Deck 37: Secured Transactions and Suretyship

Question 1

According to the UCC, a computer purchased by a CPA for use in her office will be classified as inventory.

Answer 1

False

Question 2

A security interest is ineffective against the debtor until it "attaches."

Answer 2

True

Question 3

If Sharpe Finance Co. has a secured interest in Jeff's car and Jeff is in default, in most states, Sharpe may take the car from in front of Jeff's house without getting a court order.

Answer 3

True

Question 4

Attachment must occur in order to make a security interest enforceable against the debtor and against third parties.

Question 5

The most common method of perfecting a security interest under Article 9 is filing a completed financing statement.

Question 6

Hank's tractor is collateral for a loan and Hank moves to the next county. In most states, the security instrument must be re-filed in the proper county or it will render the security interest ineffective.

Question 7

Article 9 of the UCC is flexible, simple, and it allows a variety of forms of secured financing.

Question 8

Darlene uses her computer 75 percent of its usage time for her business and 25 percent of its usage time for personal and family purposes. Under Article 9, the computer would be classified as equipment.

Question 9

A bankruptcy trustee may invalidate a granting of a security interest from the debtor if it was made on the date of or within 90 days before the filing of the bankruptcy petition and it was for the benefit of a creditor for an antecedent debt and was made before the debtor became insolvent.

Question 10

A buyer in the ordinary course of business takes collateral (other than farm products) free of any security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence.

Question 11

A debtor need not sign the financing statement.

Question 12

Mary financed her 72" high-definition TV with a bank, but is now delinquent on her payments. The bank holds a security interest in the TV. In most states, when Mary is not at home and without her knowledge, bank personnel may enter Mary's home to repossess the TV.

Question 13

First Finance Company filed its financing statement for a purchase money security interest in Donald's lawn tractor on March 1. Donald purchased the lawn tractor on February 21. If Donald files for bankruptcy on February 28, the trustee will have priority because the bankruptcy petition is filed before the creditor perfects.

Question 14

If the debtor is in default and the secured party wants to repossess the collateral in order to sell it, he must get a court order to do so.

Question 15

A PMSI is created in goods when a seller retains a security interest in the goods sold on credit by a security agreement.

Question 16

Article 9 of the UCC applies to a security interest without consent that arises by operation of law, such as a mechanic's lien.

Question 17

Monica owes a debt to Patricia, and Andrew is a surety for Monica.   If Monica properly tenders full payment and Patricia refuses it, both Monica and Andrew are discharged from the debt.

Question 18

Stanmore Corporation obtains from Southwell Manufacturing a line of credit of $50,000 to help set up a new distribution center.   Stanmore initially uses $17,000 for purchase of inventory. Southwell only has a security interest in the inventory that covers that initial $17,000 advance.

Question 19

The UCC defines a debtor's rights in collateral in Article 9.

Question 20

Perfection is required in order for the secured party to enforce rights against the debtor.

Question 21

The right of exoneration allows the surety to require the principal debtor to pay his obligation to the creditor.

Question 22

Upon the surety's payment of the principal debtor's entire obligation, the surety gets no rights.

Question 23

The promise of a surety is binding even without consideration.

Question 24

Article 9 of the UCC governs financing transactions involving security interests in real property.

Question 25

A security interest in consumer goods is always automatically perfected upon attachment.

Question 26

Possession is available as a means of perfecting a security interest in accounts and letter-of-credit rights.

Question 27

If the main purpose of the promisor (surety) is to obtain an economic benefit that he did not previously enjoy, the promise is not within the statute of frauds.

Question 28

The creditor's rights against the principal debtor are determined by the contract between them.

Question 29

If conflicting security interests and agricultural liens are unperfected, then the first to attach or become effective has priority. If neither attaches or becomes effective, all of the creditors are general, unsecured creditors.

Question 30

A primary reason for requiring a surety is to reduce the creditor's risk of loss.

Question 31

A creditor will have to exhaust all the possible legal procedures to try to collect from the principal debtor before he can collect from a conditional guarantor of collection.

Question 32

In states which have adopted certificate of title statutes for automobiles, trailers, mobile homes, and boats, perfection of a security interest must include both filing of a financing statement and notation on the certificate of title.

Question 33

A car buyer in the ordinary course of business will take free and clear of a security interest created by any person who owned the automobile prior to the dealer.

Question 34

The principal debtor's lack of capacity due to his status as a minor may be used by the surety to avoid payment of the obligation.

Question 35

A security interest in electronic chattel paper is perfected by automatic perfection.

Question 36

Payment of the debt or performance of the obligation discharges both the principal debtor and the surety.

Question 37

The Code's classifications of collateral according to nature are:
(a) goods;
(b) tangibles; and
(c) dispensable paper.

Question 38

A surety may set off his claims against the creditor if the creditor is solvent.

Question 39

A purchaser of a house who buys the property "subject to" the mortgage is not personally liable for the mortgage, nor is he a surety for the mortgage obligation.

Question 40

The surety does not have the right of contribution from cosureties.

