BUSN370 Regent Ch 22 and 23 Concepts Regarding Commercial Paper Assignment

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Utilizing the concepts regarding Commercial Paper (Chapters 22 and 23) and the Bible (more than the scriptures assigned), write a post explaining what commercial paper means, as well as a biblical discussion regarding lending from both a lender's perspective and a lendee's perspective.

Cite a minimum of two (2) scholarly peer reviewed sources (beyond your textbook or the Bible) applying APA guidelines (250-450 word count range).

  1. Liuzzo, A. L., & Hughes, R. C. (2019). Essentials of Business Law (10th ed.). New York, NY: McGraw Hill Education:
    1. Chapter 17, Sales;
    2. Chapter 18, Warranties;
    3. Chapter 22, Introduction to Commercial Paper;
    4. Chapter 23, Transfer and Discharge of Commercial Paper; and
  2. Deuteronomy 24:10-13 (Biblical Lending).

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Chapter 23 Transfer and Discharge of Commercial Paper ©2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 23-2 Endorsing Commercial Paper (1) Commercial paper can easily be transferred from one party to another for final settlements in personal and business. • Endorsement: When the holder of commercial paper signs their name, with or without other words, on the back of the instrument. • Endorser: Person who signs their name on the instrument. • Endorsee: Person to whom the instrument is transferred. Effect of an endorsement is to transfer ownership of commercial paper to another. ©2019 McGraw-Hill Education. Endorsing Commercial Paper (2) When endorsed, commercial paper takes the place of money for payment of debts, purchase of goods and services. • Commercial paper is usually endorsed on the back. • Endorsement may be written by hand, printed, or stamped. • To be valid, the endorsement must be written for the entire amount stated in the instrument. • Partial Transfer: Attempting to transfer only part of face value of a negotiable instrument by endorsement invalidates the negotiation. ©2019 McGraw-Hill Education. 23-3 Example: Validity of Endorsements Facts: • Hilda purchased a high-resolution television and paid with a $5,000 face value check. • When the check was presented, the store’s salesperson performed a credit check and noted there were insufficient funds in Hilda’s bank account. • Hilda then tried to pay with $1,000 in cash, and endorsed the same check for $4,000. The salesperson could not accept the check because it was invalid. To be valid, the endorsement must be written for entire amount stated in the instrument. Attempting to transfer only part of the face value of a negotiable instrument by endorsement invalidates the negotiation. ©2019 McGraw-Hill Education. 23-4 23-5 Type of Endorsements (1) Blank Endorsement • Endorsement where the name of the payee is written by the payee on the back of a negotiable instrument. • Bearer Instrument: An instrument indorsed in blank is payable to anyone who is in possession of it. Special (Full) Endorsement • Where the payee specifies the party to whom, or to whose order, it is to be paid. • The instrument may be further negotiated only when it has been endorsed by the specified party. ©2019 McGraw-Hill Education. 23-6 Type of Endorsements (2) Restrictive Endorsement • A signature to which words have been added, restricting the further endorsement of the instrument. • A restrictive endorsement does not prevent further transfer or negotiation of the instrument. • Examples: The phrases “For deposit only” and “Pay to [endorser’s bank] for deposit only.” Qualified Endorsement • In a qualified endorsement, the endorser avoids liability for payment even if the maker or drawer defaults on the instrument. • A qualified endorsement, using a phrase such as “Without Recourse,” may be used together with a blank endorsement or special endorsement. ©2019 McGraw-Hill Education. Obligations, Warranties, and Discharge of Endorsers (1) The endorser of a promissory note, drawer or endorser of a draft or check is liable for payment of the instrument if the following conditions are met: • It has been properly presented for payment to the maker of the note or the drawee of the draft or check. • Payment has been refused by the maker or drawee. • Notice of refusal has been given to the drawer or endorser. ©2019 McGraw-Hill Education. 23-7 Obligations, Warranties, and Discharge of Endorsers (2) In order to ensure negotiability of commercial paper, UCC assumes the following endorsement warranties: • Instrument is genuine. • All prior parties were qualified to enter into a legally binding contract. • Instrument is for a valid and existing obligation. • Endorser will pay what is due on the paper to the holder or to any subsequent endorser who had to pay on the instrument if not paid when presented for payment. • Endorser is true owner of the paper (has good title). ©2019 McGraw-Hill Education. 