REG Lecture 7

Question 1

What are the attributes of a draft under Article 3?

Answer 1

A draft is three-party commercial paper. It is an order by one person (the drawer) to another person (the drawee–usually a merchant or a bank) demanding that the drawee pay money to a third person (the payee).

Question 2

What distinguished a check from other drafts under Article 3?

Answer 2

A check is a draft (i.e., negotiable three-party paper) drawn on a bank and payable on demand.

Question 3

How does the UCC define a negotiable instrument?

Answer 3

An instrument:

1. in writing;
2. signed by the maker (note) or drawer (draft);
3. containing an unconditional promise (note) or order to pay (draft);
4. a fixed amount of money;
5. on demand or at a definite time;
6. containing no other promise or undertaking not authorized by the UCC; and
7. payable to order or bearer, with the exception of checks.

Question 4

If bearer paper is negotiated by delivery alone, how is order paper negotiated?

Answer 4

By delivery and proper endorsement.

Question 5

Once signed (endorsed) in blank, the negotiable instrument turns into:

Answer 5

Bearer paper, negotiable by delivery alone.

Question 6

Once an instrument is issued as bearer paper, will it always remain bearer paper?

Answer 6

Not necessarily. The last endorsement controls. If the last endorsement is blank, the instrument is bearer paper. If the last endorsement names a new payee (a “special” endorsement), the instrument is an order instrument.

Question 7

What is a qualified endorsement?

Answer 7

A qualified endorsement includes the words “with recourse.” This releases the endorser from contract liability (no guarantee of payment), but the endorser may still be liable if the endorser breaches any warranties.

Question 8

How does the UCC define a holder in due course?

Answer 8

A holder in due course is a holder (i.e., a person in possession of the instrument with good title to it) who takes the negotiable instrument:

1. for value;
2. in good faith; and
3. without notice that is it overdue or has been dishonored or of any defense against or claim to it on the part of any person.

Question 9

Describe the shelter doctrine.

Answer 9

A transferee takes whatever rights his or her transferor had. As a consequence, most subsequent transferees of an HDC can “succeed to” or “take shelter in” the rights of the HDC.

Question 10

What defenses may be asserted against a holder in due course (as well as a non-holder in due course transferee)?

Answer 10

[FAIDS]

• *F**orgery
• *A**djudicated insanity
• *I**ncapacity to contract (infancy)
• *D**uress
• *S**tatute of limitations
• *F**raud in the execution
• *A**lteration (material) of instrument
• *I**llegality
• *D**ischarge in bankruptcy
• *S**uretyship and other discharges known to the HDC

Question 11

Name some defenses that cannot successfully be asserted against a holder in due course.

Answer 11

• Lack of consideration
• Failure of consideration
• Theft of an instrument after it was signed by the maker or drawer
• Breach of warranty or breach of contract
• Failure of a condition precedent
• Mistake
• Unconscionability
• Impossibility
• Unauthorized completion
• Fraud in the inducement

Question 12

What is a purchase money security interest?

Answer 12

A PMSI is a security that can have super priority. It arises when:

• A creditor sells the collateral to the debtor on credit and retains a security interest in the collateral for the price, or
• The creditor advances funds that are used by the debtor to purchase the collateral and retains a security interest in the collateral for the price.

Question 13

What are the three requisites for attachment of a security interest?

Answer 13

• An agreement to create a security interest evidence by either:
  
  • an authenticated record of the security agreement (e.g., a signed, written security agreement or an authenticated electronic file containing the agreement), or
  • the creditor’s taking possession of the collateral.
• The secured party must give value for the security interest.
• The debtor must have right in the collateral.

Question 14

What are the five ways to perfect a security interest?

Answer 14

• File a financing statement
• Possession of collateral
• Automatic perfection upon attachment with a PMSI in consumer goods and small-scale assignment of accounts
• Control
• Temporary

Question 15

Under the Secured Transactions Article (Article 9), what is the order of priority in collateral when the debtor defaults?

Answer 15

• Buyer in the ordinary course of business
• Perfected PMSI holder
• Perfected secured creditor (Non-PMSI holder)
• Unperfected secured creditor
• Debtor

Question 16

What advantage does the holder of an automatically perfected PMSI in consumer goods gain by filing?

Answer 16

If a PMSI in consumer goods is filed, it takes priority over a consumer who buys the collateral from the debtor in a “garage sale” or “second-hand” purchase. Absent filing, the garage sale/second-hand purchaser would not be subject to the automatically perfected PMSI.

Question 17

What is the difference in filing requirements to perfect a purchase money security interest in inventory as compared to noninventory (equipment)?

