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CPA REG > R7 BLAW > Flashcards

R7 BLAW Flashcards

1
Q

Article 3 and 7

A

Article 3 governs Commercial Paper, a type of negotiable instrument

Article 7 governs Documents of Title
e.g. bills of lading and warehouse receipts

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2
Q

Notes

A
  • two party commercial paper
  • a promise to pay
  • maker pays payee/bearer
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3
Q

Certificate of Deposit

A
  • two party
  • type of note
  • issued by a bank
  • Bank Promissory Note
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4
Q

Drafts

A
  • three party commercial paper

- order by drawer to drawee demanding they pay to third payee

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5
Q

Checks

A
  • three party
  • type of draft
  • drawn on a bank
  • payable on demand
  • unlike other drafts, doesn’t have to say “to order” or “to bearer” automatically negotiable
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6
Q

Trade Acceptances

A
  • type of draft
  • drawn by payee on the drawee and accepted by the drawee
  • payee usually seller of goods, drawee usually buyer of goods
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7
Q

Demand vs Time Instrument

A
  • instrument payable on demand is a demand

- payable at future date is a time instrument

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8
Q

Money

A

UCC doesn’t apply to money

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9
Q

Negotiability*

A
  • only front of instrument determines negotiability
    must:
  • be in writing: very liberal
  • be signed by maker (note) or drawer (draft)
  • contain an unconditional promise or order to pay
  • for fixed amount of money only
  • payable on demand or at a definite time
  • payable to order or to bearer, except checks
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10
Q

Unconditional Promise or Order

Negotiability

A

not negotiable if it state payment is conditional

  • if state subject to or governed by another agreement, not negotiable
  • not negotiable regardless if it’s fulfilled

permissible conditions

  • subject to implied conditions
  • states its consideration “given in exchange for a car”
  • refers to transaction it came from
  • limits payment to particular source of fund “promise to pay out of funds from next wheat crop”
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11
Q

On Demand or at a Definite Time

Negotiability

A
  • have to be dated, except checks
  • must know end date
  • can be accelerated as long as there’s an end date
  • can have extension as long as there’s an end date
  • undated, postdated, and antedated are permissible!
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12
Q

Don’t Destroy Negotiability

A
  • interest
  • prepayment penalties
  • attorney’s fees
  • to protect collateral
  • waives benefit of law like waives of the right to jury trial
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13
Q

Rules of Construction

Negotiability

A
  • Words control Figures
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14
Q

If Instrument is Not Negotiable

A

there can be no holder in due course

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15
Q

Holder in Due Course

A

has freedom from many defenses that a maker or drawer might have against payment

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16
Q

Becoming a Holder (not yet in due course)

A
  • Bearer Paper just needs delivery

- Order Paper needs delivery and endorsement

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17
Q

Endorsements

A
  • last endorsement controls order vs bearer
  • 3 qualities to endorsement:
  1. Special or Blank
    - special names specific party: order paper
    - blank doesn’t name an endorsee: bearer paper
    - if necessary endorsement is missing or forged, chain of title broken and no subsequent transferee can become a holder
    - if maker or drawer forged, forger needs to pay
  2. Qualified or Unqualified
    - qualified says “without recourse”
    - means no contract liability, but still warranty liability
    - so no guarantee of payment by that endorser
  3. Restrictive or Unrestrictive
    - any other language added
    - doesn’t prevent negotiation
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18
Q

Becoming a HDC

A

must:

  • take for value (not a gift)
  • in good faith
  • without notices of any defenses or claims of ownership
  • negotiable
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19
Q

Value

Becoming a HDC

A
  • Executory Promise is not value: promise to give value in the future
  • value doesn’t need to be equivalent to face value “at a discount”
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20
Q

The Shelter Doctrine

A

non HDC gets instrument from HDC has rights of an HDC

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21
Q

Claims and Defenses on instrument

A
  • HDC only subject to real defenses, not personal
  • Real Defenses
  • Personal Defenses
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22
Q

Real Defenses*

A

“FAIDS”