23-8 Obligations, Warranties, and Discharge of Endorsers (3) An endorser of an instrument is released from liability by: • Any act that completes negotiation of the instrument, such as payment. • Release of a prior party’s obligation or release of the debtor. • Intentional cancellation of endorser’s signature by the holder. • Valid tender of payment by a prior party. • Agreement binding on the holder to extend due date of the instrument. ©2019 McGraw-Hill Education. 23-9 23-10 Holder in Due Course (1) Holder in due course of commercial paper: One who has accepted the paper in good faith and for value, before maturity, and, without actual or constructive notice of any defects in the instrument. • He or she is sometimes called a “bona fide holder for value without notice.” To be a holder in due course: • Paper must be complete and regular on its face. • Paper must have been acquired on or before the due date. • Commercial paper accepted is past due may be considered notice something might be wrong with the instrument. ©2019 McGraw-Hill Education. 23-11 Holder in Due Course (2) To be a holder in due course: • Paper must have been acquired for valuable consideration for reasonable value of the instrument itself, or for any detriment, injury, or loss suffered by the holder in taking the instrument. • Paper must have been taken in good faith and for value. • Any holder of an instrument, other than the payee, who might know of a fraud or learn of it before negotiating the instrument to a holder in due course cannot later become a similar holder. • [even if title to the instrument is transferred to them from the holder in due course]. ©2019 McGraw-Hill Education. Defenses against Payment of Commercial Paper Personal defense: Defense against payment of commercial paper that may be used against any party except a holder in due course. Real defense (absolute defense): Defense against payment of commercial paper claiming instrument was void from the beginning. • Real defenses may be used by the maker or drawer against any party to a paper, including a holder in due course. ©2019 McGraw-Hill Education. 23-12 23-13 Personal Defenses Personal defenses against payment of commercial paper relate to acts or situations leading to the issue of the paper rather than to the paper itself. • • • • • • • Lack of consideration. Fraud, duress, or undue influence. Breach of a warranty. Non-delivery of a completed instrument Non-delivery of an incomplete instrument. Payment before maturity. Counterclaim. ©2019 McGraw-Hill Education. 23-14 Real Defenses Real, or absolute, defenses to payment of commercial paper, good against anyone, including holders in due course include: • Forgery. • Material alteration: Any change made to an instrument that affects rights of the parties. • Lack of intent to execute commercial paper. • Incapacity of parties to contract. • Discharge in bankruptcy • Illegality created by law. ©2019 McGraw-Hill Education. Example: Material Alteration in an Instrument Facts: • Mark gave a postdated check to Reese who, in urgent need of cash, altered the postdated check to an earlier date and attempted to cash it. • Since the balance was insufficient in Mark’s bank account, the bank sent him notice. • Mark later disputed the payment, claiming the overdraw was a result of a material alteration performed by Reese. Any change made to an instrument affecting rights of the parties is called a material alteration. The maker or drawer is responsible to pay the paper according to its original, not altered, terms. ©2019 McGraw-Hill Education. 23-15 Presentment of Commercial Paper Presentment: Tendering a note to the maker and demanding payment, or showing a draft or check to the drawer and requesting acceptance or payment, on or after the maturity date at the place stated in the instrument. Presentment may be made by mail or at place of acceptance of payment specified in the instrument. • If no place is specified, presentment may be made at the place of business or residence of the party who is to accept or pay. • Commercial paper must be presented for payment during business hours on the due date recorded on the instrument. • A demand instrument such as a note or check must be presented for payment within a reasonable time after the date of issue. ©2019 McGraw-Hill Education. 