Question 1

Orange Bank was going to lend Fasgo Inc $1 million.As security for the repayment of the loan, Fasgo was going to give Orange Bank a general security interest in all its present and future assets.The parties have decided that the agreements will be signed and the financing will be completed on Friday.Orange Bank should file a financing statement to register its interest a few days before the completion of the transaction because

Accepted Answer

The answer of Orange Bank was going to lend Fasgo...

Question 2

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 did not attach because the agreement for the line of credit had not yet been entered into and no money had been advanced. Therefore, Melanie's security interest takes priority as it was properly perfected through filing a financing statement. The amount of money lent and any negotiations that may have taken place are irrelevant in determining priority.

Question 3

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

In order for the bank's security interest to attach to the CD-burning equipment, there needs to be a written agreement and it needs to be recorded. Since there was no written agreement, the bank's interest never attached to the equipment and therefore they cannot enforce their security interest against Record Supply.

Question 4

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, 2011.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, 2012, 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. Under the UCC, a security interest in inventory is perfected when a financing statement is filed, and priority is given to the first to file or perfect their interest. While TevCo has a purchase money security interest, this only gives priority over other security interests in the same collateral if notice is given to the prior secured party within certain time frames. Since TevCo did not give notice to the bank, the bank's prior perfected security interest takes priority.

Question 5

Which of the following best describes why personal property security legislation requires that a secured party in possession of collateral act in a commercially reasonable way when disposing of it?

Accepted Answer

Secured parties are primarily focused on recovering the amount owed to them, which may not always align with obtaining the best possible price for the collateral. The legislation ensures that they act in a way that is fair and reasonable in the marketplace.

Question 6

Comerica Bank is considering lending $50 000 to Piat Co, a farm equipment dealer that carries on business across the country and has its head office in Toronto.Piat will use the money to build an addition to its show room in Regina, Saskatchewan.Comerica wants to take a security interest in Piat's farm equipment inventory in all provinces.Which of the following best describes the searches that Comerica should do to assess the value of such a security interest? Comerica should search

Accepted Answer

Comerica should search the registries under the personal property security laws of each province where Piat Co operates, as well as the registry under the Bank Act, to fully assess the value of the security interest in Piat's farm equipment inventory across the country.

Question 7

The notice filing systems in place in most provinces have which of the following advantages?

Accepted Answer

A secured party can perfect its security interest by filing a financing statement electronically.

Question 8

Jovan Co owns a building in Winnipeg in which Saturn Shoes Inc has rented a store premises since 2000.In 2012, Galaxy Shoes Inc agreed to supply Saturn with its inventory of shoes on credit.Under its agreement with Saturn, Saturn gives Galaxy a security interest in its shoe inventory.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

A landlord's distraint right gives the landlord a right to seize the tenant's goods on the premises to satisfy unpaid rent. However, this right is subject to the rights of secured creditors who have registered their security interests under the Personal Property Security Act. In this case, Galaxy has registered its security interest in Saturn's shoe inventory, so its interest takes priority over Jovan's distraint right.

Question 9

Marissa Inc carries on an automobile parts manufacturing business in Ontario.Marissa has just finished negotiating a loan in the amount of $50 million 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

When a debtor gives a "security interest" in all of the corporation's present and future assets, it means that the creditor (in this case, National Bank) has a lien on all of Marissa's assets. This means that Marissa cannot sell any of its assets without the consent of National Bank, because any proceeds from the sale of those assets would go towards paying off the loan. However, there is an exception for inventory sold in the ordinary course of business. As long as Marissa is not trying to sell off its entire inventory in an effort to avoid paying off the loan, it can continue to operate its business and sell products to its customers.

Question 10

In August, Shazad borrowed $20 000 from the Bank of Nova Scotia in order to finance his pool cleaning business.The bank and Shazad entered into a general security agreement under which the bank took a security interest in all of the present and future assets of Shazad.Jacqueline is a car mechanic who did some repairs in September on a truck that Shazad uses to carry on his business.The truck is still in her shop in Hamilton, Ontario.Shazad has not paid Jacqueline the $2000 bill she gave him in September for repairs to the truck, and he is in default under his loan agreement with the bank.Which of the following is TRUE?

Accepted Answer

Jacqueline's possessory lien on the truck, which arises due to her having possession of the truck for the purpose of repairs and not being paid, generally has priority over the bank's security interest under the law, even if the bank's interest was registered first.

Question 11

Jerome is a farmer who has just agreed to borrow $100 000 from the Bank of Montreal to buy some new farm equipment.He has given the bank a security interest under s 427 of the Bank Act.Which of the following statements is FALSE?

Accepted Answer

Bank Act security does not always have priority over all prior registered provincial security interests; priority can depend on various factors, including the timing of registration and specific provincial laws.

Question 12

The Canadian Imperial Bank of Commerce has lent $100 000 to Cryo Corp, a corporation manufacturing medical equipment.Cryo carries on business in Ontario.The bank has taken a security interest in Cryo Corp's inventory under s 427 of the Bank Act.Which of the following is TRUE?

Accepted Answer

According to the Bank Act, the bank's security interest in Cryo Corp's inventory is automatically protected, but to perfect the security interest, the bank should also register its interest with the office of the Bank of Canada nearest Cryo's place of business and by filing a financing statement under the Ontario Personal Property Security Act. This is because the security interest in the inventory is governed by provincial law, and registration under the PPSA is necessary to make the security interest enforceable against third parties. Therefore, the correct choice is B.

