Q&A Hero

Q: Before a discharge is granted, a debtor can transfer property or make a payment in preference to one creditor over another.

Q: Uniform laws apply in all states, including those in which the laws have not been adopted.

Q: The last security interest to be perfected is the first in priority over any other perfected security interests.

Q: The principal duty of a trustee is to liquidate and close up the debtor's es­tate as quickly as possible.

Q: To determine whether a law is constitutional, a court will only look at the law's source.

Q: The "first-in-time" rule means that an unperfected security interest takes priority over a perfected security interest.

Q: A state law that conflicts with the U.S. Constitution will be deemed unconstitutional.

Q: The homestead exemption has been abolished under the Bankruptcy Code.

Q: A floating lien cannot apply to the proceeds of a sale of after-acquired property.

Q: The concept of a floating lien applies to a constantly changing inventory.

Q: The homestead exemption under the Bankruptcy Code is unlimited.

Q: Constitutional law includes only the U.S. Constitution.

Q: Future advances against a line of credit can be subject to the same collateral.

Q: In most states, state law determines the amount of a debtor's property that is exempt from dis­tribution on bankruptcy.

Q: The natural law philosopher believes that formal law is inferior to universal moral and ethical principles that are part of human nature.

Q: Bankruptcy proceedings focus on the procedures to administer a debtor's estate in bankruptcy.

Q: Law is a body of enforceable rules governing relationships among individuals and between individuals and their society.

Q: Proceeds consist of whatever is received when collateral is sold.

Q: A security agreements may provide for coverage of after-acquired property.

Q: Bankruptcy law has one goalto encourage the continued use of credit.

Q: The stability and predictability created by the law is essential to business activities.

Q: A financing statement is effective for five years from the date of filing.

Q: A homestead exemption allows a debtor to pay a fixed debt for an amount less than was actually owed.

Q: A debtor's car may be exempt from satisfaction of a judgment debt.

Q: A continuation statement is effective only if it is filed within six months before the expiration of a financing statement.

Q: Clothing is not included in state exemption statutes.

Q: A purchase-money security interest in consumer goods is perfected automatically at the time of a credit sale.

Q: If a surety pays the debt owed to a creditor, then the surety acquires any rights that the creditor had against the debtor.

Q: The office in which a financing statement should be filed depends on the creditor's location.

Q: A financing statement must include a description of the collateral by type or item.

Q: A surety can use any defenses available to a debtor to avoid liability on the obligation to the creditor.

Q: A security interest is enforceable only if the collateral is in the secured party's possession.

Q: A surety is released from his or her obligation if the debtor pays it.

Q: A financing statement cannot be the same as the security agreement.

Q: A surety is released from his or her obligation if a debtor cannot pay a debt.

Q: A financing statement must include the creditor's signature.

Q: The method of perfecting a security interest does not depend on the classification of the collateral.

Q: A guaranty contract must be in writing to be enforceable.

Q: A security interest cannot be perfected without the filing of a financing statement.

Q: Before the guarantor of a debt can be required to answer for the debt of a debtor, the debtor must have defaulted on the underlying obligation.

Q: A surety is primarily liable on an obliga­tion.

Q: Perfection refers to the quality of the collateral that secures a creditor's interest in a debtor's debt.

Q: The failure to pay a debt as promised is known as default.

Q: If the proceeds of a foreclosure sale cover the costs and the mortgage debt, any surplus is a windfall to the creditor.

Q: An employer can dismiss an employee due to garnishment for one debt.

Q: To create an enforceable security interest, the secured party must give value.

Q: Almost all types of property can be garnished.

Q: Attachment makes the security interest between a debtor and se­cured party ineffective.

Q: All of a debtor's pay can be gar­nished.

Q: If a debtor will not pay a judgment, a creditor can only resort to "self-help" to collect.

Q: For a creditor to have an enforceable security interest, the debtor must have rights in the collateral.

Q: A security interest is not enforceable after the creditor's rights have at­tached to the collateral.

Q: An attachment is a court-ordered seizure and taking into custody of prop­erty prior to the securing of a judgment for a past-due debt.

Q: A debtor is the person in whose favor there is a security interest.

Q: A creditor with a mechanic's lien on property can sell the property to sat­isfy the debt.

Q: The person who owes the payment of a secured obligation is the secured party.

