Dr. B-A's Old 576/776/776A - Business Law II Exams

Below are a few of my old exams that you might find useful for studying for exams.

Exam #1

Exam #2

Exam #3

Exam #3A

LS 576/776/776A - Business Law II

Dr. Bennett-Alexander

Winter 1992 Chapters 20,21,22 -Negotiable Instruments

PART I - TRUE/FALSE

1. All commercial paper is negotiable.

2. If the payee of a negotiable instrument negotiates it to a third party, she must then give notice to the maker.

3. A note is a three party instrument.

4. Order paper is negotiated by delivery.

5. A check is issued to Allen, indorsed by Allen and given to Lisa. Lisa is a holder.

6. A check is issued to Allen and stolen by Max. Max is a holder.

7. A check is issued to Allen, stolen by Max and sold to Andrea. Andrea is a holder.

8. If an instrument recites that it "incorporates by reference" another document, negotiability is destroyed.

9. A transferee in possession of a note which does not have the proper indorsements is in possession of nothing.

10. A payee cannot be a holder in due course.

11. Laura issued a negotiable promissory note to the order of Lori for the purchase of a television set. The set was never delivered. Lori indorsed the note to Robert who took as a holder in due course. Robert then gave the note to Angela as a gift. Angela knew the set was never delivered. Angela may recover from Laura on the note.

12. When Phyllis deposits her paycheck to her bank, the teller neglects to have Phyllis indorse the check. Upon discovering this, the teller supplies the missing indorsement. The teller's action is lack of ordinary care on the part of the bank.

13. Jean indorses a check "Pay only to Audrey". This special indorsement requires that Audrey indorse the check for proper negotiation.

14. A check is issued by Tracy and negotiated to Earl. Earl indorses "Pay to Patrick after he purchases tickets to Hawaii and gives them to me. /s/ Earl". Patrick negotiates the check to First National Bank, which gives Patrick the appropriate money for the note. First National need not have honored the conditional restrictive indorsement.

15. Christopher receives a check from Lance, on which Denny is the drawer. Christopher did not know that Denny's signature was forged. The drawee honors the check. When Denny seasonably notifies the drawee of the forgery, the drawee recredits Denny's account and requests that Christopher repay the money he was paid for the check. Christopher refuses. Christopher is correct.

PART II - MULTIPLE CHOICE

16. In order to be negotiable, an instrument must satisfy all except which one of the following requirements?

a. It must contain an unconditional promise or order to pay.

b. It must be for a sum certain in money.

c. It must be payable on demand.

d. It must be signed by the maker or drawer.

17. Which of the following, if contained in a note, would destroy its negotiability?

a. "Payment for order # 1-2345".

b. "Payment in full".

c. "Payable upon completion of contract # 1-2345".

d. "Payment secured by 1 Rolex watch".

18. Until the necessary indorsements have been supplied, the transferee has

a. virtually all the rights of a holder.

b. all the rights of a holder.

c. all the rights of a holder in due course.

d. nothing more than the contract rights of an assignee.

19. Tommy has in his possession a negotiable instrument which was originally payable to the order of Karen. It was transferred to Tommy by delivery by Sabre, who took it from Karen in good faith in satisfaction of an antecedent debt. The back of the instrument reads as follows: "Pay to the order of Sabre in satisfaction of my prior purchase of a new compact disc player, /s/ Karen". Which of the following is correct?

a. Tommy has the right to assert Sabre's rights, including her standing as a holder in due course and also has the right to obtain Sabre's signature.

b. Sabre's taking the instrument for an antecedent debt prevents her from qualifying as a holder in due course.

c. Karen's indorsement is a special indorsement, thus Sabre's signature is not required in order to negotiate the instrument.

d. Tommy is a holder in due course.

20. On April 1, Christie orders a $350 table from Yield House Furniture Co. through the mail order catalog. On April 6, Christie sees the same table in a local store for $50 less, so she calls the bank and puts a stop payment order on the check. Yield House had received the check by the time of the stop payment order. Seven months later, on November 30, a new Yield House secretary found the check in the files and deposited it to the Yield House account. The check is honored by Christie's bank. Which of the following is a true statement regarding these facts?

a. The bank must recredit Christie's account because the stop payment order ended on April 20.

b. The bank must recredit Christie's account because the stop payment order ended November 30.

c. The bank need not recredit Christie's account because payment over the stop payment order was not willful.

d. The bank need not recredit Christie's account.

21. John receives a negotiable instrument from Ahmad. In which of the following situations would John not have the status of a holder in due course?

a. Unknown to John, a fully executed bearer instrument had been stolen from the maker by Ahmad.

b. Unknown to John, the instrument had been skillfully altered so that the amount due was raised from $500 to $5000.

c. The instrument was payable to Ahmad who transferred the instrument to John without indorsing it.

d. All of the above.

22. Final payment by a bank may occur when

a. it pays the item in cash.

b. it completes the process of posting.

c. a and b.

d. neither a nor b because if there are insufficient funds, the provisional credit given by the bank is revoked.

23. Reggie is called by "David", who says he is an alumnus of Reggie's alma mater who is calling to solicit donations to the alma mater during a "phonathon" fund drive. According to David, the check is to be made out to the caller (David) so that the alumni office will know how much each caller raised, as they are competing for a prize. Reggie issues a $500 check to David. David, whose real name is Steven, indorses the check as David, cashes it and the bank debits Reggie's account. Reggie finds out that the alma mater knows nothing of David and has not sponsored a recent fundraiser. Reggie tells the bank that the funds are not to be debited from his account because the check was issued under fraudulent circumstances. The bank disagrees. Which is a true statement regarding these facts?

a. Reggie is correct because of the application of the imposter rule.

b. The bank is correct because of the application of the imposter rule.

c. The bank is correct because of the application of the ficticious payee rule.

d. Reggie is correct because of the application of the ficticious payee rule.

24. Julie signed a promissory note for $50. The amount was later altered to read $500 by someone other than Julie and without her permission. A holder in due course may recover

a. nothing, because material alteration is a real defense. b. $50.

c. $500.

d. the difference between the note as written and the note as altered.

PART III - NEGOTIABLE (A) OR NON-NEGOTIABLE (B)

25. A note signed by Henry Brown in the trade name of the Quality Store.

26. A note for $450, payable to the order of TV Products Company, "If, but only if, the color television set for which this note is given proves entirely satisfactory to me."

27. A note executed by Adams, Burton and Cady Company, a partnership, for $1,000, payable to the order of Davis, payable only out of the assets of the partnership.

28. A note promising to pay $500 to the order of Leigh and to deliver 10 tons of coal to Leigh.

29. A note for $10,000 executed by Eaton payable to the order of the First National Bank of Emanon in which Eaton promises to give additional collateral if the bank deems itself insecure and demands additional security.

30. A note reading, "I promise to pay to the order of Richard Roe $2,000 on January 31, 1990, but it is agreed that if the crop of Blackacre falls below ten bushels per acre for the 1985 season, this note shall be extended indefinitely.

31. A note payable to the order of Ray Rogers fifty years from date but providing that payments shall be accelerated by the death of Silas Hughes to a point of time four months after his d ~;3 t :h

32. A note for $500 payable to the assigns of Levi Lee.

PART III. - ANSWER AND SHORT ANSWER - For each of the questions in this section, put the answer to the first question on the scantron (A or 1 for yes, 2 or B for no), and answer the second question on the answer sheet provided. Explanations taking more space than provided will not be read. Explanatory key words may be used rather than entire sentences, i.e., "ok to state consideration", or "undated note not ok if date necessary". Just make sure its understandable to me.

33. P agreed to lend M $500. M made and delivered his note for $500 payable to P or order "ten days after my marriage." Shortly thereafter, M was married. Is the instrument negotiable? Why or why not?

34. Sam Sharpe executed and delivered to Don Dole the following instrument:

Knoxville, Tennessee

May 29, 1989

Thirty days after date I promise to pay Don Dole or order, Five Thousand Dollars. The holder of this instrument shall have the election to require the assignment and delivery to him of my 100 shares of Brookside Iron Works Corporation stock in lieu of the payment of Five Thousand Dollars in money.

/s/ Sam Sharpe

Is this instrument negotiable? Why or why not?

