BUSINESS LAW

Higor Uchôa (Dr.)

 DEBTOR-CREDITOR RELATIONSHIP

LEARNING OUTCOME

❖ THE RIGHTS AND DUTIES OF DEBTORS AND CREDITORS

❖ CONCEPT OF BANKER

❖ BANKER AND A CUSTOMER RELATIONSHIP

❖ CLASSIFICATION OF RELATIONSHIP

❖ TERMINATION OF RELATIONSHIP

❖ DUTIES AND RIGHTS OF A BANKER

❖ LAWS ASSISTING CREDITORS

❖ NEGOTIABLE INSTRUMENTS
 DEBTOR-CREDITOR RELATIONSHIP

THE RIGHTS AND DUTIES OF DEBTORS AND CREDITORS

I. Have you ever owed money to someone?

II. Have you ever been contacted by a collection agency about a debt?
III. Have you ever worked for a company that has been sued?
IV. Have you ever received a late notice indicating that your payment was
not made on time?
V. Has anyone ever owed you money?
VI. Have you ever tried to collect on a debt through the courts?

• In a nutshell, these are the issues that make up debtor-creditor law.

• Basically, debtor-creditor law comprises the rights you may legally exercise,
either as a debtor (one who owes money) or as a creditor (one to whom
money is owed).
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WHAT DOES A CREDIT SCORE REPRESENT IN

THE USA?
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HOW DOES A CREDIT SCORE IMPACT YOUR

LOANS IN THE USA?
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HOW DOES A CREDIT SCORE IMPACT YOUR

LOANS IN THE USA?

➢ Poor credit is considered anyone with a score under 580

➢ Fair or Fair credit rating will be between 580 and 669

➢ Good credit is between 670 and 739

➢ Very Good credit is between 740 and 799

➢ Excellent credit is anything above 800

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CONCEPT OF BANKER

❑ The banker is one who receives money, collects cheques and

drafts, for customers, with an obligation to honor the cheques
drawn by customers from time to time subject to availability of
amounts in the account.

❑ The term banker includes person or company acting as banker.

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CONCEPT OF CUSTOMER (banking relation)

❑ A person / company/ entity who has an account with a bank is a

customer, and with whom the banks undertake to extend services

of banking;

“A casual transaction like encashment of a cheque does not

entail a person to be customer”

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BANKER AND A CUSTOMER RELATIONSHIP

❑ The relationship between a banker and a

customer depends on the type of transaction.

❑ These relationships confer certain rights and

obligations both on the part of the banker and on
the customer.
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CLASSIFICATION OF RELATIONSHIP
 DEBTOR-CREDITOR RELATIONSHIP

❑ GENERAL RELATIONSHIP

❖ Relationship between the customer having a deposit account and

the banker.
❖ Depositor is the lender and the banker is the borrower.
❖ Depositor is the creditor and the banker is the debtor.
❖ The money handed over to the bank is a debt.
❖ The money once deposited in the bank becomes the money of
the bank and it is prerogative of the bank to use that money as it
deems fit. The depositor remains a creditor that too an unsecured
creditor
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SPECIAL RELATIONSHIP

❑ When the customer avails a loan or an advance then his/her

relationship with the banker undergoes a change to what it is when
he is a deposit holder.

❑ Since the funds are lent to the customer, he/she becomes the
borrower, and the banker becomes the lender.

❑ The relation is the debtor - creditor relation, the customer being a

debtor and the banker a secured creditor.
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Secured Transaction
“Transaction in which the payment of a debt is

guaranteed by personal property the debtor

owns.” e.g.
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Important Definitions Associated with

Secured Transactions
❑ Secured interest: It is the interest in personal property or fixtures which

secures payment or performance of an obligation;

❑ Secured party: It is the party that holds the interest in the secured property,

also known as the secured creditor;

❑ Debtor: It is the person or party that has an obligation to the secured

party;

❑ Security agreement: It is the agreement in which the debtor gives the

secured interest to the secured party;

❑ Collateral: It is the property that is subject to the security interest.

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Creation of secured interests (basic

elements)
I. The two parties create a security agreement and either there is a record

of the security agreement or the secured party is in possession of the

collateral;

II. The secured party must give value (consideration) to get the security

agreement;

III. The debtor has a right in or to the collateral.

✓ Once these three criteria are met, the secured party’s rights
attach to the collateral. When attachment occurs, the creditor
becomes a secured party with an interest in the collateral.
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Perfection of an interest (on a collateral)

“It is a series of legal steps a secured party takes to protect its
right in the collateral from other creditors who want their
debts satisfied through the same collateral”

I. Perfection by Filing (file a financing statement with a state

agency)

II. Perfection by Possession (a debtor gives a creditor the collateral

to hold until the loan is paid off - pledge)

III. Automatic Perfection (a creditor sells a consumer good to a

debtor on a credit basis)

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Scope of a security interest

“You borrow $60,000 from your bank to start an electronics
store. However, you have recently graduated from college
and have only your car, valued at $3,500, as collateral. The
bank will take a security interest in your car, but it will also
take a security interest in the materials that you will purchase
to open your store.”

