Deck 29: Security for Debt

Question 1

Which debt instruments do public corporations utilize to raise money from the market?

A) Liens, bonds.
B) Liens, debentures.
C) Bonds, debentures.
D) Promissory notes, debentures.
E) Promissory notes, liens.

Answer 1

C

Question 2

Wen purchased an automobile from Nick for $10,000. Unknown to Wen, Nick had used the automobile as security for a loan from his bank, and the bank had registered its security interest in the automobile under the provincial personal property security registration legislation. A few months after the sale, Nick defaulted on the loan, and the bank discovered that Wen was in possession of the automobile. The bank is not entitled to seize the automobile, because it had not given Wen notice of its claim against the vehicle before Wen purchased it.

Answer 2

False

Question 3

In what transaction does title not transfer?

A) Hire-purchase agreement.
B) Chattel mortgage.
C) Mortgage.
D) Conditional sales contract.
E) Title transfers in all of these transactions.

Answer 3

A

Question 4

A is an unsecured creditor in a car loan agreement dated January 1, 2020. B is a secured creditor in an unregistered chattel mortgage dated January 2, 2020.
C is a secured creditor in a registered chattel mortgage dated January 3, 2020 and registered on January 13, 2020.
D is a secured creditor in a registered chattel mortgage dated January 4, 2020 and registered on January 12, 2020.
E is a secured creditor in a registered chattel mortgage dated and registered on January 5, 2020.
Which of the following creditors has the highest priority?

A) A
B) B
C) C
D) D
E) E

Question 5

The purpose of _______________________ is to provide ___________________ with ______________________.

A) a Chattel Mortgage; the mortgagee; possession of the goods; but not title
B) Personal Property Legislation; third parties; notice of prior interests in goods
C) a debenture; debtors' flexibility to sell assets; a fixed charge crystallizing on default
D) a lien; any subcontractor, rights directly against an owner of goods or land
E) All responses are correct except a chattel mortgage.

Question 6

Jeff entered into a building contract with Mike under which Jeff agreed to construct a garage on Mike's lot for $60,000. Lumber Supply Company supplied the lumber at Jeff's request, but when Jeff failed to pay for the material within a few weeks after it was supplied, the company filed a construction lien for $30,000 against Mike's property. The lumber company has no right of lien because it has a contractual relationship with Jeff only, and must look to Jeff for payment.

Question 7

Security under Section 427 of the Bank Act gives a Chartered Bank security

A) against bona fide purchasers for value.
B) in goods not yet in existence.
C) against any bulk sale of a corporation's assets.
D) equivalent to that which would otherwise be a mortgage bond.
E) in a wider range of consumer borrowing than Trust Companies.

Question 8

Which transaction is not registered under the Personal Property Securities Act?

A) Chattel mortgage.
B) Conditional sales contract.
C) Purchase money securities interest.
D) Section 427 Bank Act security.

Question 9

A secured creditor under a chattel mortgage has

A) a right to bring either sale or foreclosure proceedings on default, at its option.
B) a right to sue for deficiency after foreclosure.
C) a right to assign the mortgage, but only on the consent of the debtor.
D) the title and the obligation to insure the goods.
E) All of the responses are correct.

Question 10

Appliance Paradise sold Carson a refrigerator by Conditional Sale Agreement, duly registered. Carson some months later, in the course of moving to another province offered it to a neighbour, Jones, who was helping Carson load his van. Jones recognized it as a bargain and in good faith paid Carson. On demand from Appliance Paradise, Carson refused to make further payments. Jones refuses to pay, citing that he is a bona fide purchaser for value. Appliance Paradise

A) has no action against Jones.
B) may seize and sell the refrigerator, and sue either Carson or Jones for any deficiency.
C) may seize and sell the refrigerator, and sue Carson for any deficiency.
D) may seize and sell the refrigerator, and sue Jones for any deficiency.
E) has no further action against Carson.

Question 11

On graduation, you start a small business consulting service operating from leased premises, and one year into business you borrow $25,000 from a bank. The best (being the most useful) security the bank can likely get from you is probably

A) a chattel mortgage.
B) a bill of sale.
C) an assignment of book debts.
D) a conditional sale agreement.
E) a right of lien.

Question 12

Wen purchased an automobile from Nick for $10,000. Unknown to Wen, Nick had used the automobile as security for a loan from his bank, and the bank had registered its security interest in the automobile under the provincial personal property security registration legislation. A few months after the sale, Nick defaulted on the loan, and the bank discovered that Wen was in possession of the automobile. The bank only has recourse against Nick for the amount owing.

Question 13

Wen purchased an automobile from Nick for $10,000. Unknown to Wen, Nick had used the automobile as security for a loan from his bank, and the bank had registered its security interest in the automobile under the provincial personal property security registration legislation. A few months after the sale, Nick defaulted on the loan, and the bank discovered that Wen was in possession of the automobile. Wen has a good and clear title to the automobile, because he purchased it without knowledge of the bank's claim.

