Chapter 20 Introduction to Commercial Paper

Transcription

1 Chapter 20 Introduction to Commercial Paper McGraw-Hill 2010 The McGraw-Hill Companies, Inc. All rights reserved.

2 Characteristics of Commercial Paper PO: 1; Page: 291 Commercial paper: A term widely used in law to describe a number of legally binding and commercially acceptable documents. Commercial paper such as notes, checks, and drafts are used to transfer money from one person to another. These documents are negotiable and are freely transferable. Negotiable instrument: A commercial paper is an unconditional written promise to pay, or pay to the order of another party, a certain sum of money on demand or at a definite time. Negotiable instruments are highly trusted and play an important role in everyday individual and business transactions. Chapter 20-2

3 Difference between Commercial Papers and Ordinary Contracts PO: 1; Page: 291 Presumption of Consideration It is assumed that the commercial paper is issued for value for consideration. A party to a simple contract who is seeking to enforce the promise contained in the agreement must prove that he or she gave consideration. However, a party to commercial paper who is trying to collect payment does not. Instead, the person trying to avoid payment must prove that he or she received no consideration. Chapter 20-3

4 Difference between Commercial Papers and Ordinary Contracts (cont.) PO: 1; Page: 291 Negotiability versus Assignability Ordinary contracts may usually be assigned, but the assignee, or the person to whom rights are transferred, may receive only those rights held by the person making the assignment (the assignor) at the time of the transfer. The person who has acquired assigned rights to a contract must notify the other party to the contract of the assignment. These conditions do not apply to commercial paper that is being negotiated (transferred). Chapter 20-4

5 Kinds of Commercial Paper PO: 2; Pages: Promises to Pay Promissory note: A written note or letter in which one person promises to pay a certain amount of money to another at a definite time. Orders to Pay There are situations in which a person orders another individual to pay a definite sum of money. Checks: A check is a written order drawn on a bank by a depositor that requests the bank to pay, on demand and unconditionally, a definite sum of money to the bearer of the check or to the order of a specified person. Drafts (bills of exchange): An unconditional written order to a person instructing him or her to pay money to another, third person. Chapter 20-5

6 The Meaning of Pay to the Order Of PO: 2; Pages: The words, Pay to the order of, give commercial paper negotiability. Negotiability: The ability to be transferred freely from one person to another and be accepted as readily as cash. Order Instrument: An item of commercial paper containing the key words of negotiability, pay to the order of, or their equivalent. Examples: Notes, drafts, and checks. Chapter 20-6

7 Parties to Commercial Paper The Parties parties involved involved a promissory in a note: note have the following names: Maker: The person who makes the promise. Maker: Comaker: The A person whose makes name the has promise. been added to the promise Comaker: to strengthen A person the promissory whose name note. has been added to the promise to Payee: strengthen The person the promissory to whom the note. promise is made. Payee: The person to whom the promise is made. Parties involved in a draft or a check : The parties involved in a draft or a check have the following names. PO: 3; Page: 293 Drawer: The person who draws or creates the check or draft. Payee: The person who receives the money. Drawer: Drawee: The person who draws is ordered creates to pay the check money or (in draft. the Payee: case of The a check, person the who drawee receives is a bank). the money. Drawee: Holder: Whoever The person is in who possession is ordered of to commercial pay the money paper. (in the case of a check, the drawee is a bank). Holder: Whoever is in possession of commercial paper. Chapter 20-7

8 Essentials for Negotiability of Commercial Paper PO: 4; Pages: To be negotiable under the Uniform Commercial Code (UCC), a commercial paper must conform to the following requirements: It must be in writing and signed by the maker or drawer. It must contain an unconditional promise or order to pay a definite sum in money. It must be payable on demand or at a definite time. It must be payable to order, to bearer, or to cash. A draft or check must name or indicate the drawee with reasonable certainty. Chapter 20-8

