Many of our daily business transactions are governed by special sets of rules. For example, sales, credit, and banking are to a great extent regulated by special statutory rules. Some important business transactions are discussed below.
Business transactions may involve several major fields of the law, particularly the law of contracts and the law of property which are not fully covered in this pamphlet.
A number of states, including Ohio, have adopted the Uniform Commercial Code, commonly called the "UCC." The UCC governs a wide range of commercial practices, including: (1) sales of goods and merchandise, and other consumer transactions; (2) commercial paper, such as checks, promissory notes, and the like; and (3) secured transactions (sales of goods on credit, or loans secured by an agreement roughly similar to a mortgage [but on personal property, not real estate]).
Many commercial transactions-a number of consumer transactions in particular-are not covered by the UCC, but are the subject of separate statutes. Some of these are: (1) retail installment sales; (2) charge accounts; (3) home solicitation sales; (4) small loans; and (5) intere
The most common forms of commercial paper are checks and promissory notes. Other common forms of commercial paper are drafts, bills of exchange, and certificates of deposit. For ease of understanding, think of a regular check when the term "commercial paper" is used. Similarly, think of depositing a check, paying a bill by check, or cashing a check when the terms "negotiation," "negotiable," and "negotiability" are used. When a check is negotiated, the cash represented by the check is transferred. For example, when a person writes a check to pay her utility bill, the value of the cash represented by the check is removed from the account of the person who wrote the check and added to the account of the utility. Another way of understanding negotiability is to substitute the word "transferability." When commercial paper meets certain requirements, it is negotiable, and moves freely in commerce. In a sense, commercial paper, or negotiable paper, is a substitute for cash, and is used in commerce because it can be more convenient and secure than cash.
Commercial paper is negotiable if it is in writing and meets four criteria: (1) it is signed by the person making it (the maker) or by the person on whose account it is drawn (the drawer); (2) it contains an unconditional promise or order to pay a specified sum of money; (3) it is payable either on demand, or at a definite time; and (4) it is payable either to the order of a particular person, or to the "bearer" (the bearer is the person in actual possession of the commercial paper, even though the identity of such person may not be known when the commercial paper is first issued). An ordinary check, when it is properly executed, is a negotiable instrument. Other common negotiable instruments are drafts, bills of exchange, certificates of deposit, and promissory notes.
Commercial paper is transferred or negotiated by endorsement. An endorsement may be unconditional, or it may place some limit on how the instrument can be negotiated in the future. For example, a check is unconditionally endorsed by signing it on the back. When endorsed in this way, the check becomes payable to the bearer, that is, it is payable to the person or entity possessing the check when it is re-negotiated (presented for payment). If the check is endorsed, "For deposit to the account of ...," it can only be negotiated by depositing it in the named account. If it is endorsed, "Pay to the order of ...," only that person named can negotiate it further.
In order for commercial paper to move freely in the business and banking worlds, persons or entities who were not parties to the original transaction must have reasonable assurance that the negotiable instrument is good, and will be honored ("honored" means paid). This assurance is provided through the doctrine of "holder in due course."
In general, a holder in due course takes a negotiable instrument free of all claims by any person, and free of the defenses of any party to the instrument with whom the holder has not dealt. To become a holder in due course, a person to whom a negotiable instrument is transferred must: (1) give something of value in return for having the instrument transferred to him; (2) complete the transaction in good faith; and (3) complete the transaction without notice of any claim or defense against the instrument.
Suppose a buyer purchases supplies on credit and gives the supplier a promissory note due in six months. The supplier takes the note to the bank to have it "discounted." That is, the supplier sells the note to the bank for something less than its face value in order to get cash, rather than wait six months for payment. The bank then takes the note to another financial institution and has it re-discounted in order to increase the bank's supply of money or credit. In each case, the note is transferred by endorsement.
