B.The Creditor Must Give Value to the Debtor

B.The Creditor Must Give Value to the Debtor

1.Which of the following elements must exist for there to be a valid, enforceable security agreement?

a.A written security agreement.

b.The creditor must give value to the debtor.

c.The debtor must have an interest in the collateral.

d.A, B, and C.

e.B and C only.

2.Article 9 of the UCC does not cover a security interest in the following:

a.Land.

b.Inventory.

c.Equipment.

d.Patents and copyrights.

3.In order for a security interest to give the secured party protection against the claims of other creditors of the debtor, the security interest must:

a.Terminate the debtor’s interest.

b.Attach to the subject matter.

c.Become perfected.

d.Entitle the creditor to possession.

4.Which of the following is true about security agreements and financing statements?

a.These are two terms for essentially the same document.

b.Both must be filed in order to perfect a security agreement.

c.Both must exist in order for a security interest to attach.

d.The financing statement gives constructive notice to the world of the existence of the related security agreement.

e.The security agreement is unenforceable until a financing statement has been filed.

5.Which of the following items does not need to be included in a financing statement?

a.The debtor’s name.

b.The debtor’s mailing address.

c.The secured party’s name.

d.A description of the collateral.

e.What constitutes a default in the underlying loan agreement.

6.Which of the following are rules established by the UCC when determining priority among conflicting claims of creditors?

a.A secured creditor’s interest is equal to an unsecured creditor’s interest.

b.A perfected security interest has priority over a mere interest in the same collateral.

c.If there are two or more perfected security interest in the same collateral, the last to perfect has priority as it is the most recent interest that has been filed.

d.All of these are correct.

7.A creditor who has repossessed collateral may choose to retain it:

a.In all circumstances.

b.In all circumstances unless the secured party receives an appropriate notice within 21 days.

c.In all circumstances when the debtor willfully did not pay the debt.

d.In all circumstances unless the secured party receives an appropriate notice within 21 days or in the case of consumer goods, if more than 60 percent of the price has been paid.

8.Ajax Corporation borrowed $50,000 from National Bank, giving National a security interest in its factory equipment. The agreement stated that the equipment would be security for this $50,000 loan and any future loans that National made to Ajax. National filed a valid financing statement. Over the next several months, Ajax borrowed another $100,000 from National. No additional financing statements were filed. Ajax has not made any payments on its loans from National. Ajax defaults on these loans. National wants to foreclose on the collateral. Assuming this security agreement is valid and perfected, how much of National’s debt is secured?

a.None, because this was not a purchase money situation.

b.Only the first $50,000 because financing statements were not filed on the last $100,000.

c.Only the first $50,000 because future advances clauses are not valid.

d.The entire $150,000 is secured.

9.Which of the following is true about the distinction between secured and unsecured credit?

a.Secured debt is debt that has already been paid, and unsecured has not yet been paid.

b.Secured debt is expected to be collected, whereas collection of unsecured debt is doubtful.

c.Secured debt will be collected over more than 1 year, whereas unsecured debt is expected to be collected within 1 year.

d.Secured debt has collateral associated with it, whereas unsecured debt has no associated collateral.

e.Secured debt results from a judgment of the court, whereas unsecured debt results from the agreement of the parties.

10.When a debtor fails to pay a debt, and the value of the collateral is less than the full amount of the debt, which of the following is generally true?

a.The creditor can obtain a deficiency judgment against the debtor for the amount of the debt that was not satisfied from the collateral.

b.The creditor must absorb the remaining loss and has no further remedy.

c.The creditor must file a bankruptcy proceeding against the debtor in order to obtain further relief.

d.The creditor must record its security interest before proceeding further.

11.Which of the following is true about service providers’ liens on personal property?

a.The liens attach with respect to any work performed on personal property that benefits the property regardless of the consent of the owner of the property.

b.They can exist only if provided for by statute.

c.Whether or not they are recorded, the lien will remain attached to the property if the debtor transfers the property to another.

d.Such a lien applies only to the reasonable value of the services provided.

12.What is a mortgage?

a.A loan to purchase a house or other real property.

b.A contract to purchase a house or other real property.

c.Any loan associated with real property.

d.A security agreement in which real property is pledged as collateral for the related debt.

13.How are mortgages and deeds of trust related to one another?

a.They are two different methods to give a lender a security interest in real property of the debtor.

b.They are two names for the same instrument, and thus can be used interchangeably.

c.They are two distinct aspects of a security agreement covering real property, both of which must be present for the security interest to be valid.

d.Mortgages are used for real property, and deeds of trust are used for personal property.

e.Mortgages are used to create a security agreement covering residential real property, and deeds of trust are used in connection with commercial real property.

14.Which of the following best describes how a deed of trust works?

a.The state gives a deed to the lender to hold until the borrower satisfies the debt.

b.The borrower gives a deed to the lender to hold until the borrower satisfies the debt.

c.When a party borrows money to purchase property, the seller holds the deed until the debt is paid off, at which point it will be conveyed to the borrower.

d.When a trust is the owner of real property, a special type of deed is required.

e.The borrower conveys a deed to a third party who holds legal title until the debt is paid off or the borrower defaults.

