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This Document Contains Chapters 31 to 35 Chapter 31—Checks and Funds Transfers TRUE/FALSE 1. A check is a particular kind of draft. Answer: True 2. The drawee of a check is always a bank. Answer: True 3. A check is drawn on the assumption that the bank has sufficient funds in the drawer's account for payment. Answer: True 4. Most states provide that if a dishonored check is not made good within a stated period of time, it will be presumed that the check was originally issued with the intent to defraud. Answer: True 5. In the case of either a check or a draft, the drawer may be held civilly liable if the instrument is dishonored. Answer: True 6. To be effective, checks must be executed on forms that are printed expressly for that purpose and issued by a bank or other financial institution. Answer: False 7. The standard form of check does not specify when it is payable, and it is therefore automatically payable on demand. Answer: True 8. The delivery of a check is regarded as an assignment of money on deposit, and the drawee bank is required to pay the holder the amount of the check. Answer: False 9. When a bank certifies a check, the amount involved in the certification will be retained in the depositor's account until payment of the certified check. Answer: False 10. A check may be certified by a bank on request of the drawer or the holder. Answer: True 11. A tender occurs when the holder of a check or other consumer transaction authorization demands payment. Answer: False 12. A bank is not required to pay a check presented more than six months after its date. Answer: True 13. A notice of dishonor may be oral, written or electronic. Answer: True 14. Checks that involve amounts of more than $5,000 generally trigger the bank reporting requirements under the USA Patriot Act. Answer: False 15. A buyer may stop payment on a certified check issued to a seller if the goods are defective when received. Answer: False 16. A written stop payment order is effective for one year. Answer: False 17. The fact that payment on a check has been stopped does not affect its negotiable character. Answer: True 18. Although a drawer has stopped payment on a check, the drawer still may be held liable on the check. Answer: True 19. If a bank improperly refuses to make payment of checks for which its customer has sufficient funds on deposit, it is liable to the drawer for damages sustained by the drawer in consequence of such dishonor. Answer: True 20. An “encryption” warranty is a warranty made by any party who encodes electronic information on an instrument. Answer: False 21. A bank must be given a reasonable amount of time to put a stop payment order into effect. Answer: True 22. A bank always is liable for making payments on a postdated check. Answer: False 23. A bank always is liable to the depositor on a counterfeit check that the bank has paid. Answer: False 24. Ordinarily, the drawee bank is liable to the drawer when it pays a check on which the drawer's signature has been forged. Answer: True 25. A bank’s customer whose signature has been forged may be barred from holding the bank liable if the customer’s negligence substantially contributed to the making of the forgery. Answer: True 26. A forged endorsement must be reported within one year of the time that the bank statement is received. Answer: False 27. The Electronic Fund Transfers Act (EFTA) does not cover transactions originated by commercial paper. Answer: True 28. A consumer who notifies the issuer of an EFT card within two (2) days after learning of a loss or theft of the card can be held to a maximum liability of $500 for unauthorized use of the card; failure to notify within this time will increase the consumer’s liability for losses to a maximum of $5,000. Answer: False 29. In a complex funds transfer, an intermediary bank may receive and transmit the payment order. Answer: True 30. A debit transaction occurs when a person making a payment requests such payment be made to the beneficiary’s bank. Answer: False MULTIPLE CHOICE 1. Which of the following statements describes a check? A. The drawer is always a bank. B. The maker is always a bank. C. A check is generally payable on demand. D. A check is a particular kind of note. Answer: C 2. Certification of a check at the request of a holder: A. releases all prior secondary parties. B. releases the drawer but not prior indorsers. C. releases prior indorsers, but not the drawer. D. does not release all prior secondary parties. Answer: A 3. Which of the following statements is correct concerning a stale check? A. A check is stale when dated more than six (6) months before presentation to the bank. B. Banks are required to pay stale checks unless a stop payment order has been issued. C. Both a. and b. D. None of the above. Answer: A 4. A depositor issued a check and, after mailing the check, suffered a heart attack and died. In the regular course of business, the bank paid the check when presented for payment, despite the fact that the bank had received notice fourteen (14) days earlier of the depositor's death. In terms of the bank’s payment of the check A. the bank is not because the payment was made within 20 days of the notification of the death. B. the bank is potentially liable to the depositor’s estate. C. the bank is not liable unless the depositor's executor posted an indemnity bond. D. the bank’s authority to act for the depositor ended on the depositor's death, regardless of whether the bank had been notified of the depositor’s death. Answer: B 5. If oral, a stop payment order is binding on the bank for __________ days unless confirmed in writing within that time. A. five (5) B. seven (7) C. fourteen (14) D. thirty (30) Answer: C 6. A written stop payment order or confirmation is effective for: A. fourteen (14) days. B. thirty (30) days. C. six (6) months. D. one (1) year. Answer: C 7. Stop payment orders: A. may be issued if a payee has failed to perform under a contract. B. do not prevent a holder in due course from demanding payment. C. are invalid for some forms of checks. D. all of the above. Answer: D 8. Morris issued a check to Al in payment of a debt. There were sufficient funds in Morris' account to cover the check when it was presented for payment. However, due to an error, the bank dishonored the check. Which of the following parties is/are potentially liable to the holder? A. the drawee bank only B. Morris and the drawee bank C. Morris only D. the drawee bank and any collecting bank Answer: C 9. The liability for losses on counterfeit checks depends on: A. whether or not the bank acted reasonably in its processing systems in clearing the checks. B. whether or not the bank complied with time requirements for customers regarding the checks. C. both a. and b. D. none of the above. Answer: C 10. A bank will not be liable for payment of a check on which the drawer's signature has been forged if: A. the bank could not have detected the forgery through a reasonable investigation. B. there are more than two prior indorsers of the check. C. the bank gives a cashier's check in payment of the depositor's check. D. the drawer's negligence contributed substantially to the forging of the signature. Answer: D 11. If a bank pays a check whose face has been altered to increase the amount above that which the drawer intended to pay, the bank: A. is liable to the drawer for the amount of the increase. B. is liable to the drawer for the full amount of the check. C. incurs liability only if it failed to examine the check before payment. D. incurs liability only if the drawer made the alteration. Answer: A 12. When a drawee bank pays on a check that lacks an essential endorsement: A. the drawer is liable. B. the payee is liable. C. the drawee bank is liable. D. no one is liable. Answer: C 13. Customers are precluded from asserting unauthorized signatures or alterations if they do not report them within __________ from the time the bank statement is received. A. fourteen (14) days B. forty (40) days C. six (6) months D. one (1) year Answer: D 14. A forged indorsement must