The maker of the note (the buyer) is primarily liable. The holder in due course does not have to look to the maker alone-or even at all-for payment. The maker (the buyer), the supplier who had the note discounted, and the bank which had the note re-discounted, are jointly and severally liable on the note. That is, the maker and both endorsers are liable separately or together to the holder in due course. The maker of the note has agreed to pay the note at the time it is due, and to make such payment to the person or entity having possession at that time. The endorsement by the supplier and the endorsement by the bank are individual agreements that each will be liable for payment if the maker "dishonors" (does not pay) the note. If the supplier to whom the note was originally given furnished improper, unsatisfactory, or insufficient supplies, the maker of the note has a valid excuse for nonpayment, but it is only valid against the supplier. The maker cannot assert this as a defense against the holder in due course. The above general rule has been modified in most consumer transactions. See "Consumer Transactions In General" below.
A "cognovit note" is a promissory note in which the maker grants a warrant of attorney to the holder of the note to confess judgment against the maker of the note. This means that in case of default, the holder of the note is authorized to go to court and have a judgment entered against the maker, without the formalities of notice and trial.
Many states prohibit any use of cognovit notes. In Ohio, they are prohibited in consumer transactions, and their use in other transactions is limited. Any note given in a consumer loan or transaction, and executed on or after January 1, 1974, can only be enforced by means of a regular lawsuit. That is, the cognovit provision of such a note (the waiver of notice and the right to trial) is invalid in consumer transactions. If the remainder of the note is valid, it may be enforced after notice and trial. In Ohio, cognovit provisions are valid in commercial transactions. However, the note must contain a conspicuous warning to the maker that she is giving up the right to notice and trial. Further, the actual confession of judgment may be filed only in courts in whose territory the maker lives, or the note was executed.
Consumer transactions are common and often dependent upon the use of credit. Credit is expensive. Most consumer transactions are covered by both state and federal law.
Currently, Ohio law allows an interest rate up to and including an annual percentage rate of 25 percent as an alternative to other statutory methods of computing the annual percentage rate for, among others, retail installment sales, and revolving charge accounts (credit cards). Stated another way, the 25 percent rate is an alternative and it is the maximum rate allowed under the alternative. Further, it must be noted that some allowable methods of computing interest may result in annual percentage rates of more than 25 percent and that such rates are enforceable under the law. See "Small Loans" below. It must be stressed that a 25 percent annual percentage rate (or any other interest rate) is not a required rate. Interest rates are subject to market pressure and to negotiation. Buyers should shop for low interest rates and low finance charges in the same way they shop for low prices. One of the basic goals of the Federal Truth in Lending Law is to provide consumers with sufficient information so that they can shop for credit, that is, know and compare the cost of credit.
Buyers are entitled to have, and to read, all parts of applications, contracts, and disclosure statements. Before signing anything, buyers should: (1) read all parts of an application or contract, as well as all disclosure statements; (2) ask questions about all aspects of such documents which are not absolutely clear; and (3) obtain satisfactory answers to all questions. If a buyer does not understand any document, he should ask for, and obtain, an opportunity to study the document, or have his attorney study the document. Denial of information or assistance, or difficulty in obtaining information or assistance, should alert the buyer that there may be problems.
As stated above, most consumer transactions are covered by both state and federal laws. For example, both state and federal laws concern the rescission (cancellation) of many kinds of consumer transactions within a certain period after receiving the goods or services. The time for exercising the right of rescission is normally very short, for example, within three days of receiving the goods or services. Similarly, in most consumer transactions the traditional concept of holder in due course has been modified. Under the consumer laws, a buyer has the right to assert all defenses against any person or entity to whom the seller has transferred buyer's contract or note.
In most consumer transactions, the buyer will receive a disclosure form which includes the disclosures required by the Federal Truth in Lending Law. Disclosure forms vary. Sellers and lenders may, with certain limitations, modify the disclosure forms, and the forms may be separate from the contract, or part of the contract. Even where disclosure forms are part of a contract, the information shown in the following form must also clearly appear in the contract. Where a consumer transaction is based upon a revolving charge account (credit card) transaction, the buyer must be given a disclosure statement before the account is established and with every periodic statement or bill issued upon the account. The disclosure form for charge account/credit cards are analogous to the following form, but are specifically designed for these transactions. Buyers who use credit cards should read and understand such disclosure forms.