Answer 17

A PMSI in inventory must be filed before the debtor received possession of the collateral and holders of prior perfected security interests in the inventory must be given notice before the debtor receives the collateral. A PMSI in noninventory may be perfected by filing up to 20 days after the debtor receives possession of the collateral and there is no special notice requirement.

Question 18

What is the rule for determining which creditor has priority when two creditors have perfected security interests in the same collateral?

Answer 18

The first secured creditor to either file or perfect has priority. Dates of attachment are irrelevant.

Question 19

What is the effect of the sale of collateral to a good faith purchaser at a default sale?

Answer 19

The sale discharges the security interest in the collateral and all subordinate liens.

Question 20

What are a secured party’s basic rights after a debtor defaults on the secured obligation?

Answer 20

• Take possession of the collateral through self-help if this can be done without breach of the peace, and sell or keep the collateral to satisfy the secured obligation.
• If the collateral is an account, notify the account debtor to pay the secured party.
• Bring a judicial action to replevy the collateral.
• Bring an ordinary judicial action to enforce the obligation.

Question 21

Under the federal Bankruptcy Code, is a trustee required for Chapter 7, Chapter 11, and Chapter 13?

Answer 21

A trustee is required for Chapter 7 and Chapter 13.

A trustee is not required for Chapter 11.

Question 22

What two groups may file voluntary bankruptcy, but may not be subject of involuntary bankruptcy?

Answer 22

• Farmers
• Nonprofit charitable organizations

Question 23

How many creditors must join in filing a petition to commence an involuntary bankruptcy case:

–if the debtor has 12 or more creditors?

–if the debtor has fewer than 12 creditors?

Answer 23

If the debtor has 12 or more creditors, at least three creditors with aggregate unsecured claims of at least $15,325 must join in petition.

If the debtor has fewer than 12 creditors, any one creditor with an unsecured claim of at least $15,325 may file the petition alone.

Question 24

What is the automatic stay?

Answer 24

Automatic stay:

• When bankruptcy proceedings commence, a creditor may not pursue remedies against the debtor or his assets.
• The automatic stay goes into effect the moment a bankruptcy petition is filed.

Question 25

Under the federal Bankruptcy Code, what elements are necessary to establish a preferential payment?

Answer 25

A preferential payment is:

• A transfer made to or for the benefit of the creditor;
• On account of an antecedent debt of the debtor;
• Made within 90 days prior to filing (one year if the creditor is an insider, such as an officer of the debtor organization or a close relative of the debtor);
• Made while the debtor was insolvent; and
• Results in the creditor receiving more than the creditor would have received under the Bankruptcy Code.

Question 26

List at least six grounds for denial of discharge.

Answer 26

• Debtor not individual
• Fraudulent transfers or concealment of property
• Failure to keep books and records
• Commission of bankruptcy crime
• Failure to explain loss of assets
• Refusal to obey orders or answer questions
• Improper conduct in an insider’s case
• Prior discharge within eight years
• Individual debtor’s failure to complete financial management course
• Waiver

Question 27

List at least six exceptions to discharge.

Answer 27

1. Taxes due within three years of filing
2. Debts incurred by fraud
3. Debts related to luxury goods
4. Open-ended credit debts of consumers
5. Debts undisclosed in bankruptcy petition
6. Debts from embezzlement, larceny, and fiducary’s fraud
7. Alimony, maintenance, support
8. Debts from willful or malicious injury
9. Debts from DWI
10. Debts that are government fines and penalties
11. Debts from eduation loans
12. Debts denied discharge in a prior bankruptcy
13. Debts incurred to pay taxes
14. Debts incurred due to violations of securities laws
15. Condo, co-op, and homeowners’ association fees
16. Restitution for federal crimes
17. Prisoner’s court fees
18. Fines for federal election law violations
19. Debt owed to pension or profit-sharing plan

Question 28

What is the hierarchy for paying unsecured priority claims in a bankruptcy proceeding?

Answer 28

Secured creditors then SAG-WEG-CTI:

S = Support obligations to spouse and children

A = Bankrupcy administration expenses

G = Gap creditors

W = Wages up to $12,475 if earned with 180 days

E = Employee benefit plan payments up to $12,475 (reduced by wage claims) if earned within 180 days

G = Grain farmers’ and fishermen’s claims against storage/processing facilites up to $6,150

C = Consumer deposits

T = Taxes

I = Injuries caused by intoxicated driving

Question 29

In a Chaper 11 reorganization, is a trustee usually appointed?

Answer 29

A trustee usually is not appointed in a Chapter 11 case; the debtor usually remains in possession of the estate’s assets.

Question 30

The order for prelimiary releif is the principal door to bankruptcy proceedings for a foreign debtor. True or false?

Answer 30

False. The main door is a petition for recognition, which is filed by the foreign representative.