Law 332 Final Review

A holder can impair the value of collateral given to secure payment of an instrument without affecting the liability of parties who would benefit from the collateral in the event of nonpayment.

False

A holder who takes a negotiable instrument from a thief cannot become an HDC even if the item was acquired in good faith and there was no reason to be suspicious of the transaction.

False

A promissory note is both a debt and evidence of the debt.

False

A secured party perfects a claim by filing a financing statement with the debtor.

False

A security interest can cover only property in which the debtor has present rights.

False

A security interest cannot become perfected without the filing of a security agreement.

False

Bankruptcy relief is provided under state, not federal, law.

False

Because a mortgage involves a transfer of real property, it need not be in writing.

False

Because a writ of attachment is a prejudgment remedy, a debtor does not need to be given notice and an opportunity to be heard before the property is seized.

False

Businesses must be technically insolvent to file for bankruptcy relief.

False

Equitable redemption allows a lender to gain title and regain possession of a property.

False

For a negotiable instrument to operate practically as a substitute for cash, it must be easily transferable and uncollectible.

False

If a check is made "payable to the order of Marcus or Nathan," both parties' indorsements are necessary for negotiation.

False

Most creditors require a borrower to purchase mortgage insurance if the borrower makes a down payment of at least 20 percent of the purchase price.

False

Once a bankruptcy petition is properly filed, creditors can commence or continue most legal actions against the debtor to recover claims.

False

Providing only a debtor's trade name in a financing statement is sufficient for perfection even if the trade name is not the legal name of the business.

False

The UCC's classification or definition of collateral does not affect where or how to perfect a security interest.

False

The death of a customer automatically revokes a bank's authority to accept, pay, or collect an item drawn by the customer on an account with the bank.

False

The instrument normally filed to give public notice to third parties of a secured party's security interest is collateral.

False

The shelter principle permits a holder with notice of a claim or defense to attain HDC status by reacquiring the instrument from a later HDC.

False

Under Chapter 13, all debts are dischargeable.

False

Voluntary petitions may be filed to initiate Chapter 7 or Chapter 11, but not Chapter 13, bankruptcies.

False

When a customer makes a deposit into a checking account, the customer becomes a debtor, and the bank a creditor, for the amount deposited.

False

A person who takes a demand instrument knowing that demand has been made has notice that the instrument is overdue.

True

A person who transfers an instrument for consideration warrants to all subsequent transferees and holders who take the instrument in good faith that all signatures on the item are authentic and authorized.

True

Every party who signs a negotiable instrument is potentially liable for payment of that instrument when it comes due.

True

For most collateral, possession by a secured party is impractical because it denies the debtor the right to use or derive income from the property to pay the debt.

True

Gary writes a check drawn on Hill Bank for $400 "payable to Ian" on May 1. Gary dies on May 3. Ian presents the check to the bank on May 5. Unaware of Gary's death, the bank

may pay the check.

Bok buys an espresso machine from Coffee Gadgets, which bills him for $100. He writes out a check drawn on Dios Bank, but later, believing that the machine is defective, issues a stop-payment order. Dios

must stop payment if the bank has a reasonable time to act.

Jaime signs an instrument using a "J" with a swirl around it. With this mark for a signature, the instrument is

negotiable

Marin writes on a piece of paper, "I owe you $600," signs it, and gives it to Nye. This instrument is

nonnegotiable, because it does not include an express promise to pay.

Fern has six nieces, ages five to sixteen. She writes an instrument for $50 that states, "Pay to the order of my niece." The instrument is

nonnegotiable, because there is no specific person identified.

Colin signs a note "payable to the order of Debit Bank." The bank indorses the note in blank and negotiates it to Equity Funds, which sells it to Financial Investments. The transfer of the note from Equity to Financial gives rise to

warranty liability.

Because a mortgage involves the transfer of real property, to comply with the Statute of Frauds, it must be

written

If a bank's payment over a stop-payment order causes subsequent checks written on the drawer's account to be returned for insufficient funds, the bank will be liable for the drawer's resulting costs.

