Question 1

With the exception of pledges, a security agreement must:

Accepted Answer

A security agreement must be in an authenticated record to be enforceable, except in the case of a pledge where possession of the collateral is sufficient.

Question 2

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

Accepted Answer

Exoneration, reimbursement, subrogation, and contribution are all rights that a surety has against the principal debtor, third parties, and cosureties in the event of a default by the principal debtor.

Question 3

Thomas borrowed $100,000 from First Bank, which asked that he both put up collateral and provide a surety. Consequently Thomas provided the bank with a security interest in his antique car collection and asked Victor to act as a surety. Victor agreed to do so and signed a surety agreement with the bank. Thomas made several payments on the loan and then asked First Bank for permission to sell three of his cars. First Bank agreed, but it never notified Victor of the sale of the collateral. Thomas then defaults on the loan. First Bank now wants Victor to pay the remainder of the loan. Must Victor pay? Explain.

Accepted Answer

The answer of Thomas borrowed $100,000 from First Bank, which...

Question 4

A field warehouse, under Article 9 of the UCC, is:

Accepted Answer

A field warehouse is a type of secured transaction under Article 9 of the UCC, which involves a pledge, is commonly used for financing inventory, and allows the debtor access to the goods while giving the secured party control.

Question 5

Generally, when may a security interest be perfected in collateral?

Accepted Answer

A security interest can be perfected in various ways depending on the type of collateral: by filing a financing statement, by possession, automatically upon attachment, or temporarily as specified by the Uniform Commercial Code (UCC).

Question 6

First Bank loaned $100,000 to Central Office Supply Store to purchase computers for its inventory. Central signed a financing agreement, which First Bank duly filed in the appropriate public office. Lynn came into Central's store and purchased a computer that was subject to the security interest held by First Bank. Assuming that Lynn is a buyer in the ordinary course of business, whose interest in the computer has priority?

Accepted Answer

The answer of First Bank loaned $100,000 to Central Office...

Question 7

Explain how the 1998 Revisions to Article 9 facilitate electronic filing of a financing statement.

Accepted Answer

The answer of Explain how the 1998 Revisions to Article...

Question 8

Subrogation includes:

Accepted Answer

Subrogation allows a party who has paid off a debt to assume the legal rights of the creditor, including rights in the security of the principal debtor.

Question 9

Gary 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. Gary refused to pay the interest demanded and sued for rescission of the contract. The bank attempted to collect from Lewis, a surety under the loan. Does Lewis have to pay?

Accepted Answer

Lewis does not have to pay because the fraud perpetrated upon Gary by the bank can be used as a defense. If the underlying contract is voidable due to fraud, the surety is also released from the obligation.

Question 10

Assume you are the creditor in each of the following situations. Identify the kind of security agreement that is involved in each transaction and explain how you would perfect that agreement. 
a. You are the creditor (Everby Bank), and you lend Brisco Gaines $5,000 for a sound system. 
b. First Bank loans Doris $10,000 to purchase inventory for her store. 
c. First Bank loans Brad $5,000 to purchase a computer network for use in his store office. 
d. Kevin needs cash for gambling debts. He brings in his high-definition TV to secure a $500 loan.

Accepted Answer

The answer of Assume you are the creditor in each...

Question 11

Mr. Chickilini is a surety for Wayne on a debt owed to Melvin. If Wayne fails to pay, what is Mr. Chickilini's defense to avoid payment of the debt?

Accepted Answer

The answer of Mr. Chickilini is a surety for Wayne...

Question 12

What party(ies) is\are involved in a suretyship relationship?

Accepted Answer

In a suretyship relationship, the principal debtor is involved as they are the party whose obligation is being guaranteed by the surety.

Question 13

Every consensual secured transaction involves:

Accepted Answer

A consensual secured transaction involves a debtor, a secured party, collateral, a security agreement, and a security interest, making all the options correct.

Question 14

What contractual defenses are available to those parties involved in surety relationships?

Accepted Answer

All of these are valid contractual defenses in surety relationships. If the principal debtor's obligation does not exist, is discharged, or is modified, it can affect the surety's obligation.

Question 15

Elmer agreed to act as the conditional guarantor of collection on a debt of $50,000 that Fred owed to Gloria. Fred paid Elmer a premium to serve as surety. If Fred defaults on the debt, what are Gloria's rights against Elmer?

Accepted Answer

The answer of Elmer agreed to act as the conditional...

Question 16

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

Accepted Answer

Subrogation allows Sam to step into the shoes of the lender after paying the full obligation, enabling him to repossess the car, collect from Dave, and collect from Steve.

Question 17

"Value" under Article 9 of the UCC is defined as including:

Accepted Answer

Under Article 9 of the UCC, "value" includes consideration under contract law, a binding commitment to extend credit, and antecedent debt, among other things.

Question 18

Karl loaned Linda $100,000. Madeline agreed to act as surety for $100,000. Nora agreed to act as surety for $75,000 and Orville agreed to act as surety for $25,000. Linda later defaulted on the loan, and Karl is now demanding payment from Nora and Orville. What amount do Nora and Orville have to pay? If Nora and Orville pay, does Madeline have any obligation? Explain.

Accepted Answer

The answer of Karl loaned Linda $100,000. Madeline agreed to...

Question 19

Under the Code, collateral is classified according to:

Accepted Answer

Collateral is classified according to its nature and use under the Uniform Commercial Code (UCC).

Question 20

Diane, who is seventeen years old, purchased an auto from Elvira on credit. Florence agreed to act as surety and signed a written surety agreement. At the time of purchase, Diane specifically asked Elvira about the condition of the car's motor and was told that it had just been replaced with a new one and was in fine condition. This was blatantly untrue, because Elvira knew it was in terrible shape and would only last a short time. The auto has now stopped running and Diane refuses to make any more payments. Elvira is now proceeding against Diane and Florence. What defenses, if any, are available to (a) Diane and (b) Florence?

Accepted Answer

The answer of Diane, who is seventeen years old, purchased...

Quiz 37: Secured Transactions and Suretyship