R8-1 Flashcards

1
Q

Which of the following events will release a noncompensated surety from liability to the creditor?

a.

The creditor was adjudicated incompetent after the debt arose.

b.

The principal debtor exerted duress to obtain the surety agreement.

c.

The creditor failed to notify the surety of a partial surrender of the principal debtor’s collateral.

d.

The principal debtor was involuntarily petitioned into bankruptcy.

A

Choice “c” is correct. A noncompensated surety will be discharged from liability if the principal debtor and the creditor modify the terms of the contract in any way. A partial surrender of the debtor’s collateral is a modification that will release a noncompensated surety from liability.

Choice “d” is incorrect. One of the reasons creditors seek sureties is to have someone who can pay the debt if the principal debtor goes bankrupt. Bankruptcy of the principal debtor will not discharge the surety.

Choice “a” is incorrect. The creditor becoming incompetent after the debt arose has no bearing on the liability of either the debtor or the surety.

Choice “b” is not as good an answer as “c”. The principal’s duress will discharge the surety’s obligation only if the creditor knew about the duress when the creditor accepted the surety.

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2
Q

Which of the following statements is(are) correct regarding debtors’ rights?

I.

State exemption statutes prevent all of a debtor’s personal property from being sold to pay a federal tax lien.

II.

Federal social security benefits received by a debtor are exempt from garnishment by creditors.

a.

Both I and II.

b.

I only.

c.

II only.

d.

Neither I nor II.

A

Choice “c” is correct. Federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits.

Choice “b” is incorrect. Federal law, nor state law, controls what property is subject to federal tax liens.

Choice “a” is incorrect. Federal law, not state law, controls what property is subject to federal tax liens, and federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits.

Choice “d” is incorrect. Federal law does not allow creditors to institute garnishment proceedings with respect to federal social security benefits, and federal law, nor state law, controls what property is subject to federal tax liens.

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3
Q

Which of the following liens generally require(s) the lienholder to give notice of legal action before selling the debtor’s property to satisfy the debt?

Mechanic’s lien

Artisan’s lien

a.

No

No

b.

No

Yes

c.

Yes

No

d.

Yes

Yes

A

Choice “d” is correct. A mechanic’s lien arises from improvements made on real property. An artisan’s lien arises from improvements made to personal property. Both require notice to the owner of the property in most states.

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4
Q

Which of the following acts always will result in the total release of a compensated surety?

a.

The creditor extends the principal debtor’s time to pay.

b.

The principal debtor’s obligation is partially released.

c.

The principal debtor’s performance is tendered.

d.

The creditor changes the manner of the principal debtor’s payment.

A

Choice “c” is correct. Tender of performance by the principal debtor completely releases the surety, even a compensated surety.

Choice “d” is incorrect. Changing the manner of payment will release a compensated surety only if the change increases the surety’s risk.

Choice “a” is incorrect. Changing the time of payment will release a compensated surety only if the change increases the surety’s risk.

Choice “b” is incorrect. Partially releasing the principal will only partially release the compensated surety.

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5
Q

When a principal debtor defaults and a surety pays the creditor the entire obligation, which of the following remedies gives the surety the best method of collecting from the debtor?

a.

Exoneration.

b.

Subrogation.

c.

Contribution.

d.

Attachment.

A

Choice “b” is correct. Subrogation is the right a surety has by which the surety succeeds to the creditor’s rights against the principal when the surety pays the principal’s obligations.

Choice “a” is incorrect. Exoneration is the right a surety has against the debtor to force the solvent debtor to pay a debt when the debtor refuses to do so.

Choice “c” is incorrect. Contribution is a right one surety has against the surety’s co-sureties to force them to pay their share of the debt.

Choice “d” is incorrect. Attachment is not a right of suretyship, but rather is a remedy with respect to the property of the debtor-principal.

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6
Q

Green was unable to repay a loan from State Bank when due. State refused to renew the loan unless Green provided an acceptable surety. Green asked Royal, a friend, to act as surety on the loan. To induce Royal to agree to become a surety, Green fraudulently represented Green’s financial condition and promised Royal discounts on merchandise sold at Green’s store. Royal agreed to act as surety and the loan was renewed. Later, Green’s obligation to State was discharged in Green’s bankruptcy. State wants to hold Royal liable. Royal may avoid liability:

a.

If Royal was an uncompensated surety.

b.

If Royal can show that State was aware of the fraudulent representations.

c.

Because the discharge in bankruptcy will prevent Royal from having a right of reimbursement.

d.

