Question 1

The process of perfection

Accepted Answer

Perfection of a security interest can be achieved by possession of the collateral in some cases, which provides public notice of the creditor's interest.

Question 2

Perfection of a security interest in collateral means that

Accepted Answer

Perfection of a security interest, often by filing a financing statement, gives the secured party priority over unperfected interests and any interests perfected after the filing date.

Question 3

TevCo Inc supplies tennis racquets to Olympus Sports Inc, a retail sporting goods store. TevCo and Olympus have entered into a supply agreement which provides that TevCo has a security interest in all racquets it supplies until they are paid for by Olympus. TevCo filed a financing statement to register its security interest on January 1, 2010. Prior to that date, Olympus had entered into an agreement with the Bank of Ottawa for an operating line of credit. As part of that agreement, Olympus gave the Bank a security interest in all its present and future assets. The Bank filed a financing statement to register its interest on December 1, 2009, indicating an interest in all of the debtor's assets including inventory. On March 1, 2010, TevCo delivered to Olympus its first shipment of 100 tennis racquets. Olympus never paid for them. A few days later, Olympus went into default under its agreement with the Bank. Both TevCo and the Bank claim to be entitled to the tennis racquets. Which of the following best describes the legal position of the two secured parties?

Accepted Answer

The Bank's security interest prevails over TevCo's because it was perfected first and TevCo does not have priority as a purchase money security interest in inventory because it failed to give notice to the Bank.

Question 4

In July, Monarch Taverns Inc borrowed $100 000 from the Bank of Commerce to finance its acquisition of a tavern. As security for Monarch's obligation to repay the loan, it gave the Bank a security interest in the tavern's inventory of spirits, then worth an estimated $50 000. Guillermo is an experienced businessman who has run several taverns. He is also the sole shareholder in Monarch. He signed a guarantee of Monarch's obligation to repay the Bank of Commerce. The corporation was represented by legal counsel in dealing with the Bank and Guillermo obtained the advice of an independent lawyer with respect to his obligations under the guarantee. After Monarch has operated the tavern business for six months, the value of the inventory has fallen to $20 000. Monarch has advised the Bank of this. Which of the following statements best describes Guillermo's obligation to the Bank of Commerce?

Accepted Answer

Guillermo is still liable under the guarantee because he signed a personal guarantee, which means he is personally responsible for the debt regardless of changes in the value of the collateral or his status as a shareholder.

Question 5

Chester owns and operates a farm. As a result of financial difficulties in the past, a bank currently holds a security interest in all of Chester's after- acquired property. Unfortunately, Chester's situation recently deteriorated even further when his thresher (a type of farm vehicle) developed irreparable defects. He cannot continue on with business unless he acquires a replacement. That appears to be a problem because he has no money for the purchase price. And while he could otherwise simply purchase the new machine on credit, the bank's security interest suggests that any new security interest necessarily would rank second. Which of the following statements is TRUE?

Accepted Answer

A thresher vendor can acquire a purchase money security interest (PMSI) in the new thresher, which would give it priority over the bank's existing security interest in after-acquired property, without needing the bank's consent.

Question 6

Which of the following is TRUE? A bank will be more likely to lend money to a borrower if the borrower grants the bank a security interest in its assets because

Accepted Answer

A security interest gives the bank a legal right to seize and sell the borrower's assets if the borrower defaults, allowing the bank to recover the loan amount.

Question 7

The special rules providing for the creation of purchase money security interests under provincial personal property security laws were put in place because if there were no such rules

Accepted Answer

The special rules for purchase money security interests (PMSIs) allow suppliers of goods to have first priority over other secured parties with interests in after-acquired property, ensuring they can secure their interest in the goods supplied.

Question 8

Which of the following is TRUE? A conditional sale is

Accepted Answer

In a conditional sale, the buyer gets possession of the goods, but the seller retains the title until the purchase price is fully paid.

Question 9

In June, Alicia borrowed $10 000 from the Toronto- Dominion Bank to start her record company. She agreed to give the Bank a security interest in all of her assets, but the agreement was never recorded in writing. In July, she sold some CD burning equipment to Record Supply Inc. Which of the following best describes the Bank's claim against the equipment?

Accepted Answer

The answer of In June, Alicia borrowed $10 000 from...

Question 10

The Bank of Nova Scotia and MMX Corp are discussing setting up a line of credit for MMX. Under the terms of the line of credit, MMX will be able to require the bank to advance it funds at any time up to an aggregate cap of $10 000. MMX will give the Bank a security interest in all of its present and future assets. The parties have not yet entered into an agreement and the Bank has advanced no money. The Bank files a financing statement to register its interest in anticipation of the agreement being entered into. Subsequently, Melanie, the president of MMX, lends the corporation $20 000. MMX gives her a security interest in all its present and future assets. Melanie files a financing statement to register her interest. Which statement best describes the relative priority of the claims of Melanie and the Bank?

Accepted Answer

The Bank's security interest is unperfected because it never attached, as no agreement was entered into and no funds were advanced. Melanie's interest is perfected because she filed a financing statement after her loan was made.

Question 11

Walid carries on a retail electronics equipment sales business. He needs a new delivery truck. He is considering two options for acquiring the truck: a secured bank financing and lease financing with an option to purchase the truck. Which of the following distinguishes secured bank financing from lease financing?