be reported within: A. forty (40) days. B. six (6) months. C. one (1) year. D. three (3) years. Answer: D 15. A thief stole Art's check book and forged Art's name as drawer of a check. The drawee paid the check in good faith and sent it to Art with the monthly statement on January 3, 2013. The thief forged other checks during February and March of 2013, which the drawee in good faith paid. All paid checks were sent to Art with monthly statements. On May 25, 2014, Art discovered all of the forgeries and notified the drawee. For which check(s) is Art entitled to be reimbursed? A. none of them B. all of them C. the first check only D. the last check only Answer: A 16. The EFTA is concerned with the: A. elimination of foreign terrorists B. eradication of foreign tribunals C. electronic transfers of funds D. eleemosynary, or charitable, transfers of funds Answer: C 17. Consumers have the responsibility to examine periodic statements provided by their financial institutions. If a loss would not have occurred but for the failure of a consumer to report within __________ of the transmittal of the statement any unauthorized transfer, the loss is borne by the consumer. A. fourteen (14) days B. thirty (30) days C. sixty (60) days D. six (6) months Answer: C 18. A consumer who notifies the issuer of an EFT card within two (2) days after learning of a loss or theft of the card is limited to a maximum liability of: A. $500. B. $50. C. There is no liability limitation in this situation. D. There is no liability in this situation. Answer: B 19. Funds transfers made by businesses are governed by __________ regulations. A. UCC B. Federal Reserve C. UCC and Federal Reserve D. neither UCC nor Federal Reserve Answer: C 20. A bank that fails to carry out a payment order is usually liable for: A. interest loss and expenses. B. loss sustained by the originator. C. consequential damages because the payment was not made. D. all of the above. Answer: A CASE 1. The Railway Express Agency delivered a shipment of goods to Lorraine. Payment for the goods was made with a certified check, payable to the order of the Railway Express Agency. The check was drawn by Lorraine on the First National Bank of Detroit. Later, the bank refused to pay the check when it was presented by Railway Express, the holder, because the bank had become insolvent and stopped doing business. The Railway Express Agency sued Lorraine. Lorraine claimed that she was not liable on the check because it was certified. Is she correct? Answer: No. Judgment will be for Railway Express Agency against Lorraine. The fact that a check is certified on the application of the drawer does not discharge the drawer. The fact that primary liability of the bank is obtained by the certification does not compel the holder of the instrument to look only to the primary party. The drawer remains bound as a secondary party. 2. Miriam issued two checks. The first check was made payable to her neighbor for a used car that the neighbor sold to Miriam. The second check was a rent payment to Miriam's landlord for the current month's rent. The car was purchased on the basis of the neighbor's written assurance that the car had only 38,000 miles of use. After Miriam took possession of the car, Miriam's mechanic checked the vehicle and substantiated that the odometer had been turned back. The car had actually been used for 79,000 miles. Miriam stopped payment on the check and offered to return the car. Meanwhile, the neighbor had purchased a computer and had negotiated Miriam's check to the vendor in payment. Discouraged by the problems with the car, Miriam decided to take a vacation. She issued a written stop payment to her bank on the rent check because she intended to use this money for the vacation. Although the drawee bank had ample time to act, it made an error and paid the rent check instead of stopping payment. Two lawsuits resulted. In the first, the vendor of the computer sued Miriam on the check. In the second, Miriam sued her bank for paying over her timely stop payment order. Decide both cases. Answer: Miriam loses both cases. In the first, she is liable despite her stop payment order to the vendor of the computer because the vendor would be a holder in due course and Miriam's defense(s) would be limited in nature, and not available against a holder in due course. In the second situation, although the bank made an error in failing to obey her stop payment order, the bank's error did not cause her a loss. She owed the rental payment. 3. Sondra realized on Tuesday that she had dropped her bank EFT card after using it at an automatic teller machine. She telephoned the bank on the following Monday to notify it of the loss. By that time, someone had used the card to withdraw $800 from Sondra's account. The bank said it would cover $300 of that amount. Sondra sued for the full amount, claiming that she had exercised reasonable care in reporting the loss, especially because the card was lost on bank premises. Will she be able to recover the full $800? Answer: No. Sondra's liability for loss in this case can be up to $500, since she did not notify the issuer of the card within two (2) days after learning of the loss. A consumer who notifies the issuer of an EFT card within two (2) days after learning of a loss or theft of the card can be held liable to a maximum liability of $50 for unauthorized use of the card; however, failure to notify within this time will increase the consumer’s liability for losses to a maximum of $500. Where she lost the card has no relevance in this case. Chapter 32—Nature of The Debtor-Creditor Relationship TRUE/FALSE 1. Suretyship is a pledge to pay one’s own debts and obligations. Answer: False 2. A third party arrangement occurs when a corporate officer agrees to be personally liable for a corporate note. Answer: True 3. Suretyship and guaranty transactions have the common feature of a promise to answer for the debt or default of another. Answer: True 4. A surety is liable from the moment of default whereas a guarantor is ordinarily only liable if the creditor cannot collect from the principal debtor. Answer: True 5. The creditor first must proceed against the debtor before suing the surety. Answer: False 6. An absolute guaranty creates the same obligation as a suretyship. Answer: True 7. Under an indemnity contract, one person pays another consideration in return for a promise to pay a specified sum of money in the event that a specified loss is suffered. Answer: True 8. In most states contracts of guaranty do not have to be in writing to be enforceable. Answer: False 9. When a suretyship or guaranty contract is entered into after and separate from the original transaction, there must be new consideration for the promise of the guarantor. Answer: True 10. Sureties have no rights to protect them from loss, to obtain their discharge because of the conduct of others that would be harmful to them, or to recover money that they were required to pay because of the debtor’s breach. Answer: False 11. If a debtor is about to leave the state, the surety may call on the creditor to take action against the debtor. Answer: True 12. Exoneration is an agreement that a party shall not be liable for loss. Answer: True 13. When a surety pays a claim that it is obligated to pay, it automatically acquires the claim and the rights of the creditor which is known as subrogation. Answer: True 14. A surety that has made payment of a claim for which it was liable as surety is not entitled to indemnity from the principal debtor. Answer: False 15. A surety may not raise the defense of mistake. Answer: False 16. Contribution is the right of a co-obligator to demand that other obligator(s) pay their fair share of the debt. Answer: True 17. If the creditor does not enforce the suretyship agreement within the time limits provided for such contract enforcement in the surety’s jurisdiction, the obligation is forever discharged. Answer: True 18. A surety is never discharged if the creditor substitutes a different debtor. Answer: False 19. Letters of credit are a form of advance arrangement for