Law Study Set

A $5000 promissory note payable to order of Neptune is discounted to Bane by blank indorsement for $4000. King steals the note from Bane and sells it to Ott, who promises to pay King $4500. After paying King, $3000, Ott learns that King stole the note. Ott makes no further payment to King. Ott is

A holder in due course to the extent of $3,333.

Angie writes a check payable to Brad. Brad indorses the check "without recourse" and delivers it to Cathy. Cathy indorses it and delivers it to Donna. Donna makes a timely presentment of the check to the drawee for payment. The drawee dishonors the check. Donna immediately notifies all parties. Donna can enforce the check against:

Cathy and Angie, Cathy has liability as an indorser; Angie has liability as the drawer.

Commercial Factors, Inc., purchased for $1,500 a $2,100 promissory note payable in two years. It paid $500 initially and promised to pay the balance ($1,000) within 10 days. Before Commercial Factors paid the balance, it learned that the note had been obtained originally by fraud in the inducement. To what extent will Commercial factors be considered a HDC?

Commercial Factors will qualify as a HDC of $700 regardless of whether it pays the additional $1,000.

On May 19, Dale sells Sue a piece of equipment and receives a purchase money security interest to secure payment of the purchase price. The property is delivered to Sue the same day. On May 25, an unsecured creditor levies on the same equipment creating a judgment lien. On May 28, Dale files a financing statement. If both Dale and the judgment lien creditor claim an interest in the piece of equipment, who has priority?

Dale has priority. A holder of a PMSI who perfects within 20 days from the date the debtor receives delivery of the collateral has priority over a subsequent lien creditor.

Which of the following transactions are governed by Article 9?

Dan establishes a line of credit with the ABC Bank to purchase the sale of his inventory. In return, he grants the ABC Bank a security interest in all of his inventory "now owned or hereafter acquired."

Perfection of a security interest permits the secured party to protect its interest by:

Establishing priority over the claims of most subsequent secured creditors.

Joe Jones is in possession of a check payable "to the order of Joe Jones". Joe indorses it specially to Pam Smith and gives it to Pam. Pam indorses it "without recourse, /s/ Pam Smith." After Joe Jones's special indorsement, this is bearer paper.

False

On April 1, Dan grants a security interest to First National Bank in equipment. First fails to file a financing statement. On May 1, Dan grants a security interest to Second National Bank in the same equipment. Second fails to file a financing statement. If Dan fails to pay both First and Second, who has priority?

First has priority. Between two unperfected secured parties, the first security interest to attach and to be enforceable against the debtor has priority.

On January 15, Bean granted Davis a security interest in a negotiable document under the terms of a written security agreement. On February 5, Bean granted Franklin a security interest in the same document. Franklin promptly filed a financing statement. On February 7, Davis filed a financing statement. If Bean defaults (fails to pay both David and Franklin), who has priority in the document?

Franklin has priority.

Payne borrowed $500 from the First National Bank, executing a promissory note promising repayment. At the time the loan was made to Payne, Gem agreed with First that Gem would repay the loan if Payne failed to do so. Gem signed the back of the note as surety. Under the circumstances:

Gem is secondarily liable to repay the loan

Dan Drawer wrote a check for $500 to Dr. I.N. Cisor as payment for dental services rendered. Two days later the crown fell out of Dan's mouth indicating that the work had not been done properly. Dan stopped payment on the check. However, before Dan did so,. Dr. Cisor negotiated the check to Hank Holder, a HDC.

Hank will be able to recover on the instrument because a HDC takes free of personal defenses, and Dan has only a personal defense.

Maggie Maker writes a note payable to the order of Bill Johnson. Bill signs his name on the back of the check and gives the note to Lynn. Lynn signs her name and adds "Pay P.J. McDougal." What is the status of this note?

It is now order paper and cannot be negotiated without P.J.'s indorsement.

Debbie borrows $5,000 from Carly. Debbie then grants a security interest to Last National Bank in equipment to secure a $10,000 loan. Last fails to file a financing statement. When Debbie fails to repay both Last and Carly, Carly claims priority since Last failed to file a financing statement. Who has priority?

Last has priority. A security interest, even an unperfected security interest, has priority over an unsecured creditor.

Dan buys a television set from Lemon Appliances giving Lemon a security interest in the television to secure repayment. Lemon fails to file a financing statement. Dan then borrows $5000 from the Last National Bank giving Last a security interest in the same television set to secure repayment. Last files a financing statement. If Dan fails to repay both Lemon and Last, who has priority in the television set?