As an example, let us discuss a disclosure statement for the purchase of an automobile from Big Wheel Auto on May 1, 1981, under the following contractual conditions: (1) the price of the car was $7,607.50; (2) the buyer paid Big Wheel a down payment of $1,500 and financed the remaining $6,107.50 for 36 months at an annual percentage rate of 14.84 percent; and (3) the monthly payments are $211.23, with the first payment due June 1, 1981.
A disclosure form will generally contain only that information required by the Truth in Lending Law. It is not the entire contract. For example, a disclosure form typically does not identify the make, model, color, or serial number of the car. In fact, the form probably refers the buyer to the contract documents for this information.
Buyers should obtain and study the disclosure form and contract prior to making a final commitment. For the transaction described above, the disclosure form would (before purchase) show, among other things, that the Annual Percentage Rate (APR) is 14.84 percent, and the Finance Charge is $1,496.80, that is, it costs $1,496.80 to finance $6,107.50 under this contract for three years at an APR of 14.84 percent. In other words, under this contract the buyer must pay back $7,604.30 or $1,496.80 more than the $6,107.50 which will be financed or borrowed. Continuing, the disclosure form would show: (1) the total amount, including down payment, that the buyer will pay; (2) the number, amount, and date when payments are due; (3) that credit life insurance will be purchased and it will cost $120.00; (4) the seller will retain a security interest in the car (the car may be repossessed and sold by the seller if the buyer fails to make payments); (5) certain filing fees will be paid; (6) late charges will be assessed; and (7) if the buyer completes all payments before three years, buyer will not have to pay a penalty and may be entitled to a refund. The "may" and "will not" blocks to the left of the phrase "have to pay a penalty [because of prepayment]" are confusing. When these blanks are not completed the buyer does not have to pay a penalty.
If the buyer were to indicate on the disclosure form that she wanted an itemization, she would have received a written itemization similar to the following:
Itemization of the Amount Financed of $6,107.50
$ -0- Amount given to you directly
$ 5975.00 Amount paid to your account
_______ (Big Wheel Auto)
Amount paid on your behalf
$ 12.50 to Motor Vehicle Bureau
$ 120.00 to Credit Life Ins. Co.
$ -0- Prepaid finance charge
Such information is helpful because it shows how the Amount Financed is distributed.
Before addressing the disclosure requirements for credit card transactions, a few general comments on credit card law are required. First, credit cards cannot be issued indiscriminately. They can be issued only in response to a written or oral request, or as a renewal or replacement of a card that a cardholder had previously accepted. Second, a cardholder's liability for the unauthorized use of a credit card is limited to $50. Thus, if a credit card is lost or stolen, the cardholder's maximum liability for any items improperly charged to cardholder's account is $50. (The maximum liability can be reduced by contract or through negotiation. Further, the cardholder can reduce the maximum liability by reporting the loss as soon as possible after such loss is discovered.) Third, a cardholder may, within certain limits, assert good faith claims and defenses against the card issuer and may withhold payments. The card issuer may not attempt to collect the amount in dispute or issue adverse credit reports until the dispute is settled.
In general, a financial institution must notify a consumer in writing at least 21 days prior to the effective date of any change in any term or condition of the consumer's account if the change would result in greater cost or liability for such consumer or decreased access to the consumer's account.
As noted above, there are special disclosure requirements for credit card accounts. Before a credit card account is used, the card issuer must provide the cardholder with a written initial disclosure. The initial disclosure must show: (1) the periodic (monthly) rate used to compute finance charges and the annual percentage rate of the finance charges; (2) when finance charges begin to accrue, and any free-ride period (a period where no interest or finance charges are made); (3) the method used to determine the balance on which the finance charge is computed; and (4) if a security interest is retained, a description of the property or item purchased by the cardholder. Finally, the initial disclosure must contain a statement of the cardholder's billing rights under the federal Fair Credit Billing Act.