  • Fraud in the execution
  • Forgery
  • Adjudicated insanity
  • material Alteration
  • Infancy
  • Illegality: void
  • Duress: physical void
  • Discharge in bankruptcy
  • Suretyship defenses
  • Statute of limitations: GR 3 years from draft 6 on notes
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23
Q

Personal Defenses

A
  • all defenses other than real defenses
  • unauthorized completion: filling out something blank, not changing it like material alteration
  • failure of consideration
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24
Q

Liability of parties

Commercial Paper

A

GR: signature = liable

  • Maker: primarily liable
  • Drawer: secondarily liable
  • Drawee: primarily liable after “acceptance”/signing and all prior endorsers are discharged
  • certification of a check from bank discharges all prior endorsers as well
  • oral stop payment order is binding on bank for 14 days
  • written stop payment order is binding for 6 months
  • Endorser: secondarily liable, except w/o recourse means no contract liability but still has warranty liability
  • anyone who transfers has warranty liability
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25
Q

Warranty Liability

Commercial Paper

A

exists even if you don’t sign or sign w/o recourse

5 Transfer Warranties

  • transferor has good title
  • signatures are genuine or authorized
  • not materially altered
  • no defense of any party is good against transferor
  • transferor has no knowledge of any insolvency

may be disclaimed by language “transferor makes no warranties”

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26
Q

Forgery

Commercial Paper

A

forger is always liable
who is liable if forger is missing?
- forgery of drawer’s name: drawee liable bc they should know their own customer’s signature
- forgery of payee’s name: does not pass good title, so first person the forger passed it to

exceptions:

  • Imposter Rule: if maker/drawer issues an instrument to an imposter then effective
  • Fictitious Payee Rule
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27
Q

Discharge from liability

Commercial Paper

A
  • by payment, satisfaction, or tender of payment to holder
  • by lining through their signatures
  • oral renunciation is not effective
  • by delay in presentment or failure to give notice of dishonor and
  • by acceptance or certification of a draft by a bank

Discharge is a Personal Defense

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28
Q

Secured Transaction

A

secured by collateral or security interest

- usually involve credit transactions

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29
Q

Security Interest

A

allows creditor to repossess collateral if debtor fails to fulfill credit obligation

  • effective upon attachment
  • effective against third parties upon perfection who might also have interest in collateral
  • perfection is a form of notice that this creditor has superior rights
30
Q

Article 9

A

concerns secured party’s rights
applies to most security interests in personal property or fixtures and outright sales of receivables

does not apply to security interest in land: mortgages, wage claims, statutory liens/mechanic’s liens

31
Q

Purchase Money Security Interests (PMSI)

A

has priority over all other types of security interests in the same collateral, if the PMSI is properly perfected

PMSI arises when:
- creditor sells collateral to debtor on credit, retaining security interest for purchase or
- creditor advances funds used by debtor to purchase the collateral
(for purchases of the collateral w creditor’s money/credit)

32
Q

Types of Collateral

A

determined by how collateral is used

  • consumer goods: personal use
  • inventory: for sale or lease
  • equipment: for use in business

+ more

  • receivables
  • stocks, bonds, mutual funds
  • proceeds: whatever received upon sale exchange collection or disposition of collateral “trade in”
33
Q

Duties of Secured Party

A

use reasonable care to preserve any collateral in the secured party’s possession

34
Q

Attachment

A

3 Requisites:

  1. agreement creating the security evidenced by either:
    a) authenticated record signed by debtor or
    b) creditor taking possession of collateral
  2. value must be given by secured party in exchange for security interest
  3. debtor must have rights in collateral, not necessarily own it tho
35
Q

After-Acquired Property

A

permissible

- most often used w equipment or inventory

36
Q

Perfection

A 
to get priority in collateral over most third parties
5 methods to perfection:
1. filing
2. taking possession of collateral
3. control
4. automatic perfection
5. temporary perfection

timing: attachment has to happen before perfection

if completed steps necessary for perfection but attachment hasn’t happened yet, perfected when attached

  • best way to perfect is to take possession so other people can’t become holder in due course
37
Q

