REG 7 BK Flashcards
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If holder of a negotiable instrument is not an HDC, what defenses can be asserted by an obligor?
Any defense that can be asserted in a simple contract action (failure of consideration, fraud, nonperformance of conditions, etc.).
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If the holder of a negotiable instrument has the rights of an HDC, what defenses can the obligor assert?
Only “real defenses,” which is anything in the “FAIDS” mnemonic— Forgery, Fraud in the execution, Alteration, Adjudicated Insanity, Infancy, Illegality, Duress, Discharge in bankruptcy, Suretyship if status known, Statute of limitations.
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Is failure of consideration a defense against an HDC?
No. This is a “personal defense” that can only be asserted against a non-HDC.
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Is giving a party an instrument with the amount left blank a defense against an HDC?
No. A material alteration of the amount is a defense against an HDC, but leaving the amount blank is only a personal defense. Even though it is blank, the idea is that a later holder would fill in an amount. An HDC is allowed to do this. It’s his note, and he can have someone else fill in an amount if he wants.
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Who is secondarily liable on a check?
The drawer.
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How can a drawee become primarily liable on a check?
By signing it or by certifying it. Certification of a check by a bank discharges all prior parties.
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When can a trustee be appointed in a Chp. 11 case?
On a showing of fraud, dishonesty, etc.
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What is the order of priority of priority claimants for bankruptcy?
SAGWEGCTI— Support obligations, admin expenses for bk, gap creditors, wage expenses up to $12,000 per employee if earned within 180 days of filing, employee benefit plan contributions up to $12,000 per employee if earned within 180 days of filing, grain farmers and fishermen claims up to $6,000, consumer deposits for goods paid for but not delivered up to $2,000, taxes, injuries claims caused by driving intoxicated.
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What is the order of distribution of the debtor’s estate (the 3 main claimants)?
- Secured creditors 2. Priority claimants 3. Unsecured creditors
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Debts that are exceptions to BK discharge?
“WAFTED”– willful and malicious injury, alimony, fraud, taxes, educational loans, debts undisclosed in BK petition
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In what Chapters of BK is a trustee appointed? Why only with these chapters?
Chapter 7 and Chapter 13. The reason is because these chapters of bk involve liquidation of a debtor’s assets. Also, in Chapter 11, normally suffering businesses file for this chapter. Thus, the debtor remains in possession of the assets because they are presumed to be in the best position to run the business.
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What is a “preference” that the trustee can set aside?
It is a transfer made to or for the benefit of a creditor, on account of an antecedent debt, made within 90 days prior to filing the petition, that results in the creditor receiving more than they would have under BK code.
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Why do preferential transfers occur in BK cases?
These tend to occur because the creditor may be a family member or a business partner, etc.
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What is a fraudulent transfer in a BK case?
Any transfer made with the intent to hinder, delay or defraud creditors or any transfer where the debtor received less than equivalent value while the debtor was insolvent.
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Why would a debtor sell an asset for a low amount while they are insolvent?
He would sell low and buy it back in an underhanded agreement to make it look like he has less property for the bk proceeding. That way he gets to keep the asset and it doesn’t get sold in the BK proceeding.
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What property that the debtor receives after filing the BK petition is included in his estate?
“DII”– property received from divorce, inheritance, or insurance within 180 days after filing the petition.
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To what do the creditor minimums and $15,325 rules regarding BK’s apply to?
Involuntary petitions only
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Describe Chapter 13 BK.
Debtor repays all or a portion of his debts over a 3-5 year period. Remaining debts are discharged.
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Describe Chapter 11 BK.
The debtor remains in possession of his assets and adopts a plan to pay off his debts at a different time and/or at a different amount.
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General rule for retention of collateral in satisfaction of debt? Exception?
GR: Yes, it’s fine. The exception is with consumer goods where the debtor has paid off at least 60% of the loan. In this case, the creditor must sell the collateral within 90 days after repossession.
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What is the reason behind the exception for the rule regarding retention of collateral in satisfaction of debt?
The debtor may have built up some equity in the property, and could be entitled to surplus that can only be paid to him if collateral is sold.
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With a sale of collateral, what right of redemption do the debtor and subordinate security holders have?
