Business Law Chapter 14 Negotiable Instruments Securities and
Business Law Chapter 14: Negotiable Instruments, Securities and Secured Transactions
What Are Negotiable Instruments? • What we today call “negotiable instruments” were once known under the more general category of “commercial paper. ”
• Negotiable Instrument: An unconditional promise or order to pay a fixed amount of money, with or without interest.
• Examples of negotiable instruments include drafts and notes.
Drafts • Drafts are negotiable instruments that order payment to be made.
Notes • Notes are instruments that promise payment in the future.
Cash versus Negotiable Instruments • Currency is designed to be anonymous and to pass freely from person to person. • Negotiable instruments, on the other hand, can be converted into cash at some point.
• Negotiable instruments are both more secure and more easily regulated than the use of cash.
Negotiable Instruments Are Governed By The UCC • The Uniform Commercial Code also governs negotiable instruments under Article 3.
What Makes a Document Negotiable? • UCC § 3 -104 explains that a document becomes negotiable when it contains an unconditional promise to pay money and is payable to a bearer or payable on demand.
Organization of Article 3 • Article 3 is divided into subparts that deal with a broad spectrum of negotiable instruments.
Part 1, Article 3 • Article 3 only applies to instruments that are payable to the bearer or to order at the time that they are issued.
Identifying Parties to be Paid • Article 3 provides that the means for identifying the party to be paid must come from the language of the document and the intent of the signor.
Holder in Due Course • The Holder in Due Course Rule grants complete and legal title to an instrument even when there are outstanding claims against it. • It protects buyers who act in good faith.
Warranties • Article 3 provides specific warranties including: • That the signatures on the instrument are authentic and authorized • That the instrument has not been altered
• That the person who transferred the instrument has no knowledge of an insolvency proceeding concerning the transaction
Accord and Satisfaction • Article 3 -311 provides that when an instrument contains a conspicuous statement that the instrument was tendered as payment in full, the debt is discharged and no further actions are warranted.
Negotiable Instruments and Securities • Securities and negotiable instruments are sometimes confused with one another. • A security is a share or ownership interest in a company. • A negotiable instrument promises payment; a security is evidence of company ownership.
What Qualifies as a Security? • A security is defined as a share in a corporation or an obligation by an issuing company.
Securities and Federal Law • Securities law is controlled not only by state law, through the Uniform Commercial Code, but also through various federal statutes.
Federal Laws that Apply to Securities • The first of a series of federal legislative initiatives aimed at the securities field was the Securities Act of 1933. • The Securities Act was quickly followed by the Securities Exchange Act of 1934 which authorized the creation of the Securities and Exchange Commission.
The Securities and Exchange Commission • The Securities and Exchange Commission (SEC) has been a potent force in the securities field since its inception. • It polices stock exchanges, brokers, investment advisors, financial institutions and publicly-traded companies.
Registration with the SEC • One way of ensuring that investors receive accurate information is the SEC’s requirement that all securities sold in the United States must be registered.
Viewing Registration Information • The SEC maintains all of this information in a public-access database called EDGAR. This database can be accessed directly from the SEC’s web page at <http: //www. sec. gov>
Securities and State Law (The UCC) • Article 8 of the Uniform Commercial Code governs securities.
Provisions of Article 8 of the UCC • Other features in Article 8 include a provision making the Statute of Frauds inapplicable to securities agreements. • The Article is comprehensive in its coverage of securities and should always be referred to whenever a securities question arises.
Stock • Stock represents ownership interest in companies.
Common Stock • Common stock is the stock that a company issues in order to raise capital. • This stock is sold on stock exchanges around the world.
Preferred Stock • Preferred stock is a class of stock that entitles the person who possesses it with priority when it comes to paying dividends.
Article 9 • Article 9 of the UCC concerns secured transactions. • A secured transaction is any promise to pay on a loan that is guaranteed by some form of collateral.
Care and Maintenance of the Collateral • Other rules enforced under Article 9 include the requirement to care for the collateral. • Article 9 -207 requires the party in possession of collateral to use reasonable care in its custody and preservation.
Priority in Paying Claims • Priority refers to the order in which claims will be paid. • Article 9 creates rules for priority of claims.
UCC Financing Statements • Article 9 also provides that proof of a secured transaction in property must be filed in order to substantiate the claim. • These documents are often referred to as “UCC Financing Statements” and can often be located in the local courthouse.
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