REG - Notes Chapter 6 http://www.cpa-cfa.

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Commercial Paper
Commercial paper is promissory notes (CDs) or drafts (checks) The commercial paper laws arose, in part, to provide a convenient and safe substitute for cash Article 3 governs any type of note or draft (check or installment note) - not warehouse receipts, bills of lading, stocks and bonds Step 1: identify the type of paper A note is a two party commercial paper. It is a promise by one party (the maker) to pay money to another party (the payee) Certificate of deposit (a bank promissory note) A CD is a negotiable instrument issued by a bank that acknowledges receipt of money and promises to repay at a future date Drafts is a three party commercial paper. It is an order by one person (the drawer) to another person (the drawee) demanding that the drawee pay money to a third person (the payee) Checks drawee must be a bank and be payable on demand Trade acceptances draft drawn by seller ordering the buyer to pay Demand note/draft an instrument payable on demand Time note/draft an instrument payable at a future date Step 2: is the instrument negotiable To be a negotiable instrument, the instrument must: Be in writing Be signed my the maker (note) or drawer (draft) - UCC is liberal on what constitutes a signature, could be an X or a scribble as long as you wrote it Contain an unconditional promise (note) or order (draft) to pay - not negotiable if on the front it states payment is conditional (subject to or contingent upon) Be a fixed amount of money only - on the face of the instrument and be a specifically ascertainable amount (its not uncertain if its payable with interest, with stated disc/prem or with cost of legal fees) Be payable on demand or at a definite time - Checks dont have to be dates, but it should - Notes may have to be dated if the notes says payable after 90 or 180 days Be payable to order or to bearer, with the exception of checks, and - Unless its a check, it must state order or bearer (pay to the order of John) - an instrument payable to bearer, is payable to anyone who possesses it Contain no undertaking or instruction not authorized by the UCC - certain authorized promises will not destroy negotiability such as, collateral, promises to pay legal fees, waivers of the right to a jury trial, promises to pay prepayment penalty, interest, pay off early Type written terms control over pre-printed terms. Hand written terms control over both Words controls figures. Pay five dollars and 5,000 is construed as an order to pay 5 dollars

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If an instrument is not negotiable there can be no holder in due course and the holder in due course rule cannot apply. Thus, transferees of the instrument will take the instrument subject to any defense against payment that a party might have Step 3: Does the holder qualify as an HDC? The process by which commercial paper is transferred is called negotiation, and the persons whom the UCC seeks to protect are holders in due course (HDCs) and most transferees of holders in due course The first step in becoming an HDC is becoming a holder. A holder can be thought of as a person with good title to the commercial paper Bearer paper is negotiated by delivering the instrument to a transferee Order paper (commercial paper payable to specific person) requires delivery to that person and the payees endorsement (signature) Special endorsement names a particular person as endorsee and always makes the instrument order paper The UCC treats the forgery as the genuine signature of the forger. Thus, transferees are holders of the forgers instrument Endorsers are secondarily liable (guarantors) (must pay) if primary party defaults Without recourse means there is no guarantee of payment by the endorser. The without recourse endorser still has warranty liability Restrictive endorsement generally have no effect on negotiability Types of endorsements Blank = mere signature of holder; converts to bearer Special = pay to specific person; converts to order Restrictive = only, or for deposit or for collection; restrictive order Qualified = without recourse; bearer Becoming a holder in due course (HDC) has superior rights to transferor Article 3 limits the defenses that can be raised against an HDC A holder will take commercial paper in due course to the extent that he takes the paper with all these: Is negotiable For value - An executory promise (a promise to give value in the future) is not value - Value need not be equivalent to face value In good faith, and Without notice of any defenses to or claims of ownership on the instruments - purchase without knowledge that the instrument is overdue, dishonoured, or any claim against If all these are not met, the holder is a mere assignee of transferor and has no better rights than the original transferor The shelter doctrine A holder through a HDC Article 3 provides that most subsequent transferees of an HDC can succeed to or take shelter in the rights of an HDC. So even though the transferee himself might not qualify as an HDC, he can claim the rights of an HDC 2

