Bailey Exam 3

Hannah Palindrome became aware of the loss of her automated teller card on Monday evening, March 3. The financial statements mailed to Hannah on April 1, May 1, and June 1 showed a $60 withdrawal on March 4 and a $600 withdrawal on March 9 but no other activity in the account. Assuming that the main provisions of the EFTA apply, Hannah is liable for

$660 if she reports the loss on June 15 The consumer's liability is limited to the lesser of $50 or the amount transferred without authorization prior to notifying the financial institution. If the consumer fails to notify the institution within 2 business days after learning of the loss of the means of access, his/her liability is the lesser of $500 or the amount transferred without authorization after 2 business days following discovery of the loss but prior to notification of the institution. If the consumer does not report an unauthorized transfer or error within 60 days of the transmission of a financial statement containing such a transaction or error, the consumer bears the loss. Consequently, if Hannah does not report the loss until June 15, her liability is $660.

Cobb gave Garson a signed check with the amount payable left blank. Garson was to fill in, as the amount, the price of fuel oil Garson was to deliver to Cobb at a later date. Garson told Cobb the amount would be no more than $900. Garson did not deliver the fuel oil but filled in the amount of $1,000 on the check. Garson then negotiated the check to Joseph in satisfaction of a $500 debt with the $500 balance paid to Garson in cash. Cobb stopped payment, and Joseph is seeking to collect $1,000 from Cobb. Cobb's maximum liability to Joseph will be

1,000 Joseph took after proper negotiation, in good faith, without notice of the unauthorized completion, and for value (payment of an antecedent debt). Mere knowledge that an incomplete instrument has been completed is not notice of a defense. Accordingly, Joseph is a holder in due course (HDC), and Cobb is liable for the amount of the check as completed (UCC 3-407).

Shemwell Co. purchased a printing press from Jones Equipment, Inc. Shemwell signed a promissory note for the purchase price and signed a security agreement stating, "The buyer waives as against any assignee of the security interest any claim or defense that the buyer may have against the seller." Jones assigned the promissory note and security agreement to 1st Bank. The waiver-of-defenses clause is not enforceable against Shemwell if

1st Bank did not give value for the assignment from Jones. A waiver-of-defenses clause contained in a security agreement is not always binding. For personal defenses in business transactions, the debtor is bound by the waiver only when the assignee has taken the assignment for value, in good faith, and without notice of a claim or defense. However, the clause will not be effective with respect to real defenses, i.e., those assertable against a holder in due course of a negotiable instrument.

Abe Booth is president of ABC Company. He has signed a promissory note on behalf of the corporation. On which signature below will Abe Booth not be personally liable?

ABC Company By Abe Booth Its President An agent who signs his/her own name to a negotiable instrument is personally liable unless both the identity of the principal and the representative capacity are indicated on the face of the instrument (UCC 3-402). By naming the company, stating his title, and using the word "by," Booth avoids personal liability.

Under the EFTA, a financial institution holding a customer's account that may be accessed by electronic means must furnish the customer with periodic statements. If the customer discovers an error, the financial institution must comply with certain procedures prescribed by the act. Which of the following is true?

After proper notice, the institution is obligated to investigate The customer has 60 days to give an oral or written notice of errors in its account, but the institution may require written confirmation within 10 business days of receiving an oral notice. The notice obligates the institution to investigate and report within 10 business days. Any error must be corrected within 1 business day after its discovery. Instead, the institution may temporarily recredit the account within 10 business days of receipt of notice. If it chooses this alternative, it has 45 business days from receipt of notice to complete the investigation. If it finds no error, the institution has 3 business days to mail an explanation to the customer. Failure to adhere to the prescribed procedures or a knowing and willful conclusion (despite the evidence) that the account was not erroneous permits the customer to recover treble damages.

A secured creditor wants to file a financing statement to perfect its security interest. Under the UCC Secured Transactions Article, which of the following must be included in the financing statement?

An indication of the collateral. To be effective, the financing statement must (1) include the name of the debtor, (2) include the name of the secured party or representative, and (3) indicate the collateral covered. A financing statement that covers as-extracted collateral or timber to be cut or that covers goods that are to be fixtures must include additional information, for example, a description of the real property to which the collateral relates. If the collateral is growing crops, uncut timber, or unextracted minerals, the financing statement must also describe the pertinent real estate.

Which of the following actions does not discharge a prior party to a negotiable instrument?

An oral renunciation of that prior party's endorsement. A person entitled to enforce the instrument may discharge any party. No consideration is required. It may be done by surrendering the instrument, by intentionally canceling the instrument or the party's signature, by destruction or mutilation, or by striking out the party's signature. It may also be done by agreeing not to sue or otherwise renouncing rights by a signed writing. Thus, a renunciation is ineffective unless in written form.

