Deck 23: Debtor-Creditor Relations and Bankruptcy.

Question 1

A commitment fee is an amount a lender requires as consideration for its promise to keep a commitment to loan available.

Answer 1

True

Question 2

A purchase money security interest in consumer goods is an automatically perfected security interest.

Answer 2

True

Question 3

In CASE 23.2Executive Benefits Insurance Agency v.Arkinson(2014)the U.S.SupremeCourt ruled that some claims Congress labeled as "core" (so-called Stern claims)cannot be adjudicated by a bankruptcy court even if all the parties consent to the bankruptcy court's jurisdiction in advance.

Answer 3

True

Question 4

A purchase-money security interest in consumer goods is automatically perfected.

Question 5

Chapter 13 does not provide a bankruptcy discharge for corporations.

Question 6

The debtor-in-possession must honor all prebankruptcy executory contracts.

Question 7

After-acquired property is property that the debtor acquires after the repayment of a loan under a security agreement.

Question 8

A debtor does not have to show it is insolvent to file for bankruptcy.

Question 9

A revolving loan is based upon the continuous extension of credit of an unlimited amount.

Question 10

Under a guaranty of collection,the guarantor becomes obliged to pay only after the lender has attempted unsuccessfully to collect the amount due from the primary debtor.

Question 11

Agreements for term or revolving loans may call for mandatory prepayment when certain events occur.

Question 12

National banks acting as lenders are subject to state usury laws.

Question 13

In order to reflect the greater risk to the lender,secured loans are priced at a higher rate than unsecured loans.

Question 14

Commercial paper is a term that describes short-term corporate indebtedness.

Question 15

Payments in the ordinary course of business made within 90 days prior to a Chapter 11 bankruptcy filing are voidable as a preference.

Question 16

A creditor's claim in bankruptcy may be involuntarily postponed through application of the doctrine of equitable subordination.

Question 17

If a borrower fails to repay a secured loan,the lender may foreclose on the collateral.

Question 18

The UCC requires that a precise form be followed in order to create a security interest.

Question 19

A repayment plan under a Chapter 11 bankruptcy must either be accepted unanimously or pass the "best interests of creditors" test.

Question 20

The UCC provides that,unless otherwise agreed,a security agreement gives the secured party a security interest in the proceeds if collateral is sold,exchanged,collected,or otherwise disposed of.

Question 21

A(n)__________ clause in a loan document provides that any breach by the borrower under any other loan agreement constitutes an event of default.

A) attached
B) dragnet
C) cross-default
D) cross collateralization

Question 22

__________ a security interest involves making it valid as against other creditors of the debtor.

A) Finalizing
B) Perfecting
C) Organizing
D) Signing

Question 23

A provision in a loan agreement that the borrower cannot incur additional debt beyond a certain amount is an example of a(n)__________ covenant.

A) absolute
B) prohibitive
C) negative
D) affirmative

Question 24

A number of states have enacted legislation providing that loan commitments must be in writing to be enforceable.

Question 25

In a(n)__________ loan,more than one lender enters into concurrent direct obligations with the borrower to make the loan.

A) participation
B) term sheet
C) syndicated
D) illegal

Question 26

Requirements that must be met under the loan agreement before the lender's obligations arise are known as:

A) conditions precedent.
B) conditions concurrent.
C) conditions subsequent.
D) loan qualifiers.

Question 27

Which of the following makes a security interest created under Article 9 a floating lien?

A) The provision that, unless otherwise agreed, a security agreement gives the secured party a security interest in the proceeds if the collateral is sold, exchanged, collected, or otherwise disposed of.
B) The provision that, unless otherwise agreed, a security agreement fails to give the secured party a security interest in the proceeds if the collateral is sold, exchanged, collected, or otherwise disposed of.
C) The provision that, unless otherwise agreed, interest rates will vary depending on the prime rate of interest.
D) The provision that, unless otherwise agreed, the parties will not sell, exchange, collect, or otherwise dispose of property and that if such an action is taken, all sums owed become immediately due.

