1
Q
Items that are NOT covered under UCC Article 3
A
- bills of lading
- warehouse receipts
- bonds
- stocks
2
Q
Note
A
- a promise to pay
- maker = one who owes the money
- payee/bearer = one to whom payment is due
3
Q
Is a CD a draft or a note?
A
a note
4
Q
Draft
A
- order for third party to pay
- drawer = one who orders the payment
- drawee = one who is ordered to pay
- payee = one to whom payment is due
5
Q
Check
A
- special type of draft
- drawee is a bank
- payable on demand
6
Q
Trade Acceptances
A
*type of draft
7
Q
Demand vs Time Instruments
A
- demand = at any time
* time instrument = maturity date
8
Q
Does the UCC apply to money?
A
No
9
Q
Requirements for Negotiability
A
- written
- signed by the maker or drawer
- contain an unconditional promise or an order to pay
- fixed amount of money (legal tender)
- payable on demand or at a definite time
- payable to order or to bearer
* checks are the one exception to 6
10
Q
Do checks have to have the “magic words”?
A
No
11
Q
Can power of attorney be used to sign negotiable instruments?
A
Yes
12
Q
Conditions that Destroy Negotiability for Promise or Order
A
- cannot be subject to or governed by another agreement
2. no express conditions (if this happens then I will pay)
13
Q
On which side of the instrument is negotiability determined?
A
the front
14
Q
Do acceleration clauses destroy negotiability?
A
No; could use death (usually can’t) to accelerate payment
15
Q
Do extension clauses destroy negotiability?
A
No
16
Q
Authorized Promises that DO NOT destroy negotiability
A
- pay legal fees
- waivers of the right to jury trial
- pay a prepayment penalty
17
Q
Rules of Construction
A
words control figures
18
Q
Can negotiable instruments involve money and goods/services?
A
No, money only
19
Q
Negotiation for Becoming a Holder
A
bearer paper = delivery
order paper = delivery & proper endorsement
20
Q
Types of Endorsements
A
- Special (names a specific party) (order paper)
- Blank (signs name) (bearer paper)
- Qualified (without recourse)
- Restrictive
21
Q
Are endorsers liable by contract to be guarantors of payment?
A
Yes, they are secondarily liable
22
Q
Requirements to be an HDC
A
takes paper:
- with value
- in good faith
- without notice of any defenses to or claims of ownership
23
Q
Does an executory promise count as value?
A
No
24
Q
Facts that do not constitute notice to invalidate HDC status
A
- antedated or postdated
2. purchase at a discount
25
Shelter Doctrine
*most subsequent transfers of the instrument following an HDC will pass along the HDC status, EVEN IF it fails to meet one of the HDC requirements
26
Which defenses are HDCs subject to?
Real defenses
27
Real Defenses
```
F raud in the execution
F orgery
A djudicated insanity
A lteration (material)
I nfancy
I llegality
D duress
D ischarge in bankruptcy
S uretyship
S tatute of limitations
```
28
Two of the MOST USED personal defenses on the CPA exam
1. unauthorized completion
| 2. failure of consideration
29
Liability of Parties with Negotiable Instruments
Note/CD
1. Maker
2. Endorsers
Drafts
1. Drawee (once accepted)
2. Drawer/endorsers
30
How to discharge prior parties
1. Drawee signs and accepts
| 2. Certification of Check
31
Duties between Drawer and Drawee
* honor draft
| * stop payment orders
32
Steps to make endorser secondarily liable
1. presents the instrument to the maker or drawee for payment
2. maker or drawee dishonors
3. endorser is given proper notice of the dishonor
33
Transfer Warranties
*you reasonably believe it's good paper
34
Effects of Forgery
1. Forgery of Drawer's Name - drawee liable upon acceptance
| 2. Forgery of the Payee's Name - does not usually pass good title
35
Exceptions to Forgery where Drawer/Maker will be Liable
1. Imposter Rule - issued to an imposter
| 2. Fictitious Payee Rule - imaginary employee
36
Methods of Discharge
1. payment, satisfaction or tender of payment
2. cancellation or renunciation
3. impairing recourse or collateral
4. delay in presentment or failure to give notice of dishonor
5. acceptance or certification of a draft by a bank
37
Scope of UCC Article 9
*contractual security interests in personal property or fixtures
38
Purchase Money Security Interests
1. creditor sells the collateral to the debtor on credit
or
2. the creditor advances funds used by the debtor to purchase the collateral
39
Types of Collateral
Goods (consumer, inventory, equipment)
Intangible collateral accounts
Investment property
Proceeds
40
Three Requirements for Attachment
1. authenticated record of the security agreement signed by DEBTOR or creditor takes possession
2. value must be given by the secured party
3. debtor must have rights in the collateral
*attachment occurs when all three are satisfied
41
Pledge
creditor taking possession of the collateral
42
Is a financing statement required for attachment?
