Question 1

Interest is generally computed on a __________ basis.

Accepted Answer

Interest is typically calculated on a daily basis, which is then added up and compounded over a specific period such as monthly, quarterly, or yearly. This method of calculation is known as compound interest.

Question 2

Under a guaranty of __________,the guarantor's obligation to pay the lender is triggered automatically when the debtor fails to make a payment when due.

Accepted Answer

Under a guaranty of payment, the guarantor's obligation to pay is triggered automatically when the debtor fails to make a payment when due. This means that the lender does not have to take any action to pursue the guarantor for payment – it is an automatic obligation. This is different from a guaranty of performance or collection, which may require the lender to take additional steps to enforce the guaranty. Security is not a type of guaranty, but rather refers to collateral that may be used to secure a loan.

Question 3

Fact Pattern 23-1
Bailey has been making large credit card purchases for months. He has also borrowed money from Jack and Susan, friends of his, so that he can continue his rather lavish lifestyle involving foreign travel. He borrowed $1,000 from Jack and $2,000 from Susan. He also borrowed $500 from his mother. Bailey finally decides that he can no longer continue to make even the minimum payments on his credit cards and considers filing for bankruptcy. He does, however, want to pay some of his debts. Bailey, therefore, puts off the credit card companies and saves his cash. He starts the New Year off by paying on January 1 all funds owed to his mother. He was particularly concerned about repaying his mother because he still lived at home and had some concerns that she would kick him out of the house if he did not repay her. Then, on June 1 he pays Jack; and on July 4, he pays Susan. Bailey proceeds to file bankruptcy on August 2 because he has repaid anyone he really cares about. He plans to complete the bankruptcy and move to the Caribbean.
-Refer to Fact Pattern 23-1.Which of the following is true regarding the repayment of the loan to Bailey's mother?

Accepted Answer

Bailey's mother would be considered an insider, and the payment was made within one year of the filing for bankruptcy, making it a preference under bankruptcy law.

Question 4

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

Accepted Answer

A continuing guaranty is one that remains in effect until specifically revoked by the guarantor, even if the obligations of the primary debtor change or additional obligations are incurred. This provides the lender with greater security and flexibility in the event that the primary debtor defaults on their obligations. Restricted guaranties, on the other hand, only cover specific obligations, while primary guaranties are the main obligation of the guarantor and performance guaranties guarantee a specific result.

Question 5

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

Accepted Answer

The D'Oench, Duhme doctrine prevents borrowers from asserting unwritten agreements to defend against collection efforts by federally insured banks, requiring agreements to be in writing and properly documented.

Question 6

In CASE 23.3United States Department of Justice v.Sperry (2013),Sperry,the sole owner of a Subchapter S corporation that filed bankruptcy,made paymentstoother creditors before paying the corporation's federal tax obligations.Sperrycountered that he was released from the tax liens,and claimed the corporation-not him-owed the 'trust fund taxes.' The IRS sued.How did the court rule and why?

Accepted Answer

The court ruled in favor of the IRS because Sperry's payments and loans triggered personal liability for trust fund taxes. The court held that Sperry was a responsible party under the Internal Revenue Code and that his payments to other creditors were in violation of his duty to pay trust fund taxes.

Question 7

__________ 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 if filed.

Accepted Answer

Unsecured creditors must file a proof of claim stating the amount they are owed in a form provided by the bankruptcy court within the time period established by the jurisdiction in which the case is filed. This allows them to participate in the bankruptcy case and potentially receive some payment for their claim.

Question 8

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.

Accepted Answer

A Chapter 7 discharge is not available to a debtor who has received a discharge in a prior Chapter 7 or Chapter 11 case filed within the preceding eight years, or a Chapter 13 case filed within the preceding six years.

Question 9

In theStern v.Marshall case discussed in the text,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?

Accepted Answer

The U.S. Supreme 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. The Court held that because the counterclaim did not arise under federal bankruptcy law and was not necessarily resolved in the claims allowance process, the bankruptcy court could only issue proposed findings of fact and conclusions of law, with the final decision to be made by the district court. This ruling upheld the constitutionality of the bankruptcy court's jurisdiction while limiting its authority in certain cases.

Question 10

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

Accepted Answer

Cross-collateralization is the use of collateral from one loan to secure the obligations on another loan. It is also sometimes called a "dragnet" clause. Choice A is not correct because perfection refers to the process of establishing a security interest in collateral. Choice C is incorrect because a floating lien is a security interest in a changing pool of collateral. Choice D is not a commonly used or recognized term in the context of collateralization.

Question 11

Fact Pattern 23-1
Bailey has been making large credit card purchases for months. He has also borrowed money from Jack and Susan, friends of his, so that he can continue his rather lavish lifestyle involving foreign travel. He borrowed $1,000 from Jack and $2,000 from Susan. He also borrowed $500 from his mother. Bailey finally decides that he can no longer continue to make even the minimum payments on his credit cards and considers filing for bankruptcy. He does, however, want to pay some of his debts. Bailey, therefore, puts off the credit card companies and saves his cash. He starts the New Year off by paying on January 1 all funds owed to his mother. He was particularly concerned about repaying his mother because he still lived at home and had some concerns that she would kick him out of the house if he did not repay her. Then, on June 1 he pays Jack; and on July 4, he pays Susan. Bailey proceeds to file bankruptcy on August 2 because he has repaid anyone he really cares about. He plans to complete the bankruptcy and move to the Caribbean.
-Refer to Fact Pattern 23-1.Which of the following is true regarding the repayment of the loans from Jack and Susan?