Lemon has priority. They were automatically perfected. Therefore, the first party to perfect has priority.

Which of the following satisfies the requirements for negotiability, assuming the other requirements are also met?

Mary Maker promises to pay to the order of Bob King $5,000 for his car.

Buffy writes a check payable to Muffy and delivers it to her. Muffy presents the check to the drawee, The Prep State Bank. The bank refuses to pay the check. Can Muffy, as a holder, hold the bank liable on its drawee's contract?

No

On June 1, 2015, M & M Machinery makes a promissory note payable to the First National Bank which is payable on June 1, 2017. First indorses it and negotiates it to the Last National Bank on July 3, 2015. Last presents the note for payment to M & M on June 15, 2017. First claims that it was discharged by the late presentment. Is it correct?

No, First is an indorser on a note. Indorsers on notes are not owed the right of presentment.

On June 1, 2015, M & M Machinery makes a promissory note payable to the First National Bank which is payable on June 1, 2017. First indorses it and negotiates it to the Last National Bank on July 3, 2015. Last presents the note for payment to M & M on June 15, 2017. M & M claims that it was discharged by the late presentment. Is it correct?

No, M & M is incorrect. M & M is the maker and makers are absolutely, primarily liable. They are not owed the right of presentment.

Dan Drawer wrote a check on October 31, to the Grocery Store $80. The Grocery Store cashed the check at its bank on February 3, and it bounced on February 15, when the drawee bank informed the bank that Joe had stopped payment because groceries had been spoiled. Is the bank a HDC?

No, because the bank had knowledge that the check was overdue.

Andy decided to start a business. He needed a business loan. Mike agreed to loan Andy $100,000 if he would issue a promissory demand note to him in the amount of $110,000, and obtain a co-signer on the note. Andy agreed. Joey agreed to co-sign the note for Andy. Andy and Joey signed the front of the note and Andy issued it to Mike. Mike indorsed the note in blank and negotiated it to Friendly Finance Co. at a discount. Assume that Friendly is a HDC.

None of the above are true: Andy is liable in the capacity in which he signed. As an accommodation maker, he is absolutely, primarily liable just like a maker.

Tom grants Alabama Bank a security interest in "all equipment now owned or hereafter acquired" on February 1. Alabama Bank advances Tom $10,000 based on their agreement and files a financing statement. On March 1, Tom buys a new oven granting the supplier (Ovens, Inc.) a PMSI. Ovens files a financing statement on March 9. Tom defaults on both loans and Alabama Bank and Ovens are claiming an interest in the oven. Who has priority?

Ovens has priority. As a PMSP of non-inventory collateral, they can get priority over prior perfected secured parties as long as they perfect within 20 days from the date the debtor acquires the collateral.

One of the requirements needed for a holder of a negotiable instrument to be a holder in due course is the value requirement. Ruper is the holder of a $1000 check written out to her. Which of the following would not satisfy the value requirement?

Ruper received the check in exchange for a promise to do certain specified services three months later.

On April 1, Dan grants a security interest to First National Bank in equipment. First fails to file a financing statement. On May 1, Dan grants a security interest to Second National Bank in the same equipment. Second promptly files a financing statement. On May 5, First files a financing statement. If Dan fails to pay both First and Second, who has priority?

Second has priority because between two perfected secured parties, the first one to file or to be perfected has priority.

On April 1, Dan grants a security interest to First National Bank in equipment. First fails to file a financing statement. On May 1, Dan grants a security interest to Second National Bank in the same equipment. Second promptly files a financing statement. If Dan fails to pay both First and Second, who has priority?

Second has security because it perfected its security interest. A perfected security interest beats an unperfected security interest.

Dan leases a new Ford Focus (worth $25,000) from the Acme Ford Dealer. Dan signs a lease agreement in which he agrees to provide a down payment of $5000 and to pay $350 per month for 48 months. At the end of the lease term Dan can exercise an option to purchase the Focus for $1500. Is this a security interest or a true lease?

Security interest

Sue indorses a check "without recourse" an negotiates the check to the Big Grocery Store in exchange for groceries. Big Grocery indorses the check and deposits the check in its account at State Bank. State Bank indorses and presents the check to the drawee bank, Magnolia Bank for payment. Who has made a transfer warranty?

Sue and Big Grocery

On January 15, the Appliance Store sells Dan Debtor a television set on credit for his own personal use, taking in return a security interest in the television set to secure repayment. The Appliance Store fails to file a financing statement at that time. On April 1, Dan files a bankruptcy petition. On April 5, the Appliance Store files a financing statement. The trustee has contested the priority of the security interest.