35. For the balance due on the purchase of a tractor Henry executed and delivered to Jane his promissory note containing the following language:

January 1, 1989, I promise to pay to the order of Jane Jones the sum of $7000 to be paid only out of my checking account at the XYZ National Bank in Athens, Ga, in two installments of $3500 each, payable on May 1, 1989 and on July 1, 1989, provided that if I fail to pay the first installment on the due date, the entire sum shall become immediately due. /s/ Henry Brown.

Is the note negotiable? Why or why not?

36. M employs A to work for her for one year from January 1, 1990 to December 31, 1990, at a salary of $1000 a month, payable monthly. On January 2, M delivers to A twelve promissory notes in otherwise negotiable form, maturing respectively on the last day of successive calendar months throughout the year of 1990. On the first note there is the statement "For January 1990 salary"; on the second note "For February 1990 salary"; and so on for each note. On January 3, 1990, A sold and indorsed the twelve notes to XYZ Bank and on January 4, 1990, quit work. Are these notes negotiable? Why or

37. Rick, who operates a department store, executed the following instrument:

$2600 Athens, GA 3/5/91

On July 1, 1991, I promise to pay to Dana, or order, the sum of twenty-six Hundred Dollars for the privilege of one framed advertising sign, size 24x36 inches, at one end of each of two hundred sixty motor coaches of the New Omnibus Company for a term of three months from May 15, 1991. /s/ Rick Bishop

Is this instrument negotiable? Why or why not?

38. Joanna executed and delivered the following note to Vicki:

Athens, Ga 6/1/91

I promise to pay to the order of Vicki Bagwell or bearer, on or before July 1, 1991, the sum of $7000. This note is in consideration of Bagwell's transferring to the undersigned title to her 1989 Buick automobile. /s/ Joanna Addison

Addison and Bagwell agreed that delivery of the car be deferred to 7/1/91. On June 15, Bagwell sold and delivered the note, without indorsement, to Linda for S6200. Has Linda acquired any rights? Why or why not? If she has acquired rights, tell what they are.

39. Richard Ball received a check from /Dorothy Hinson Enterprises, Inc. drawn on the Citizens Bank of Athens, in the sum of $10,000. Richard indorsed the check "Mr. Richard Ball for deposit only, Account of Richard Ball", placed it in a "bank by mail" envelope addressed to the First National Bank of Athens, where he maintained a checking account, and placed the envelope over a tier of mailboxes in his apartment building along with other letters to be picked up by the mail carrier the next day. Timothy stole the check, went to the Bank of X, where Richard was unknown, represented himself to be Richard, and cashed the check. Has Bank X taken the check by negotiation? Why or why not?

40. Kathryn issues a check payable to the order of Theresa in payment of an obligation Kathryn owes Theresa. Theresa delivers the check to Chrissie without indorsing it in exchange for 100 shares of General Motors stock owned by Chrissie. Does Chrissie have a claim against Theresa? Why or why not? In your answer tell how Theresa has transferred the check.

41. Tony executed and delivered to Gretchen a negotiable promissory note payable to the order of Gretchen as payment for 100 bushels of wheat Gretchen had sold to Tony. Gretchen indorsed the note "Pay to Lori only, /s/ Gretchen" and sold it to Lori. Lori then sold the note to Sherry after indorsing it "Pay to Sherry, /s/ Lori" Does Sherry acquire any rights in the instrument? Why or why not?

42. Bradley executed and delivered to Wes a negotiable promissory note payable to the order of Wes for $500. Wes indorsed the note, "Pay to Tina upon her satisfactorily repairing the roof of my house, /s/ Wes" and delivered it to Tina as a downpayment on the contract price of the roofing job. Tina then indorsed the note and sold it to William for $450. Does William acquire any rights in the promissory note? Why or why not?

PART IV - INDORSEMENTS - For each of the following indorsements indicate whether-the indorsement is blank or special, restrictive or nonrestrictive and qualified or unqualified. For each question, you will need to use three separate scantron answer numbers. For each indorsement indicate:

in the first #: A for blank and B for special

in the second #: A for restrictive and B for nonrestrictive

in the third #: A for qualified and B for unqualified

43,44,45. "Pay to M without recourse."

46,47,48. "Pay to A for collection

49,50,51. "I hereby assign all my rights, title, and interest in this note to F in full."

52,53,54. "Pay to the Southern Trust Company."

55,56,57. "Pay to the order of the Farmers Bank of Athens for deposit only."

LS 576/776/776A

Dr. Bennett-Alexander

Credit is given only for complete answers. In order to be complete, your answers must include recognition of all of the following issues and answers to the specific questions asked.

33. Issue: Whether an instrument is negotiable if it is not payable on demand and the event it is payable upon is not definite. No. The question is whether the instrument is negotiable and why or why not. No. The instrument is not negotiable because it is not payable on demand or at a definite time since a definite time cannot be conditioned upon the happening of an event uncertain at the time the instrument is issued. "Ten days after my marriage" is too uncertain.

34. Issue: Whether an instrument that is possibly payable in something other than a sum certain in money is negotiable. No. The question was whether the instrument is negotiable and why or why not. No. The instrument is not negotiable because a negotiable instrument must be payable only in a sum certain in money. Here the holder could elect to be paid in stock and this destroys negotiability.

35. Issue: Whether restricting payment of a note from a particular fund is ok. No. The question was is the note negotiable and why or why not. The answer is no. This is a note which says it is payable only out of a particular fund (checking account). This destroys negotiability. If it was a check, by implication it would be payable out of that checking account fund, but this is a note, and it literally restricts the payment from a particular fund and that destroys negotiability. The facts do not fit into any of the exceptions (government entity, partnership, etc.)

36. Issue: Whether mere notations on an instrument destroys negotiability. No. The question was whether the notes were negotiable and why or why not. Yes. The notes are negotiable. The notes contain the notation: "For February 1990 salary", etc., but that is ok and does not condition the notes and destroy negotiability.

37. Issue: Whether stating consideration on an instrument destroys negotiability. No, it does not. The question was is the note negotiable, why or why not. Yes, the note is negotiable. The note merely stated that the money was to be paid in exchange for putting up the bus signs. This is ok to do and does not destroy negotiability.

38. Issue: Whether a bearer instrument transferred without indorsement is an effective negotiation of the instrument. It is. The question asked whether Linda acquired any rights? Why or why not? If she has acquired rights, tell what they are. Yes, Linda has acquired the rights of a holder in due course. She is in possession of a bearer instrument (pay to the order of Vickie Bagwell or bearer) which did not have to be signed, and was not. We have no indication that she did not meet the other requirements of a holder in due course.

39. Issue: Whether a bank taking an order instrument with a restrictive banking indorsement takes it by negotiation if the instrument is indorsed and delivered, even though the bank does not act consistently with the indorsement. The answer is yes. The question asked has the bank taken the check by negotiation, why or why not? The answer is yes, it took by proper negotiation because it was order paper and had been indorsed and delivered. Proper negotiation only requires that order paper be indorsed and delivered. That was done here. The effect of a restrictive banking indorsement is to give the indorser a cause of action if the restriction is not complied with, but it does not prevent negotiation if the instrument is not transferred in conformity with the indorsement.

40. Issue: Whether order paper transferred to one who gives value, without indorsement of the transferor, gives any rights to the transferee. Yes, they have the rights of a transferee. The question was does Chrissie have a claim against Theresa? Why or why not, and in your answer tell how Theresa has transferred the check. The answer is yes, it gives Chrissie the rights of an assignee, because this was order paper needing indorsement and delivery and the transferor only delivered the instrument, and did not indorse it. Since the proper indorsement was not on the instrument, the transferee took it by assignment and has the rights of an assignee. Since the transferee, Chrissie, paid value, she has a claim, as the transferee who paid value for the instrument, to have the transferor's indorsement placed upon the instrument.

41. Issue: The effect of a restrictive indorsement attempting to prohibit further transfer, upon the transferee of a negotiable instrument. Question was does Sherry acquire any rights in the instrument, why or why not? The answer is yes, Sherry acquires all rights in the instrument, even though there was a restrictive indorsement attempting to prohibit further transfer. The effect of such an indorsement is to treat the restrictive indorsement as a special indorsement only needing the signature of the indorser and delivery to be effectively negotiated. We therefore know of no reason why Sherry does not take the specially indorsed instrument as a holder in due course.

