Deck 32: Nature of the Debtor-Creditor Relationship

Question 1

Standby letters of credit are used only in international trade situations.

Answer 1

False

Question 2

Letters of credit are a form of advance arrangement for financing.

Answer 2

True

Question 3

The creditor's failure to give the surety notice of default is not a defense.

Answer 3

True

Question 4

A surety that has made payment of a claim for which it was liable as surety is entitled to indemnity from the principal debtor.

Question 5

If a debtor is about to leave the state, the surety may call on the creditor to take action against the debtor.

Question 6

A surety may raise the defense of lack of capacity of parties, absence of consideration, fraud, or mistake.

Question 7

Suretyship is governed by the UCC.

Question 8

When a suretyship or guaranty contract is entered into after and separate from the original transaction, there must be new consideration for the promise of the guarantor.

Question 9

Sound business practice dictates the use of written contracts for both suretyships and indemnities.

Question 10

A surety primarily is liable; ordinarily, a guarantor is only secondarily liable.

Question 11

The creditor first must proceed against the debtor before suing the surety.

Question 12

Sureties have no rights to protect them from loss, to obtain their discharge because of the conduct of others that would be harmful to them, or to recover money that they were required to pay because of the debtor's breach.

Question 13

Suretyship, guaranty, and indemnity contracts all create a relationship by which one party becomes responsible for the debt or undertaking of another party.

Question 14

Suretyship and guaranty transactions have the common feature of a promise to answer for the debt or default of another.

Question 15

In most states, the statute of frauds requires that contracts of guaranty be in writing to be enforceable.

Question 16

If the creditor does not enforce the suretyship agreement within the time limits provided for such contract enforcement in the surety's jurisdiction, the obligation is forever discharged.

Question 17

When a surety pays a claim that it is obligated to pay, it automatically acquires the claim and the rights of the creditor; this is known as subrogation.

Question 18

A surety may be discharged if the creditor substitutes a different debtor.

Question 19

Under an indemnity contract, one person pays another consideration in return for a promise to pay a specified sum of money in the event that a specified loss is suffered.

Question 20

An absolute guaranty creates the same obligation as a suretyship.

Question 21

If there are two or more sureties and one pays more than its proportionate share of the debt, such surety has the right against the cosureties known as:

A)indemnity.
B)exoneration.
C)subrogation.
D)contribution.

Question 22

A letter of credit cannot extend for a period of more than five (5) years.

Question 23

The issuer of a letter of credit must verify that the underlying transaction has been performed.

Question 24

A guaranty of payment creates a(n):

A)contract of surety.
B)contract of credit.
C)letter of credit.
D)absolute guaranty.

Question 25

When a surety pays a debt that it is obligated to pay, it automatically acquires the claim and the rights of the creditor through:

A)assignment.
B)exoneration.
C)subrogation.
D)default.

Question 26

Pasquale and Paul were sureties on the debt of Rose. Each had a $100,000 responsibility. Upon Rose's default, Pasquale paid $50,000 to the creditor. How much may Pasquale recover from Paul under the concept of contribution?

A)zero
B)$50,000
C)$10,000
D)$25,000

Question 27

An issuer has an obligation to honor drafts under a letter of credit if the conditions specified in the letter have been satisfied. This obligation includes the bank's obligation to assure that the goods sold by the seller in fact conform to the contract.

Question 28

Which of the following contract defenses cannot be raised as a defense against suretyship obligations?

A)lack of capacity
B)fraud
C)mistake
D)The surety may raise any defense that a party to an ordinary contract may raise.

Question 29

Consideration is not required to establish or modify a letter of credit.

Question 30

If a guaranty contract is entered into subsequent to the original transaction:

A)permission must be obtained from the state legislature.
B)no new consideration is required.
C)new consideration must be given for the promise of the guarantor.
D)no new consideration is required for the promise of the surety.

Question 31

The issuer of a letter of credit is in effect the obligor on a third-party beneficiary contract made for the benefit of the beneficiary of the letter.

Question 32

Otella borrowed $5,000 from a bank and was behind in her payments. Later, Armand wrote to the bank that Armand would "make good" Otella's obligations if Otella did not pay. Armand's agreement is:

A)binding because it is written.
B)binding because it is supported by consideration.
C)invalid unless Otella also signs Otella's statement.
D)not binding because it is not supported by consideration.

Question 33

Which of the following is correct concerning suretyship and guaranty?

