Getty Images Plus Miller R 2014 Business Law Tod

Week 4: Debtor/Creditor Relationships

In the melodramas of the 1800s, one familiar character was the evil landlord that entered the stage to the boos and hisses of the audience, where he inevitably showed no mercy towards the lovely heroine and her family. The debtor-creditor relationship has advanced significantly since those days. Contracts and collateral, as well as a wide area of negotiable instruments, provide both options and protection to the parties in a transaction.

What is the difference between an unsecured loan and a secured loan? What is a bill of lading and why is it needed? This week you will be introduced to these different types of agreements that may be formulated between a creditor and a debtor, as well as the various tools or negotiable instruments that may be used in the transactions.

Learning Objectives

Students will:

Identify the different types of negotiable instruments, their purposes and the parties to each type
Differentiate between the parties and terminology in connection with both unsecured and secured credit transactions
Demonstrate the requirements for creating a valid security interest by attachment
Evaluate the methods that can be used to establish the priority of a security interest through perfection
Explain the general and special priority rules for security interests and the rights of creditors upon a debtor’s default

Photo Credit: [JackF]/[iStock / Getty Images Plus]/Getty Images

Learning Resources

This page contains the Learning Resources for this week. Be sure to scroll down the page to see all of this week’s assigned Learning Resources. To access select media resources, please use the media players below and/or the course DVD (as applicable).

Required Readings

Miller, R. (2014). Business law today: The essentials (10th ed.). Mason, OH: Cengage Learning.

Chapter 13, “Negotiable Instruments”

Chapter 15, “Creditors’ Rights and Bankruptcy (only pp. 436- 446)

Chapter 13 details the concept of negotiable instruments, including the different types of negotiable instruments, how they may be transferred, and the different types of liability that can be associated with these instruments. The first section of Chapter 15 focuses on the topic of creditors’ rights. You will be introduced to the concept of security and explore laws protecting both creditors and debtors.

Required Media

Week 4 Overview
Note: The approximate length of this media piece is 10 minutes.

1.Discussion: Strategic Default

Due to fluctuations in the housing market, some investors may discover that they have purchased property at the most inopportune time. With market values falling, individuals may find themselves in the inauspicious position of owing much more than the property is currently valued at- they are “underwater” on their mortgage.

Conduct online research regarding the concept of a strategic default, then respond to the following questions:

Should the collateral be the only exposed asset if there is a secured transaction? Should the creditor be able to go after the debtor beyond the collateral?
Should it be different if the default is on a home mortgage versus a car loan?
As a business consultant, one of your clients is considering a strategic default on her home mortgage. What advice would you give her?

With these thoughts in mind:

By Day 3

Post an initial statement that expresses your thoughts on strategic default. The length of your response(s) should be a minimum of 150 words.

2.Assignment 1: Security Interests

In extending high-risk credit to individuals or businesses, it is often necessary for the lenders to have some means of protecting themselves from default or bankruptcy on the part of the debtor. One of the mechanisms that can help protect creditors from the effects of bankruptcy or default is the establishment of a security interest.

In a 2- to 3-paragraph paper, respond to the following:

How do you go about creating a security interest?
Why would you even want to create a security interest?
How do security interests facilitate businesses being able to borrow money?
Lastly, why is perfection so important in connection with security interests?

Your written assignments must follow APA guidelines. Be sure to support your work with specific citations from this week’s Learning Resources and additional scholarly sources as appropriate.

Your task is to negotiate in reaching a mutually agreeable resolution that is fair to all and meets the requirements stated above to allow the airline to continue operations. You will use the following guidelines for your activity:

3.Assignment 2: Negotiable Instruments

Negotiable instruments are among the most common tools for financial transactions. Whether a check, a draft, a promissory note, or a certificate of deposit, negotiable instruments allow for business transactions to occur more smoothly, while legally protecting the parties involved.

Using the information presented in the scenario below respond to the following in a 1- to 2-page paper:

Mary has started a company that will provide computer hardware and software for processing orders for companies who sell moderately high volumes of merchandise over the Internet. For a typical customer, Mary will sell a hardware and software package to the customer along with a multiyear maintenance contract, typically 2, 3, or 4 years. The customer will incur a significant up-front charge for the equipment, followed by monthly charges for the maintenance plan. Mary plans to allow her customers to pay for the equipment itself over the time of the maintenance plan. Thus, if the customer gets a 3-year maintenance plan, the customer will have up to 3 years to pay for the equipment. In order to acquire its facilities and equipment, Mary’s company will need to borrow money. Discuss the common situations where Mary’s company is likely to make use of negotiable instruments, and in particular, the risks associated with the use of negotiable instruments.