15.Under a land sales contract:

a.A third-party lender provides financing for the purchase of a piece of property.

b.Credit is extended directly by the seller to the buyer, with the buyer not receiving a deed from the seller until the debt obligation is fully satisfied.

c.Credit is extended directly by the seller to the buyer, with the buyer receiving a deed immediately and that will become null and void upon default.

d.Land is sold that will not involve the use of a mortgage or deed of trust.

16.A material person’s lien can be obtained on real property by a contractor who has not been paid and who has:

a.Provided materials used on the real property.

b.Provided labor on the real property.

c.Provided materials used on the real property or labor on the real property.

d.Provided materials or labor used on personal property that was located on the real property at the time of providing the materials or labor.

e.C and D.

17.Jack has a construction company that specializes in home remodeling and renovation. He enters into a contract with Sandra to remodel her basement. Sandra agrees to pay in three installments, the third of which is due at the time of completion. Sandra makes the first two payments on schedule but refuses to make the final one even though the job has been completed. To preserve his rights, Jack files against the property. What type of filing has Jack most likely done?

a. A mechanic’s lien.

b. A mortgage.

c. A deed of trust.

d. A deficiency judgment.

e. A foreclosure.

18.What does it mean for liability on a negotiable instrument to be secondary liability?

a.The liability is for a small amount.

b.The liability arises only if the party with primary liability defaults and does not pay.

c.There are two parties to share the secondary liability.

d.It means that the liability relates to a two-party negotiable instrument.

19.In order to impose secondary liability, the following requirements must be met except that:

a.the instrument is properly presented for payment.

b.the instrument is dishonored.

c.the reason that the instrument was dishonored is justified.

d.timely notice of the dishonor is given to the party with secondary liability.

20.Betty Bongo, a real estate agent working for ABC Realty sells a home to Jason Biggs. Upon escrow closing, Betty signs the paperwork, “ABC Realty, by Betty Bogo, agent.” Later it was determined that the home had Jason bought had a mold problem that should have been disclosed. Who is personally responsible on the instrument?

a.Betty Bongo, as agent for ABC Realty.

b.ABC realty.

c.Both Betty Bongo and ABC Realty.

d.All of these are correct.

e.None of these are correct.

21.If in the question above Betty Bongo did not show that her signature was made in a representative capacity and she cannot prove that the original parties did not intend her to be liable, who is liable?

a.ABC realty.

b.Visa.

c.Betty Bongo.

d.All of these are correct.

22.Which kind(s) of liability can be imposed only if a party has signed an instrument?

a.Warranty liability only.

b.Contract liability only.

c.Both contract liability and warranty liability.

d.Neither contract liability nor warranty.

23.What are the two general kinds of implied warranties for which warranty liability can be imposed in connection with a negotiable instrument?

a.Transfer and contract.

b.Signature and contract.

c.Transfer and secondary.

d.With recourse and without recourse.

e.Transfer and presentment.

24.When a person transfers a negotiable instrument, to whom does this transferor make transfer warranties?

a.Only parties to whom the transferor makes a written assertion in connection with the transfer.

b.For all transfers, to the immediate transferee only.

c.For all transfers, to the immediate transferee and all subsequent transferees.

d.For transfers for consideration, to the immediate transferee, and if the transfer is by indorsement, to all subsequent transferees as well.

25.If Royce wanted to know which universal defenses against the payment of a negotiable instrument that he could use, which of the following would he have available to him?

a.Infancy or minority.

b.Extreme duress.

c.Discharge in bankruptcy.

d.Material alteration.

e. All of these are correct.

26.If Royce comes to you and asks what type of personal defenses can he raise against enforcement of a negotiable instrument by an ordinary holder, which of the following would you say qualify as such?

a.Mental illness.

b.Illegality of a contract.

c.Undue influence.

d.Discharge of an instrument by payment or cancellation.

e.All of these are correct.

27.Which of the following parties are liable only after a negotiable instrument has been presented and dishonored, and proper notice has been given?

a.Drawer, maker, acceptor, and qualified indorser.

b.Maker, acceptor, and unqualified indorser.

c.Acceptor and qualified indorser.

d.Drawer and unqualified indorser.

e.Maker and unqualified indorser.

28.What is the effect of the presence of a defense in connection with a negotiable instrument?

a.Payment of the instrument can be avoided.

b.The instrument becomes null and void.

c.The transfer warranties are no longer applicable.

d.The maker or drawer becomes liable for damages.

29.Which of the following will not discharge a party from liability on a negotiable instrument?

a.Payment by the party who is primarily liable.

b.Cancellation of the instrument.

c.A subsequent holder releasing collateral securing the instrument.

d.Failing to comply with a restrictive indorsement.