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Step 4: Does the maker/drawer have a real or personal defense Holder in due course rule is a negotiable instrument is negotiated to a holder in due course, the HDC takes free from personal defenses and claims and is subject to only real defenses (FAIDS2) If the holder does not have the rights of an HDC, the maker or drawer can successfully assert any defense Real defenses may be asserted against both HDC and non-HDC transferees FAIDS2 Forgery Fraud in execution Alteration of instrument Adjudicated insanity Infancy Illegality Duress Discharge in bankruptcy Surety defenses Statue of limitations Personal defenses cant be raised against an HDC or their assignees (shelter doctrine) - such as: fraud in the inducement, failure of consideration, theft of instrument after signed, breach of contract, mistake, impossibility, unauthorized completion (giving a party an instrument with the amount left blank) Thats different then material alteration (changing the amount written on the instrument without permission) Liability of the parties Note/CD - Primary liable maker - Secondary liable endorsers Draft/check - Primary liable Drawee (if they accept) - Secondary liable Drawer + endorsers An endorser can be liable in two separate ways Contract liability by endorsing the instrument he becomes secondarily liable (negates if without recourse) Warranty liability any person who transfers an instrument for consideration makes the five warranties listed below (exists even if the transferor does not sign or signs without recourse) - Transferor is entitled to enforce the instrument - All signatures are genuine or authorized - The instrument has not been materially altered - No defense of any party is good against the transferor, and - The transferor has no knowledge of any insolvency proceeding against the maker, acceptor, or drawer of an unaccepted instrument Forgery General rule real defense for the innocent party whose name was forged Forger is always liable Forgery of drawers name the drawee is liable upon acceptance for negligence (should have known the signature was forged) 3

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Forgery of the payees name does not usually pass good title If a maker or drawer issues an instrument to an imposter, any resulting forgery of the payees name will be effective

Secured Transactions
Secured transactions debt secured by collateral Security interest right of creditor to repossess upon default Effective between creditor and debtor as soon upon attachment. Effective against third parties upon perfection (a form of notice that the creditor has security interest in the collateral and gives the creditor superior rights to collateral compared to certain third parties When a debtor pledges collateral to multiple parties creditor protects themselves from third parties by perfect security interest Purchase money security interest (PMSI) has priority over all other types of security interests in the same collateral, if the PMSI is properly perfected. A PMSI arises when: A creditor sells the collateral to the debtor on credit, retaining a security interest, or The creditor advances funds used by the debtor to purchase the collateral Types of collateral Consumer goods personal use goods Inventory goods held for sale or lease Equipment goods that do not fit into another category 3 requisites for attachment (creditor vs. debtor) Parties must have an agreement creating the security interest by: - An authenticated record (written agreement) of the security agreement by the debtor, or - Creditor takes possession or control of the collateral Value must be given to the debtor Debtor must have rights in the collateral (debtor owns/has possession of the collateral) Authenticated record signed and approved by debtor Perfection of the security interest (creditors vs. third parties) Perfection of a security interest cannot be completed until it has been attached (but can occur at the same time) There are 5 methods of perfection: 1. Filing give notice by filing a financing statement, authenticated by debtor, which contains: - name and mailing address of debtor and secured party - indication of the collateral covered by the financing statement, and - if the collateral is real property, there is a description of that real property 2. Taking possession (oral agreement ok) this is similar to when a pawn shop takes an item in exchange - must use reasonable care is storing and preserving the collateral 3. Perfection by control for investment property - Certificated stocks and bond securities must take possession - Uncertificated securities must have owner notify the issuer to reregister the securities in the name of the secured party - Securities accounts owner of the account must contact the broker and instruct the broker that the secured party no has whatever right 4. Automatic perfection PMSI in consumer (personal) goods only 4

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- security interest can be perfected by attachment in consumer goods without any added requirements 5. Temporary perfection - 20 day period for proceeds - 4 months grace period for interstate shipments (protected in new state until end of grace period) There can be conflicting interests in collateral. Between creditor and debtors; between creditors with a security interest in the same collateral. The priority ranking is: 1. Buyer in the ordinary course of business (HDCs and the like) - even if the buyer has knowledge of the security interest 2. Holder of a properly perfected PMSI in the collateral - exception: second hand consumer purchase without notice (did not file) would take free of PMSI - PMSI in inventory to have priority must be perfect before debtor gets possession and notice must be given to other perfected parties in same collateral - PMSI in equipment has priority is filed anytime within 20 days of the debtor getting possession of the collateral 3. Holder of a perfected security interest (and judicial lienholders once the lien has attached) - Two creditors both perfected but neither PMSI, first to file or perfect gets priority (so the party with the earliest date of the two categories gets priority). - Dates of attachment are irrelevant 4. Holder of an unperfected security interest - If there are two unperfected security interests in the same collateral, first to attach has priority 5. The Debtor Rights on defaults Self-help secured party may take possession of collateral without judicial process if the breach is not breached Replevin Action judicial action seeking the transfer of personal property After default or repossession, the secured party may sell or lease the collateral. Once the collateral is sold, all subordinate claims are wiped out and there is no right of redemption by subordinate security interest holders or the debtor Proceeds of the sale are distributed in the following order: Expenses of repossession Satisfaction if the debt of the creditor Satisfaction of other creditors with security interests Any surplus is paid to the debtor A secured party may keep the collateral un full or partial satisfaction of the debt Exception: in consumer goods cases where the debtor has paid at least 60% of the loan, the secured party must sell the collateral within 90 days after repossession, unless the debtor waives this right