True

If the numerical and written amounts on a check differ, the check is payable in the written amount.

True

Improper filing of a financing statement can render a security interest unperfected.

True

In a Chapter 13 proceeding, the debtor retains possession of his or her assets.

True

In a Chapter 7 proceeding, the bankruptcy trustee collects the debtor's estate and reduces it to cash, preserving the interests of the debtor and creditors.

True

It is not a material alteration to change the figures on a check so that they agree with the written amount, and thus, any holder is entitled to enforce the check.

True

The borrower is typically required to pay all property taxes, assessments, and other claims against the property.

True

The destruction or mutilation of an instrument is considered cancellation, and thus discharges the liability of all parties, only if it is done with the intention of eliminating obligation on the instrument.

True

To avoid liability for negligence, a customer must examine monthly bank statements and canceled checks promptly and with reasonable care, and report any forged signatures to the bank.

True

To avoid the risk of loss from theft, a holder can convert a blank indorsement to a special indorsement by writing, above the signature of the indorser, the name of the indorsee.

True

To be negotiable, if an instrument is not payable on demand, it must be payable at a definite time.

True

Usually, an indorsement is unqualified, which means that the indorser is guaranteeing payment on an instrument, in addition to transferring title to it.

True

When a bank certifies a check, the bank is agreeing in advance to accept the check when it is presented for payment and to make payment with funds reserved for the purpose.

True

When a bank wrongfully dishonors a check, it is liable to the customer for any resulting damages.

True

In addition to financial statements, each voluntary petition in bankruptcy must include

a certificate proving the receipt of credit counseling.

Ciera presents an instrument that states "pay to the order of Duff" to East Bank for payment. As the most common type of negotiable instrument regulated by the Uniform Commercial Code, this is

a check.

To buy a home, Lois pays part of the purchase price up front in cash and borrows the rest of the funds from Members Credit Union. The part of the purchase price paid up front is

a down payment.

Capital Inc. holds a security interest in Discount Store's inventory. The parties agree that the interest will continue in the collateral even if it is sold, exchanged, or disposed of in some other way. This is

a floating lien.

Construction Company has a claim against Diners Café to satisfy a debt that takes priority over other claims against the same property. This is

a lien

Leno makes a gift of a check to Millie who takes it in good faith and without notice of any claim, defense, or defect. With respect to this check, Millie is

an ordinary holder.

Quint signs a check "pay to the order of Rona" drawn on Quint's account at Suburban Bank. Quint has $400 in his account but the amount of the check is $500, which the bank pays. This is

an overdraft

Eligible for relief on a petition in bankruptcy under Chapter 11 is

any debtor who is eligible under Chapter 7, and railroads.

Under Chapter 7, once the proceeds of the bankruptcy estate have been distributed, the debtor's remaining debts

are discharged.

Loan Office Inc. has a security interest against Manufacturing Company that is enforceable. In other words, with respect to the collateral, the creditor's rights are said to

attach

Faro is an agent authorized to sign negotiable instruments on behalf of Global Supply Inc. To protect against potential liability on a note signed on the corporation's behalf, Faro should

identify Global Supply and indicate his agency status.

All bankruptcy proceedings are held in

federal bankruptcy courts.

The payment of Commerce Inc.'s debt to Debt Service LLC is guaranteed by the firm's property. Debt Service is most likely to perfect its interest by

filing a financing statement with the appropriate authority.

Gillis writes a check to Harley as payment for a game player but soon discovers it is broken. Gillis goes to the drawee bank and orally authorizes Ilene, a bank officer, to stop payment on the check. This order is valid for

fourteen days.

At the time of the filing of the petition and the time of the filing of the plan, Chapter 13 imposes on the debtor the requirement of

good faith.

Housewares Inc. warrants its goods to be free of defects. Ivy issues an instrument to Housewares for the purchase of an appliance that proves to be defective. With respect to payment on the instrument, Ivy

has a personal defense.

Bob's Barber Shop borrows from first Credit Company and then Debit Loans LLC, using the same property as collateral for both loans. Debit Loans perfects its security interest. Credit Company does not. The debtor defaults on both loans. The party with first rights to the collateral is

Debit Loans LLC.