financing. Answer: True 20. Standby letters of credit are used only in international trade situations. Answer: False 21. The use of letters of credit arose in international trade. Answer: True 22. Consideration is not required to establish or modify a letter of credit. Answer: True 23. The issuer of a letter of credit is in effect the obligor on a third-party beneficiary contract made for the benefit of the beneficiary of the letter. Answer: True 24. The bank that tells the beneficiary that a letter of credit has been issued is known as the correspondent bank. Answer: False 25. A letter of credit cannot extend for a period of more than five (5) years. Answer: False 26. The amount of credit specified in a letter of credit must be taken by the beneficiary in the form of a lump-sum payment. Answer: False 27. The issuer of a letter of credit can revoke or modify the letter at any time without the consent of the beneficiary, even if that right is not expressly reserved in the letter. Answer: False 28. A letter of credit must be in writing and signed by the issuer. Answer: True 29. An issuer has an obligation to honor drafts under a letter of credit if the conditions specified in the letter have been satisfied. This obligation includes the bank's obligation to assure that the goods sold by the seller in fact conform to the contract. Answer: False 30. The issuer of a letter of credit must verify that the underlying transaction has been performed. Answer: False MULTIPLE CHOICE 1. In a guaranty contract, the obligor is called a: A. surety. B. principal. C. guarantor. D. creditor. Answer: C 2. A guaranty of payment creates a(n): A. contract of surety. B. contract of credit. C. letter of credit. D. absolute guaranty. Answer: D 3. Which of the following is correct concerning suretyship and guaranty? A. A surety is always liable from the moment the principal is in default. B. A guarantor is always liable from the moment the principal is in default C. Both a. and b. D. None of the above. Answer: A 4. A(n) __________ is an undertaking by one person, for consideration, to pay another person a sum of money in the event of a specified loss. A. absolute guaranty B. indemnity contract C. guaranty of payment D. suretyship Answer: B 5. When a surety pays a debt that it is obligated to pay, it automatically acquires the claim and the rights of the creditor through: A. assignment. B. exoneration. C. subrogation. D. default. Answer: C 6. An agreement or provision in an agreement that one party shall not be held liable for loss is: A. contribution. B. exoneration. C. indemnity. D. subrogation. Answer: C 7. A surety that has made payment of a claim for which it was liable as a surety is entitled to which of the following from the principal? A. Indemnity B. Exoneration C. Assignment D. Subrogation Answer: A 8. If there are two or more sureties and one pays more than its proportionate share of the debt, such surety has the right against the co-sureties known as: A. indemnity. B. exoneration. C. subrogation. D. contribution. Answer: D 9. Pasquale and Paul were sureties on the debt of Rose. Each had a $100,000 responsibility. Upon Rose's default, Pasquale paid $50,000 to the creditor. How much may Pasquale recover from Paul under the concept of contribution? A. Zero B. $50,000 C. $10,000 D. $25,000 Answer: D 10. Which of the following contract defenses cannot be raised as a defense against suretyship obligations? A. Lack of capacity B. Absence of consideration C. Mistake D. All of the above defenses may be raised. Answer: D 11. Bailment given as security for the payment of a debt is a(n): A. pledge B. contribution C. guaranty D. indemnity Answer: A 12. Which of the following is not a suretyship defense? A. statute of limitations B. performance of the obligation by the principal debtor C. creditor substitution of the original debtor with a new one D. insolvency of bankruptcy of the principal debtor Answer: D 13. A letter of credit: A. is an advance arrangement for financing. B. is used only in domestic sales. C. involves only two parties. D. all of the above. Answer: A 14. An agreement under which one party agrees to pay drafts drawn by a creditor is called a: A. contract of surety. B. guaranty contract. C. letter of credit. D. debtor's agreement. Answer: C 15. If an issuer requests its correspondent bank where the beneficiary is located to notify the beneficiary of the issuance of a letter of credit, the correspondent bank is called a(n): A. advising bank. B. foreign bank. C. consulting bank. D. coissuer. Answer: A 16. Letter of credit transactions involve ______ contract(s). A. one (1) B. two (2) C. three (3) D. four (4) Answer: C 17. A letter of credit usually sets a: A. minimum money amount. B. maximum money amount. C. both of the above. D. none of the above. Answer: B 18. A letter of credit: A. cannot last for more than five years. B. may be in either oral or written form. C. can only be issued by a bank. D. must be in writing and signed by the issuer. Answer: D 19. The issuer of a letter of credit: A. is obligated to honor drafts drawn under the letter if the conditions specified in the letter have been met. B. has no duty to verify that the papers are properly supported by facts. C. has no duty to verify that the underlying transaction has been performed. D. all of the above. Answer: D 20. Which of the following is an example of an improper payment? A. A payment made after a letter of credit has expired. B. A payment made in excess of the amount authorized by the letter of credit. C. Both a. and b. are improper payments. D. Neither a. nor b. are improper payments. Answer: C CASE 1. Bud is unable to obtain a loan without some form of additional reassurances. Bud comes to you for assistance. You are willing to help Bud, but you wish to protect yourself from liability as much as possible. Would you prefer a surety or a guaranty? The bank issuing the loan also wishes to protect itself as much as possible. Would the bank prefer a surety or guaranty? If your oral assurances are enough to solidify the loan, has a surety or guaranty been formed? Answer: Under either a surety or a guaranty, you are being asked to promise to answer for Bud's debt. It would be to your advantage to create a guaranty situation, for this would make you secondarily liable, rather than being primarily liable under a suretyship. You then could be assured that all efforts would be made to collect from Bud before an attempt to collect from you. The bank probably would prefer to have you create a surety, because this would allow them to come directly to you for payment and therefore save them time and money in collection costs. Because most states require that guaranties be written to be enforceable, it appears that a surety is being sought through oral assurances. 2. Deirdre read that bids were being solicited for the construction of an apartment tower. Deirdre submitted the lowest bid and was offered the contract contingent on her providing acceptable sureties in the amount of $1 million. Because Deirdre never had done work on this scale, it was virtually impossible for her to obtain the appropriate sureties. She convinced Reassuring Sureties, Inc. to issue the necessary commitment by misrepresenting that she was a famous builder in Canada. As the work progressed, it seemed to be going well and Deirdre was asked to make the project 52 stories instead of 50 stories, which was the original contract height. She agreed to this change. After the work was completed, many breaches of contract on the part of Deirdre became evident. Reassuring Sureties was sued for a $500,000 loss. Reassuring Sureties defended on the grounds of fraud and material change in the contract. Decide. Answer: Fraud will not be an effective defense because the creditor did not know of, or participate in, the fraud. Material alteration of the contract (52 stories instead of 50) without the surety's permission is an effective defense. 