Reg 7 Flashcards
(98 cards)
1
Q
Under the Negotiable Instruments Article of the UCC, which of the endorser's liabilities are disclaimed by a "without recourse" endorsement? a. Warranty liability only. b. Both contract and warranty liability. c. Contract liability only. d. Neither contract nor warranty liability.
A
Choice “c” is correct. Endorsing a negotiable instrument without recourse negates contract liability but not warranty liability.
2
Q
Under the Negotiable Instruments Article of the UCC, which of the following provisions satisfies the requirement that an instrument, to be negotiable, must be payable at a definite time?
a.
The instrument is undated and payable “30 days after date.”
b.
The instrument is dated and payable “in six months but the payor may extend this period indefinitely.”
c.
The instrument is dated and payable “15 days after sight.”
d.
The instrument is undated and payable “when the payee dies.”
A
Choice “c” is correct. An instrument is payable at a definite time if it can be established from the face of the instrument when the obligation will become due. An obligation payable 15 days after sight is payable 15 days after it is presented for payment.
Choice “b” is incorrect. Although six months is a definite time, the option of the payor to extend indefinitely the time for payment destroys negotiability.
Choice “a” is incorrect. If an instrument is not dated, we cannot know when 30 days after date is. Therefore, this is not payable at a definite time.
Choice “d” is incorrect. Although the payee will die some day, we do not know when, so the date of payment is not definite.
3
Q
Under the Negotiable Instruments Article of the UCC, which of the following statements is(are) correct regarding the requirements for an instrument to be negotiable? I. The instrument must be in writing, be signed by both the drawer and the drawee, and contain an unconditional promise or order to pay. II. The instrument must state a fixed amount of money, be payable on demand or at a definite time, and be payable to order or to bearer. a. Both I and II. b. I only. c. Neither I nor II. d. II only.
A
Choice “d” is correct. To be negotiable, the instrument must meet all of the following:
Be in writing
Be signed by the maker or drawer (not drawee)
Contain an unconditional promise or order
Be for a fixed amount of money
Be payable on demand or at a definite time
Be payable to order or bearer
Contain no additional undertaking/instruction not authorized by the UCC
Alternative I is incorrect because there is no requirement that the drawee sign.
4
Q
Which of the following instruments is subject to the provisions of the Negotiable Instruments Article of the UCC? a. An investment security. b. A certificate of deposit. c. A bill of lading. d. A warehouse receipt.
A
Choice “b” is correct. Checks, drafts, promissory notes and certificates of deposits are within the provisions of the Negotiable Instruments Article of the UCC (Article 3).
Choice “c” is incorrect. A bill of lading is governed by Article 7.
Choice “d” is incorrect. A warehouse receipt is governed by Article 7.
Choice “a” is incorrect. Investment securities (e.g., stocks and bonds) are governed by Article 8.
5
Q
The first assertion is true-payment is guaranteed. The instrument here is endorsed. In essence, an endorser makes a contract of guarantee: if the instrument is presented for payment and is dishonored, the endorser agrees to pay on the instrument according to its terms when it was endorsed. The second assertion is also true. When an instrument is endorsed to a specified person, it becomes order paper, but it still may be negotiated further, as long as the special payee endorses.
A
Note: Actually, whether or not the instrument may be further negotiated also depends on to whom the instrument was drawn in the first place, and that information is not provided. If the instrument here was payable to bearer or to the order of Faye Smith, it may be further negotiated, but if it was payable to the order of anyone else, it could not be further negotiated without that person’s endorsement.
6
Q
Under the Commercial Paper Article of the UCC, which of the following documents would be considered an order to pay? I. Draft. II. Certificate of deposit. a. I only. b. II only. c. Neither I nor II. d. Both I and II.
A
Choice “a” is correct. Order paper is three-party paper where one person orders another to pay yet a third person. A draft is order paper. A certificate of deposit is two-party paper. In a CD, a bank acknowledges receipt of money and promises to pay. UCC 3-104
7
Q
Under the Commercial Paper Article of the UCC, for an instrument to be negotiable it must: a. Contain references to all agreements between the parties. b. Be payable to order or to bearer. c. Contain necessary conditions of payment. d. Be signed by the payee.
A
Choice “b” is correct. Any writing to be a negotiable instrument must be payable to order or to bearer, with the exception of checks. If the instrument is payable to order, it is negotiated by delivery with any necessary endorsement; if payable to bearer, it is negotiated by delivery alone. UCC 3-104
8
Q
Under the Commercial Paper Article of the UCC, which of the following circumstances would prevent a promissory note from being negotiable?
a.
An acceleration clause that allows the holder to move up the maturity date of the note in the event of default.
b.
An extension clause that allows the maker to elect to extend the time for payment to a date specified in the note.
c.
A person having a power of attorney signs the note on behalf of the maker.
d.
A clause that allows the maker to satisfy the note by the performance of services or the payment of money.
A
Choice “d” is correct. To be negotiable, a note must be payable in money and only in money. A note that allows the maker to pay by performing services is not negotiable. UCC 3-104
9
Q
Under the Commercial Paper Article of the UCC, which of the following requirements must be met for a transferee of order paper to become a holder? I. Possession. II. Endorsement of transferor. a. I only. b. II only. c. Neither I nor II. d. Both I and II.
A
Choice “d” is correct. To be a holder of order paper, one must have all necessary signatures, such as that of the transferor, and possession of the instrument must have been transferred. UCC 3-201
10
Q
Under the Commercial Paper Article of the UCC, which of the following requirements must be met for a person to be a holder in due course of a promissory note?
a.
The note must be negotiable.
b.
The note must be payable to bearer.
c.
The holder must be the payee of the note.
d.
All prior holders must have been holders in due course.
A
Choice “a” is correct. One may be an HDC only of a negotiable instrument. UCC 3-302
Choice “b” is incorrect. One can be an HDC on a negotiable note payable to order; it need not be payable to bearer.
Choice “d” is incorrect. One will be an HDC if he is a holder who takes the instrument for value, in good faith, and without notice that the instrument is overdue or has been dishonored or of any defenses on or claims to the instrument. There is no requirement that all prior holders be HDCs. UCC 3-302
Choice “c” is incorrect. Transferees can be HDCs. The status is not limited to the payee of the note. Indeed, the payee generally cannot be an HDC.
11
Q
Under the Commercial Paper Article of the UCC, which of the following circumstances would prevent a person from becoming a holder in due course of an instrument?
a.
The note was collateral for a loan.
b.
The note was purchased at a discount.
c.
The person was notified that payment was refused.
d.
The person was notified that one of the prior endorsers was discharged.
A
Choice “c” is correct. One will be an HDC only if the person is a holder who takes the instrument for value, in good faith, and without notice that the instrument is overdue or has been dishonored or of any defenses on or claims to the instrument. A refusal to pay is a dishonor. UCC 3-304
12
Q
Under the Commercial Paper Article of the UCC, which of the following statements best describes the effect of a person endorsing a check “without recourse?”
a.
The person makes no promise or guarantee of payment on dishonor.
b.
The person converts the check into order paper.
c.
The person gives no warranty protection to later transferees.
d.
The person has no liability to prior endorsers.
A
Choice “a” is correct. Signing without recourse negates contract liability on the instrument. Contract liability is the promise to pay upon dishonor. UCC 3-414
Choice “d” is incorrect. An endorser is liable to subsequent parties on an instrument; not to prior parties, and this is true no matter how the endorser signs.
Choice “c” is incorrect. Signing without recourse negates contract liability on the instrument. Warranty liability (e.g., all signatures are genuine, the instrument has not been materially altered, etc.) is not negated.
Choice “b” is incorrect. A person does not automatically convert a check to order paper by endorsing it “without recourse.” A special endorsement (i.e., one naming a new payee) can convert bearer paper to order paper.
13
Q
Vex Corp. executed a negotiable promissory note payable to Tamp, Inc. The note was collateralized by some of Vex’s business assets. Tamp negotiated the note to Miller for value. Miller endorsed the note in blank and negotiated it to Bilco for value. Before the note became due, Bilco agreed to release Vex’s collateral. Vex refused to pay Bilco when the note became due. Bilco promptly notified Miller and Tamp of Vex’s default. Which of the following statements is correct?
a.
Bilco will be unable to collect from either Tamp or Miller because of Bilco’s release of the collateral.
b.
Bilco will be able to collect from Tamp because Tamp was the original payee.
c.
Bilco will be unable to collect from Miller because Miller’s endorsement was in blank.
d.
Bilco will be able to collect from either Tamp or Miller because Bilco was a holder in due course.
A
Choice “a” is correct. When a person entitled to enforce an instrument impairs the value of collateral securing the instrument, the obligations of the endorsers are discharged to the extent of the impairment. The security was completely released so the endorsers will be released from their obligation (assuming the note was fully collateralized). UCC 3-606
14
Q
Which of the following negotiable instruments is subject to the UCC Commercial Paper Article?
a.
Installment note payable on the first day of each month.
b.
Bill of lading payable to order.
c.
Warehouse receipt.
d.
Corporate bearer bond with a maturity date of January 1, 2009.
A
Choice “a” is correct. Commercial paper includes drafts and notes. Thus, it covers an installment note [UCC 3-104].
Choice “d” is incorrect. The commercial paper article specifically excludes investment securities such as corporate bonds [UCC 3-103(1)], which are covered under Article 8.
Choice “c” is incorrect. The commercial paper article specifically excludes documents of title [UCC 3-103(1)], which includes warehouse receipts governed by Article 7.
Choice “b” is incorrect. The commercial paper article specifically excludes documents of title [UCC 3-103(1)], which includes bills of lading governed by Article 7.
15
Q
Which of the following conditions, if present on an otherwise negotiable instrument, would affect the instrument’s negotiability?
a.
