Question 1

A bond which guarantees the performance of the terms of a contract is a(n) bond.

Accepted Answer

A performance bond is a type of surety bond that guarantees the completion of a project according to the terms and conditions of a contract. It ensures that the contractor will meet their obligations and complete the project as promised, and protects the project owner against financial loss if the contractor fails to do so. Performance bonds are commonly used in construction and other industries where large contracts are involved.

Question 2

Fred agreed to loan George $10,000 for his retail store for which George signed a promissory note.Two months later, Fred heard that George's business was in trouble and that he might not be able to repay the loan.As a result of hearing this information, Fred asked Herman to guarantee the loan.Herman gave a glowing oral endorsement of George and of George's business and then orally promised to pay the $10,000 if George did not.Herman has done business with George for 10 years and George buys his entire inventory from Herman's wholesale outlet.Herman adds that George is his major customer.Is Herman's agreement to pay the $10,000 if George does not pay it enforceable?

Accepted Answer

The statute of frauds requires that a suretyship agreement be in writing to be enforceable. However, the main purpose rule exception states that if the main purpose of the guarantor's promise is to benefit themselves, then the agreement does not need to be in writing. In this case, Herman's main purpose in guaranteeing the loan was to protect his own business interest as George is his major customer and purchases his entire inventory from him. Therefore, the agreement will likely be enforceable even though it was not in writing.

Question 3

Revised Article 9 removes the requirement of from the financing statement.

Accepted Answer

Revised Article 9 no longer requires the debtor's signature on a financing statement. However, all other elements including the notice filing, name of the secured party, and an indication of the collateral covered by the financing statement are still required.

Question 4

Kay borrowed $200,000 for her business.First Bank loaned the money but required a surety and collateral.Kay put up her boat, valued at $110,000, and Anson agreed to guarantee the entire loan.After Kay had paid $50,000 of the loan, she asked First Bank to release the collateral since she wanted to sell it to her brother.The bank looked at her perfect payment record and agreed.Two weeks later, she sold the business, took the boat to Brazil, and never was heard from again.Can First Bank collect from Anson?

Accepted Answer

The answer of Kay borrowed $200,000 for her business.First Bank...

Question 5

Alice loans George $500 and Sue acts as surety under the loan agreement.When George defaults, Alice comes to Sue to collect the $500.Sue reaches a settlement to pay $400 to Alice in complete satisfaction of the loan.What recourse does Sue have against George?

Accepted Answer

Sue, as a surety, can seek reimbursement from George for the amount she paid on his behalf, which is $400.

Question 6

Inventory includes:

Accepted Answer

Inventory includes goods held for sale or lease, such as finished products waiting to be sold, raw materials for manufacturing, or merchandise for resale. Farm products, equipment, and intangible products are not categorized as inventory.

Question 7

A defense that can only be asserted by the principal debtor is called a defense.

Accepted Answer

A personal defense is one that can only be raised by the principal debtor and cannot be raised by any other party in the transaction. Personal defenses include things like lack of capacity, duress or undue influence, fraud in the execution, and illegality. Real defenses, on the other hand, can be asserted by any party in the transaction and include things like forgery, material alteration, and discharge of the debt. Subrogation and joint defenses are not relevant to this context.

Question 8

Because of the , the contractual promise of a surety to the creditor must be in writing to be enforceable.

Accepted Answer

The statute of frauds is a legal requirement that certain types of contracts be in writing in order to be enforceable, including contracts for the sale of goods over a certain value, contracts that cannot be performed within one year, and promises made by a surety. Therefore, because of the statute of frauds, the contractual promise of a surety must be in writing to be enforceable.

Question 9

Glenn decided to borrow from Jones Bank since it promised that his loan interest rate would be systematically reduced every year when the board met.The loan rate was never reduced, but actually increased monthly.Glenn refused to pay the interest demanded and sued for rescission of the contract; thereupon, the bank attempted to collect from Lewis, a surety under the loan.Does Lewis have to pay?

Accepted Answer

If Glenn's contract with Jones Bank is rescinded due to the bank's fraudulent promise, the surety obligation under the contract is also rescinded. This means that Lewis, the surety under the loan, would not be responsible for paying the debt. Fraud is a valid defense to a contract, and in this case, the fraud perpetrated upon Glenn would also release the surety from their obligation.