❑ After-acquired property (property acquired by the debtor

after the security agreement is made - inventory)

❑ Proceeds (something that is exchanged for the collateral)

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Priority disputes

“Secured parties have priority over unsecured creditors”

➢ What if we have Secured versus Secured Creditors?

Answer: If both parties are secured, the determination of

priority for claim to collateral moves to considerations of time
and perfection, that is, the party that perfected its interest first
will have priority in claim to the collateral or if neither party
has perfected its security interest, the party that attached its
security interest first will have first claim to the collateral.
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Priority disputes (cont.)

“Secured parties have priority over unsecured creditors”

➢ What if we have Secured Party versus Buyer?

Answer: If a debtor sells collateral in which a secured party

has an interest, the security interest generally remains in
effect. Therefore, If you sell the collateral and default on the
loan, the bank can seize the collateral from the buyer.
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Default

“When a debtor fails to make payments on a

loan or declares bankruptcy”
❑ In the U.S.A. each security agreement provides a specific
definition of what is considered a default.

❑ Each agreement determines the procedures and consequences

that occur in the event of default
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Default (cont.)

WHAT ARE A SECURED PARTY’S

REMEDIES TO RECOVER ITS
MONEY WHEN A DEBTOR
DEFAULTS ON A LOAN?
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Default (cont.)
1. Take possession of the collateral*

*Secured party may not breach the peace in repossessing the property;
*These remedies are limited if the debtor has filed for bankruptcy.

• Disposition of the Collateral (the secured party can sell, lease, or

transfer the collateral in any commercially reasonable method)

• Retention of the Collateral (the secured party may choose to

keep the collateral in full or partial satisfaction of the debt)

2. Ignore its rights in the collateral and proceed to the court

❑ An unsecured creditor has just the option to file suit and seek a
judgment in the amount of the debt
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Termination of relationship between a

banker and a customer

I. The death, insolvency, insanity of the customer.

II. The customer closing the account i.e. Voluntary termination.

III. The closing of the account by the bank after giving due notice.

IV. The completion of the contract or the specific transaction.

V. Bankruptcy of the company.

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Bankruptcy
“When an entity is unable to pay its debts, bankruptcy law provides
various options for the entity to resolve these debts.”

1. All bankruptcy cases begin with the filing of a petition for bankruptcy.
2. Once the petition is filed, the court grants an automatic stay for creditor
actions against the debtor’s estate. In other words, creditors’ legal actions
against the debtor must cease.
3. The court determines whether an order of relief should be granted.
4. The creditors meet with the debtor.
5. Some type of payment plan is created and approved, usually by the
creditors and the court.
6. The payment plan is implemented by the debtor.
7. Debts remaining after the plan is implemented are usually discharged.
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Bankruptcy relieves
❑ Liquidation (when a debtor turns over all assets to a trustee, an

individual who takes over administration of the debtor’s estate)

❑ Reorganizations (allows creditors and a debtor to create a plan

to reorganize the debtor’s financial affairs under the supervision

of the bankruptcy court - Assets are not liquidated)

❑ Individual repayment plans (permits individuals to pay their debts

to creditors in installment plans, under a court’s supervision)

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SURETYSHIP AND GUARANTY

Principal ❑ When a 3rd party

Creditor
Debtor
promises to pay a debt
owed by a Debtor who
doesn’t pay, either a
suretyship or guaranty
Surety / is created.
Guarantor
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SURETYSHIP

❑ Express contract between the surety and the

creditor.

❑ Creditor can demand payment from surety at any

time after debt is due.

❑ Creditor need not exhaust all legal remedies

against the debtor before holding the surety
responsible.
 Negotiable Instruments

LETS TALK ABOUT

PAYMENT AND LAW

 NEGOTIABLE INSTRUMENTS

NEGOTIABLE INSTRUMENTS

❖ Once a sales contract has been created and executed and the

parties are aware of their respective obligations under the

contract, the next phase is the payment by the buyer to the seller

for the goods purchased.

❖ Payment is usually made in one of three ways: in cash, through

credit arrangements, or with a substitute for cash.

 NEGOTIABLE INSTRUMENTS

❖ What is negotiable?
✓ Negotiable means transferable.
✓ The negotiation that goes on refers to the transfer of the instrument
between two people, or from one bank to another, or even from
one country to another.