Question 28

In CASE 23.1Tufankujian v.Rockland Trust Co.(2003)Tufankujian signed a contract to acquire a Toyota dealership for $1.4 million.Rockland agreed to lend Tufankujian $700,000 at 7.5% interest,with the remaining $700,000 to come from the SBA at a separate interest rate which was quoted by Rockland at 6.5% (but with no written guaranty).Ultimately,the loan was not consummated and Tufankujian sued.How did the court rule?

A) The court dismissed Tufankujian's claims.
B) The court heldTufankujianbreached his duty of good faith and fair dealing and awarded damages toRockland.
C) The court heldRockland had committed fraud but only awarded Tufankujian nominal damages of $1.
D) The court heldRockland breached its duty of good faith and fair dealing and awarded damages toTufankujian.

Question 29

Which of the following is NOT true regarding methods of perfection?

A) A security interest in a deposit account may be perfected only by taking control of the collateral.
B) A security interest in a letter-of-credit right may be perfected only by taking control of the collateral.
C) A security interest in money may be perfected either through possession or through filing a financing statement.
D) For a limited period, a purchase-money security interest in consumer goods is automatically perfected.

Question 30

A __________ interest rate fluctuates throughout the life of the loan according to the interest rate that the lender would pay if it borrowed the funds in order to relend them.

A) fixed
B) principal
C) base
D) floating

Question 31

Congress is given the power to enact bankruptcy laws by:

A) a delegation of authority by the President.
B) the U.S.Constitution.
C) rulings of the Supreme Court.
D) inherent powers under federalism.

Question 32

A loan agreement may be preceded by a(n)__________ which is a letter outlining the terms and conditions on which the lender will lend.

A) term sheet
B) advance notification
C) contract addendum
D) attachment

Question 33

A(n)__________ loan is one in which the original lender sells shares to other parties.

A) master
B) syndicated
C) participation
D) attached

Question 34

An equipment lease that serves the purpose of financing is known as a(n)__________ lease.

A) finance
B) temporary
C) lending
D) debtor's

Question 35

Which of the following is NOT true regarding remedies for default of a security agreement?

A) After default, the secured party has the right to take possession of the collateral so long as judicial process is followed.
B) After properly taking possession of the property, the secured party may then dispose of the collateral at a public or private sale.
C) If there is a surplus from the sale of collateral, the secured parry is required to return it to the debtor.
D) If there is a deficiency from the sale of collateral, the debtor remains liable for that amount

Question 36

A __________ is an agreement whereby one or more creditors of a common debtor agree to defer payment of their claims until another creditor of the same debtor is fully paid.

A) participation loan
B) cross-collateralization
C) debt subordination
D) lien subordination

Question 37

A(n)__________ guaranty is enforceable only with respect to a specified transaction or series of transactions.

A) attached
B) upstream
C) restricted
D) payment

Question 38

A bank's __________ rate is the lowest published rate of interest at which the bank lends to its best and most creditworthy commercial customers.

A) lien
B) term
C) prime
D) secured

Question 39

An equipment lease that serves the purpose of financing is known as a(n)__________ lease.

A) credit
B) finance
C) unterminal
D) revokable

Question 40

While state restrictions may apply,there are no federal restrictions on lenders and borrowers entering into transactions whereby secured credit will be sued to acquire stock.

Question 41

Interest is generally computed on a __________ basis.

A) yearly
B) monthly
C) weekly
D) daily

Question 42

Under a guaranty of __________,the guarantor's obligation to pay the lender is triggered automatically when the debtor fails to make a payment when due.

A) security
B) collection
C) payment
D) performance

Question 43

Fact Pattern 23-1
Bailey has been making large credit card purchases for months. He has also borrowed money from Jack and Susan, friends of his, so that he can continue his rather lavish lifestyle involving foreign travel. He borrowed $1,000 from Jack and $2,000 from Susan. He also borrowed $500 from his mother. Bailey finally decides that he can no longer continue to make even the minimum payments on his credit cards and considers filing for bankruptcy. He does, however, want to pay some of his debts. Bailey, therefore, puts off the credit card companies and saves his cash. He starts the New Year off by paying on January 1 all funds owed to his mother. He was particularly concerned about repaying his mother because he still lived at home and had some concerns that she would kick him out of the house if he did not repay her. Then, on June 1 he pays Jack; and on July 4, he pays Susan. Bailey proceeds to file bankruptcy on August 2 because he has repaid anyone he really cares about. He plans to complete the bankruptcy and move to the Caribbean.
Refer to Fact Pattern 23-1.Which of the following is true regarding the repayment of the loan to Bailey's mother?