Question 10

As a general rule, for purposes of attachment of a security interest, a debtor is deemed to have rights in collateral that she:

Accepted Answer

A debtor is deemed to have rights in collateral that she owns, has in her possession, or is in the process of acquiring from a seller. Therefore, all of these choices are correct.

Question 11

Max pressured Madeline to cosign his car loan, telling her he would otherwise reveal secrets about her that would taint her reputation for honesty.When Max defaults and the creditor tries to collect from Madeline, she:

Accepted Answer

The answer of Max pressured Madeline to cosign his car...

Question 12

Upon the surety's payment of the principal debtor's entire obligation, the surety obtains all of the rights the creditor has against or through the principal debtor.The term for the surety's "stepping into the shoes" of the creditor is known as:

Accepted Answer

The term for the surety's "stepping into the shoes" of the creditor is known as subrogation. This means that the surety essentially becomes the creditor and can exercise all the creditor's rights against the principal debtor. Contribution refers to the sharing of liability between multiple parties, reimbursement refers to the payment of expenses by one party to another, and exoneration refers to the release of liability from a party.

Question 13

Specialized suretyships would include:

Accepted Answer

Specialized suretyships typically refer to types of bonds that cover specific risks or situations. Fidelity bonds, which protect against employee theft or fraud, would fall under this category. Incorporate bonds would not typically be considered specialized, as they are a standard requirement for incorporating a business. Non-official and legislative bonds do not make sense as specialized suretyship categories.

Question 14

An undertaking by a surety to protect an employer against the dishonesty of an employee is a(n) bond.

Accepted Answer

A fidelity bond is specifically designed to protect an employer against the dishonest acts of their employees. Performance bonds are typically used in the construction industry to ensure completion of a project, while judicial and official bonds involve legal proceedings and government positions, respectively.

Question 15

Which of the following contractual defenses are not available to those parties involved in surety relationships?

Accepted Answer

A surety relationship is one where a person (the surety) agrees to be responsible for the debt or obligation of another person (the principal debtor) if the principal debtor fails to pay. The surety has limited defenses available compared to the principal debtor, and the change in the surety's financial assets is not a contractual defense. The nonexistence of the principal debtor's obligation, discharge of the principal debtor's obligation, and modification of the principal debtor's contract are all contractual defenses available to the principal debtor.

Question 16

Dayton Hardware Store and Leighton Bank enter a loan agreement in which Leighton agrees to lend $10,000 on the security of Dayton's existing store equipment.A security agreement is executed and a financing statement is filed, but no funds are advanced.A week later, Dayton enters a loan agreement with Ramos Bank in which Ramos agrees to lend $10,000 on the security of the same store equipment.The funds are advanced, a security agreement is executed, and a financing statement is filed.A week later, Leighton Bank advances the agreed $10,000.Dayton defaults on both loans.In this case:

Accepted Answer

Priority among security interests perfected by filing is determined by the order in which the financing statements were filed. Even though Leighton Bank did not advance the funds initially, it had a prior security interest in the store equipment because it had filed the financing statement first. Therefore, Leighton Bank has priority over Ramos Bank in this case.

Question 17

If the principal debtor defaults, the surety has rights against the principal debtor, third parties, and cosureties.These rights would include:

Accepted Answer

The surety has three main rights in case of default by the principal debtor - exoneration (being discharged from any further liability), reimbursement (being repaid for any losses or expenses incurred), and subrogation (being able to step into the shoes of the creditor and pursue their rights against the debtor, third parties or cosureties). Therefore, choice D, "All of these", is the correct answer.

Question 18

Which of the following would not help a surety defend himself from payment of a debt?

Accepted Answer

The creditor's knowledge or lack of knowledge about the riskiness of the loan does not affect the surety's liability. The other options could potentially help the surety defend himself from payment of the debt.

Question 19

Which of the following is NOT a method by which a security interest be perfected in collateral?

Accepted Answer

Perfection of a security interest is typically achieved through filing a financing statement, taking possession of the collateral, or automatically upon attachment in certain cases. A signed agreement describing the collateral in detail is necessary for attachment of the security interest but does not by itself perfect the security interest.

Question 20

Dale defaults on a car loan secured by his car and guaranteed by both Sam and Dave.Subrogation would allow Sam, who paid Dale's full obligation, to:

Accepted Answer

Subrogation allows Sam to step into the shoes of the lender after paying off Dale's obligation, enabling him to repossess the car, collect from Dave, and collect from Dale.

Quiz 37: Secured Transactions and Suretyship