MGMT 200 Chapter 18

In Re Darby

-After Darby filed for Chapter 13 bankruptcy, Time Warner canceled his cable service -Darby filed a motion with the bankruptcy court to compel Time Warner to reinstate his service upon the offering of assurances of future payments -The bankruptcy court and district court held that cable service was not a utility that had to be provided as a necessity under the law -Darby appealed -Even if Darby were correct in his assertion that he could not obtain an alternative to cable television, the fact that Time Warner is not a necessity is enough to exempt it from the requirements of the bankruptcy code -Affirmed

Associated Home and RV Sales, INC. v. Bank of Belen

-Plaintiff sells recreational vehicles under the trade name Enchantment -It hired Ramos to assist with bookkeeping -In the next 20 months, Ramos forged 211 check payable to herself or to cash, thereby stealing $283,547 from Enchantment before managers discovered the forgeries and notified the bank -The bank refused to cover the losses, noting that is sent monthly statements, including photocopies of canceled checks -Enchantment sued the Bank of Belen for common law fraud and negligence and for negligence under the UCC -The trial court granted summary judgement to the bank -Enrichment appealed -We reverse the motion for summary judgement in favor of Bank

Chapter 11

-applies to businesses that wish to remain in operation and not be liquidated -business only

If a negotiable instrument may be freely traded in the market without concern for other contractual responsibilities, the party with the instrument is said to be __________

a holder in due course

who is the party seeking the loan

the maker

True or false: Before a person may file for bankruptcy, they must complete a debtor education course

true

mortgage

-a lien that gives the lien holder the right to sell the property and repay the debt from sale proceeds in the event the borrower defaults -the debtor is the mortgagor -the creditor is the mortgagee

possessory lien

-a lien that may apply to personal property -provides a security interest for creditors that add value to or care for personal property -offers the right to continue to hold goods on which work has been done, or for which materials have been supplied, until the customer pays

note

-a promise--not an order-- by one party, called the maker, to pay a certain sum of money to another party, the payee

distinction between a guaranty and a surety

-a surety is primarily liable after the debtor -the guarantor is secondarily liable

negotiable instrument

-a written promise or order to pay a certain sum of money -functions as a substitute for cash -provide a way for credit to be extended to debtors

some debts are not discharged by bankruptcy proceedings

-alimony and child support payments -back taxes -most student loans -some debts incurred immediately before filing bankruptcy -debts incurred by fraud against creditors -fines owed to the government

two avenues through which the creditor can obtain the customers' property (referred to as security or collateral)

-by agreement with the debtor -by operation of law

perfecting a security

-by filing a financing statement with the appropriate public office -by possessing the collateral -by "controlling" the collateral; or -it's done automatically upon attachment of the security interest (some jurisdictions)

UCC

Uniform Commercial Code

True or false: Under the UCC, open accounts for commercial transactions are permissible, but "revolving accounts" are not as the security is too uncertain

false

True or false: a certificate of deposit is a draft on a bank and payable on demand

false

the primary way to perfect is to...

file the financing statement with the secretary of state or other relevant official as required by state law, so it is available for public inspection

negotiable instruments

flexible commercial instruments because of their ability to be transferred

tangible property

goods that are movable at the time a security interest attaches or begins

A promise by one party (the maker) to pay a certain sum of money to another party (the payee) is called a ___________

note

bill of exchange

when a draft guarantees payment for goods in international trade

Attachment and Perfection: DOTS

-Debtor -Other creditor claiming an interest in the same collateral -Trustee in bankruptcy -Subsequent purchaser from the debtor without knowledge of perfection

Fordyce Bank and Trust v. Bean Timberland

-Fordyce Bank made a series of loans to Bean Timberland so it could buy timber from landowners -Bean would cut timber from owners' lands and sell logs to Potlatch and Idaho Timber, which milled the logs into lumber -Bean gave the bank security interests in the timber -The proceeds from timber sales were to repay the loans -the bank perfected its interests by filing UCC financing statements with the Secretary of State's office -Bean sold the timber but failed to repay the loans and went bankrupt -The bank sued Potlatch and Idaho because the bank had priority interest in the timber sale proceeds -The bank alleged that Potlatch and Idaho were negligent in their dealings for failing to do a lien search and failed to exercise good faith as required by the UCC -The trial court held for Potlatch and Idaho, ruling that they were negligent -They were not required to perform a security interest search in the ordinary course of business -The bank appealed -Affirmed