A) It will be considered a preference because Bailey's mother would be considered an insider, and it was made within one year of the filing for bankruptcy.
B) Although Bailey's mother would not be considered an insider, the payment would be considered a preference because it was made within one year of the filing for bankruptcy.
C) The filing will be considered a preference only if Bailey and his mother had an agreement that she would advance the amounts to him again once the bankruptcy was completed.
D) The payment would not be considered a preference because it was not made within 30 days of the filing for bankruptcy.

Question 44

A guaranty that covers all future obligations of the primary debtor to a lender is referred to as a __________ guaranty.

A) continuing
B) restricted
C) primary
D) performance

Question 45

Which of the following expresses the effect of the D'Oench,Duhme doctrine in relation to federally insured banks?

A) It makes it harder for federal agencies to bring criminal charges against bank officials who negligently, but not intentionally, made bad loans.
B) It makes it easier for federal agencies to bring criminal charges against bank officials who negligently, but not intentionally, made bad loans.
C) It makes it harder for federal agencies to collect on outstanding loans by specifically providing that an oral loan commitment is enforceable so long as at least two bank officials confirm the existence of the oral agreement and there is no indication that the debtor involved acted in an illegal manner.
D) It makes it easier for federal agencies to collect on outstanding loans by barring enforcement of any agreements unless the agreements are in writing and approved contemporaneously by the bank's board or loan committee and recorded in the bank's written records.

Question 46

In CASE 23.3United States Department of Justice v.Sperry (2013),Sperry,the sole owner of a Subchapter S corporation that filed bankruptcy,made paymentstoother creditors before paying the corporation's federal tax obligations.Sperrycountered that he was released from the tax liens,and claimed the corporation-not him-owed the 'trust fund taxes.' The IRS sued.How did the court rule and why?

A) For the IRS, because Sperry was never properly incorporated and was therefore personally liable.
B) For Sperry, because the Subchapter S corporation-not Sperry-was liable for the tax obligations.
C) For the IRS.Sperry's payments and loans triggered personal liability.
D) For Sperry, because the IRS failed to give proper notice before seizing the company's assets.

Question 47

__________ creditors must file a __________ stating the amount of their claim in a form provided by the bankruptcy court within time periods established by the jurisdiction in which the case if filed.

A) Unsecured, notice
B) Unsecured, proof of claim
C) Unsecured, automatic stay
D) Secured, reaffirmation agreement

Question 48

A Chapter 7 discharge is not available to a debtor who has received a discharge in a bankruptcy filed in the preceding _____ years or in a Chapter 13 case filed in the preceding _____ years.

A) two; four
B) six; seven
C) eight; six
D) seven; six

Question 49

In theStern v.Marshall case discussed in the text,the U.S.Supreme Court addressed whether a counterclaim for tortuous interference with an expected gift,filed in response to a bankruptcy claim for defamation,was a core matter subject to the jurisdiction of the bankruptcy court.And if it was a core matter subject,did the authority conferred upon the bankruptcy court violate Article III of the U.S.Constitution? How did the Court rule?

A) The Court ruled that the tortuous interference counterclaim was a core proceeding but that the bankruptcy court lacked the constitutional authority to enter a final judgment on the claim.
B) The Court ruled that the tortuous interference counterclaim was a core proceeding and that the bankruptcy court had the constitutional authority to enter a final judgment on the claim.
C) The Court ruled that the tortuous interference counterclaim was not a core proceeding and that the bankruptcy court lacked the constitutional authority to enter a final judgment on the claim.
D) The Court ruled that the tortuous interference counterclaim was a core proceeding in part and that the bankruptcy court had the constitutional authority to enter a final judgment on portions of the claim.