Because the arrangement was void at the inception.

A

Choice “b” is correct. Fraud on the surety by the principal debtor is not a defense unless the creditor knew of the fraud.

Choice “a” is incorrect. An uncompensated surety can be bound as long as the surety’s promise is made before consideration passed between the principal debtor and the creditor. Here, State renewed the loan in exchange for obtaining the surety. Thus, there is sufficient consideration to bind Royal.

Choice “c” is incorrect. Discharge in bankruptcy of the principal debtor does not discharge the surety.

Choice “d” is incorrect. Nothing in the facts makes the arrangement here void at the inception.

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7
Q

Wright cosigned King’s loan from Ace Bank. Which of the following events would release Wright from the obligation to pay the loan?

a.

King is granted a discharge in bankruptcy.

b.

Ace is paid in full by King’s spouse.

c.

Ace seeking payment of the loan only from Wright.

d.

King is adjudicated mentally incompetent.

A

Choice “b” is correct. Assuming that this is a suretyship situation and that Wright’s only obligation is as a surety, full payment of the underlying obligation discharges the surety.

Choice “c” is incorrect. Because nothing in the facts states that Wright signed only as a guarantor or guarantor of collection, Ace had no duty to first seek payment from King; so, Ace’s failure to first seek payment from King does not result in Wright’s discharge.

Choice “a” is incorrect. Discharge of the principal debtor for bankruptcy does not discharge a cosigner of a loan.

Choice “d” is incorrect. Incompetency of the principal debtor does not discharge a cosigner of a loan.

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8
Q

Under the Federal Fair Debt Collection Practices Act, which of the following would a collection service using improper debt collection practices be subject to?

a.

Reduction of the debt.

b.

Criminal prosecution for violating the Act.

c.

Abolishment of the debt.

d.

Civil lawsuit for damages for violating the Act.

A

Choice “d” is correct. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. 15 USC 1692k(a)(1)

Choice “c” is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide for abolishment of the debt.

Choice “a” is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide for a reduction of the debt.

Choice “b” is incorrect. The FDCPA gives parties injured by unfair collection practices the right to sue for damages. It does not provide criminal penalties.

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9
Q

Which of the following actions between a debtor and its creditors will generally cause the debtor’s release from its debts?

~~Composition of creditors

~~Assignment for the benefit of creditors

a.

Yes

No

b.

Yes

Yes

c.

No

No

d.

No

Yes

A

Choice “a” is correct. A composition of creditors is an agreement between a debtor and at least two creditors that the creditors will take less than full payment to discharge the debts owed by the debtor to the creditors who participate in the composition agreement. The agreement results in discharge of the debts in full because a contract is created by the cross-promises of the parties (i.e., the cross-promises serve as consideration, so the pre-existing duty rule is avoided). On the other hand, an assignment for the benefit of creditors is a transfer of some or all of a debtor’s property to a trustee who then uses the property to pay the creditors. There is no discharge of debts here because the creditors have not entered into any contract to take less than full payment.

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10
Q

Which of the following prejudgment remedies would be available to a creditor when a debtor owns no real property?

~~Writ of attachment

~~Garnishment

a.

Yes

Yes

b.

Yes

No

c.

No

Yes

d.

No

No

A

Choice “a” is correct. A writ of attachment is an order by the court to a sheriff to seize a person’s property. The writ can apply to personal property and to real property, and so the writ can be used even when a person owns no real property. Garnishment is an order to a third person who holds property of the debtor to turn the property over to a creditor. The property involved usually are wages and/or other property owed by the third person to the debtor. There is no requirement that the property be the debtor’s real property.

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11
Q

Which of the following rights does a surety have?

~~Right to compel the creditor to collect from the principal debtor
~~Right to compel the creditor to proceed against the principal debtor’s collateral
a.

No

No

b.

No

Yes

c.

Yes

No

d.

Yes

Yes

A

Explanation

Choice “a” is correct. A surety generally is primarily liable on the debt the surety agrees to backstop and has no right to compel the creditor to collect from the principal debtor or to compel the creditor to proceed against the debtor’s collateral. (There is, however, a very limited right to both of these in certain circumstances.)

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12
Q

Ingot Corp. lent Flange $50,000. At Ingot’s request, Flange entered into an agreement with Quill and West for them to act as compensated co-sureties on the loan in the amount of $100,000 each. Ingot released West without Quill’s or Flange’s consent, and Flange later defaulted on the loan. Which of the following statements is correct?

a.