A)Each relationship always creates primary liability.
B)Each involves answering for the debt or default of another.
C)Each relationship of suretyship or guaranty must be in writing to be enforceable.
D)Each relationship always creates secondary liability.

Question 34

An American merchant who buys goods from a French merchant obtains a letter of credit from an American bank. A French bank, upon the request of the American bank, notifies the French seller that the letter of credit has been issued. In this case, the American buyer is the issuer, the American bank is the correspondent bank, and the French bank is the advising bank.

Question 35

In a guaranty contract, the obligor is called a:

A)surety.
B)principal.
C)guarantor.
D)creditor.

Question 36

A letter of credit must be in writing and signed by the issuer.

Question 37

The use of letters of credit arose in international trade.

Question 38

The issuer of a letter of credit can revoke or modify the letter at any time without the consent of the beneficiary, even if that right is not expressly reserved in the letter.

Question 39

The amount of credit specified in a letter of credit must be taken by the beneficiary in the form of a lump-sum payment.

Question 40

A surety that has made payment of a claim for which it was liable as a surety is entitled to which of the following from the principal?

A)indemnity
B)exoneration
C)assignment
D)subrogation

Question 41

Which of the following is not a defense to a surety?

A)fraud practiced by the debtor of which the creditor was unaware
B)lack of consideration
C)lack of capacity on the part of the surety
D)mistake

Question 42

The issuer of a letter of credit:

A)is obligated to honor drafts drawn under the letter if the conditions specified in the letter have been met.
B)has no duty to verify that the papers are properly supported by facts.
C)has no duty to verify that the underlying transaction has been performed.
D)all of the above.

Question 43

An agreement under which one party agrees to pay drafts drawn by a creditor is called a:

A)contract of surety.
B)guaranty contract.
C)letter of credit.
D)debtor's agreement.

Question 44

A letter of credit:

A)can be issued only by an insurance company.
B)may be in either oral or written form.
C)can be issued only by a bank.
D)must be in writing and signed by the issuer.

Question 45

A letter of credit usually sets a:

A)minimum money amount.
B)maximum money amount.
C)$500 money amount.
D)none of the above.

Question 46

If an issuer requests its correspondent bank where the beneficiary is located to notify the beneficiary of the issuance of a letter of credit, the correspondent bank is called a(n):

A)advising bank.
B)foreign bank.
C)consulting bank.
D)coissuer.

Question 47

Bud is unable to obtain a loan without some form of additional reassurances. Bud comes to you for assistance. You are willing to help Bud, but you wish to protect yourself from liability as much as possible. Would you prefer a surety or a guaranty? The bank issuing the loan also wishes to protect itself as much as possible. Would the bank prefer a surety or guaranty? If your oral assurances are enough to solidify the loan, has a surety or guaranty been formed?

Question 48

Deirdre read that bids were being solicited for the construction of an apartment tower. Deirdre submitted the lowest bid and was offered the contract contingent on her providing acceptable sureties in the amount of $1 million. Because Deirdre never had done work on this scale, it was virtually impossible for her to obtain the appropriate sureties. She convinced Reassuring Sureties, Inc. to issue the necessary commitment by misrepresenting that she was a famous builder in Canada. As the work progressed, it seemed to be going well and Deirdre was asked to make the project 52 stories instead of 50 stories, which was the original contract height. She agreed to this change.
After the work was completed, many breaches of contract on the part of Deirdre became evident. Reassuring Sureties was sued for a $500,000 loss. Reassuring Sureties defended on the grounds of fraud and material change in the contract. Decide.

Question 49

Typically, there are how many parties to a letter of credit?

A)two (2)
B)three (3)
C)four (4)
D)five (5)

Question 50

Which of the following is not a suretyship defense?

A)invalidity of the original obligation
B)principal discharged the obligation by payment
C)original contract between debtor and creditor was modified without surety's permission
D)reimbursement

Question 51

Howard bought goods from Williams. Howard sent Williams a draft covered by a letter of credit issued by First National Bank. Is the bank required to investigate to determine whether the goods sent by Williams conform to the contract?

Question 52

If the issuer of a letter of credit dishonors a draft without justification, it is liable to its customer for:

A)fiduciary default.
B)breach of contract.
C)fiduciary peril.
D)monetary malfeasance.

Question 53

A letter of credit:

A)is an advance arrangement for financing.
B)is used only in domestic sales.
C)is used only in international trade.
D)involves only two parties.