Deck 30: Secured Transactions

Question 1

The provinces across Canada have each enacted a stature called the Personal Property Security Act. These acts use a common form of registration to record security interests. This system enables a province to

A) allow the public to search in the name of the property used as collateral.
B) provide public notice of the debtor's security interests.
C) easily reject any after- acquired property.
D) make ownership interests by "attachment".
E) provide a guaranteed certificate of search.

Answer 1

E

Question 2

Where security devices are agreed to in advance as terms in the contract, they are often called

A) collateral security.
B) the creditor back- up system.
C) the pledge of assets.
D) consensual security interests.
E) non- consensual security interests.

Answer 2

D

Question 3

The Hendersons have purchased their new riding lawnmower on a conditional sale contract. They have just been notified that the contract was assigned to a finance company. The Hendersons may now

A) have to sue for their rights under the contract.
B) have the benefits of a cut- out clause.
C) have the protection of a holder in due course as guaranteed by the Bills of Exchange Act.
D) be subject to all the personal defences that the seller has against the conditional buyer.
E) expect to have the same defences they had against the retailer.

Answer 3

E

Question 4

Jack and Reba purchased some furniture on a conditional sale contract. This couple carries no insurance on their household goods. The furniture is stolen one Sunday afternoon. Who will most likely take the loss?

A) The thieves, since this is a liability claim and they are to blame.
B) The merchant, since they still hold title and have insurance covering their insurable interests.
C) The bailee, since this is a bailment for value on the sale of goods.
D) This couple, because the conditional sale contract gives them strict liability.
E) The state, since this is a criminal case.

Question 5

Regarding the remedies of a conditional seller, she

A) has the right to possession of the chattel so long as the terms of the conditional sale agreement are being met.
B) loses ownership of the chattel as soon as the buyer makes his final payment.
C) is entitled to use force in recovering goods by self help.
D) retains a lien on the title to the chattel.
E) takes title away from the buyer when he defaults.

Question 6

What is the difference between a chattel mortgage and a conditional sale contract?

A) a conditional sale is a personal obligation of the buyer, whereas a chattel mortgage does not bind the chattel mortgagor personally
B) in a conditional sale contract the security is the property sold, whereas a chattel mortgage can have as security any chattels
C) a chattel mortgage must be registered to affect third parties, whereas a conditional sale agreement does not need to be registered to affect third parties
D) if there is default under a conditional sale contract, the seller can seize the goods and sue the buyer for any deficiency, whereas under a chattel mortgage the chattel mortgagee can only seize the goods
E) none of the above is correct

Question 7

Last Fall, Mrs. Edwards purchased two expensive dresses from Fashions Galore on a conditional sale contract, Now, five months later, she has defaulted on her payments. Fashion Galore should

A) keep all the proceeds from the repossession and resale of the goods.
B) obtain possession as the bailee of the goods purchased.
C) obtain a court order if Mrs. Edwards refuses to give up possession.
D) sue the conditional buyer for the face value of the note.
E) automatically, at the point of default, get title back from Mrs. Edward.

Question 8

A reason that a secured lender should register its secured interest is to:

A) secure the priority of the lender in the event of bankruptcy of the borrower
B) allow the lender to seize the security from the borrower
C) guarantee the lender repayment of the debt
D) prohibit the borrower from reselling the security
E) all of the above

Question 9

Phillip, who has a loan on his car at the bank, has placed his car on consignment at the local used car lot. His law professor tells Phillip that consignments can amount to a secured type of credit. If this is true, who is the creditor?

A) the consignor
B) In this case, the professor is wrong.
C) the next purchaser of the car
D) the consignee
E) the bank

Question 10

Adam Monarch is quite well off. He is selling one of his unincorporated farms and all its equipment to young Carl Gardner. Carl has very little cash but lots of potential for being a good farmer. Adam is willing to finance the sale under the easiest of terms, yet he wants to retain the best security possible. For security, Adam will accept a combination first mortgage and

A) chattel mortgage.
B) second mortgage.
C) pledging of equipment.
D) conditional sale contract.
E) floating charges.

Question 11

A bill of sale can be used as an instrument of credit. Which document is the bill of sale most like when it is used as an instrument of credit?

A) an assignment
B) a consignment agreement
C) a chattel mortgage
D) a negotiable instrument
E) a pledge

Question 12

Regarding security devices, in a the item remains the property of the vendor until the debt is paid, whereas in a _ the property is transferred to the buyer and immediately upon default re- transferred to the vendor.