The instrument is postdated.
b.
The instrument contains a promise to provide additional collateral if there is a decrease in value of the existing collateral.
c.
The instrument is payable at a definite time subject to an acceleration clause in the event of a default.
d.
The instrument is payable six months after the death of the maker.
A
Choice “d” is correct. Negotiable commercial paper must be payable on demand or at a definite time [UCC 3-104(1)(c)]. An instrument payable at someone’s death or at a time after someone’s death is not payable at a definite time because while all people will die, we don’t know when [UCC 3-109(2)].
16
Q
For a person to be holder in due course of a promissory note:
a.
The note must be payable in U.S. currency to the holder.
b.
All prior holders must have been holders in due course.
c.
The note must be negotiable.
d.
The holder must be the payee of the note.
A
Choice “c” is correct. Negotiability of the instrument is a prerequisite to holder in due course (HDC) status.
Choice “a” is incorrect. A note is negotiable as long as it is payable in currency recognized as money where the currency is issued.
Choice “d” is incorrect. The holder need not be the payee to be a HDC. The whole point of commercial paper is its transferability; the commercial paper may be transferred beyond the original payee.
Choice “b” is incorrect. Not all prior holders need to have been HDCs in order for the present holder to be an HDC. For instance, if the note is endorsed and gifted to a person, the donee is not an HDC because the donee has not given value. (Note: under the “shelter doctrine,” a donee will have the rights of an HDC if the donor was an HDC.) Even though a donee may not be an HDC, a subsequent holder could acquire HDC status if (i) the subsequent holder pays to the donee value for the note and (ii) the other three requirements for HDC status are present: the holder obtained the instrument in good faith, the holder obtained the instrument without notice of any defenses to, or claims of ownership on, the instrument, and the instrument was commerical paper.
17
Q
A maker of a note will have a valid defense against a holder in due course as a result of any of the following conditions, except: a. Infancy. b. Forgery. c. Fraud in the execution. d. Lack of consideration.
A
Choice “d” is correct. An HDC takes free of personal defenses but is subject to real defenses. Lack of consideration is a personal defense and thus is not valid defense against an HDC.
Choice “a” is incorrect. An HDC takes free of personal defenses but is subject to real defenses. Infancy is a real defense (represented by the “I” in the FAIDS mnemonic) and so is a valid defense for the maker.
Choice “b” is incorrect. An HDC takes free of personal defenses but is subject to real defense. Forgery is a real defense (represented by the “F” in the FAIDS mnemonic) and so is a valid defense for the maker.
Choice “c” is incorrect. An HDC takes free of personal defenses but is subject to real defenses. Fraud in the execution is a real defense (represented by the “F” in the FAIDS mnemonic) and so is a valid defense for the maker.
18
Q
Under the Negotiable Instruments Article of the UCC, an instrument will be precluded from being negotiable if the instrument: a. Is undated. b. Is made subject to another agreement. c. Fails to state the underlying consideration. d. Fails to state the place of payment.
A
Choice “b” is correct. Under the Negotiable Instruments Article of the UCC, an instrument is not negotiable if it states that it is “subject to” or “contingent upon” another agreement.
Choice “d” is incorrect. A negotiable instrument is not required to state the place of payment.
Choice “c” is incorrect. Consideration is not required for an instrument to be negotiable. We frequently make gifts by check. The check can be negotiable even though no consideration is given for the gift.
Choice “a” is incorrect. Failure to date an instrument will not destroy negotiability. An undated instrument is counted as being payable on demand.
19
Q
Under the Negotiable Instruments Article of the UCC, which of the following parties has secondary liability on an instrument? a. An issuer of a cashier's check. b. A drawer of a draft. c. A maker of a note. d. An acceptor of a note.
A
Choice “b” is correct. The drawer of a draft is secondarily liable. The drawer is liable only after the draft is presented to the drawee, the draft is dishonored, and the drawer is given notice of dishonor.
Choice “d” is incorrect because an acceptor is primarily liable. When a drawee signs a draft, the drawee becomes an acceptor and is primarily liable.
Choice “a” is incorrect because with a cashier’s check, the bank is both the drawer and the drawee. As the issuer the bank would be primarily liable.
Choice “c” is incorrect because the maker of a note is primarily liable.
20
Q
Train issued a note payable to Blake in payment of contracted services that Blake was to perform. Blake endorsed the negotiable note “pay to bearer” and delivered it to Reed in satisfaction of a debt owed Reed. Train refused to pay Reed on the note because Blake had not yet performed the services. Reed was unaware of this failure when he took the note. Under the Negotiable Instruments Article of the UCC, must Train pay Reed?
a.
Yes, Train has to pay Reed because Reed was a holder in due course.
b.
No, Train does not have to pay Reed because the note was issued to Blake.
c.
No, Train does not have to pay Reed until the services are performed.
d.
Yes, Train has to pay Reed because the note was converted into bearer paper.
A
Choice “a” is correct. Reed met all four requirements to be a holder in due course: (i) Reed was the holder of a negotiable instrument (the note); (ii) Reed gave value (receiving from the transferor a note as payment for the transferor’s debt owed to the transferee constitutes value); (iii) nothing in the facts indicates that Reed lacked good faith; and (iv) Reed had no notice of Blake’s nonperformance of services. Nonperformance of services is a personal defense and not a real defense. A holder in due course takes free of personal defenses and is subject only to real defenses. Thus, Train will have to pay Reed.
21
Q
Under the Negotiable Instruments Article of the UCC, which of the following instruments is classified as a promise to pay? a. A check. b. A trade acceptance. c. A draft. d. A certificate of deposit.
A
Choice “d” is correct. A promissory note is a “promise to pay”. A draft is an order for a third party to pay. A certificate of deposit is a bank promissory note and is therefore a promise to pay.
22
Q
Under the Negotiable Instruments Article of the UCC, which of the following defenses generally may be used against all holders of negotiable instruments? a. Lack of consideration. b. Breach of warranty. c. Fraud in the inducement. d. Minority of the maker.
A
Choice “d” is correct. Under the Negotiable Instruments Article with respect to a holder who is not a holder in due course and who is not covered by the shelter doctrine, a maker or drawer may raise any contract defense, but the defenses that a maker or drawer can raise against a holder in due course (a holder who takes an instrument for value, in good faith, and without notice of any defenses on or claims to the instrument, and the instrument is a negotiable instrument/commercial paper) and against a holder to whom the shelter doctrine applies are limited to those commonly known as “real” defenses. One such real defense is the minority of the maker (we use the term “infancy” in class, but the two terms mean the same thing).
23
Q
Under the Negotiable Instruments Article of the UCC, a holder in due course in a nonconsumer transaction takes a negotiable instrument free from which of the following defenses that may be asserted by a party with whom the holder in due course had not dealt? a. Fraud in the execution. b. Breach of contract. c. Infancy, to the extent that it is a simple contract defense. d. Discharge in an insolvency proceeding.
A
Choice “b” is correct. A holder in due course (a holder who takes an instrument for value, in good faith, and without notice of any defenses, on or claims to, the instrument, and the instrument is a negotiable instrument/commercial paper) takes the instrument free from ordinary contract defenses and is subject to only certain defenses commonly known as known as “real” defenses. Breach of contract is an ordinary contract defense, not a real defense, and the maker/drawer cannot successfully raise against a holder in due course the defense of breach of contract.
24
Q
Train issued a $10,000 note to Curator in exchange for a painting that Curator claimed to have been painted by a certain artist. The note provided that it was payable 10 days after Train sold his car. Train sold his car on May 1. Meanwhile, Curator transferred the note to Contractor in payment of work Contractor had performed for Curator. When Contractor presented the note to Train for payment 10 days after Train sold his car, Train refused to pay Contractor, claiming that the note was not negotiable and that Curator had defrauded him because the painting was not by the painter specified and, instead, was an almost valueless copy. Under the Negotiable Instruments Article of the UCC, which of the following statements is correct regarding the status of the note?
a.
The note was not negotiable because it was subject to another writing.
b.
The note was not a negotiable instrument because it was not payable at a definite time.
c.
The note was negotiable because it was conditioned on an event that took place.
d.
The note was negotiable because it was for a fixed amount of money.
A
Choice “b” is correct. To be negotiable, an instrument must be payable at a definite time. “10 days after Train sells his car” is not a definite time − we do not know when or if the car will be sold. Therefore, the instrument is not negotiable.
Choice “a” is incorrect. To be negotiable, an instrument generally cannot state that it is subject to another writing. However, nothing in the facts indicates that Train’s note said that it was subject to another writing.
Choice “d” is incorrect. To be negotiable, an instrument must be for a fixed amount of money, but that an instrument is for a “sum certain” alone is not sufficient to make the instrument negotiable. The other requirements for negotiability must be met as well, and here the note is not negotiable because it was not payable at a definite time.
Choice “c” is incorrect. Whether a note is negotiable is determined from the face of the instrument (i.e., whether it is conditional depends on what the instrument says). A condition in the instrument is not cured merely because the condition has been fulfilled.
25
Under the Negotiable Instruments Article of the UCC, which of the following statements is correct regarding a check?
a.
A check does not need to be payable on demand.
b.
A check does not need to be drawn on a bank.
c.
A check is an order to pay money.
d.
A check is a promise to pay money.
Choice "c" is correct. A check is a type of draft with two particular characteristics, namely drawn on a bank and payable on demand. A draft is order paper (a drawer orders the drawee to pay money to a payee or to bearer).
Choice "d" is incorrect. As indicated above, a draft (including checks) is not a promise to pay (two-party paper) but, rather, is an order to pay.
Choice "a" is incorrect. A check must be payable on demand. An instrument that has all of the other attributes of a check but that is not payable on demand is a time draft.
