Deck 23: Debtor Creditor Relations And Bankruptcy

Question 1

In order to reflect the greater risk to the lender,secured loans are priced at a higher rate than unsecured loans.

Answer 1

False

Question 2

A purchase money security interest in consumer goods is an automatically perfected security interest.

Answer 2

True

Question 3

Payments in the ordinary course of business made within 90 days prior to a Chapter 11 bankruptcy filing are voidable as a preference.

Answer 3

False

Question 4

A security interest in after-acquired collateral will attach when the debtor acquires rights in the collateral.

Question 5

A commitment fee is assessed against a lender at the time a loan agreement is signed.

Question 6

The UCC requires that a precise form be followed in order to create a security interest.

Question 7

A debtor does not have to show it is insolvent to file for bankruptcy.

Question 8

A repayment plan under a Chapter 11 bankruptcy must either be accepted unanimously or pass the "best interests of creditors" test.

Question 9

A fraudulent conveyance directly or indirectly transfers assets to a third party with the intent to put assets out of the reach of creditors.

Question 10

Chapter 13 does not provide a bankruptcy discharge for corporations.

Question 11

Agreements for term or revolving loans may call for mandatory prepayment when certain events occur.

Question 12

The debtor-in-possession must honor all prebankruptcy executory contracts.

Question 13

The UCC provides that,unless otherwise agreed,a security agreement gives the secured party a security interest in the proceeds if collateral is sold,exchanged,collected,or otherwise disposed of.

Question 14

The equitable subordination doctrine of bankruptcy law prevents one creditor who,through fraud or other wrongful conduct,increases its recovery at the expense of other creditors of the same debtor.

Question 15

Waivers are the borrower's promises that it will or will not take specific actions as long as either a commitment or a loan is outstanding.

Question 16

If a borrower fails to repay a secured loan,the lender may foreclose on the collateral.

Question 17

In CASE 23.2 Executive Benefits Insurance Agency v.Arkison (2014)the U.S.Supreme Court ruled that some claims Congress labeled as "core" (so-called Stern claims)cannot be adjudicated by a bankruptcy court even if all the parties consent to the bankruptcy court's jurisdiction in advance.

Question 18

A purchase-money security interest in consumer goods is automatically perfected.

Question 19

Commercial paper is a term that describes short-term corporate indebtedness.

Question 20

National banks acting as lenders are subject to state usury laws.

Question 21

A number of states have enacted legislation providing that loan commitments must be in writing to be enforceable.

Question 22

__________ a security interest involves making it valid as against other creditors of the debtor.

A) Finalizing
B) Perfecting
C) Organizing
D) Signing

Question 23

A __________ interest rate fluctuates throughout the life of the loan according to the interest rate that the lender would pay if it borrowed the funds in order to relend them.

A) fixed
B) principal
C) base
D) floating

Question 24

Which of the following is NOT true regarding methods of perfection?

A) A security interest in a deposit account may be perfected only by taking control of the collateral.
B) A security interest in a letter-of-credit right may be perfected only by taking control of the collateral.
C) A security interest in money may be perfected either through possession or through filing a financing statement.
D) For a limited period,a purchase-money security interest in consumer goods is automatically perfected.

Question 25

Which of the following is NOT true regarding remedies for default of a security agreement?

A) After default,the secured party has the right to take possession of the collateral so long as judicial process is followed.
B) After properly taking possession of the property,the secured party may then dispose of the collateral at a public or private sale.
C) If there is a surplus from the sale of collateral,the secured party is required to return it to the debtor.
D) If there is a deficiency from the sale of collateral,the debtor remains liable for that amount.

Question 26

An equipment lease that serves the purpose of financing is known as a(n)__________ lease.

A) finance
B) temporary
C) lending
D) debtor's

Question 27

In CASE 23.1 Tufankjian v.Rockland Trust Co.(2003)Tufankjian signed a contract to acquire a Toyota dealership for $1.4 million.Rockland agreed to lend Tufankjian $700,000 at 7.5% interest,with the remaining $700,000 to come from the SBA at a separate interest rate which was quoted by Rockland at 6.5% (but with no written guaranty).Ultimately,the loan was not consummated and Tufankjian sued.How did the court rule?