23-16 23-17 Dishonor of Commercial Paper A negotiable instrument is considered dishonored if: • Not accepted when presented. • Not paid when presented for payment at maturity. • Presentment is excused or waived, and instrument is past due and unpaid. Holder of dishonored commercial paper must give notice of the dishonor immediately—a bank by midnight, and by any other person by midnight of the third business day after dishonor to the drawer and to all endorsers in order to hold them liable on the instrument. • Any drawer or endorser to whom such notice is not given is relieved from liability. ©2019 McGraw-Hill Education. Chapter 22 Introduction to Commercial Paper ©2019 McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Characteristics of Commercial Paper Commercial paper: term widely used in law to describe a number of legally binding, commercially acceptable documents. • Commercial paper that is notes, checks, and drafts are used to transfer money from one party to another. • Negotiable documents are freely transferable. Negotiable instrument: Commercial paper this 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 essential role in everyday individual and business transactions. ©2019 McGraw-Hill Education. 22-2 Difference between Commercial Papers and Ordinary Contracts (1) Presumption of Consideration • It is assumed commercial paper is issued for value—for purposes of consideration. • A party to a simple contract seeking to enforce promises contained in the contract must prove consideration was given. • BUT, a party to commercial paper trying to collect payment does not. • Instead, the party trying to avoid payment must prove they received no consideration. ©2019 McGraw-Hill Education. 22-3 Difference between Commercial Papers and Ordinary Contracts (2) Negotiability versus Assignability • Ordinary contracts may usually be assigned, but the assignee, or person to whom rights are transferred, may receive only those rights held by the person making the assignment (assignor) at the time of transfer. • The person who acquires assigned contract rights must notify the other party to contract of assignment. • But, conditions do not apply to commercial paper being negotiated (transferred). • The person to whom commercial paper is transferred may acquire a better right to the paper than the person who made the transfer. ©2019 McGraw-Hill Education. 22-4 22-5 Types of Commercial Paper Promises to Pay • Promissory note: A written note or letter where one party promises to pay a certain amount of money to another at a definite time. Orders to Pay • Situations in which a party orders another to pay a definite sum of money. • Checks: A check is a written order, drawn on a bank by a depositor requesting the bank pay, on demand and unconditionally, a definite sum of money to the bearer of the check or the order of a specified party. • Drafts (Bills of Exchange): Unconditional written order to a party instructing payment of money to another, third party. ©2019 McGraw-Hill Education. The Meaning of “Pay to the Order Of” The words, “Pay to the order of,” give commercial paper negotiability. • Negotiability: The ability to be transferred freely from one party to another and be accepted as readily as cash. Order Instrument: Item of commercial paper containing the key words of negotiability, “pay to the order of,” or equivalent. • Examples: Notes, drafts, and checks. ©2019 McGraw-Hill Education. 22-6 22-7 Parties to Commercial Paper Parties involved in a promissory note: • Maker: Party who makes the promise. • Comaker: A party whose name has been added to the promise to strengthen the promissory note. • Payee: Party to whom the promise is made. Parties involved in a draft or a check: • Drawer: Person who draws or creates the check or draft. • Payee: Person who receives the money. • Drawee: Person who is ordered to pay the money (in the case of a check, the drawee is a bank). • Holder: Whoever is in possession of commercial paper. ©2019 McGraw-Hill Education. Essentials for Negotiability of Commercial Paper To be negotiable under the Uniform Commercial Code (UCC), a commercial paper must: • Be in writing and signed by the maker or drawer. • Contain an unconditional promise or order to pay a definite sum in money. • Be payable on demand or at a definite time. • Be payable to order, to bearer, or to cash. • If draft or check name or indicate the drawee with reasonable certainty. ©2019 McGraw-Hill Education. 22-8 Nonessentials for Negotiability of Commercial Paper (1) As consideration is presumed, the words “for value received” are not needed. If date of a note, check, or draft is not indicated, the holder may write in the date when the instrument was issued without affecting negotiability. • If the 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). ©2019 McGraw-Hill Education. 