No
43
After-acquired Property as Collateral
*most often used with inventory and equipment (could be used with consumer goods)
44
5 Methods for Perfection
1. filing
2. taking possession
3. control
4. automatic perfection
5. temporary perfection
45
Perfection by Filing
* filing a financing statement
* indicates address and names of debtor and secured party
* identifies the collateral
* DEBTOR MUST authorize filing
46
Financing Statement Effective Date
* 5 years
| * can be renewed indefinitely
47
Perfection by Taking Possession
*oral agreement for attachment is okay in this circumstance
48
Perfection by Control
*used with investment instruments but similar to pledge
49
Automatic Perfection
PMSI with Consumer Goods (personal use)
*perfection occurs when attached
*also with small scale assignment of accounts
50
Temporary Perfection
* 20 days for proceeds
| * 4 months for moving out of state
51
Priorities of Security Interests
1. buyer in the ordinary course of business
2. holder of a properly perfected PMSI
3. holder of a perfected security interest (not PMSI)
4. holder of an unperfected security interest (attachment only)
5. debtor
52
Properly Perfected PMSI Rules
*do not have to file but you should
| EXCEPTION: secondhand consumer purchaser without notice where no financing statement was filed (garage sale)
53
PMSI in Inventory
*prior perfection and notice required for priority
54
PMSI in Noninventory
*priority filing within a 20-day grace period (will relate back to the day the DEBTOR got POSSESSION)
55
Is there a 20-day grace period for inventory?
No
56
Conflicting Perfected Security Interests (non-PMSI)
first to FILE or perfect
*can file before someone else perfected and win
*bankruptcy trustee is subordinate to all prior perfected security interests
57
Can priority rules for security interests be modified?
Yes, contractually
58
Rights on Default for Security Interests
1. right to take possession
* *on own or through a judicial action
2. sell collateral
* *public or private sale
* *commercially reasonable
* *debtor and other parties must be given notice
* *SALE WIPES OUT ALL SUBORDINATE INTERESTS; still subject to superior interests
* *debtor has the right to redeem up until the sale
59
Proceeds Order from Selling Collateral
1. pay the expenses of repossession and sale
2. pay creditors with security interest in the collateral in order of priority
3. surplus (if any) goes back to the debtor
60
Compulsory Disposition of Consumer Goods
* consumer goods only
* where debtor has paid at least 60% of the loan, the secured party must sell the collateral within 90 days after repossession
61
General Rule for Collateral in Satisfaction of Debts
*usually, the creditor will be able to retain the secured property
62
Types of Bankruptcy
7 - liquidation
9 - municipal debt adjustment
11 - reorganization
12 - family farmers
13 - adjustments of debts of individuals
15 ancillary and other cross-border cases
63
In which bankruptcy cases are trustees always appointed?
7 and 13
| *11 can be appointed but it is not a requirement
64
End Result of Chapter 7 for Individuals and Artificial Entities
Individuals - discharged of debts
| Artificial entities - dissolved
65
Dismissal or Conversion of a Chapter 7 Case
1. Current Monthly Income (average of six months preceding filing)
* below median state = stay in Chapter 7
* at or above median state = means test
2. Means test
* average monthly income - allocated expenses X 60
* Less than $7,475 = permitted
* above $12,475 = presumption of abuse
* between = abuse if amount equals 25% of nonprioirty claims
66
Can individuals be forced into Chapter 13?
No, it is only voluntary and must be approved by the debtor if a Chapter 7 case is dismissed
67
Presumption of Abuse
* rebuttal showing special circumstances
* no abuse for disabled veterans
* general abuse test = bad faith
* can be dismissed if conviction of violent crime or drug trafficking
68
Who cannot go into a Chapter 7 proceeding?
R ailroads
I nsurance companies
B anks
S mall business investment companies
69
Credit Counseling Requirement
* must occur no more than 180 days before filing the bankruptcy petition
* 7 and 13 must complete a financial management course before debts are discharged
70
Duties of Debt Relief Agencies
* written contract with debtor
| * not advise debtor to incur more debt
71
Common Features of Chapter 7 and 11 Cases
* Individuals, corporations, partnerships
* voluntary or involuntary
* automatic stay
72
Automatic Stay under 7 and 11
* stops almost all collection efforts
| * exceptions: criminal prosecutions, paternity suits, child support
73
Grounds for voluntary and involuntary 7 and 11 proceedings
```
voluntary = filing for order of relief and passes income tests
involuntary = not paying debts as they come due
```
74
Must debtors be insolvent to file for bankruptcy?