Question 50

If the collateral from one loan is used to secure the obligations on another loan,this is called __________,or sometimes called a "__________" clause.

A) perfection, default
B) cross-collateralization, dragnet
C) floating lien, dragnet
D) attached loan, dragnet

Question 51

Fact Pattern 23-1
Bailey has been making large credit card purchases for months. He has also borrowed money from Jack and Susan, friends of his, so that he can continue his rather lavish lifestyle involving foreign travel. He borrowed $1,000 from Jack and $2,000 from Susan. He also borrowed $500 from his mother. Bailey finally decides that he can no longer continue to make even the minimum payments on his credit cards and considers filing for bankruptcy. He does, however, want to pay some of his debts. Bailey, therefore, puts off the credit card companies and saves his cash. He starts the New Year off by paying on January 1 all funds owed to his mother. He was particularly concerned about repaying his mother because he still lived at home and had some concerns that she would kick him out of the house if he did not repay her. Then, on June 1 he pays Jack; and on July 4, he pays Susan. Bailey proceeds to file bankruptcy on August 2 because he has repaid anyone he really cares about. He plans to complete the bankruptcy and move to the Caribbean.
Refer to Fact Pattern 23-1.Which of the following is true regarding the repayment of the loans from Jack and Susan?

A) The payment to Susan would be considered a preference because it was made within 30 days of the filing for bankruptcy, but the payment to Jack would not be considered a preference because it was made more than 30 days prior to the bankruptcy filing.
B) Payments to both Jack and Susan would be considered preferences because they were made within 90 days of the filing for bankruptcy.
C) Payments to both Jack and Susan would be considered preferences because Jack and Susan are insiders, and the payments were made within one year of the bankruptcy filing.
D) The payments would not be considered preferences.

Question 52

A(n)__________ subordination is an agreement between two secured creditors by which the subordinating party agrees that the lien of the other creditor will have priority notwithstanding the relative priorities that the parties' liens would otherwise have under applicable law.

A) unenforceable
B) debt
C) lien
D) equitable

Question 53

One popular method in Chapter 11 cases is called a(n)__________ bankruptcy,in which the company solicits votes on its plan of reorganization prior to filing bankruptcy.

A) prepackaged
B) cramdown
C) workout
D) confirmation

Question 54

A state law that limits the maximum rate of interest that may be charged is called a(n)__________ law.

A) interest
B) usury
C) rate
D) term

Question 55

In theIn re Bryan Road casereferencedin the text,the main issue before the Florida court was whethera pre bankruptcy waiver of the automatic stay in a prepetition workout was enforceable.How did the court rule?

A) After considering a number of factors, the court concluded that the waiver of the automatic stay would be enforced.
B) The court ruled as a matter of law that such agreements are contrary to the principles set forth in the federal bankruptcy statutes and that such agreements are, therefore, unenforceable.
C) The court ruled as a matter of law that such agreements are enforceable.
D) The court ruled that such agreements are enforceable only if all other creditors are paid in full.

Question 56

In order to arrive at an actual interest rate,a __________ is an amount added to the bank's theoretical cost of obtaining funds to lend.

A) spread
B) base
C) reference
D) security

Question 57

In a __________ bankruptcy under Chapter 11,the debtor solicits votes on its plan of reorganization and only files for Chapter 11 protection after it has obtained the required votes in favor of the plan.

A) preapproved
B) preplanned
C) prepackaged
D) prenegotiated

Question 58

The __________ interest rate is based on the cost of borrowing offshore U.S.dollars in the global interbank market.

A) International Rate Exchange
B) Frankfurt International Trade Rate
C) London Interbank Offered Rate
D) New York Exchange Rate

Question 59

With a(n)__________ guaranty,subsidiaries guarantee,or pledge their assets as security for,the parent's debt.

A) downstream
B) upstream
C) leveraged
D) subordination

Question 60

Bank president Spencer had approved significant loan amounts to Bob for the purpose of developing a shopping center.Spencer was satisfied that the land collateralizing the shopping center loan was sufficient,and Spencer was not particularly concerned about that loan.Bob,however,requested an additional loan for the purpose of starting a temporary employee agency.Bob offered to collateralize that loan with his office equipment,but Spencer was uneasy that such collateral was insufficient.If Spencer decides to go forward with the loan involving the temporary employee agency,which of the following is true regarding his options?