To buy a truck under warranty from Detour Motors, Eli, a consumer, signs a note payable to the dealer. The note includes the notice required by FTC Rule 433. The dealer sells the note to Finance Company, which takes it in good faith, for value, and unaware of any defenses against payment. Eli discovers that the truck is defective and returns it to Detour Motors. The consumer can assert the breach of warranty to avoid payment on the note against

Detour Motors and Finance Company.

A debtor must have title to collateral to give a secured party a security interest in the property.

False

A difference between the handwriting in the body of a check and in the signature affects the validity of the item and will bar a holder from HDC status.

False

A fixed-rate mortgage is a standard mortgage with an adjustable rate of interest.

False

Lamont and Marcel collaborate to defraud Nina, who is induced to give Marcel a note payable to Marcel's order. Marcel indorses the note for value to Orson, an HDC. Later, Orson sells the note to Lamont. Under the shelter principle,

Lamont cannot acquire HDC rights in the note.

Lon is Mill Corporation's agent and is authorized to write checks on the firm's account in North Bank. Lon writes a check "pay to the order of Ocean Shipping." Lon signs the check "Mill Corporation by Lon, agent." The bank dishonors the check. Liability extends to

Mill Corporation.

Kiosk Jewelers borrows from Lender Inc. and Mortgage Company, using the same collateral. Only Mortgage Company has a perfected security interest. Kiosk defaults on both loans. The party with first rights to the collateral is

Mortgage Company.

Ranch West owes Silo & Barn Inc. $5,000 on their contract, but refuses to pay. To collect, Silo files a mechanic's lien, under which security for the debt is represented by

Ranch's real estate.

A bank is not obligated to pay an uncertified check presented for payment more than six months from its date.

True

A lender can require a borrower to maintain the property in such a way that the lender's investment is protected.

True

A mortgage gives a creditor a lien on a debtor's real property as security for payment of a debt.

True

An instrument that orders the drawee to pay a certain sum of money, usually to a third-party payee, is a draft.

True

Any debtor who is eligible for bankruptcy relief under Chapter 7 is eligible under Chapter 11.

True

Attachment ensures that a security interest between a debtor and a secured party is effective.

True

Because liability for payment on a negotiable instrument is immediate when the instrument is signed or issued, no action by the holder is required.

True

United Contractors Inc. holds a lien on Vista Estate's real property. This property can be sold to satisfy the debt if, before the sale, notice is given to

Vista Estate.

A certificate of deposit (CD) is issued when Lo-Risk Invest LLC deposits funds with Money Bank on the bank's promise to repay the funds, with interest, on a certain date. Lo-Risk cannot withdraw the funds before the date of maturity because

a CD is a time deposit.

Yang files a petition in bankruptcy under Chapter 7. Zhen takes control over her property and reduces it to money for distribution. Zhen is

a bankruptcy trustee.

Coki receives a payroll check from Data Solutions Inc. and indorses it by signing her name on the back of the check. This is

a blank indorsement.

Elmer pays Fidelity Bank $1,000 plus a service fee to draw a check on itself made payable to Go Delivery Service. This is

a cashier's check.

A voluntary petition in bankruptcy must include

a list of the debtor's creditors and the amount of the debt owed to each.

Construction Inc. wants to agree with its creditors on a plan under which it pays a portion of its debt and is discharged of the rest. To accomplish this goal, the corporation should file a petition in bankruptcy under Chapter 11 for relief through

a reorganization.

To purchase a house, Elma obtains a mortgage loan from Fidelity Bank. Later, Elma is unable to make payments on the loan. Meanwhile, the market value of the house has declined. Fidelity agrees to a sale of the property for less than the amount due on the loan. This is

a short sale.

Dag signs a check "pay to the order of Eton" drawn on Dag's account at First Bank and dates the check "May 1." Eton presents the check to the bank for payment on December 15. This is

a stale check.