Choice "b" is incorrect. A check must be drawn on a bank. An instrument that has all of the other attributes of a check but that is not drawn on a bank is simply a draft.
26
```
Under the Negotiable Instruments Article of the UCC, the proper party to whom a check is presented for payment is:
a.
The drawer.
b.
The holder.
c.
The maker.
d.
The drawee.
```
Choice "d" is correct. A drawer (the check writer) draws a check payable to the payee; the bank whose routing number is set forth on the bottom left of the check is the drawee.
Choice "a" is incorrect. The drawer is the person who writes the check.
Choice "c" is incorrect. A maker is a person who makes a (promissory) note. A note is presented to the maker for payment, but a check is not a type of note; it is a type of draft, and drafts are presented to a drawee for payment.
Choice "b" is incorrect. A holder is someone in legal possession of a check; the holder may be the payee or some subsequent transferee of the payee. In any event, a check is not presented to a holder for payment.
27
Lamont signed a promissory note in favor of Roth as part of Lamont's purchase of supplies from Roth. The note required that the $10,000 be repaid 90 days from the date of the note. There were no conditions attached to repayment. Roth endorsed the note in blank and sold it to the bank. Lamont defaulted on the promissory note. The bank sought a judgment ordering Lamont to pay the bank. Under the Negotiable Instruments Article of the UCC, how will the court most likely rule?
a.
The court will not direct Lamont to pay the bank because the promissory note was a negotiable instrument negotiated with Roth.
b.
The court will direct Lamont to pay the bank because the promissory note was a negotiable instrument negotiated to the bank in due course.
c.
The court will direct Lamont to pay the bank because the note was part of a transaction between merchants.
d.
The court will not direct Lamont to pay the bank because the promissory note was not a negotiable instrument.
Choice "b" is correct. When a maker signs a negotiable promissory note and when the note is negotiated to a holder in due course (or when an HDC transfers the note to a holder to whom the shelter doctrine applies), the maker must pay the note when due according to its terms when the maker signed unless the maker has a real defense. The facts here do not indicate that the maker has any real defenses.
28
Last Bite Restaurant issues an instrument to Rags for Linen, Inc. Which of the following is not necessary for the instrument to be negotiable?
a.
A recital of the consideration given in exchange for the promise to pay.
b.
Payable on demand or at a definite time.
c.
An unconditional promise or order to pay.
d.
Signed by Last Bite Restaurant.
Choice "a" is correct. There is no requirement that a negotiable instrument recite the consideration given in exchange for the promise to pay. Including such information is optional (but allowable).
29
Sammy is in possession of a bearer promissory note in the amount of $500. Landscaper Ralph offers to trim the hedges on Sammy's property next week in exchange for the note. Sammy agrees and delivers the note to Ralph. Ralph:
a.
Cannot be a holder in due course, because the note is a bearer instrument.
b.
Cannot be a holder in due course, because Ralph did not yet give value for the instrument.
c.
Cannot be a holder in due course, because Ralph did not acquire the instrument in good faith.
d.
Can be a holder in due course, because the good faith and value requirements apply only to the transferor, not to the holder.
Choice "b" is correct. A holder in due course (HDC) is a holder who takes an instrument for value, in good faith, and without notice of any claims or defenses. In addition, the instrument must be a negotiable instrument (commercial paper). While an exectory promise (i.e., one that has not yet been fulfilled) constitutes contract consideration, an executory promise does not constitute value for purposes of ascertaining if a holder is an HDC. Thus, Ralph cannot be an HDC until Ralph performs all that Ralph promised to perform.
30
```
Peter asks Jen, who suffers from a mental disability, to sign a piece of paper that Peter says is an attendance sheet. In fact, the document is a negotiable note. Jen is later sued by a holder in due course. Jen's best defense would be:
a.
Mistake.
b.
Fraud in the execution.
c.
Duress.
d.
Fraud in the inducement.
```
Choice "b" is correct. Where a person is tricked into signing something that she does not know is a negotiable instrument, there has been a fraud committed in the execution of the document, and this defense is available even against a holder in due course.
Choice "a" is incorrect. The defense of mistake is not available against a holder in due course.
Choice "c" is incorrect. Duress occurs when an innocent party is threatened into committing an act that the innocent party would not normally agree to perform. Whether the defense can be raised against a holder in due course depends on the seriousness of the threat, but here there is no threat.
Choice "d" is incorrect. Fraud in the inducement occurs when one is promised value in exchange for an instrument and the promisor does not intend to and does not give that value. Such a defense is not valid against a holder in due course and is not supported by the facts here anyway.
31
```
Under the Negotiable Instruments Article of the UCC, an endorsement of an instrument "for deposit only" is an example of what type of endorsement?
a.
Qualified.
b.
Special.
c.
Blank.
d.
Restrictive
```
Choice "d" is correct. The words "for deposit only" restrict further negotiation of the instrument and so are an example of a restrictive endorsement.
Choice "c" is incorrect. A blank endorsement does not name a special endorsee. The words "for deposit only" create a restrictive endorsement, not a blank endorsement.
Choice "a" is incorrect. A qualified endorsement is one that includes the words "without recourse" and so eliminates the endorser's contract liability on the instrument.
Choice "b" is incorrect. A special endorsement is one that names a new payee.
32
```
Ashley needs to endorse a check that had been endorsed by two other individuals prior to Ashley's receipt of the check. Ashley does not want to have surety liability, so Ashley endorses the check "without recourse." Under the Negotiable Instruments Article of the UCC, which of the following types of endorsement did Ashley make?
a.
Blank.
b.
Special.
c.
Qualified.
d.
Restrictive.
```
Choice "c" is correct. An endorsement that includes the words "without recourse" is called a "qualified" endorsement. When an endorser signs without recourse, the endorser does not undertake the contract liability of an endorser.
Choice "a" is incorrect. A blank endorsement is one that does not name a person to be paid. Such an endorsement makes the check bearer paper, which can be transferred simply by delivery.
Choice "b" is incorrect. A special endorsement is a check that names a new payee. It makes the check order paper. Further transfer requires the signature of the named payee and delivery to the new transferee-holder.
Choice "d" is incorrect. A restrictive endorsement is one that purports to limit further transfers of the check. Such endorsements generally are not effective except to the extent that they limit the transfer to the collection system (e.g., for deposit only).
33
```
Under the Negotiable Instruments Article of the UCC, what kind of endorsement is made by the use of the words "Lee Louis"?
a.
Special, nonrestrictive, and qualified.
b.
Blank, nonrestrictive, and qualified.
c.
Special, nonrestrictive, and unqualified.
d.
Blank, nonrestrictive, and unqualified.
```
Choice "d" is correct. The endorsement "Lee Louis" is blank because it does not name a new, specific endorsee, it is nonrestrictive because it does not have any words purporting to restrict further negotiation, and it is unqualified because it does not include the words, "without recourse."
Choice "b" is incorrect. A qualified endorsement would include the words, "without recourse." Inclusion of these words means that the endorsee does not agree to be contractually liable on the instrument, but the endorsee still might have warranty liability.
Choice "c" is incorrect. The endorsement is not special because a special endorsement includes the name of a new endorsee, such as "Pay John Smith /s/ Lee Louis."
Choice "a" is incorrect. The endorsement is not special because a special endorsement includes the name of a new endorsee. Moreover, it is not qualified because it does not include the words, "without recourse."
34
Hall forged Crandall's signature on a promissory note dated April 1, Year 3. The note was for $5,000 and was payable to bearer on demand. Hall offered to sell the note to Corn for $4,000. Corn knew that Crandall had been out of the country since Year 1. In addition, Corn knew that Crandall's name and signature were misspelled, and that Hall had a questionable reputation. Despite this, Corn purchased the note for $4,000. Under the Negotiable Instruments Article of the UCC, what are Corn's rights under the note?
a.
Corn is a holder and may enforce the note against Hall.
b.
Corn is a holder in due course under the shelter rule and may enforce the note only against Hall.
c.
Corn is a holder and may enforce the note against Crandall.
d.
Corn is a holder in due course and may enforce the note against Hall and Crandall.
Choice "a" is correct. A holder will take commercial paper as a holder in due course (HDC) to the extent that he or she takes the paper for value, in good faith, and without notice of any defenses or claims of ownership. Corn is not a HDC because he has knowledge that Crandall has a defense against this instrument. Therefore, Corn is simply a holder. The note can be enforced against Hall, who has no defense.
Choice "d" is incorrect. Corn is not a holder in due course because he has knowledge that Crandall has a defense against this instrument.
Choice "b" is incorrect. Corn is not a holder in due course because he has knowledge that Crandall has a defense against this instrument.
Choice "c" is incorrect. The instrument cannot be enforced against Crandall, who has the real defense of forgery.
35
```
Under the Negotiable Instruments Article of the UCC, which of the following defenses by the maker of a negotiable instrument can be successfully asserted against a holder in due course?
a.
Fraud in the inducement.
b.
Fraud in the execution.
c.
Lack of consideration by the original payee.
d.
Breach of the underlying contract.
```
Choice "b" is correct. The defenses against a holder in due course are the following: fraud in the execution, forgery, adjudicated insanity, material alteration, infancy, illegality, duress, discharge in bankruptcy, suretyship defenses, and statute of limitations.
36
Under the Secured Transactions Article of the UCC, which of the following purchasers will own consumer goods free of a perfected security interest in the goods?
a.
A merchant who purchases the goods for resale.
b.
A consumer who purchases the goods from a consumer purchaser who gave the security interest.
c.
A consumer who purchases the goods in the ordinary course of business.
d.
A merchant who purchases the goods for use in its business.
Choice "c" is correct. The general rule is that a buyer takes subject to security interests in the goods bought, but one large exception to this rule is that any buyer from a merchant in the ordinary course of business usually takes free of a security interest previously given by the merchant.