Question 14

Jeff entered into a building contract with Mike under which Jeff agreed to construct a garage on Mike's lot for $60,000. Lumber Supply Company supplied the lumber at Jeff's request, but when Jeff failed to pay for the material within a few weeks after it was supplied, the company filed a construction lien for $30,000 against Mike's property. When Mike is notified of the registration of the lien, he must hold back the amount of the lien, or whatever funds he has in his hands at the time, if they should be less than the amount of the claim.

Question 15

A property owner is required to maintain a _____________ on a project for the benefit of ________________.

A) trust fund; suppliers of goods and services
B) hold-back; subcontractors
C) surplus; subcontractors
D) hold-back; suppliers of goods and services
E) right of action; subcontractors

Question 16

Under a _____________ agreement title in the goods passes to the buyer when the _______________ but under a _______________ agreement title passes to the buyer when the __________________.

A) conditional sale; buyer opts to exercise the purchase; hire-purchase; final payment is made
B) hire-purchase; seller opts to exercise the purchase; conditional sale; final payment is made
C) hire-purchase; seller opts to exercise the purchase; chattel mortgage; final payment is made
D) hire-purchase; buyer opts to exercise the purchase; chattel mortgage; final payment is made
E) hire-purchase; buyer opts to exercise the purchase; conditional sale; final payment is made

Question 17

Wen purchased an automobile from Nick for $10,000. Unknown to Wen, Nick had used the automobile as security for a loan from his bank, and the bank had registered its security interest in the automobile under the provincial personal property security registration legislation. A few months after the sale, Nick defaulted on the loan, and the bank discovered that Wen was in possession of the automobile. Nick is liable to Wen for breach of warranty of title, if the bank should seize the automobile.

Question 18

Which transaction is the most suitable way for a bank to take inventory as security?

A) Chattel mortgage.
B) Conditional sales contract.
C) Purchase money securities interest.
D) Section 427 Bank Act security.
E) None of these.

Question 19

Jeff entered into a building contract with Mike under which Jeff agreed to construct a garage on Mike's lot for $60,000. Lumber Supply Company supplied the lumber at Jeff's request, but when Jeff failed to pay for the material within a few weeks after it was supplied, the company filed a construction lien for $30,000 against Mike's property. Lumber Supply Company cannot file a lien against Mike's property because the company is not a subcontractor or workman.

Question 20

Doe purchased an automobile from Jones for $1,000. Unknown to Doe, Jones had used the automobile as security for a loan from his bank, and the bank had registered its security in the automobile under the provincial personal property security registration legislation. A few months after the sale, Jones defaulted on his loan, and the bank discovered that Doe was in possession of the automobile. Which of the following are true?

A) The bank is not entitled to seize the automobile because it had not given Doe notice of its claim against the vehicle before Doe purchased it.
B) The bank is not entitled to seize the automobile because Jones had not given notice to Doe of the bank's claim against the vehicle before Doe purchased it.
C) Doe has a good title to the automobile because he purchased it as a bona fide purchaser, for value, without notice.
D) Jones is liable to Doe for breach of implied condition of title should the bank seize the automobile.
E) Jones is liable to Doe for breach of implied warranty of title should the bank seize the automobile.

Question 21

Under a conditional sale agreement, the purchaser never gets title until the final payment is made.

Question 22

A purchaser under a conditional sales agreement endangers his equity of redemption by falling in arrears on his payments.

Question 23

It tends to be conventional debt transactions which give rise to the use of chattel mortgages.

Question 24

Janicka purchased a snowmobile from Andrew under a conditional sale agreement. Andrew registered the conditional sale agreement pursuant to the requirements for registration set down in the provincial legislation. Janicka later sold the snowmobile to Gary, who purchased the machine without making a search for conditional sale agreements. Gary purchased the snowmobile free of any claims by Andrew, because he had no notice of the conditional sale agreement.

Question 25

Where a creditor is financing the inventories of a manufacturer of life preservers, the most sensible security for all involved is a floating charge.

Question 26

Janicka purchased a snowmobile from Andrew under a conditional sale agreement. Andrew registered the conditional sale agreement pursuant to the requirements for registration set down in the provincial legislation. Janicka later sold the snowmobile to Gary, who purchased the machine without making a search for conditional sale agreements. If Gary pays Andrew the balance owing in order to retain the snowmobile, Janicka is free of the conditional sale agreement.

Question 27

A merchant who in the ordinary course of business deals in quantities of grain exceeding 50 metric tonnes would not find these transactions falling within the jurisdiction of the Bulk Sales Act.

Question 28

A security interest is attached on creation of the security instrument and perfected upon either registration or possession by the creditor.

Question 29

Outline the reasons for lien legislation, its benefits to industry, obligations upon "owners," and as an example, trace the events of a lien involving an "owner" who clearly did not realize his obligations.

Question 30

Discuss the characteristics of the two major corporate debt instruments, highlighting their similarities and differences, and give concrete examples of appropriate use of each.