Perfection by Filing

A

filing a Financing Statement containing

  • name and mailing address of debtor and secured party
  • indication of collateral covered and
  • if for real property, a description of the real prop
  • debtor must authorize filing, can’t be oral
  • filed with secretary of state
  • effective for 5 years and can be renewed for add. 5 years w continuation statement
38
Q

Perfection by Taking Possession

A

similar to pawn shop

  • can’t pledge intangible property
  • secured party muse use reasonable care in storing and preserving the collateral, but can charge debtor for it
  • oral agreement for attachment is okay
39
Q

Perfection by Control

A

security interest in Investment Property may be perfected by control

more R7-32

40
Q

Automatic Perfection*

A

security interest can be perfected simply by attachment of the security interest without any add. requirements
2 types:
1. PMSI in consumer goods (personal use)
2. Small Scale Assignment of Accounts (accounts receivable) cant be a majority of receivables

41
Q

Temporary Perfection

A
  1. 20 day period for proceeds: security interest in proceeds from original collateral is perfected for 20 days
  2. Interstate shipments: 4 month grace period if perfected in first state to perfect in second state
42
Q

Priorities*

A

ranking:

  • buyer in ordinary course of business & HDCs
  • perfected PMSI
  • perfected non-PMSI
  • unperfected, just attached
  • the debtor

+ you can sell your “place”/priority rights

43
Q

Perfected PMSI

A

PMSI in Consumer Goods is automatically perfected and don’t have to file but should to protect from exception to winning
- exception: “garage sale” if buyer of CONSUMER GOODS resell the goods to another consumer buyer, the second buyer will take free of an automatically perfected PMSI

PMSI in Inventory

  • must file before inventory is delivered to debtor and
  • others w security interest in same collateral given notice of PMSI before delivered to debtor

PSMI in noninventory/Equipment
- must file and be perfected wi/i 20 days after debtor receives collateral

44
Q

Perfected Security Interests (non-PMSI)

A
  • first to file or perfect wins
  • judicial lien vs security interest: whoever attached or perfected first, respectively
  • bankruptcy trustee subordinate to all prior perfected security interests, but priority over subsequent
45
Q

Rights on Default

A
  1. Take Possession of and Sell
    Taking Possession
    - self help without breach of the peace
    - Replevin: judicial action
    Sale
    - may sell or lease
    - public or private sale
    - commercially reasonable
    - debtor and other parties must generally be given notice of sale
    - sale wipes out all subordinate interests, but subject to superior interests
    - debtor has the right to redeem by paying off indebtedness before the sale
    Proceeds
    - first pay expenses of repossession and sale
    - then pay creditors w security interest in order of priority
    - any surplus goes to debtor
  2. Retention
    GR: can usually retain EXCEPT consumer goods where debtor has paid at least 60% of the loan, the secured party must sell the collateral within 90 days after repossession
46
Q

Types of Bankruptcy Cases

A

there are 6 of them:

  • Chapter 7 Liquidation
  • Chapter 9 Municipal Debt Adjustment
  • Chapter 11 Reorganization
  • Chapter 12 Family Farmers w Regular Income
  • Chapter 13 Adjustment of Debts of Individuals w Regular Income
  • Chapter 15 Ancillary and Other Cross Border Cases

exam doesn’t focus on Chapter 9 or 12
- really know 7, 13, and 11

47
Q

Chapter 7 Liquidation

A
  • I, P, C
  • trustee appointed and collects debtor’s assets, liquidates them, and uses proceeds to pay off creditors
  • if debtor is an individual, debts are then discharged w certain exceptions
  • if debtor is artificial entity (corp), it is dissolved and debts are wiped out
  • if individual: must pass means or abuse test, if debtor’s income is too high case will be converted to Chapter 13
48
Q

Chapter 13 Adjustment of Debts of Individuals w Regular Income

A
  • I only
  • debtor repays all or portion of debts over 3 to 5 year period
  • not a liquidation, but trustee oversees handling
  • remaining debts discharged
49
Q