42. Issue: Effect of a restrictive conditional indorsement upon a transferee of a negotiable instrument. Question was does William acquire any rights, why or why not? The answer is yes, William acquires the rights of a holder in due course to the extent that he paid value consistent with the condition. It does not destroy negotiability to put conditions on an indorsement, but it does destroy negotiability to put conditions on the front of a negotiable instrument. The effect of the condition in the indorsement is that the holder becomes a holder in due course who pays value and takes without notice of a defense to the instrument, to the extent that the transferee paid value consistent with the condition.

Last Updated April 18, 1997 by Dawn D. Bennett-Alexander

LS 576, 776, 776A - Business Law II

Dr. Bennett-Alexander

Winter 1992

Chs. 22, 23, 24

Chapter 22

1. Angela issues a note to Bob, who is not a holder in due course. Bob negotiates the note to Carl, a holder in due course. Carl negotiates to Douglas, a holder in due course. Douglas negotiates the note back to Bob for value. Bob is now a holder in due course.

2. A issues a note to B. B negotiates the note to C, who is a holder in due course. C negotiates the note to D, her friend, as a birthday gift. D presents the note for payment to A, who says that he will not pay because he never received from B the goods for which the note was issued. Since D is a holder in due course, she can collect from A on the note anyway, despite the assertion of a personal defense by A.

3. B negotiates a promissory note to S. The note is stolen from S and negotiated. On the date of maturity for the note, the holder of the note, a holder in due course, presents the note to B for payment. B refuses to pay, asserting that the note was stolen from S. This defense is a personal defense and will not be effective to prevent the holder in due course from collecting from B on the note.

4. A executes a $500 promissory note to B for value. B negotiates the note to C. C adds a zero to the $500 and makes the note into one for $5000. C negotiates the note to D, who takes as a holder in due course. D presents the note to A for payment and A refuses to honor the note. D is wrong for doing so .

5. In the question above, A can refuse to pay D $5000, since the note had been materially altered, which is a personal defense, but must pay to the holder in due course the original tenor of the note, that is, $500.

6. Amy issues a $1000 promissory note to Beth for goods to be delivered. Beth negotiates the note to Cristina for value. Cristina knows that Beth is not going to deliver to Amy the same quality goods that the two agreed upon. Cristina negotiates the note to Devin as a birthday gift. Even though Devin does not qualify as a holder in due course because he gave no value, he has the rights of one under the shelter .t r; n ~

7. In the question above, if Devin negotiated the note to Ed, a holder in due course, and Ed presented the note to Amy upon maturity, Amy would be not be able to effectively assert the personal defense of fraud in the inducement against Ed.

8. Question # 7 above is false because the defense of fraud in the inducement is a real defense.

9. Question # 7 above is false because the defense asserted would not be fraud in the inducement, but rather, fraud in the execution.

10. J.J. purchases a new washer and dryer on credit from an appliance store. A month later the promissory note which J.J. issued for payment of the appliances is negotiated to Boo Acceptance Corporation. Boo Acceptance Corporation is in the business of buying promissory notes for which it gives value. When J.J.'s washer no longer works after two months, J.J. refuses to continue to pay for the washer. Boo Acceptance Corporation, as a holder in due course of J.J.'s promissory note, may collect from J.J. anyway, as failure of consideration is only a personal defense.

11. Jeff, a minor, issued a negotiable instrument to Heather. Heather negotiates the instrument to Anne, who takes as a holder in due course. When Anne presents the instrument to Jeff for payment at maturity, Jeff refuses to pay. Jeff asserts that he is a minor, which in his state, is a defense to a simple contract. Jeff's defense is a real defense and is good against Anne, even though she is a holder in due course.

12. The good faith necessary to take a negotiable instrument as a holder in due course is honesty in fact.

13. In question #10 above, when Boo Acceptance Corporation buys up promissory notes for value, it generally pays value in the form of the remainder of the payment left on the face value of the note, minus ten percent of the note. This discount, which permits Boo to pay the transferor less than the amount the note is actually worth, does not prevent Boo Acceptance Corporation from meeting the requirement that the holder in due course give value.

14. A holder in due course must take an instrument before it is overdue. For demand paper which has no specific due date, the rule is that the holder in due course take it within a reasonable time after issue. For a check a reasonable time is deemed to be within seven days after issue or date of issue, whichever is longest.

15. Alfred issues a negotiable note to Benny. Benny negotiates the note to Clark, who takes as a holder in due course. Clark negotiates the note to Dork as a gift. Dork negotiates the note to Ervin, who takes the note with notice that there is a defense. Ervin negotiates the note to Fatima, who takes the note with notice that the note is overdue. Alfred's personal defense of nonperformance of a condition precedent will not be effective against Fatima.

Chapter 23

16. Allen issues a check to Rhonda. Rhonda negotiates the check to Stephanie, who negotiates it to Ashley. When Ashley presents the check to the drawee bank for payment, the check is dishonored. Ashley notifies Allen, who says he does not have the money to pay. To whom must Ashley now go for payment?

a. Rhonda.

b. Stephanie.

c. Drawee bank.

d. Allen.

17. What effect does a delay in presentment have upon indorsers?

a. It limits their liability.

b. It has no effect upon their liability.

c. It discharges them.

d. It limits their liability if the delay passes a reasonableness test.

18. Which of the following is a correct statement regarding acceptance/certification?

a. Generally, if the bank refuses to certify a check, it is dishonored.

b. Upon certification, the drawer becomes primarily liable.

c. The drawer and all indorsers are discharged from liability upon certification obtained by the holder.

d. Certification is a procedure by which the bank verifies that the drawer has sufficient funds and the check is authentic.

19. Dishonor of a note takes place if

a. the maker fails to pay the note when properly presented.

b. the maker wishes to make a reasonable examination of the note.

c. the maker delays payment until the close of business on the day of presentment.

d. all of the above.

20. While on a buying trip, Anne, an agent of Paul, procures merchandise for Paul from a new wholesaler she has not dealt with before. Anne pays for the merchandise with a check which she signs "Anne Doe, agent for Paul Roe". Who is liable on the check?

a. Anne.

b. Paul

c. Anne and Paul

d. First National Bank.

21. Flora is in possession of a negotiable note issued by Karen. Flora indorses the note to Andrea without recourse. Andrea indorses the note in blank and negotiates it to Donald. Donald negotiates the note to Tess as a gift. As it turns out, the note was forged and Karen refuses to honor it. Donald is liable to Tess on the note for breach of unconditional warranty.

22. Since Flora indorsed the note without recourse, she has waived her unconditional liability.

23. There are two types of potential liability associated with negotiable instruments. They are

a. negotiable and non-negotiable liability.

b. contractual and non-contractual liability.

c. unconditional and warranty liability.

d. conditional and warranty liability.

24. Z is a holder in due course of a negotiable note that has just come due. X is the maker. Y is the payee. On the back of the note is Y's special indorsement to Z. Which of the following is true?

a. X is primarily liable and Y is secondarily liable. b. Y is primarily liable and X is secondarily liable. c. X is primarily liable and Z is secondarily liable. d. Y is primarily liable and Z is secondarily liable.

25. X has primary liability on a negotiable instrument. Y has secondary liability on the negotiable instrument, consequently,

a. X is liable only after the instrument is dishonored.

b. If Y is a drawer, (s)he will have no liability after acceptance.

c. X cannot be the maker.

d. Y's liability generally arises only after presentment, dishonor and notice of dishonor.

26. An unqualified indorser of any negotiable instrument engages that (s)he

a. will pay the instrument when it becomes due.

b. will pay the instrument after presentment, dishonor and notice of dishonor.

c. has secondary liability to the holder or any indorser.

d. has primary liability to the holder or any indorser.

27. Mays Corp. has the following instrument which it purchased in good faith and for value from Angela Manufacturing, Inc.:

July 2, 1992

Prissy Wholesalers, Inc.

Athens, GA

Pay to the order of Angela Manufacturing, Inc., one thousand seven hundred dollars ($1,700) three months after acceptance.

____________________________________

Angela Zee, President

Angela Manufacturing, Inc.

Accepted:

Prissy Wholesalers, Inc.

