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PRDV205: Business Law and Legal Procedures

Unit 5: NEGOTIABLE INSTRUMENTS AND SECURED TRANSACTIONS   The UCC addresses two very important areas in modern trade and commerce – the transfer of money by way of documents that guarantee payment, and the recording of interests in property serving as security for a loan.  Most of us are familiar with one kind of negotiable instrument – checks.  Every day, individuals and businesses pay vendors by way of check or draft.  Behind these transactions is an extensive body of law to ensure the orderly transfer of money.  In addition to checks, promissory notes are also used to guarantee repayment of loans.  Likewise, laws governing secured transactions provide a framework for interpreting contracts that provide for collateral on loans and allow a process for recording such contracts so that creditors are put on notice regarding earlier collateral interests.  For example, you might get a loan on a new car, for which the car serves as collateral.  Insuring contracts for payment of money in commercial transactions helps to provide for a stable and reliable system of commerce.

Unit 5 Time Advisory
This unit should take you approximately 3 hours to complete.

Unit5 Learning Outcomes
Upon successful completion of this unit, you should be able to:
- describe the elements of negotiable instruments; - describe the elements of a secured transaction; and - identify the steps required to make a state UCC filing.

5.1 Negotiable Instruments   5.1.1 An Overview of Negotiable Instruments   - Reading: Business Law and the Legal Environment: “Chapter 22, Section 1: Introduction to Commercial Paper” Link: Business Law and the Legal Environment: “Chapter 22, Section 1: Introduction to Commercial Paper” (PDF)

 Instructions: Read Chapter 22, Section 1 of the textbook.  This
reading introduces you to the concept known as commercial paper (the
Uniform Commercial Code uses the alternative term negotiable
instruments).  These terms refer to a range of traditionally
paper-based instruments that facilitate financial transactions in
commerce.  You likely are already familiar with one form of
commercial paper – checks drawn from a bank checking account.  This
reading addresses various forms of commercial paper, including bank
checks, certificates of deposit, and promissory notes.  

 Reading this textbook section should take approximately 30
minutes.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution, as requested by the work’s original creator or
licensee.

5.1.2 Types of Negotiable Instruments   - Reading: Business Law and the Legal Environment: “Chapter 22, Section 2: Scope of Article 3 and Types of Commercial Paper and Parties” Link: Business Law and the Legal Environment: “Chapter 22, Section 2: Scope of Article 3 and Types of Commercial Paper and Parties” (PDF)

 Instructions: Read Section 2 from Chapter 22 of the textbook.  This
reading begins with a general overview of the scope Article 3 of the
UCC, which governs negotiable instruments.  In particular, you will
explore the different categories of negotiable instruments – drafts,
checks, and notes (also known as *promissory notes*).  

 Note that this reading also covers the material you need to know
for subunits 5.1.2.1 and 5.1.2.2, found below.  You can refer to
those subunits for additional guidance on how to approach this
reading  

 Reading this textbook section should take approximately 30
minutes.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution, as requested by the work’s original creator or
licensee.

5.1.2.1 Drafts and Checks   Note: This topic is covered by the Chapter 22, Section 2 textbook reading assigned under Subunit 5.1.2 (above).  In addition to understanding what drafts and checks are, make sure you are able to identify the parties to a draft or check.  Also note the importance of drafts in trade and commerce, and be sure you understand the various kinds of drafts and checks.

5.1.2.2 Notes   Note: This topic is covered by the Chapter 22, Section 2 textbook reading assigned under Subunit 5.1.2 (above).  For this subunit, be sure to familiarize yourself with the definition of and the parties to a promissory note in the brief section titled “Notes” on page 780.  If you have ever received a loan from a bank or other institution, it is likely that you have signed a promissory note.

5.1.3 Requirements   - Reading: Business Law and the Legal Environment: “Chapter 22, Section 3: Requirements for Negotiability” Link: Business Law and the Legal Environment: “Chapter 22, Section 3: Requirements for Negotiability” (PDF)

 Instructions: Read Section 3 from Chapter 22 of the textbook.  This
reading covers the specific requirements that must be met in order
for commercial paper to be negotiable.  It is important that you
have a sound understanding of these requirements, as well as the
types of, and parties to, the various forms of negotiable
instruments.  

 Reading this textbook section should take approximately 30
minutes.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution, as requested by the work’s original creator or
licensee.

5.1.4 Holders in Due Course   - Reading: Law of Commercial Transactions: “Chapter 24, Section 1: Holder in Due Course” Link: Law of Commercial Transactions: “Chapter 24, Section 1: Holder in Due Course” (PDF)

 Instructions: Read Chapter 24, Section 1 of the textbook.  Under
the UCC, a holder in due course is a person with special rights in a
negotiable instrument.  This person has certain rights that protect
him or her against claims that either party to the original
instrument might have made against each other.  Under the common law
of contract, however, the holder in due course is simply an
assignee.  As you proceed through this reading, pay particular
attention to the UCC requirements that must be met in order to
obtain the status of a holder in due course.  

 Reading this textbook section should take approximately 30
minutes.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution, as requested by the work’s original creator or
licensee.

5.2 Secured Transactions   - Reading: Law of Commercial Transactions: “Chapter 28, Section 1: Introduction to Secured Transactions” Link: Law of Commercial Transactions: “Chapter 28, Section 1: Introduction to Secured Transactions” (PDF)

 Instructions: Read Chapter 28, Section 1 of the textbook.  As you
are probably aware, some loans are unsecured – for example, the
loans that generally are offered through credit cards.  Many loans,
however, are secured – meaning that the lender gets some kind of
assurance that the loan will be paid.  The UCC provides rules for
the formation of secured transactions and provides a means to
“perfect” the security interest.  This reading will provide you with
a concise introduction to the law of secured transactions.  

 Reading this textbook section should take approximately 1 hour.  

 Terms of Use: This text was adapted by The Saylor Foundation under
a [Creative Commons Attribution-NonCommercial-ShareAlike 3.0
License](http://creativecommons.org/licenses/by-nc-sa/3.0/) without
attribution, as requested by the work’s original creator or
licensee.