Deck 32: Nature of the Debtor-Creditor Relationship

Question 1

In most states contracts of guaranty do not have to be in writing to be enforceable.

Answer 1

False

Question 2

Exoneration is an agreement that a party shall not be liable for loss.

Answer 2

True

Question 3

When a surety pays a claim that it is obligated to pay,it automatically acquires the claim and the rights of the creditor which is known as subrogation.

Answer 3

True

Question 4

Suretyship is a pledge to pay one's own debts and obligations.

Question 5

Letters of credit are a form of advance arrangement for financing.

Question 6

The creditor first must proceed against the debtor before suing the surety.

Question 7

If the creditor does not enforce the suretyship agreement within the time limits provided for such contract enforcement in the surety's jurisdiction,the obligation is forever discharged.

Question 8

A third party arrangement occurs when a corporate officer agrees to be personally liable for a corporate note.

Question 9

Sureties have no rights to protect them from loss,to obtain their discharge because of the conduct of others that would be harmful to them,or to recover money that they were required to pay because of the debtor's breach.

Question 10

Under an indemnity contract,one person pays another consideration in return for a promise to pay a specified sum of money in the event that a specified loss is suffered.

Question 11

If a debtor is about to leave the state,the surety may call on the creditor to take action against the debtor.

Question 12

Standby letters of credit are used only in international trade situations.

Question 13

A surety is never discharged if the creditor substitutes a different debtor.

Question 14

Suretyship and guaranty transactions have the common feature of a promise to answer for the debt or default of another.

Question 15

An absolute guaranty creates the same obligation as a suretyship.

Question 16

A surety that has made payment of a claim for which it was liable as surety is not entitled to indemnity from the principal debtor.

Question 17

A surety may not raise the defense of mistake.

Question 18

A surety is liable from the moment of default whereas a guarantor is ordinarily only liable if the creditor cannot collect from the principal debtor.

Question 19

Contribution is the right of a co-obligator to demand that other obligator(s)pay their fair share of the debt.

Question 20

When a suretyship or guaranty contract is entered into after and separate from the original transaction,there must be new consideration for the promise of the guarantor.

Question 21

Consideration is not required to establish or modify a letter of credit.

Question 22

The use of letters of credit arose in international trade.

Question 23

A guaranty of payment creates a(n):

A) contract of surety.
B) contract of credit.
C) letter of credit.
D) absolute guaranty.

Question 24

A(n)__________ is an undertaking by one person,for consideration,to pay another person a sum of money in the event of a specified loss.

A) absolute guaranty
B) indemnity contract
C) guaranty of payment
D) surertyship

Question 25

Pasquale and Paul were sureties on the debt of Rose.Each had a $100,000 responsibility.Upon Rose's default,Pasquale paid $50,000 to the creditor.How much may Pasquale recover from Paul under the concept of contribution?

A) Zero
B) $50,000
C) $10,000
D) $25,000

Question 26

The issuer of a letter of credit is in effect the obligor on a third-party beneficiary contract made for the benefit of the beneficiary of the letter.

Question 27

The issuer of a letter of credit must verify that the underlying transaction has been performed.

Question 28

A letter of credit must be in writing and signed by the issuer.

Question 29

The bank that tells the beneficiary that a letter of credit has been issued is known as the correspondent bank.

Question 30

The amount of credit specified in a letter of credit must be taken by the beneficiary in the form of a lump-sum payment.

Question 31

Which of the following is correct concerning suretyship and guaranty?

A) A surety is always liable from the moment the principal is in default.
B) A guarantor is always liable from the moment the principal is in default
C) Both a.and b.
D) None of the above.

Question 32

An agreement or provision in an agreement that one party shall not be held liable for loss is:

A) contribution.
B) exoneration.
C) indemnity.
D) subrogation.

Question 33

In a guaranty contract,the obligor is called a:

A) surety.
B) principal.
C) guarantor.
D) creditor.

Question 34

If there are two or more sureties and one pays more than its proportionate share of the debt,such surety has the right against the co-sureties known as:

A) indemnity.
B) exoneration.
C) subrogation.
D) contribution.

Question 35

A surety that has made payment of a claim for which it was liable as a surety is entitled to which of the following from the principal?