37
```
Under the Secured Transactions Article of the UCC, what would be the order of priority for the following security interests in consumer goods?
I.
Financing agreement filed on April 1.
II.
Possession of the collateral by a creditor on April 10.
III.
Financing agreement perfected on April 15.
a.
I, II, III.
b.
III, II, I.
c.
II, III, I.
d.
II, I, III.
```
Choice "a" is correct. When there are conflicting perfected security interests in the same collateral, the first creditor to file or to perfect has priority. Here, "I" was filed first. "II" was next perfected by possession. "III" was last to be filed or perfected.
38
Under the UCC Secured Transactions Article, which of the following events will always prevent a security interest from attaching?
a.
Failure of the debtor to have rights in the collateral.
b.
Failure to have an authenticated record of a security agreement.
c.
Failure of the creditor to give present consideration for the security interest.
d.
Failure of the creditor to have possession of the collateral.
Choice "a" is correct. For a security interest to attach (i) there must be an agreement to create the security interest evidenced by either an authenticated security agreement or the creditor's taking possession or control of the collateral, (ii) the creditor must give value, and (iii) the debtor must have rights in the collateral. Thus, a debtor must always have rights in the collateral in order for a security interest to attach.
39
```
Under the UCC Secured Transactions Article, which of the following actions will best perfect a security interest in a negotiable instrument against any other party?
a.
Perfecting by attachment.
b.
Filing a security agreement.
c.
Taking possession of the instrument.
d.
Obtaining a duly executed financing statement.
```
Choice "c" is correct. Because a holder in due course of a negotiable instrument has priority over a prior perfected security interest, the best way to perfect a security interest in a negotiable instrument is to take possession of it, because taking possession of the instrument prevents a later person from becoming a holder in due course.
40
Under the UCC Secured Transactions Article, perfection of a security interest by a creditor provides added protection against other parties in the event the debtor does not pay its debts. Which of the following parties is not affected by perfection of a security interest?
a.
Other prospective creditors of the debtor.
b.
A buyer in the ordinary course of business.
c.
A subsequent personal injury judgment creditor.
d.
The trustee in a bankruptcy case.
Choice "b" is correct. Perfection has little effect on a buyer in the ordinary course of business (such a buyer takes subject to a perfected security interest only if the buyer knows that the sale violates the security agreement).
Choice "a" is incorrect. Perfection gives the secured party superior rights in the collateral as against most later creditors.
Choice "d" is incorrect. If the bankruptcy is filed after perfection, the secured party will have priority in the collateral as against the trustee in bankruptcy because the trustee is treated as a lien creditor as of the day the bankruptcy petition is filed, and a prior perfected security interest has priority over a subsequent lien creditor.
Choice "c" is incorrect. Subsequent judgment creditors have lower priority in collateral than a secured creditor who has perfected a security interest in the collateral.
41
Larkin is a wholesaler of computers. Larkin sold 40 computers to Elk Appliance for $80,000. Elk paid $20,000 down and signed a promissory note for the balance. Elk also executed a security agreement giving Larkin a security interest in Elk's inventory, including the computers. Larkin perfected its security interest by properly filing a financing statement in the state of Whiteacre. Six months later, Elk moved its business to the state of Blackacre, taking the computers. On arriving in Blackacre, Elk secured a loan from Quarry Bank and signed a security agreement putting up all inventory (including the computers) as collateral. Quarry perfected its security interest by properly filing a financing statement in the state of Blackacre. Two months after arriving in Blackacre, Elk went into default on both debts. Which of the following statements is correct?
a.
Quarry's security interest is superior because Larkin's time to file a financing statement in Blackacre had expired prior to Quarry's filing.
b.
Quarry's security interest is superior because Quarry had no actual notice of Larkin's security interest.
c.
Larkin's security interest is superior even though at the time of Elk's default Larkin had not perfected its security.
d.
Larkin's security interest is superior provided it repossesses the computers before Quarry does.
Choice "c" is correct. When a security interest in collateral is perfected and the collateral is subsequently moved to another state, the collateral is temporarily perfected for four months in the state into which the collateral is moved. Thus, because Larkin's security interest in Elk's computers was perfected in Whiteacre, the interest was temporarily perfected in Blackacre. Since the default occurred within the four month temporary perfection period, Larkin has priority over the bank's subsequently perfected security interest.
42
Drew bought a computer for personal use from Hale Corp. for $3,000. Drew paid $2,000 in cash and signed a security agreement for the balance. Hale properly filed the security agreement. Drew defaulted in paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused, Hale peacefully repossessed the computer.
Under the UCC Secured Transactions Article, which of the following remedies will Hale have?
a.
Sell the computer and retain any surplus over the amount owed.
b.
Sell the computer without notifying Drew.
c.
Retain the computer over Drew's objection.
d.
Obtain a deficiency judgment against Drew for the amount owed
Choice "d" is correct. After consumer goods collateral is repossessed and more than 60% of the price has been paid, unless the debtor agrees otherwise, the collateral must be sold, and the creditor can hold the debtor liable for any deficiency.
Choice "a" is incorrect. After the sale any surplus must be given to the debtor.
Choice "c" is incorrect. After consumer goods collateral is repossessed and more than 60% of the price has been paid, unless the debtor agrees otherwise, the collateral must be sold.
Choice "b" is incorrect. A secured party generally must notify the debtor of the sale.
43
Drew bought a computer for personal use from Hale Corp. for $3,000. Drew paid $2,000 in cash and signed a security agreement for the balance. Hale properly filed the security agreement. Drew defaulted in paying the balance of the purchase price. Hale asked Drew to pay the balance. When Drew refused, Hale peacefully repossessed the computer.
Under the UCC Secured Transactions Article, which of the following rights will Drew have?
a.
Prevent Hale from selling the computer.
b.
Force Hale to sell the computer.
c.
Redeem the computer after Hale sells it.
d.
Recover the sale price from Hale after Hale sells the computer.
Choice "b" is correct. Where a debtor has paid more than 60% of the price of consumer goods collateral and the creditor repossesses the collateral after default, the creditor must sell the collateral within 90 days unless the debtor agrees otherwise.
Choice "c" is incorrect. A debtor has a right to redeem before collateral is sold, but not after it is sold.
Choice "d" is incorrect. After collateral is sold, the proceeds go first to the costs of the sale, next to satisfy the secured party, then to any other party with an interest in the collateral. Only if there is a surplus can the debtor recover any of the sale price.
Choice "a" is incorrect. The debtor may allow the creditor to keep the collateral in satisfaction of the debt, but has no power to prevent a sale if the creditor does not want to retain the collateral in satisfaction.
44
```
In what order are the following obligations paid after a secured creditor rightfully sells the debtor's collateral after repossession?
I.
Debt owed to any junior security holder.
II.
Secured party's reasonable sale expenses.
III.
Debt owed to the secured party.
a.
I, II, III.
b.
III, II, I.
c.
II, I, III.
d.
II, III, I.
```
Choice "d" is correct. Upon disposition of the goods, the costs of the sale are satisfied first, the secured party is paid next, and any junior security holders are paid next. If any proceeds remain, they are remitted to the debtor.
45
which of the following requirements is necessary to have a security interest attach?
Attachment requires that: (i) the parties agree to create a security interest—evidenced by either an authenticated security agreement or the creditor's taking possession or control of the collateral, (ii) the debtor must have rights in the collateral, and (iii) the creditor must give value. There is no requirement that the security agreement be filed. (Filing is related to perfection.)
46
Winslow Co., which is in the business of selling furniture, borrowed $60,000 from Pine Bank. Winslow executed a promissory note for that amount and used all of its accounts receivable as collateral for the loan. Winslow executed a security agreement that described the collateral. Winslow did not file a financing statement. Which of the following statements best describes this transaction?
a.
Perfection of the security interest occurred even though Winslow did not file a financing statement.
b.
Perfection of the security interest occurred by Pine having an interest in accounts receivable.
c.
Attachment of the security interest did not occur because Winslow failed to file a financing statement.
d.
Attachment of the security interest occurred when the loan was made and Winslow executed the security agreement.
Choice "d" is correct. A security interest attaches when there is a security agreement (either an authenticated record of the agreement or the creditor's having either possession or control of the collateral), the creditor gives value, and the debtor has rights in the collateral. All three requirements were present when the loan here was made and the security agreement was executed.
47
Grey Corp. sells computers to the public. Grey sold and delivered a computer to West on credit. West executed and delivered to Grey a promissory note for the purchase price and a security agreement covering the computer. West purchased the computer for personal use. Grey did not file a financing statement. Is Grey's security interest perfected?
a.
Yes, because it was perfected at the time of attachment.
b.
No, because Grey failed to file a financing statement.
c.
No, because the computer was a consumer good.
d.
Yes, because Grey retained ownership of the computer.
Choice "a" is correct. If a seller retains a security interest for the sale price of consumer goods, the security interest is automatically perfected; neither filing nor possession by the secured party is necessary.
Choice "d" is incorrect. Retention of ownership when the debtor has possession of the collateral is not an effective substitute for obtaining and perfecting a security interest.
Choice "c" is incorrect. The security interest is automatically perfected because the computer is a consumer good here (i.e., used for personal purposes as opposed to business purposes).
Choice "b" is incorrect. The security interest will be automatically perfected, as explained above.
48
Noninventory goods were purchased and delivered on June 15, 1993. Several security interests exist in these goods. Which of the following security interests has priority over the others?
a.
Purchase money security interest perfected June 24, 1993.
b.
Security interest attached June 15, 1993.
c.
Security interest perfected June 20, 1993.
d.
Security interest in future goods attached June 10, 1993.
