Session #2

This presentation contains many common legal terms or concepts you should be familiar with as a credit manager. It isnot a complete list, nor is it a list of terms you will necessarily find on the NACM CCE Exam. You may see terms on the exam that are not listed here. These terms were selected as examples of terms you may encounter in the CCE exam.

You may want to use this list as a guide for your individual exam preparation.

Common Legal Terms

a. Mutual Assent

b. Offerc. Acceptance

d. Counteroffere. Rejection

f. Consideration

g. Battle of the Forms

h. Statute of Fraudsi. Parol Evidence

j. Transfer of Title

1. Contract Law Basics

2222. . . . Negotiable Instruments Negotiable Instruments Negotiable Instruments Negotiable Instruments

a. Transfer

b. Indorsements

c. Holder v. Holder in Due Course

d. Defenses

3.3.3.3. Secured Transactions Secured Transactions Secured Transactions Secured Transactions – UCC Article 9UCC Article 9UCC Article 9UCC Article 9a. Security Agreements / Security Interestb. Collateral / Scopec. Perfecting a Security Interest / Filingd. Where & When to Filee. Priorityf. PMSIg. Default

4. Agency Relationships4. Agency Relationships4. Agency Relationships4. Agency Relationships

a. Formation

b. Agents & Principals

c. Duties

d. Liabilities

e. Independent Contractors

5. Entity Formation & Implications for Credit 5. Entity Formation & Implications for Credit 5. Entity Formation & Implications for Credit 5. Entity Formation & Implications for Credit ExtensionExtensionExtensionExtension

a. Sole Proprietorships

b. Partnerships – General and Limited

c. LLC’sd. Corporations

6.6.6.6. Security DevicesSecurity DevicesSecurity DevicesSecurity Devices

a. Personal & Corporate Guarantees

b. Mechanics Liens

c. Bonds

d. Miscellaneous Liens on Personalty

e. Letters of Credit

7.7.7.7. Bankruptcy Bankruptcy Bankruptcy Bankruptcy

a. Chapter 7 Liquidation

b. Chapter 9 Municipalities

c. Chapter 11 Reorganization

d. Chapter 12 Family Farmer Repayment Plan

e. Chapter 13 Individual Repayment Plan

f. Dealing with Debtors in Bankruptcy

8.8.8.8. Antitrust Antitrust Antitrust Antitrust a. Sherman Act §1b. Sherman Act §2c. Clayton Actd. Federal Trade Commission Acte. Enforcement & Penaltiesf. Exceptionsg. NACM Trade Groups

9.9.9.9. Libel and SlanderLibel and SlanderLibel and SlanderLibel and Slander

a. Facts v. Opinions

b. Defenses

c. NACM Trade Groups

10.10.10.10. LegislationLegislationLegislationLegislation

1.Sarbanes-Oxley

2.Patriot Act

3.Fair and Accurate Credit Transaction Act (FACTA)

4.Fair Credit Reporting Act (FCRA)

5.Fair Debt Collection Practices Act (FDCPA)

6.Equal Credit Opportunity Act (ECOA)

7.Truth in Lending Act (Reg Z)

We have included five sample essay questions. None of the questions are actual questions from prior or future exams. Hopefully, they are a close approximation. You may be given a short scenario to digest and explain. You may be simply directed to explain a concept. Regardless of the form, you should read the complete question and then answer in the format requested. Often the answer is to be in 2, or maybe 3, short well written paragraphs. We have attempted to demonstrate that with a sample answer for each sample question.

In 2 paragraphs, explain UCC Article 9.

Article 9 of the UCC allows sellers and lenders to take a security interest in the debtor’s personal property. The creditor (secured party) and debtor enter into a contract calleda security agreement that spells out the rights and obligations of each party along with the elements of default and remedies available to the secured party. The debtor grants to the secured party the right to take property in which debtor has an interest (called collateral) in the event of default, sell the collateral and

apply the proceeds toward the debt. In order to perfect its position and have rights to the collateral ahead of other claimants, the secured party must file a UCC 1 financing statement with the state in which the debtor is incorporated (or where its headquarters are located in some situations.)

Filing the UCC1 is said to perfect the interest in the collateral. Should the debtor sell the collateral, the purchaser will take it subject to the creditor’s perfected security interest if the underlying debt has not been satisfied. The secured position also allows the creditor to be paid ahead of unsecured creditors in the event the debtor files a petition in bankruptcy.

As the seller and financer of heavy equipment, you are familiar with UCC Article 9. But you notice several creditors have taken security interest in your customer’s equipment, including after acquired equipment and proceeds. In two paragraphs, identify the problem and state what action you could take to sell equipment to your customer on credit and not be behind the other creditors.