A) Spencer should request a cross-default provision and also a cross-collateralization provision.
B) Spencer should only request a cross-default provision because Article 9 makes cross-collateralization provisions unenforceable.
C) Spencer should only request a cross-collateralization provision because Article 9 makes cross-default provisions unenforceable.
D) Spencer should request a guarantee from a solvent person or entity because Article 9 makes both cross-default and cross-collateralization provisions illegal.

Question 61

Several commentators have criticized the Bankruptcy Code as too easily excusing individuals and businesses from honoring their lawful obligations.From a societal standpoint,do you believe that the Bankruptcy Code plays a positive role in social and economic relationships? What changes,if any,would you recommend?

Question 62

What is required in a filing for a voluntary petition in bankruptcy? An involuntary petition?

Question 63

Matthew has filed for Chapter 7 bankruptcy relief.He had borrowed money from his best friend,Rick,for the purchase of a car.Matthew really wants to repay Rick,but does not want to jeopardize his bankruptcy relief and the discharge of a number of other debts.What option,if any,is open to Matthew?

A) No options are open to Matthew because any payment to Rick would be considered a voidable preference.
B) Matthew can reaffirm the debt to Rick, and the bankruptcy judge has no authority to interfere in that decision.
C) Matthew can reaffirm the debt to Rick, but the bankruptcy judge has the authority to disapprove of the agreement if the court finds that it is not in Matthew's best interest.
D) Matthew can reaffirm the debt to Rick but only up to 50% of the maximum amount owed, and the bankruptcy judge has the authority to disapprove of the agreement if the court finds that it is not in Matthew's best interest.

Question 64

Discuss the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA")in regards to whether Chapter 7 or Chapter 13 relief is appropriate.

Question 65

Bob goes bankrupt.He has several creditors and a small amount in savings.He owes XYZ Bank $200,000 for which he used his home as collateral.XYZ Bank properly perfected its interest in the home.Bob additionally owes $3,000 in alimony to an ex-wife,Sue; $50,000 in unsecured credit card bills; and $5,000 in unsecured debt to his friend Tina.After all exemptions are satisfied,$205,000 from the sale of the home and $5,000 in a small bank account remain for distribution to creditors.Which of the following is true regarding priority?

A) All funds are added together and disbursed to the claimants based upon the percentage of each creditor's claim.
B) Tina has first priority, the credit card companies are then paid, and XYZ Bank is entitled to any remainder.
C) XYZ Bank receives $200,000 from the sale of the home, Sue receives $3,000, and the remainder is divided between the credit card companies and Tina.
D) Tina has first priority, XYZ Bank is then paid, and the credit card companies divide the remainder.

Question 66

Alice,the president of ABC Bank,had a meeting with Fred to discuss the fact that he was having difficulty making the payments on his loan that was guaranteed by Sylvia.Fred requested that Alice provide a grace period to Fred and allow him to miss a few payments without penalty in order to catch up his finances.Alice had no objection.Assuming the guaranty agreement did not address such situations,is Alice acting prudently and why or why not?

A) Yes, because Sylvia, as a guarantor, has no rights to oppose any action of the bank.
B) Yes, because while Sylvia has certain rights in regard to actions taken by the bank, she had no right to oppose the provision of a grace period since it is unlikely that allowing such a grace period would impair Sylvia's interests.
C) No, because Alice should have obtained the written consent of Sylvia in the form of an affirmation of the guaranty in view of the grace period.
D) No, because as a matter of equitable business practice, Alice should have put Sylvia on notice although Alice did not increase the bank's exposure by failing to do so.

Question 67

Set forth the five events referenced in the text that usually constitute events of default.

Question 68

Define the terms security interest,dragnet clause,and perfection.What are the methods of perfecting a security interest?

Question 69

What is a preference under the bankruptcy code? What time period is reviewed to determine if a preference has occurred? When does a long-term debt payment to a bank qualify under the ordinary course of business exception?