Unless the requirement is waived or expired, presentment of a promissory note for payment is necessary to hold liable

An unqualified endorser Presentment is a demand for payment or acceptance made by (or on behalf of) a person entitled to enforce the instrument. This demand is made (1) to the drawee (e.g., a bank) or a party obliged to pay the instrument (a maker, endorser, etc.); (2) to a bank in the case of a note or accepted draft payable at the bank; or (3) to the drawee to accept a draft. An unqualified endorser undertakes that, upon proper presentment to the primary party, dishonor, and proper notice of dishonor to the endorser (satisfaction of conditions precedent), (s)he will pay the instrument. Thus, an endorser is secondarily liable. Presentment is not necessary to charge a primary party. However, in practice, a note contains a waiver of compliance with the conditions precedent, and the holder may proceed directly against endorsers when payment is made by the maker.

Retailer Corp. was in need of financing. To secure a loan, it made an oral assignment of its accounts receivable to J. Roe, a local investor, under which Roe lent Retailer, on a continuing basis, 90% of the face value of the assigned accounts receivable. Retailer collected from the account debtors and remitted to Roe at intervals. Before the debt was paid, Retailer filed a petition in bankruptcy. Which of the following is true?

As between the account debtors and Roe, the assignment is not an enforceable security interest. Retailer's assignment does not constitute an enforceable security interest against either Retailer or third parties, such as the account debtors. When the collateral consists of accounts, a security interest does not become enforceable against the debtor and third parties (attach) until the debtor has authenticated a security agreement describing the collateral. Furthermore, the debtor must have received value, and the debtor must have rights (or the ability to transfer rights) in the collateral. Attachment of a security interest in accounts requires that the debtor authenticate a security agreement because the secured party cannot take possession, control, or delivery of accounts. However, an assignment that does not transfer a significant part of the assignor's receivables creates a security interest that is automatically perfected

The EFTA requires financial institutions to provide their customers with written documentation of electronic fund transfers at various times. These times include all of the following except

At the time of each preauthorized credit to an account An individual may arrange with a financial institution to have transfers made to his/her account on a prearranged basis. The financial institution and consumer may agree that written notification will be given only when a scheduled credit is not actually made

Vex Corp. executed a negotiable promissory note payable to Tamp, Inc. The note was collateralized by some of Vex's business assets. Tamp negotiated the note to Miller for value. Miller endorsed the note in blank and negotiated it to Bilco for value. Before the note became due, Bilco agreed to release Vex's collateral. Vex refused to pay Bilco when the note became due. Bilco promptly notified Miller and Tamp of Vex's default. Which of the following statements is true

Bilco will be unable to collect from either Tamp or Miller because of Bilco's release of the collateral The UCC provides many circumstances in which a party may be discharged from liability on an instrument. One way is the impairment of right of recourse or of collateral. The extent of discharge is limited to the loss resulting to the party from the impairment. Bilco's agreement to release the collateral effected discharge of Tamp and Miller.

A proper presentment, dishonor, and a prompt notice of dishonor are required to establish the liability of a secondary party. In certain cases, these requirements may be waived or excused. Which of the following is a true statement?

Both presentment and notice of dishonor may be waived Under UCC 3-504, presentment and notice of dishonor may be entirely excused when the party to be charged has waived these requirements expressly or by implication either before or after the instrument is due.

Which of the following conditions occurring subsequent to (after) the endorsements would discharge all of the endorsers?

Certification of the check. Certification is an unconditional promise by a bank to pay (an acceptance of liability). Prior to certification, a drawee bank is not liable on a check. But once the drawee bank certifies a check, the drawer and all prior endorsers are discharged (UCC 3-414 and 3-415). Moreover, by his qualified endorsement, Paul Folk is not liable on the instrument

An otherwise valid negotiable bearer note is signed with the forged signature of Darby. Art Archer, who believed he knew Darby's signature, bought the note in good faith from Hal Harding, the forger. Archer transferred the note without endorsement to Barker in partial payment of a debt. Barker then sold the note to Charles Chase for 80% of its face amount and delivered it without endorsement. When Chase presented the note for payment at maturity, Darby refused to honor it, pleading forgery. Chase gave proper notice of dishonor to Barker and to Archer. Which of the following statements best describes the situation from Chase's standpoint?