Flange will be released for 50% of the loan balance.

b.

Quill will be liable for 50% of the loan balance.

c.

Quill will be liable for the entire loan balance.

d.

Ingot’s release of West will have no effect on Flange’s and Quill’s liability to Ingot.

A

Choice “b” is correct. Release of a co-surety is treated the same as release of security. The release discharges the other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.

Choice “c” is incorrect. Release of a co-surety is treated the same as release of security. The release discharges the other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.

Choice “d” is incorrect. Release of a co-surety is treated the same as release of security. The release discharges the other co-sureties to the extent of the impairment of their rights. Had West not been released, Quill would have had a right of contribution against West for half of the debt. Thus, Quill is discharged to that extent.

Choice “a” is incorrect. A principal is not discharged from a debt merely because a surety is released.

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13
Q

A debtor may attempt to conceal or transfer property to prevent a creditor from satisfying a judgment. Which of the following actions will be considered an indication of fraudulent conveyance?

~~Debtor remaining in possession after conveyance

~~Secret conveyance

~~Debtor retains an equitable benefit in the property conveyed

a.

Yes

Yes

No

b.

Yes

Yes

Yes

c.

Yes

No

Yes

d.

No

Yes

Yes

A

Choice “b” is correct. Under the Uniform Fraudulent Conveyance Act, all three acts are indicia of a fraudulent conveyance.

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14
Q

A homestead exemption ordinarily could exempt a debtor’s equity in certain property from post-judgment collection by a creditor. To which of the following creditors will this exemption apply?

~~Valid home mortgage lien

~~Valid IRS Tax lien

a.

Yes

Yes

b.

No

No

c.

Yes

No

d.

No

Yes

A

Choice “b” is correct. Generally, a home mortgage lien is not subject to a state homestead exemption if it is a purchase money mortgage and neither is an IRS tax lien.

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15
Q

Which of the following methods will allow a creditor to collect money from a debtor’s wages?

a.

Order of receivership.

b.

Arrest.

c.

Mechanic’s lien.

d.

Writ of garnishment.

A

Choice “d” is correct. A writ of garnishment will allow a creditor to collect money from a debtor’s wages.

Choices “b” and “a” are incorrect. Neither the arrest of the debtor nor an order of receivership will allow a creditor to collect money from a debtor’s wages.

Choice “c” is incorrect. A mechanic’s lien is placed on property such as an automobile and will prevent the owner from transferring “clean” title without paying the mechanic’s lien. A mechanic’s lien does not, by itself, allow the creditor to collect money from a debtor’s wages.

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16
Q

A party contracts to guarantee the collection of the debts of another. As a result of the guaranty, which of the following statements is correct?

a.

The guarantor may use any defenses available to the debtor.

b.

The guaranty must be in writing.

c.

The creditor may proceed against the guarantor without attempting to collect from the debtor.

d.

The creditor must be notified of the debtor’s default by the guarantor.

A

Choice “b” is correct. The Statute of Frauds requires promises to pay the debts of another to be evidenced by a writing containing the material terms.

Choice “c” is incorrect. Before seeking payment from a guarantor of collection, a creditor must first attempt to collect from the principal debtor.

Choice “a” is incorrect. The guarantor may use some, but not all, of the debtor’s defenses. For example, the debtor’s minority or bankruptcy is not a defense to the guarantor.

Choice “d” is incorrect. A surety generally has no right to be notified of the debtor’s default.

17
Q

Which of the following events will release a noncompensated surety from liability?

a.

Modification by the principal debtor and creditor of their contract that materially increases the surety’s risk of loss.

b.

Filing of an involuntary petition in bankruptcy against the principal debtor.

c.

Insanity of the principal debtor at the time the contract was entered into with the creditor.

d.

Release of the principal debtor’s obligation by the creditor but with the reservation of the creditor’s rights against the surety.

A

Choice “a” is correct. Any variation on an uncompensated surety’s risk releases the surety.

Choice “d” is incorrect. If the release includes a reservation of rights against the surety, the surety is not discharged.

Choice “b” is incorrect. The fact that the principal debtor is bankrupt is not a defense to the surety.

Choice “c” is incorrect. The fact that the principal debtor was incompetent at the time the contract was made is not a defense available to the surety.

18
Q

Nash, Owen, and Polk are co-sureties with maximum liabilities of $40,000, $60,000 and $80,000, respectively. The amount of the loan on which they have agreed to act as co-sureties is $180,000. The debtor defaulted at a time when the loan balance was $180,000. Nash paid the lender $36,000 in full settlement of all claims against Nash, Owen, and Polk. The total amount that Nash may recover from Owen and Polk is:

a.