Real Property (Land)

Fee simple absolute ownership of all rights in the land Life estate last as long as the life of a person Future interests an estate that does not entitle the holder to current possession, but may give the owner possession in the future Nonpossessory interests intangible real property 5

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Easements limited right to use the land of another License privilege to go upon the land of another (watch a concert) Profit right to enter land and take a substance from the land (soil, timber, minerals) Concurrent estates any estate in land can be held concurrently by several persons. These co-tenants have the right to enjoyement and possession of the jointly owned land Because each co-tenant has rights to the whole land, their interests in the land is undivided Joint tenancy Right of survivorship In a joint tenancy, when one joint tenant dies, the property passes to the surviving joint tenants by operation of law. A joint tenant cannot change this by a provision in his or her will

4 unities are required to create joint tenancy: TTIP Unity of time interests vest at the same time Unity of title interests must be acquired by the same instrument Unity of interest interests must be of the same type and duration Unity of possession interests must give identical rights to enjoyment While a joint tenant is alive, he/she may transfer his or her interest without the permission of the other joint tenants. The transferee become a tenant in common with no right of survivorship. Tenancy in common concurrent estate with no right of survivorship When a tenant in common dies, her interest passes to her heirs or the persons named in the will Tenancy by the entirety joint tenancy between spouses, with right of survivorship Landlord and tenant Leasehold estate a possessory estate that entitles the tenant, rather than the owner, to exclusive possession of the land Tenancy for years tenancy expires at the end of the stated period without notice to either party Periodic tenancies continue until terminated by notice Tenancy at will may terminate the tenancy at anytime without notice Absent specific restrictions in the lease, a tenant may engage in any lawful activity on the premises. Assignments by tenants original tenant transfers all of their interest to the new tenant The new tenant is liable to the landlord (for rent) Sublease Sublessee is liable to the original lessee but not to the landlord, to the sublessor A landlord may assign or sell his interest in the property If a lease prohibits assignment, you could still sublease and visa versa (play on words) Transfer of real property conveyancing (transfer tile through sale or gift) To be an enforceable contract for the sale of land must be in writing and signed by purchaser, contain a description of the property, the parties, the price, the manner of payment

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Deeds must be in writing and signed by the grantor, identify the property, identify the parties, and show intention to transfer realty (price is not required). Must be delivered to be effective (not necessarily physical) Recording similar to perfecting protects buyer from subsequent 3rd parties Recordation not essential between grantor and grantee Recording gives constructive notice to the world of purchasers interest Types of recording acts determines who will keep property where a grantor conveys the same property to more than one grantee Notice statutes subsequent BFP (bona fide purchaser) prevails over a prior grantee who failed to record Race notice statutes subsequent BFP is protects only if she records before prior grantee records and has no notice of a prior transfer Race statutes first to record wins A standard insurance policy insures only a good record title as of the policys date Recording rules apply to all interests in real property. Thus, a subsequent purchaser who records generally will not be subject to a prior, unrecorded mortgage that he/she is not aware of. Mortgage debt secured by real property A mortgage is created by a written mortgage deed (like a financing statement) Required items of a valid mortgage: Delivery Description of the property Names of the parties Words of grant or conveyance Mortgagors signature Mortgagors acknowledgement Whether its a deed, lease or mortgage it must contain a description of the premises RESPA is a federal act that requires that certain disclosures be made when a debtor agrees to give a mortgage on the debtors property Deficiency if the sale does not bring a sum sufficient to satisfy the debt for which the mortgage was given, some states allow the mortgage to bring a deficiency action against the mortgagor to recover the deficiency, but some state do not allow such an action Assuming a mortgage if a buyer assumes an existing mortgage of a seller, the buyer has agree to be liable for this mortgage. The seller (old mortgagor) is also liable. Buying subject to an existing mortgage the buyer is not liable for the existing mortgage. However, buyer runs the risk of foreclosure if the seller does not pay the mortgage and defaults A prior recorded mortgage has priority over a second mortgage. So upon default, the first mortgage must be paid in full before the second mortgage can get anything The mortgagor has an equitable right of redemption until the foreclosure sale is held and may have a statutory right to redeem the property after the sales as well (if the state statue permits)

REG - Notes Chapter 6 http://www.cpa-cfa.org

Additional
Surety one who is liable for the debt or obligation of another To make a document of title negotiable, its terms goods are to be delivered to bearer or to the order of a named person Essential terms of a warehouse receipt Who is to receive the goods Description of the goods and the number of the receipt must be included The date the receipt was issued Where the goods are being stored The fees and storage rates must be stated Signed by the warehouseman or agent must be included