In the Matter of Kmart Corporation

-Kmart consists of the parent company and 37 affiliates and subsidiaries -When it filed for bankruptcy, it requested to pay, in full, the claims of selected "critical vendors" -The request stated that some suppliers would be unwilling to do business in the future if past debts were not paid -To stay in operation, it needed to continue to receive them, its ability to pay other creditors would be further impaired -The bankruptcy judge agreed and granted the order, without notifying the disfavored creditors -The judge held that its decision was in the best interest of the debtors and creditors -Kmart was allowed to determine who were critical vendors -Kmart paid about $300 million to 2,330 suppliers -Another 2,000 vendors were not paid -They and 43,000 additional unsecured creditors got about 10 cents on the dollar, mostly in stock of the reorganized company -Some of the creditors appealed to the district court -It reversed the order authorizing payments to critical vendors -Judge Grady concluded that neither the Bankruptcy Code nor the "doctrine of necessity" supported the order -The decision was then appealed to the 7th circuit and affirmed -Even if the code allows critical-vendors orders in principle, preferential payments to a class of creditors are proper only if the record shows the prospect or benefit to the other creditors--this record does not, so the critical-vendors order cannot stand. Affirmed

Summers Group, INC. v. Tempe Mechanical, LLC

-Summers Group, dba Rexel, sold electrical materials for construction on property owned by Metro Lofts -Rexel was not paid for materials provided so recorded a mechanic's lien on Metro Lofts' property -Other contractors on the work, including Tempe Mechanical, also filed liens against Metro Loft for non-payment -After not receiving payment, Rexel brought suit against Metro Lofts and all other lienholders -Some lienholders (other contractors) did not respond and had default judgments entered against them -Tempe, which had filed a lien, answered Rexel's complaint -Metro Lofts was in bankruptcy and under the control of bankruptcy trustee, ML Manager -All parties agreed that the bankruptcy court would determine the priority of payment of all valid liens -Before the bankruptcy court could sort out priority of payments, the trial court had to determine the validity of the various liens -ML Manager argued that it stood, first to receive payment, and because it should not be challenged, Rexel should pay all attorney fees related to the litigation -The trial court agreed -Rexel appealed -As unsuccessful parties in a lien priority contest, all the Remaining Lien Claimants should be liable for ML Manager's attorney fees award in proportion to their claims against the encumbered party -Reversed and remanded

General Electric Business Financial Services v. Silverman

-Warren Park Partners, Ltd., borrowed $34.8 million from the GE Financial to buy land in Frisco, Texas -At the time the loan agreement was made, Silverman and his partners signed a guaranty by which each "absolutely, unconditionally, and irrevocably guaranteed" the full payment of the principal and interest of all sums due under the loan agreement -Warren Park defaulted on the loan agreement and went into bankruptcy, so GE demanded payment from the partners -When they failed to pay, GE sued -Silverman and his partners claimed affirmative defenses fraud, extortion, theft, and economic duress -Affirmative defenses raise new facts that, if true, defeat the plaintiff's claim are true -The basis for the defense was that hours before signing the documents, GE notified defendants of changes to the terms of the loan agreement that they did not have time to contest as the loan was needed immediately -They signed the agreement because they were trapped and claimed that a GE employee told them that the new terms would not be enforced -GE moved for summary judgement -Plaintiff's motion for summary judgement is granted

a draft

-a binding order to pay a fixed sum of money hat involves 3 parties -created by the drawer, who orders the drawee--usually a bank-- to pay a certain sum to the payee

suretyship

-a contract for a suretyship is a promise by a third party (the surety) to be responsible for the borrower's payment obligations, or performance, to a creditor -the borrower or debtor is referred to as the principal -a surety could provide a suretyship for a fee or out of kindness, but could also be an owner or shareholder in the business -a suretyship can be created only by a contract between the surety and the creditor -the surety is obligated to pay the creditor if the principal fails to pay the debt or provide performance to the creditor

attachment lien

-a court-ordered seizure of goods from a customer to prevent the customer from disposing of the goods -to obtain an attachment lien, the creditor must show that the debtor is likely to dispose of the product

debts not extinguished by bankruptcy

-alimony and child support payments -back taxes -most student loans -some debts incurred immediately before filing bankruptcy -debts incurred by fraud against the creditors -fines owed to the government

certificate of deposit

-an acknowledgement by a bank that is has received money from a customer with a promise by the bank that it will repay the money received at a date specified or, in some instances, on demand

According to the UCC, to be negotiable, an instrument must meet certain requirements. It must:

-be written -be an unconditional order or promise to pay -be signed by the maker or drawer -be payable on demand or at specified time -be made out "to order" or "to bearer" and -state a certain sum of money

how can a negotiable instrument be transferred?