In addition to the initial disclosure, the card issuer must provide the cardholder with periodic statements (bills) for each billing period in which there is an outstanding balance. The periodic statements must use the same terminology as the initial disclosure and must show: (1) the previous balance of the account; (2) the transactions within the billing period; (3) credits; (4) periodic rates; (5) the balance on which the finance charge is being computed; (5) the finance charge; (6) the annual percentage rate; (7) any other charges; (8) the closing date of the billing cycle; and (9) the address for notices of billing errors.
In addition to the initial and periodic disclosures, the card issuer must provide the following disclosures: (1) an annual statement of billing rights if billing rights are not stated on each periodic statement (bill); (2) a written notice that previously disclosed terms of the account or contract are to be changed (such notices must be made at least 15 days before the effective date of the change); and (3) the existence and amount of any surcharge.
As noted above, the card issuer must notify the cardholder of the cardholder's right to challenge billing errors. In summary, the procedure for challenging billing errors is as follows.
The cardholder must give the card issuer written notice (a billing error notice) of any billing error within 60 days after the first statement (bill) containing the error.
The card issuer must resolve the dispute within 90 days of its receipt of the billing error notice. If the dispute is not immediately resolved, the card issuer must acknowledge receipt of the cardholder's billing error notice. This acknowledgment must be sent to cardholder within 30 days after the card issuer's receipt of the notice.
The cardholder need not make payments on the amount in dispute and the card issuer may not charge interest on, or attempt to collect, the amount in dispute. Further, the card issuer may not issue any adverse credit reports until the dispute is settled.
If a billing error does occur, the card issuer must make the appropriate correction and send a written notice of correction to the cardholder.
If a billing error did not occur, the card issuer must send the cardholder a written explanation and may then bill the cardholder for the amount due, including finance charges on the disputed amount.
A retail installment sale is a transaction in which a consumer pays the purchase price over time by making periodic payments. The transaction always involves an installment note executed by the buyer to the seller and a security interest (like a mortgage) in the items purchased, which permits the seller to repossess the items if the debt is not paid. Usually, the contract, security agreement, and note are included on the same form. The sale of the automobile mentioned above is an example of a retail installment sale. (The disclosure form which appears above is an example of the kind of disclosure which is required.)
A balloon note is a promissory note under which the buyer agrees to pay a series of small installments and a final large installment for the remaining balance. Balloon notes are permitted in consumer transactions only if the note contains a provision which specifically allows the buyer to refinance the balance due on the final installment at the same, or better, terms as the small installments.
For example, suppose a person buys a used car for $1,000, giving a down payment of $100 cash and financing the balance for two years. With the finance charges added to the unpaid balance, the buyer would normally pay monthly installments of more than $50. In order to reduce these payments, the buyer could execute a balloon note requiring 23 installments of $35 each and a final installment of $397. The law requires that the buyer be permitted to refinance the final installment amount on the same or better terms. That is, the note must state that the interest rate, payment amounts, and repayment period for the refinanced final payment must be the same or lower than those of the original contract. Thus, the buyer would, among other things, be able to pay the refinanced final payment over 24 installments.
If the buyer is more than 30 days late on a payment in a consumer transaction, the seller may accelerate the payments. That is, seller can declare all payments immediately due on account of the default.
A buyer who pays off the balance completely before the final payment is due is entitled to a proportionate refund on the interest or finance charges.
