Deck 42: Introduction to Security

Question 1

A guarantor is a person who:

A) joins with the person who is primarily liable in promising to make the payment or to perform the duty.
B) does not join in making a promise, but makes a separate promise and agrees to be liable on the happening of a certain event.
C) is paid for serving as a surety, such as a bonding company.
D) acts as a surety without compensation, such as a friend who cosigns a note as a favor.

Answer 1

B
Explanation: A guarantor does not join in making a promise; rather, a guarantor makes a separate promise and agrees to be liable on the happening of a certain event. A guarantor's promise must be made in writing to be enforceable under the statute of frauds.

Question 2

Forbearance is the method by which a court authorizes the sale of personal property subject to a lien so that the creditor can obtain the money to which he is entitled.

Answer 2

False

Question 3

Under strict foreclosure, the creditor has the right to a deficiency, and the debtor has the right to a surplus.

Answer 3

False

Question 4

There are only two parties to a deed of trust: (1) the owner of the property who borrows the money and (2) the trustee who holds legal title to the property put up as security.

Question 5

The basic rules of strict liability apply in determining the existence and nature of the relationship of principal and surety.

Question 6

Which of the following statements best defines a surety?

A) A person who is liable for the performance of another person's duty
B) A person who is not liable for the payment of a principal's debts
C) A person who makes a separate promise to be liable for the payment of a principal's debts
D) A person who is not entitled to be reimbursed by the principal

Question 7

Zahra agreed to act as surety for a loan taken by her son, Rudo, from the Third National Bank. The terms of the loan provided that Rudo would pay the loan off in 12 monthly installments at 10 percent. If Rudo renegotiates the terms of the loan with the bank without Zahra's knowledge and is now obligated to pay the loan off in 12 monthly installments at 9 percent, which of the following statements is true?

A) Renegotiation of the note by Rudo does not relieve Zahra of liability as surety because the new terms are more favorable than the original terms.
B) Zahra must notify the bank in writing that she no longer wishes to act as surety in order to avoid liability under the new terms.
C) Zahra must notify Rudo in writing that she no longer wishes to act as surety in order to avoid liability under the new terms.
D) Zahra is no longer obligated because her responsibilities as a surety cannot be changed without her consent.

Question 8

The surety joins with the person who is primarily liable in promising to make the payment or to perform the duty.

Question 9

Rita cosigned a promissory note for $500 at the Federal Credit Union for her friend Sue. Sue defaults on the note, and the credit union collects $500 from Rita on her suretyship obligation. Rita then not only gets the right to collect $500 from her but also gets the Federal Credit Union's rights against Sue.

Question 10

Foreclosure proceedings are regulated by statute in the state in which the property is located.

Question 11

A guarantor does not join with the person who is primarily liable in making a promise; rather, a guarantor makes a separate promise and agrees to be liable on the happening of a certain event.

Question 12

If the creditor allows the principal more time to perform the contract without the surety's consent, this relieves the surety of responsibility.

Question 13

A surety is a person who is liable for the payment of another person's debt or for the performance of another person's duty.

Question 14

Which of the following statements is true for unsecured credit?

A) Only consumers use unsecured credit for their personal transactions.
B) The creditor may require the debtor to convey to the creditor a lien on the debtor's property.
C) When goods are delivered on unsecured credit, the creditor retains all rights in the goods.
D) The unsecured credit transaction involves maximum risk to the creditor.

Question 15

Most states treat the deed of trust different from a mortgage in giving the borrower a relatively short period of time to redeem the property.

Question 16

If you go to a dentist to have a cavity in a tooth filled and she sends you a bill payable by the end of the month, services have been rendered on the basis of secured credit.

Question 17

Each state has a statute that permits persons who contract to furnish labor or materials to improve real estate to claim a lien on the property until they are paid.

Question 18

Under the common law, the innkeeper was allowed to claim a lien on the guest's property brought to the hotel or inn to secure payment for the innkeeper's reasonable charges for food and lodging.

Question 19

The rights and liabilities of the surety and the guarantor are substantially different.

Question 20

Which of the following defenses goes to the merits of a primary contract and can be used by a surety?