3. Howard bought goods from Williams. Howard sent Williams a draft covered by a letter of credit issued by First National Bank. Is the bank required to investigate to determine whether the goods sent by Williams conform to the contract? Answer: No. The issuer of a letter of credit has no duty to verify that the papers are supported by the facts or that the underlying transaction has been performed. It is thus immaterial whether the goods sold by the seller conform to the contract as long as the seller tenders the documents specified by the letter of credit. Chapter 33—Consumer Protection TRUE/FALSE 1. The aim of consumer protection legislation is to protect persons of limited means and limited knowledge. Answer: True 2. The category of protected consumers for many statutes has been expanded to include partnerships, corporations and government entities. Answer: True 3. Consumer protection statutes are identical in all fifty states and the District of Columbia. Answer: False 4. A consumer claiming that there has been a violation of a consumer protection statute has the burden of proving that the statutory definition of "consumer" has been satisfied. Answer: True 5. Those who are liable for violations of consumer protection situations are persons or enterprises that regularly enter into the type of transaction in which the injured consumer was involved. Answer: True 6. Consumer protection even protects a consumer from the consumer's own negligence. Answer: False 7. Consumer protection law often requires those dealing with consumers to make certain mandated disclosures. Answer: True 8. Despite consumer protection legislation, for most consumers pursing their rights in court is not cost beneficial. Answer: False 9. Individuals can seek criminal and civil penalties against those who violate consumer protection statutes. Answer: False 10. The FTC requires advertisers to maintain records of the data used as support for statements made in the ads that deal with the safety, performance, efficacy, quality, or comparative price of an advertised product. Answer: True 11. Corrective advertising required by the FTC also is called retroactive advertising. Answer: False 12. Labels on packages are regulated to provide information about the contents and warnings about the dangers involved in the use of the product. Answer: True 13. The FTC requires that only descriptive and non-ambiguous terms such as jumbo, giant, or full be used in product labeling. Answer: False 14. A sale of goods or services for $25 or more made to a buyer at home may be set aside without cause within five (5) business days. Answer: False 15. Consumers must re-register every three years in order to stay on the National Do Not Call Registry. Answer: False 16. Consumer protection laws, which commonly regulate the form of consumer contracts, provide that back-page disclaimers are void if the front page of a contract does not call attention to the presence of the terms on the back page. Answer: True 17. An auto dealer who does not actually know of a roll-back can use lack of knowledge as a defense against odometer fraud, regardless of the condition of the car. Answer: False 18. The subterranean lending market makes loans to consumers who have bankruptcies, no credit history, low-to-moderate incomes, or a poor credit history. Answer: False 19. Predatory lending is a practice on the part of the subprime lending market whereby lenders take advantage of less sophisticated consumers or those who are desperate for funds by using the lenders’ superior bargaining positions to obtain credit terms that go well beyond compensating them for their risk. Answer: True 20. The types of provisions that make contracts unconscionable include clauses that award excessive damages or the application of credit payments across purchases over time so that the consumer is never able to pay off any goods. Answer: True 21. The CARD Act substantially restricts the solicitation of credit card accounts for those under the age of 18. Answer: False 22. A consumer may waive all defenses otherwise provided for by law. Answer: False 23. Under the Equal Credit Opportunity Act, it is unlawful to discriminate against an applicant because all or part of the applicant’s income is obtained from a public assistance program. Answer: True 24. When a credit application is refused, it is sufficient that the lender give the applicant a written statement saying: "application refused." Answer: False 25. When improper collection methods are used, it is no defense to the creditor that the improper acts were performed by an agent, an employee, or any other person acting on behalf of the creditor. Answer: True 26. A letter from a collection agency to a consumer that gives the impression a lawsuit is about to be brought against the consumer when in fact it will not be brought is not a violation of the Fair Debt Collection Practices Act. Answer: False 27. The Fair Credit Reporting Act applies only to consumer credit. Answer: True 28. Pursuant to the Credit Repair Organization Act of 1996, credit repair organizations must be “non-profit.” Answer: False 29. Anyone promoting the sale of a real estate development that is divided into fifty (50) or more parcels of less than five (5) acres each must file a development statement with the secretary of Housing and Urban Development. Answer: True 30. Automobile lemon laws protect only persons buying automobiles for personal, family, or household use. Answer: True MULTIPLE CHOICE 1. Consumer protection statutes and regulations do not protect against: A. deceptive advertising. B. the consumer’s own negligence. C. unsolicited credit cards sent to creditworthy consumers. D. unreasonable methods of debt collection by debt collection agencies. Answer: B 2. Who may bring an action for relief under consumer protection legislation? A. the Federal Trade Commission B. a state attorney general C. the consumer D. all of the above Answer: D 3. What is not a correct statement concerning consumer protection legislation? A. It prohibits the consumer from suing in his or her own right and gives the right to sue solely to an agency or to the attorney general. B. It recognizes that the theoretical right of the consumer to sue may be of little practical value. C. It provides special remedies. D. It provides certain agencies to police statutes passed to aid consumers. Answer: B 4. Compensatory damages: A. compensate consumers for their actual loss. B. are imposed to punish the defendant for wrongdoing. C. both a. and b. D. none of the above. Answer: A 5. The policing of fraudulent advertising is entrusted to which of the following administrative agencies? A. IRS B. FTC C. UCCC D. FDA Answer: B 6. Advertising regulations are designed to: A. give the consumer an accurate description of the product. B. punish sellers who knowingly make false statements about the product offered for sale. C. punish sellers who state a false opinion about the product. D. give the consumer information about other similar products that are available. Answer: A 7. When an enterprise has made false and deceptive statements in advertising, the FTC may require new advertising to correct the former statement so that consumers are aware of the truth. This corrective advertising required by the FTC is also called __________ advertising. A. retractive B. red active C. retroactive D. refractive Answer: A 8. A sale of goods or services for $25 or more made to a buyer at home may be set aside within __________ days. A. three (3) business B. three (3) calendar C. five (5) business D. five (5) calendar Answer: A 9. The Telephone Consumer Protection Act prohibits: A. automated marking calls without prior express consent. B. calls to patients’ room in hospitals. C. calls after 9:00 PM. D. all of the above. Answer: D 10. Odometer fraud laws: A. impose the same standards on both private sellers and auto dealers. B. allows the buyer to collect twice the actual loss from the fraud. C. limits the total loss the buyer can collect to $1,500. D. all of the above. Answer: C 11. The __________ lending market makes loans to consumers who have bankruptcies, no credit history, low-to-moderate incomes, or a poor credit history. A. subprime B. subterranean C. suboptimal D. optimus prime Answer: A 12. An unsolicited distribution