Secured transactions must be filed with the secretary of state to be perfected. The secured interests are prioritized on a first in time, first in right basis. So generally the prior filed security interests would have a claim to the equipment ahead of the new seller.

However, Article 9 of the UCC allows a “purchase money security interest” (PMSI) which provides a way for the seller or financer of the new equipment to be ahead of all other secured parties in the collateral being financed. The secured party has to perfect its interest within 20 days of the date the debtor takes possession.

You are a wholesaler of fresh foods. You generally sell to restaurants that are incorporated or are limited liability companies. You could take a security interest in the goods you sell but they spoil quickly and there is no benefit to taking back your product. You could take a security interest in the equipment and furnishings but your customers generally lease or rent these items. Is there anything you can arrange with the “owners” to make it more likely that you will collect your money if the restaurant fails to make payment? Identify the nature of the problem and a possible resolution in two paragraphs.

The “owners” (shareholders, directors, officers, members or employees) of corporations and LLC’s generally have no obligation to pay the debts of the entity if the entity fails tomake timely payment. It is wise to obtain a personal guarantee (or surety) to assure payment. The guarantor can be an “owner” or any other person willing to put up his or her credit to support the request for credit by the customer.

The guarantee must be in writing and be signed by the guarantor(s). The creditor should obtain a credit report on the guarantor(s) to evaluate the credit worthiness of the guarantor(s). The creditor should also verify that the guarantor has assets to satisfy the debts. (eg, a husband may give a guarantee but all of the assets are in the wife’s name.)

(A variation on Q 3.) Describe the four major types of entities and state why it is important for the credit manager to know the differences between/among the differing forms. In a separate paragraph, identify a simple method to make certain the principal(s) of the entity is (are) liable and state how you might obtain and enforce that liability.

The four major types of entities are:

Sole Proprietorship. An individual simply commences doing business and has unlimited liability.

Partnership. This requires at least two people or entities. There may be a written agreement but need not be for a general partnership and, like the sole proprietorship, the parties can simply commence to do business. General partners have unlimited liability. A limited partnership must be in writing and filed with the state. The limited partner(s)’liability is limited to their investment. There must be at least one general partner.

LLC. This is a cross between a partnership and a corporation. But the essence is to give the members protection from liability (liable to the extent or their investment) while giving them the flexibility of a partnership.

Corporation. This provides a limitation on the liability of the owners (shareholders) to the extent of their investment. There must be written articles of incorporation that are filed with the state. It is more difficult to form but provides a more extensive mechanism for raising capital than the other forms.

The creditor needs to be aware of the limitation of liability for each type of entity. The sole proprietor and general partners may have unlimited liability but may have the least ability to raise capital with which to pay debts. The LLC and corporation owners can hide behind the shield granted and not step up to pay when they incur debts the entity cannot pay.

The liability limitations afforded corporations and LLC’s may be bypassed by obtaining a personal (or corporate) guarantee from some or all of the members, shareholders, officers or other party who has the ability to pay if the entity doesn’t. Any personal or corporate guarantee must be in writing signed by the party against whom it is to be enforced. If the entity with whom you are dealing is not credit worthy without the guarantee then you can refuse to sell unless other terms are reached. If the guarantee is obtained, then upon default by the entity, the guarantor is usually advised, asked for payment and sued if the payment is not made.

You and your customer, Vick, find that you both have a common customer, Fred. Fred pays you about 15 days slow each month. Vick is having trouble collecting anything from Fred and is quite upset about it. In a moment of anger, Vick calls you and says “if we both stop supplying Fred, Fred will have no supplier and will have to pay up. Help me out with this or I will quit buying from you.” Is this a problem beyond the possible loss of sales to Vick, and if so, what? What action should you take? Please state your answer in two paragraphs.

If an agreement is made with Vick to stop selling to Fred, both Vick and I have entered in to a group boycott against Fred which is a per se violation of Section 1 of the Sherman Antirust Act. Parties, both the company and the individuals, who violate the Act may be liable to criminal and civil penalties. Unfortunately, after receiving such a call, if I experience difficulty in collecting from Fred and stop selling to Fred, it may appear that my company entered into the requested agreement with Vick.

During the phone call I should cut Vick off and tell him of the problem and that I am uncomfortable continuing the conversation. Because of the possible misinterpretation should I ever need to suspend Fred’s credit privilege, I should then contact my attorney to have a letter prepared and sent to Vick explaining that my company will not participate in any such boycott. The letter should further state the decision to sell or not to sell to any customer will be made by my company based upon my company’s independent evaluation of the credit worthiness of its customers.