A) Indemnity
B) Exoneration
C) Assignment
D) Subrogation

Question 36

The issuer of a letter of credit can revoke or modify the letter at any time without the consent of the beneficiary,even if that right is not expressly reserved in the letter.

Question 37

Which of the following contract defenses cannot be raised as a defense against suretyship obligations?

A) Lack of capacity
B) Absence of consideration
C) Mistake
D) All of the above defenses may be raised.

Question 38

An issuer has an obligation to honor drafts under a letter of credit if the conditions specified in the letter have been satisfied.This obligation includes the bank's obligation to assure that the goods sold by the seller in fact conform to the contract.

Question 39

When a surety pays a debt that it is obligated to pay,it automatically acquires the claim and the rights of the creditor through:

A) assignment.
B) exoneration.
C) subrogation.
D) default.

Question 40

A letter of credit cannot extend for a period of more than five (5)years.

Question 41

Letter of credit transactions involve ______ contract(s).

A) one (1)
B) two (2)
C) three (3)
D) four (4)

Question 42

A letter of credit usually sets a:

A) minimum money amount.
B) maximum money amount.
C) both of the above.
D) none of the above.

Question 43

If an issuer requests its correspondent bank where the beneficiary is located to notify the beneficiary of the issuance of a letter of credit,the correspondent bank is called a(n):

A) advising bank.
B) foreign bank.
C) consulting bank.
D) coissuer.

Question 44

Bud is unable to obtain a loan without some form of additional reassurances.Bud comes to you for assistance.You are willing to help Bud,but you wish to protect yourself from liability as much as possible.Would you prefer a surety or a guaranty? The bank issuing the loan also wishes to protect itself as much as possible.Would the bank prefer a surety or guaranty? If your oral assurances are enough to solidify the loan,has a surety or guaranty been formed?

Question 45

A letter of credit:

A) cannot last for more than five years.
B) may be in either oral or written form.
C) can only be issued by a bank.
D) must be in writing and signed by the issuer.

Question 46

Howard bought goods from Williams.Howard sent Williams a draft covered by a letter of credit issued by First National Bank.Is the bank required to investigate to determine whether the goods sent by Williams conform to the contract?

Question 47

The issuer of a letter of credit:

A) is obligated to honor drafts drawn under the letter if the conditions specified in the letter have been met.
B) has no duty to verify that the papers are properly supported by facts.
C) has no duty to verify that the underlying transaction has been performed.
D) all of the above.

Question 48

An agreement under which one party agrees to pay drafts drawn by a creditor is called a:

A) contract of surety.
B) guaranty contract.
C) letter of credit.
D) debtor's agreement.

Question 49

A letter of credit:

A) is an advance arrangement for financing.
B) is used only in domestic sales.
C) involves only two parties.
D) all of the above.

Question 50

Deirdre read that bids were being solicited for the construction of an apartment tower.Deirdre submitted the lowest bid and was offered the contract contingent on her providing acceptable sureties in the amount of $1 million.Because Deirdre never had done work on this scale,it was virtually impossible for her to obtain the appropriate sureties.She convinced Reassuring Sureties,Inc.to issue the necessary commitment by misrepresenting that she was a famous builder in Canada.As the work progressed,it seemed to be going well and Deirdre was asked to make the project 52 stories instead of 50 stories,which was the original contract height.She agreed to this change.
After the work was completed,many breaches of contract on the part of Deirdre became evident.Reassuring Sureties was sued for a $500,000 loss.Reassuring Sureties defended on the grounds of fraud and material change in the contract.Decide.

Question 51

Which of the following is not a suretyship defense?

A) statute of limitations
B) performance of the obligation by the principal debtor
C) creditor substitution of the original debtor with a new one
D) insolvency of bankruptcy of the principal debtor

Question 52

Bailment given as security for the payment of a debt is a(n):

A) pledge
B) contribution
C) guaranty
D) indemnity

Question 53

Which of the following is an example of an improper payment?

A) A payment made after a letter of credit has expired.
B) A payment made in excess of the amount authorized by the letter of credit.
C) Both a.and b.are improper payments.
D) Neither a.nor b.are improper payments.