Deck 11: Law of Credit and Finance

Question 1

If the mortgagees dispose of the land and building,and the proceeds are sufficient to pay the first mortgage in full,and one half of the second,the second mortgagee may claim for the balance in the bankruptcy as an unsecured creditor.

Answer 1

True

Question 2

Municipal taxes take priority over trade creditors in the distribution of the assets of the bankrupt firm.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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 interest in the automobile under the provincial personal property security registration legislation.A few months after the sale,Jones defaulted on the loan,and the bank discovered that Doe was in possession of the automobile.
Doe has a good and clear title to the automobile,because he purchased it without knowledge of the bank's claim.

Question 5

If the first and second mortgagees so desire,they may surrender their security to the trustee,and claim as unsecured creditors in the bankruptcy.

Question 6

Baker entered into a building contract with Able under which Baker agreed to construct a garage on Able's lot for $6,000.Lumber Supply Company supplied the lumber at Baker's request,but when Baker failed to pay for the material within a few weeks after it was supplied,the Company filed a construction lien for $3,000 against Able's property.
If Able ignores the lien claim,and pays the entire $6,000 to Baker,Able may be obliged to pay an amount equivalent to the sum he was required to hold back over again.

Question 7

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 interest in the automobile under the provincial personal property security registration legislation.A few months after the sale,Jones defaulted on the loan,and the bank discovered that Doe was in possession of the automobile.
Jones is liable to Doe for breach of warranty of title,if the bank should seize the automobile.

Question 8

Baker entered into a building contract with Able under which Baker agreed to construct a garage on Able's lot for $6,000.Lumber Supply Company supplied the lumber at Baker's request,but when Baker failed to pay for the material within a few weeks after it was supplied,the Company filed a construction lien for $3,000 against Able's property.
When Able 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 are less than the amount of the claim.

Question 9

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 interest in the automobile under the provincial personal property security registration legislation.A few months after the sale,Jones defaulted on the loan,and the bank discovered that Doe was in possession of the automobile.
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.

Question 10

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

Question 11

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 interest in the automobile under the provincial personal property security registration legislation.A few months after the sale,Jones defaulted on the loan,and the bank discovered that Doe was in possession of the automobile.
The bank has recourse against only Jones for the amount owing.

Question 12

Baker entered into a building contract with Able under which Baker agreed to construct a garage on Able's lot for $6,000.Lumber Supply Company supplied the lumber at Baker's request,but when Baker failed to pay for the material within a few weeks after it was supplied,the Company filed a construction lien for $3,000 against Able's property.
Lumber Supply Company cannot file a lien against Able's property,because the company is not a subcontractor or workman.

Question 13

Under the Bankruptcy and Insolvency Act,employees have first-priority claims against the assets of the bankrupt firm.

Question 14

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

Question 15

Nogood Service Centre encountered financial setbacks over a period of time,and eventually found itself insolvent.Among its creditors were the first and second mortgagees of the land and building that Nogood owned,trade creditors,employees who had not been paid wages,and the municipality,for arrears of property taxes.Nogood decides not to make a proposal to its creditors.
Nogood may make a voluntary assignment in bankruptcy,if it is insolvent.

Question 16

Nogood Service Centre encountered financial setbacks over a period of time,and eventually found itself insolvent.Among its creditors were the first and second mortgagees of the land and building that Nogood owned,trade creditors,employees who had not been paid wages,and the municipality,for arrears of property taxes.Nogood decides not to make a proposal to its creditors.
Nogood must have committed an act of bankruptcy within the preceding six months,and owe its creditors at least $1,000 before the creditors may take bankruptcy proceedings against it.

Question 17

On default,the first and second mortgagees may realize on the security of the land and building,rather than claim as creditors in the bankruptcy proceedings.

Question 18

Baker entered into a building contract with Able under which Baker agreed to construct a garage on Able's lot for $6,000.Lumber Supply Company supplied the lumber at Baker's request,but when Baker failed to pay for the material within a few weeks after it was supplied,the Company filed a construction lien for $3,000 against Able's property.
The lumber company has no right of lien because it has a contractual relationship with Baker only,and must look to Baker for payment.

Question 19

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

Question 20

The employees of the company are treated in the same manner as the trade creditors for the payment of the entire amount of their wage claims.