Question 41

Two or more sureties bound for the same debt of a principal debtor are known as:

A) absolute sureties.
B) cosureties.
C) conditional guarantors of collection.
D) co-creditors.

Question 42

When Mark bought new office furniture on credit, Bartin's Office Supply Co. filed a financing statement. What would be required on the financing statement?

A) The trade name of Mark's business.
B) Mark's signature.
C) Mark's name and an indication of what collateral is covered by the agreement.
D) All of these would be required.

Question 43

What term is used to describe the creation of a security interest that is enforceable against the debtor?

A) Attachment.
B) Pledge.
C) Perfection.
D) Lien.

Question 44

Which of the following is a type of collateral involving rights evidenced by indispensable paper?

A) A certificated security.
B) An uncertificated security.
C) A security entitlement.
D) All of these are examples of indispensible paper.

Question 45

A tangible or electronic record that evidences both a monetary interest and security interest in or a lease of specific goods is known as:

A) a negotiable instrument.
B) a document of title.
C) a promissory note.
D) chattel paper.

Question 46

Automatic perfection means that:

A) no financing statement need be filed.
B) no agreement need be made between the debtor and the secured party.
C) no value need be advanced.
D) All of these are true about automatic perfection.

Question 47

A bond, which guarantees the performance of the terms of a contract, is a(n):

A) judicial bond.
B) official bond.
C) performance bond.
D) fidelity bond.

Question 48

Bill owns and operates a farm and a farm machinery dealership. Under the Code, a new tractor that Bill uses on his farm is classified as:

A) farm products.
B) inventory.
C) consumer goods.
D) equipment.

Question 49

If Regency Services, Inc. wishes to protect itself against the possible dishonesty of Chad, an employee who will be handling corporate funds, Regency may purchase a(n):

A) performance bond.
B) fidelity bond.
C) judicial bond.
D) official bond.

Question 50

Upon paying the principal debtor's entire obligation, the surety is __________ the rights of the creditor.

A) subject to
B) subrogated to
C) exonerated by
D) set off by

Question 51

If the surety is a(n) ___________, then the creditor may hold the surety liable as soon as the principal debtor defaults.

A) absolute surety
B) conditional surety
C) subrogee
D) mortgagee

Question 52

Bill lends Harvey $1,500 and the loan is secured by Harvey's furniture. If Bill files a financing statement on January 30, 2012 how long will it be effective?

A) Until July 30, 2012.
B) Until January 30, 2017.
C) Until January 30, 2032
D) For 30 days.

Question 53

A security interest:

A) is an interest only in personal property to secure payment or performance of an obligation.
B) is effective against third parties, but not the debtor, when it "attaches."
C) may arise in fixtures under UCC Article 9.
D) in fixtures, even if perfected, will not have priority over a mortgage in the real property to which the goods are attached.

Question 54

The types of indispensable paper include:

A) chattel paper.
B) instruments.
C) documents.
D) All of these.

Question 55

Dr. Wells purchased a refrigerator for use in storing medications at his office. The refrigerator will be classified as:

A) consumer goods.
B) equipment.
C) a fixture.
D) inventory.

Question 56

The right of a surety who has paid the creditor to be repaid by the principal debtor is:

A) exoneration.
B) subrogation.
C) reimbursement.
D) None of these.

Question 57

A defense that can only be asserted by the principal debtor is called a:

A) real defense.
B) subrogated defense.
C) personal defense.
D) joint defense.

Question 58

"Attachment" occurs when a secured party gives value, the debtor has acquired rights in the collateral, and:

A) the debtor has completed his obligation to pay.
B) the collateral is delivered to the borrower.
C) the debtor and secured party have an agreement.
D) the secured party has completed his obligation.

Question 59

Which of the following is true?

A) A security agreement may create or provide for a security interest in property that the debtor presently does not own or have rights to.
B) Obligations covered by a security agreement may not include future advances.
C) Federal regulation allows a credit seller or lender to obtain a nonpossessory security interest in a consumer's household goods, such as furniture, appliances, and clothing, whether as a purchase money security interest or otherwise.
D) Encryption of a record cannot serve as a debtor's authentication of a security agreement.

Question 60

Jill owns and operates a donut shop. Under the Code, the flour, sugar, and other goods used by Jill to make donuts are classified as:

A) farm products.
B) fixtures.
C) consumer goods.
D) inventory.

Question 61

Thomas borrowed $100,000 from First Bank, which asked that he both put up collateral and provide a surety. Consequently Thomas provided the bank with a security interest in his antique car collection and asked Victor to act as a surety. Victor agreed to do so and signed a surety agreement with the bank. Thomas made several payments on the loan and then asked First Bank for permission to sell three of his cars. First Bank agreed, but it never notified Victor of the sale of the collateral. Thomas then defaults on the loan. First Bank now wants Victor to pay the remainder of the loan. Must Victor pay? Explain.

Question 62

Karl loaned Linda $100,000. Madeline agreed to act as surety for $100,000. Nora agreed to act as surety for $75,000 and Orville agreed to act as surety for $25,000. Linda later defaulted on the loan, and Karl is now demanding payment from Nora and Orville. What amount do Nora and Orville have to pay? If Nora and Orville pay, does Madeline have any obligation? Explain.