A) assignment; pledge
B) chattel mortgage; pledge
C) conditional sale; chattel mortgage
D) conditional sale; consignment
E) chattel mortgage; conditional sale

Question 13

An interest in property of a debtor to which a creditor may look in the event of non- payment of the debt is called

A) collateral security.
B) property interest.
C) chattel mortgage.
D) secured property.
E) debenture.

Question 14

Some provinces have provided relief to conditional buyers by

A) making the buyer liable for any deficiency after resale of the goods.
B) allowing the use of the acceleration clause.
C) knowing that the resale of chattels to be "value destructive", they have required the conditional seller to turn over any surplus realized.
D) not allowing any equity position to accumulate with progression of payments.
E) giving recovery rights when debt is paid within a given period of time.

Question 15

Under the terms of most conditional sale assignments to finance companies, the conditional seller remains liable for payment if their conditional buyers should default. This arrangement is known as

A) recourse financing.
B) an equitable assignment.
C) discount financing.
D) factoring.
E) account receivable installment sales.

Question 16

Which one of the following requires permission from the security holder before the item(s) used as collateral can be sold?

A) real estate mortgage
B) floating charges
C) stock- in- trade
D) pledge
E) chattel mortgage

Question 17

This form of personal covenant must be registered pursuant to the provincial Personal Property Security Act. The recording ensures validity against a would- be purchase of secured assets. This could be in reference to

A) one's fiduciary duty.
B) a corporate summons.
C) collusion between creditors.
D) a chattel mortgage.
E) a prior discharge.

Question 18

It is customary in U.S. and Canadian businesses for suppliers and vendors to

A) sell merchandise on a closed account basis.
B) ask for collateral before extending credit.
C) consider the significance of loan security as quite important.
D) minimize the alienation of customers when demanding security.
E) give trade credit upon request.

Question 19

If an owner sells you goods that have been pledged as security for a loan, the claim against those goods is known as

A) a contract pledge.
B) collateral.
C) creditor interests.
D) security interest.
E) a secured transaction.

Question 20

Each of the following may create consensual security interests EXCEPT

A) leases.
B) guarantees.
C) liens.
D) consignments.
E) accounts receivable.

Question 21

Which of the following is not a form of security for bank loans?

A) Assignment of book debts
B) Mortgage of Real Estate
C) Guarantee of a third party
D) Chattel Mortgage
E) Assignment of Office Furniture

Question 22

When dealing with security interest, the failure of a creditor to register

A) will result in a legal offence which invalidates the creditor's interests.
B) may be a matter of too much trouble and expense.
C) will risk that the debtor can prevail in a law suit.
D) allows the provisions in the Sale of Goods Act to govern where there is an innocent third party.
E) would always be quite foolish.

Question 23

Which of the following is not including in the categories of persons to which a bank may loan money under the Bank Act?

A) Aquaculturalists
B) Farmers
C) Fisherman
D) Manufacturers
E) Doctors

Question 24

Self liquidating financing is usually the best form of financing for

A) lawyers.
B) students.
C) doctors.
D) teachers.
E) farmers.

Question 25

Under the common law a creditor can transfer title to goods she does not own.

Question 26

Self liquidating financing is usually the best form of financing for farmers.

Question 27

What advantage does a secured creditor have over an unsecured creditor when they both are forced to collect an overdue account?

Question 28

A financing statement under the PPSA, will usually include a statement of the events that constitute default.

Question 29

For the bank to realize on a section 427 security (Bank Act, 1991), which of the following must the bank receive from the borrower?

A) floating charges
B) a chattel mortgage
C) the standard form of notice-then filed at the nearest land registry office
D) a conditional sale contract
E) power of attorney

Question 30

One of the requirements for the effectiveness of a security interest under the PPSA is that it must "attach".

Question 31

Under a consignment by a manufacturer, the goods remain the property of the manufacturer.

Question 32

Sonny bought a computer from The Bad Guys on a conditional sales contract. Two months later Sonny sold the computer to Fred without mentioning it was not paid for. Can The Bad Guys recover the computer from Fred?

A) Yes, if the security device is properly registered with the province.
B) Yes, directly from Fred, or they can force Sonny to retrieve the computer.
C) Yes, but it would be easier for them to get the money from Sonny.
D) No, since this is a consumer transaction where title is guaranteed.
E) No, provided Fred is an innocent third party.