Q: Efrem owns Fans & Players, a retail sporting goods shop. When Great Hill Lodge, a new ski resort, is built in the area, Efrem decides to expand and borrows a large sum from Hometown Bank. The bank takes a secu­rity interest in Efrem's present inventory and any after-acquired inven­tory as collateral for the loan. The bank properly perfects the security in­terest by filing a financing statement. Efrem's business is profitable, and he begins doubling his inventory. A year later, an avalanche destroys the ski slope and lodge. Efrem's business takes a turn for the worse, and he defaults on his debt to the bank. The bank seeks possession of his en­tire inventory, even though the inventory is twice as large as it was when the loan was made. Efrem claims that the bank has rights to only half of his inventory. Is Efrem correct? Explain.

Q: Secured transactions are governed by the Uniform Commercial Code (UCC).

Q: Joy steals a check from Kyle, forges his signature, and transfers the check to Loco Loans, Inc., for value. Unaware that the signature is not Kyle's, Loco Loans presents the check to Metro Bank, the drawee, which cashes the check. Kyle discovers the forgery and insists that Metro recredit his account. Can Metro refuse? If not, from whom can the bank recover?

Q: Sara needs $1,500 to buy textbooks and other school supplies. Tomas agrees to loan Sara $1,500, accepting as collateral Tomas's car. They put their agreement in writing and sign it. Sara keeps possession of the car. Does Tomas have an enforceable security interest? How can Tomas let other creditors know of his interest in the car?

Q: Hoppy steals two checks from Eagle Retail Stores, Inc.a blank check and a check payable to the order of General Supplies Company (GSC), drawn on Eagle's account with First National Bank. Hoppy forges Eagle's signa­ture on the blank check and makes it payable to himself. Hoppy forges GSC's indorsement on the back of the check payable to GSC, and adds "Pay to the order of Hoppy." At Friendly Credit, Inc., Hoppy indorses the back of both checks with his own name and gives them to Friendly for cash. Friendly does not know about the theft or the forged signatures and presents the checks to First National, which pays them. Eagle, which was not negli­gent, discovers the forgeries and asks First National to recredit its ac­count. Who suffers the loss on each check?

Q: Hal's Hardware store defaults on a debt to Intrastate Bank, which takes possession of the collateral securing the debt. Intrastate sells the collat­eral. The proceeds from the sale are applied first to a. Hal's debt to Intrastate. b. Hal's debts to other creditors. c. Intrastate's fees for the sale. d. payments Hal's made on the debt to Intrastate.

Q: Computer World (CW), after repossessing a multimedia system from Dave, a consumer, decides to keep the system instead of reselling it. CW sends written notice to Dave. CW can now keep the system a. only after attempting an unsuccessful public sale of the system. b. only after notifying any other appropriate secured party. c. unless Dave objects. d. under any circumstances.

Q: Jackie inserts a debit card issued by her bank into a machine and keys in her personal identification number. She is then able to withdraw $500 in cash. Jackie is using a. an automated teller machine. b. a point-of-sale system. c. a direct deposit system. d. an Internet payment system.

Q: Elias repays his debt, incurred to buy consumer goods, to Fidelity Bank and immediately files a written request for a termination state­ment. Fidelity a. must comply within one month of receipt of the letter. b. must comply within twenty days of receipt of the letter. c. must refund $500 to Elias. d. need not comply.

Q: Green Landscape Company buys a backhoe on credit from Heavy Equipment Corporation, but does not make a payment on the loan for sev­eral months. Heavy repossesses the backhoe by towing it from a pub­lic street. Green sues Heavy for breach of the peace. Green will probably a. not prevail, because Heavy did not use judicial process. b. not prevail, because the repossession was not a breach of the peace. c. prevail, because Green did not default on the loan. d. prevail, because the repossession was a breach of the peace.

Q: Khalil holds a security interest in inventory owned by Luc. Khalil assigns his interest in the inventory to Mal. Mal becomes the secured party of record a. automatically. b. if Khalil advises Luc of the assignment. c. if Mal advises Luc of the assignment. d. if Mal files a uniform amendment form.

Q: When processing a check, Superior Bank encodes information, such as the amount of the check, on the item. Superior thereby warrants to any subsequent bank or payor a. the item has been returned to the drawer. b. nothing. c. the check has been processed manually. d. the encoded information is correct.