A) Lack of consideration
B) Lack of capacity
C) Insanity
D) Bankruptcy

Question 21

Possessory liens give the lienholder the right to keep possession of the debtor's property:

A) for a reasonable period of time after the debt has been paid.
B) until the debtor regains possession by fraud or other illegal act.
C) until the reasonable charges for the service have been paid.
D) even if possession of the goods has not been entrusted to the lienholder.

Question 22

If mortgagors sell the interest in their property without the consent of the mortgagee, _____.

A) they have acted illegally
B) the sale does not affect the mortgagee's interest in the property
C) the mortgagee will lose his or her interest in the property
D) the mortgagee will lose all claims against the mortgagor

Question 23

Which of the following statements is true of accommodation sureties?

A) They are people paid for serving as a surety.
B) They are protected by the courts at a higher level than other types of sureties.
C) They must show that they will be harmed by an extension of time before they are relieved of responsibility.
D) They are professional companies that take payment for acting as a surety.

Question 24

In a deed of trust transaction, the _____.

A) lender should sue the trustee in case of a deficiency
B) surplus proceeds from a sale of property goes to the trustee
C) lender sells the property at a judicial sale
D) borrower deeds to the trustee the property that is to be put up as security

Question 25

Which of the following statements about foreclosure of liens is true?

A) The lienholder need not give notice to the debtor for holding a sale of the possessed goods.
B) The lienholder need not bring a lawsuit against the debtor if there is no statutory procedure.
C) The right of a lienholder to possess goods does not automatically give the lienholder the right to sell the property.
D) The lienholder cannot have the property sold at a judicial sale.

Question 26

If Jack and Victor were cosureties for John, Jack's right to reimbursement would include:

A) the right to any collateral in the possession of the creditor.
B) the right to recover from the principal the costs paid on the principal's obligation.
C) the right to share the costs paid with Victor.
D) all the rights that the creditor had.

Question 27

Linda and David borrowed $10,000 from the Smart Loan Company and executed a mortgage on their home to Smart Loan as security for the note. Smart Loan did not record the mortgage. If Linda and David sell their home to Sheila, and Sheila is not aware of the mortgage, then the mortgage is _____.

A) as valid for Sheila as it is to Linda and David
B) not valid for Sheila
C) valid for future creditors only
D) invalid for all parties

Question 28

In a deed of trust transaction, when a trustee sells the property and the proceeds generate a surplus, it _____.

A) is paid to the borrower
B) is paid to the lender
C) is paid to the trustee
D) goes to the state

Question 29

A common law lien essentially includes:

A) possession by the court.
B) a debt to the court created by the failure of a surety to pay a creditor.
C) possession by the improver as well as debt created by the improvement.
D) an improvement which does not become a part of the property.

Question 30

A surety's right to recover his or her costs from a principal once he or she performs or pays the principal's obligations is known as the right _____.

A) to fair compensation
B) of subrogation
C) to reimbursement
D) to contribution

Question 31

Article _____ of the Uniform Commercial Code sets out a comprehensive scheme for regulating security interests in personal property and fixtures.

A) 3
B) 5
C) 6
D) 9

Question 32

If several people act as cosureties for a principal and one of them had paid the principal's debt, the cosurety who paid the debt has a claim against the other cosureties because of his or her right _____.

A) of subrogation
B) to contribution
C) of strict foreclosure
D) to reimbursement

Question 33

Sheng and Min were cosureties for their friend Lei on a loan contract. When Lei failed to repay the loan within the stipulated time, Min paid the whole obligation as her surety. Min is now entitled to collect half the amount of liability from Sheng in accordance with her right _____.

A) to contribution
B) of subrogation
C) to reimbursement
D) to compensation

Question 34

_____ implies that the creditor has no right to a deficiency and the debtor has no right to any surplus.

A) The deed of trust
B) Mortgage
C) Strict foreclosure
D) Possessory lien

Question 35

Artisans who retain goods are liable for conversion if they:

A) return the goods before the debt has been paid.
B) keep the goods without the right to a lien.
C) lose the goods to the debtor in a fraudulent manner.
D) sell the goods for the unpaid charges.