Chase can hold Barker liable on the ground that Barker warranted to Chase that neither Darby nor Archer had any defense valid against Barker The parties to this note are Harding (the forger of Darby's signature), Archer, Barker, and Chase. The only signature on the note was Darby's forged by Harding. Every transferor of a negotiable instrument for consideration warrants to his/her transferee that no defense of any party is good against him/her (UCC 3-416). Thus, Barker warranted to Chase that neither Darby nor Archer had any defense against Barker. But Darby had a defense of forgery effective even against a holder in due course, and Chase could therefore hold Barker liable.

Robb, a minor, executed a promissory note payable to bearer and delivered it to Dodsen in payment for a stereo system. Dodsen negotiated the note for value to Mellon by transfer of possession alone and without endorsement. Mellon endorsed the note in blank and negotiated it to Bloom for value. Bloom's demand for payment was refused by Robb because the note was executed when Robb was a minor. Bloom gave prompt notice of Robb's default to Dodsen and Mellon. No holder of the note was aware of Robb's minority. Which of the following parties will be liable to Bloom?

Dodsen: No Mellon: Yes Any person who signs a negotiable instrument is liable on it. A party is primarily liable if (s)he is required to pay by the terms of the instrument itself. Unqualified endorsers are secondarily liable; they are liable only if the party with primary liability fails to honor the instrument, and only if the holder gives timely notice of dishonor. A person who does not endorse an instrument is usually not liable on it. However, a person who transfers a negotiable instrument without endorsement, but for full consideration, warrants to the immediate transferee that (s)he is entitled to enforce the instrument

Lombard, Inc., manufactures exclusive designer apparel. It sells through franchised clothing stores on consignment, retaining a security interest in the goods. Gifford is one of Lombard's franchisees pursuant to a detailed contract signed by both Lombard and Gifford. For the security interest to be valid against Gifford with respect to the designer apparel in Gifford's possession, Lombard

Does not have to do anything further. Attachment of a security interest is the process by which a security interest becomes enforceable against a debtor by a secured party. Attachment of a security interest in inventory collateral results as soon as the following three events occur (barring an explicit agreement otherwise): (1) The collateral is in the possession of the secured party pursuant to the debtor's security agreement or the debtor has authenticated a security agreement describing the collateral, (2) value has been given, and (3) the debtor has rights (or the ability to transfer rights) in the collateral. All these conditions have been satisfied. The detailed contract was a "security agreement" because it created or provided for a security interest. Value has been given because Lombard has effectively sold the goods on credit to Gifford. The debtor has rights in the goods because it has the power to sell the goods at a profit. Consequently, the security interest has attached, and Lombard need not do anything further to protect itself against Gifford.

Don loaned $10,000 to Jon, and Robert agreed to act as surety. Robert's agreement to act as surety was induced by (1) fraudulent misrepresentations made by Don concerning Jon's financial status and (2) a bogus unaudited financial statement of which Don had no knowledge, and that was independently submitted by Jon to Robert. Which of the following is true?

Don's fraudulent misrepresentations provide Robert with a defense that will prevent Don from enforcing the surety undertaking. A surety may take advantage of all his/her available personal defenses on a contract, e.g., fraud or intentional misrepresentation. A creditor's fraudulent misrepresentations provide the surety with a defense that will prevent the creditor from enforcing the surety undertaking.

Drawer writes a $1,000 check on her account at Drawee Bank. Drawer has only $975 in the account. If Drawer and Drawee have no agreement concerning overdrafts

Drawee may honor the check and charge Drawer's account for $1,000. In the absence of an agreement to permit overdrafts, the bank has no obligation to honor an overdraft. If it chooses to pay the check, the customer has an enforceable implied obligation to reimburse the bank (i.e., effectively a loan). The bank will also have the right to impose a service charge. If the bank and the customer have an agreement permitting overdrafts, the bank will probably charge interest.

Drawer writes a check on Drawee Bank. Drawer has sufficient funds in her account, and the check is in proper form. When Payee presents the check for payment, Drawee refuses to pay. Drawee is liable to

Drawer, but not payee A bank has no liability to anyone other than its drawer for refusing to pay on a check. Hence, the bank has no liability whatsoever to Payee. Only if the bank accepted (or certified) the check would it be liable to the holder (UCC 3-413).

Lester Dunbar sold to Walter Masters real property on which Charles Endicott held a first mortgage. Masters expressly assumed the mortgage debt. Subsequently, Masters defaulted in payment of the mortgage debt. Masters contends that Endicott must first proceed against Dunbar, the original mortgagor, because he is primarily liable for the mortgage debt. Based upon these facts,

Dunbar is, in fact, a surety and must satisfy the mortgage if Masters does not When a buyer of real estate assumes an existing mortgage, the seller remains liable because a novation has not occurred. Between the seller and buyer, the buyer has become the primary debtor, and the seller is a surety. Because Dunbar is a surety of the assumed mortgage, he must pay if Masters does not.