-by assignment or negotiation -if the instrument is assigned, the assignee has the same contract rights and responsibilities as the assignor -if the instrument is transferred by negotiation, the transferee takes the instrument free of the transferor's contract responsibilities

bearer instruments

-can be created in different ways -for example, the maker (drawer) may create a bearer instrument by stating, "to bears," "to the order of the bearer," "payable to bearer," "to cash," or "pay to the order of cash"

involuntary bankruptcy

-creditors file a petition with the court, forcing the declaration of bankruptcy and the beginning proceedings

sources of credit information

-customer financial statements -banks -credit reporting agencies -trade associations

UCC identifies 4 negotiable instruments

-drafts, checks, notes, and certificates of deposit -can be separated into orders to pay (drafts and checks) and promises to pay (notes and certificates of deposit)

discharge

-final stage of bankruptcy proceeding for individuals -means that the nonexempt assets have been liquidated and the proceeds distributed among certain creditors, who may not ask for more

What is bankruptcy?

-generalized state of financial failure which can sometimes be used strategically to help consumers and businesses get rid of their debts and repay their creditors -its purpose is to provide an orderly resolution where a debtor owes more than can be paid

installment account

-generally used by consumers for the purchase of durable goods such as automobiles -debtors repay by regular (generally monthly) payments

UCC states that to be a holder in due course, the transferee must...

-give value for the negotiable instrument -take the instrument without knowledge that it is overdue or defective -take the instrument in good faith

Surety's rights against the principal

-if the principal (borrower) does not pay the creditor, and the surety has to satisfy the debt, the principal is obligated to repay the surety -if the borrower could pay the creditor but refused to, the surety is entitled to exoneration -the surety is also entitled to be subrogated to the rights of the creditor against the debtor -in seeking repayment from the principal, the surety may assert any rights the creditor could have asserted against the debtor, including taking any security interests the creditor obtained from the borrower

open account

-most common form of credit -goods are sold on an invoice that provides evidence of the transaction -full payment is expected within a fixed time

cashier's check

-on form of check in which the bank is both the drawer and the drawee -ex: the purchase of real estate, where the owner/seller of the property requires that a guarantee of payment occur at the time title to the property is to pass to the buyer so to meet this requirement, a buyer gives the seller a cashier's checl

creditor

-person or business -one who lends money to, or allows goods or services to be purchased on credit by another party, the debtor

declaration of bankruptcy

-remains on a person's credit history for 10 years -the debtor may not seek another discharge for 8 years

Security interest under the UCC

-sale of good is made -contract signed, payment not complete -contract states seller has right to repossess if payments not made (attachment) -seller files notice with Secretary of State or other state official so public notice of priority claim to goods exists (perfection)

attachment

-security interest signed by consumer -seller must provide value -customer must have legal transferable right to collateral -rights against unsecured creditors but not necessarily against other secured creditors

non-recourse debt

-the lender can seize the collateral (the property), but not seek a deficiency judgement for any money owed not covered by the sale of the property

mechanic's lien

-the most common lien for work performed on real property -the party that furnishes material, labor, or services for the construction or repair of a building or other real property can place a lien on the property for unpaid bills (and becomes the lienor or lienholder)

perfection of security interest

-the seller can reclaim the goods -to make a security interest more easily enforceable, the seller must create the interest, or legal right, and make sure that the interest is attached and perfected

revolving account

-this is similar to the installment account, except that the debtor makes a minimum monthly payment, which is generally a fraction of the outstanding balance -more debt can be added to the account over time

debtor in possession

-when the debtor acts as trustee of the operation, attempting to generate income to cover debts owed -debtor's duty is to act in the best interests of the creditors as well as the owners

priority classes in bankruptcy

1. secured creditors 2. costs of preserving and administering the debtor's estate 3. unpaid wage claims 4. certain claims of farmers and fisherman 5. refund of security deposit 6. alimony and child support 7. taxes 8. general (unsecured) creditors who can file a proof of claim

If a business files for bankruptcy and keeps operating in bankruptcy, it is said to be in ________