A) The court dismissed Tufankjian's claims.
B) The court held Tufankjian breached his duty of good faith and fair dealing and awarded damages to Rockland.
C) The court held Rockland had committed fraud but only awarded Tufankjian nominal damages of $1.
D) The court held Rockland breached its duty of good faith and fair dealing and awarded damages to Tufankjian.

Question 28

An equipment lease that serves the purpose of financing is known as a(n)__________ lease.

A) credit
B) finance
C) interminable
D) revocable

Question 29

While state restrictions may apply,there are no federal restrictions on lenders and borrowers entering into transactions whereby secured credit will be sued to acquire stock.

Question 30

Which of the following makes a security interest created under Article 9 a floating lien?

A) The provision that,unless otherwise agreed,a security agreement gives the secured party a security interest in the proceeds if the collateral is sold,exchanged,collected,or otherwise disposed of
B) The provision that,unless otherwise agreed,a security agreement fails to give the secured party a security interest in the proceeds if the collateral is sold,exchanged,collected,or otherwise disposed of
C) The provision that,unless otherwise agreed,interest rates will vary depending on the prime rate of interest
D) The provision that,unless otherwise agreed,the parties will not sell,exchange,collect,or otherwise dispose of property and that if such an action is taken,all sums owed become immediately due

Question 31

Requirements that must be met under the loan agreement before the lender's obligations arise are known as:

A) conditions precedent.
B) conditions concurrent.
C) conditions subsequent.
D) loan qualifiers.

Question 32

A(n)__________ clause in a loan document provides that any breach by the borrower under any other loan agreement constitutes an event of default.

A) attached
B) dragnet
C) cross-default
D) cross collateralization

Question 33

What is the primary purpose of debt subordination?

A) To cap homestead exemptions in limited circumstances
B) To prevent intentional infliction of emotional distress on a borrower by bank officials
C) To protect the senior creditor in the event the debtor becomes insolvent
D) To make the guarantor's assets unavailable to its creditors

Question 34

A bank's __________ rate is the lowest published rate of interest at which the bank lends to its best and most creditworthy commercial customers.

A) lien
B) term
C) prime
D) secured

Question 35

Which of the following is considered a negative covenant?

A) A borrower will keep the lender informed of its financial condition.
B) A borrower will maintain insurance policies.
C) A borrower may not incur additional debt beyond a specified amount.
D) A borrower will inform the lender of any material adverse change in its operations or financial condition.

Question 36

A(n)__________ guaranty is enforceable only with respect to a specified transaction or series of transactions.

A) attached
B) upstream
C) restricted
D) payment

Question 37

A(n)__________ loan is one in which the original lender sells shares to other parties.

A) master
B) syndicated
C) participation
D) attached

Question 38

In a(n)__________ loan,more than one lender enter into concurrent direct obligations with the borrower to make the loan.

A) participation
B) term sheet
C) syndicated
D) illegal

Question 39

A term sheet that may precede a loan agreement does which of the following?

A) Outlines the terms and conditions on which the lender will lend
B) Evaluates the credit of any guarantors
C) Enforces specified transactions
D) Exercises setoff rights

Question 40

Congress is given the power to enact bankruptcy laws by:

A) a delegation of authority by the president.
B) the U.S.Constitution.
C) rulings of the Supreme Court.
D) inherent powers under federalism.

Question 41

One popular method in Chapter 11 cases is called a(n)__________ bankruptcy,in which the company solicits votes on its plan of reorganization prior to filing bankruptcy.

A) prepackaged
B) cramdown
C) workout
D) confirmation

Question 42

Which of the following statements about the zone of insolvency is NOT true?

A) The scope of the duty owed to creditors by a firm in the zone of insolvency varies by jurisdiction.
B) Insolvency is usually defined as an inability to pay debts as they mature.
C) Creditors have a right to assert direct claims for breach of fiduciary duty against a firm's board of directors in the zone of insolvency.
D) There is no test or definition for the zone of insolvency.

Question 43

In Stern v.Marshall,the U.S.Supreme Court addressed whether a counterclaim for tortuous interference with an expected gift,filed in response to a bankruptcy claim for defamation,was a core matter subject to the jurisdiction of the bankruptcy court.And if it was a core matter subject,did the authority conferred upon the bankruptcy court violate Article III of the U.S.Constitution? How did the Court rule?