Home Solicitation Sales
Ohio law controls home solicitation sales. The law is directed at abuses which became common in sales made at consumers' homes. These abuses included, for example: (1) deception and high-pressure salesmanship; (2) the sales of goods and
services which the consumer really did not want or need; (3) the sales of goods and services of inferior quality at grossly inflated prices; and (4) the business practices of some transient salespersons and their employers. These business practices included selling the consumers' promissory notes at a discount and leaving the area. Specifically, certain door-to-door salespersons would sell the consumers' notes-the consumers' written promise to pay-to finance companies or banks for less than the face amount of the note and then leave the area. In effect, they left the consumer with a debt to pay the finance company or bank, but without anyone or any entity to contact about problems with the sale or with the goods and services. It should be noted that the good-faith sale of promissory notes at a discount is a common and legitimate business practice.
A home solicitation sale is defined as a sale concluded at the buyer's home in a personal solicitation by the seller. Such sales do not include: (1) sales under $25; (2) sales of real estate, insurance, stocks, bonds, or cars or automotive services (when such sales are by licensed brokers or dealers in such items); or (3) sales at auctions.
In order to be valid, a contract for a home solicitation sale must be in writing, and must contain substantially the same language used in the sales pitch. That is, the salesperson cannot say one thing, and put another in the contract. If the sale is an installment sale, the laws on retail installment sales must be met. The contract must contain a notice of cancellation (a clear description of the buyer's right to cancel), and clear instructions on how the buyer can cancel the contract.
A buyer in a home solicitation sale may cancel the contract at any time within three days after it is signed, by sending or delivering a notice of the cancellation to the seller in any of various ways. If the sale is canceled, the seller must return any money paid, plus any trade-in or deposit. Also, the seller cannot discount the note (if any) until five days after the sale. The seller cannot negotiate (transfer) the note at all if the sale is canceled, but must return the note to the buyer. If the note is negotiated, the laws on retail installment sales apply and the transferee (the person or entity which received the note from the seller) must notify the buyer of the transfer and give the buyer 15 days to state any defenses or claims. A buyer who cancels a home solicitation sale must return any goods in substantially as good a condition as when the buyer received them.
The Ohio "Lemon Law," effective in November 1987, applies to the purchase of new automobiles. Purchasers of new motor vehicles which do not conform to any applicable express warranty within one year of delivery, or the first 18,000 miles of operation, have legal remedies against the seller. The rights include compelling the seller to repair the defects, and in the event that repair attempts are unsuccessful, replacement of the motor vehicle or refund of the purchase price.
Formerly, retail installment sales contracts were the most important method of extending consumer credit. Today, credit cards are the most common method, although installment sales are still important. Another means of extending consumer credit is the small loan.
The credit card is perhaps the most widespread method for extending consumer credit. In general, a credit card is evidence that the holder has a contract with the issuer of the card to maintain a revolving charge account in the cardholder's name. Historically, revolving charge accounts have been among the most expensive forms of consumer credit.
A revolving charge account contract permits the cardholder to purchase goods and services at any time on presentation of the card. The card issuer must send the cardholder monthly statements. Under some plans, the cardholder may pay the total monthly balance without charge (just as if the cardholder had an open account with the issuer). In all cases, the cardholder may make a minimum payment and carry the balance of the statement into the following month or months by paying a monthly finance charge. The minimum monthly payment may vary depending on the size of the balance, and is not necessarily uniform among issuers. In general, the issuer has no security interest in the goods sold. Late payment charges cannot be assessed on a revolving charge account, but finance charges for amounts not timely paid can be added to the unpaid balance.
Some credit card accounts are not revolving charge accounts. Rather, they are open accounts in which the cardholder has promised to pay the card issuer all of the balance due within a certain time. Under the agreement, a balance cannot be carried forward to the next billing period. These credit cards are usually "travel and entertainment" cards.
The Electronic Fund Transfer Act establishes the basic rights, liabilities, and responsibilities of consumers who use electronic money transfer machines (automatic teller machines). The terms and conditions involving a consumer's account must be disclosed in readily understood language at the time the consumer contracts for the electronic fund transfer service. In addition to certain other specific requirements, the disclosure must include: (1) the consumer's liability for unauthorized transfers; (2) the person or office to contact with questions; (3) a statement of any charges involved in the service; (4) the circumstances under which the financial institution will, in the ordinary course of business, disclose information concerning the customer's account to third persons; (5) the consumer's right to stop payment of a pre-authorized electronic fund transfer and how to initiate a stop payment order; and (6) the statement of consumer's right to receive documentation of electronic fund transfers.