22-9 Nonessentials for Negotiability of Commercial Paper (2) Place of business or home of a maker of a note is presumed where the instrument was drawn or where is payable if this information is not given on the paper. In a note, draft, or check, if 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. Numbering of (or the failure to number) commercial paper does not affect its negotiability. ©2019 McGraw-Hill Education. 22-10 Example: Negotiability of a Commercial Paper Facts: • Trudy offered Milo a $500 promissory note in payment for merchandise she purchased. • The note specified payment within 30 days; however, 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 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 negotiability of the commercial paper. ©2019 McGraw-Hill Education. 22-11 22-12 Checks Checks are used more than any other instrument of credit as means of making payment, to settle debts and pay for purchases. Checks need not be made out on the printed forms supplied by banks. • Any writing including the essential elements of negotiability is considered a valid check when signed and delivered by the drawer. • BUT, many banks today prefer that encoded routing number assigned a drawer (depositor) be shown on every check written. ©2019 McGraw-Hill Education. Relationship between Bank and Depositor Checks provide a safe means of transferring money and serve as a receipt when paid and cleared by the bank. Banks must honor a check drawn properly against the money the drawer has on account, or the bank will be liable to the drawer for damages. ©2019 McGraw-Hill Education. 22-13 22-14 Payment of Checks Checks are always payable on demand. Liability of Drawer: UCC provides a reasonable length of time for presentation for payment is 30 days after the date appearing on the check or after issue (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. • Stale check: A check presented more than six months after its date; will not be honored by banks. ©2019 McGraw-Hill Education. Check Clearing for the 21st Century Act (2004) This federal law, known as Check 21, revolutionized the manner in which checks are handled by banks. Check 21: • Created efficiency in check handling by allowing banks to create digital substitutes of checks, thus removing paper checks from the process. • Allows for rapid electronic check transfers. ©2019 McGraw-Hill Education. 22-15 22-16 Certified Checks (1) A merchant who sells goods to a person whose credit standing is not known may request the customer make payment by certified check. • Certified check: A check the bank has promised to pay when presented for payment. • The bank assumes absolutely liability for payment. ©2019 McGraw-Hill Education. 22-17 Certified Checks (2) Liability • If a drawer of a check is certified, payer remains conditionally liable for payment until the holder can reasonably present check for payment. • BUT, when a check is certified at request of the payee or holder, the drawee is still responsible for payment, the drawer and all prior endorsers are released from all liability. • The reason is the payee or holder could have requested payment instead of certification. ©2019 McGraw-Hill Education. Cashier’s Check “Cashier’s Check” also known as an official check, teller’s check, or bank check. Issued by bank cashier or other designated bank officer; drawn against bank funds. A depositor may request a cashier’s check when they intend to use it to pay for merchandise from an out-of-town dealer who will not accept business or personal checks. Cashier’s checks are made payable either to the depositor who purchases it from the bank or the person who is to cash it. ©2019 McGraw-Hill Education. 22-18 Traveler’s Check Traveler’s Check: A form of certified check issued in a denomination of $20 or more by certain banks, travel agencies, or financial services companies. • Persons who are traveling, especially in foreign countries, traveler’s checks are a safe form in which to carry money. • Only the purchaser who signed the checks when purchased may negotiate them. ©2019 McGraw-Hill Education. 22-19 22-20 Money Orders Money Order is similar in form to a personal check, but generally purchased at a bank or other third party location. Money order funds are prepaid – much like a certified check. • Money orders are considered to be a more trusted form of payment than a personal check. Money orders are limited in maximum face value. ©2019 McGraw-Hill Education. 