Chapter 7

Question 1

Under the Negotiable Instruments Article of the UCC, which of the endorser’s liabilities are disclaimed by a “without recourse” endorsement?

Answer 1

Contract liability only.

Question 2

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?

Answer 2

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

Question 3

Which of the following instruments is subject to the provisions of the Negotiable Instruments Article of the UCC?

Answer 3

Checks, drafts, promissory notes and certificates of deposits are within the provisions of the Negotiable Instruments Article of the UCC (Article 3).

Question 4

Under the Commercial Paper Article of the UCC, which of the following documents would be considered an order to pay?

Answer 4

Draft

Question 5

Under the Commercial Paper Article of the UCC, which of the following circumstances would prevent a promissory note from being negotiable?

Answer 5

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

Question 6

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?

Answer 6

The note must be negotiable.

Question 7

Under the Negotiable Instruments Article of the UCC, which of the following parties has secondary liability on an instrument?

Answer 7

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.

Question 8

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?

Answer 8

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.

Question 9

What is considered a promise to pay?

Answer 9

A Certificate of Deposit

Question 10

Under the Negotiable Instruments Article of the UCC, which of the following defenses generally may be used against all holders of negotiable instruments?

Answer 10

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).

Question 11

Under the Negotiable Instruments Article of the UCC, the proper party to whom a check is presented for payment is:

Answer 11

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.

Question 12

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?

Answer 12

Qualified

Question 13

Under the Negotiable Instruments Article of the UCC, what kind of endorsement is made by the use of the words “Lee Louis”?

Answer 13

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.”

Question 14

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?

Answer 14

A consumer who purchases the goods in the ordinary course of business

Question 15

Under the Secured Transactions Article of the UCC, which of the following remedies is available to a secured creditor when a debtor fails to make a payment when due?

Answer 15

When a debtor defaults, the secured creditor can proceed against the collateral, but is not required to. Instead, the creditor can obtain a general judgment

Question 16

Under the UCC Secured Transactions Article, which of the following events will always prevent a security interest from attaching?

Answer 16

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.

Question 17

Under the UCC Secured Transactions Article, which of the following after-acquired property may be attached to a security agreement given to a secured lender?

Answer 17

A secured party may take a security interest in both after-acquired inventory and after-acquired equipment. The only limits on the effect of after-acquired property clauses involve consumer goods and commercial tort claims

Question 18

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?

Answer 18

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.

Question 19

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?

Answer 19

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).

Question 20

When a security interest in collateral is perfected and the collateral is subsequently moved to another state, the collateral is temporarily perfected for how long?

Answer 20

Four Months

Question 21

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 ?

Answer 21

sold, and the creditor can hold the debtor liable for any deficiency.

Note that regarding the DEBTOR, 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.

Question 22

Upon disposition of goods:

Answer 22

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.

Question 23

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?

Answer 23

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.

Question 24

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?

Answer 24

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.

Question 25

What are the three elements that must coesit for a security interest to attach?

Answer 25

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.

Question 26

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?

Answer 26

A sale of the collateral after default to a good faith purchaser destroys subordinate interests in the collateral.

Question 27

Which of the following is included within the scope of the secured transactions article of the code?

Answer 27

Article 9 of the Uniform Commercial Code specifically includes any sale of accounts receivable.

Question 28

Under the Secured Transactions Article of the UCC, a secured party generally must comply with each of the following duties, except:

Answer 28

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.

The debtor has no right to require the creditor to assign the security interest to another party. Only the creditor, not the debtor, has the right to assign a debt.

Question 29

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?

Answer 29

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.

Question 30

Under the Secured Transactions Article of the UCC, what secured transaction document must be signed by the debtor?

Answer 30

The security agreement must be signed or authenticated by the debtor.

Question 31

Under the Secured Transactions Article of the UCC, which of the following statements is correct regarding a security interest that has not attached?

Answer 31

A security interest is not effective against anyone before it attaches to the collateral.

Question 32

Perfection of a security interest permits the secured party to protect its interest by:

Answer 32

The act of “perfection” of a security interest establishes a priority over claims of most subsequent secured creditors.

Question 33

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?

Answer 33

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.

Question 34

A financing statement must contain the following:

Answer 34

(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.

Question 35

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?

Answer 35

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.

The debtor is relieved of any personal liability to the judgment creditor.

Question 36

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:

Answer 36

Chapter 9 is for municipal debt adjustment; a family farmer cannot seek relief under this chapter.

Question 37

Chapter 7 Bankruptcy:

Answer 37

Chapter 7 provides for liquidation of a debtor’s estate. A family farmer with regular income may seek relief under Chapter 7.

Question 38

Chapter 11 Bankruptcy:

Answer 38

Chapter 11 is for debt reorganization and is available to family farmers with regular income.

Question 39

Chapter 13 Bankruptcy:

Answer 39

Chapter 13 is for adjustment of debts of individuals with regular income and is available to a family farmer with regular income.

Question 40

Chapter 9 Bankruptcy:

Answer 40

Chapter 9 is for municipal debt adjustment

Question 41

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:

Answer 41

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.

Question 42

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:

Answer 42

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.

Question 43

A person may be petitioned involuntarily into bankruptcy if?

Answer 43

that person is not paying debts as they become due.

Note: If a debtor has fewer than 12 creditors, any one creditor owed more than $15,325 of unsecured debt can petition the debtor into bankruptcy.

Question 44

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?

Answer 44

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.

Question 45

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?

Answer 45

When there are fewer than 12 unsecured creditors, any one creditor who is owed $15,325 (as adjusted for inflation) in unsecured debt or more may file an involuntary petition in bankruptcy.

Question 46

Which of the following claims will not be discharged in bankruptcy?

Answer 46

Money owed as alimony is not discharged in bankruptcy.

Question 47

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?

Answer 47

After the reorganization plan is confirmed, the debtor is released from debts except as provided in the plan or by law.

Question 48

The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code:

Answer 48

The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. (i.e., temporarily prevents their enforcement).

Question 49

Which of the following transfers by a debtor, within ninety days of filing for bankruptcy, could be set aside as a preferential payment?

Answer 49

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.

Question 50

Which of the following statements is correct with respect to the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code?

Answer 50

Under Bankruptcy Code Section 303, creditors may petition a debtor involuntarily into a Chapter 11 bankruptcy reorganization proceeding.

Question 51

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?

Answer 51

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.

Question 52

Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy not have?

Answer 52

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.

Question 53

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?

Answer 53

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.

Question 54

Which of the following statements is not true under Chapter 15 of the United States Bankruptcy Code?

Answer 54

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.

Question 55

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:

Answer 55

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.

Question 56

Which of the following types of debtor are not eligible for relief under Chapter 11 of the Bankruptcy Code?

Answer 56

Although both individuals and corporations are generally eligible for relief under Chapter 11, stockbrokers are specifically excluded.

Question 57

What does “contemporaneous exchange” mean?

Answer 57

This is something that usually applies to when someone has filed for bankruptcy. Quick’s paid Kray 100,000 for inventory. This would not be voidable because even though payment occurred during the 90-day preference period, it was a “contemporaneous exchange” of equivalent value and therefore not a preference. Example is: Kray paid 100,000 for inventory he received.

Question 58

A trade acceptance is an instrument drawn by a:

Answer 58

A trade acceptance is a “draft” drawn by the seller of goods on the buyer’s account. The trade acceptance orders the buyer or his/her designee to make payment.