Q: Quotient Financial Corporation is a secured party with a security interest in property owned by Retail Sales Company. Perfection of this security in­ter­est may not protect Quotient Financial against the claim of a. a bank. b. a buyer in the ordinary course of business. c. a subsequent lien creditor. d. a trustee in bankruptcy.

Q: Finance Bank receives a check drawn on the account of Get-Rich Industries, Inc., one of the bank's customers, at 3 p.m. Friday. Hildy, the pre­senter of the check, is not one of the bank's customers. The bank uses de­ferred posting with a 2 p.m. cutoff hour. If it decides to dis­honor the check, it must do so by midnight a. Saturday. b. Sunday. c. Monday. d. Tuesday.

Q: Expert Capital Company and Frugal Financial Bank are secured parties with security interests in property owned by Grande Corpora­tion. Between these security interests, the first to be filed or perfected has prior­ity over other filed or per­fected security interests in a. most circumstances. b. no circumstances. c. states that have not adopted Article 9 of the UCC. d. states that require a security agreement to be signed and dated by the creditor.

Q: On Monday, Michelle deposits in her account at Fiscal Bank a local check for $500. After 5:00 p.m. on Friday, from these funds, Michelle can withdraw no more than a. $100. b. $400. c. $500. d. $600.

Q: Idle Investments, Inc., and Harbor Bank are secured parties with security interests in property owned by GR8 Manufacturing Corporation. Priority between these security interests is generally determined by a. the amount of the claim. b. the custom in the trade. c. the time of perfection. d. the time the security agreement was signed.

Q: Fact Pattern 19-2Tom draws a check, on his account in State Bank in New York, payable to Digital Media, Inc., in San Francisco. Digital deposits the check in its ac­count at First National Bank.Refer to Fact Pattern 19-2. Tom's bank isa. the cashing bank.b. the depositary bank.c. the intermediary bank.d. the payor bank.

Q: Fact Pattern 20-2General Leasing Company (GLC) buys equipment for use as inventory, borrow­ing $1 million from Helpful Finance Corporation for a security in­terest in the equipment. The next day, GLC borrows $500,000 from Interstate Bank, also for a security interest in the equipment. GLC defaults on the loans.Refer to Fact Pattern 20-2. Suppose that two weeks after GLC takes possession of the equipment, Helpful and Interstate file financing statements, with Interstate fil­ing first. In that cir­cum­stance, the party with priority to the equipment isa. GLC.b. Helpful and Interstate proportionately.c. Helpful only.d. Interstate only.

Q: Fact Pattern 19-2Tom draws a check, on his account in State Bank in New York, payable to Digital Media, Inc., in San Francisco. Digital deposits the check in its ac­count at First National Bank.Refer to Fact Pattern 19-2. Digital's bank isa. the cashing bank.b. the depositary bank.c. the intermediary bank.d. the payor bank.

Q: Fact Pattern 20-2General Leasing Company (GLC) buys equipment for use as inventory, borrow­ing $1 million from Helpful Finance Corporation for a security in­terest in the equipment. The next day, GLC borrows $500,000 from Interstate Bank, also for a security interest in the equipment. GLC defaults on the loans.Refer to Fact Pattern 20-2. Suppose that Helpful perfects its se­curity in­ter­est when GLC takes possession of the equipment. In that cir­cum­stance, the party with pri­ority to the collateral on GLC's default would bea. GLC.b. Helpful and Interstate proportionately.c. Helpful only.d. Interstate only.

Q: Roald writes a check for $700 to Savannah. Savannah indorses the check in blank and transfers it to Twitchell, who alters the check to read $7,000 and presents it to Union Bank, the drawee, for payment. The bank cashes it. Roald discovers the alter­ation and files a suit against the bank. Roald can recover a. $7,000. b. $6,300. c. $700. d. 0.

Q: Middling Credit Corporation asks Little Supply Company to agree to a security agreement that provides for coverage of the proceeds from the sale of after-acquired prop­erty. This is a. a first-in, first-out rule. b. a floating lien. c. a funds guaranty. d. in violation of secured transactions law.

Q: Clyde issues a check payable to Discount Mart. Elle, Discount's cashier, forges the store's indorsement and deposits the check in her bank ac­count. Clyde's bank, Main Street Bank, pays the check. Clyde can recover from a. Elle, but not Main Street Bank. b. Main Street Bank, which cannot recover from Elle. c. Main Street Bank, which can recover from Elle. d. no one.