By:

Angela indorsed the instrument on the back in her capacity as president of Angela, Inc. when the note was transferred to Mays on July 15, 1992. What liability do Prissy and Angela have to Mays?

a. Prissy has primary liability and Angela has secondary liability.

b. Angela has primary liability and Prissy has no liability.

c. Angela has primary liability and Prissy has secondary liability.

d. Prissy has primary liability and Angela has no liability.

28. Ed asked Jason, his father-in-law, to sign a note as an

accomodation co-maker. Jason did this for Ed as a personal favor to his daughter. Both indorsed the note for value to Linda who had knowledge that Jason had signed the note for Ed's accomodation only. With respect to Jason's rights and liabilities , which of the following is correct?

a. Linda has the right to treat either or both parties as primarily liable on the note.

b. Linda's best basis for recovery is to sue Jason as an indorser.

c. Jason has no liability beyond one-half of the face value of the note, plus interest.

d. In the event Ed defaults on the note, notice must be promptly given to Jason as a condition to holding him liable.

29. If an instrument contains no agreement about delayed presentment, then which of the following is the proper time for presentment?

a. On the date of issue for a check or note.

b. Ten days after the due date if it is a promissory note.

c. Within 30 days after issue or date, whichever is later, for a check.

d. A reasonable time after issuance of the instrument regardless of its type.

30. For consideration, T negotiated a negotiable instrument to E y a blank indorsement and delivery. E later negotiated the instrument to F by special indorsement. T does not warrant to F that

a. all signatures are genuine or authorized.

b. the instrument has not been materially altered.

c. the transfer is rightful.

d. the maker or drawer is solvent.

31. When the holder of a negotiable instrument transfers it for consideration by indorsing "without recourse", (s)she

a. makes no warranty as to title to any subsequent holder.

b. prevents further negotiability.

c. makes the same warranties as an unqualified indorser except that (s)he warrants that (s)he does not have knowledge of a defense of any party good against him rather than that there is not such a defense.

d. becomes immune from recourse of any kind by a subsequent holder.

32. The only parties primarily liable on negotiable instruments are makers of notes and acceptors of drafts.

33. The warranties of transfer automatically attach by operation of law to those who transfer negotiable instruments.

34. Conditional liability attaches to parties based upon their status as a party on the negotiable instrument.

35. When an instrument is presented for payment, it is permissible, among other things, for the party to whom presentment is made to require reasonable identification of the person making presentment, and evidence of authority if the presentment is made for another, and to require such things does not constitute a dishonor.

36. If there has been a dishonor, notice of the dishonor must be given by any holder before the midnight deadline after the instrument has been dishonored.

37. Assume A, B, C, and D are indorsers in that order. Holder gives notice to A and C only. C will not be required to give additional notice to A. If C is compelled to pay, she will have recourse against A. B and D are discharged if they are not notified by the holder or one of the indorsers.

38. An indorser who is required to pay can recover from an indorser prior to him or her.

39. An indorser who is required to pay can recover from an indorser who indorsed after him or her.

40. Presentment may be made by personally contacting the liable party, but cannot be done through the mail or a clearinghouse.

Chapter 24

41. A major difference between a secured creditor under Article 9 and an unsecured creditor is that a secured creditor has a security interest in collateral whereas an unsecured creditor has no collateral to secure the debt.

42. An automobile may be classified as either a consumer good, equipment or inventory, depending on the debtor's status and use.

43. Documentary collateral differs from intangible collateral in that documentary collateral is evidenced by a writing, whereas intangible collateral is not.

44. The purpose of perfecting a security interest is to protect the secured party from subsequent creditors who may gain a security interest in the same collateral.

45. It is illegal for a debtor to give a security interest in the same collateral to more than one secured party.

46. Which of the following is not an excluded transaction under Article 9?

a. an artisan's lien.

b. a lease with the option to purchase.

c. an assignment of wages.

d. a transfer of an insurance policy.

47. Which is not classified as documentary collateral under Article 9?

a. chattel paper.

b. a negotiable instrument.

c. a negotiable bill of lading.

d. a patent.

48. Which is not classified as intangible property for the purposes of Article 9 collateral?

a. Accounts receivable.

b. Goodwill.

c. A patent.

d. A warehouse receipt.

49. A pickup truck could not be classified as

a. a consumer good.

b. inventory.

c. equipment.

d. a contract right.

50. Which of the following is not necessary for attachment to occur?

a. debtor has acquired rights in the collateral.

b. the creditor has extended value to the debtor.

c. the debtor has signed a security agreement.

d. the debtor has sinned a financing statement.

51. Which is untrue for purposes of Article 9?

a. A security agreement must be in writing and signed by the debtor.

b. The security agreement may be oral.

c. A financing statement need not state an expiration date.

d. A creditor must perfect his security interest in a stock certificate by taking possession of it.

52. For purposes of attachment, the earliest time at which a debtor could acquire rights in collateral is when

a. the debtor receives possession of the collateral.

b. the debtor pays the purchase price for the collateral.

c. the collateral becomes identified to the sales contract.

d. a creditor extends value to the debtor.

53. Perfection describes a priority protection under Article 9 between a

a. creditor and a debtor.

b. debtor and a third party.

c. seller and the trustee in bankruptcy.

d. creditor and third party.

54. In order to be effective, a continuation statement must be filed within (select correct answer from below) of the financing statement's termination.

a. 10 days

b. 21 days

c. 6 months

d. 5 years

55. Any debtor who defaults on a loan may have his property repossessed by a creditor.

56. In the event of bankruptcy of the debtor, secured creditors and unsecured creditors have the same rights against the bankrupt's estate.

57. Virtually any item of personal property can be used as collateral for a secured transaction.

58. Classification of property determines the place of filing to perfect the security interest and the rights of the debtor upon default.

59. The classification of farm products would include cheese made from the milk of cows on the farm.

60. The classification of inventory is limited to completed goods or materials used or consumed in a business.

61. In order for attachment to occur, the following must occur in the order given: creditor makes a security agreement with the debtor, the creditor makes sure the debtor has rights in the collateral, the creditor gives the debtor value, and the agreement is put in writing and signed by debtor, or creditor takes possession of the good.

62. A bank agreeing to lend money, as well as actually lending it, is value for Article 9 purposes.

63. Buyer purchases a good from Seller using a check. Buyer then uses the property as collateral for a loan from Creditor. The check from Buyer to Seller bounces. If the security interest of Creditor attaches before Seller exercises a right to reclaim the good, Creditor generally prevails over unpaid Seller who holds the bounced check.

64. Generally an unperfected security interest is subordinate to the claims of others who acquire an interest in the collateral without knowledge of the unperfected security interest.

65. Though possession is the required method of perfection of a security interest in instruments, if for some reason the collateral is temporarily released to the debtor, filing is not required because the security interest remains perfected for 14 days without filing.

Last Updated April 18, 1997 by Dawn D. Bennett-Alexander

LS 576 - Business Law II

Dr. Bennett-Alexander

Winter '92

Issues in Secured Trans, Business Orgs.

Issues in Secured Transactions

1. Johnstone Hardware Company sold a $450 drill press to Markum for use in his home workshop. Markum paid 2Q% initially and promised to pay the balance in monthly installments over a period of one year. Johnstone took a purchase money security interest in the drill press to secure payment. Markum promised not to sell or otherwise transfer the drill press without Johnstone's consent. Johnstone did not file a financing statement in connection with the transaction. Markum subsequently found himself hard pressed to make the payments and defaulted. He then sold the drill press to his neighbor Harper for $250 for Harper to use in his home workshop without disclosing Johnstone's interest and without Johnstone's consent. Under the circumstances

a. The security agreement need not be in writing and signed in order to be valid since the purchase price of the drill press is less than $500.

b. No one can obtain superior rights to the drill press in that transfer of the press was prohibited without Johnstone's consent.

a. Johnstone's security interest is perfected against the other creditors of Markum, but not against Harper.

d. Harper would take the drill press free of Johnstone's security interest even if Johnstone had filed.