Chapter 11 Reorganization

A
  • I, P, C
  • have hope
  • no liquidation
  • GR: trustee not required, but court may appoint one
  • debtor remains in possession of their assets and plans reorganization
  • creditors paid to extent possible and business continues
50
Q

Chapter 15 Ancillary and Cross Border Cases

A
  • commenced by “foreign representative” filing a petition for recognition
51
Q

The Means Test

A
  • average income over 6 months before filing * 12
  • if equal to or less than state median income, Ch 7 permitted
  • if greater, apply Means Test

Means Test

  • (avg monthly income - allowed expenses) * 60
  • if < 7,425: Ch 7 permitted
  • if > 12,475: Ch 13 bc presumption of abuse
  • if between: abuse only if amount is 25% of debtor’s unsecured claims

Allowed Expenses

  • living expenses in amt set by IRS
  • health and disabbility insurance and health savings account
  • care of elderly, disabled, and chronically ill
52
Q

Rebutting the Presumption of Abuse for Ch 7

A
  • showing special circumstances (serious illness or call to active military duty)
  • exception: no presumption of abuse for disabled veterans

General Abuse Test

  • even if debtor qualified for Ch 7, relief can be denied if shown to act in “bad faith”
  • only raised by court, trustee, or bankruptcy administrator
53
Q

Who can’t file for Ch 7 bankruptcy?

A 
"RIBS"
Railroads
Savings Institutions and Stockbrokers
Insurance Companies
Banks
\+ small business investment companies
54
Q

Credit Counseling Required if Debtor is an Individual

A
  • must occur w/i 180 days before filing bankruptcy petition

- debtors filing under Ch 7 or 13 must complete a financial management course before debts are discharged

55
Q

Debt Relief Agencies

A

agencies that are paid compensation to assist consumer debtors in filing bankruptcy petitions

  • must enter into a written contract
  • may not advise a person to incur more debt in anticipation of a bankruptcy filing
56
Q

Common Features of Chapter 7 and Chapter 11

A
  • I, P, C

may be Voluntary or Involuntary
Voluntary
- debtor files for Order of Relief
- debtor doesn’t need to be insolvent, but must pass income tests
- spouses may file jointly to avoid duplicative fees
Involuntary
- unsecured creditors may petition
- farmers and charities may not be petitioned involuntarily
- fewer than 12 creditors: 1+ owed $15,325*
- more than 12: 3+ owed 15,325*
- does not constitute Order of Relief there’s a gap before OoR
- ppl who become creditors of the debtor during this gap are given high priority in recovering

Automatic Stay effective against most creditors stops almost all collection efforts
- doesn’t apply to criminal prosecutions, paternity suits, and spousal or child support obligations

Duties of Debtor

  • after petition is filed, must file:
  • list of creditors and their addresses
  • schedule of assets and liabilities at FMV
  • schedule of current income and expenditures
  • copies of pay stubs
  • itemized statement of monthly net income
  • copies of federal tax returns from last tax year
57
Q

Section 341 Meeting– Creditor’s Meeting

A

within 20-40 days after order for relief, meeting of creditors is held

  • all interested parties must be given notice including name, address, and SS # of debtor and automatic stay and final dates for filing claims
  • debtor must attend
58
Q

Property of the Bankruptcy Estate

A

Included

  • all debtor’s real and personal property at time of filing
  • “DII” divorce, inheritance, or insurance w/i 180 days after filing
  • income generated from estate

Excluded

  • spendthrift trusts, educational IRAs and state tuition programs
  • contributions to employee benefit plans
  • things necessary to live: homestead, motor vehicle, household goods, crops, and animals, tools of trade or professional books, health aids, government benefits
59
Q

Trustee’s Powers as a Hypothetical Lien Creditor

A
  • as of filing date
  • has priority over all creditors except those w prior perfected security interests or prior stautory or judicial leans
  • or PMSI of noninventory perfected within 20 days after debtor receives possession of collateral
60
Q