of credit cards to persons who have not applied for them is: A. always allowed. B. voidable. C. illegal. D. only allowed if the recipient is at least 21 years old. Answer: C 13. The owner of a lost credit card is: A. liable for all purchases made by its finder if the card was lost through negligence. B. not liable for any purchases if the card was lost despite the exercise of reasonable care by the cardholder. C. liable for all purchases if the card originally had been sent to the cardholder without any prior request and never was used by such holder. D. not liable for more than $50 for the unauthorized use of the card. Answer: D 14. If you allow another person to use your credit card but the person uses the card for a purpose other than the one you specified: A. an unauthorized usage has occurred. B. an authorized usage has occurred. C. you will not be responsible for more than $50 of the amount charged. D. both a and c. Answer: B 15. Pursuant to the CARD Act of 2009, all credit card companies must have bills in consumers’ hands not less than __________ before the bill is due. A. seven (7) days B. fourteen (14) days C. twenty-one (21) days D. thirty (30) days Answer: C 16. A finance company may reject an applicant for a loan on the grounds that the applicant is: A. married. B. sixty-five or older. C. divorced. D. none of the above. Answer: D 17. It is lawful to refuse to extend credit to a consumer based on the consumer's: A. race. B. marital status. C. credit history. D. age. Answer: C 18. What is not a correct statement concerning the Fair Debt Collection Practices Act? A. It prohibits improper practices in the collection of consumer debts. B. It applies to original creditors who are collecting from original debtors. C. The validity of the debt is not a defense. D. Violators are liable to debtors for damages. Answer: B 19. The Fair Credit Reporting Act applies to: A. consumer credit. B. commercial credit. C. business credit. D. all of the above. Answer: A 20. Anyone promoting the sale of a real estate development that is divided into fifty (50) or more parcels of less than five (5) acres each must file a(n) __________ statement with the secretary of Housing and Urban Development. A. building plan B. development C. environmental impact D. real property Answer: B CASE 1. Sue Thompson received a home "cold-canvas" sales call from a representative of the Enlightened Encyclopedia Company. The salesperson, after a rather aggressive presentation, convinced Sue to order a $1,200 Deluxe Encyclopedia set for her two children. Sue was impressed with the quality of the books, but shortly after signing the contract, she realized that she could not really afford to make the required monthly payments. What rights, if any, does Sue have in this situation? Answer: Sue has the legal right to rescind this contract within three (3) business days. This right is not contingent on any defect in the goods or any misrepresentation on the part of the salesperson. Sue simply has the right to change her mind. The purpose of this protection is to allow consumers a chance to "cool off" from an aggressive, overly-persuasive sales presentation. 2. Samuel signed a contract to purchase furniture on credit. The contract clearly set forth in bold print all charges included in the cost of the credit, including the interest rate and annual percentage rate. The seller informed Samuel that the seller regularly sold these contracts to a finance company that paid it immediate cash and then collected from the debtors. The seller further advised that the finance company did not want "the headache" of determining the validity of consumer complaints and that therefore the contract provided that the consumer waived all defenses concerning the furniture against the finance company. The contract expressly provided that the seller would remain responsible for any non-conformities in the furniture or breaches of contract on its part. The furniture was defective, but the finance company is demanding that Samuel make the payments to it required by the contract and resolve its disputes with the seller of the furniture. Samuel consults you regarding his rights. What is your response? Answer: An FTC regulation protects Samuel. It provides that any holder of a consumer credit contract is subject to all defenses that the debtor could assert against the seller of the goods. This is a required statement that should have been included, in boldface type, in the contract that Samuel signed. 3. Peter applied for a loan at three banks. Peter's application was denied at the first two banks but finally was approved by the third institution. Peter believes that the first two banks denied his application because of his minority status. No explanation ever was provided by the banks denying Peter's request for funds. After obtaining the loan, Peter soon found himself unable to make the prescribed payments. Peter went into default, causing the bank to turn his case over to a collection agency. The collection agency called him “night and day” and were very abusive in their collection practices. Peter became quite distraught and unable to function at his job. As a result, Peter was soon fired. Peter asks for your advice regarding his legal rights. What is your response? Answer: It is unlawful to discriminate against an applicant for credit on the basis of race, among other criteria. Peter should have been furnished with a written explanation as to why his application was rejected. The debt collection practices in this case are unreasonable and prohibited by statute. They also may be held to constitute an unreasonable invasion of privacy. In addition, if the debt collection practices constitute extreme and outrageous behavior, it is possible that the tort of intentional infliction of emotional distress has occurred. Because the collection agency violated the Fair Debt Collection Practices Act, an action to recover damages for Peter's physical illness, and the subsequent loss of his job, could be initiated. Chapter 34—Secured Transactions in Personal Property TRUE/FALSE 1. A security interest gives a creditor the same protection than is afforded by a right to sue on the debt. Answer: False 2. A security interest is a property right that enables the creditor to take possession of the property if the debtor does not pay the amount owed. Answer: True 3. The property that is subject to the security interest is called collateral. Answer: True 4. In a security agreement, the creditor and the debtor agree that the creditor has a security interest. Answer: True 5. A security agreement need not describe the collateral involved. Answer: False 6. A security agreement must be backed by a written record even if the creditor has possession of the collateral. Answer: False 7. Creditors cannot legally request collateral on a previously unsecured loan. Answer: False 8. For a security interest to attach, the creditor must file a financing statement. Answer: False 9. A debtor must have rights in the collateral for a security interest to attach. Answer: True 10. An after-acquired property clause in a consumer security agreement can cover only goods acquired by the debtor within thirty (30) days after the creditor gave value to the debtor. Answer: False 11. Consumer goods are classified into different categories based on the debtor's intended use, not the physical characteristics of the goods. Answer: True 12. Grund, a night club performer, financed the purchase of a drum set to be used in his night club act. The collateral is classified as a consumer good. Answer: False 13. Claim in a changing or shifting stock of the buyer’s goods is known as a floating lien. Answer: True 14. Collateral may change its form and character during the course of a security agreement. Answer: True 15. When a security interest in property is inferior to other interests and claims to the property, it is said to be perfected. Answer: False 16. A security interest needs to be perfected, whether or not there are competing claims for the collateral. Answer: False 17. Attachment provides creditors with rights. Answer: True 