$28,000

b.

$24,000

c.

$0

d.

$140,000

A

Choice “a” is correct. A co-surety has a right of contribution from co-sureties. Where the debt has been reduced, each co-surety remains liable for the lesser of: (i) the reduced amount of debt or (ii) the original amount for which the co-surety has agreed to be responsible. However, the right of contribution allows each co-surety to recover from the other co-sureties their pro rata share of the payment. Here, Nash satisfied the debt by paying $36,000. Proportionally, Nash was liable for 40/180 (or 2/9) of the original debt, Owen was responsible for 3/9, and Polk was responsible for 4/9. Nash’s pro rata share of the $36,000 is $8,000; Owen’s share is $12,000; and Polk’s share is $16,000. Thus, Nash may recover $28,000.

19
Q

The federal Fair Debt Collection Practices Act prohibits a debt collector from engaging in unfair practices. Under the Act, a debt collector generally can be prevented from:

a.

Contacting a third party to ascertain a debtor’s location.

b.

Commencing a lawsuit to collect a debt.

c.

Continuing to collect a debt.

d.

Communicating with a debtor who is represented by an attorney.

A

Choice “d” is correct. The Fair Debt Collection Practices Act prohibits contacting the debtor directly if an attorney represents the debtor.

Choice “a” is incorrect because a collection agency can contact a third party to discover a debtor’s whereabouts.

Choice “c” is incorrect because the Fair Debt Collection Practices Act is designed to curb abuses in the collection process. The Act is not designed to eliminate the debt.

Choice “b” is incorrect because all creditors have the right to sue debtors to collect debts.

20
Q

Which of the following bonds are an obligation of a surety?

a.

Convertible bonds.

b.

Debenture bonds.

c.

Municipal bonds.

d.

Official bonds.

A

Choice “d” is correct. An official bond is a type of surety bond. Many states require public officials to obtain bonds from a surety for faithful performance of their duties. Such bonds obligate a surety for all losses that the public official causes by negligence or nonperformance of required duties.

Choice “a” is incorrect. A convertible bond is a corporate bond that may be converted into stock. A convertible bond has nothing to do with the obligations of a surety.

Choice “b” is incorrect. A debenture bond is simply an unsecured corporate bond. A debenture bond has nothing to do with the obligations of a surety.

Choice “c” is incorrect. A municipal bond is a bond issued by a city or other local government. A municipal bond has nothing to do with the obligations of a surety.

21
Q

Sorus and Ace have agreed, in writing, to act as guarantors of collection on a debt owed by Pepper to Towns, Inc. The debt is evidenced by a promissory note. If Pepper defaults, Towns will be entitled to recover from Sorus and Ace unless:

a.

Pepper dies before the note is due.

b.

Sorus and Ace are in the process of exercising their rights against Pepper.

c.

Sorus and Ace prove that Pepper was insolvent at the time the note was signed.

d.

Towns has not attempted to enforce the promissory note against Pepper.

A

Choice “d” is correct. Sorus and Ace have agreed to be guarantors of collection. Thus, Towns, the creditor, must pursue the debtor, Pepper, before Towns is entitled to recover from Sorus and/or Ace.

Choice “b” is incorrect. Towns, the creditor, will be entitled to recover from Sorus and Ace, the sureties, even if the sureties are in the process of exercising their rights against the debtor (i.e., “right of exoneration”).

Choice “c” is incorrect. Insolvency of the debtor, either at the time the note was signed, or at the time of default, is not a defense of a surety.

Choice “a” is incorrect. Death of the debtor is not a defense of a surety.

22
Q

Edwards Corp. lent Lark $200,000. At Edwards’ request, Lark entered into an agreement with Owen and Ward for them to act as compensated co-sureties on the loan in the amount of $200,000 each. If Edwards releases Ward without Owen’s or Lark’s consent, and Lark later defaults, which of the following statements is correct?

a.

Lark will be released for 50% of the loan balance.

b.

Owen will be liable for 50% of the loan balance.

c.

Edwards’ release of Ward will have no effect on Lark’s and Owen’s liability to Edwards.

d.

Owen will be liable for the entire loan balance.

A

Choice “b” is correct. Owen will be liable for 50% of the loan balance. The release of one co-surety (Ward) without the consent of the other co-surety (Owen) discharges the remaining co-surety’s (Owen) right of contribution from the released co-surety (Ward) and discharges the remaining co-surety to the extent the released party was liable. Owen and Ward were equally liable on the debt. Thus, Ward’s release will release Owen from 50% of Owen’s liability.

