REG: Diag Assessment: 5/4/2018 Flashcards
Ames Construction Co. contracted to build a warehouse for White Corp. The construction specifications required Ames to use Ace lighting fixtures. Inadvertently, Ames installed Perfection lighting fixtures, which are of slightly lesser quality than Ace fixtures, but in all other respects meet White’s needs. Which of the following statements is correct?
1) White’s recovery will be limited to monetary damages because Ames’ breach of the construction contract was not material.
2) White will not be able to recover any damages from Ames because the breach was inadvertent.
3) Ames did not breach the construction contract because the Perfection fixtures were substantially as good as the Ace fixtures.
4) Ames must install Ace fixtures or White will not be obligated to accept the warehouse.
White’s recovery will be limited to monetary damages because Ames’ breach of the construction contract was not material.
Only in the event of a material, or substantial, breach can a party to a contract receive the full array of remedies available by law or contract. This breach is not material, because the fixtures were of only “slightly lesser quality” and “meet White’s needs.” Thus, White’s recovery will be limited to the difference in value between the Perfection and Ace fixtures. Had the breach been material, White would have had the right to demand that the fixtures be replaced with Ace fixtures.
A party contracts to act as a surety for the collection of the debts of another.
As a result of the suretyship agreement, which of the following statements is correct?
1) The creditor may proceed against the surety without attempting to collect from the debtor.
2) The surety agreement must be in writing.
3) The surety may use any defenses available to the debtor.
4) The creditor must be notified of the debtor’s default by the surety.
The surety agreement must be in writing.
The Statute of Frauds requires a suretyship contract to be in writing unless the surety financially or economically benefits from making the surety agreement.
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?
1) Quill will be liable for 50% of the loan balance.
2) Quill will be liable for the entire loan balance.
3) Ingot’s release of West will have no effect on Flange’s and Quill’s liability to Ingot.
4) Flange will be released for 50% of the loan balance.
Quill will be liable for 50% of the loan balance.
Co-sureties have rights against each other in the event that they are forced to pay more than their fair share. Here, Quill and West are equal co-sureties, because they are responsible for the same amount ($100,000). If Quill is initially forced by Ingot to pay the entire amount, it may, in a separate lawsuit, seek 50% of what it paid from West. Since West’s release was not consented to by Quill, Quill retains its right of contribution against West.
Under the Secured Transactions Article of the UCC, which of the following statements is correct regarding a security interest that has not attached?
1) It is effective against the debtor, but not against third parties.
2) It is effective against both the debtor and third parties.
3) It is effective against third parties with unsecured claims.
4) It is not effective against either the debtor or third parties
It is not effective against either the debtor or third parties
For a security interest to attach, the following must be present:
Underlying debt/obligation;
Either a security agreement or possession of the collateral by the creditor; and
Debtor must have interest in the property.
Until all three are present, the security interest does not attach.
Under the Secured Transactions Article of the UCC, which of the following security agreements does NOT need to be in writing to be enforceable?
1) A security agreement collateralizing a debt of LESS than $500.
2) A security agreement where the collateral is highly perishable or subject to wide price fluctuations.
3) A security agreement where the collateral is in the possession of the secured party.
4) A security agreement involving a purchase money security interest.
A security agreement where the collateral is in the possession of the secured party
Possession is nine tenths of the law, and under Article 9, possession is the security interest as well as perfection.
Under the Secured Transactions Article of the UCC, which of the following items can usually be excluded from a filed original financing statement?
1) The name of the debtor.
2) The address of the debtor.
3) A description of the collateral.
4) The amount of the obligation secured.
The amount of the obligation secured.
There need not be the amount of the debt reflected in the publicly filed financing statement. All that needs to be included is which collateral is subject to the security interest, not the value of the collateral or the debt.
Which of the following requires a filing for perfection?
1) A purchase money security interest in consumer goods.
2) A purchase money security interest in equipment.
3) A security interest in negotiable promissory notes.
4) None of the above.
A purchase money security interest in equipment
Here, possession as a method of perfection is not practical, and, although it is a purchase money security interest, the collateral equipment is not covered by the automatic perfection rule. Thus, a filing is required.
On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators. This comprised Ace’s entire inventory and was financed under an agreement with Rome Bank that gave Rome a security interest in all refrigerators on Ace’s premises, all future acquired refrigerators, and the proceeds of sales. On July 12, Rome filed a financing statement that adequately identified the collateral. On August 15, Ace sold one refrigerator to Cray for personal use and four refrigerators to Zone Co. for its business.
Which of the following statements is correct?
1) The refrigerators sold to Zone will be subject to Rome’s security interest.
2) The refrigerator sold to Cray will not be subject to Rome’s security interest.
3) The security interest does not include the proceeds from the sale of the refrigerators to Zone.
4) The security interest may not cover after-acquired property even if the parties agree.
The refrigerator sold to Cray will not be subject to Rome’s security interest.
Even though the interest is perfected, Cray still gets to keep the refrigerator. A buyer in the ordinary course of business takes goods free from a security interest, even if the buyer has knowledge of the security agreement.
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.
1) I only.
2) II only.
3) Both I and II.
4) Neither I nor II.
II only.