18. Perfection can occur merely by possession of the collateral by the creditor. Answer: True 19. Consumer goods are not subject to perfection of a security interest. Answer: False 20. When a consumer gives a creditor a security interest in forthcoming health insurance proceeds, the creditor must file a statement with the insurance company in order to have a perfected security interest. Answer: False 21. Creditors receive an automatic 30-day temporary perfection in negotiable instruments taken as collateral. Answer: False 22. Under Revised UCC Article 9, a financing statement must be signed by the debtor. Answer: False 23. Under Revised UCC Article 9, a debtor may authorize a financing statement by acquiring the collateral that is subject to the security agreement. Answer: True 24. The steps in terminating a financing transaction upon full payment by the debtor include the preparation of a termination statement by the creditor and the presentation of the statement to the filing officer, who marks the record "terminated." Answer: True 25. If two creditors have a security interest in the same collateral, their priority is determined according to the “last in-first out” provision. Answer: False 26. A buyer who buys goods from a debtor in the ordinary course of business is subject to a creditor’s security interest but only if the interest was perfected and the buyer had notice of it. Answer: False 27. Self-help repossession of collateral upon a buyer's default is contrary to public policy and never is allowed. Answer: False 28. Generally, a secured creditor who has repossessed collateral may retain the collateral and cancel the debt. Answer: True 29. A debtor may redeem collateral at any time prior to the time that the secured party has disposed of the collateral or entered into a binding contract for resale by tendering the entire obligation that is owed plus any legal costs and expenses incurred by the secured party. Answer: True 30. Upon the debtor’s default, the creditor may sell the collateral at a public or private sale, or lease it to a third party. Answer: True MULTIPLE CHOICE 1. An interest in personal property or fixtures that secures payment or performance of an obligation is called a: A. guaranty holding. B. security interest. C. guaranty interest. D. good-faith guaranty. Answer: B 2. Which is not an element of attachment? A. the filing of a financing statement B. a security agreement C. value received by the debtor D. the debtor has rights in the collateral Answer: A 3. A security agreement must: A. identify the parties involved. B. contain a reasonable description of the collateral. C. demonstrate that the parties intended for the creditor intends to have a security interest. D. all of the above. Answer: D 4. When a seller sells on credit and is given a security interest in the goods, that interest is called: A. a purchase money security interest. B. a future transaction. C. a floating lien. D. none of the above. Answer: A 5. Whatever is received upon the sale, exchange, collection or other disposition of collateral is known as: A. goods. B. paper. C. proceeds. D. security interest. Answer: C 6. A security interest that is effective against third persons as well as against the buyer is called a: A. universal security interest. B. prohibitive security interest. C. perfected security interest. D. protective security interest. Answer: C 7. The concept of perfection concerns: A. the creation of the security interest. B. protection against the claims of others to the collateral. C. the rights of the creditor against the debtor. D. converting unsecured creditors into secured creditors. Answer: B 8. Perfection of a security interest takes place: A. upon the creditor's possession of the collateral. B. upon attachment in the case of a purchase money security interest in consumer goods. C. upon the filing of a financing statement. D. all of the above. Answer: D 9. _______ occurs when a bank is able to require the debtor account holder to clear all transactions in that account. A. Control B. Perfection. C. Termination D. Redemption Answer: A 10. If the collateral is in the possession of the creditor: A. a financing statement must be filed to perfect the interest. B. the security interest is perfected. C. only a security interest has been obtained. D. the type of goods will determine the method of perfection. Answer: B 11. In most states, __________ provides that a security interest in a non-inventory motor vehicle must be noted on the vehicle title registration. A. a non-Code statute B. UCC Article 2 C. UCC Article 9 D. judicial precedent Answer: A 12. When a state statute requires a security interest in a motor vehicle to be noted on the certificate of title, the security interest is perfected: A. by the certificate notation, when a non-inventory motor vehicle is involved. B. by filing under the UCC, regardless of how the vehicle is classified. C. by filing under the UCC, when the motor vehicle is inventory. D. either by the certificate notation or by a UCC filing, depending on how the state statute defines the term motor vehicle. Answer: A 13. A financing statement must provide: A. the name of the debtor. B. the name of the secured party or their representative. C. the covered collateral. D. all of the above. Answer: D 14. What is the purpose of a financing statement? A. to meet UCC accounting requirements under Article 9 B. to create a security interest C. to amend a security agreement D. to alert third persons that a creditor has a security interest in the collateral described Answer: D 15. When the filing of a financing statement is defective: A. the security interest is lost. B. the filing fails to perfect the security interest. C. the security interest is perfected through the court’s application of equitable principles. D. the public notice of the creditor’s interest is still effective. Answer: B 16. The perfection obtained by filing a financing statement lasts for __________. A. five (5) years, and is renewable. B. five (5) years, and is non-renewable. C. ten (10) years, and is renewable. D. ten (10) years, and is non-renewable. Answer: A 17. A(n) __________ statement is a document, which may be requested by a paid-up debtor, stating that a security interest is no longer claimed under the specified financing statement. A. execution B. discharge C. termination D. hold harmless Answer: C 18. When there are two perfected secured creditors in the same collateral: A. priority goes to the creditor who perfected first. B. priority goes to the creditor who is owed the greatest amount of money. C. each perfected secured creditor has a 50% interest in the collateral. D. Both perfected secured creditors are treated like unsecured creditors in regards to the collateral. Answer: A 19. If a breach of the peace might occur: A. self-help repossession is the only option available to obtain the collateral. B. the creditor must use court action to obtain the collateral. C. the creditor is barred from repossessing the collateral. D. the collateral reverts to the debtor. Answer: B 20. Upon a default by a buyer, the secured seller may resell the collateral: A. not less than three (3) months after the buyer's default. B. not less than six (6) months after the buyer’s default. C. only at a public sale. D. at either a public or a private sale. Answer: D CASE 1. King Electronics, a retailer of video equipment, sold two DVRs to Larson, a psychologist, for use in her professional practice, which was located in her home. The sale to Larson was made on credit. King retained a security interest in the DVRs sold but did not file a financing statement. Mills, another creditor of Larson, has asserted that his lien on the two DVRs is superior to King's security interest. Is he right? As you decide, remember to classify the DVRs as collateral in the hands of King and Larson. Answer: Judgment will be for Mills. The DVRs are inventory in the hands of King and equipment in the hands of Larson. King must file a financing statement to perfect its security interest in the DVRs. Because of King's failure to file a financing statement covering the two DVRs sold to Larson on credit, Mills has a right that is superior to King's right in the collateral. 