Question 33

One of the rights of a lending bank in the event a borrower defaults is the right to sell the security without notice to the borrower.

Question 34

An acceleration clause permits a chattel mortgagor to pay off the mortgage more quickly.

Question 35

A properly registered security interest is generally effective against all third parties.

Question 36

Can the chartered banks require security for loans outside the types indicated in the federal Bank Act?

A) Yes, guarantees by third party.
B) Yes, warehouse receipts and order bills of lading.
C) No, only those types of security listed in the Act.
D) Yes, pledge of shares and bonds.
E) Yes, assignment of book debts.

Question 37

What is collateral security?

Question 38

Under the Bank Act, a bank may lend money to a list of borrowers. This list does not include Acquaculturalists.

Question 39

Sometimes conditional sale contracts exist between the manufacturer and the retailer. How does the consumer know she is getting clear title to the goods purchased?

A) She doesn't know for sure, that's wherein lies the problem.
B) In this case the Mercantile Agency Rule would be suspended.
C) The federal Personal Property Security Act guarantees it to consumers.
D) Because if she didn't, it would fly in the face of consumer expectations.
E) By provincial statute-buyer acquires good title if the goods are resold in the ordinary course of business.

Question 40

Milton ordered a fancy telescope from a catalogue- using his bank credit card. When it arrived it seemed quite different from that of the catalogue description. Neither the catalogue company nor the manufacturer would take the telescope back. Milton now wants the chartered bank which issued the credit card to reverse the charges. Does Milton have an legal claim against the bank?

A) No, the bank is a lender to Milton and not an assignee of contracts from sellers.
B) Yes, but who can afford to sue a chartered bank?
C) Yes, the federal Bank Act requires chartered banks to be advocates for consumers in respect to credit card purchases.
D) No, Milton must pursue remedies through the Better Business Bureau
E) Yes, they are the assignee of the seller.

Question 41

What are the remedies of a conditional seller on default by the conditional buyer?

Question 42

Explain some important criteria to consider before granting credit to a prospective borrower.

Question 43

How is it that security devices mislead innocent third parties?

Question 44

How might the assignment of book debts (owed to the assignor) seriously prejudice the position of general creditors and prospective general creditors?

Question 45

Identify in relation to each of the statements below what security device is being described.

Question 46

Once a security interest has been created by an agreement between creditor and debtor, what must be done in a "personal property security system" to protect the security of competing interests of third parties?

Question 47

Sometimes a lease agreement can be construed as a security agreement rather than a true lease. Why is this distinction important for the lessor to determine?

Question 48

Does a bank have a right of lien against property left in its safekeeping by one of its borrowers?

Question 49

Explain what is meant by the term "financing leases".

Question 50

What is "perfection' of a secured interest under personal property security legislation? Why is "perfection' relevant to the rights of a secured lender?

Question 51

Charles Brown, a fisherman, gave security to a bank under section 427 of the Bank Act in order to finance the purchase of a fishing boat from Triumph Ship Builders Ltd. The bank duly registered the standard form of notice with the Bank of Canada in relation to the fishing boat. A year later, Charles sold the fishing boat to Sea Traders Inc., who were marine mercantile agents. Sea Traders were unaware of the bank's section 427 security and made no attempt at searching for encumbrances against the fishing boat. Sea Traders in the normal course of business sold the fishing boat to Harold Walker, a bona fide purchaser for value. Charles left the country permanently after his sale to Sea Traders. Discuss the bank's position against each of Sea Traders, Charles Brown, and Harold Walker.

Question 52

In what way could a consignment contract be an indirect type of credit? Use an example to explain.

Question 53

For consumer goods, how much value to a creditor is the right of repossession?

Question 54

Alvin Smith bought a car from XYZ Autos Inc., a car dealership, for the price of $15,000. Alvin paid $5,000 cash and entered into a conditional sales contract to finance the remaining $10,000. Alvin had obtained the $5,000 from his bank and executed a chattel mortgage for $9,000 in favour of his bank. This represented $5,000 for the deposit and $4,000 in existing indebtedness. After Alvin obtained the car, he provided the bank with a description and its serial number. The bank completed the chattel mortgage with this information and registered a financing statement under the prevailing personal property security legislation. XYZ Autos Inc. similarly registered a financing statement but was three days later than the bank. Alvin subsequently defaulted under both securities. Which of the creditors has priority to the car and why?