Regulation Exam 2

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  1. Holder in due course
    A person who takes a negotiable instrument for value, in good faith, and without notice of any defenses on or claims to the instrument (only real defenses will be able to be used)
  2. Notes
    Two-party commercial paper; the promise by one party to pay money to another party
  3. CD
    Note where the bank is the payee acknowledging receipt of money and the promise to repay at a future date
  4. Draft
    Three-party commercial paper; an order by one person (the drawer) to another person (the drawee) demanding that the drawee pay money to a third person
  5. Check
    Draft where the drawee is the bank and must be payable on demand; they are the exception to the need to contain the words "to order" or "to bearer"
  6. Trade Acceptance
    A draft drawn by the payee (usually the seller of goods) on the drawee (usually the buyer of the seller's goods) and accepted by the drawee (accepting liability on the instrument)
  7. How does a time differ from a demand instrument?
    A demand instrument is payable on demand whereas a time instrument is payable at a future date
  8. Elements of a negotiable instrument (Front only)
    • Be in writing
    • Be signed by the maker
    • Contain an unconditional promise or order to pay
    • Be for a fixed amount of money and only money
    • Be payable on demand or at a definite time
    • Be payable to order or to bearer with the exception of checksĀ and
    • Contain no additional undertaking or instruction not authorized by the UCC
  9. What constitutues a writing? Who must?
    Just about anything you can think of; maker must sign a note and the drawer must sign a draft
  10. What does and what does destroy negotiability?
    It can't be subject ot another agreement and there cannot be any express conditions. The following won't make it conditional: (1) being subject to implied conditions, (2) stating its consideration, (3) referring to the transaction out of which the instrument arose (even regarding collateral, prepayment or acceleration), or (4) limiting payment to a particular source or fund
  11. What are ok in terms of meeting the requirement of being money?
    • Interest
    • Stated discounts or additions when certain conditions are met
    • Cost of collection attorney's fees payable upon default
    • Has to be payable in currency (foreign permissable)
  12. What constitutues a definite time?
    • On or before a stated date
    • At a fixed period after the stated date
    • At some time readily ascertainable at the time the instrument is issued
    • At a defintie period of time atfer sight or acceptance
  13. What doesn't constitute a definite time?
    • Events not certain to happen
    • Events certain to happen but uncertain as to time
    • Ok: acceleration clauses, extension clauses, and undated, postdated and antedated instruments
  14. Payable to order or bearer
    • Order paper must state that it is payable "to the order of" an identified person or payable to an identified person "or order"
    • Bearer paper is payable to anyone who has possession of it ("to bearer," "to the order of bearer" to a named person "or bearer" or "to cash/to the order of cash")
  15. What is the exception to the order/bearer rule?
  16. Words control figures
    When words and numbers do not match each other on an instrument, the words control what is actually payable
  17. What happens when the instrument is not negotiable?
    There can be no holder in due course and the holder in due course rule cannot apply. Transferees take the instrument subject to any defense against payment a party might have
  18. Becoming a holder
    • Bearer paper requires mere delivery
    • Order paper requires delivery and endorsement
    • The last endorsement controls order vs bearer (endorsement can be special/blank, restrictive/unrestrictive, and qualified/unqualified)
  19. Becoming a holder in due course (elements)
    • Paper is for value
    • In good fiath
    • Without notice of any defenses to or claims of ownership on the instrument
    • Negotiable
  20. Value
    Executory promise is not value and values do not need to be equal
  21. Good faith
    These means honesty in fact
  22. Notice to purchaser
    • Knows that any part of the principal is overdue, acceleration has been made or the instrument is a demand instrument that no longer can be demanded
    • Instrument is irregular
    • Knows that obligation of any party is voidable in whole or in part
    • OK: antedated/postdated and purchase at a discount
  23. Shelter doctrine
    Even though the transferee himself may not qualify as a holder in due course, he can claim rights of one who held the commercial paper before him
  24. Real defenses (FAIDS)
    • Fraud in the execution/Forgery
    • Adjudicated insanity/materialĀ Alteration
    • Infancy/Illegality
    • Duress/Discharge in bankruptcy
    • Suretyship/Statute of limitations
  25. Personal defenses
    These are the same as those available in ordinary contract actions; a specific one is unauthorized completion
  26. Liability of parties
    • Maker of a note is primarily liable and the endorser is secondarily liable unless it is made without recourse
    • Drawee of a draft is primarily liable after acceptance (signing) and drawer is secondarily liable
  27. Transfer warranties
    • The transferor is entitled to enforce the instrument (good title)
    • All signtures are genuine or authorized
    • The instrument has not been materially altered
    • No defense of any party is good against the transferor
    • The transferor has no knowledge of any insolvency proceeding that has been institued against the maker, acceptor or drawer
