REG Chapter 7

Question 1

Requirements to classify as a negotiable instrument within Article 3

Answer 1

1) be in writing
2) signed by the maker or drawer
3) contain unconditional promise
4) fixed amount of money
5) payable on demand or at a definite time stated on face of document
6) payable to order or bearer, except checks
7) contain no additional instructions not authorized by UCC

Question 2

Defenses against HDC and non HDC transferees

FAIDS

Answer 2

F - fraud in the execution
F - forgery of a necessary signature
A - adjudicated insanity 
A - alteration of the instrument
I - infancy
I - illegality (in exchange to kill someone)
D - duress
D - discharge in bankruptcy
S - statue of limitations has run

Question 3

Types of Endorsement

Answer 3

Blank = instrument is bearer paper and may be further negotiated by delivery without another endorsement

Special = pay a specific person and must be signed and delivered for further negotiation

Restrictive = “For deposit” or “For collection”. It specifies the use or conditions using the instrument. It does not prevent further negotiation.

Qualified = “Without Recourse” and person is skipped if it bounces. So the person has no contractual liability but does have warranty liability.

Question 4

What is a holder in due course?

Answer 4

• Takes instrument for value
• Good faith
• Without notice of any claims or defenses
• Must be negotiable

Question 5

Article 9 - Secured Transactions

Answer 5

Applies to personal property and fixtures while excluding mortgages, wages, and liens.

1. Secured transaction, debtor bought from creditor and gave property as collateral
2. Debtor has the right to repossess the collateral
3. Security interest will be effective as soon as creditor attaches the interest so that creditor could take over collateral if the debtor doesn’t pay
4. Creditor has to perfect interest so he could have priority on the collateral as other parties may claim it as well

Question 6

PMSI (Purchase Money Security Interest) creditors have top priority - why?

Answer 6

They gave you the money to buy the collateral, either the car dealership or a bank gave you the money to buy the car and they will take the car if you do not pay.

They will not be PMSI if they give you money to buy the car but will take something that you already own if you do not pay

Question 7

Requirements in order for a creditor to ATTACH and therefore take over collateral from the debtor

Answer 7

1. Agreement in writing signed by debtor
   OR
   creditor takes possession of the collateral
2. Creditor must give value
3. Debtor must have right to collateral, like own it and have possession

All 3 must be satisfied in order to have attachment

Question 8

Perfection in a collateral - 5 methods

Answer 8

Gives you priority over 3rd parties (attachment is over debtor). Must attach first to then perfect.

1. File financing statement with state where property is and must be signed by debtor, 5 year protection
2. Take tangible possession (pawn shop)
3. Control - get the bond, get the piece of paper and control it
4. Automatic perfection - no additional step, you attach and automatically perfect at the same time and only happens when creditor is PMSI (gave money to buy the collateral) in consumer goods (personal use)
5. Temporary perfection - you are perfected in original collateral (car) and then they trade it in for a boat you will have temporary perfection on the boat for 20 days

Temporarily perfected on new state for 4 months if the collateral moved

Question 9

Article 9 - Who has priority over the collateral?

Answer 9

1. Buyers in ordinary course of business (buy from Macy’s)
2. Perfected PMSI (gave money to buy collateral)
3. Perfected but not PMSI (you didn’t give $ to buy collateral)
4. Unperfected (you only attached)
5. Debtor

Question 10

Types of bankruptcy

Answer 10

Ch 7 Liquidation: trustee appointed
Ch 9 Municipal debt adjustment
Ch 11 Reorganization: hope, business continues
Ch 12 Family farmers
Ch 13 Adjtmt of debt individuals only: bad luck, trustee, must be voluntary
Ch 15 Crossboarder cases

Question 11

Creditor requirement to file involuntary bankruptcy petition

Answer 11

If the company has < 12 creditors, all we need is a creditor to whom they own $15K

If the company has > 12 creditors, we need 3 creditors who are owned an aggregate amount of $15K

Question 12

Prioritize Debt on Bankruptcy Case

SAG - WEG - CTI

Answer 12

S- support to spouse and children
A- admin expenses of bankruptcy proceeding
G- gap creditors

W- wages if earned 6 months before filing ^ to $12K/emp.
E- employee benefit plan contribution up to $12K/emp.
G- grain stuff

C- consumer deposits for goods paid but not delivered
T- taxes
I- injury claims caused by intoxicated driving