Choice "a" is correct. A purchase money security interest (PMSI) in noninventory goods has priority over all other security interests in the same collateral if the PMSI is perfected within 20 days of the debtor's getting possession. Here, the PMSI was filed 9 days after the debtor got possession of the noninventory goods.
49
```
On March 1, Green went to Easy Car Sales to buy a car. Green spoke to a salesperson and agreed to buy a car that Easy had in its showroom. On March 5, Green made a $500 downpayment and signed a security agreement to secure the payment of the balance of the purchase price. On March 10, Green picked up the car. On March 15, Easy filed the security agreement. On what date did Easy's security interest attach?
a.
March 15.
b.
March 10.
c.
March 5.
d.
March 1.
```
Choice "b" is correct. For a security interest to attach, three elements must coexist. There must be an agreement to create a security interest (either an authenticated record of the agreement or the creditor's having either possession or control of the collateral), the secured party must give value for the interest, and the debtor must have rights in the collateral. Here, all elements existed on March 10: the parties agreed to create a security interest on March 5, the secured party gave value on March 10, and the debtor obtained an interest in the collateral on March 10 when the debtor picked up (took title to) the car.
50
Mars, Inc. manufactures and sells VCRs on credit directly to wholesalers, retailers, and consumers. Mars can perfect its security interest in the VCRs it sells without having to file a financing statement or take possession of the VCRs if the sale is made to:
a.
Retailers.
b.
Wholesalers that sell to buyers in the ordinary course of business.
c.
Consumers.
d.
Wholesalers that sell to distributors for resale.
Choice "c" is correct. A seller who sells goods on credit and retains a security interest in the goods to secure the purchase price has a purchase money security interest (PMSI). A PMSI in consumer goods is automatically perfected; there is no need to file.
Choices "a", "d", and "b" are incorrect. If Mars sells to retailers or wholesalers, the collateral is inventory, since it is held by the debtor for sale to others. A security interest in inventory is not automatically perfected, even if the secured party has a purchase money security interest. The fact that a wholesaler sells to buyers in the ordinary course addresses the question of whether the buyers will be subject to Mars' security interest and does not affect Mars' need to file.
51
Which of the following transactions would illustrate a secured party perfecting its security interest by taking possession of the collateral?
a.
A consumer borrowing to buy a car.
b.
A pawnbroker lending money.
c.
A bank receiving a mortgage on real property.
d.
A wholesaler borrowing to purchase inventory.
Choice "b" is correct. Perfection by taking possession requires the secured party to take possession of the collateral, and that is what happens when a pawnbroker lends money − the pawnbroker gives a person money in exchange for an item of personal property, which the person may redeem by paying back the pawnbroker.
52
Under the UCC Secured Transactions Article, which of the following statements is correct concerning the disposition of collateral by a secured creditor after a debtor's default?
a.
The debtor may not redeem the collateral after the default.
b.
A good faith purchaser for value and without knowledge of any defects in the sale takes free of any subordinate liens or security interests.
c.
Secured creditors with subordinate claims retain the right to redeem the collateral after the collateral is sold to a third party.
d.
The collateral may only be disposed of at a public sale.
Choice "b" is correct. A sale of the collateral after default to a good faith purchaser destroys subordinate interests in the collateral.
Choice "a" is incorrect. The debtor generally has the right to redeem until the collateral is sold.
Choice "c" is incorrect. A sale of the collateral after default to a good faith purchaser destroys subordinate interests in the collateral.
Choice "d" is incorrect. Both public and private sales are permitted, but in any event the sale must be commercially reasonable.
53
Which of the following is included within the scope of the secured transactions article of the code?
a.
The outright sale of accounts receivable.
b.
The assignment of a claim for wages.
c.
The sale of chattel paper as a part of the sale of a business out of which it arose.
d.
A landlord's lien.
Choice "a" is correct. Article 9 of the Uniform Commercial Code specifically includes any sale of accounts receivable.
Choices "d", "b", and "c" are incorrect. The Code specifically excludes a landlord's lien, the assignment of a claim for wages, and the sale of chattel paper as a part of the sale of business out of which it arose.
54
Under the Secured Transactions Article of the UCC, a secured party generally must comply with each of the following duties, except:
a.
Filing or sending the debtor a termination statement when the debt is paid.
b.
Using reasonable care in preserving any collateral in the secured party's possession.
c.
Assigning the security interest to another party at the debtor's request.
d.
Confirming, at the debtor's request, the unpaid amount of the debt.
Choice "c" is correct. Section 404 of the "Secured Transaction" Article (Article 9 of the Uniform Commercial Code) requires the filing or sending to debtor a termination statement when the debt is paid. Section 208 of the Secured Transaction Article allows the debtor to send to the creditor a statement of the amount of the unpaid debt. The creditor must confirm the correctness of the unpaid debt within two weeks of receipt. Section 207 of the Secured Transaction Article requires the creditor to use reasonable care in storing and preserving collateral in the creditor's possession.
55
```
Under the Secured Transactions Article of the UCC, which of the following statements is (are) correct regarding the filing of a financing statement?
I.
A financing statement must be filed before attachment of the security interest can occur.
II.
Once filed, a financing statement is effective for an indefinite period of time provided continuation statements are timely filed.
a.
Neither I nor II.
b.
II only.
c.
Both I and II.
d.
I only.
```
Choice "b" is correct. A financing statement relates to perfection of a security interest; filing a financing statement is not relevant to attachment. Thus, statement I is incorrect. Statement II, however, is correct. A financing statement is effective for five years, but can be extended for another five years by filing a continuation statement within six months before the end of the five year period. Successive continuation statements must be filed by the end of each subsequent five year period.
56
```
Under the Secured Transactions Article of the UCC, for which of the following types of collateral must a financing statement be filed in order to perfect a purchase money security interest?
a.
Inventory.
b.
Personal jewelry.
c.
Promissory notes.
d.
Stock certificates.
```
Choice "a" is correct. By definition a purchase money security interest in inventory can only occur in one of two ways: (i) the creditor sells inventory to the debtor on credit and retains a security interest for the purchase price or (ii) the creditor lends money to the debtor so that the debtor can purchase the inventory. In either case filing is the only way to perfect when the debtor has possession of the inventory. If the debtor has possession of the inventory (which is almost always the case) the creditor cannot perfect by possession or control. In addition, the creditor cannot be automatically perfected with a purchase money security interest in inventory. Only a purchase money security interest in consumer goods is automatically perfected without the creditor's either possessing/controlling the consumer goods or filing a financing statement with respect to the consumer goods. Thus, the only way to perfect a purchase money security interest in inventory is to file a financing statement.
57
```
Under the Secured Transactions Article of the UCC, what secured transaction document must be signed by the debtor?
a.
Termination statement.
b.
Statement of assignment.
c.
Security agreement.
d.
Release of collateral.
```
Choice "c" is correct. The security agreement must be signed or authenticated by the debtor.
Choice "b" is incorrect. The Secured Transaction Article permits a creditor to assign all or part of his rights under a security agreement. A statement of assignment must be signed by the creditor, not the debtor.
Choice "d" is incorrect. The Secured Transaction Article permits a creditor to release all or part of his rights to collateral described in a security agreement. A release of collateral must be signed by the creditor, not the debtor.
Choice "a" is incorrect. A termination statement terminates a security interest in collateral. The termination statement must be signed by the creditor, not the debtor.
58
```
Under the Secured Transactions Article of the UCC, all of the following are needed to create an enforceable security interest, except:
a.
A security agreement must exist.
b.
The secured party must give value.
c.
The debtor must have rights in the collateral.
d.
A financing statement must be filed.
```
Choice "d" is correct. Attachment is the process whereby a security interest is created to give the creditor rights against the debtor. There are three requisites for attachment. First, there must be an agreement between the creditor and the debtor (either an authenticated record of the agreement or the creditor's having either possession or control of the collateral); second, the creditor must give value, and third, the debtor must have rights in the collateral. Filing a financing statement is not a requirement for creating a security interest. Filing is one of the methods of perfecting, against third parties, a security interest.
59
Under the Secured Transactions Article of the UCC, which of the following statements is correct regarding a security interest that has not attached?
a.
It is not effective against either the debtor or third parties.
b.
It is effective against the debtor, but not against third parties.
c.
It is effective against third parties with unsecured claims.
d.
It is effective against both the debtor and third parties.
Choice "a" is correct. A security interest is not effective against anyone before it attaches to the collateral. Thus, all of the other answer choices are incorrect.
60
Perfection of a security interest permits the secured party to protect its interest by:
a.
Avoiding the need to file a financing statement.
b.
Preventing another creditor from obtaining a security interest in the same collateral.
c.
Establishing priority over the claims of most subsequent secured creditors.
d.
Denying the debtor the right to possess the collateral.
Choice "c" is correct. The act of "perfection" of a security interest establishes a priority over claims of most subsequent secured creditors.
Choice "a" is incorrect. In many cases the act of "perfection" requires the filing of a financing statement.
Choice "b" is incorrect. The act of "perfection" does not necessarily give the secured party a priority over all other parties (e.g., buyers of inventory in the ordinary course of business have superior rights). (Again, watch out for all inclusive words such as "all.")
Choice "d" is incorrect. In most cases the secured party (creditor) obtains "perfection" while the debtor possesses the collateral.
61
Roth and Dixon both claim a security interest in the same collateral. Roth's security interest attached on January 1, Year 1, and was perfected by filing on March 1, Year 1. Dixon's security interest attached on February 1, Year 1, and was perfected on April 1, Year 1, by taking possession of the collateral. Which of the following statements is correct?
a.
Dixon's security interest has priority because Dixon's interest attached before Roth's interest was perfected.
b.
Dixon's security interest has priority because Dixon is in possession of the collateral.
c.
Roth's security interest has priority because Roth's security interest attached before Dixon's security interest attached.
d.