Accepted Answer

In lease financing, Walid would not own the truck until he exercised the option to purchase in the lease, whereas in secured bank financing, he would own the truck from the start.

Question 12

The process of distraint

Accepted Answer

Distraint is a common law remedy allowing landlords to seize a tenant's property for unpaid rent, and it is not governed by Personal Property Securities (PPS) legislation.

Question 13

Shariff's Car Depot (SCD) sells new and used cars. Because it perceived a demand for Tucker Hupmobiles, a type of retro- design vehicle, it purchased several directly from Tucker Auto Inc. Those purchases were made under conditional sales contracts. At the relevant time, SCD paid part, but not all of the purchase price. As predicted, SCD received a great deal of consumer interest in the Hupmobiles. It sold one to Ingrid. Several days later, however, SCD fell into serious financial difficulties and defaulted on some of its debts. As it was entitled to do in the circumstances, Tucker purported to exercise its rights to recover all interest in the Hupmobiles that it had conditionally sold to SCD. Which of the following statements is TRUE?

Accepted Answer

Ingrid receives the vehicle free of Tucker's security interest because SCD sold it to her in the ordinary course of its business, which typically allows the buyer to take the vehicle free of any security interests.

Question 14

Vegreville Food & Farm Inc (VFFI) operates a general store in a rural area of Saskatchewan. For a variety of reasons, the company has experienced continuing and substantial financial difficulties over the past ten years. As a result, most of its assets are subject to one or more security interests. Those security interests are held by a number of creditors. VFFI recently found itself unable to meet its obligations and it has defaulted on a number of contracts. Creditors are now looking to execute upon their security interests. Which of the following statements is most likely to be TRUE?

Accepted Answer

As between competing creditors with security interests registered under provincial personal property security legislation, priority is determined by the date and time of registration, rather than by perfection.

Question 15

Albert carried on a jewelry store business in Edmonton. He borrowed $10 000 from the Bank of Edmonton. As security for the repayment of his loan, Albert had given the Bank a security interest in his inventory and equipment. The Bankfailed to file a financing statement to register its interest. Albert sold all of his gem cutting equipment to Bruce who carried on another jewelry store business because he had decided to get out of this aspect of the business. Bruce is not aware of the Bank's security interest. Which of the following statements best describes the interest of the Bank in the gem cutting equipment?

Accepted Answer

Bruce takes the equipment free of the Bank's interest because the Bank's interest is not perfected and Bruce was not aware of it. Under the Personal Property Security Act, an unperfected security interest is subordinate to the rights of a buyer who purchases the collateral without knowledge of the security interest.

Question 16

Eldon leases tools and other equipment on a long- term basis to construction companies. He needs to buy a new forklift truck to lease in his business. Which of the following describes ways that Eldon could acquire the forklift truck?

Accepted Answer

All the options listed are valid ways for Eldon to acquire the forklift truck: buying it for cash, leasing with an option to purchase, borrowing money to buy it, or buying on credit.

Question 17

Jovan Co owns a building in Winnipeg in which Saturn Shoes Inc has rented a store premises since 2000. In 2009, Galaxy Shoes Inc agreed to supply Saturn with shoes on credit. Under its agreement with Saturn, Saturn gives Galaxy a security interest in the shoes supplied until they are paid for. Galaxy filed a financing statement to register its interest under the Manitoba Personal Property Security Act. No other financing statements have been registered against Saturn. Saturn has not paid its rent for two months and is in default under its agreement with Galaxy. Jovan and Galaxy both claim to be entitled to seize the shoes currently in Saturn's store. Which of the following is TRUE?

Accepted Answer

The answer of Jovan Co owns a building in Winnipeg...

Question 18

Which of the following is TRUE? The most important factor that a creditor considers in making its decision to grant credit to a debtor is

Accepted Answer

The most important factor for a creditor is the debtor's ability to repay the credit obligation, as this directly impacts the likelihood of recovering the loaned amount.

Question 19

Marissa Inc carries on an automobile parts manufacturing business in Ontario. Marissa has just finished negotiating a loan in the amount of $50 000 000 from National Bank. As security for the corporation's obligations under the loan, Marissa has agreed to give National Bank a security interest in all of the corporation's present and future assets. Which of the following is TRUE?

Accepted Answer

In a typical security agreement, a borrower like Marissa Inc. can sell inventory in the ordinary course of business free of the security interest, allowing the business to continue operating normally.

Question 20

Sally borrowed $50 000 from Halifax Bank to renovate her basement. The loan was to be repaid in monthly instalments over five years. The interest rate was 5 percent. Sally's mother, Elise, guaranteed the loan. Elise was provided with independent legal advice before she signed the guarantee. After two years, Sally sought to increase the amount of the loan. After a few meetings, Sally and the Bank agreed to increase the loan to $75 000 and to increase the interest rate to 7 percent. Which of the following statements regarding Elise's legal position is TRUE?

Accepted Answer

Elise is only bound by the guarantee up to the amount of Sally's original liability under the loan because she did not consent to the increase in the interest rate or the increase in the amount of the loan. Changes to the terms of the loan without the guarantor's consent typically release the guarantor from liability for the new terms.

Quiz 23: Secured Transactions