The Appliance Store will win.

Danielle Dabney writes a check drawn on the Last National Bank and made payable to Penny Pepper. Before the check can be delivered to Penny, Tom Thief steals the check and forges her signature. Tom takes the check to the First Avenue Grocery Store and the Grocery Store takes the check as payment for groceries. First then deposits the check into its account with the Second National Bank, who negotiates it to the Third National Bank, who presents it for payment to Last.

The Grocery Store has breached both the presentment warranty and transfer warranty of good title.

A customer's account has a balance of $2000 at 9:00; at 10:00 he deposits check #1 in the amount of $2,000; and at 11:00 he deposits check #2 in the amount of $3,000. On the next day the customer withdraws $2,500 from the account. Thereafter, both checks bounce since payment has been stopped on each of them. Since the customer has vanished without a trace, the bank sues the drawer on the checks alleging HDC status.

The bank is a HDC for $500 of check #1 and none of check #2.

Fast Loans, Inc. a small loan company, loaned $600 to Morton to purchase a television set for his home. The security agreement between the parties provided that pending repayment of the loan the company was to have a security interest in the television set as well as in all other consumer goods thereafter acquired by Morton. Three months later, Morton bought a refrigerator for cash for his home. Morton has now defaulted on the loan to Fast Loans, and the company seeks to seize the refrigerator, which it claims is subject to its security interest.

The company has a purchase money security interest in the television set.

Acme is the holder of a check which was originally drawn by Dante and made payable to Sylvia. Sylvia properly indorsed the check to Field. Field had the check certified by the drawee bank and then indorsed the check to Bates. As a result:

The drawee bank becomes primarily liable and both Sylvia and Dante are discharged.

Handyman Corporation manufactures electric drills and sells them to retail hardware stores.

The drills are inventory in Handyman's hands.

Under Article 3, which of the following circumstances would prevent a person from becoming a HDC?

The person was notified that payment was refused.

The First National State Bank agreed on May 1, to consider making loans to Acme Company of up to $50,000. Acme signed a security agreement giving First a security interest in Acme's inventory. Thereafter, on June 1, First loaned Acme $25,000.

The security interest attaches and is enforceable on June 1.

On June 12, Bank lends Dan Debtor $20,000 to purchase a piece of equipment taking in return a security interest in the equipment. Dan obtains the equipment that afternoon. On June 18, Dan files a bankruptcy petition. Who would have priority?

The trustee in bankruptcy.

John induces Paul by fraud to make a note payable to John. John negotiates it to George, who in good faith and without notice of the fraud. George gives it to Ringo as a birthday gift. When Ringo attempts to collect from Paul, Paul asserts the defense of fraud in the inducement.

While Ringo is not a HDC, he acquired the instrument through a HDC, thus acquiring the rights of a HDC, and Paul's defense of fraud in inducement is not good against Ringo.

Scarlett O'Hara makes a promissory note payable to Rhett Butler, repayment to be made in a balloon payment at the end of the 12 month period. Furthermore, monthly interest payments are to be made in installments on the 15th of each month beginning in June. Rhett sells the note at a discount to the Rebel State Bank on the 17th of June. The note has written on it in big letters a penciled notation "missed paying first installment." Can Rebel State Bank qualify as an HDC?

Yes.

A two-party instrument in which the party to pay is called the maker and the other party is called the payee is:

a promissory note.

Tom is in the business of selling appliances. He grants Alabama Bank a security interest in "all inventory now owned or hereafter acquired" on February 1. Alabama Bank advances Tom $10,000 based on their agreement and files a financing statement. On March 1, Tom orders a supply of new ovens for his inventory granting the supplier (Ovens, Inc.) a PMSI. Ovens files a financing statement on March 9. Tom defaults on both loans and Alabama Bank and Ovens are claiming an interest in the oven. Who has priority?

a. Alabama Bank has priority; it was the first to perfects its security interest. b. Alabama Bank has priority; in order for a PMSP of inventory collateral to gain priority over a prior perfected secured party they had to give notice to Alabama Bank and to perfect their security interest at the time the debtor acquired the collateral. c. Ovens has priority. As a PMSP of inventory collateral, it can get priority over prior-perfected secured party as long as it perfects within 20 days from the time the debtor acquired the collateral. d. Two of the above. answer: 2 above are correct

Dan wrote a check payable to Pete and delivered it on January 1, 2016. On January 15, 2016, Pete indorsed it and delivered the check to Henry. On February 15, 2016, Henry indorsed it and delivered the check to Hank. Which of the following statements is correct?