Question 13

Oneal carries on a wholesale toy distribution business.He sells to his customers on credit, giving them 30 days to pay.Oneal is negotiating for an operating line of credit and his bank has asked him to assign his receivables to them as security for his obligations under the line of credit.Assuming that Oneal agrees to the assignment, which of the following is TRUE?

Accepted Answer

If Oneal agrees to assign his receivables to the bank, he will be permitted to continue to collect his own receivables and carry on his business as usual, unless he defaults on his loan and the bank exercises its rights pursuant to the assignment agreement. The customers will still pay their accounts to Oneal, who will then forward the payments to the bank to repay the loan. If Oneal defaults, the bank will have the right to collect the receivables directly from the customers. Option A is incorrect because customers will not have to pay their accounts to the bank. Option B is incorrect because if Oneal's receivables are more than the amount of the loan, the surplus will not automatically be the bank's. Option D is incorrect because Oneal will still have to collect his receivables himself. Option E is incorrect because if Oneal defaults under the operating line of credit, his customers will still have to pay what they owe him.

Question 14

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

Without the special rules for purchase money security interests, a subsequent supplier of goods would not be entitled to first priority for its security interest in the goods supplied if there were already other secured parties with security interests in after-acquired property. This would make it difficult for suppliers to obtain financing and could potentially hinder the ability of debtors to obtain necessary inventory.

Question 15

Battleford Bank lent Artegal Manufacturing Inc $50 000.The loan is secured by a general security agreement under which Artegal has given Battleford Bank a security interest in all of its equipment.The agreement provides that Artegal must deliver financial statements to the Bank every three months.Failure to do so is defined as a default under the agreement.Artegal fails to deliver financial statements for a three-month period, though it has not missed any loan payments.Which of the following is TRUE?

Accepted Answer

Artegal has committed a default as defined in the security agreement by failing to deliver financial statements. Therefore, Battleford Bank may take enforcement action, which includes seizing the equipment under the security interest. The fact that Artegal has not missed any loan payments is irrelevant in this case.

Question 16

Donaldo China Inc is an importer of plates operating in Toronto.It borrowed $100 000 from Barings Bank and, in a written agreement, gave the bank a security interest in its inventory.The bank filed a financing statement to register its security interest for two years in 2010.The bank's registration expired in December 2012.In April 2013, Donaldo becomes bankrupt.A trustee in bankruptcy is appointed to administer the estate of Donaldo.Which of the following statements is TRUE?

Accepted Answer

Barings Bank's security interest was not renewed after the two-year period, so the security interest is no longer valid. As a result, the trustee in bankruptcy will not consider it a secured claim and will treat it as an unsecured debt.

Question 17

Perfection of a security interest in collateral means that

Accepted Answer

When a security interest is perfected by filing a financing statement, it generally ranks ahead of any interest perfected after the date of registration as well as unperfected security interests in the same collateral. Option A and D are not correct as there can be multiple security interests in the same collateral, and only unperfected interests are affected by perfection. Option B is incorrect as a perfected interest ranks ahead of all other interests, not just unperfected ones. Option E is incorrect as other creditors can obtain a perfected interest, but it would rank behind the previously perfected security interest.

Question 18

The registration systems established under provincial personal property security laws in most provinces are superior to the systems that existed previously.Which of the following best describes why the new systems are better?

Accepted Answer

The answer of The registration systems established under provincial personal...

Question 19

Able Finance Corp carries on a lending business in Saint John, New Brunswick.Athos Transport has asked Able to acquire a truck trailer and then lease it to Athos for five years in return for monthly payments which will cover the full amount of the purchase price plus 10 percent.At the end of the lease term, Athos has an option to buy the trailer for $100.Assuming that Able and Athos enter into this transaction, which of the following is TRUE? The New Brunswick Personal Property Security Act

Accepted Answer

The answer of Able Finance Corp carries on a lending...

Question 20

Info-Tech Ltd is a distributor of computers.Info-Tech borrowed $500 000 from the Bank of Montreal in 2008.In its written agreement, Info-Tech agreed pay back the loan over four years.As security for the loan, it gave the bank a security interest in all of its present and future assets.The bank never filed a financing statement to perfect its interest.In September 2009, Info-Tech still owed $400 000 to the bank.It also owed $40 000 to Computer Sales Inc, its primary supplier.Info-Tech defaults on its loan payments and its payments to Computer Sales.Computer Sales sues Info-Tech and gets a judgment for $40 000.It then takes possession of Info-Tech's inventory and starts selling it off.The bank finds out and claims that its security interest prevails over Computer Sales.Which of the following best describes the legal position of the parties?

Accepted Answer

The judgment in favour of Computer Sales gave it a right to take possession of the inventory as a judgment creditor. As a result, Computer Sales has a possessory interest in the inventory, which prevails over the bank's unperfected security interest. The fact that the bank is owed more money than Computer Sales does not affect the priority of their conflicting interests in the inventory. Additionally, the fact that Computer Sales is a supplier does not automatically give it a purchase money security interest, as it would need to have a security agreement or registration in place to secure this interest. Therefore, the best choice is C.

Quiz 22: Secured Transactions