Blue is a holder of a check originally drawn by Rush and made payable to Silk. Silk properly endorsed the check to Field. Field had the check certified by the drawee bank and then endorsed the check to Blue. As a result,

Field is not discharged from liability Certification is an unconditional promise by a bank to pay (an acceptance of liability). Prior to certification, a drawee bank is not liable on a check. But once the drawee bank certifies a check, the drawer and all prior endorsers are discharged (UCC 3-414 and 3-415). However, a party who endorses subsequent to certification is not discharged. (S)he is secondarily liable.

Motor Sales, Inc., sells motor vehicles at retail. It borrowed money from Finance Company and gave a properly executed security agreement in its present and future inventory and in the proceeds therefrom to secure the loan. The security interest was duly perfected under the laws of the state where Motor does business and maintains its entire inventory. Thereafter, Motor sold a new pickup truck from its inventory to a consumer and received a certified check in payment of the full price. Which of the following is true?

Finance's security interest in the certified check Motor received is perfected against Motor's other creditors The certified check received by the debtor constitutes identifiable cash proceeds from the sale of the inventory. In general, a security interest attaches to identifiable proceeds of collateral. Moreover, this security interest is perfected if the security interest in the original collateral was also perfected. A perfected security interest in proceeds becomes unperfected on the 21st day after attachment unless (1) the proceeds are identifiable cash proceeds; (2) some other method is used to perfect the security interest at the time of attachment or within 20 days thereafter; or (3) a filed financing statement covers the original collateral, the proceeds are collateral in which a security interest could be perfected by filing in the same office as the original collateral, and the proceeds are not obtained using the cash proceeds. Because a certified check constitutes identifiable cash proceeds, Finance has a perfected security interest in it that will not lapse on the 21st day after attachment.

Path stole a check made out to the order of Marks. Path forged the name of Marks on the back and made the instrument payable to himself. He then negotiated the check to Harrison for cash by signing his own name on the back of the instrument in Harrison's presence. Harrison was unaware of any of the facts surrounding the theft or forged endorsement and presented the check for payment. Central County Bank, the drawee bank, paid it. Disregarding Path, which of the following will bear the loss?

Harrison. This question involves the forgery of an endorser's signature. Harrison did not qualify as a holder, much less a holder in due course, because the theft and forged endorsement precluded a proper negotiation of the check by the payee. Because Harrison did not acquire title, (s)he breached the presentment warranty of title (UCC 4-208) and is liable to Central County Bank. Harrison's only recourse is against the thief.

Tawney Manufacturing approached Worldwide Lenders for a loan of $50,000 to purchase vital components it used in its manufacturing process. Worldwide decided to grant the loan but only if Tawney would agree to a field warehousing arrangement. Pursuant to their understanding, Worldwide paid for the purchase of the components, took a negotiable bill of lading for them, and surrendered the bill of lading in exchange for negotiable warehouse receipts issued by the bonded warehouse company that had established a field warehouse in Tawney's storage facility. Worldwide did not file a financing statement. Under the circumstances, Worldwide

Has a security interest in the goods that has attached and is perfected The requirements of attachment have been satisfied. Value was given, the debtor had rights in the collateral, and the secured party had possession of the collateral. Whether the debtor authenticated a security agreement describing the collateral is irrelevant because the collateral is in the possession of the secured party pursuant to the debtor's security agreement. The warehouse company issued negotiable documents of title representing the goods. These negotiable documents are in the possession of the secured party. Also, value was given when Worldwide paid for the parts, and the debtor has rights in the collateral (use of the components in manufacturing). Perfection of a security interest in the goods has also occurred. Possession of the negotiable documents of title is a means of perfecting a security interest in them. Furthermore, perfecting a security interest in the negotiable documents is a means of perfecting a security interest in the goods they represent while the goods are held by the issuer of the documents.

Ford was unable to repay a loan to City Bank when due. City refused to renew the loan unless an acceptable surety could be provided. Ford asked Owens to act as surety on the loan. To induce Owens to agree to become a surety, Ford made fraudulent representations about Ford's financial condition and promised Owens discounts on merchandise sold at Ford's store. Owens agreed to act as surety and the loan to Ford was renewed. Subsequently, Ford's obligation to City was discharged in Ford's bankruptcy and City wishes to hold Owens liable. Owens may avoid liability

If Owens can show that City Bank was aware of the fraudulent representations A principal debtor's fraudulent misrepresentation is a material fact that the creditor has a duty to disclose to the surety. Because the surety arrangement is between the surety and the creditor, concealment or nondisclosure is a form of fraud against the surety by the creditor and is a personal defense of the surety. However, the principal debtor's fraud is not a defense against an innocent creditor.