a. If Hank presented the check to the drawee bank for certification and they refused to certify, their refusal would constitute a dishonor. b. Hank presented the check to the drawee bank for payment on February 20, 2016, and the bank refused to pay. If Hank gives prompt notice of dishonor to all parties, Dan is probably liable on his drawer's contract. c. Hank presented the check to the drawee bank for payment on February 20, 2016, and the bank refused to pay. If Hank gives prompt notice of dishonor to all parties, Pete is liable on his indorser's contract. d. Hank presented the check to the drawee bank for payment on February 20, 2016, and the bank refused to pay. If Hank gives prompt notice of dishonor to all parties, Henry is liable on his indorser's contract. e. At least two of the above are correct (If you think at least two of the above are correct, choose only Choice 5). Answer: E (2 are correct)

Frank Forger steals a pad of checks from Debbie Davis. On March 1, the bank pays forged check #1 for $300. On March 5, the bank pays forged check #2 for $325. On March 20, Debbie receives her bank statement revealing the forged checks. On March 25, the bank pays check #3 forged by Frank for $700. Forged checks #4 and #5 are paid on April 25 for $600 and $700 respectively. On April 27, Debbie notifies the bank of the forgeries and demands recredit for all 5 items. Under these facts Denise:

can recover on checks #1, 2, and 3, but loses her right to recover on checks #4 and 5.

A motor vehicle, used by debtor for his person use, would be classified as:

consumer goods

A motor vehicle, held by a car dealer for sale, would be classified as:

inventory

The paper products used as part of the business of a law practice would be classified as:

inventory

Dave Drawer draws and delivers a check payable to the order of Speedy Star. Star endorses the check in blank and puts it in his wallet. Larsen E. Jones takes Star's wallet and attempts to use the check to pay for groceries at the Second Avenue Grocery Store. Second requires a signature, so Jones forges the check "Charlie Dondo." This forgery:

is irrelevant as far as negotiation is concerned.

A note, otherwise negotiable, containing the phrase: "Payable on January 1, 2030, but if my Uncle Joe dies before this note is due, it shall become payable 10 days after distribution of his estate." is:

negotiable.

June 30, 2015 Ninety (90) days from date, I promise to pay to pay to the order of Information, Inc., the sum of $10,000 with interest at the prime rate as set by the Last National Bank on today's date. This amount is for supplies purchased pursuant to a contract entered into between the parties on today's date. In the event that the holder shall deem himself to be insecure, the entire obligation becomes immediately due and payable. If the maker is unable to pay the note when it becomes due, the note may be extended for 30 days, at the option of the maker. In the event of default, the maker agrees to pay collection costs and attorney's fees. /s/ Best Books Best Books This instrument is:

negotiable.

Michelle operates a bookstore in the name of Best Books. She orders a shipment of books from her supplier, financing the purchase. In return for the books, she signs and delivers to Information, Inc., the following promissory note. Promissory Note June 30, 2015 Ninety (90) days from date, I promise to pay to pay to the order of Information, Inc., the sum of $10,000 with interest at the prime rate as set by the Last National Bank on today's date. This amount is for supplies purchased pursuant to a contract entered into between the parties on today's date. In the event that the holder shall deem himself to be insecure, the entire obligation becomes immediately due and payable. If the maker is unable to pay the note when it becomes due, the note may be extended for 30 days, at the option of the maker. In the event of default, the maker agrees to pay collection costs and attorney's fees. /s/ Best Books Best Books This instrument is:

negotiable.

Promissory Note June 30, 2015 Ninety (90) days from date, I promise to pay to pay to the order of Information, Inc., the sum of $10,000 with interest at the prime rate as set by the Last National Bank on today's date. This amount is for supplies purchased pursuant to a contract entered into between the parties on today's date. In the event that the holder shall deem himself to be insecure, the entire obligation becomes immediately due and payable. If the maker is unable to pay the note when it becomes due, the note may be extended for 30 days, at the option of the maker. In the event of default, the maker agrees to pay collection costs and attorney's fees. /s/ Best Books Best Books This instrument is:

negotiable.

A purchaser of a negotiable instrument would least likely be a holder in due course if, at the time of purchase, the instrument is

overdue by three weeks

A note otherwise negotiable is non-negotiable if it is:

payable on June 1, 2019, subject to an extension at the option of the maker.

All of the following can be classified as farm products except:

threshed wheat owned by Farmer and stored in an independent warehouse.