Because a party's authenticating intent with respect to a note is shown by the name of the party written on the line that calls for the name of that party,

a stamped imprint of the name can be sufficient to transfer the note.

To make a sale to Gourmet Inc., Hill Valley Commodities asks Gourmet's outside accountant Ingre to co-sign a credit application. According to the terms, if Gourmet defaults, Hill Valley can look to Ingre for payment without first pursuing legal remedies against Gourmet. Ingre is

a surety.

Rico agrees to buy a bicycle from Salvatore for $250. Salvatore agrees to deliver the bike on September 1. Rico writes a draft for $250 payable to Salvatore on September 1. This is

a time draft.

Business Inc.'s debt to Cartage Company is past due. Cartage brings a legal action against Business to collect. To ensure that a judgment in the creditor's favor will be collectible, Cartage asks the court to order the seizure of the debtor's property. This is a request for

a writ of attachment.

Brew Pub Company's debt to Credit Service is past due. Credit obtains a judgment against Brew, but the firm refuses to pay. Credit asks the court to order the seizure of Brew's property. This is a request for

a writ of execution.

Franco buys a sofa from Grey at a garage sale. Franco writes Grey a check for $50 to pay for the couch. Grey is

the payee.

Motor Sales Inc. signs an instrument that promises to pay National Parts Company a certain price, with interest, for a shipment of auto parts. It is necessary to know when the instrument is due in order to

all of the choices.

Personal property that is most often exempt from satisfaction of a creditor's judgment debt on a debtor's default, up to a specified amount, includes

all of the choices.

Under Chapter 7 and Chapter 11

all of the choices.

Compared to Chapter 7 and 11 plans, a Chapter 13 plan

allows a debtor to retain possession of his or her assets.

In good faith and for value, Joya gets from Kyle a negotiable bearer instrument. Joya does not know that Kyle stole the instrument. Joya is

an HDC.

To buy a condo, Mary obtains a thirty-year mortgage with an interest rate that is fixed for three years and then adjusts annually. Mary's mortgage is

an adjustable-rate mortgage.

Resources Inc. receives a check from Steel Products Company and indorses it with a stamped imprint of its name on the back. This converts the check to

an order instrument.

To buy a townhouse, Becky obtains a mortgage loan from Countywide Bank. The lender should record the mortgage to

be officially on record as holding an interest in the property.

Brie, Cam, and Dei are co-sureties of Edie's debt to Finance LLC. Brie pays the entire debt. Her right of contribution entitles her to recover any amount paid above the surety's obligation from

cam and Dei.

An instrument, such as a check, drawn payable to an organization

can be negotiated by an authorized representative of the entity.

A payee or indorsee whose name is misspelled on an instrument

can indorse with the misspelled name, the correct name, or both.

Dana draws a check on Equity Bank, and asks the bank to agree in advance to accept the check by setting aside sufficient funds to cover the amount. If Equity agrees, the check will be considered

certified

Auto Sales & Finance wants to get paid for its goods and services, so it will not sell goods or lend funds unless payment is guaranteed. To obtain those goods or services, a customer or borrower might pledge

collateral

Rico borrows funds from Suburban Bank secured by Rico's house. Rico defaults on the debt. The bank's options include

d. disposing of the collateral in any commercially reasonable manner.

Under Chapter 7, creditors are paid in a certain order of priority. The highest-priority class comprises claims for

domestic support.

To make Credit Bank a collecting agent on a check "payable to the order of Duane," Duane should

indorse the check "for deposit only."

On the back of a check "payable to Huan," Huan signs her name and negotiates the item to Ito. To avoid liability on the item if it is later dishonored, Ito should

indorse the check "without recourse."

To buy furniture, Gina, a consumer, signs a purchase agreement with Home Store, the seller, to pay $100 down and $50 per month until the price is paid. Home Store takes a security interest in the furniture. Because it was created as part of purchase agreement with a consumer, the security interest

is automatically perfected.

An involuntary bankruptcy occurs when a debtor

is forced into bankruptcy proceedings by his or her creditors.