2. Bass, an automobile dealer, had an inventory of 40 cars and ten trucks. He financed the purchase of this inventory with County Bank under an agreement dated January 5 that gave the bank a security interest in all vehicles on Bass' premises, all future acquired vehicles, and the proceeds from their sale. On January 10, County Bank properly filed a financing statement that identified the collateral in the same way that it was identified in the agreement. On April 1, Bass sold a passenger car to Dodd for family use and a truck to Diamond Company for its hardware business. Which of the following is correct?

a. The security agreement may not provide for a security interest in after-acquired property even if the parties so agree.

b. County Bank's security interest is perfected as of January 5.

c. The passenger car sold by Bass to Dodd continues to be subject to the security interest of County Bank.

d. The security interest of County Bank does not include the proceeds from the sale of the truck to Diamond Co.

3. Thrush, a wholesaler of television sets, contracted to sell 100 sets to Kelly, a retailer. Kelly signed a security agreement with the 100 sets as collateral. The security agreement provided that Thrush's security interest extended to the inventory, to any proceeds therefrom, and the after-acquired inventory of Kelly. Thrush filed his security interest centrally. Later, Kelly sold one of the sets to Haynes who purchased with knowledge of Thrush's perfected security interest. Haynes gave a note for the purchase price and signed a security agreement using the set as collateral. Kelly is now in default. Thrush can

a. not repossess the set from Haynes, but is entitled to any payments Haynes makes to Kelly on his note.

b. repossess the set from Haynes as he has a purchase money security interest.

c. repossess the set as his perfection is first, and first in time is first in right.

d. repossess the set in Haynes' possession because Haynes knew of Thrush's perfected security interest at the time of purchase.

4. A purchase money security interest

a. may be taken or retained only by the seller of collateral.

b. is exempt from the Uniform Commercial Code's filing requirements.

c. entitles the person who is the original purchase money lender to certain additional rights and advantages, which are nontransferable. entitles the purchase money lender to a priority through a ten-day grace period for filing.

d. entitles the purchase money lender to a priority through a ten-day grace period for filing.

5. In the course of an examination of the financial statements of Control Finance Company of the year ended September 30, 1986, the auditors learned that the company has just taken possession of certain heavy industrial equipment from Arrow Manufacturing Company, a debtor in default. Arrow had previously borrowed $60,000 from Control secured by a security interest in the heavy industrial equipment. The amount of the loan outstanding is $30,000. Which of the following is correct regarding the rights of Control and Arrow?

a. Control is not permitted to sell the repossessed

b. equipment at private sale.. Arrow has no right to redeem the collateral at any time once possession has been taken.

c. Control is not entitled to retain the collateral it has repossessed in satisfaction of the debt even though it has given written notice to the debtor and he consents.

d. Arrow is not entitled to a compulsory disposition of the collateral.

6. Robert Cunningham owns a shop in which he repairs electrical appliances. Three months ago Electrical Supply Company sold Cunningham, on credit, a machine for testing electrical appliances and obtained a perfected security interest at the time as security for payment of the unpaid balance. Cunningham's creditors have now filed an involuntary petition in bankruptcy against him. What is the status of Electrical in the bankruptcy proceeding?

a. Electrical is a secured creditor and has the right against the trustee if not paid to assert a claim to the electrical testing machine it sold to Cunningham.

b. Electrical must surrender its perfected security interest to the trustee in bankruptcy and share as a general creditor of the bankrupt's estate.

c. Electrical's perfected security interest constitutes a preference and is voidable.

d. Electrical must elect to resort exclusively to its secured interest or to relinquish it and obtain the same share as a general creditor.

7. The Jolly Finance Company provides the financing for Triple J Appliance Company's inventory. As a part of its sales promotion and public relations campaign, Jolly Finance placed posters in Triple J's stores indicating that Triple J is another satisfied customer of Jolly and that the goods purchased at Triple J are available through the financing by Jolly. Jolly also files a financing statement which covers the financed inventory. Victor Restaurants purchased four hi-fi sets for use in its restaurants and had read one of the Jolly posters. Triple J has defaulted on its loan and Jolly Finance is seeking to repossess the hi-fi sets. Which of the following is correct?

a. Jolly has a perfected security interest in the hi-fi sets which is good against Victor. Victor's knowledge of the financing arrangement between Jolly and Triple J does not affect its right to the hi-fi sets.

c. Jolly's filing was unnecessary to perfect its security interest in Triple J's inventory since it was perfected upon attachment.

d. The hi-fi sets are consumer goods in Victor's hands.

8. Replevin and repossession are the same actions and can be used by a creditor to recover property from a defaulting debtor.

9. Self help is not permitted in repossession if it breaches the peace.

10. It would be permissible for a creditor whose debtor has defaulted to somehow disable the collateral to keep debtor from using it.

11. At a public sale of the collateral, the secured party can purchase the property.

12. Foreclosure is the sale of the debtor's collateral which the secured party has a security interest in.

13. Strict foreclosure is another term for foreclosure.

14. If the secured party is going to sell the property at a private sale, the sale may be illegal if the secured party did not give the debtor notice of the time and place of the pending sale.

15. If the secured party repossesses collateral which is consumer goods for which debtor has paid over fifty percent of the purchase price or loan amount, then the secured party must sell the collateral within ninety days after taking possession of the collateral.

16. A buyer at foreclosure takes free of the secured party's security interest.

17. If there is a mandatory sale, strict foreclosure is not permitted.

18. Generally there is no time limit on when the sale of repossessed collateral must take place.

19. Generally if a sale of the collateral is authorized, the secured party's interest in the collateral ceases.

20. A buyer in the ordinary course of business takes free of the secured party's security interest even if the security interest is perfected and even if the buyer knows of the secured party's security interest.

21. A consumer buyer of consumer goods from a consumer seller takes the collateral free of the secured party's interest even if s/he knows of the secured party's security interest on the same collateral.

22. Generally as between two secured parties, the first to file or otherwise perfect has priority.

23. If a fixture filing does not include a legal description of the real estate, it may not work to perfect the secured party's interest.

24. If the security interest on a fixture is not a purchase money security interest, generally the first to file, as between the mortgage on the property and the security interest in the fixture, has priority.

25. Donald owns real estate and has a recorded mortgage on the property. Amy has a purchase money security interest in a light fixture on Donald's real estate. Amy 's security interest in the light fixture attached on January 1. The fixture was attached to the real estate on January 5. Amy fixture filed on the lighting fixture on January 12. As between Amy and Donald, Amy has priority.

26. A construction loan has total priority over a security interest in fixtures added as part of new construction.

27. If a security interest in acccessions attaches before the good becomes an accession, the security interest has priority over all claims to the whole object.

28. If the security interest attaches after goods become an accession, the security interest in the accession has priority over all pre-existing claims to the whole object, but not over subsequent claims to the whole object.

Choosing the Form of Business Organization

29. A joint venture is not a Partnership.

30. Respondeat superior applies to participants of a joint venture.

31. Tom and Jerry, dentists, decide to operate as a professional service corporation. Shareholders in the PSC can include the dental hygenist, receptionist, secretary, computer operator and the janitor for Tom and Jerry's office.

32. Jerry from # 31 above, is extracting a tooth on Pat, a child, who is under anesthesia. Pat fails to come out from under the anesthetic, never regains consciousness and eventually dies. If Pat's parents sue Jerry, Jerry will be able to enjoy the protection afforded under the corporate status of the business organization.

The Principal-Agent Relationship

33. Agency is a fiduciary relationship between one who acts on behalf of another and under their control for contracting purposes.

34. Independent contractors are generally not agents of their proprietors.

35. The proprietor of an independent contractor has full control over the details and manner of the work conducted.

36. Employees are generally not agents of their employers.

37. Generally no special capacity is needed for a person to act as an agent.

38. The principal-agent relationship is legally created by a document called "articles of agency".

39. Agency relationships must be in writing in order to be legal.

40. John was an insurance agent of Fidelity Insurance Co., Inc. As part of John's job, he collected insurance premiums from clients around the state. Often, John was uncomfortable carrying large sums of money around with him, so he deposited the premiums to his personal bank account and withdrew the cash when he got ready to go into the office to make his premium reports. John never kept any of the money for himself. John has violated one of the duties of an agent.

41. A principal has a duty to his or her agent to

a. compensate.

b. reimburse.

c. indemnify.

d. all of the above

42. A factor is an agent with the limited responsibility of procuring customers so the owner can sell or exchange property belonging to the owner.

