National American University

BUSINESS L 3100

Chapter 32-NATURE OF THE DEBTOR-CREDITOR RELATIONSHIP

TRUE/FALSE

1)Suretyship is a pledge to pay one’s own debts and obligations.

 

                                           

 

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

 

                                           

 

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

 

                                           

 

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

 

                                           

 

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

 

                                           

 

6. An absolute guaranty creates the same obligation as a suretyship.

 

                                           

 

7. 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.

 

                                           

 

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

 

                                           

 

9. 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.

 

                                           

 

10. 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.

 

                                           

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

 

                                           

 

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

 

                                           

 

13. 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.

 

                                           

 

14. 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.

 

                                           

 

15. A surety may not raise the defense of mistake.

 

                                           

 

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

 

                                           

 

17. If the creditor does not enforce the suretyship agreement within the time limits provided for such con- tract enforcement in the surety’s jurisdiction, the obligation is forever discharged.

 

                                           

 

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

 

                                           

 

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

 

                                           

 

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

 

                                           

 

21. The use of letters of credit arose in international trade.

 

                                           

 

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

 

                                           

23. 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.

 

                                           

 

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

 

                                           

 

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

 

                                           

 

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

 

                                           

 

27. 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.

 

                                           

 

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

 

                                           

 

29. An issuer has an obligation to honor drafts under a letter of credit if the conditions specified in the let- ter 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.

 

                                           

 

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

 

                                           

 

 

MULTIPLE CHOICE

 

1. In a guaranty contract, the obligor is called a:
   1. surety.
   2. principal.
   3. guarantor.
   4. creditor.

                                           

2. A guaranty of payment creates a(n):
   1. contract of surety.
   2. contract of credit.
   3. letter of credit.
   4. absolute guaranty.

                                           

 

3. Which of the following is correct concerning suretyship and guaranty?
   1. A surety is always liable from the moment the principal is in default.
   2. A guarantor is always liable from the moment the principal is in default
   3. Both a. and b.
   4. None of the above.

                                           

 

4. 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.
   1. absolute guaranty
   2. indemnity contract
   3. guaranty of payment
   4. surertyship

                                           

 

5. When a surety pays a debt that it is obligated to pay, it automatically acquires the claim and the rights of the creditor through:
   1. assignment.
   2. exoneration.
   3. subrogation.
   4. default.

                                           

 

6. An agreement or provision in an agreement that one party shall not be held liable for loss is:
   1. contribution.
   2. exoneration.
   3. indemnity.
   4. subrogation.

                                           

 

7. 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?
   1. Indemnity
   2. Exoneration
   3. Assignment
   4. Subrogation

                                           

8. 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:
   1. indemnity.
   2. exoneration.
   3. subrogation.
   4. contribution.

                                           

 

9. 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?
   1. Zero

b.   $50,000

c.     $10,000

d.   $25,000

                                           

 

10. Which of the following contract defenses cannot be raised as a defense against suretyship obligations?
    1. Lack of capacity
    2. Absence of consideration
    3. Mistake
    4. All of the above defenses may be raise

                                           

 

11. Bailment given as security for the payment of a debt is a(n):
    1. pledge
    2. contribution
    3. guaranty
    4. indemnity

                                           

 

12. Which of the following is not a suretyship defense?
    1. statute of limitations
    2. performance of the obligation by the principal debtor
    3. creditor substitution of the original debtor with a new one
    4. insolvency of bankruptcy of the principal debtor

                                           

 

13. A letter of credit:
    1. is an advance arrangement for financing.
    2. is used only in domestic sales.
    3. involves only two parties.
    4. all of the above.

                                           

14. An agreement under which one party agrees to pay drafts drawn by a creditor is called a:
    1. contract of surety.
    2. guaranty contract.
    3. letter of credit.
    4. debtor's agreement.

                                           

 

 

15. 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):
    1. advising bank.
    2. foreign bank.
    3. consulting bank.
    4. coissuer.

                                           

 

 

16. Letter of credit transactions involve               contract(s).
    1. one (1)
    2. two (2)
    3. three (3)
    4. four (4)

                                           

 

 

17. A letter of credit usually sets a:
    1. minimum money amount.
    2. maximum money amount.
    3. both of the above.
    4. none of the above.

                                           

 

 

18. A letter of credit:
    1. cannot last for more than five years.
    2. may be in either oral or written form.
    3. can only be issued by a bank.
    4. must be in writing and signed by the issuer.

                                           

 

 

19. The issuer of a letter of credit:
    1. is obligated to honor drafts drawn under the letter if the conditions specified in the letter have been met.
    2. has no duty to verify that the papers are properly supported by facts.
    3. has no duty to verify that the underlying transaction has been performed.
    4. all of the above.

                                           

20. Which of the following is an example of an improper payment?
    1. A payment made after a letter of credit has expired.
    2. A payment made in excess of the amount authorized by the letter of credit.
    3. Both a. and b. are improper payments.
    4. Neither a. nor b. are improper payments.

                                           

 

CASE

 

1. Bud is unable to obtain a loan without some form of additional reassurances. Bud comes to you for as- sistance. You are willing to help Bud, but you wish to protect yourself from liability as much as possi- ble. 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?

 

 

 

2. Deirdre read that bids were being solicited for the construction of an apartment tower. Deirdre submit- ted 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 neces- sary commitment by misrepresenting that she was a famous builder in Canada. As the work pro- gressed, 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. Reas- suring Sureties was sued for a $500,000 loss. Reassuring Sureties defended on the grounds of fraud and material change in the contract. Decide.