30.Who is discharged if a holder strikes out a prior indorsement on a negotiable instrument?

a.Only the party whose name was stricken.

b.The party whose name was stricken and all prior indorsers.

c.The party whose name was stricken and all subsequent indorsers.

d.All indorsers.

31.Lisa purchases a home theater system from Homeplace Cinema. Lisa signs a $10,000 negotiable promissory note in connection with this purchase. This note requires monthly payments for 5 years. After the system is installed, Lisa begins to have trouble with it. It turns out that there are defective components in both the video and audio aspects of the system. Meanwhile, Homeplace Cinema has sold Lisa’s promissory note to Amalgamated Finance, which meets all the requirements of a holder in due course. Lisa refuses to make any further payments on the notes due to the breach of contract by Homeplace Cinema. Which of the following is true?

a.Lisa has no further obligation to pay because the breach of contract is a real defense.

b.Lisa must pay the note to the extent of the fair market value of the home theater system in its current condition.

c.Lisa does not have to pay because federal legislation has eliminated holder in due course protection for negotiable instruments that are part of a consumer credit transaction.

d.Lisa must pay because the obligation of a promissory note is always unconditional.

32.A holder of a negotiable instrument is:

a.Anyone who has possession of an instrument.

b.Anyone who is rightfully in possession of an instrument.

c.Anyone who is in possession of a bearer instrument or anyone who is in possession of an instrument payable to that person.

d.Anyone who is in possession of an instrument payable to that person.

e.Anyone who is in possession of an instrument payable to that person if the person has indorsed the instrument.

33.Which of the following is correct with regard to a holder in due course?

a.A holder in due course is primarily liable on an instrument.

b.A holder in due course must notify subsequent transferees of his holder in due course status.

c.A holder in due course can obtain greater rights to payment of an instrument than his transferor had.

d.A holder in due course can give greater rights to a transferee than he has as a holder in due course.

34.The advantage of a holder in due course over a simple holder of an instrument is that the holder in due course can:

a.Indorse the instrument “without recourse,” thus limiting his liability.

b.Transfer the instrument to others, thus using it as a substitute for money.

c.Collect on the instrument even if it has been forged.

d.Collect on the instrument if the maker or drawer asserts a personal defense.

e.Collect punitive damages from a party who wrongly does not pay a negotiable instrument.

35.Which of the following is true about the good faith requirement for becoming a holder in due course?

a.It applies to both the transferor and the transferee of a negotiable instrument.

b.The UCC contains detailed requirements for meeting good faith.

c.It is an objective test applied using the reasonable person standard.

d.It means honesty in fact in the conduct of the transaction in question.

e.It is an objective test based on a reasonable person.

36.In order to become a holder in due course, one must take a negotiable instrument without notice of the following except:

a.That the instrument is overdue.

b.That the instrument has been dishonored.

c.That the instrument was signed by an agent.

d.That there was a claim to it by another person.

e.That there is a defense against it.

37.Can the payee of a negotiable instrument be a holder in due course?

a.Yes, the payee is always a holder in due course.

b.Yes, for notes but not for drafts.

c.No, not under any circumstances.

d.Usually not because the payee is usually aware of defenses or irregularities.

38.Under what doctrine could a party who is aware that an instrument is overdue take that instrument and acquire the rights of a holder in due course?

a.The shelter principle.

b.The indorsement protection doctrine.

c.The personal defense doctrine.

d.The public policy exception.

e.The taking for value doctrine.

39.What does it mean for liability on a negotiable instrument to be secondary liability?

a.The liability is for a small amount.

b.The liability arises only if the party with primary liability defaults and does not pay.

c.There are two parties to share the secondary liability.

d.It means that the liability relates to a two-party negotiable instrument.

40.Which of the following parties are liable only after a negotiable instrument has been presented and dishonored, and proper notice has been given?

a.Drawer, maker, acceptor, and qualified indorser.

b.Maker, acceptor ,and unqualified indorser.

c.Acceptor and qualified indorser.

d.Drawer and unqualified indorser.

e.Maker and unqualified indorser.

41.Against whom can the maker of a note successfully assert a personal defense?

a.The payee.

b.A holder in due course.

c.A holder who is not a holder in due course.

d.A and B only.

e.A and C only.

42.Billy, a minor, buys a car form Ajax Auto Dealers, signing a $2,000 negotiable installment note in payment. Ajax needs the cash, so it sells the note to Acme Finance Company, for its fair market value, indorsing the note in blank. The owner of Acme, who personally purchased the note, knew that Billy was a minor. Circumstances occur such that Acme can collect the note only if it is a holder in due course. Is Acme a holder in due course with respect to this note?

a.Yes, Acme is a holder in due course.

b.No, because the note was not properly negotiated to Acme.

c.No, because Acme did not take the note in good faith.

d.No, because Acme took the note with notice that there was a defense to its payment.

e.No, Acme is not a holder in due course because of some other reason.