Power over Fraudulent Transfers

A
  • trustee has power to set aside fraudulent transfers made w/i 2 years of filing
  • fraudulent transfer is made with intent to hinder, delay, or defraud creditors or any transfer where debtor received less than equivalent value while the debtor was insolvent
61
Q

Trustee can disaffirm Preferences

A

when payment is “set aside”, the trustee can take payment back from creditor and it becomes part of bankruptcy estate

  • transfer made to or for benefit of creditor
  • antecedent debt of debtor
  • w/i 90 days prior to filing the petition (1 year if creditor is an insider)
  • results in creditor receiving more than they would’ve under the Bankruptcy Code

purpose: to prevent one creditor being preferred over others

not included:

  • payment to a fully secured creditor bc they would’ve been paid anyways
  • transfers in the ordinary course of business
  • consumer payments under 600
  • PMSI perfected w/i 20 days of debtor receiving for noninventory
  • domestic support obligations
62
Q

Claims Against the Estate

A

Unsecured creditors have to file a proof of claim and shareholders must file a proof of interest w bankruptcy court
- if fail to timely file, they may not take part in distribution of debtor’s estate

63
Q

Objections to Discharge

A

these will prevent the debtor from receiving any discharge

  • fraudulent transfers or concealment of property
  • unjustifiably failing to keep books and records
  • prior discharge within 8 years
  • commission of a bankruptcy crime
  • failure to explain loss of assets
  • refusal to obey orders or answer questions
  • improper conduct in an insider’s case
  • failure to complete financial management course
64
Q

Exceptions to Discharge

A

certain debts of an individual are not discharged under Ch 7 or 11
“WAFTED”
- willful and malicious injury, but negligent torts are discharged
- alimony and divorce
- fines and penalties
- fraud
- taxes due w/i 3 years of filing
- embezzlement
- educational loans unlesss it would impose an “undue hardship”
- debts undisclosed in bankruptcy petition

65
Q

Reaffirmation of Discharged Debts

A

debtor may reaffirm if they don’t want a particular debt discharged (to keep good relations or something)

  • if agreement to reaffirm debt was made before granting of discharge
  • clear and conspicuous provision that they have right to rescind prior to discharge
  • informs debtor not required by law
66
Q

Distribution of Debtor’s estate

A

3 basic categories of claimants, paid in the following order:

  1. secured claimants: in full what they’re secured to, the rest is like general creditors
  2. priority claimants (SAG WEG CTI) and
  3. general creditors who filed claims on time: pro rata
67
Q

Priority Claimants*

A

SAG WEG CTI
Support obligations to spouse and children
Administrative expenses
Gap claims after involuntary petition is filed before OoR

Wage claims up to 12,475
Employee benefit plans up to 12,475
Grain farmers and fisherman

Consumer deposits
Tax claims
Injury claims from Intoxicated driving

68
Q

Creation of Creditors’ Committee or Security Holder’s Committee and their power

Chapter 11 Reorg

A

consisting of willing persons holding the 7 largest unsecured claims against the debtor

if corporation, security committee of 7 largest holders of equity securities

  • committees can consult w debtor, investigate debtor’s finances, participate in preparing reorg plan, etc.
69
Q

Chapter 11 Reorg Plan

A
  • debtor has exclusive right to file reorg plan in first 120 days after order for relief is effective
    others may file plan if:
  • trustee has been appointed
  • debtor has not filed plan w/i the 120 days
  • debtor has filed plan but not obtained acceptance of every impaired class (2/3 in amount and 1/2 in number of claims) not unanimous
court will confirm plan if accepted by all impaired classes
- also must provide for payment for all administrative expenses and all third party involuntary gap creditors in cash
Cram Down: they'll accept if just 1 impaired class accepts and court finds it's not unfairly discriminatory and is fair and equitable w respect to any dissenting impaired classes
70
Q

Chapter 15 Case

A

commenced by “foreign representative” filing a petition for recognition of a “foreign proceeding”

  • this operates as the principal door of a foreign representative to US courts
  • automatic stay
  • prohibits discrimination against foreign creditors and requires cooperation with foreign courts and representatives

CPA REG (11 decks)

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