Smith bought a TV from the ABC Appliance Store and paid for the set with a check. Later in the day, Smith found a better model for the same price at another store. Smith immediately called ABC trying to cancel the sale. ABC told Smith that they were holding him to the sale and had negotiated the check to their wholesaler, Glenn Company, as a partial payment on inventory purchases. Smith telephoned his bank, the Union Trust Bank, and ordered the bank to stop payment on the check. Which of the following statements is true?

If Union Trust mistakenly pays Smith's check 2 days after receiving the stop order, the bank will not be liable. An oral order to stop payment is good for 14 days. The drawee bank, however, must be given reasonable time to act on the stop order (UCC 4-403). Because 2 days is probably reasonable time to act on an order to stop payment, the reason the bank will not be liable is that Smith has no defense on the check and will be liable on it. A bank that pays in violation of a stop order succeeds to the rights of the payee (ABC) against the drawer (UCC 4-407).

Ajax, Inc., sold a refrigerator to Broadway Bill's Restaurant and accepted Broadway's negotiable promissory note for $450 as payment. The note was payable to Ajax's order 1 year later. Ajax endorsed in blank endorsement and sold it to National Bank for $350. National credited Ajax's checking account with $350, which brought Ajax's balance to $925. Ajax drew checks for a total of $825, which National honored. National then learned that the refrigerator had not been delivered by Ajax. The note is now due and unpaid. National brings suit; Broadway pleads lack of consideration on the note. Which of the following is a valid statement?

In ascertaining the extent to which value had been given by National, the FIFO rule will apply to the deposit and withdrawals. A holder in due course can assert its rights only to the extent that it has given value (UCC 3-302). A bank is considered to give value on a customer's account only to the extent that the funds have been withdrawn from the bank. The FIFO rule (the first funds in are the first funds out) applies for this purpose. Thus, National gave value only to the extent of $250 because $100 of the deposit still remained in Ajax's account

Cross has an unperfected security interest in the inventory of Safe, Inc. The unperfected security interest

Is subordinate to lien creditors of Safe who become such prior to any subsequent perfection by Cross. Certain interests have priority over unperfected security interests. Included are the rights of a lien creditor, that is, a creditor who has acquired a lien on the property involved by judicial process, an assignee for the benefit of creditors, a receiver in equity, or a trustee in bankruptcy. The lien creditor takes the property subject to any security interest perfected before the lien attached, but its rights are superior to any security interest perfected after the lien attached.

Maxim Corporation, a wholesaler, was indebted to the Wilson Manufacturing Corporation in the amount of $50,000 arising out of the sale of goods delivered to Maxim on credit. Maxim authenticated a security agreement creating a security interest in certain collateral of Maxim. The collateral was described in the security agreement as "the inventory of Maxim Corporation, presently existing and thereafter acquired." In general, this description of the collateral

Is sufficient to cover all inventory. Unless the secured party takes possession of the inventory collateral, the security interest will not attach unless the debtor has authenticated a security agreement that adequately describes the collateral. Such a description is sufficient if it reasonably identifies what is described even though the language is not specific. For example, collateral may be reasonably identified by a type of collateral (other than a commercial tort claim or, in a consumer transaction, consumer goods, a security entitlement, a securities account, or a commodity account) defined in the UCC, such as inventory.

Jack drew a check, payable to the order of Ellen, for $100. The check was endorsed in blank by Ellen to John, who skillfully altered the amount of the check to $1,000. John then cashed it at his club, which gave value, took in good faith, and had no knowledge or notice of the alteration. The alteration was not detected until Jack received his bank statement. Jack insisted that his bank recredit his account. Which of the following is true?

Jack's bank must recredit only $900 if the drawer did not negligently contribute to the alteration. The material alteration of an instrument is a real defense that can be asserted even against a holder in due course (UCC 3-407). The holder in due course may enforce the instrument's original terms but is not entitled to the altered terms of the document, provided the drawer was not negligent in contributing to the alteration (UCC 3-406). Jack's bank most likely qualifies as a holder in due course and, as such, may debit Jack's account for only $100 (the check's "original tenor"). The bank must recredit Jack's account for $900 (UCC 4-401)

Larkin is a wholesaler of computers in the state of Whiteacre. Larkin sold 40 computers to Elk Appliance, which also does business in the state of Whiteacre, for $80,000. Elk paid $20,000 down and signed a promissory note for the balance. Elk also executed a security agreement giving Larkin a security interest in Elk's inventory, including the computers. Larkin perfected its security interest by properly filing a financing statement in the state of Whiteacre. Six months later, Elk moved its business to the state of Blackacre, taking the computers. On arriving in Blackacre, Elk secured a loan from Quarry Bank and signed a security agreement, putting up all inventory (including the computers) as collateral. Quarry perfected its security interest by properly filing a financing statement in the state of Blackacre. Two months after arriving in Blackacre, Elk went into default on both debts. Which of the following statements is true?