2. Mark purchased a very expensive automobile on credit. Within a week, Mark discovered that a tune-up was necessary, for he was in the habit of driving at an excessive rate of speed. When the car was repaired, the bill was more than $1,000. Mark does not have the money to pay for the car repairs or the monthly car payments. The credit company as well as the repair shop are concerned over who has priority of repayment. Who has priority and why? Answer: Titles to automobiles are represented by a title certificate. To obtain a perfected status in regards to the automobile, applicable state law would be controlling. Usually, a notation of the security interest is made on the title itself, and this creates a perfected status. Even if the credit company had perfected its security interest, in most states this perfected status does not have priority over repair or storage liens against property. The repair shop is first in line to receive payment. 3. Morris made two purchases. He purchased his neighbor Cordelia's typewriter and a computer from Crazy Computers. Regarding the typewriter, Cordelia had bought it on credit from Jack's Typewriters. Cordelia had financed the purchase with Jack's and signed a promissory note and a security agreement covering the purchase. The creditor, Jack's, did not file a financing statement, relying on the concept of automatic perfection for purchase money security interests in consumer goods. Morris was unaware of the history of the typewriter. The computer was subject to a security interest in favor of Country Bank, which had perfected its security interest by filing. Morris, by coincidence, knew of this security interest when Morris purchased the computer. Unfortunately, neither Cordelia nor Crazy Computers paid the secured creditors who now seek to repossess the collateral from Morris. What will be the likely outcome of this case? Answer: Neither creditor will be successful. Regarding the typewriter, a purchase money security interest of consumer goods provides automatic perfection without filing a financing statement. However, if no filing statement is filed, resale to another consumer who does not know of the security interest will cause the interest to terminate. If Morris was buying as a consumer, the security interest has terminated. Morris will keep the computer free of the security interest of Country Bank because a buyer of inventory in the ordinary course of business is free from security interests placed on the goods by the seller, regardless of whether the buyer is aware of them. Chapter 35—Bankruptcy TRUE/FALSE 1. Jurisdiction over bankruptcy proceedings is vested in the federal district courts. Answer: True 2. In a Chapter 7 bankruptcy, the debtor's non-exempt assets are liquidated to pay debts. Answer: True 3. Stockbrokers are eligible to file Chapter 11 bankruptcy. Answer: False 4. In order to be eligible for Chapter 13 bankruptcy an individual must have less than $1,081,400 in unsecured debt. Answer: False 5. A court can dismiss an individual debtor’s petition if the debtor does not satisfy the means test. Answer: True 6. An involuntary bankruptcy case is commenced by creditors filing a petition with a bankruptcy court. Answer: True 7. Nonprofit corporations are exempt from involuntary bankruptcy proceedings. Answer: True 8. The holder of a claim that is the subject of a bona fide dispute may be counted as a petitioning creditor. Answer: False 9. If the debtor is generally not paying debts as they become due, the debtor may be subject to an involuntary bankruptcy petition. Answer: True 10. The filing of an involuntary bankruptcy case petition results in an order of relief. Answer: False 11. The filing of a voluntary, but not an involuntary, petition operates as an automatic stay. Answer: False 12. A debtor may recover damages against any creditor who filed a bankruptcy petition in bad faith. Answer: True 13. All debts are discharged in bankruptcy, whether disclosed by the debtor or not. Answer: False 14. If a trustee is not elected by creditors, an interim trustee will be appointed by the court. Answer: True 15. By operation of law, the trustee automatically becomes the owner of all of the debtor’s property in excess of the property to which the debtor is entitled under exemption laws. Answer: True 16. The trustee may void any fraudulent transfer made by the debtor within two (2) years of bankruptcy when the debtor’s actual intent was to hinder, delay, or defraud creditors by engaging in the transfer. Answer: True 17. To be set aside as a preference, a transfer must be fraudulent. Answer: False 18. A payment by a debtor in the ordinary course of business, such as the payment of a utility bill, will not be set aside by the bankruptcy trustee. Answer: True 19. A creditor must only file a proof of claim if the bankruptcy trustee does not know of the existence of the claim. Answer: False 20. Bankruptcy law does not regulate the manner in which the assets of the debtor are distributed; instead, distribution of the debtor’s assets is solely within the discretion of the trustee. Answer: False 21. Creditors who hold security for payment, such as a lien or a mortgage on the debtor’s property, are less affected by the debtor's bankruptcy. Answer: True 22. In approximately 50% of all bankruptcies no unsecured creditors receive any payments. Answer: False 23. Costs and expenses of administration of the bankruptcy case, including trustee fees are paid before any money is disbursed to secured or unsecured creditors. Answer: False 24. In a bankruptcy case, after all creditors have been paid, any balance is turned over to the debtor. Answer: True 25. Debtor’s exemptions are provided under federal law and thus are the same in each state. Answer: False 26. Under the Bankruptcy Reform Act, the allowable homestead exemption for debtors was significantly reduced. Answer: True 27. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a discharge is available only once every ten (10) years. Answer: False 28. A discharge releases the debtor from the unpaid balance of most debts including taxes and tax penalties. Answer: False 29. Individuals and corporations, but not partnerships, may be reorganized under the Bankruptcy Code. Answer: False 30. A reorganization plan may, in certain instances, provide for the rejection of executory contracts or collective bargaining agreements. Answer: True MULTIPLE CHOICE 1. Chapter 7 is: A. a liquidation proceeding. B. a reorganization proceeding. C. an extended time payment plan. D. always an involuntary proceeding. Answer: A 2. A voluntary petition in bankruptcy may be filed by a(n): A. husband and wife. B. railroad company. C. insurance company. D. all of the above. Answer: A 3. An involuntary petition in bankruptcy may not be commenced against: A. a nonprofit corporation. B. an individual. C. a for-profit corporation. D. any of the above. Answer: A 4. If there are twelve (12) or more creditors, at least __________ of those creditors whose unsecured and undisputed claims total __________ or more must sign the involuntary petition. A. one (1); $14,425 B. three (3); $14,425 C. one (1); $15,575 D. three (3); $15,575 Answer: B 5. Where the debtor has fewer than twelve (12) creditors, how many must sign an involuntary petition? A. one (1), assuming that the creditor’s unsecured claim is at least $14,425 B. one (1), assuming that the creditor’s secured claim is at least $15,575 C. three (3), assuming that the creditors’ unsecured claims total at least $14,425 D. three (3), assuming that the creditors’ secured claims total at least $15,575 Answer: A 6. An automatic stay: A. arises only upon the filing of a voluntary petition. B. prevents any further interest from accruing on a debtor's outstanding debts. C. prevents creditors from taking action outside of the bankruptcy proceeding against a debtor. D. ends if a debtor attempts to incur additional debt after a petition has been filed. Answer: C 7. If an involuntary bankruptcy petition is dismissed other than by