Question 21

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

Question 22

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

Question 23

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 24

Any funds remaining after the claims of the employees,the trustee,and the municipality would be distributed to the trade creditors.

Question 25

Expenses of the trustee take priority over municipal taxes in the distribution of assets of the bankrupt firm.

Question 26

George's sole proprietorship is nearing insolvency rapidly.He goes to New York for six months to solicit funds for a bailout.His worried creditors petition his bankruptcy.They will fail.

Question 27

A corporation becomes a legal bankrupt when its total liabilities exceed total assets.

Question 28

Where debts exceed $1,000,an insolvent person is,upon petition of creditors,a bankrupt person.

Question 29

A proposal to creditors,if rejected by them,creates automatically a bankrupt in the proposer-debtor.

Question 30

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

Question 31

Once a person is petitioned into bankruptcy,a personal balance sheet at that moment would show zero assets.

Question 32

Trade creditors share rateably on the basis of "cents on the dollar" of their claims.

Question 33

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

Question 34

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

Question 35

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 36

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

Question 37

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

Question 38

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

Question 39

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 40

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

Question 41

Under the Bankruptcy and Insolvency Act,a person in financial difficulty has three distinct routes upon which a start toward a resolution of his or her problems can commence;two are voluntary,and one is involuntary.

Question 42

An inspector is agent for the bankrupt,overseeing the dealings of the trustee.

Question 43

When an asset subject to a security interest fails to satisfy the debt owing to that creditor,that creditor ranks as a preferred creditor to the balance of the estate.

Question 44

Doe purchased a vehicle from Jones for $1,000.Unknown to Doe,Jones had used the vehicle as security for a loan from his bank,and the bank had registered its security in the vehicle 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 vehicle.Which of the following are true?

A)The bank is not entitled to seize the vehicle 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 vehicle 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 vehicle 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 45

To be effective,the assignment of a chattel mortgage must be absolute.

Question 46

Appliance Paradise sold Carson a refrigerator by conditional sale agreement,duly registered.Some months later,in the course of moving to another province,Carson offered the fridge 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 47

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 48

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

A)trust fund,suppliers of goods and services.
B)holdback,subcontractors.
C)surplus,subcontractors.
D)holdback,suppliers of goods and services.
E)right of action,subcontractors.

Question 49

Consider this estate: Assets of $135,000 that include a boat valued at $38,000 subject to a security interest of $60,000.There are tax arrears of $7,000;one secured creditor;and Smith,an unsecured creditor,owed $120,000.Smith will receive $90,000.

Question 50

No claim against the remaining assets of a bankrupt person is stronger than that of the Crown.

Question 51

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 52

In the absence of fraud,a bankrupt with an estate of $62,000 and general debts of $107,000 is as liable to receive a discharge as a bankrupt with an estate of $27,000 and general debts of $7,000.

Question 53

Any Canadian corporation with outstanding issues of bonds may avail itself of the Companies' Creditors Arrangement Act,rather than make an assignment in bankruptcy under the Bankruptcy and Insolvency Act.

Question 54

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)chattel mortgage,mortgage is perfected,conditional sale,final payment is made.
D)hire-purchase,buyer opts to exercise the purchase,conditional sale,final payment is made.
E)none of these

Question 55

Where a formal proposal made by a debtor is rejected by his or her unsecured creditors,the debtor is deemed to have made an assignment in bankruptcy.

Question 56

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 but a.

Question 57

If on bankruptcy the bankrupt's cash account rests at zero,even secured creditors will receive nothing.

Question 58

Where a formal proposal made by a debtor is rejected by his or her unsecured creditors,the debtor is deemed to be insolvent.

Question 59

A secured creditor under a chattel mortgage has

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 these.

Question 60

To be effective,the assignment of a chattel mortgage by the lender must be absolute,and notice of the assignment must be given to the chattel mortgagee.

Question 61

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

Question 62

Acme Widget Company grants to the Empire Bank on January 15,2002,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 12,2003,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 2003,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.

Question 63

Where a consumer debtor has debts less than ___________ ,excluding those secured by the person's principal residence,he or she may use the summary administration procedures of the Bankruptcy and Insolvency Act.

A)$1,000.
B)$5,000.
C)$25,000.
D)$50,000.
E)$75,000.