43. The statute of frauds applies to agency relationships.

44. An attorney in fact is an attorney who is, in fact, an attorney.

45. James goes to Blake and tells him he wishes to purchase a particular painting for his principal, but does not disclose the principal's name. In this situation, the principal is considered to be an undisclosed principal.

46. A broker is an agent with possession and control of the principal's property for purposes of selling it.

47. Tess, 16, is an agent for Tracy, 23, for purposes of the purchase of a motorcycle. If Tracy later wants to get out of the deal, she can use the legitimate defense of lack of capacity because Tess, her agent, was only 16 years old and this is below the age of capacity for contracting in this state.

48. If an agent has an accident while within the course of the employment and the principal is sued and found liable, the principal can sue the agent for the amount the principal had to pay out because of the agent's negligence.

49. Jenniffer, principal, gives instructions to Anne, her agent. Anne thinks the instructions Jenniffer gave her are dumb and she has a better way of accomplishing the task. If Anne ignores Jenniffer's instructions and does the task her own way, Anne has breached no duty to Jenniffer if Anne does not cause any harm.

50. Knowledge of the agent is generally imputed to the principal.

Agency and the Law of Contracts

51. An agent's authority may be actual or apparent/ostensible.

52. Express authority may be written or oral.

53. Actual authority may be express or implied.

54. A principal cannot ratify the contract if the undisclosed principal.

55. A third party may hold either the agent or the principal liable if there is a breach of the contract entered into by the agent with the third party.

56. An undisclosed principal is liable to an agent the same as a disclosed principal is liable to an agent.

57. A principal is liable for contracts by agents with actual or apparent authority, or if the principal ratifies the acts of the agent.

58. If a person is a general agent, third parties dealing with the agent are not held responsible for private limitations on the agent's power.

59. If an agent received notice of something before the agency was created between principal and agent, the principal will still be bound by the agent's notice if the information is present in the agent's mind when the agent is acting for the principal in a transaction in which the information is material.

60. Punch is the principal and Judy is the agent. Judy enters into a contract for Punch which Punch has not given Judy authority to do. When Judy tells Punch: "Punch, I entered into a contract for you and I think its a good one." Punch replies to Judy: " I trust your judgment, Judy. I'm sure it's fine. I agree to it." There is later a problem with the contract and Punch attempts to get out of the deal by stating that he did not authorize Judy to enter into the contract in the first place. The third party with whom Judy made the contract argues that Punch ratified the contract and is therefore bound. This argument is not effective against Punch.

61. If a third party held both the undisclosed principal and the agent liable on a contract, the third party could recover full damages from each of the parties.

Agency, Torts and Employment

62. Proprietors are liable for the torts committed by their independent contractors when the activities are inherently dangerous, illegal, nondeleqable or ratified by the proprietor.

63. Proprietors are not liable for the torts committed by their independent contractors when the activities are inherently dangerous, illegal, nondelegable or ratified by the proprietor.

64. If an employee is injured on the job and sues the employer, the employee will be subject to the following defense by the employer:

a. contributory negligence.

b. fellow servant doctrine.

c. voluntary assumption of the risk.

d. all of the above.

65. Respondeat superior applies to tort actions involving an employer and an employee even where the employer did not direct the employee's act or assent to it.

66. Respondeat superior provides for joint and several liability between the employer and employee.

67. Respondeat superior provides for only several liability between the employer and employee.

68. Respondeat superior provides for only joint liability between the employer and employee.

69. Respondeat superior applies to all torts committed within the scope of employment.

70. If an employee chooses to pursue a worker's compensation claim and the payment amount turns out to be insufficient to cover the injury, the employee may sue the employer for the remaining damage.

71. If the employee files a worker's compensation claim against the employer, the employer is free to demonstrate that the accident which happened to the employee was caused by the employee's own negligence or that of another employee, but was not the fault of the employer.

72. If two employees get into a fight at work and one is injured, the injured employee may receive workers compensation benefits because the injury arose in the course of employment.

Termination of Agency Relationships

73. The death of either the agent or principal terminates the agency relationship.

74. If the principal becomes insane the agency is terminated, but the agency is not terminated if only the agent becomes insane.

75. An agency coupled with an interest cannot be unilaterally terminated by the principal.

76. An agency coupled with an obligation is not terminated unilaterally, but may be terminated by operation of law.

77. An agency coupled with an interest is not terminated by operation of law.

78. When an agency is terminated by operation of law, there is no need for the principal notify the public of the termination of the agency.

79. Personal notice of the termination of the agency relationship must be given by the principal to anyone who has dealt with the agent.

80. The principal need only give constructive notice of the termination of the agency relationship to the public in general that has not personally dealt with the agent.

Partnerships

81. A limited partner has the right to inspect the partnership's books or to receive an accounting without losing his limited liability.

82. To be valid, a partnership agreement need not be evidenced in writing.

83. Unless a partnership agreement provides otherwise, every partner has a right to share equally in the profits and is under a duty to contribute equally to the losses.

84. Property owned by an individual partner may be transferred to the partnership as a part of the partner's capital contribution.

85. Although Abe contributed no capital to the partnership when it was formed, he may be liable for losses when it dissolves.

86. The partnership may include the word "company" or "LTD".

87. Third parties always have the duty to investigate whether the person represented as a partner really is a partner.

88. A buy-sell agreement in a partnership can provide for the evaluation of a partner's interest at her death.

89. A partner's contribution to a partnership may consist of her services to the partnership.

90. A partner is both an agent of the partnership and a principal in the partnership.

91. Generally, partners are not entitled to reasonable compensation or a salary from the partnership.

92. Generally, a partner is entitled to receive a salary from the partnership.

93. Every partner has the right to inspect the partnership books where the books are maintained.

94. If a partner is survived by his spouse, that spouse will automatically become a partner with all the rights and duties of the deceased.

95. When a partner assigns her interest, the assignee receives the partner's share of the profits, but does not become a partner.

96. If a partner injures a third party and the third party collects directly from the partner, the partner cannot seek contribution from his partners unless the injury occurred while the partner was performing partnership business.

97. A partner in a trading partnership has the implicit power to borrow money or to bind the firm on negotiable paper.

98. Unanimous consent of all partners is required in order to bring in a new partner, unless otherwise agreed.

99. Dissolution, the legal destruction of the partnership relationship, occurs whenever any partner ceases to be a member of the firm or whenever a new partner is admitted to the firm.

100. Partners lack the power to expel one another from a partnership unless the partnership agreement specifically provides such a power.

101. In a partnership at will, any partner has both the power and the right to withdraw.

102. A partnership creditor may seek payment out of a partner's individual assets if the partnership is insolvent.

103. A personal creditor of a partner may seek collection out of partnership property if the partner is unable to pay his personal debts as they become due.

104. The doctrine of marshalling assets permits an individual partner's creditor to proceed against the partner's partnership interest, which is an asset of the partner's, before going against the partner's personal assets.

105. Dan Dudley, Sr., wanted to help his son, Dan, Jr., get established in the men's retail clothing business. Although Dan, Jr. was to operate this business as a sole proprietorship, his father allowed him to use his father's stationery to place orders with wholesalers. Because Dan, Sr. had a very favorable business reputation, wholesalers were more than willing to sell to Dan, Jr. on credit. Based on these factors, Dan, Sr. is likely to be considered as

a. an implied partner.

b. a limited partner.

c. a partner by consent.

d. a partner by estoppel.

106. Jimmy Carter, Hamilton Jordan and Jody Powell were general partners in a consulting business. Carter contributed the use of his famous name. Jordan managed the business, and Powell contributed the capital. Absent an agreement to the contrary, which one of the following provisions would govern the partnership automatically?

a. Powell and Jordan assume the responsibility for paying Carter's personal debts upon dissolution of the partnership.

b. Powell has the majority vote with respect to management decisions.

c. Carter, Jordan and Powell share profits and losses equally.

d. Jordan is entitled to a reasonable salary for his services.

107. The accountant's, Clela, Patti and Alice, formed a partnership for the purpose of practicing accountancy. Patti negligently audited a client's records. As a result of her mistake, Patti was sued. She lost the case and became obligated to pay the former client $15,000. Under these circumstances, Patti

a. cannot legally require her partners to pay any of these damages.

b. can collect $5,000 from each of her partners.

c. can refuse to pay until her partners also pay.

d. can collect $15,000 from the partnership.