None.
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When does a PMSI in noninventory collateral have priority over other perfected security interests?
When they file within 20 days of the debtor receiving possession of the collateral.
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How does a PMSI work with inventory?
There is no 20 day grace period. To have priority, it must be perfected before the debtor gets possession and notice must be given to the other perfected parties in the same collateral.
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If a secured party filed a financing statement, does the “garage sale” rule apply for a secondhand buyer?
No, because if the secured party filed, the secondhand purchaser had notice of the automatically perfected PMSI, so the secured party can repossess.
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What is the “garage sale” rule?
A secondhand purchaser of consumer goods takes them free of an automatically perfected PMSI, as long as they didn’t know of the original security interest.
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What leads to automatic perfection?
A PMSI in consumer goods or a small scale assignment of A/R
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What is an analogy for perfection by taking possession?
A pawn shop takes an item in exchange for a loan of money.
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For how long is a filed financing statement good for?
5 years
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What must be included in a filed financing statement?
The name and mailing address of the debtor and the secured party and an indication of the collateral covered by the financing statement.
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When do attachment and perfection occur at the same time?
When the creditor takes possession of the collateral.
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Who must sign a security agreement?
The debtor only.
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Is a financing statement required for attachment?
No. A financing statement is only required for perfection.
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Define consumer goods.
Goods that are used for personal purposes/goods for personal use.
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Define inventory.
Goods held for sale or lease.
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Define equipment.
Goods used primarily in a business that don’t fit into the inventory or consumer goods categories.
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What is a PMSI?
There are 2 types of PMSI’s. One is where a creditor sells collateral to a debtor on credit, retaining a security interest for the purchase price. The other is where the creditor advances funds used by the debtor to purchase collateral. Just ask yourself, did the debtor obtain the collateral with the creditor’s $ or the creditor’s credit? In either case, a PMSI is formed.
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When does forgery pass good title?
- If the maker/drawer issues an instrument to an impostor. 2. If a corporation makes a check out to a fictitious payee/employee. GR: Whoever’s negligent is liable.
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What are the requirements to be a holder of order paper?
Possession and endorsement.
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What is a qualified endorsement?
One made without recourse.
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What are the requirements for an instrument to be negotiable?
“SWFDUO”—signed by maker or drawer, in writing, for fixed amount of money, payable at definite time or on demand, unconditional promise to pay, payable to order or bearer
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What is a time draft?
Commercial paper payable at a future specified date.
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What is a trade acceptance?
A type of draft.
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What is included in Article 3? What is not included in Article 3?
Included— any note or draft. Not included– stocks, bonds, warehouse receipts, etc.
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When is a security agreement enforceable?
When it attaches.
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Requirements for attachment?
A security agreement or creditor takes possession of collateral, value given, and debtor has rights in collateral.
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What is the order of priorities in collateral?
- Buyer in the ordinary course of business 2. Perfected PMSI 3. Perfected security interest 4. Unperfected security interest 5. Debtor
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When is specific performance available as a remedy?
When goods are unique or buyer can’t reasonably cover (ie replace).
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Who needs to sign a financing statement?
Neither creditor nor debtor.
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How long is an oral stop payment order good for? How about a written stop payment order?
Oral–14 days. Written– 6 months.
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How do you become an HDC?
Take an instrument for value, in good faith, with no knowledge of any defenses. The instrument must be negotiable.
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What is the effect of a sale of collateral?
It wipes out all rights of redemption and all subordinate claims.
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Can Chapter 13 be involuntary?
No. It can only be voluntary.
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What is Chp 9 BK for?
Municipal debt adjustment.
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Who must join petition in involuntary BK?
<12 creditors—-one or more who is owed $15,000+, if 12+ creditors, at least 3 of them who are owed $15,000+ in aggregate.
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For Chp. 11, do you need unanimous acceptance of a plan by the stockholders/creditors?
No—only 2/3 of them must accept.
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Who may not file for BK under Chapter 7?
“RIBS”– Railroads, Insurance Companies, Banks, and Savings Institutions
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What is the order of proceed distribution in a default sale?
1) Pay expenses of rep & sale 2) Pay creditors who have a security interest 3) surplus paid to debtor