22-21 Bad Checks and Forgery Bad Checks • Bad check: One against a bank in which the drawer has insufficient or no funds on deposit to cover the check. • It is a criminal offense for a person to intentionally issue a check drawn on a bank in which the 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 other financial document, causing 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. ©2019 McGraw-Hill Education. 22-22 Forgery Two common types of forgery: • Forged check • Raised check Liability for Forged Checks • A depositor who opens a checking account with a bank must fill out a signature card on file with the bank. • The bank assumes to know the depositor’s signature and is liable if it pays any checks where the drawer’s signature has been forged. ©2019 McGraw-Hill Education. 22-23 Postdated Checks Postdated Checks • A check 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, as long as funds are on deposit by the date on the check. • A person may postdate a check for self-protection when some act is to be completed by the payee before the date of the check. • Note: a bank may honor a postdated check before its date unless the drawer has given bank reasonable notice of postdating. • The drawer must notify their bank of the postdating to avoid a payee cashing a check prior to the date indicated. ©2019 McGraw-Hill Education. 22-24 Stopping Payment on Checks Stopping Payment on Checks • A depositor’s instruction to their bank not to pay a particular check. • The notice may be given at any time before a check is presented for payment. • If the bank does not stop order as requested by the drawer and cashes the check, it is liable to the depositor for the amount paid. ©2019 McGraw-Hill Education. Example: Stopping Payment on Checks Facts: • Isabel issued a check to Juan for $500 as payment in full for a previously owed debt. • Later, Isabel realized she had already paid Juan in cash. • Isabel tried to contact Juan several times to correct the error. Unable to reach him, 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, Isabel must pay the service fee as banks usually charge such fees to provide the service of carrying out a stop-payment order. ©2019 McGraw-Hill Education. 22-25 22-26 Electronic Funds Transfer Systems and Automated Teller Machines Electronic funds transfer (EFT): A system offering a variety of convenient and useful applications such as ATMs, point-of-sale (POS) systems, direct deposit and withdrawals, etc. Automated Teller Machines (ATM) • ATMs performs many functions that tellers do in banks. • Customers activate the ATM by using a debit or credit card, security pin number and select a transaction. • Using an ATM, customers can: • Inquire about status of their account. • Withdraw cash (in local currencies). • Make deposits. • Transfer funds from one account to another. ©2019 McGraw-Hill Education. 22-27 Point of Sale & Direct Deposits and Withdrawals Point-of-Sale Systems (POS) • A point-of-sale system allows a consumer to transfer funds from a bank account to the merchant’s bank account to pay for any transaction. Direct Deposits and Withdrawals • Electronic movement of funds from one bank account to another has many useful applications. ©2019 McGraw-Hill Education. 22-28 Other EFTs Most banks provide customers with the use of an online portal through which they may access information about their accounts, transfer funds, and permit bank customers to authorize bank payments. Pay-by-phone systems allow depositors to telephone their bank’s computer and authorize payment of certain bills to other accounts or to third parties. Transfer of funds between banks has revolutionized global banking system as it speeds processing financial settlements and international trade. ©2019 McGraw-Hill Education. Electronic Funds Transfer Act (1979) The most comprehensive federal legislation is the Electronic Funds Transfer Act in full effect in1980. • 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. 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. EFTA requires the institution to provide written receipts each time an ATM is used, and monthly statements on which electronic transactions are shown. ©2019 McGraw-Hill Education. 22-29
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Explanation & Answer




Commercial paper



In a business perspective, a commercial paper is a legal instrument used to settle business
transactions; it is a monetary document that is transferred from one party to another to settle
business transactions. There are three parties to a commercial paper, the endorsee who signs the
commercial paper and the endorsee who will benefit from the final transfer of the commercial
paper (Liuzzo, & Hughes, 2019). Once the endorser has signed the commercial paper, the
ownership is transferred t...

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