108. Which of the following is an example of a trading partnership?

a. a law firm.

b. a medical clinic.

c. an accounting firm.

d. a flower shop.

109. Dissolution will occur in violation of the partnership agreement

a. by the expulsion of any partner from the business in accordance with power conferred by the partnership agreement.

b. at the end of the stipulated term or after the performance of a particular undertaking specified by the agreement.

c. by the express will of any partner prior to the occurrence of a definite term or particular undertaking specified in the agreement.

d. by the agreement of all partners.

Corporations

110. Southern Airways united with North Central Airlines to form Republic Airlines. This union is an example of

a. a consolidation.

b. a reorganization.

c. a combination.

d. a merger.

111. Exxon Oil Company recently purchased Reliance Electric Company. If Reliance ceases to exist, but Exxon's structure is still present, this union is an example of

a. a merger.

b. a consolidation.

c. an acquisition of assets.

d. a reorganization.

112. John's right to maintain his proportionate interest in a corporation by purchasing new issues of stock is the

a. participating right.

b. cumulative right.

c. proxy right.

d. pre-emptive right.

113. Subchapter S corporations may have no more than 42 shareholders.

114. A corporation is a separate legal entity that comes into existence when the federal government issues a corporate charter.

115. A corporate promoter is an agent of the corporation.

116. Shareholders are never liable for the debts of the corporation except to the extent they pay value for the stock they purchase.

117. A corporation officially comes into existence when

a. the application for a charter is filed.

b. the state issues the charter.

c. the bylaws are first adopted.

d. the first share of stock is sold.

118. At the time the promoter of a corporation enters into contracts on behalf of the corporation to be formed, the promoter is personally liable on the contracts.

119. If a corporation is granted a charter and agrees at its first meeting to enter into a novation of the promoter's contracts, the promoter is released from liability.

120. If the corporation is granted a charter and agrees at its first meeting to have the promoter assign the contracts she has entered into to the corporation, the promoter is released from liability.

121. Shareholders are the owners of corporations.

122. The owners of corporations generally do not directly participate in the governance of the corporation.

123. The corporation's board of directors is protected from liability for bad business decisions by operation of the business judgment rule.

124. Piercing the corporate veil takes place when board of directors members have conflicts of interests between themselves and the corporation.

125. You're really glad this is over and will have a great break, even though it will be a quick one.

Last Updated July 31, 1997 by Dawn D. Bennett-Alexander

LS 576/776/776E - Business Law II

Dr. Bennett-Alexander

Secured Transactions, Agency, Bus. Orgs.

PART I - Multiple Choice & True/False

Issues in Secured Transactions

1. Robert Cunningham owns a shop in which he repairs electrical appliances. Three months ago Electrical Supply Company sold Cunningham, on credit, a machine for testing electrical appliances and obtained a perfected security interest at the time as security for payment of the unpaid balance. Cunningham's creditors have now filed an involuntary petition in bankruptcy against him. What is the status of Electrical in the bankruptcy proceeding?

a. Electrical is a secured creditor and has the right against the trustee if not paid to assert a claim to the electrical testing machine it sold to Cunningham.

b. Electrical must surrender its perfected security interest to the trustee in bankruptcy and share as a general creditor of the bankrupt's estate.

c. Electrical's perfected security interest constitutes a preference and is voidable.

d. Electrical must elect to resort exclusively to its secured interest or to relinquish it and obtain the same share as a general creditor.

2. The Jolly Finance Company provides the financing for Triple J Appliance Company's inventory. As a part of its sales promotion and public relations campaign, Jolly Finance placed posters in Triple J's stores indicating that Triple J is another satisfied customer of Jolly and that the goods purchased at Triple J are available through the financing by Jolly. Jolly also files a financing statement which covers the financed inventory. Victor Restaurants purchased four CD players for use in its restaurants and had read one of the Jolly posters. Triple J has defaulted on its loan and Jolly Finance is seeking to repossess the CD players. Which of the following is correct?

a. Jolly has a perfected security interest in the CD player which is good against Victor.

b. Victor's knowledge of the financing arrangement between Jolly and Triple J does not affect its right to the CD players.

c. Jolly's filing was unnecessary to perfect its security interest in Triple J's inventory since it was perfected upon attachment.

d. The CD players are consumer goods in Victor's hands.

3. Replevin and repossession are the same actions and can be used by a creditor to recover property from a defaulting debtor.

4. Self help is not permitted in repossession if it breaches the peace.

5. It would be permissible for a creditor whose debtor has defaulted to somehow disable the collateral to keep debtor from using it.

6. At a public sale of the collateral, the secured party can purchase the property.

7. Foreclosure is the sale of the debtor's collateral which the secured party has a security interest in.

8. Strict foreclosure is another term for foreclosure.

9. If the secured party is going to sell the property at a private sale, the sale may be illegal if the secured party did not give the debtor notice of the time and place of the pending sale.

10. If the secured party repossesses collateral which is consumer goods for which debtor has paid over fifty percent of the purchase price or loan amount, then the secured party must sell the collateral within ninety days after taking possession of the collateral.

11. A buyer at foreclosure takes free of the secured party's security interest.

12. If there is a mandatory sale, strict foreclosure is not permitted.

13. Generally there is no time limit on when the sale of repossessed collateral must take place.

14. Generally if a sale of the collateral is authorized, the secured party's interest in the collateral ceases.

15. A buyer in the ordinary course of business takes free of the secured party's security interest even if the security interest is perfected and even if the buyer knows of the secured party's security interest.

16. A consumer buyer of consumer goods from a consumer seller takes the collateral free of the secured party's interest even if s/he knows of the secured party's security interest on the same collateral.

17. Generally as between two secured parties, the first to file or otherwise perfect has priority.

18. If a fixture filing does not include a legal description of the real estate, it may not work to perfect the secured party's interest.

19. If the security interest on a fixture is not a purchase money security interest, generally the first to file, as between the mortgage on the property and the security interest in the fixture, has priority.

20. Donald owns real estate and has a recorded mortgage on the property. Amy has a purchase money security interest in a light fixture on Donald's real estate. Amy 's security interest in the light fixture attached on January 1. The fixture was attached to the real estate on January 5. Amy fixture filed on the lighting fixture on January

21. As between Amy and Donald, Amy has priority.

22. A construction loan has total priority over a security interest in fixtures added as part of new construction.

23. If a security interest in accessions attaches before the good becomes an accession, the security interest has priority over all claims to the whole object.

24. If the security interest attaches after goods become an accession, the security interest in the accession has priority over all pre-existing claims to the whole object, but not over subsequent claims to the whole object.

25. Jay purchases a new car from MoBetta Cars and gives the MoBetta a security interest in the automobile. Three months later Jay buys an automobile sound system from SoundAroundTown. SoundAroundTown tales a PMSI in the sound system and files a financing statement. Jay takes the system to Mike' Garage and has it installed. Later, Jay defaults on the sound system, but not the car. SoundAroundTown has priority over MoBetta Cars even though MoBetta had a perfected security interest in the car before the system was put in.

26. In the question above, it is true that in the conflict between the secured party and the owner of the car, if the security interest attaches to the sound system before the sound system became a part of the car, the secured partyhas priority over all claims to the whole car whether they are before or after the system was installed.

27. Sinchona purchases a new dryer from Snears Dept. Store. She buys the dryer on credit and gives Snears a security interest in the dryer as collateral. Four months after she purchases the machine, two workers arrive at her door and say that they have come to reposses the dryer. They explained that they represented Dryer, Inc., the manufacturer from whom Snears purchased the dryers and since Snears had defaulted on the loan and the dryers were used as collateral for the loan, and Dryer, Inc. had a perfected security interest, Dryer, Inc. had the right to repossess the dryer. Which of the following is correct?

Since Dryer, Inc. had a perfected security interest, it has the right to repossess Sinchona's dryer.

Regardless of Dryer, Inc.'s perfected security interest, it has no right to repossess Sinchona's dryer since she is a buyer in the ordinary course of business.

Answer B is incorrect since the dryer is not a farm product.

Dryer, Inc. has no right to the dryer because a secured party's interest in the collateral ends when there is an authorized sale.