Loan companies must be licensed by the state. They are permitted to make small loans-loans up to $5,000-at special interest rates. They may charge up to 21 percent per year. Further, interest rates are negotiable. Buyers should not blindly accept the interest rate which is offered. They should shop for the best possible interest rate and terms. Further, they should negotiate. Just because an interest rate figure, or any other item, is in writing or is printed does not mean that it cannot be changed. Sellers of money as well as sellers of merchandise can change the terms of their documents.
People probably get into more difficulty because of unwise business management than for any other reason. This is particularly true with respect to consumer credit transactions. Most troubles of this kind can be avoided by five simple rules: (1) use credit sparingly; (2) stay within your budget; (3) make sure you know what is involved before obligating yourself; (4) live up to your obligations, but if you get into trouble, let the other party know your situation; and (5) keep accurate records.
Consumer credit is expensive, and should be used only when absolutely necessary. In the long run, it is much better to pay cash, because the money saved on interest can be used to buy more goods and services. Often we buy something because we think we need it now. Many of these purchases could be delayed. Many times it is smarter to save and pay cash later than to buy now and pay more. Further, regular savings through a bank, credit union, or investment could make your savings grow.
Do not obligate yourself to payments which you will have trouble meeting. Remember, you must pay the rent or mortgage payments on the house, buy food and clothing, pay the doctor and dentist, keep your insurance premiums paid, meet your obligations on your car and other major purchases, keep everything running and in repair, and have a little left over for emergencies and leisure. Be very careful about using overtime pay in figuring your ability to meet long-term payments. The fact that your employer currently is working at full capacity and you are getting substantial overtime pay is no guarantee that the overtime will continue.
Do not enter into any business transaction without fully informing yourself on what is involved, and of your rights and obligations. Read every paper you are asked to sign. Do not sign anything with blank spaces on it-everything should be filled in, or crossed out if it does not apply. Do not rely on sales talk. Rely only on what is written in the contract, note, security agreement, mortgage, or other papers that formalize the agreement. Do not sign anything you do not understand-consult a lawyer first. A lawyer can do much more for you before you obligate yourself. Once you obligate yourself, your options may be very limited.
Once you have obligated yourself, keep your promise. A good credit rating can be very valuable. A bad credit rating can hold you back financially and perhaps prevent your getting credit in the future, or make future credit more expensive.
Sometimes it is impossible to meet your obligations promptly. When this happens, contact the creditor and discuss your situation. Creditors are frequently willing to adjust or temporarily delay payments. People in the business of extending consumer credit know that if they pressure debtors in financial trouble too much or too quickly, they may destroy the debtor's ability to eventually make complete payment. If you do not contact the creditor when you run into financial difficulties, the creditor may conclude that you are a deadbeat.
It is important to keep: (1) copies of all papers you sign; (2) copies of all correspondence to you and from you concerning purchases and payments; (3) a record of all payments. If there is a disagreement or error, you will have your own records. Having your own records will make it much easier to argue your position, negotiate, or even prove your claim or defense if you have to go to court. Finally, your mortgage and home equity loan records can provide you with proof of the interest you paid on these loans. The interest on these loans may be deductible for federal income tax purposes.
Articles appearing on this website are intended to provide broad, general information about the law. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.
Reprinted and distributed by Fanger & Associates LLC with permission from the Ohio State Bar Foundation as a service to our clients and friends.
Excerpted from The Law And You, A Handbook of General and Everyday Law Affecting Ohio Citizens. Prepared for the Ohio State Bar Association by the Ohio State Bar Foundation. Copyright © 1997-1999 Ohio State Bar Association.
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