Deck 31: Nature of the Debtor Creditor Relationship

Question 1

A surety is discharged if the creditor substitutes a different debtor.

Answer 1

True

Question 2

If the creditor does not enforce the suretyship agreement within the statute of limitations, the obligation is forever discharged.

Answer 2

True

Question 3

Subrogation is an agreement that a party shall not be liable for loss.

Answer 3

False

Question 4

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

Question 5

In most states contracts of guaranty do not have to be in writing to be enforceable.

Question 6

When a surety pays a claim that it is obligated to pay, the surety is exonerated, and automatically acquires the claim and the rights of the creditor.

Question 7

A guaranty of collection allows the creditor to firstproceed against the debtor before suing the guarantor.

Question 8

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

Question 9

Letters of credit are a two-party agreement used for financing.

Question 10

Sureties have no rights or remedies to protect them from loss or breach of contract.

Question 11

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 12

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 13

An absolute guaranty creates the same obligation as a suretyship.

Question 14

Suretyship is a pledge to pay one's own debts and obligations.

Question 15

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

Question 16

A debtor-creditor relationship is essentially a bi-lateral contract with enforceable rights and duties for both parties.

Question 17

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 18

A surety is liable from the moment the principal is in default.

Question 19

Indemnity is the right of a co-obligator to demand that other obligators pay their fair share of the debt.

Question 20

A surety may not raise the defense of mistake because it is not an ordinary contract defense.

Question 21

An agreement or provision in an agreement that one party shall not be held liable for loss is:

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

Question 22

In a letter of credit the beneficiary is the drawer of the drafts that will be drawn under the letter of credit.

Question 23

An issuer in a letter of credit transaction has an obligation to assure that the goods sold by the seller in fact conform to the contract.

Question 24

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 25

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

Question 26

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 27

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

Question 28

A guaranty of payment creates a(n):

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

Question 29

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

Question 30

In a guaranty contract, the obligor is called a:

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

Question 31

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 co-sureties known as: ______.

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

Question 32

Which of the following is correct concerning suretyship and guaranty?

A) A surety is always liable from the moment the principal is in default.
B) A guarantor is always liable from the moment the principal is in default.
C) Both are undertakings by one person, for a consideration, to pay another person a sum of money in the event that the other person sustains a specified loss.
D) Neither can be exonerated from liability.

Question 33

The use of letters of credit arose in international trade.

Question 34

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 35

A(n) __________ is an undertaking by one person, for consideration, to pay another person a sum of money in the event of a specified loss.

A) absolute guaranty
B) indemnity contract
C) guaranty of payment
D) suretyship

Question 36

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 37

Under the independence rule banks cannot, except in limited circumstances, delve into the underlying contract issues and must only focus on the terms of the letter of credit.

Question 38

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 39

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

Question 40

All of the following contract defenses can be raised as a defense against suretyship obligations except: ________.

A) Lack of capacity
B) Absence of consideration
C) Mistake
D) Noncompliance with Statute of Frauds

Question 41

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 42

In a letter or credit, the _______ will be the drawer of the drafts that will be drawn under a letter of credit.

A) correspondent bank.
B) issuer.
C) beneficiary.
D) advising bank.

Question 43

Letter of credit transactions involve ______ contract(s).

A) one (1)
B) two (2)
C) three (3)
D) four (4)

Question 44

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 45

A letter of credit: ______.

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

Question 46

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 47

A letter of credit usually sets a:

A) minimum money amount.
B) maximum money amount.
C) duration.
D) strict compliance rule.

Question 48

A letter of credit:

A) cannot last for more than five years.
B) may be in either oral or written form.
C) can only be issued by a bank.
D) must be in writing and signed by the issuer.

Question 49

Bailment given as security for the payment of a debt is a(n): ______.

A) pledge.
B) contribution.
C) guaranty.
D) subrogration.

Question 50

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 51

Which of the following is not a suretyship defense?

A) statute of limitations
B) performance of the obligation by the principal debtor
C) creditor substitution of the original debtor with a new one
D) insolvency of bankruptcy of the principal debtor

Question 52

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 53

Under the ______, the respective parties are protected by a careful description of the documents that will trigger payment.

A) letter of credit rule.
B) standby letter rule.
C) independence rule.
D) strict compliance rule.