  28. Methods of discharge
    • By payment, satisfaction or tender of payment to a holder
    • By cancellation or renunciation (intentional destruction, crossing through signatures)
    • By impairing recourse or collateral
    • By delay in presentment or failure to give notice of dishonor
    • By acceptance or certification of a draft by a bank
  29. Secured transactions
    Credit transaction where the creditor uses a security interest or collateral to be able to rely on the debtor's promise to pay
  30. Perfection
    Gives the creditor rights in the collateral superior to certain third parties
  31. Purchase Money Security Interests (PMSI)
    Has priority over all other types of security interests in the same collateral, if the PMSI is properly perfected. Exists when (1) a creditor sells the collateral to the debtor on credit or (2) the creditor advances funds used by the debtor to purchase the collateral
  32. Types of collateral
    • Goods (consumer goods, inventory, or equipment; items are classified depending on use)
    • Intangible collateral accounts
    • Investment property
    • Proceeds (come from sale of collateral)
  33. Duties of a secured party
    A secured party has a duty to file or send the debtor a termination statement when the debt is paid, confirm for the debtor the unpaid amount left on the secured debt and to use reasonable care to preserve any collateral in the secured party's possession
  34. Attachment recquisites (effective when all three are satisfied)
    • Have an agreement evidenced by an authenticated record or the creditor taking possession or control of the collateral
    • Value muct be given by the secured party
    • The debtor must have rights in the collateral
  35. Perfection
    Gives the secured party the maximum priority in the collateral over most other such third parties
  36. How does a security interest perfect (once it is attached)?
    • By filing
    • By taking possession
    • By control
    • Automatically - when secured party has a PMSI in consumer goods or a small scale assignment of accounts
    • Temporarily - twenty day period for proceeds from original collateral and four months for first state when collateral is brought to a second
  37. Priority ranking for conflicting interests in collateral
    • Buyer in the ordinary course of business of inventory
    • Holder of a properly perfected PMSI in the collateral
    • Holder of a perfected security interest in the collateral
    • Holder of an unperfected security interest in the collateral
    • Debtor
  38. Exception to priority for perfected PMSI (garage sale rule)
    If the buyer of consumer goods resells the goods to another consumer buyer, the second-hand buyer will take free of an automatically perfected PMSI as long as there is no notice of that interest
  39. Rights on default
    • Take possession and sell collateral
    • Retention of collateral in satisfaction of debt
    • Debtor's right to pay all creditors in full
    • Judicial action against the debtor
  40. After a sale what occurs?
    • Collateral is given free of all subordinate (not superior) interests
    • Debtor can no longer redeem by paying off the indebtedness
  41. What are proceeds used for?
    • To pay expenses on repossession and sale
    • To pay creditors with a security interests in order of priority (not pro rata)
    • To pay the debtor
  42. Surety
    One who is directly liable for all the debt or obligation of another
  43. Gratuitous surety
    One who is not compensated for his promise to the creditor and the surety will be released upon any change of their risk
  44. Compensated surety
    One who is paid for his promise to the creditor (such as a bonding company) and is only released upon a material change that increases risk
  45. Sureties rights against creditor
    • No right of notice for missed payments or default
    • Generally no right to compel the creditor to collect
    • Generally no right to compel creditor to apply the security interest
  46. Sureties rights against debtor
    • Exoneration: compel principal to pay (before paying creditor)
    • Subrogation: enforce any rights of the creditor (after paying)
    • Reimbursement: gain back amount paid on behalf of the debtor (after paying)
  47. Sureties rights against co-sureties
    • Exoneration
    • Contribution: based on the solvent sureties share of the payment
  48. Defenses of the surety
    • Creditor defrauded principal
    • Creditor obtained via duress
    • Illegality of obligation
    • Discharge of obligation through payment, release or covenant not to sue
    • Surety's incapacity or bankruptcy
    • Variation of surety's risk
  49. Not available defenses (when principal is in wrong)
    • Principal defrauds surety unless creditor was aware of it
    • Incapacity of principal
    • Bankruptcy of principal
  50. Judicial lien
    Requires the debtor to turn over the property possessed by the debtor to the court, who sells it and gives the proceeds to the creditor
  51. Garnishment
    When property is in the hands of a third party, an order can be made to turn over that property to the creditor
  52. Exemptions against garnishment
    • Homestead exemption
    • Personal injury awards
    • Limit on amount of wages that can be garnished
  53. Prohibited acts under FDCPA for collection agencies
    • Contacting the debtor at inconvenient times
    • Contacting the debtor directly if the debtor is represented by an attorney
    • Using harassing or abusive language
    • Making false or misleading claims
    • Contacting the debtor at his place of employment if the employer objects
Card Set:
Regulation Exam 2
2012-12-29 22:23:33
CPA Regulation Exam

Becker R6
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