A) The Court ruled that the tortuous interference counterclaim was a core proceeding but that the bankruptcy court lacked the constitutional authority to enter a final judgment on the claim.
B) The Court ruled that the tortuous interference counterclaim was a core proceeding and that the bankruptcy court had the constitutional authority to enter a final judgment on the claim.
C) The Court ruled that the tortuous interference counterclaim was not a core proceeding and that the bankruptcy court lacked the constitutional authority to enter a final judgment on the claim.
D) The Court ruled that the tortuous interference counterclaim was a core proceeding in part and that the bankruptcy court had the constitutional authority to enter a final judgment on portions of the claim.

Question 44

Bank president Spencer had approved significant loan amounts to Berry for the purpose of developing a shopping center.Spencer was satisfied that the land collateralizing the shopping center loan was sufficient,and Spencer was not particularly concerned about that loan.Berry,however,requested an additional loan for the purpose of starting a temporary employee agency.Berry offered to collateralize that loan with office equipment,but Spencer was uneasy that such collateral was insufficient.If Spencer decides to go forward with the loan involving the temporary employee agency,which of the following is true regarding Spencer's options?

A) Spencer should request a cross-default provision and also a cross-collateralization provision.
B) Spencer should only request a cross-default provision because Article 9 makes cross-collateralization provisions unenforceable.
C) Spencer should only request a cross-collateralization provision because Article 9 makes cross-default provisions unenforceable.
D) Spencer should request a guarantee from a solvent person or entity because Article 9 makes both cross-default and cross-collateralization provisions illegal.

Question 45

A lien subordination __________ the right of the subordinating party to accept payment from the debtor.

A) acts like debt subordination and gives
B) supersedes a prior secured party's claim and
C) does not limit
D) invalidates

Question 46

With a(n)__________ guaranty,subsidiaries guarantee,or pledge their assets as security for,the parent's debt.

A) downstream
B) upstream
C) leveraged
D) subordination

Question 47

Interest is generally computed on a __________ basis.

A) yearly
B) monthly
C) weekly
D) daily

Question 48

If the collateral from one loan is used to secure the obligations on another loan,this is called __________,or it is sometimes called a "__________" clause.

A) perfection; default
B) cross-collateralization; dragnet
C) floating lien; dragnet
D) attached loan; dragnet

Question 49

A guaranty that covers all future obligations of the primary debtor to a lender is referred to as a __________ guaranty.

A) continuing
B) restricted
C) primary
D) performance

Question 50

A state law that limits the maximum rate of interest that may be charged is called a(n)__________ law.

A) interest
B) usury
C) rate
D) term

Question 51

When the debtor fails to make a payment when due,the guarantor's obligation to pay the lender is triggered automatically under the guaranty of:

A) security.
B) collection.
C) payment.
D) performance.

Question 52

Which of the following is the most common expression of a floating interest rate?

A) The sum of the prime rate and a specified number of percentage points
B) A percentage of the prime rate
C) Spread
D) LIBOR

Question 53

A Chapter 7 discharge is not available to a debtor who has received a discharge in a bankruptcy filed in the preceding __________ years or in a Chapter 13 case filed in the preceding __________ years.

A) two; four
B) six; seven
C) eight; six
D) seven; six

Question 54

Which of the following is true of the automatic stay in a bankruptcy filing?

A) It is the most immediate and dramatic advantage of any bankruptcy filing.
B) It instantly resolves most litigation and collection activities against the debtor.
C) It prevents further loss of income to the business.
D) It prevents bankruptcy court from authorizing creditors to resume collection efforts.

Question 55

__________ creditors must file a __________ stating the amount of their claim in a form provided by the bankruptcy court within time periods established by the jurisdiction in which the case is filed.

A) Unsecured; notice
B) Unsecured; proof of claim
C) Unsecured; automatic stay
D) Secured; reaffirmation agreement

Question 56

Which of the following expresses the effect of the D'Oench,Duhme doctrine in relation to federally insured banks?

A) It makes it more difficult for federal agencies to bring criminal charges against bank officials who negligently,but not intentionally,made bad loans.
B) It makes it easier for federal agencies to bring criminal charges against bank officials who negligently,but not intentionally,made bad loans.
C) It makes it more difficult for federal agencies to collect on outstanding loans by specifically providing that an oral loan commitment is enforceable so long as at least two bank officials confirm the existence of the oral agreement and there is no indication that the debtor involved acted in an illegal manner.
D) It makes it easier for federal agencies to collect on outstanding loans by barring enforcement of any agreements unless the agreements are in writing and approved contemporaneously by the bank's board or loan committee and recorded in the bank's written records.