Question 63

Gary decided to borrow from Jones Bank since it promised that his loan interest rate would be systematically reduced every year when the board met. The loan rate was never reduced, but actually increased monthly. Gary refused to pay the interest demanded and sued for rescission of the contract. The bank attempted to collect from Lewis, a surety under the loan. Does Lewis have to pay?

A) Yes, because there is no defense.
B) No, because a fraud perpetrated upon Gary will be a defense.
C) Yes, since the surety obligation is separate from the underlying contract.
D) No, because the surety stands in the shoes of the debtor for all purposes.

Question 64

"Value" under Article 9 of the UCC is defined as including:

A) consideration under contract law.
B) a binding commitment to extend credit.
C) antecedent debt.
D) All of these.

Question 65

Steve defaults on a car loan secured by his car and guaranteed by both Sam and Dave. Subrogation would allow Sam, who paid Steve's full obligation to:

A) repossess the car.
B) collect from Dave.
C) collect from Steve.
D) All of these.

Question 66

Subrogation includes:

A) creditor's rights against the principal debtor, but not including the creditor's priorities in a bankruptcy proceeding.
B) no rights against cosureties.
C) no rights against co-makers.
D) creditor's rights in security of the principal debtor.

Question 67

Elmer agreed to act as the conditional guarantor of collection on a debt of $50,000 that Fred owed to Gloria. Fred paid Elmer a premium to serve as surety. If Fred defaults on the debt, what are Gloria's rights against Elmer?

Question 68

What party(ies) is/are involved in a suretyship relationship?

A) The principal debtor.
B) An ancillary bailee.
C) Principal bailee.
D) All of these.

Question 69

Mr. Chickilini is a surety for Wayne on a debt owed to Melvin. If Wayne fails to pay, what is Mr. Chickilini's defense to avoid payment of the debt?

Question 70

If the principal debtor defaults, the surety has rights against the principal debtor, third parties, and cosureties. These rights would include:

A) exoneration.
B) reimbursement.
C) subrogation.
D) All of these.

Question 71

Generally, when may a security interest be perfected in collateral?

A) By the secured party's filing a financing statement in the designated public office.
B) By the secured party's taking or retaining possession of the collateral.
C) Automatically, on the attachment of the security interest.
D) All of these, depending on the type of collateral.

Question 72

Every consensual secured transaction involves:

A) a debtor and  a secured party.
B) collateral.
C) a security agreement and a security interest.
D) All of these.

Question 73

What contractual defenses are available to those parties involved in surety relationships?

A) The nonexistence of the principal debtor's obligation.
B) Discharge of the principal debtor's obligation.
C) Modification of the principal debtor's contract.
D) All of these.

Question 74

Diane, who is seventeen years old, purchased an auto from Elvira on credit. Florence agreed to act as surety and signed a written surety agreement. At the time of purchase, Diane specifically asked Elvira about the condition of the car's motor and was told that it had just been replaced with a new one and was in fine condition. This was blatantly untrue, because Elvira knew it was in terrible shape and would only last a short time. The auto has now stopped running and Diane refuses to make any more payments. Elvira is now proceeding against Diane and Florence. What defenses, if any, are available to
(a) Diane and
(b) Florence?

Question 75

Under Article 9 of the UCC, a pledge is:

A) the delivery of personal property to a creditor as security for the payment of a debt.
B) a requirement that the secured party and the debtor agree to certain collateral.
C) an equipment transfer before a forced sale.
D) a form of indispensable paper.

Question 76

A field warehouse, under Article 9 of the UCC, is:

A) one kind of a pledge.
B) a common arrangement for financing inventory.
C) an agreement that allows the debtor access to the pledged goods and simultaneously gives the secured party control over the pledged property.
D) All of these are true of a field warehouse.

Question 77

First Bank loaned $100,000 to Central Office Supply Store to purchase computers for its inventory. Central signed a financing agreement, which First Bank duly filed in the appropriate public office. Lynn came into Central's store and purchased a computer that was subject to the security interest held by First Bank. Assuming that Lynn is a buyer in the ordinary course of business, whose interest in the computer has priority?

Question 78

Under the Code, collateral is classified according to:

A) its nature and use.
B) the fundamental rights of the secured party.
C) the fundamental rights of the debtor.
D) its value.

Question 79

With the exception of pledges, a security agreement must:

A) be in an authenticated record.
B) be signed by the debtor with his personal, not business, name.
C) contain at least a generic description of the collateral, such as "all my personal property."
D) All of these.

Question 80

Assume you are the creditor in each of the following situations. Identify the kind of security agreement that is involved in each transaction and explain how you would perfect that agreement.
a. You are the creditor (Everby Bank), and you lend Brisco Gaines $5,000 for a sound system.
b. First Bank loans Doris $10,000 to purchase inventory for her store.
c. First Bank loans Brad $5,000 to purchase a computer network for use in his store office.
d. Kevin needs cash for gambling debts. He brings in his high-definition TV to secure a $500 loan.