Larkin's security interest is superior even though at the time of Elk's default Larkin had not perfected its security interest in the state of Blackacre. Larkin perfected its security interest in the state where the debtor and the collateral were located. The perfection of the security interest continues until the earlier of the time perfection would lapse in the original state, 4 months after a change of the debtor's location to another state, or 1 year after a transfer of the collateral to a new debtor located in another state. Here, the collateral was perfected until the day of removal. It would have continued perfected until 4 months later without any action by Larkin. Thus, 2 months after the debtor and the collateral arrived in Blackacre, Larkin's perfected security interest had priority over the subsequent security interest of Quarry Bank. The general rule is that conflicting perfected security interests rank according to time of filing or perfection.

The Electronic Fund Transfer Act (EFTA) is consumer legislation that would not apply to transactions originated through

Machine-generated checks. An electronic fund transfer is a "transfer of funds, other than a transaction originated by check, draft, or similar paper instrument, initiated through an electronic terminal, telephonic instrument, or computer or magnetic tape so as to order, instruct, or authorize a financial institution to debit or credit an account." The EFTA does not apply to machine-generated checks (negotiable instruments regulated by UCC Articles 3 and 4

Under the EFTA, a financial institution will avoid liability to its customer for failure to

Make a timely transfer if the terminal does not have sufficient funds The institution will not be liable when the terminal lacked the cash to complete the transaction or the customer's account had insufficient funds. Except in the case of stop-payment orders, the institution may also defend by proving that an act of nature or a technical malfunction known to the customer at the time (s)he attempted the transaction caused the failure.

When the holder of a negotiable instrument transfers it for consideration by endorsing "without recourse," (s)he

Makes the same warranties as an unqualified endorser The endorsement "without recourse" is a qualified endorsement that negates secondary contract liability. However, qualified endorsement does not modify transfer warranties.

Mansfield Financial lends money on the strength of negotiable warehouse receipts. Its policy is always to obtain a perfected security interest in the receipts against the creditors of the borrowers and to maintain it until the loan has been satisfied. Insofar as this policy is concerned, which of the following is true?

Mansfield has a perfected security interest in goods represented by the receipts A warehouse receipt is a form of document of title issued by a person engaged in the business of storing goods. A warehouse receipt is negotiable if by its terms the goods that it represents are to be delivered to the bearer or to the order of a named person. During the period that goods represented by a document of title are in the possession of the issuer (bailee), a security interest in the goods may be perfected by perfecting a security interest in the document. Possession of the negotiable document is a means of perfecting a security interest in it.

Mozart Manufacturers of Florida manufactured and sold three pianos to Virtuoso Piano School of Vandelay, Florida in a credit transaction. Mozart properly filed a 5-year financing statement with regard to the pianos in Florida on February 2, the day after the sale. Finding its business a trifle slow in Vandelay, Virtuoso packed up its pianos and moved to Atlanta, Georgia on May 2 of the same year. On September 1, Mozart properly filed a financing statement in Georgia. What is the status of Mozart's security interest?

Mozart's security interest was continuously perfected. The perfection of the security interest in goods (the pianos) based on the law of the debtor's location (Florida) continues for the unexpired period in the original state, 4 months after the debtor moves to a new state, or 1 year after transfer to a person in another state who as a result has the status of a debtor, whichever period first expires. Here, the security interest was perfected from February 2 to May 2, the day of removal. It would have continued perfected from May 2 until September 2 without any action by Mozart. By taking the appropriate steps to perfect the security interest in the new state, Mozart ensured itself of a continuously perfected security interest.

On January 1, Shemwell Co. signed a security agreement giving Jones a security interest in a crane Shemwell was planning to buy for its business. In exchange for the security agreement, Jones signed a contract to lend Shemwell $10,000 on request. On January 9, Shemwell purchased the crane. On January 15, Jones delivered $10,000 to Shemwell. On January 20, Jones filed the security agreement with the appropriate public officials. Under the UCC, when did Jones's security interest in the crane attach?