9 Nonessentials for Negotiability of Commercial Paper Because consideration is presumed, the words for value received are not needed. If the date of a note, check, or draft is not indicated, the holder may write in the date when the instrument was issued without affecting its negotiability. If this date is not known, the date when the paper was received is considered the date of issue. Commercial paper may be: Antedated (dated previously), or Postdated (dated ahead). PO: 5; Pages: Chapter 20-9

10 Nonessentials for Negotiability of Commercial Paper (cont.) PO: 5; Page: 295 The place of business or home of a maker of a note is presumed to be where the instrument was drawn or where it is payable if this information is not given on the paper. In a note, draft, or check, if the amount payable expressed in figures differs from the sum stated in words, the amount expressed in words is considered the true one. If the sum stated in words is also not expressed in figures, this omission does not affect negotiability. The numbering of (or the failure to number) commercial paper does not affect its negotiability. Chapter 20-10

11 Example: Negotiability of a Commercial Paper PO: 5; Pages: Trudy offered Milo a $500 promissory note in payment for merchandise she had purchased. The note specified payment within 30 days. Milo refused to accept the note because it was handwritten in red ink and signed in the body of the instrument. In this case, Milo has incorrectly assumed that the note was not enforceable since it was handwritten in red ink. The note is valid and enforceable because the device used in writing a note does not affect the negotiability of the commercial paper. Chapter 20-11

12 Checks PO: 6; Page: 295 The check is used more than any other instrument of credit as a means of making payment, both to settle debts and to pay for purchases. Checks need not be made out on the printed forms supplied by banks. Any writing that includes the essential elements of negotiability is considered a valid check when signed and delivered by the drawer. However, many banks today prefer that the encoded routing number assigned a drawer (depositor) be shown on every check written by him or her. Chapter 20-12

13 Relationship between Bank and Depositor PO: 6; Page: 295 A check provides a safe means of transferring money and serves as a receipt when paid and canceled by the bank. The bank must honor a check when it is properly drawn against the money the drawer has on deposit, or the bank will be liable to the drawer for damages. Chapter 20-13

14 Payment of Checks The UCC provides that, with respect to the liability of the drawer, a reasonable length of time for presentation for payment is 30 days after the date appearing on the check or after issue (the date the check is actually written), whichever is later. A bank may pay a check presented more than 30 days after its date, but it is not required to do so. PO: 6; Page: 295 Stale check: A check presented more than six months after its date; will not be honored by banks. Chapter 20-14

15 Certified Checks PO: 6; Page: 296 A merchant who sells goods to a person whose credit standing is not known may request the customer to make payment by certified check. Certified check: A check that the bank has promised to pay when it is presented for payment. Liability If a drawer of a check has the bank certify it, he or she remains conditionally liable for payment of the check until the holder can reasonably present it for payment. However, when a check is certified at the request of the payee or holder, while the drawee is still responsible for eventual payment, the drawer and all prior indorsers are released from all liability. The reason is the payee or holder could have requested payment instead of certification. Chapter 20-15

16 Cashier s Check PO: 6; Page: 297 Sometimes called an official check, a teller s check, or a bank check. It is issued by the cashier or other designated officer of a bank and drawn against bank funds. A depositor may request such a check when he or she intends to use it to pay for merchandise from an out-of-town dealer who will not accept a personal check. A cashier s check is made payable either to the depositor who purchases it from the bank or to the person who is to cash it. Chapter 20-16

17 Traveler s Check PO: 6; Page: 297 A certified check issued in a in denomination a of of $10 $10 or more more by certain by certain banks, banks, travel agencies, travel agencies, and financial and services financial companies. services companies. For persons who are traveling, especially in foreign countries, traveler s checks are a safe form For in persons which to who carry are money. traveling, especially in foreign countries, traveler s checks are a safe Only form the in purchaser which to carry who money. signed the checks when he or she bought them may negotiate Only the purchaser who signed the checks them. when he or she bought them may negotiate them. Chapter 20-17

