R-6 2013

Question 1

What are the attibutes of a draft under Article 3?

Answer 1

A draft is three-party commercial paper. It is an order by one person (the drawer) to another person (the drawee–usually a merchant or a bank) demanding that the drawee pay money to a third person (the payee).

Question 2

What distinguishes a check from other drafts under Article 3?

Answer 2

A check is a draft (i.e., negotiable three-party paper) drawn on a bank and payable on demand.

Question 3

How does the UCC define a negotiable instument?

Answer 3

An instrument: a) in writing; b) signed by the maker (note) or drawer (draft); c) containing an unconditional promise (note) or order to pay (draft); d) a fixed amount of money; e) on demand or at a definite time; f) containing no other promise or undertaking not authorized by the UCC; and, g) payable to order or bearer, with the exception of checks.

Question 4

If bearer paper is negotiated by delivery alone, how is order paper negotiated?

Answer 4

By delivery and proper endorsement.

Question 5

Once signed (endorsed) in blank, the negotiable instrument turns into:

Answer 5

Bearer paper, negotiable by delivery alone.

Question 6

Once an instrument is issued as bearer paper, will it always remain bearer paper?

Answer 6

Not necessarily. The last endorsement controls. If the last endorsement is blank, the instrument is bearer paper. If the last endorsement names a new payee (a “special” endorsement), the instrument is an order instrument.

Question 7

What is a qualified endorsement?

Answer 7

A qualified endorsement includes the words “without recourse.” This releases the endorser from contract liability (no guarantee of payment), but the endorser may still be liable if the endorser breaches any warranties.

Question 8

How does the UCC define a holder in due course?

Answer 8

A holder in due course is a holder (i.e., a person in possession of the instrument with good title to it) who takes the negotiable instrument: a) for value; b) in good faith; and c) without notice that it is overdue or has been dishonered or of any defense against or claim to it on the part of any person.

Question 9

Describe the shelter doctrine.

Answer 9

A transferee takes whatever rights his or her transferor had. As a consequence, most subsequent transferees of an HDC can “succeed to” or “take shelter in” the rights of the HDC.

Question 10

What defenses may be asserted against a holder in due course (as well as a non-holder in due course transferee)?

Answer 10

FAIDS: Forgery; Adjudicated insanity; Incapacity to contract (infancy); Duress; Statute of limitations. FAIDS: Fraud in the execution; Alteration (material) of instrument; Illegality; Discharge in bankruptcy; Suretyship and other discharges known to HDC.

Question 11

Name some defenses that cannot successfully be asserted against a holder in due course.

Answer 11

Lack of consideration; Failure of consideration; Theft of an instrument after it was signed by the maker or drawer; Breach of warranty or breach of contract: Failure of a condiiton precedent; Mistake; Unconscionability; Impossiblity; Unauthorized completion; Fraud in the inducement.

Question 12

What is a purchase money security interest?

Answer 12

A PMSI is a security interest that can have super priority. It arises when: A creditor sells the collateral to the debtor on credit and retains a security interest in the collateral for the price; or The creditor advances funds that are used by the debtor to purchase the collateral and retains a security interest in the collateral for the price.

Question 13

What are the three requisites for attachment of a security interest?

Answer 13

An agreement to create a security interest envidence by either: an authenticated record of the security agreement (e.g., a signed, written security agreement or an authenticated electronic file containing the agreement), or thecreditor’s taking possession of the collateral. THe secured party must give value for hte security interest. The debtor must have rights in the collateral.

Question 14

What are the five ways to perfect a secuirty interest?

Answer 14

File a financing statement; Possession of the collateral; Automatic perfection upon attachment with a PMSI in consumer goods and small-scale assignment of accounts; Control; Temporary.

Question 15

Under the Secured Transactions Article (Article 9), what is the order of priority in collateral when the debtor defaults?

Answer 15

Buyer in the ordinary course of business; Perfected PMSI holder; Perfected secured creditor (Non-PMSI holder); Unperfected secured creditor; Debtor.

Question 16

What advantage does the holder of an automatically perfected PMSI in consumer goods gain by filing?

Answer 16

If a PMSI in consumer goods is filed, it takes priority over a consumer who buys the collateral from the debtor in a “garage sale” or “second-hand” purchase. Absent filing, the garage sale/second-hand purchaser would not be subject to the automatically perfected PMSI.

Question 17

What is the difference in filing requirements to perfect a purcahse moneyu security interest in inventory as compared to noninventory (equipment)?

Answer 17

A PMSI in inventory must be filed before the debtor receives possession of the collateral and holders of prior perfected security interests in the inventory must be given notice before the debtor receives the collarteral. A PMSI in noninventory may be perfected by filing up to 20 days after the debtor receives possession of the colleteral and there is no special notice requriement.

Question 18

What is the rule of determining which creditor has priority when two creditors have perfected security interests in the same collateral?

Answer 18

The frist secured creditor to either file or perfect has priority. Dates of attachment are irrelevant.

Question 19

What is the effect of the sale of collateral to a good faith purchaser at a default sale?

Answer 19

The sale discharges the security interest in the collateral and all subordinate liens.

Question 20

What are a secured party’s basic rights after a debtor defaults on the secured obligation?

Answer 20

Take possession of the collateral through self-help if this can be done without breach of the peace, and sell or keep the collateral to satisfy the secured obligation. If the collateral is an account, notify the account debtor to pay the secured party. Bring a judicial action to replevy the collateral. Bring an ordinary judiciary action to enforce the obligation.

Question 21

What is a guarantor of collectibility?

Answer 21

One who binds himself in writing to perform upon default of another; and, Creditor must exhaust remedies against debtor before collecting from surety (guarantor of collection).

Question 22

Generally, is a writing required in order for a surety to be liable?

Answer 22

Yes. A surety promise is required to be evidenced by a writing under the Statute of Frauds.

Question 23

What are the surety’s rights against the principal?

Answer 23

Exoneration (right to compel principal to pay); Subrogation (enforcement of creditors’ rights against principal); Reimbursement (right to recover from principal after surety pays).

Question 24

What are the surety’s rights against co-sureties?

Answer 24

Exoneration (right to compel co-sureties to pay pro rata share); Contribution (right of paying co-surety to collect from other so-surety the share co-surety should have paid).

Question 25

What are some potential defenses of a surety?

Answer 25

Forged signature; Defrauded principal; Duress upon principal; Illegality of the principal’s obligations; Nonperformance by creditor; Impossibility; Discharge of principal’s obligation; Variations of the surety’s risk.

Question 26

May a debtor’s Social Security payments be garnished?

Answer 26

No. Social Security payments are not subject to garnishment under federal law.

Question 27

The Fair Debt Collection Practices Act prevents a creditor who is owed money from calling the debtor before 8 am or after 9 pm. True or False?

Answer 27

False. The Fair Debt Collection Practices Act applies to debt collection agencies; it does not apply to a creditor trying to collect a debt owed to the creditor.