On January 9, when Shemwell purchased the crane for its business. Attachment of a security interest in collateral occurs when the security interest is enforceable against the debtor. It is enforceable against the debtor and third parties when all of the following events have occurred unless the time is postponed by an explicit agreement: (1) value has been given; (2) the debtor has rights (or the ability to transfer rights) in the collateral; and (3) the collateral (other than a certificated security) is in the possession of the secured party pursuant to the debtor's security agreement, the debtor has authenticated a security agreement containing a description of the collateral, the secured party has control of investment property (or of deposit accounts, letter-of-credit rights, or electronic chattel paper) under the debtor's security agreement, or a registered certificated security has been delivered pursuant to the debtor's security agreement. The secured party gave value on January 1 when it entered into a contractual agreement to lend money to the debtor, the debtor had rights in the collateral on January 9, and the debtor authenticated a security agreement on January 1. Hence, the attachment requirements were met on January 9.

On October 1, Winslow Corporation obtained a loan commitment of $250,000 from Liberty National Bank. Liberty filed a financing statement on October 2. On October 5, the $250,000 loan was consummated, and Winslow signed a security agreement granting the bank a security interest in inventory, accounts receivable, and proceeds from the sale of the inventory and collection of the accounts receivable. Liberty's security interest was perfected

On Octboer 5 A security interest is perfected when it has attached and when all of the necessary steps required for perfection have been taken. The security interest did not attach until October 5 when the security agreement was authenticated by the debtor. Because a financing statement had already been filed, October 5 was also the date when perfection occurred. NOTE: Priority among perfected security interests is determined by date of filing or perfection, whichever comes first. Thus, Liberty Bank has priority over a conflicting perfected security interest from the date of filing on October 2.

Hoover is a holder in due course of a check that was originally payable to the order of Nelson or bearer and has the following endorsements on its back: Nelson Pay to order of Maxwell Duffy Without Recourse Maxwell Howard Which of the following statements about the check is true?

Presentment for payment must be made within 30 days after endorsement to hold an endorser liable If an instrument is dishonored, an endorser must pay the amount due according to the terms at the time of endorsement or, if the endorsement was of an incomplete instrument, according to the terms as completed. The endorser is not liable, however, if the endorsement was without recourse, any required notice of dishonor is not given, or the instrument is a draft accepted by a bank post-endorsement. If the endorser is liable under the foregoing rules, this liability is nevertheless discharged if a check is not presented for payment (or given to a depository bank for collection) within 30 days after endorsement.

A surety is best defined as one who

Promises to answer to a third person for the debt or performance of another. A surety is contractually obligated to a creditor to pay a debt or to perform an obligation owed by the principal debtor to the creditor if the principal fails to pay or otherwise perform. Suretyship is therefore a security device.

In general, which of the following statements is true concerning the priority among checks drawn on a particular account and presented to the drawee bank on a particular day?

The checks may be charged to the account in any order convenient to the bank In general, the UCC provides that items may be accepted, paid, certified, or charged to the indicated account of its customer in any order convenient to the bank (UCC 4-303).

Gomer obtained checks payable to the order of certain repairmen who serviced various large corporations. He observed the delivery trucks of repairmen who did business with the corporations; then he submitted bills on the bogus letterhead of the repairmen to the corporations. The return envelope for payment indicated a local post office box. When the checks arrived, Gomer would forge the payees' signatures and cash the checks. The parties cashing the checks are holders in due course. Who will bear the loss assuming the amount cannot be recovered from Gomer?

The defrauded corporations. When an impostor causes a drawer to issue a check to him/her and endorses it in the name of the payee, the endorsement is effective against the drawer (UCC 3-404). The drawer is thereby deprived of the real defense of forgery against holders in due course and others. Thus, the defrauded corporations (drawers) will ultimately have to bear the loss.

Case Corporation manufactures electric drills and sells them to retail hardware stores. Under the Uniform Commercial Code, it is likely that

The drills are inventory in Case's hands The classification of goods depends on who holds the property and the use to which it is put. Inventory consists of goods, other than farm products, that are held for sale or lease or to be provided under a contract for service; that are leased or provided under a contract for service; or that consist of materials used or consumed by a business, work-in-process, or raw materials. Electric drills are inventory in the hands of their manufacturer (or a retailer) because they are held for sale. The drills are consumer goods, however, in the hands of someone using them primarily for personal, family, or household purposes. They are equipment if they do not qualify as inventory, farm products, or consumer goods.

A filing requirement for perfection applies to which of the following transactions under Article 9 (Secured Transactions) of the Uniform Commercial Code?

The factoring of a significant amount of the assignor's accounts receivable The factoring of accounts receivable involves their outright sale and is governed by Article 9. In standard commercial practice, the distinction between transactions in accounts that are secured transactions and those that are sales is often obscure, so the UCC treats both as secured transactions. Perfection of a security interest in accounts ordinarily may only be achieved by filing because nothing exists to possess. An outright purchaser of accounts therefore must file a financing statement to perfect an ownership interest. Nevertheless, when an insignificant amount of the assignor's accounts is transferred, perfection is by attachment only, and a financing statement need not be filed.

