the formal requirements that an instrument must meet to be negotiable.•Explain the effect on negotiability of an instrument’s (1) being undated, antedated, or postdated; (2) lack of completion; and (3) ambiguity.

TEACHING NOTES

The term "negotiable instruments" (instruments) refers to checks, drafts, checks, promissory notes and certificates of deposit. For a number of reasons, payment by noncash means is preferable in many transactions. Noncash payments take two forms: paper (checks and drafts) and electronic (debit cards, credit cards, automated clearinghouse [ACH], and prepaid cards). 3 / 4

CHAPTER 26 FORM AND CONTENT 3

© 2018 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website or school-approved learning management system for classroom use.By number of transactions, electronic payments now exceed three-quarters of all noncash payments while payments by check are now less than one-quarter of all noncash payments.By value, electronic payments constitute about 55 percent of all noncash payments while checks represent 45 percent of all noncash payments. More specifically, in the United States in 2009, the number of checks paid was approximately 24.5 billion with a value of approximately $32 trillion. Although by number of transactions, debit cards are now the most used noncash payment in the United States, by value, debit card payments amount to only 2 percent of all noncash payments.The financing or credit function of negotiable instruments is indispensable.• promissory notes are used extensively in financing sales of goods • corporations fund their operating expenses or current assets by issuing commercial paper in the form of short-term promissory notes • corporations obtain long-term financing by issuing long-term promissory notes (bonds) • promissory notes (mortgages) are also used in financing sales of real estate • a certificate of deposit (CD) is a promissory note issued by a bank and is used by many individuals as a type of deposit account that typically offers a higher rate of interest than a regular savings account

In 1990, the American Law Institute and the National Conference of Commissioners on Uniform Laws approved a Revised Article 3 to the Uniform Commercial Code (UCC). Named “Negotiable Instruments,” the new Article maintains the basic scope and content of prior Article 3 (Commercial Paper). In 2002, the American Law Institute and the Uniform Law Commission completed updates to Articles 3 and 4. All States except New York have adopted the 1990 version of Article 3 and at least ten States have adopted the 2002 version. This part of the text will discuss the 1990 version of Revised Article 3 but will also point out the major changes from prior Article 3. The 1990 version of Revised Article 3 is presented in Appendix B.

*** Chapter Outcome *** Discuss the concept and importance of negotiability.

26-1 NEGOTIABILITY

Negotiability is a legal concept that allows written instruments to be used as a readily accepted form of payment in substitution for money; it defines the way in which rights and obligations are assigned in the area of negotiable instruments.26-1a Development of Law of Negotiable Instruments Under common law, and as far back as the Middle Ages, the payment of money was a contract right only of the intended payee; contract rights and obligations could not be assigned.Eventually, however, the law permitted contractual rights to be assigned, giving the assignee the right to collect on the debt, and making the assignee subject to all the defenses available to the obligor. This remains the law of assignments: the assignee stands in the shoes of his assignor.Merchants involved in the flourishing trade of the time still wanted more reform, because it was difficult to find people willing to accept an assignment. Thus, the concept of the holder in due course developed, allowing certain good faith transferees who give value to acquire the right to be paid, free of most of the defenses to which an assignee is subject.26-1b Assignment Compared with Negotiation

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