Roth's security interest has priority because Roth perfected before Dixon perfected.
Choice "d" is correct. When there is a conflict between perfected security interests, generally the secured party who was first to file or to perfect has priority. Roth filed and perfected before Dixon perfected (Dixon did not file).
Choices "a" and "c" are incorrect per the above.
Choice "b" is incorrect. Roth's security interest is superior to Dixon's, because Roth was first to file or perfect. The fact that Dixon is in possession of the collateral is irrelevant.
62
Sun, Inc. manufactures and sells household appliances on credit directly to wholesalers, retailers, and consumers. Sun can perfect its security interest in the appliances without having to file a financing statement or take possession of the appliances if the sale is made by Sun to:
a.
Consumers.
b.
Retailers.
c.
Wholesalers that sell to distributors for resale.
d.
Wholesalers that sell to buyers in the ordinary course of business.
Choice "a" is correct. Perfection is automatic with attachment in the case of a PMSI (Purchase Money Security Interest) in consumer goods.
Choices "d", "b", and "c" are incorrect. The appliances in the hands of wholesalers or retailers, who sell to either buyers in the ordinary course of business or distributors for resale, would be inventory. A purchase money security interest in inventory is not automatically perfected. Sun would have to file to perfect its interest in the wholesalers' or retailers' inventory.
63
Pix Co., which is engaged in the business of selling appliances, borrowed $18,000 from Lux Bank. Pix executed a promissory note for that amount and pledged all of its customer installment receivables as collateral for the loan. Pix executed a security agreement that described the collateral, but Lux did not file a financing statement. With respect to this transaction:
a.
Perfection of the security interest occurred despite Lux's failure to file a financing statement.
b.
Attachment of the security interest did not occur because Pix failed to file a financing statement.
c.
Perfection of the security interest did not occur because accounts receivable are intangibles.
d.
Attachment of the security interest took place when the loan was made and Pix executed the security agreement.
Choice "d" is correct. Attachment of a security interest takes place when three events have been completed:
Agreement between creditor and debtor (or the creditor has either possession of or control of the collateral),
Value is given by creditor, and
Debtor has rights in collateral
Here, attachment took place when the loan was made and the debtor signed the security agreement.
64
Under the UCC Secured Transactions Article, when collateral is in a secured party's possession, which of the following conditions must also be satisfied to have attachment?
a.
The public must be notified.
b.
The debtor must have rights to the collateral.
c.
The secured party must receive consideration.
d.
There must be a written security agreement.
Choice "b" is correct. The term attachment refers to the relationship between the debtor and the secured party (creditor).
There are 3 requirements for an attachment:
Agreement of the parties (either an authenticated record of the agreement or the creditor's having either possession or control of the collateral).
Value is given by creditor.
Debtor has rights in the collateral.
Attachment does not take place until all 3 events have happened. Of the possible selections "b" is the only one of the 3 elements.
65
Under the UCC Secured Transaction Article, what is the effect of perfecting a security interest by filing a financing statement?
a.
The debtor is protected against all other parties who acquire an interest in the collateral after the filing.
b.
The secured party has permanent priority in the collateral even if the collateral is removed to another state.
c.
The secured party has priority in the collateral over most creditors who acquire a security interest in the same collateral after the filing.
d.
The secured party can enforce its security interest against the debtor.
Choice "c" is correct. The best way to think of perfection is that perfection is similar to a loose rope around the collateral. Sometimes when the secured party goes to call in the collateral, the collateral is there, but sometimes the collateral is not there. As the answer states, perfection will give the secured party priority over most creditors.
66
```
A secured creditor wants to file a financing statement to perfect its security interest. Under the UCC Secured Transactions Article, which of the following must be included in the financing statement?
a.
An after-acquired property provision.
b.
The creditor's signature.
c.
A listing or description of the collateral.
d.
The collateral's location.
```
Choice "c" is correct. Under the UCC Secured Transactions Article (Article 9) a financing statement must contain a general description of the collateral in which the security interest is being sought.
Choice "a" is incorrect. While an after-acquired property clause is permitted, it is not required.
Choice "b" is incorrect. A financing statement must include the creditor's name and address, but the financing statement need not be signed by either the creditor or the debtor.
Choice "d" is incorrect. A financing statement may provide for the location of the collateral, but such information is not a requirement.
67
```
Second Best Buy, Inc., is a retailer of small appliances. Second Best Buy gives Chase Financial Corporation a security interest in the inventory owned by Second Best Buy, Inc. Chase files a financing statement to perfect its interest. Who has higher priority in the collateral than Chase?
a.
A subsequent trustee in bankruptcy.
b.
The stockholders of Second Best Buy.
c.
A buyer in the ordinary course of Second Best Buy's business.
d.
A subsequent lien creditor.
```
Choice "c" is correct. A buyer in the ordinary course of business is one who buys from a merchant's inventory. Such a buyer has the highest priority in the collateral and takes free of a perfected security interest regardless of the buyer's knowledge of the perfected interest unless the buyer knows that the sale is in violation of the security agreement.
68
National Bank lends $200,000 to Dave and files a financing statement on January 5. Dave signs the security agreement when he picks up the money on January 14. Dave also borrows money from Local Town Bank on January 7. Local Town Bank gives Dave the money, files a financing statement, and has Dave sign a security agreement on January 8. Dave used the same property as collateral for both loans. If Dave defaults on both loans, which bank will have priority in the collateral?
a.
National Bank, because its interest attached first.
b.
Local Town Bank, because its interest attached first.
c.
Local Town Bank, because it perfected first.
d.
National Bank, because it filed first.
Choice "d" is correct. When there is a conflict between perfected security interests in the same collateral, priority goes to the creditor who was first either to file or to perfect, even if perfection is not completed upon filing (there can never be perfection until there is attachment; attachment did not occur until after the date on which National Bank filed). Because National Bank filed before Local Town Bank either filed or perfected, Local Town Bank has constructive notice of National Bank's interest.
69
```
Houseofcards Finance, Inc., files a financing statement regarding a transaction with Biskuit Company. A valid, enforceable financing statement must contain all of the following, except:
a.
A description of the collateral.
b.
The name of the secured party.
c.
The name of the debtor.
d.
A statement of the purpose of the transaction.
```
Choice "d" is correct. A financing statement must contain the following: (i) the name and address of the debtor and of secured party, (ii) a description or indication of the collateral covered by the financing statement, and, (iii) if the collateral is related to real property, a description of that real property. The financing statement must also be authenticated by the debtor. The financing statement need not include a statement of the purpose of the transaction.
70
Under the Secured Transactions article of the UCC, when does a security interest become enforceable?
a.
The debtor and the secured party execute a security agreement describing the transfer of collateral from seller to buyer and the secured party retains possession of the agreement.
b.
The value has been given, the secured party receives a security agreement describing the collateral authenticated by the debtor, and the debtor has rights in the collateral.
c.
The debtor and the secured party execute a security agreement describing the transfer of the collateral and, after doing so, the secured party files it with the requisite agency.
d.
A contract is executed between a debtor and a secured party under which the debtor gives the secured party rights in collateral if the debtor violates any of the terms contained in the contract.
Choice "b" is correct. For a security interest to be enforceable, it must attach to the collateral. There are three prerequisites to attachment, and all three must be satisfied for an interest to attach: (i) the parties have to agree to create a security interest, and this agreement must be evidenced either by the creditor's taking possession of, or having control of, the collateral or by a written security agreement describing the collateral and authenticated (e.g., signed) by the debtor, (ii) the secured party must have given value in exchange for the security interest, and (iii) the debtor must have rights in the collateral.
71
Under the Secured Transactions Article of the UCC, which of the following security agreements does not need to be in writing to be enforceable?
a.
A security agreement collateralizing a debt of less than $500.
b.
A security agreement where the collateral is highly perishable or subject to wide price fluctuations.
c.
A security agreement involving a purchase money security interest.
d.
A security agreement where the collateral is in the possession of the secured party.
Choice "d" is correct. Attachment of a security interest requires: (i) value given by the creditor, (ii) the debtor's having rights in the collateral, and (iii) an agreement to create the security interest evidenced either by a written security agreement describing the collateral and authenticated (e.g., signed) by the debtor or by the creditor's taking possession of the collateral. When a creditor takes possession, no written security agreement is required.
72
```
Under the Secured Transactions Article of the UCC, which of the following items can usually be excluded from a filed original financing statement?
a.
A description of the collateral.
b.
The name of the debtor.
c.
The address of the debtor.
d.
The amount of the obligation secured.
```
Choice "d" is correct. A security agreement need not include the amount of the obligation secured. The security agreement must include the name and address of the debtor, a description of the collateral (by type is sufficient), and the debtor's authentication (e.g., a signature or electronic substitute). Because choices "b", "c", and "a" all are required, they cannot be excluded and are incorrect choices.
73
Under the Secured Transactions Article of the UCC, if a secured creditor rightfully repossesses and sells a debtor's collateral, which of the following obligations is the first to be paid from the proceeds of the sale?
a.
The refund of the debtor's payments made prior to the date of the sale.
b.
The reasonable expenses incurred by the sale.
c.
The balance of the debt owed the primary secured creditor.
d.
The debt owed any creditor with a subordinate security interest in the collateral.
Choice "b" is correct. The proceeds of a default sale are distributed in the following order. First, to pay expenses of the repossession and sale; second, to pay creditors with a security interest in the collateral in order of priority; and third, any surplus is paid to the debtor.
74
Taso Corp. sells laptop computers to the public. Taso sold and delivered a laptop to Cara on credit. Cara gave Taso a purchase money security interest in the laptop by executing and delivering to Taso a promissory note for the purchase price and a security agreement covering the laptop. Cara purchased the laptop for personal use. Taso did not file a financing statement. Under the Secured Transactions Article of the UCC, is Taso's security interest perfected?
a.