consent of all petitioning creditors and the debtor, the court may award which of the following to the debtor? A. Costs B. Reasonable attorney fees C. Damages D. All of the above Answer: D 8. The status of a trustee in a bankruptcy proceeding is best described as the: A. prosecutor of the debtor. B. successor to the debtor. C. defender of the debtor. D. protector of the debtor. Answer: B 9. A transfer of property by the debtor to a creditor may be set aside as a __________ transfer and the property recovered by the debtor’s trustee in bankruptcy if (1) the transfer was made to pay a debt incurred at some earlier time; (2) the transfer was made when the debtor was insolvent and within ninety (90) days before the filing of the bankruptcy ; and (3) the transfer resulted in the creditor receiving more than the creditor would have received in a liquidation of the debtor’s estate. A. predetermined B. preternatural C. preordained D. preferential Answer: D 10. A debtor is presumed to be insolvent on and during what number of days immediately preceding the date of the filing of a bankruptcy petition? A. 30 B. 60 C. 90 D. 120 Answer: C 11. Which of the following is a preferential transfer? A. a transaction for present consideration B. a payment in the ordinary course of business C. both a. and b. are preferential transfers D. neither a. nor b. are preferential transfers Answer: D 12. Under the 2005 reforms: A. it is easier for creditors to show they did not receive a voidable preference. B. non-consumer debt payments of less than $7,500 are not subject to the voidable preference standards. C. both a. and b. D. none of the above. Answer: A 13. Claims for wages, salaries, or commissions have priority in the payment of unsecured debts over: A. costs and expenses of the administration of the bankruptcy case. B. claims arising in the ordinary course of business after commencement of the case. C. claims arising for contributions to employee benefit plans. D. all of the above. Answer: C 14. With regard to priority of claims in the payment of unsecured debts, which of the following has priority over alimony and child support obligations? A. costs and expenses of the administration of the bankruptcy case. B. claims arising in the ordinary course of the debtor’s business after commencement of the case C. claims for wages, salaries or commissions earned within 180 days before the filing of the petition D. none of the above Answer: D 15. The debtor will be denied a discharge if: A. the debtor had been extravagant. B. the debtor incurred debts because of negligence. C. the debtor received a discharge ten (10) years previously. D. the debtor refused to obey a lawful order of the court. Answer: D 16. Which of the following debts is not dischargeable in bankruptcy? A. judgments based on negligence B. judgments based on breach of contract C. judgments for willful and malicious injuries D. judgments in which the creditors would receive no distribution Answer: C 17. A discharge does not release a person from a consumer debt to a single creditor totaling more than $5,775 for luxury goods or services if the debt was incurred within how many days of the order for relief? A. 90 B. 120 C. 180 D. 365 Answer: A 18. In a Chapter 11 rehabilitation plan, the debtor: A. keeps all of the assets (both exempt and non-exempt). B. remains in business. C. makes a settlement that is acceptable to the majority of the creditors. D. all of the above. Answer: D 19. Which of the following is a correct legal conclusion regarding reorganization bankruptcy? A. Individuals, partnerships, and corporations in business may be reorganized. B. A plan for reorganization may be filed only by a committee of creditors. C. When a reorganization plan is confirmed by the court, the creditors can revert back to their original position if they are not satisfied with the plan. D. Individuals within a particular class of creditors can be treated differently if they object to the reorganization plan. Answer: A 20. An extended time payment plan: A. does not provide for a discharge of the debtor. B. provides for a discharge of the debtor. C. does not require creditors holding the same type or class of claim to be treated the same way. D. will not allow the debtor to pay the debts in installments if the debtor's creditors had not originally agreed to such installments. Answer: B CASE 1. Peter is employed as a shop electrician for ABC, Inc. Peter has a car being repaired and a home on which he is paying mortgage payments. Peter is contemplating filing for bankruptcy, but he is not sure which type of petition to file. Peter also wonders whether the auto repair costs and the mortgage payments are dischargeable. Which bankruptcy filing is most appropriate for Peter? Are Peter’s debts dischargeable? Answer: While it could be argued that Peter could qualify for Chapter 7, 11 or 13, it seems most appropriate for Peter to file a Chapter 13 action. Peter is an individual debtor with a regular income. Only two debts seem to be causing the bulk of Peter's concerns. The auto expenses and the mortgage payments possibly could be resolved through creating or modifying time payments. Even though the auto shop and the mortgage company have not agreed to time payments or a modification of existing time payments, they will be subject to such changes upon court approval of a Chapter 13 plan. It should be noted that both the auto repair shop and the mortgage company have security interests in Peter’s car and home, respectively.. Accordingly, neither party need fear a potential loss by way of Peter’s bankruptcy, assuming that their respective security interests are sufficient in value to cover the debts Peter owes them. 2. The creditors of Sara Delano have petitioned for involuntary bankruptcy proceedings against her. Delano has been consistently late in paying her obligations for the past year. Two months before the petition was filed, a custodian was appointed to protect Delano's property. In her statement contesting the bankruptcy petition, Delano pointed out that she had dealt in good faith and could not be shown to be guilty of any act of misconduct. In addition, she cited her willingness to allow a custodian to be appointed as an indication of her intention to avoid bankruptcy and honor her obligations. Can she prevail? Answer: No. The fact that Delano has generally not paid her debts as they came due is sufficient grounds for her creditors' action. In addition, the second grounds that would preclude her protest-the appointment of a custodian for her property-occurred within 120 days before the filing of the petition. The fact that Delano has exercised good faith has no bearing on the case. 3. Arthur was involuntarily petitioned into bankruptcy by three of his creditors. When the trustee reviewed Arthur's books and records, the trustee discovered the following transactions: (a) Three weeks before the filing of the petition, Arthur paid cash for $17,000 worth of inventory for his store; and (b) Twelve days before the filing of the petition, Arthur paid $300 in full satisfaction of his store’s most recent electric bill. The trustee is considering attempting to set aside both of these transfers as preferential transfers. Discuss the advisability of the trustee’s attempt to set aside these transfers. Answer: Neither of these transfers constitutes a preference. A transaction for present consideration, such as a cash sale, is not subject to being set aside. Further, a payment by a debtor in the ordinary course of business, such as the payment of a utility bill, will not be set aside. Arthur’s payment of $17,000 for store inventory is a transaction for present consideration, as well as a payment in the ordinary course of business. Although his payment of the electric bill is arguably payment for something received earlier (electricity), it is, nevertheless, a payment in the ordinary course of business. Test Bank for Business Law: Principles for Today's Commercial Environment David P. Twomey, Marianne M. Jennings 9781133588245, 9781305575158, 9780324786699

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