❖ What is an instrument?
✓ In the broadest sense, almost any agreed-upon medium of
exchange could be considered a negotiable instrument.
✓ In day-to-day banking, a negotiable instrument usually refers to
checks, drafts, bills of exchange, and some types of promissory
notes (commercial papers)
 NEGOTIABLE INSTRUMENTS

Is a contract a commercial paper?

❑ Bob sells a bushel of apples to Betty; in exchange, Betty executes a contract to

pay Bob $5 on demand. A few days later, Bob buys some oranges from Pat for
$5. Instead of paying Pat the $5 in cash, Bob assigns Betty’s obligation to pay
Bob’ $5 to Pat.
❑ When Pat demands the money from Betty, Betty will pay Pat the $5, and
everyone will be square.
 NEGOTIABLE INSTRUMENTS

“A negotiable instrument is a written document

containing the signature of the creator that makes an
unconditional promise or order to pay a certain
sum of money at either a certain time or on
demand”
 NEGOTIABLE INSTRUMENTS

Why are negotiable instruments

important?
✓ Its quicker, safer, and more efficient way to carry
on transactions with large/small businesses and with
consumers;

✓ People don't need to carry large amounts of money on their person;

✓ Reduces the risk of loss/theft when payments are sent through the mail;
✓ Provides a receipt and a record for tax purposes.
 NEGOTIABLE INSTRUMENTS

The six requirements for negotiability are:

1. The instrument is a written document;

2. It is signed by the creator of the instrument;

3. The instrument has an unconditional promise or order to pay;

4. The amount to be paid is a sum certain in money;

5. Payment is to be made either on demand or at a fixed future time;

6. The document must contain the words of negotiability, e.g., “pay to the

bearer.”
 NEGOTIABLE INSTRUMENTS

CHECKS

❖ Most common form of negotiable instrument;

❖ Preferred method of payment for many debts;

❖ Offer convenience, safety, and a record of

transactions
 NEGOTIABLE INSTRUMENTS

TYPES OF CHECKS

❖ Cashier’s check: A draft with respect to which the drawer and

drawee are the same bank or branches of the same bank;

❖ Certified check: A check accepted by the bank on which it is

drawn.
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TYPES OF ENDORSEMENT

❖ Blank: Sign the back of the check with the name that matches

the front of the check and the signature card.

❖ Full: This endorsement changes ownership of the check from the

original payee to a new payee, The person cashing the check.

❖ Restrictive: This endorsement limits what can be done with the

check; usually "For Deposit Only"

 NEGOTIABLE INSTRUMENTS

DRAFTS

✓ A draft is a three-party instrument, similar to a check;

✓ A draft is an order signed by one party (the drawer, or drafter) that

is addressed to another party (the drawee) directing the drawee

to pay to someone (the payee) the amount indicated on the draft.

✓ The payment may be at sight or at some defined time;

✓ Most drafts are used for the purchase of goods and services when

the transaction goes beyond the bounds of U.S. banking law.

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BILLS OF EXCHANGE

❖ A bill of exchange is a negotiable and unconditional

written order, such as a check, draft, or trade agreement,

addressed by one party to another;

❖ The receiver of the bill must pay the specified sum or

deliver specified goods on demand or at a specified time;

❖ Bills of exchange are a common form of internationally

negotiable instruments.
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PROMISSORY NOTES

❖ A promissory note is a written promise to pay at a fixed or

determinable future time a sum of money to a specified
individual.
❖ These two-party instruments are legally binding documents
with many specified terms that vary widely.
❖ Commercial paper, a short-term (270 days or fewer) note or
draft issued by a corporation or government, is a common
investment instrument.
 NEGOTIABLE INSTRUMENTS

MONEY ORDERS

✓ Particularly personal money orders, are usually in the same

form as personal checks and are considered checks;

✓ Both banks and nonbanks sell money orders;

✓ The amount of money to be paid is usually already imprinted

on the money order. The person purchasing the money signs
the money order as the drawer and fills in the name of the
person who is to receive the money.
 NEGOTIABLE INSTRUMENTS

ACCEPTING DEPOSITS
❑ Banks must credit customers’ accounts as well as draw from
them.

❑ Four types of banks involved in check collection are:

✓ Depository banks (depository for safeguarding and storage
purposes)
✓ Payor banks (it is the drawee of a draft/check)
✓ Collecting banks (it collects money from the account of the writer
of a cheque on behalf of the person who has deposited the
cheque into the bank)
✓ Intermediary banks (it acts on behalf of the sender bank)
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ACCEPTING DEPOSITS (cont.)

❖ If a customer’s account cannot cover a check, the bank will
dishonor it, and the customer will be held liable for the amount;

❖ A bank must honor a check if it is properly payable.

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THANK YOU