No, because Taso failed to file a financing statement.
b.
No, because the laptop is a consumer good.
c.
Yes, because Taso retained possession of the collateral.
d.
Yes, because it was perfected at the time of attachment.
Choice "d" is correct. Taso sold the laptop to Cara on credit and received a purchase money security interest (PMSI) in the laptop, which resulted in an attachment. This PMSI is automatically perfected because the item purchased is a consumer good. The filing of a financing statement is not required.
75
Under the Secured Transactions Article of the UCC, a financing statement generally must contain:
a.
The date the underlying debt will be paid.
b.
The signature of a witness to the execution of the financing statement.
c.
The dollar amount of the consideration provided by the secured party.
d.
The address of the debtor.
Choice "d" is correct. Under the Secured Transactions Article of the UCC, a financing statement must contain the name and mailing address of the debtor and secured party, an indication of the collateral covered by the financing statement, and, if the financing statement covers collateral related to real property, a description of that real property.
76
Under Chapter 7 of the federal Bankruptcy Code, what effect does a bankruptcy discharge have on a judgment creditor when there is no bankruptcy estate?
a.
The judgment creditor's claim is nondischargeable.
b.
The judgment creditor retains a statutory lien against the debtor.
c.
The debtor is required to pay a liquidated amount to vacate the judgment.
d.
The debtor is relieved of any personal liability to the judgment creditor.
Choice "d" is correct. Under Chapter 7, a discharge discharges most debts of a debtor, whether or not there is a bankruptcy estate from which to pay the debts.
77
```
A family farmer with regular annual income may file a voluntary petition for bankruptcy under any of the following Chapters of the federal Bankruptcy Code, except:
a.
9
b.
13
c.
7
d.
11
```
Choice "a" is correct. Chapter 9 is for municipal debt adjustment; a family farmer cannot seek relief under this chapter.
Choice "c" is incorrect. Chapter 7 provides for liquidation of a debtor's estate. A family farmer with regular income may seek relief under Chapter 7.
Choice "d" is incorrect. Chapter 11 is for debt reorganization and is available to family farmers with regular income.
Choice "b" is incorrect. Chapter 13 is for adjustment of debts of individuals with regular income and is available to a family farmer with regular income.
78
Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate. An example of such property is:
a.
Child support payments received by the debtor within one year after the filing of the petition.
b.
Inheritances received by the debtor within 180 days after the filing of the petition.
c.
Wages earned by the debtor within one year after the filing of the petition.
d.
Social Security payments received by the debtor within 180 days after the filing of the petition.
Choice "b" is correct. The estate includes income generated from estate property and property the debtor receives from a bequest, devise, inheritances, property settlement, divorce, or beneficial interest in life insurance within 180 days after filing of the petition.
79
Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate. An example of such property is:
a.
Social Security payments received by the debtor within 180 days after the filing of the petition.
b.
Gifts received by the debtor within one year after the filing of the petition.
c.
Municipal bond interest received by the debtor within 180 days after the filing of the petition.
d.
Alimony received by the debtor within one year after the filing of the petition.
Choice "c" is correct. The bankruptcy estate includes property the debtor receives from a bequest, devise, inheritance, property settlement, divorce decree or beneficial interest in a life insurance policy or death benefit plan within 180 days after the filing of the petition. In addition, the estate includes any income generated by estate property (rents, interest and dividends) after the petition is filed. Earned income after the case commences is generally excluded.
80
Strong Corp. filed a voluntary petition in bankruptcy under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code. A reorganization plan was filed and agreed to by all necessary parties. The court confirmed the plan and a final decree was entered.
Which of the following statements best describes the effect of the entry of the court's final decree?
a.
Strong Corp. will be discharged from all its debts and liabilities that arose before the confirmation of the plan, except as otherwise provided in the plan, the order of confirmation, or the Bankruptcy Code.
b.
Strong Corp. will be discharged from all its debts and liabilities.
c.
Strong Corp. will be discharged only from the debts owed creditors who agreed to the reorganization plan.
d.
Strong Corp. will be discharged from all its debts and liabilities that arose before the date of confirmation of the plan.
Choice "a" is correct. Under the Bankruptcy Code, the court's final decree results in a discharge of all debts and liabilities that arose before confirmation of the plan, except as otherwise provided in the plan, the order of confirmation, or the Bankruptcy Code.
Choices "b" and "d" are incorrect. Nondischargeable debts are not discharged by the reorganization.
Choice "c" is incorrect. The discharge is effective even against creditors who voted against the plan.
81
Deft, CPA, is an unsecured creditor of Golf Co. for $16,000. Golf has a total of 10 creditors, all of whom are unsecured. Golf has not paid any of the creditors for three months. Under Chapter 11 of the Federal Bankruptcy Code, which of the following statements is correct?
a.
Golf may not be petitioned involuntarily into bankruptcy because there are less than 12 unsecured creditors.
b.
Golf may not be petitioned involuntarily into bankruptcy under the provisions of Chapter 11.
c.
Three unsecured creditors must join in the involuntary petition in bankruptcy.
d.
Deft may file an involuntary petition in bankruptcy against Golf.
Choice "d" is correct. When there are fewer than 12 unsecured creditors, any one creditor who is owed $15,325 in unsecured debt or more may file an involuntary petition in bankruptcy.
Choice "a" is incorrect. The fact that there are fewer than 12 unsecured creditors means that only one creditor is needed for the involuntary petition (as long as the creditor is owed at least $15,325 in unsecured debt).
Choice "b" is incorrect. A debtor who is not paying debts as they become due is subject to being involuntarily petitioned into bankruptcy under the provisions of Chapter 11.
Choice "c" is incorrect. When there are fewer than 12 unsecured creditors, any one or more of the creditors may file the involuntary petition, but the petitioner(s) must be owed in aggregate at least $15,325 in unsecured debt.
82
Which of the following claims will not be discharged in bankruptcy?
a.
A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral.
b.
A claim that arises from alimony or maintenance.
c.
A claim brought by a judgment creditor whose judgment resulted from the debtor's negligent operation of a motor vehicle.
d.
A claim that arises out of the debtor's breach of a contract.
Choice "b" is correct. Money owed as alimony is not discharged in bankruptcy.
Choice "d" is incorrect. Contract claims are dischargeable in bankruptcy.
Choice "a" is incorrect. Debts owed to secured creditors beyond the value of the collateral are treated like any other unsecured debt and are discharged by the bankruptcy.
Choice "c" is incorrect. Debts arising from negligent conduct are dischargeable in bankruptcy (if the auto accident arose from drunk driving or the injuries were willful, the debt would not be discharged).
83
Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, which of the following statements applies to a person who has voluntarily filed for and received a discharge in bankruptcy?
a.
The person must surrender for distribution to the creditors amounts received as an inheritance, if the receipt occurs within 180 days after filing the bankruptcy petition.
b.
The person can obtain another voluntary discharge in bankruptcy under Chapter 7 after three years have elapsed from the date of the prior filing.
c.
The person is precluded from owning or operating a similar business for two years.
d.
The person will be discharged from all debts.
Choice "a" is correct. The bankruptcy estate is deemed to include money inherited within 180 days after the bankruptcy petition is filed.
Choice "d" is incorrect. Not all debts are discharged by a bankruptcy. For example, alimony is not discharged, and neither are debts arising from fraud.
Choice "b" is incorrect. After a Chapter 7 bankruptcy, the debtor may not obtain another bankruptcy for eight years.
Choice "c" is incorrect. There is no limitation on the types of businesses a debtor may own after bankruptcy.
84
Under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code, after a reorganization plan is confirmed, and a final decree closing the proceedings entered, which of the following events usually occurs?
a.
A reorganized individual debtor will not be allowed to continue in the same business.
b.
A reorganized corporate debtor will be liquidated.
c.
A trustee will continue to operate the debtor's business.
d.
A reorganized corporate debtor will be discharged from all debts except as otherwise provided in the plan and applicable law.
Choice "d" is correct. After the reorganization plan is confirmed, the debtor is released from debts except as provided in the plan or by law.
Choice "b" is incorrect. The goal of a reorganization is to allow the debtor's business to continue; the business is not dissolved at the conclusion of the bankruptcy proceedings.
Choice "c" is incorrect. Generally in a reorganization the debtor remains in possession and there is no trustee. In any event, a trustee would not be left in place after the reorganization is complete. The goal of Chapter 11 is to allow the debtor's business to continue.
Choice "a" is incorrect. The goal of a reorganization is just the opposite: to allow the debtor's business to continue.
85
The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code:
a.
Terminates all security interests in property in the bankruptcy estate.
b.
Stops the debtor from incurring new debts.
c.
Terminates liens on exempt property.
d.
Stops the enforcement of judgment liens against property in the bankruptcy estate.
Choice "d" is correct. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor.
Choice "c" is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. The filing does not terminate liens, but merely stays them (i.e., temporarily prevents their enforcement).
Choice "a" is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. The filing does not terminate security interests but rather merely stays them (i.e., temporarily prevents their enforcement).
Choice "b" is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. The filing does not prevent the debtor from incurring new debts.
86
Which of the following requirements must be met for creditors to file an involuntary bankruptcy petition under Chapter 7 of the Federal Bankruptcy Code?
a.
At least one fully secured creditor must join in the petition.
b.
The debtor has not been paying its bona fide debts as they become due.
c.
There must not be more than 12 creditors.
d.
The debtor must owe one creditor more than $5,000.
Choice "b" is correct. An involuntary petition for bankruptcy can be filed if a debtor owes more than $14,425 in unsecured debt and is not paying its debts as they become due.
Choice "d" is incorrect. The debtor must owe at least $14,425 because the petition must be filed by unsecured creditors owed at least that much, but creditors can aggregate their claims. There is no requirement that the debtor owe one creditor $5,000.