Question 57

The __________ interest rate is based on the cost of borrowing offshore U.S.dollars in the global interbank market.

A) International Rate Exchange
B) Frankfurt International Trade Rate
C) London Interbank Offered Rate
D) New York Exchange Rate

Question 58

Which of the following statements about Chapter 11 bankruptcy is NOT true?

A) The debtor's ability to borrow on a secured basis can be enhanced in a Chapter 11 reorganization.
B) The goal of Chapter 11 is to reorganize the debtor with a new capital structure so that it can emerge from bankruptcy as a viable concern.
C) Chapter 11 is available to banks,savings and loan associations,credit unions,insurance companies,stockbrokers,or commodity brokers.
D) Chapter 11 is available to individuals,partnerships,corporations,unincorporated associations,and railroads.

Question 59

Mirin has filed for Chapter 7 bankruptcy relief.Mirin had borrowed money from a best friend,Rene,for the purchase of a car.Mirin really wants to repay Rene,but does not want to jeopardize the bankruptcy relief and discharge of a number of other debts.What option,if any,is open to Mirin?

A) No options are open to Mirin because any payment to Rene would be considered a voidable preference.
B) Mirin can reaffirm the debt to Rene,and the bankruptcy judge has no authority to interfere in that decision.
C) Mirin can reaffirm the debt to Rene,but the bankruptcy judge has the authority to disapprove of the agreement if the court finds that it is not in Mirin's best interest.
D) Mirin can reaffirm the debt to Rene but only up to 50 percent of the maximum amount owed,and the bankruptcy judge has the authority to disapprove of the agreement if the court finds that it is not in Mirin's best interest.

Question 60

Barrett,who has several creditors and a small amount in savings,goes bankrupt.Barrett owes XYZ Bank $200,000 for which Barrett's home was used as collateral.XYZ Bank properly perfected its interest in the home.Barrett additionally owes $3,000 in alimony; $50,000 in unsecured credit card bills; and $5,000 in unsecured debt to a friend,Taliesin.After all exemptions are satisfied,$205,000 from the sale of the home and $5,000 in a small bank account remain for distribution to creditors.Which of the following is true regarding priority?

A) All funds are added together and disbursed to the claimants based upon the percentage of each creditor's claim.
B) Taliesin has first priority; the credit card companies are then paid; and XYZ Bank is entitled to any remainder.
C) XYZ Bank receives $200,000 from the sale of the home; the ex-spouse receives $3,000; and the remainder is divided between the credit card companies and Taliesin.
D) Taliesin has first priority; XYZ Bank is then paid; and the credit card companies divide the remainder.

Question 61

Several commentators have criticized the bankruptcy code as too easily excusing individuals and businesses from honoring their lawful obligations.From a societal standpoint,do you believe that the bankruptcy code plays a positive role in social and economic relationships? What changes,if any,would you recommend?

Question 62

Free met with Ara,the president of ABC Bank,to discuss Free's difficulty making the payments on a loan that was guaranteed by Shia.Free requested that Ara provide a grace period to Free and allow for a few missed payments without penalty in order to catch up other finances.Ara had no objection.Assuming the guaranty agreement did not address such situations,is Ara acting prudently and why or why not?

A) Yes,because Shia,as a guarantor,has no rights to oppose any action of the bank.
B) Yes,because although having certain rights in regard to actions taken by the bank,Shia had no right to oppose the provision of a grace period since it is unlikely that allowing such a grace period would impair Shia's interests.
C) No,because Ara should have obtained the written consent of Shia in the form of an affirmation of the guaranty in view of the grace period.
D) No,because as a matter of equitable business practice,Ara should have put Shia on notice although Ara did not increase the bank's exposure by failing to do so.

Question 63

What is required in a filing for a voluntary petition in bankruptcy? An involuntary petition?

Question 64

What is a preference under the bankruptcy code? What time period is reviewed to determine if a preference has occurred? When does a long-term debt payment to a bank qualify under the ordinary course of business exception?

Question 65

What five events referenced in the text usually constitute a default?

Question 66

What portion of the bankruptcy code deals with an international insolvency situation,and how does it work? On what international law is it based?