Ruth takes her car to Service Center, which repairs the car and bills her for $500. She writes out a check drawn on Tempo Bank, but later, believing that Service Center did not fix the car properly, issues a stop-payment order. If Tempo pays the check, the bank

is liable for Ruth's loss due to the wrongful payment.

Bauxite Mine borrows $60,000 from Commerce Bank, with the loan secured by the borrower's property. The debtor defaults on the loan. Commerce relinquishes its security interest to seek a judicial remedy. To obtain funds to satisfy the debt by a seizure and sale of the borrower's nonexempt property, after a writ is issued, the creditor can use the process of

levy

Chapter 7 of the Bankruptcy Code provides for

liquidation proceedings.

Edna is the payee of a bearer instrument—a promissory note in the amount of $10,000. Flem offers to irrigate Edna's ranch next week in exchange for the note. She agrees and delivers the note to Flem. Flem is

not an HDC, because he did not yet give value for the instrument.

Noah signs Ola's name to a check without Ola's authorization. Noah can be held personally liable for payment on the check by

only an HDC.

Transfer of a note "payable to the order of Credit Company" by delivery to Debit Associates, with the payee's indorsement, for consideration, extends warranty liability

only to Debit and its immediate transferee.

Bogart presents a sight draft to Commerce Bank for payment. A bank employee writes accepted across the face of the instrument, and adds the date and the bank's signature. The draft is

payable immediately or within a stated time after sight.

Ready Credit Inc. holds a security interest in inventory owned by Soy Products Inc. Ready Credit can protect its claim to the inventory in the event of Soy Products' default by

perfection

Bravo co-signs a $15,000 note payable to College Loan Company enabling Dios to obtain a student loan. The terms of the note stated that Bravo signed "on behalf of" Dios. If Dios stops making payments on the debt, Bravo is

primarily liable.

Bass signs a note "payable to the order of Credit Bank." Unless Bass has a valid defense against payment, his liability on this note is

primary

With respect to debtors, the main goal of bankruptcy law is to

provide a new start without creditors' claims.

If a voluntary petition in bankruptcy is found to be proper, the court's entry of an order for relief

puts into place an automatic stay.

An instrument payable to two or more persons without an "and" or an "or" between the parties' names, such as a check "payable to the order of Gerhard Hans,"

requires the indorsement of only one the parties to be negotiated.

To create an enforceable security interest for a loan, in terms of the collateral, the debtor must have

rights in it

The UCC does not define the term default. This encourages the parties to a secured transaction to

stipulate the conditions that will constitute a default.

Special requirements for the form and content of negotiable instruments are imposed by

the Uniform Commercial Code.

Faye forges Greta's signature on a check "payable to the order of Faye" drawn on Greta's account at Home Bank. Most likely, if the bank pays the check

the bank will have to recredit Greta's account.

To create an enforceable security interest between Finance Corporation and Global Trade Inc. in a written security agreement, the agreement must contain a description of

the collateral.

To create an enforceable security interest between Mortgage Bank and National Property Company in a written security agreement, the agreement must be signed by

the debtor.

Under any chapter of the Bankruptcy Code, failing to file the necessary documents with the debtor's petition for relief can result in

the dismissal of the petition.

Mara has a checking account at North Bank. Mara signs a check "payable to Ovid" drawn on Mara's account. North Bank is

the drawee

Bern signs a check "pay to the order of College Bookstore" drawn on his account at Debit Bank to buy textbooks. Bern is

the drawer.

Because he or she was in the best position to prevent wrongdoing with respect to an instrument, transfer and presentment warranties attempt to shift liability to

the person who dealt face to face with the wrongdoer.

Under Chapter 13, a repayment plan must provide for

the same treatment of each claim within a particular class of claim.

Baer writes a check for $500 "payable to Cary" drawn on Baer's account at Debit Bank. Cary indorses and sells the check to Esau, who deposits the check in his account at Fidelity Bank. Fidelity dishonors the check. Baer or Cary may be liable for payment of the check if

timely notice of dishonor is given.

To operate practically as a substitute for cash or a credit device, a negotiable instrument must be

transferable without the danger of being uncollectable.