No
75
Who Must Join Petition for Involuntary Bankruptcy?
Fewer than 12 Creditors
**one or more creditor owed at least $15,325
More than 12 Creditors
**at least three owed $15,325
76
Does an involuntary petition constitute an order for relief?
No necessarily; there is a 20-30 day period
77
Creditor's Meeting for Section 7 and 11
* debtor must attend
| * all interested parties including creditors, trustee, and debtor
78
Property of the Bankruptcy Estate
* "at the time of filing"
* includes all real and personal property at the time of filing
* includes property the debtor from:
* *D ivorce
* *I nheritance
* *I nsurance
79
Property Excluded from Estate
* Educational IRAs, tuition programs
| * exempt property (federal and states)
80
Who does the trustee not have priority over?
*Creditors who perfected before the bankruptcy proceedings or ones that perfected during the 20 day period
81
Fraudulent Transfers
* 2 years
* any transfer made with intent to hinder, delay or defraud creditors or
* any transfer where the debtor received less than equivalent value while the debtor was insolvent
82
Preferential Payments
1. transfer made to or for the benefit of a creditor
2. on account of an antecedent debt of the debtor
3. 90 days/1 year (insider)
4. made while the debtor was insolvent
5. results in the creditor receiving more than the creditor would have received under the Bankruptcy Code
83
Is payment to a fully secured creditor a preferential payment?
No
84
Transfers that cannot be set aside by Trustee
1. transfers in the ordinary course of business
2. PMSI perfected within 30 days
3. Consumer payments under $600
4. Domestic support obligations
85
Proof of Claim
*unsecured creditors must file this in bankruptcy proceedings
86
Objections to Discharge under Chapter 7
* 1. debtor not an individual
* 2. fraudulent transfers/concealment of property
* 3. unjustifiably failed to keep books and records
* 4. prior discharge within eight years
* 5. commission of a bankruptcy crime
6. failure to explain loss of assets
7. refusal to obey orders or to answer questions
8. improper conduct in an insider's case
9. waiver
10. failure to complete financial management course
87
Debts that Survive Bankruptcy
```
W illful and malicious injury (negligence are dischargeable), operating a vehicle while intoxicated
A limony, support, marital separation
F raud, fines
T axes due within three years of filing
E ducational loans
D ebts undisclosed
+ luxury goods
```
88
Reaffirmation Requirements
1. agreement to reaffirm was made before the granting of the discharge
2. clear provision that the debtor has a right to rescind
3. informed that reaffirmation is not required by law
89
Revocation of Discharge
bad faith
90
Distribution of the Debtor's Estate
```
Secured claimants
Priority Claimants
*S upport
*A dministrative fees
*G ap period business expenses (ordinary)
*W ages for employees (12,475)
*E mployee benefit plans (12,475 in total w/wages)
*G rain farmers and fishermen
*C onsumer deposits up to 2,775
*T ax claims
*I njury claims from intoxicated driving
General Creditors
```
91
What happens if a secured creditor's collateral fails to cover the full amount of the debt?
*they become a general creditor for the remaining portion of the debt
92
Creditors' Committee for Chapter 11
*seven largest UNSECURED claims against the debtor
93
Equity Security Holders' Committee
*seven largest holders of the equity securities
94
When will a trustee be appointed in a Chapter 11 proceeding?
*fraud, dishonesty, incompetence, gross mismanagement
95
Reorganization Plan under Chapter 11
* debtor has exclusive right for first 120 days
| * can be submitted by others if a trustee has been appointed
96
Acceptance of the Plan by Creditors
*creditors and equity holders must agree within each group for 2/3 of the dollar amount
97
Who confirms the reorganization plan?
the court
98
Effects of Confirmation of Reorganization Plan
* binding on all creditors, equity security holders, and the debtor
* discharged for some debts except for WAFTED
99
Foreign Representative's Powers under Chpater 15
1. operate debtor's business
2. seek additional relief including filing a full bankruptcy case
3. participate in pending US cases
100
What does Chapter 15 prohibit?
discrimination against foreign creditors
101
Requirements of Notice and Cooperation for Chapter 15
1. notice to foreign creditors
| 2. cooperate to the maximum extent possible
102
How long are stop payment orders good for?
Oral: 14 days
Written: 6 months
103
Garage Sale Rule
* PMSI in consumer goods will not be effective if a filing statement has been files; otherwise it is free from the PMSI
* assumes the individual looked up the financing statement
Becker REG
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