A party contracts to guarantee the collection of the debts of another. As a result of the guaranty, which of the following statements is true?

The guaranty must be in writing A person who guarantees the payment of a debt of another without qualification has primary liability; (s)he may be required to pay the debt upon default even though the creditor makes no effort to collect. In states that distinguish between sureties and guarantors, such a person is identified as a surety. The guarantor of collection is a person who guarantees the debt upon condition that the creditor first make use of ordinary legal means to collect from the debtor. Surety and guaranty arrangements that involve promises to answer for the debt of another are within the statute of frauds and are required to be in writing, assuming the main purpose of the promise is not to benefit the surety or guarantor

A surety will not be liable on an undertaking if

The underlying obligation was illegal. The obligation for which the surety assumes liability must be legal. A suretyship agreement is a contract, and one of the requirements for a valid contract is that the subject be legal.

Ace, Inc., lent $10,000 to King, Inc., one of its best customers. The loan was for three years and was evidenced by a note. In addition, Walsh and Paxton, King's principal shareholders, had orally guaranteed the repayment of the loan. With respect to Walsh and Paxton, which of the following is a true statement?

They are cosureties and, as such, their surety undertaking must be in a signed writing. Walsh and Paxton each guaranteed the loan in full. This direct guaranty makes them sureties. Two or more persons who are sureties on the same obligation are known as cosureties. A valid defense of the shareholders in this situation is that the suretyship agreement was not in writing and signed as required.

The Town Bank makes collateralized loans to its customers at 1% above prime on securities owned by the customer, subject to existing margin requirements. In doing so, which of the following is true?

Town Bank can obtain a perfected security interest in the securities by control. Investment property includes securities, whether certificated or not. A security interest in investment property may be perfected by control or by filing. Control of a certificated security in bearer form arises from delivery to the secured party. If the security is in registered form, control requires delivery and endorsement or delivery and registration. Control of an uncertificated security requires delivery or the issuer's agreement to comply with instructions without the further consent of the debtor-registered owner. Control of a security entitlement requires that the secured party become the holder or that the securities intermediary agree to comply with entitlement orders originated by the secured party without further consent by the debtor-entitlement holder. A secured party has control over a securities account if the secured party controls all security entitlements in the account

Sorus and Ace have agreed, in writing, to act as guarantors of collection on a debt owed by Pepper to Towns, Inc. The debt is evidenced by a promissory note. If Pepper defaults, Towns will be entitled to recover from Sorus and Ace unless

Towns has not attempted to enforce the promissory note against Pepper An absolute surety is primarily liable for the debtor's obligation. A creditor may proceed directly against the surety immediately upon default by the debtor. A guarantor of collection has only secondary liability. The creditor must first proceed against the principal debtor. Only when a judgment is returned unsatisfied may (s)he proceed against the guarantor.

Which of the following parties makes warranties upon transferring a negotiable instrument?

Transferors for consideration. Any person who receives consideration for transferring (as opposed to obtaining payment or acceptance of) an instrument makes specific warranties regarding that instrument and may be held liable for any breach of those warranties (UCC 3-416).

Robb stole one of Markum's blank checks, made it payable to himself, and forged Markum's signature to it. The check was drawn on the Unity Trust Company. Robb cashed the check at the Friendly Check Cashing Company, which in turn deposited it with its bank, Farmers National. Farmers proceeded to collect on the check from Unity Trust. The theft and forgery were quickly discovered by Markum who promptly notified Unity. None of the parties were negligent. Who will bear the loss, assuming the amount cannot be recovered from Robb?

Unity Trust Company. Unity must ultimately bear the loss because a drawee bank that pays a check issued over a forged drawer's signature may not charge the customer's account if the customer was not negligent. Also, Unity may hold neither Friendly nor Farmers National (the collecting bank) liable on breach of a presentment warranty. On presentment, one warrants only that (s)he has no knowledge a drawer's signature is forged (UCC 4-208).

An add-on clause for a new installment purchase of goods is generally

Valid because it gives vendors in low-income areas additional security and thereby increases the availability of credit An add-on clause is an agreement that failure to make payment on the goods purchased permits not only the items purchased under the current contract to be repossessed, but also any prior items purchased from the same seller. Add-on clauses give vendors additional security. If add-on clauses are invalidated, vendors will be less likely to sell consumer goods on credit to low-income families. However, courts have sometimes invalidated such clauses because they offend notions of public policy.