Choice “a” is incorrect. A release of a surety does not affect the liability of the principal debtor. Thus, because Lark is the principal debtor, the release of Ward (the surety) does not affect Lark’s liability.

Choices “d” and “c” are incorrect. The release of one co-surety without the consent of the other co-surety discharges the remaining co-surety to the extent the released party was liable. Ward was equally liable on the debt with Owen. Thus, the release of Ward releases Owen from liability for half of the loan balance.

23
Q

Lane promised to lend Turner $240,000 if Turner obtained sureties to secure the loan. Turner agreed with Rivers, Clark, and Zane for them to act as co-sureties on the loan from Lane. The agreement between Turner and the co-sureties provided that compensation be paid to each of the co-sureties. The agreement further indicated that the maximum liability of each co-surety would be as follows: Rivers $240,000, Clark $80,000, and Zane $160,000. Lane accepted the commitments of the sureties and made the loan to Turner. After paying ten installments totaling $100,000, Turner defaulted. Clark’s debts, including the surety obligation to Lane on the Turner loan, were discharged in bankruptcy. Later, Rivers properly paid the entire outstanding debt of $140,000. What amount may Rivers recover from Zane?

a.

$70,000

b.

$56,000

c.

$0

d.

$84,000

A

Choice “b” is correct. $56,000. When one of several co-sureties becomes bankrupt, the other co-sureties are liable on the debt to the extent each agreed and are liable in contribution to each other in proportion to the amount each agreed to pay. Here, Clark was discharged in bankruptcy, leaving Rivers and Zane as co-sureties. Rivers agreed to pay up to $240,000, and Zane agreed to pay up to $160,000; so, their proportional liability is 24:16 (3:2), respectively. Thus, Zane is liable for 2/5 of the $140,000; 2/5 of $140,000 = $56,000.

24
Q

Mane Bank lent Eller $120,000 and received securities valued at $30,000 as collateral. At Mane’s request, Salem and Rey agreed to act as uncompensated co-sureties on the loan. The agreement provided that Salem’s and Rey’s maximum liability would be $120,000 each. Mane released Rey without Salem’s consent. Eller later defaulted when the collateral held by Mane was worthless and the loan balance was $90,000. Salem’s maximum liability is:

a.

$90,000

b.

$30,000

c.

$45,000

d.

$60,000

A

Choice “c” is correct. $45,000.

A release of a co-surety without the other co-surety’s consent and without “reservation of rights” against the other co-surety results in the remaining co-surety’s losing the right of contribution against the released co-surety. Thus, the remaining surety is discharged to the extent that the remaining surety could have recovered from the released surety. Here the sureties were liable for the debt equally. Thus, Salem is now liable for only $45,000, which is half of the $90,000 debt.

25
Q

On June 1, Year 1, Decker orally guaranteed the payment of a $5,000 note Decker’s cousin owed Baker. Decker’s agreement with Baker provided that Decker’s guaranty would terminate in 18 months. On June 3, Year 2, Baker wrote Decker confirming Decker’s guaranty. Decker did not object to the confirmation. On August 23, Year 2, Decker’s cousin defaulted on the note and Baker demanded that Decker honor the guaranty. Decker refused. Which of the following statements is correct?

a.

Decker is liable under the oral guaranty because Decker did not object to Baker’s June 3 letter.

b.

Decker is not liable under the oral guaranty because it expired more than one year after June 1.

c.

Decker is liable under the oral guaranty because Baker demanded payment within one year of the date the guaranty was given.

d.

Decker is not liable under the oral guaranty because Decker’s promise was not in writing.

A

Choice “d” is correct. Under the Statute of Frauds a promise to pay the debt or default of another (a “surety” contract) must be evidenced by a writing signed by the surety (the party to be charged). Decker orally guaranteed the debt owed by Decker’s cousin. Thus, Decker’s promise is not enforceable. Baker’s confirmation is irrelevant.

Choices “a” and “c” are incorrect, because Decker is not liable under the oral guaranty. The guaranty must be evidenced by a writing signed by Decker to be enforceable. Unlike a confirmation between merchants in a sale of goods contract, Baker’s confirmation is irrelevant here.

Choice “b” is incorrect. Decker is not liable because Decker did not sign the guaranty. That the promise expired one year after Decker’s guaranty is not relevant here.