Question 36

If the surety has to perform the principal's obligation, then the surety acquires all the rights that the creditor had against the principal. This is known as the surety's right _____.

A) to contribution
B) of subrogation
C) to compensation
D) to reimbursement

Question 37

An employee from Hamid's Automobile Inc. called up Horner's home to repair the latter's car. It was repaired in Horner's garage. When Horner defaulted on the bill, Hamid's employee went to his house to take possession of the car, claiming that the corporation had a lien on the car by virtue of the work performed on it. According to this scenario, which of the following statements is true?

A) The employee is entitled to the possession of the car because he was the one who performed the repairs on the car.
B) Hamid's employee is justified in his actions as the corporation did have a lien on the car by virtue of the work performed on it by its employee.
C) The corporation has no lien on the car because the employee did not notify Horner at the time of the repairs that a lien would be claimed.
D) The corporation has no lien on the car, because its employee came to Horner's house to make the repairs and so Horner never gave up possession of his car to Hamid's.

Question 38

In a deed of trust transaction, when a trustee sells the property and the proceeds generate a deficiency, the _____.

A) borrower is relieved of all obligations to the lender
B) lender may sue the borrower on the debt and recover a judgment
C) lender may sue the trustee
D) trustee may sue the borrower

Question 39

In which of the following cases can a surety avoid liability for a principal's default?

A) If the principal is a minor and therefore lacks the capacity to contract
B) If the principal has filed for bankruptcy
C) If the principal is induced to contract with the seller-creditor by fraud or duress
D) If the principal is insane

Question 40

Under the common law, airlines were entitled to liens to secure the reasonable value of the services they perform because they:

A) provided labor to improve personal property that belongs to someone else.
B) provided food and lodging to their customers.
C) were required by law to provide the service to anyone who seeks it.
D) made all their profits only through such liens.

Question 41

Which of the following is true of a land contract?

A) The buyer agrees to pay the purchase price over a period of time.
B) The trustee holds legal title to the property put up as security.
C) If a buyer defaults, the seller does not have the right to declare forfeiture.
D) The lender holds legal title to the property put up as security.

Question 42

Rashid purchased real estate known as Parcel A, subject to a preexisting mortgage, in favor of Local National Bank. Leila purchased real estate known as Parcel B, assuming a preexisting mortgage on it in favor of Local National Bank. After each purchase took place, there were defaults on the debts that gave rise to the mortgages. Although Local National Bank instituted and completed foreclosure proceedings with regard to each of the two mortgages, it did not yield enough funds to pay off the debt in full. Therefore, Local National Bank made demands on Rashid and Leila for payment of the deficiency owed on Parcel A and on Parcel B, respectively. Explain if Local National Bank is entitled to receive the deficiencies it seeks from Rashid and Leila.

Question 43

People who contract to furnish labor or materials to improve real estate:

A) can claim a lien on the property until they are paid.
B) cannot claim any lien on the property.
C) can claim a lien on a property irrespective of statutory requirements.
D) cannot foreclose their lien on the property.

Question 44

Which of the following is true of a land contract?

A) The seller agrees to convey the title when the full price is paid.
B) The trustee holds legal title to the property put up as security.
C) If a buyer defaults, the seller does not have the right to declare a forfeiture.
D) The title to property is conveyed if partial payment has been made.

Question 45

Andy bought a bicycle on credit from a dealer. Andy being a minor, his father agreed to be a surety for him on the purchase. When Andy failed to repay the debt within the stipulated time, the dealer filed a lawsuit against Andy's father. What defense can Andy's father use to avoid paying the dealer?

Question 46

Under which of the following contract devices does a seller usually retain title on a property until the full price for the property is paid?

A) Mortgage
B) Land sales contract
C) Deed of trust
D) Strict foreclosure

Question 47

The provider of materials or labor is not entitled to a lien if the:

A) property is a public property.
B) materials are provided without reference to a particular property.
C) materialman is not a general contractor.
D) property is under a land sales contract or mortgage.

Question 48

Describe the distinction between a surety and a guarantor.

Question 49

What is a possessory lien? Give an example.

Question 50

What is a deed of trust?