Question 31

Under a chattel mortgage, the debtor starts out with title to the goods, gives it to the creditor, and earns it back upon the final payment.

Question 32

Where a manufacturer has registered a conditional sale agreement on the sale of the goods to a retailer, a member of the general public who is a customer of the retailer will, on purchase, receive good title to the goods despite the registration of the prior agreement. In addition, that customer need not perform any searches.

Question 33

A security interest is perfected on creation of the security instrument and attaches upon either registration or possession by the creditor.

Question 34

The maintenance of a prescribed hold-back defeats all claims for liens even if they exceed the amount held back, and an order vacating the liens shall issue.

Question 35

Janicka purchased a snowmobile from Andrew under a conditional sale agreement. Andrew registered the conditional sale agreement pursuant to the requirements for registration set down in the provincial legislation. Janicka later sold the snowmobile to Gary, who purchased the machine without making a search for conditional sale agreements. If Janicka defaults in payment to Andrew, Andrew may seize the snowmobile from Gary.

Question 36

A bricklayer unpaid for his last week's work may look to the landowner to pay his wages rather than pursue his employer.

Question 37

Janicka purchased a snowmobile from Andrew under a conditional sale agreement. Andrew registered the conditional sale agreement pursuant to the requirements for registration set down in the provincial legislation. Janicka later sold the snowmobile to Gary, who purchased the machine without making a search for conditional sale agreements. If Janicka defaults in payment, and Andrew seizes the snowmobile, Gary would have a right of action against Janicka.

Question 38

Jeff entered into a building contract with Mike under which Jeff agreed to construct a garage on Mike's lot for $60,000. Lumber Supply Company supplied the lumber at Jeff's request, but when Jeff failed to pay for the material within a few weeks after it was supplied, the company filed a construction lien for $30,000 against Mike's property. If Mike ignores the lien claim, and pays the entire $60,000 to Jeff, Mike may be obliged to pay an amount equivalent to the sum he was required to hold back over again.

Question 39

Where there is a security interest in goods, a bona fide purchaser for value with notice can obtain good title to the goods.

Question 40

A security interest must not be attached before it is perfected.

Question 41

Discuss how the internationalization of business affects the practical legal aspects of security for debt. Give some examples to illustrate your discussion.

Question 42

McBryde owned a commercial property which required considerable renovation. On September 7^th, she engaged Anderson Construction to perform the general contracting and project management, who quoted a price of $180,000 for all of the work. Anderson subcontracted work to a number of suppliers in the carpentry, plumbing, and electrical trades. On November 14^th, Anderson presented a bill for $60,000 for work done to that point. Had the truth been known, Anderson was an incompetent manager, and had the following accounts outstanding relating to the project: Albert Electric, $9 000; Rainbow Interiors, $12,000; Carson's Carpentry, $22,000; Hot-Heat Furnace and Duct, $7,700; and Hytown Construction Supply, $21,500.
In the first week of December, Anderson moved to another province leaving behind his business debts. On December 12^th, each supplier registered valid liens, in the amount owed to them, against McBryde's property. What should McBryde have done on November 14^th? What should she do on December 13^th? If she does the "right thing" throughout, what will be the disposition of this matter? What is the alternative ending(s) if she does not do the "right thing" throughout?

Question 43

Seabreeze Outboard and Outdoor Shop Limited was offering for sale used reconditioned snowmobiles. Tim was interested in one of the snowmobiles and purchased it. Sometime after his purchase he found that Empire Financial, which held a conditional sale agreement over the snowmobile with Seabreeze, had petitioned the bankruptcy of Seabreeze. On seizing the company's files and learning the whereabouts of the goods sold that were covered by the conditional sale agreement, Empire had tracked down Tim and had ultimately removed the snowmobile from Tim's yard. Tim was outraged but admitted that he had not searched the province's personal property security registry to determine whether or not the snowmobile was subject to a conditional sale agreement before he purchased it. Discuss the likely outcome of this situation.

Question 44

An assignment of book debts is a common corporate financing method. Describe such an assignment, the two ways debts may be collected and why each may be preferred by the assignor. Further, describe the notion of crystallization as it would apply in this context.

Question 45

Compare and contrast the conditional sales agreement and the chattel mortgage, with respect to their principal differences, similarities and uses.

Question 46

Acme Widget Company grants to the Empire Bank on January 15, 2018, a debenture over all fixed assets and chattels of the company. The terms of the debenture are such that it represents a security interest in all present and future assets and chattels of the company. On April 12, 2019, Acme purchases an advanced Widget press and executes a chattel mortgage in favour of Downtown Finance Company in the amount of the purchase price of the press. In December 2019, Acme falls on hard financial times and a receiver is appointed under the terms of the debenture. The receiver realizes on all fixed assets of the company, converting them to cash, including the advanced Widget press. The chattel mortgagee brings suit against the receiver for conversion of the press. Discuss the priorities, and the nature of the claims of both the Empire Bank and Downtown Finance Company with respect to the advanced Widget press or the funds realized from its sale.