Question 64

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

Question 65

You move to a large,expensive city to take up new employment following graduation.After two years,in reconciling your debts,you find that this new lifestyle with its expenses,and perhaps some inattention on your part,has left you in debt well beyond your means.All new sources of cash have been exhausted family,friends,etc.Describe your next series of moves.

Question 66

The Bankruptcy and Insolvency Act provides for the stay of all proceedings and executions against an individual upon bankruptcy,or the acceptance of a proposal.Discuss the rationale and effect of this provision.

Question 67

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

Question 68

Which of the following are true?

A)a receiving order or a voluntary assignment will create a bankruptcy.
B)a bankrupt can be fined for his actions leading to bankruptcy,and a "proposal" can stave off bankruptcy.
C)bankruptcy is a federal matter,and inspectors are appointed by creditors.
D)a and c.
E)All of these.

Question 69

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

Question 70

Consider the following quotation: "The Bankruptcy and Insolvency Act just gives people a free ride.People can run up debts and then walk away from them,letting their creditors take the fall.That's not right.In the good old days,debtor's prison took care of people with that kind of irresponsible attitude." What aspects of the philosophy are behind the Bankruptcy and Insolvency Act,and what provisions of the act would you bring to this person's attention?

Question 71

"The existence and degree of development of bankruptcy proceedings can be taken as a reasonably accurate measure of the development of a market economy." Discuss this statement,treating the significance to an economic system of having bankruptcy proceedings,the question of priorities,and presence of criminal sanctions.

Question 72

A married couple,with $25,000 in debts owed to each of 5 general creditors,plus $15,000 owed to a conditional sale vendor for home furnishings,sold their $100,000 home to the wife's parents for $50,000 and moved to an apartment.Thereafter,they made a voluntary assignment,indicating remaining assets of the $50,000 cash and $15,000 in furnishings.Each general creditor will receive

A)$10,000.
B)$11,608.
C)$20,000.
D)$20,535.
E)None of these.

Question 73

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 74

An unpaid supplier of goods who is an unsecured creditor,but can identify the goods supplied out of the inventory of a commercial bankrupt,is entitled to reclaim the goods if the supply was made

A)within the 15 days preceding the bankruptcy.
B)within the 30 days preceding the bankruptcy.
C)within the 45 days preceding the bankruptcy.
D)within the 60 days preceding the bankruptcy.
E)within the 90 days preceding the bankruptcy.

Question 75

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 76

McBryde owned a commercial property that required considerable renovation.On September 7,she engaged Anderson Construction to perform the general contracting and project management.Anderston quoted a price of $180,000 for all the work.Anderson subcontracted work to a number of suppliers in the carpentry,plumbing,and electrical trades.On November 14,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,each supplier registered valid liens,in the amount owed to him,against McBryde's property.What should McBryde have done on November 14? What should she do on December 13? If she does the "right thing" throughout,what will be the disposition of this matter? What are the alternative endings if she does not do the "right thing" throughout?

Question 77

Where an act of bankruptcy has occurred under the Bankruptcy and Insolvency Act,_________________ may file a petition for a receiving order.

A)any creditor.
B)any secured creditor.
C)any creditor owed in excess of $100.
D)the debtor.
E)a and d.

Question 78

A bankrupt tour operator has assets of $485,000,made up of a boat worth $400,000 and prepaid docking rights worth $85,000.Claims include a security interest by a bank for $425,000 in the boat,$25,000 in unpaid taxes,and $25,000 owed to each of two general creditors.Each general creditor will receive

A)$17,500.
B)$20,000.
C)$20,000,with $20,000 to taxes.
D)$21,250.
E)$21,250,with $21,250 to taxes.

Question 79

The assets of a bankrupt are administered by the __________,whose actions are reviewed by the ___________.

A)superintendent in bankruptcy,inspectors.
B)trustee,creditors.
C)liquidator,trustee.
D)trustee,inspectors.
E)superintendent in bankruptcy,creditors.

Question 80

In the case of a deceased bankrupt who has the following creditors 1.a year's worth of municipal taxes
2)trustees' fees
3)income tax owing
4)a month's wages to an employee
5)a month's rent
The priority of payment would be in the following order,from highest to lowest:

A)3,2,1,4,5.
B)3,1,2,4,5.
C)3,1,2,5,4.
D)2,4,1,5,3.
E)2,3,1,4,5.