Chapter 11

secured creditor

a business is a secured creditor when it has the ability to take some of the nonpaying customers' property to satisfy the debt

as a creditor..

a business monitors its credit extension and debt collection policies (creditors are interested in being protected in the event a debtor is unable or unwilling to pay)

common form of suretyship

a co-signature on a bank loan

exoneration

a court ordering requiring the principal to pay

check

a draft drawn on a bank and payable on demand

sight draft

a draft that requires immediate payment by the drawee to the payee

garnishment

a statutory procedure under which a creditor gains the right to attach up to 25% of a customer's net wages to be applied to an outstanding debt

drawee

agrees to make the payment, such as the bank making a payment based on a document presented to it

assets that are exempt form proceedings include...

care, clothing, appliances, some equity in a home, and a pension

nonexempt property

certain real and personal property is exempt from attachment proceedings

when personal property is used as collateral to back up a loan the note created is a

collateral note

In the Associated Home and RV Sales v. Bank of Belen case, where a bank honored bogus checks written by an employee on the company's account, the courts held that the bank:

could be liable for negligence under the UCC for failing to follow proper procedure

who issues or creates the document that requests payment

drawer

True or false: Any person in financial difficulty has the right to file for Chapter 7 (liquidation) bankruptcy no more than every 10 years

false

to establish superior rights--that is to perfect the security interest--the creditor must...

give notice of the existence of the security interest so other potential creditors are aware that they will stand behind the creditor with the perfected interest in getting paid

purchase money security interest

gives the lender rights against the borrower--rights that are superior to other creditors in the event the borrower fails to meet debt obligations

unsecured (general) creditor

has little more than the customer's promise to pay securing the loan

Chapter 7

means liquidation by discharge of most debts after sale and distribution of the sale proceeds of the debtor's non-exempt assets

In the case In re Darby, where Darby was in Chapter 13 bankruptcy and could not get cable television service, the court held that the cable company...

need not provide service to Darby as it is not a necessity

is the creditor's bankruptcy a defense of surety

no because the surety is providing financial protection to the creditor against such an event

In Fordyce Bank and Trust v. Bean Timberland, where a security interest in timber held by the bank to secure a loan to a timber cutter was ignored by buyers of timber, the courts held that there was....

no obligation for buyers to perform a lien search, so the buyers were not liable to the bank

Which of the following is least likely to be extinguished by bankruptcy

non of the other choices are likely to be extinguished by bankruptcy (back taxes, student loans, alimony)

secured transaction

occurs when a buyer wants goods and does not pay cash and the seller is leery of an unsecured debt

common types of credit accounts

open, installment, revolving

A lien placed on personal property is called a _________

possessory lien

guarantor

provides a guarantee of payment to a creditor should the principal debtor fail to pay and, therefore, can be the same as a surety

homestead law

provides an exemption that allows the debtor to retain the family home up to a specified amount free from creditors' claims

lien

security obtained by a creditor through the operation of law

A promise by a third party to be responsible for a borrower's payment obligations to a creditor is called a __________

suretyship

according to the UCC, for there to be attachment of a security interest...

the agreement must be signed by the customer; the seller must have provided value; and the customer must have legal, transferable rights in collateral

if the instrument is assigned...

the assignee has the same contract rights and responsibilities as the assignor

if an instrument is made "to bearer" ....

the party in possession is required only to deliver the instrument to transfer it

payee

the party to receive the payment

if repayment is not made...

the payee has certain rights to the personal property of the maker to help repay the loan

if the customer is unable to pay...

the seller has rights against the customer that are superior to unsecured creditors but not necessarily superior to other secured creditors

if the instrument is transferred by negotiation..

the transferee takes the instrument free of any of the transferor's contract obligations

promissory notes

these instruments involve two parties--the maker and the payee--rather than 3 parties (a drawer, a drawee, and a payee) required for a draft or check

what does it mean for a seller to default

they cannot or will not meet payment obligations

True or false: A legally binding written order to pay a fixed sum of money that involves three parties--a drawer, a drawee, and a payee-- is a draft

true

True or false: if a debt is past due, a court may order seizure of goods to prevent the goods from being disposed of by the debtor

true

true or false: only a voluntary option exists under Chapter 13

true

true or false: the drawer or maker is obligated to pay the instrument once it is in possession of a holder in due course

true

true or false: a mortgage must be in writing

true, according to the statute of frauds

floating lien

used when the smaller components of the general asset can change over time, such as in the case of the outstanding balances in a company's accounts receivable