18 Bad Checks and Forgery PO: 6; Pages: Bad Checks Bad check: One against a bank in which the drawer has insufficient funds on deposit to cover the check or no funds at all. It is a criminal offense for a person to intentionally issue a check drawn on a bank in which that person has an account but has insufficient funds on deposit. Forged and Raised Checks Forgery: The act of fraudulently making or altering a note, check, draft, or some other document, causing the financial loss of another. Both the intent to defraud and the creation of a liability must be proved in order for an act to constitute forgery. A person who commits a forgery is guilty of a crime. Chapter 20-18

19 Forgery PO: 6; Page: 298 Two common types of forgery: A forged check A raised check Liability for Forged Checks A depositor who opens a checking account with a bank must fill out a signature card and leave it on file with the bank. The bank is then assumed to know the depositor s signature and is liable if it pays any checks on which the drawer s signature has been forged. Chapter 20-19

20 Postdated Checks and Stopping Payment on Checks PO: 6; Pages: Postdated Checks A check that is dated later than the date the check is written. A person may write a postdated check when insufficient funds are in the bank at the time the check is drawn, but the person expects to deposit sufficient funds to cover it by the date on the check. A person also may postdate a check for self-protection when some act is to be completed by the payee before the date of the check. Stopping Payment on Checks An instruction a depositor gives to his or her bank not to pay a particular check. The notice can be given at any time before a check is presented for payment. If the bank does not do as requested by the drawer and cashes the check, it is liable to the depositor for the amount paid. Chapter 20-20

21 Example: Stopping Payment on Checks PO: 6; Page: Isabel owed Juan $500, and gave him a check for the amount as repayment for the debt. Later, Isabel realized that she had already paid Juan in cash. She tried to contact Juan several times to correct the misunderstanding. She was unable to reach him, so she asked her bank to stop payment on the check. While the bank honored her request, it charged Isabel a service fee. In this case, the bank is justified in asking for the fee since a small service charge is usually made by the bank for carrying out a stop-payment order. Chapter 20-21

22 Electronic Funds Transfer Systems and Automated Teller Machines PO: 7; Page: 299 Electronic funds transfer (EFT): A system that offers a variety of convenient and useful applications such as ATMs, point-ofsale (POS) systems, direct deposit and withdrawals, etc. Automated Teller Machines (ATM) An ATM performs many functions that tellers in banks do. Customers activate the ATM by using their debit or credit card and will be able to select a transaction. Using an ATM, customers can: Inquire about the status of their account. Withdraw cash (in local currencies). Make deposits. Transfer funds from one account to another. Chapter 20-22

23 Point of Sale & Direct Deposits and Withdrawals Point-of-Sale Systems A point-of-sale system allows a consumer to transfer funds from a bank account to the merchant s bank account to pay for merchandise purchased. Direct Deposits and Withdrawals The electronic movement of funds from one bank account to another has many useful applications. PO: 7; Page: 300 Chapter 20-23

24 Other EFTs PO: 7; Pages: Some services give customers who have personal computers access to information about their accounts, allow depositors to transfer funds from one account to another, and permit bank customers to authorize the bank to pay regular bills. Pay-by-phone systems allow depositors to telephone their bank s computer and authorize payment of certain bills and transfer funds to other accounts or to third parties. Transfer of funds between banks has revolutionized the worldwide banking system because of its speed in processing financial settlements and international trade. Chapter 20-24

25 The Electronic Funds Transfer Act PO: 7; Page: 301 The most comprehensive federal legislation is the Electronic Funds Transfer Act of 1979 (EFTA), which went into full effect in The act establishes the rights, responsibilities, and liabilities of consumers in dealings with financial institutions. The primary purpose of the act is to protect consumers. The EFTA limits consumer liability to $50 if the consumer notifies the card issuer within two days of learning that a card has been lost or stolen. If the customer fails to notify the issuer within two days, the consumer s liability increases to $500. The EFTA also requires the institution to provide written receipts each time an ATM is used, and monthly statements on which electronic transactions are shown. Chapter 20-25