26
Q

A distinction between a surety and a co-surety is that only a co-surety is entitled to:

a.

Subrogation.

b.

Reimbursement (Indemnification).

c.

Contribution.

d.

Exoneration.

A

Choice “c” is correct. Only a co-surety has the right of contribution against other co-sureties. Contribution results in the sharing of liability on a pro-rata basis among co-sureties.

Choice “b” is incorrect, because reimbursement or indemnification is the right of both a surety and co-sureties to be repaid by the debtor for the surety’s or co-sureties’ payment to the creditor.

Choice “a” is incorrect, because subrogation is the right of both a surety and of the co-sureties, which have paid the creditor, to “stand in the shoes of the creditor” and sue the debtor for payment.

Choice “d” is incorrect, because exoneration is both: (i) the right of a surety (and the right of co-sureties) to bring an action against a debtor who has assets but has failed to pay the creditor and (ii) the right of a co-surety to bring a lawsuit to require the other co-sureties to pay their pro-rata share of the principal’s debt.

27
Q

Which of the following defenses would a surety be able to assert successfully to limit the surety’s liability to a creditor?

a.

A discharge in bankruptcy of the principal debtor.

b.

A personal defense the principal debtor has against the creditor.

c.

The incapacity of the surety.

d.

The incapacity of the principal debtor.

A

Choice “c” is correct. A surety may raise his or her own contract defenses to limit his or her liability; thus, the surety’s own incapacity is a defense to the surety promise.

Choice “a” is incorrect. The debtor’s discharge in bankruptcy is not available as a defense to the surety. A debtor’s possibility of going bankrupt is one of the main reasons that creditors require sureties.

Choice “b” is incorrect. A surety generally cannot raise the debtor’s personal defenses against the creditor.

Choice “d” is incorrect. A surety cannot raise the debtor’s incapacity as a defense against the creditor. A debtor’s infancy or mental incapacity is one of the main reasons why a creditor might require a surety.

28
Q

First State Bank lent Debbie Nepsy $50,000 to purchase securities. Debbie agreed to repay the loan in 20 monthly installments of $2,500. Debbie stopped making payments after paying her first two installments. The bank then began phoning Debbie at all hours of the day and night, asking her to repay the loan, calling her a dead beat, and threatening to have her thrown in jail. Debbie explained that the securities she purchased are now worthless, so she will not repay the loan, and she told the bank to stop calling her. Nevertheless, the bank continued calling. The bank’s actions are in violation of:

a.

None of the answer choices are correct.

b.

The Clayton Act.

c.

The Fair Debt Collection Practices Act.

d.

The Securities Exchange Act of 1934.

A

Explanation

Choice “a” is correct. As will be explained below, the bank’s actions do not appear to violate any of the Acts listed in choices “d”, “c”, or “b”.

Choice “d” is incorrect. The Securities Exchange Act of 1934 regulates many aspects of securities after they are issued but does not apply to the bank’s collection activities here because it does not appear that the bank was involved in the sale of the securities beyond making the loan to Debbie.

Choice “c” is incorrect. The Fair Debt Collection Practices Act prohibits debt collection agencies from conducting such activities with respect to consumer debts, but the Act does not apply to a creditor attempting to collect its own debts.

Choice “b” is incorrect. The Clayton Act is applicable to antitrust matters in business, not to collection activities.

29
Q

Carlos asked Rick and Peter to guarantee Carlos’ debt to Gord Motors. Both Rick and Peter agree to act as sureties. The contract that all parties signed provides that Rick’s maximum liability is $30,000, and Peter’s is $20,000. Carlos owes Gord Motors $20,000 and is in default. Rick pays Gord Motors the entire amount. In the absence of an agreement to the contrary, Rick can recover from Peter:

a.

$8,000.

b.

$20,000.

c.

Nothing.

d.

$12,000.

A

Explanation

Choice “a” is correct. As a general rule each surety is liable to the creditor for the entire amount of the debt. However, with respect to co-sureties, each co-surety can seek contribution from the other co-surety (or co-sureties) to the extent any co-surety pays more than his/her/its pro rata share of the debt. In this case Rick’s pro rata share of the debt is $30,000/($30,000 + $20,000) = 3/5. 3/5 x $20,000 = $12,000. Peter’s pro rata share is $20,000/($30,000 + $20,000) = 2/5. 2/5 x $20,000 = $8,000. Peter owes Rick $8,000 in contribution.

Choices “d”, “b”, and “c” are incorrect, per the above explanation.