Choice "c" is incorrect. There can be more than 12 creditors. If there are, at least three must join in the petition.
Choice "a" is incorrect. There is no requirement of a secured creditor joining in the petition. In fact, a secured creditor cannot be counted as one of the required petitioners to the extent that the security covers the obligation owed.
87
Which of the following transfers by a debtor, within ninety days of filing for bankruptcy, could be set aside as a preferential payment?
a.
Prepaying an installment loan on inventory.
b.
Borrowing money from a bank secured by giving a mortgage on business property.
c.
Paying a business utility bill.
d.
Making a gift to charity.
Choice "a" is correct. A transfer of the debtor's property to or for the benefit of a creditor for an antecedent debt at a time when the debtor was insolvent and within 90 days of filing the bankruptcy petition constitutes a preference if the transfer gives the transferee more than the transferee would have obtained under the Bankruptcy Code. Prepayment of an installment loan falls within this description. This transaction does not qualify for the exception for payment of ordinary business because the prepayment is not under the usual terms of the contract.
88
```
Which of the following acts by a debtor could result in a bankruptcy court revoking the debtor's discharge?
I.
Failure to list one creditor.
II.
Failure to answer correctly material questions on the bankruptcy petition.
a.
II only.
b.
I only.
c.
Neither I nor II.
d.
Both I and II.
```
Choice "a" is correct. Bankruptcy Code section 727(d) sets out the reasons for revoking a discharge. The grounds include failing to answer a material question on the bankruptcy petition if the question has been approved by the court, unless the fifth amendment privilege against self-incrimination is appropriately claimed. Thus, II could be a ground for revocation. The grounds do not include failure to list one creditor. Thus, I is not a possible ground.
89
Robin Corp. incurred substantial operating losses for the past three years. Unable to meet its current obligations, Robin filed a petition for reorganization under Chapter 11 of the Federal Bankruptcy Code. Which of the following statements is correct?
a.
Robin may continue in business only with the approval of a trustee.
b.
The creditors' committee must select a trustee to manage Robin's affairs.
c.
The reorganization plan may only be filed by Robin.
d.
A creditors' committee, if appointed, will consist of unsecured creditors.
Choice "d" is correct. The creditors' committee, if appointed, is made up of unsecured creditors.
Choice "b" is incorrect. A trustee usually is not appointed in a reorganization.
Choice "c" is incorrect. Robin has a right to file the first plan of reorganization, but creditors can also file a plan.
Choice "a" is incorrect. In a reorganization there is a presumption that the debtor will remain in possession.
90
A reorganization under Chapter 11 of the Federal Bankruptcy Code requires all of the following, except the:
a.
The filing of a reorganization plan.
b.
Confirmation of the reorganization plan by the court.
c.
Opportunity for each class of claims to accept the reorganization plan.
d.
Liquidation of the debtor.
Choice "d" is correct. There is no requirement of liquidation in a reorganization.
Choice "a" is incorrect. In a reorganization a plan of reorganization must be filed.
Choice "b" is incorrect. In a reorganization the plan of reorganization must be approved by the court.
Choice "c" is incorrect. In a reorganization each class of claimants has an opportunity to accept the plan (although it need not be accepted by all classes, such as unimpaired classes of security holders).
91
Which of the following statements is correct with respect to the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code?
a.
The commencement of a bankruptcy case may be voluntary or involuntary.
b.
The debtor must be insolvent if the bankruptcy petition was filed voluntarily.
c.
A trustee must always be appointed.
d.
A reorganization plan may be filed by a creditor anytime after the petition date.
Choice "a" is correct. Under Bankruptcy Code Section 303, creditors may petition a debtor involuntarily into a Chapter 11 bankruptcy reorganization proceeding.
Choice "c" is incorrect. The general rule in a reorganization is that a trustee is not appointed.
Choice "b" is incorrect. There is no requirement of insolvency for filing a voluntary reorganization petition.
Choice "d" is incorrect. A creditor must wait 120 days to file a plan unless a trustee has been appointed.
92
Which of the following types of claims would be paid first in the distribution of a bankruptcy estate under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code if the petition was filed July 15, Year 3?
a.
Inventory purchased and delivered August 1, Year 3.
b.
Federal tax lien filed June 30, Year 3.
c.
Employee wages due April 30, Year 3.
d.
A secured debt properly perfected on March 20, Year 3.
Choice "d" is correct. All perfected security interests are paid first. Since the security interest here was filed more than 90 days before the bankruptcy, this event does not constitute a voidable preference.
Choice "a" is incorrect. The creditor is either an involuntary case gap creditor (third priority) or a creditor with a disallowed post-petition claim; the facts are unclear. In either case, a secured creditor would have priority.
Choice "c" is incorrect. Wage claims for wages earned within 180 days of the bankruptcy have a fourth priority. Older wage claims are treated as general unsecured claims and are paid last. In either case, the wage claims are subordinate to a perfected security interest.
Choice "b" is incorrect. If the federal government obtains a lien for taxes against the debtor's estate before the bankruptcy petition is filed, the federal tax lien is treated as a secured interest. However, this interest is subordinate to the March 20 secured claim because the March 20 interest was perfected before the tax lien attached.
93
Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy not have?
a.
The power to prevail against a creditor with an unperfected security interest.
b.
The right to avoid any statutory liens against the debtor's property that were effective before the filing of the bankruptcy petition.
c.
The right to use any grounds available to the debtor to obtain the return of the debtor's property.
d.
The power to require persons holding the debtor's property at the time the bankruptcy petition is filed to deliver the property to the trustee.
Choice "b" is correct. A trustee in bankruptcy is treated as a hypothetical lien creditor on all of the debtor's property as of the date the bankruptcy petition is filed. The trustee is subordinate to all prior perfected security interests, including statutory liens that were effective prior to the filing of the bankruptcy petition.
94
On April 1, Roe borrowed $100,000 from Jet to pay Roe's business expenses. On June 15, Roe gave Jet a signed security agreement and financing statement covering Roe's inventory. Jet immediately filed the financing statement. On July 1, Roe filed for bankruptcy. Under the federal Bankruptcy Code, can Roe's trustee in bankruptcy set aside Jet's security interest in Roe's inventory?
a.
Yes, because a security agreement may only cover goods actually purchased with the borrowed funds.
b.
Yes, because Roe giving the security interest to Jet created a voidable preference.
c.
No, because the loan proceeds were used for Roe's business.
d.
No, because the security interest was perfected before Roe filed for bankruptcy.
Choice "b" is correct. A trustee in bankruptcy has the power to set aside preferences, which generally may be defined as a transfer that: (i) is made for the benefit of a creditor on account of an antecedent debt, (ii) is made within 90 days of the filing of the bankruptcy petition, (iii) is made while the debtor was insolvent (presumed within the 90-day period), and (iv) enables the creditor to get more than the creditor would have received in the bankruptcy proceeding. Here, the loan was made on April 1, creating a debt as of that date. The security interest was given on June 15. So, all four requirements are present, and the security interest can therefore be set aside by the trustee.
95
```
Which, if any, of the following statements are true under Chapter 15 of the United States Bankruptcy Code?
I.
A foreign entity may file only under Chapter 15.
II.
The automatic stay is not available under Chapter 15.
a.
I and II.
b.
Neither I nor II.
c.
II only.
d.
I only.
```
Choice "b" is correct. A foreign entity may file an ancillary proceeding under Chapter 15, and may also file a proceeding under Chapter 7 or Chapter 11. Thus, I is not true. The automatic stay arises after a petition for recognition is granted by the court. Thus, II is not true.
96
Which of the following statements is not true under Chapter 15 of the United States Bankruptcy Code?
a.
A foreign representative may operate the debtor's business in the U.S.
b.
A foreign representative may participate in other U.S. bankruptcy cases pending against the represented debtor.
c.
U.S. courts have an affirmative duty to cooperate with foreign courts.
d.
Discrimination against foreign interests is never allowed.
Choice "d" is correct. This statement is not true. Although discrimination against foreign interests generally is prohibited, discrimination is allowed with regard to certain foreign government tax liens. All of the other statements are true.
97
Which of the following requirements must be met for creditors to file an involuntary bankruptcy petition under Chapter 7 of the Federal Bankruptcy Code?
a.
At least one fully secured creditor must join in the petition.
b.
The debtor has not been paying its bona fide debts as they become due.
c.
There must not be more than 12 creditors.
d.
The debtor must owe one creditor more than $5,000.
Choice "b" is correct. An involuntary petition for bankruptcy can be filed if a debtor owes more than $15,325 in unsecured debt and is not paying its debts as they become due.
Choice "d" is incorrect. The debtor must owe at least $15,325 to all of the unsecured creditors. There is no requirement that one creditor be owed any specified amount.
Choice "c" is incorrect. There can be more than 12 creditors. If there are more than 12 creditors, at least 3 must join together in filing the petition.
Choice "a" is incorrect. There is no requirement that a secured creditor join in the petition.
98
Karen sells her one-year-old sports car to her mother for $100. The next week, Karen files for bankruptcy under Chapter 7. Regarding the sale of the car, the trustee may:
a.
Cancel it as a fraudulent transfer.
b.
Cancel it as a voidable preference.
c.
Not cancel it, but can sue Karen's mother for return of the $100.
d.
Not cancel it because it is a sale, not a gift.
Choice "a" is correct. Transfers made within two years of the filing date with an intent to hinder, delay, or defraud creditors or any transfer where the debtor received less than equivalent value while the debtor was insolvent are fraudulent transfers and may be set aside by the trustee. A one year old car typically is worth far more than $100, and because Karen filed for bankruptcy the next week, she likely was insolvent when she made the transfer.