Accepted Answer

Payments to both Jack and Susan would be considered preferences because they were made within 90 days of the filing for bankruptcy.

Question 12

A(n)__________ subordination is an agreement between two secured creditors by which the subordinating party agrees that the lien of the other creditor will have priority notwithstanding the relative priorities that the parties' liens would otherwise have under applicable law.

Accepted Answer

A lien subordination is an agreement where one creditor agrees to subordinate its lien to another creditor's lien, giving the latter priority.

Question 13

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.

Accepted Answer

A prepackaged bankruptcy is a common method in Chapter 11 cases where the company negotiates with its creditors before filing for bankruptcy and then solicits votes on its plan of reorganization prior to filing. This allows for a faster and smoother bankruptcy process.

Question 14

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

Accepted Answer

A usury law sets a cap on the interest rates that can be charged on loans, preventing lenders from charging excessive interest rates.

Question 15

In theIn re Bryan Road casereferencedin the text,the main issue before the Florida court was whethera pre bankruptcy waiver of the automatic stay in a prepetition workout was enforceable.How did the court rule?

Accepted Answer

The court concluded that the waiver of the automatic stay would be enforced after considering a number of factors.

Question 16

In order to arrive at an actual interest rate,a __________ is an amount added to the bank's theoretical cost of obtaining funds to lend.

Accepted Answer

The spread is an amount added to the bank's theoretical cost of obtaining funds to lend, which then results in the actual interest rate offered to borrowers. The base rate is just the starting point for calculating the actual interest rate. The reference rate is a benchmark used for comparing interest rates, but not necessarily for determining the actual interest rate for a particular borrower. Security refers to collateral provided by the borrower and does not factor into the calculation of the interest rate.

Question 17

In a __________ bankruptcy under Chapter 11,the debtor solicits votes on its plan of reorganization and only files for Chapter 11 protection after it has obtained the required votes in favor of the plan.

Accepted Answer

Prepackaged bankruptcy involves the debtor negotiating a plan of reorganization with its creditors before filing for bankruptcy. The plan is then put to a vote and, if approved, the debtor files for Chapter 11 protection with the prepackaged plan already in place. This type of bankruptcy is often quicker and more streamlined than traditional Chapter 11 bankruptcies.

Question 18

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

Accepted Answer

The London Interbank Offered Rate (LIBOR) is the benchmark interest rate at which banks lend to each other in the international interbank market for short-term loans. It is the most widely used benchmark or reference rate for determining borrowing costs of financial instruments such as commercial loans, mortgages, credit cards, and derivatives.

Question 19

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

Accepted Answer

An upstream guarantee is when a subsidiary guarantees or pledges their assets as security for the parent company's debt. This is typically used when the parent company is trying to raise funds or obtain financing, as it gives lenders more security and reassurance that the debt will be paid back. Downstream guarantees, on the other hand, involve the parent company guaranteeing the subsidiary's debt, and leveraged guarantees involve using borrowed funds to make the guarantee. Subordination refers to the prioritization of debts in the event of bankruptcy or default.

Question 20

Bank president Spencer had approved significant loan amounts to Bob 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.Bob,however,requested an additional loan for the purpose of starting a temporary employee agency.Bob offered to collateralize that loan with his 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 his options?

Accepted Answer

A cross-default provision would allow Spencer to declare a default on the temporary employee agency loan if Bob defaults on any of his other loans with the bank. A cross-collateralization provision would allow Spencer to use the collateral securing the shopping center loan to secure the temporary employee agency loan. While Article 9 does restrict the enforceability of some cross-collateralization provisions, it still allows them under certain circumstances, such as when the collateral securing the original loan secures the new loan as well. Therefore, Spencer should request both a cross-default provision and a cross-collateralization provision to protect the bank's interests. Alternatively, Spencer could also request a guarantee from a solvent person or entity to further secure the loan.

Quiz 23: Debtor-Creditor Relations and Bankruptcy.

Interest is generally computed on a __________ basis.

Under a guaranty of __________,the guarantor's obligation to pay the lender is triggered automatically when the debtor fails to make a payment when due.

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

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

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 if filed.

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.

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

A(n) __________ subordination is an agreement between two secured creditors by which the subordinating party agrees that the lien of the other creditor will have priority notwithstanding the relative priorities that the parties' liens would otherwise have under applicable law.

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

In theIn re Bryan Road casereferencedin the text,the main issue before the Florida court was whethera pre bankruptcy waiver of the automatic stay in a prepetition workout was enforceable.How did the court rule?

In order to arrive at an actual interest rate,a __________ is an amount added to the bank's theoretical cost of obtaining funds to lend.

In a __________ bankruptcy under Chapter 11,the debtor solicits votes on its plan of reorganization and only files for Chapter 11 protection after it has obtained the required votes in favor of the plan.

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

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