R7

Question 1

What is the purpose of Commercial Paper Laws?

Answer 1

Ordinary promises to pay are unsuitable as a substitute for cash since contract defense may apply. Commercial paper laws: convenient and safe substitute for cash.

Question 2

How does a Holder in due course take paper?

Answer 2

Takes a negotiable instrument for value,
In good faith,
Without notice of any defenses or claims to the instrument.

Question 3

What is a note?

Answer 3

2 Party Promise to pay to order or bearer. Maker pays Payee.
CD
Promissory Note

Question 4

What is a Draft?

Answer 4

Order for a Third Party to Pay.
Drawer Orders Drawee to Pay Payee
Checks: Payable on Demand by Drawee Bank

Question 5

What are the requirements to be a negotiable Instrument?

Answer 5

In Writing
Signed by Maker (Note) or Drawer (Draft)
Unconditional Promise to pay
Fixed Amount of Money -- Words Supersede
Payable on Demand or at a definite Time
Payable to Order or bearer

Question 6

What is the process of transferring Negotiable Instruments?

Answer 6

Negotiation.

Question 7

How does one Become a Holder In Due Course – The negotiation Process

Answer 7

Bearer Paper Requires Delivery
Order Paper Requires Delivery and Endorsement
Last Endorsement Controls Order vs. bearer

Question 8

What are the Types of Negotiation?

Answer 8

Blank: Become Bearer Paper
Special: Names a Specific Party
Restrictive: Specifies use or conditions; Deposit Only
Qualified: Without Recourse, no guarantee of payment, still have warranty liability.

Question 9

What is the Shelter Doctrine?

Answer 9

Even Though the transferee might not qualify as an HDC, they can claim the rights of an HDC who held paper before.

Question 10

What are the defenses a Holder in Due Course Is Subject to?

Answer 10

F Fraud in execution/Forgery
A Adjudicated Insane/ Alteration Materially
I Infancy/Illegality
D Duress Physically/ Discharge in bankruptcy
S Suretyship/Statute of Limitations

Question 11

Who are the liable parties in a Negotiation?

Answer 11

Maker: Primarily Liable
Drawer: Secondarily Liable
Drawee: Primarily Liable After Acceptance

Question 12

How is HDC Instrument Liability Discharged?

Answer 12

Payment, Satisfaction, or Tender of Payment to a holder
Cancellation or renunciation; destruction
Impairing recourse or collateral
By delay in presentment or failure to give notice of dishonor;
Acceptance or certification of a draft by a bank.

Question 13

What are the different Types of Bankruptcy?

Answer 13

Chapter 7: Liquidation – Trustee Appointed
Chapter 9: Municipal
Chapter 11: Reorganization – No Liquidation, Trustee Not Required
Chapter 13: Adjustment of Debts of Individuals with regular income.
Chapter 15: Ancillary and Cross Border Cases

Question 14

What types of bankruptcy are Voluntary or Involuntary?

Answer 14

Chapter 7 and 11: Voluntary or Involuntary

Chapter 13: Involuntary Only

Question 15

Must a debtor be insolvent to file for bankruptcy?

Answer 15

No.

Question 16

What is a Fraudulent Transfer?

Answer 16

2 Years within date of filing
Made with intent to hinder, delay, or defraud creditors or any transfer where the debtor received less than equivalent value while debtor was insolvent.

Question 17

What is a Preferential Payment

Answer 17

Made to or Benefit of a Creditor
Account of an antecedent debt
90 Days Regular, 1 Year Insiders

Question 18

What is the Priority of A bankrupt Debtor’s Estate?

Answer 18

Secured, Priority, General (Includes Secured who received collateral).

Secured
S  Support
A  Administrative
G  Gap Claims 
W Wages to Employees
E  Employee Benefits
G  Grain Farmers
C  Consumer Deposits
T  Tax Claims
I  Personal Injury From Intoxicated Driving

Question 19

What is a secured transaction?

Answer 19

Creditor is able to rely on something other than the debtor’s promise to ensure payment; security interest or collateral.

Question 20

What is a security interest?

Answer 20

Right of credit to repossess upon default?

Question 21

When is a security interest effective between a creditor and a debtor?

Answer 21

As soon as the Security Interest is “attached.”

Question 22

When is a security interest effective against third parties?

Answer 22

Upon Perfection. Attachment is not enough, creditor must perfect, file form of notice.

Question 23

What is a Purchase Money Security Interest?

Answer 23

Priority over all other types of security in the same collateral, if properly perfected. Arises when:
Creditor sells collateral to debtor on credit, retaining a security interest; or
Creditor advances funds by the debtor to purchase collateral.
Essentially: Did debtor receive the collateral with the creditor’s money or credit?

Question 24

What are the three requisites for attachment?

Answer 24

Parties must have an agreement, Value must be exchanged, debtor must have rights in collateral.

Question 25

A security is not enforceable against any party until what?

Answer 25

It has attached to the collateral.

Question 26

What are the methods of perfection?

Answer 26

Filing
Taking possession of the collateral
Control
Automatic Perfection (PMSI Consumer Goods)
Temporary Perfection

Question 27

What is the Priority ranking between conflicting interests in collateral?

Answer 27

Buyer in ordinary course of business of inventory.
Holder of a properly perfected PMSI
Holder of Perfected Security Interest, or Judicial Lien attached
Holder of unperfected security interest in the collateral;
Debtor

Question 28

What happens to subordinate claims after the sale of collateral?

Answer 28

They are wiped out.

Question 29

How does control result in perfection?

Answer 29

Security interests in investment property may be perfected by “control.” Secured party has taken steps to be able to have the investment sold without further action from the owner.

Question 30

What is a trade acceptance?

Answer 30

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.