28. Hallelujah! Matt is graduating! He is headed for New York City and wiping the dust of this old town off his shoes. Matt has a great job that pays big bucks. College was pretty traumatic for him, so he is ridding himself of any reminders. He sells all of his apartment furnishings, to other students, at a yard sale. Unfortunately, the purchasers didn't know that Matt hadn't quite finished paying for some of the things he sold. In fact, Matt's television, VCR, furniture and microwave were all bought on credit, with the seller taking a security interest in the goods. When Matt leaves town, he also stops paying on the goods. The secured parties decide to exercise their rights upon default when Matt stops paying. There is a legal conflict between the secured parties and those who purchased Matt's goods.

A. The secured parties win since they had perfected security interests.

The secured parties lose since their security interests were not perfected.

The purchasers win since they were consumer buyers in the ordinary course of business who knew nothing of the security interests.

The secured parties win if they filed financing statements on the goods before Matt sold them .

Heather purchases a shipment of living room furniture to sell in her furniture store. In return, she gives the manufacturer, Sticks & Wicker, Inc., a check and chattel paper to cover the down payment and balance. This was considered to be proceeds from inventory, in which WoodCo, Sticks & Wicker's supplier, had a perfected security interest. Three days later, Sticks & Wicker, Inc., needing more supplies for building furniture, gives another supplier, FabriCo., among other things, Heather's check and chattel paper to pay for the supplies. Sticks & Wicker defaults. Since Fabrico received the chattel paper and instruments as proceeds from inventory, paid value and took them in the ordinary course of business, and WoodCo is claiming a right to the proceeds based on a ten-day automatic attachment, Woodco would have priority.

In the above situation, if the chattel paper or instruments were from non-inventory or were the original collateral, Fabrico would take priority if it had received them in the ordinary course of business and had no knowledge of WoodCo's existing security interest.

Joy Bank gave Kristin a loan to purchase inventory for her business. In return, Joy Bank took a lender's PMSI in the inventory purchased. As part of its security agreement, Joy Bank has a floating lien with an after-acquired property clause in it. Three months later, Kristin needs more money for more inventory. Joy Bank declines to give Kristin the money and Kristin goes to JackBanc and gets the loan. JackBanc takes a PMSI in the inventory Kristin purchases. Kristin defaults. In the battle between Joy Bank and JackBanc

A. Joy Bank wins because it was the first to have a perfected security interest.

JackBanc wins because it had no notice of an existing security interest.

Joy Bank wins because it has an after-acquired property clause.

JackBanc wins only if it gave Joy Bank written notice of its intention to extend credit to Kristin and it perfected its security interest before Kristin received the inventory.

Business Organizations

32. Aster, agent for Peter, receives from Theobold, on Peter's behalf, monies from a contract. Aster does not have authority from Peter to receive such monies. Aster absconds with the funds.

a. Theobold can recover the money from Peter.

b. Theobold can recover the money from Aster.

c. Theobold cannot recover the money from either.

d. None of the above.

33. Assume instead, that Aster is overpaid by Theobold and Theobold notifies Aster of the overpayment. Aster gives the money to Peter.

a. Aster must return the overpayment to Peter.

b. Aster must return the overpayment to Theobold.

c. Aster does not have to return the overpayment to Theobold since Aster has given the money to Peter.

d. Both a and b.

34. Wright Price was the principal promoter of Washbburn Corporation. Prior to its incorporation, Price contracted to purchase $50,000 of inventory in the name of Washburn Corporation. The seller did not know Washburn did not yet exist. Who is liable on the contract?

a. Price, unless there is a novation of the contract by Wahburn, Price and the seller.

b. Price, because he was acting for a principal with no capacity.

c. Washburn, because a promoter has authority to enter into preincorporation agreements on behalf of the corporation to be formed.

d. Washburn, unless it rescinds the contract.

35. Which of the following is not true concerning a corporation?

a. It is a legal entity.

b. It provides limited liability to its owners.

c. It may have perpetual existence.

d. Its owners generally directly govern the corporation.

36. The object or purpose for which a corporation is formed is expressly stated in

a. its charter.

b. its bylaws.

c. the minutes.

d. the articles of incorporation.

37. If a corporation acts outside the scope of its authority, such act is said to be

a. ultra vires.

b. intra vires.

c. implied actions.

d. ex post facto actions.

38. A foreign corporation is one that

a. is incorporated in another country.

b. is incorporated in a different state.

c. is doing business in a different state.

d. is in interstate commerce.

39. The bylaws of the corporation differ from the charter in that the former usually

a. are less detailed.

b. concern day-to-day management of the corporation.

c. must be filed with the state.

d. may be changed without shareholder approval.

40. Which of the following statements is correct regarding the fiduciary duty?

a. A majority shareholder may owe a fiduciary duty to fellow shareholders.

b. A director's fiduciary duty to the corporation may be discharged by merely disclosing his/her self interest.

c. A director owes a fiduciary duty to the shareholders of the corporation, but not to the corporation itself.

d. A promoter of a corporation to be formed owes no fiduciary duty to anyone, unless the contract engaging the promoter so provides.

41. Which of the following is not an essential element of an agency relationship?

a. It must be created by contract.

b. The agent must be subject to the principal's control.

c. The agent is a fiduciary with respect to the principal.

d. The agent acts on behalf of anther and not him/herself.

42. In the course of your audit of Julie Finesse, doing business as Finesse Apparel, a sole proprietorship, you discover that in the past year Finesse has regularly joined with Claire Walters in the marketing of bathing suits and beach accessories. You are concerned whether Finesse and Walters have created a partnership relationship. Which of the following factors is the most important in ascertaining this status?

a. The fact that a partnership agreement is not in existence.

b. The fact that each has a separate business of her own which she operates.

c. The fact that Finesse and Walters divide the net profits equally on a quarterly basis.

d. The fact that Finesse and Walters did not intend to be partners.

PART II - Matching

43. A + B = C a. merger

44. A + B = B b. termination

45. legal destruction of the partnership c. actual notice

46. partnership no longer exists d. consolidation

47. past or present creditors e. dissolution

48. principal and agency known a. capacity ok

49. agency known, principal unknown b. disclosed P

50. agency unknown, principal unknown c. no capacity

51. A minor, P adult d. undisclosed P

52. P minor, A adult e. partially disclosed P

53. state takes away corp.'s rts a. quo warranto

54. marshalling assets b. ptsp assets 1st

55. control over details of performance c. indep contractor

56. pubic at large d. notice by publicatn

57. actual creditors e. actual notice

PART III True/False

58. After a corporation comes into existence, the promoter is no longer liable on the contracts s/he entered into on behalf of the corporation.

59. Debbie and Susan sell flowers to lunchtime passersby in order to raise money for the cancer research. Debbie and Ruth are partners.

60. If one represents him/herself as a partner or lets another represent him/herself as such, s/he will actually be a considered a partner and will be liable to third parties if liability arises.

61. Unless otherwise agreed, partners share equally in the profits and losses of the partnership.

62. Partners generally possess more implied authority than general agents.

63. Generally, partners do not receive compensation.

64. Bobby, a limited partner who contributed $50,000 to the Abbott Fay partnership, is sued along with Abbott and Fay for $1.7 million due to a contract dispute. Bobby, like Abbott and Fay, is jointly and severally liable for the $1.7 million.

65. A corporation can only be formed by complying with a state statute.

66. Big Burger Co. sues Zerno Corporation for breach of contract for $1000 of hamburger buns which were not delivered. Zerno may assert as a defense to payment the fact that Big Burger is not registered to do business in that state.

67. Piercing the corporate veil will result in the personal liability of the corporation's shareholders.

68. It is permissible for partners to make an agreement that if there is liability, they will let one or more of the partners pay less than an equal share of the liability.

69. If there is an agreement to the above effect, it is binding on everyone involved in a dispute with the partnership, regardless of the capacity in which they are involved.

70. A buy and sell provision in a partnership agreement prevents the partners from becoming too concerned with their own interests when it is time to sell or otherwise dispose of the partnership interest.

71. A partnership interest may not be assigned.

72. Partners are routinely entitled to receive an accounting.

73. Partners own partnership property as tenants in partnership and any member of the partnership has the power to execute a deed to such property by signing the partnership name.

74. If such a transfer is wrongful, it will still be given legal effect.

Last Updated July 31, 1997 by Dawn D. Bennett-Alexander