Exemption statutes never apply to all personal property. They may exempt selected items, such as a computer, clothes, bibles, trade equipment, and furniture. A creditor cannot seize any and every asset to satisfy a debt. Social Security benefits are exempt from garnishment.
Green is heavily in debt to numerous creditors. Green does have some assets, including an antique car that he drives in parades and to other functions. Green is looking for a method that will allow him to get out of debt without going into bankruptcy, and will allow him to continue to drive his antique car. Green sells the antique car to a friend living in another city at a price estimated at 70% of the car’s actual value. The friend has agreed to allow Green to keep the car and use it as before the sale. Green then gets all other creditors, except Sharp, to sign an agreement that, upon selling all of his remaining non-exempt assets, and with an appropriate division of proceeds, they would release him from his debts. Which of the following is correct?
1) Since the vast majority of creditors signed the Composition of Creditor’s Agreement, Sharp is also bound by the agreement.
2) The above agreement is called an Assignment for the Benefit of Creditors.
3) If Sharp cannot prove the transfer of the antique car as fraud-in-fact, Sharp has virtually no remedy available.
4) Sharp can pursue an action based on fraud-in-law to set aside the sale to Green’s friend.
Sharp can pursue an action based on fraud-in-law to set aside the sale to Green’s friend.
Since Sharp did not sign the Agreement, he is not bound by it. To be an assignment for the benefit of creditors, Green would have to voluntarily transfer certain assets to a trustee or an assignee who, in turn, offers each creditor a pro rata payment. This not only did not happen, but the Agreement assured him that almost all of his debts would be cancelled. Although there may be fraud-in-fact on the sale of the antique car, it will be difficult to prove, since there was a substantial payment (70% of the car’s estimated value) to a non-relative. What Sharp can prove is fraud-in-law, whereby, despite the sale, Green was allowed to possess and use the car as if the sale never took place. This gives Sharp the basis for an action of fraud-in-law; a presumption of fraud, which it is doubtful Green can rebut.
On August 1, 2004, Hall files a voluntary petition under Chapter 7 of the Federal Bankruptcy Code.
Hall’s assets are sufficient to pay general creditors 40% of their claims.
The following transactions occurred before the filing:
- On May 15, 2004, Hall gave a mortgage on Hall’s home to National Bank to secure payment of a loan National had given Hall two years earlier. When the loan was made, Hall’s twin was a National employee.
- On June 1, 2004, Hall purchased a boat from Olsen for $10,000 cash.
- On July 1, 2004, Hall paid off an outstanding credit card balance of $500. The original debt had been $2,500.
The National mortgage was
1) Preferential, because National would be considered an insider.
2) Preferential, because the mortgage was given to secure an antecedent debt.
3) Not preferential, because Hall is presumed insolvent when the mortgage was given.
4) Not preferential, because the mortgage was a security interest.
Preferential, because the mortgage was given to secure an antecedent debt.
A debtor who declares bankruptcy may not give one creditor better treatment than others. Any payment or security interest made to a particular creditor within 90 days of declaring bankruptcy is a preferential payment if the payment is made on an antecedent debt.
An antecedent debt is one that existed at the time bankruptcy was declared.
The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code
1) Terminates liens on exempt property.
2) Terminates all security interests in property in the bankruptcy estate.
3) Stops the debtor from incurring new debts.
4) Stops the enforcement of judgment liens against property in the bankruptcy estate.
Stops the enforcement of judgment liens against property in the bankruptcy estate
Once a bankruptcy petition is filed, the enforcement of any lien against this property is stopped pending a resolution through bankruptcy proceedings.
Which of the following acts by a debtor could result in a bankruptcy court revoking the debtor’s discharge?
I. Failure to list one creditor.
II. Failure to answer correctly material questions on the bankruptcy petition.
1) I only.
2) II only.
3) Both I and II.
4) Neither I nor II.
II only.
A discharge is usually final. It will be revoked only if later evidence suggests that the debtor acted fraudulently or intentionally misled the bankruptcy court. Failure to list one creditor is probably not a fraudulent action, particularly if there are many creditors. Failing to answer important questions honestly and accurately may well indicate fraud.
On May 24, Knurl, an appliance dealer, files for bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code. A trustee is appointed and an order for relief is entered.
Knurl’s non-exempt property is converted to cash, which is available to satisfy the following claims and expenses:
Claim by Card Corp. (one of Knurl’s suppliers) for toasters ordered on May 11, and delivered on credit to Knurl on May 15. $50,000
Fee earned by the bankruptcy trustee. $12,000
Claim by Hill Co. for the delivery of televisions to Knurl on credit. The televisions were delivered on April 9, and a financing statement was properly filed on April 10. These televisions were sold by the trustee, with Hill’s consent, for $7,000, their fair market value. $7,000
Fees earned by the attorneys for the bankruptcy estate. $8,000
The cash available for distribution includes the proceeds from the sale of the televisions. What amount will be distributed to Card if the cash available for distribution is $50,000?
1) $23,000
2) $30,000
3) $31,000
4) $43,000
$23,000
All three of the other claims have a higher priority than the claim of Card. Card is a general creditor and comes last in the pecking order. All superior claims must be paid in full first, and then any leftovers will be paid to Card.
After $50,000 - $12,000 - $7,000 - $8,000, Card will receive only $23,000.
