Exam 23: Secured Transactions

Simtech Inc needs $1 000 000 for research related to a new product it is developing. It has been discussing a loan with Toronto Bank. On January 10, the Bank files a financing statement to register a security interest in all the assets of Simtech. On January 12, Simtech borrows $20 000 from one of its shareholders secured by a security interest in all the assets of the corporation. The shareholder files a financing statement to register its security interest on the same day. On January 15, the Bank and Simtech agree that the Bank will lend Simtech $1 000 000 and Simtech agrees to give the Bank a security interest in all of its assets. If Simtech defaulted on the loans to both the shareholder and the Bank, the shareholder's security interest would have first priority because the shareholder advanced its money first, before the Bank and before its security interest was perfected.

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?

People who give guarantees are vulnerable to the actions of the principal debtor and the creditor. Explain how the law seeks to protect guarantors with reference to examples of the ways in which the guarantor may be put at risk.

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?

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?

Itzik operates a bakery with 10 employees in Regina, Saskatchewan. In May, Itzik borrowed $10 000 from MBank to finance the acquisition of a new oven. He gave MBank a security interest in all his present and future assets as security for his obligation to repay the loan. By July, his business was in trouble. He failed to remit to the Canada Revenue Agency the amounts he had withheld from the wages he paid his employees for May, June, and July. Instead, he used some of it to pay suppliers and the rest, $5000, he kept at the bakery for emergencies. Itzik defaults on his obligation to MBank. Is MBank entitled to the $5000?

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?

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 2007. The Bank's registration expired in December 2009. In April 2010, Donaldo becomes bankrupt. A trustee in bankruptcy is appointed to administer the estate of Donaldo. Which of the following statements is TRUE?

A lease of goods can have the same financial characteristics as a secured loan to finance the acquisition of an asset. The interest in the asset held by the lessor, in the case of the lease, or the secured lender, in the case of a secured financing, secures the payments required to be made. For this reason, all leases of personal property must be registered under provincial personal property security laws.

A true consignment

Alice needed some tractors for her gardening services business in Windsor. She approached Cooper's Equipment Leasing Inc. She asked Cooper's to obtain two tractors meeting her specifications and lease them to her. After performing a credit assessment of Alice, Cooper's decide to proceed with the transaction. Under the terms of the lease, Alice was obliged to make regular monthly payments over two years which would result in paying Cooper's more than the full purchase price. Alice had an option to purchase the tractors at the end of the lease for $500 each. Alice knew that it was likely that the value of the tractors at the end of the lease would be at least $1000. In January, Alice stopped making payments under the lease and went bankrupt. Cooper's claimed the tractors but the trustee in bankruptcy has refused to give them up. Who is entitled to the tractors?

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?

Under the Bank Act, banks may take a special type of security interest in specified assets. No other creditor may take this interest. Nevertheless, banks remain free to take any other kind of security interest in any type of personal property in addition to any interest under the Bank Act.

Joshua had a licence to operate a nursing home in Scarborough. Under the legislation setting up the licencing scheme, the licence was fully transferable at the request of the licencee. Indeed, licences were bought and sold all the time along with the nursing home businesses that they related to. The licence could only be revoked on limited grounds by the responsible agency of the government of Ontario, and there was a right to appeal any decision to revoke the licence. Under the licence, Joshua operated Green Acres Nursing Home. In order to finance the building of an addition to the nursing home, Joshua borrowed $75 000 from the Bank of Ontario. As security for the loan, he gave the Bank a security interest in all his personal property. A few months after he received the loan, Joshua defaulted. Can the Bank seize the licence along with Joshua's other personal property?

Kingston Bank has a security interest in the equipment of Apex Manufacturing to secure a $10 000 loan that the Bank made to Apex. Apex has defaulted on one of its monthly loan payments in the amount of $1000. The security agreement provides that the whole amount of the loan is payable on demand. The Bank can seize the equipment without notice to Apex.

Gratzia Cross Country Skiing Inc told Power Leasing Inc that it wanted to acquire a machine which cuts cross country ski tracks. Gratzia enters into a lease under which the Power Leasing will buy a track- cutting machine and then lease it to Gratzia for three years. The lease payments will pay Power the full amount of the purchase price plus a return of 14 percent per year. At the end of the three years, Gratzia has an option to buy the machine for $1. This transaction is similar in effect to a secured financing. Power should file a financing statement to register its title to the track- cutting machine under the applicable provincial personal property security legislation to protect his interest.

Legrand Distribution Corp sells watches to wholesalers in Ontario who resell them to retail outlets. Legrand also sells to some retail outlets directly. One of Legrand's wholesale customers is Reuben. Legrand has entered into a contract with Reuben under which Reuben gave Legrand a security interest in all watches supplied by Legrand until they are paid for. Reuben defaulted on his payment obligations and Legrand, acting under the security agreement, seized all the watches supplied by Legrand that are in Reuben's store. The total amount owed by Reuben to Legrand is $2500. Legrand could probably sell the watches for $3000. Instead of selling them right away, Legrand decided to keep the watches. Legrand sent Reuben a note saying that it is taking the watches in full satisfaction of Reuben's debt to Legrand. Reuben is unhappy because he knows the watches are worth more than he owed Legrand. Is there anything that Reuben can do about this? Should he try to do anything about it?

Royal Bank is considering making a loan to O'Dell Inc, a manufacturer of computers. O'Dell is seeking a loan of $100 000 repayable over three years. If you were the bank manager, what kinds of information would you need to assess the risk of non- payment by O'Dell?

Terry borrowed $5000 from Jerry to buy a new car for her personal use in Winnipeg, Manitoba where they both lived. The loan was to be repaid in 12 blended monthly instalments of $500, which included both principal and interest. The loan agreement also provided that if Terry missed one payment, Jerry could declare that the whole amount outstanding at that time was immediately due. Terry gave Jerry a security interest in her car as security for her obligations under the loan agreement. Terry missed the first payment. Jerry declared the whole amount due and seized the car. Terry is entitled get the car back and reinstate the loan by making the first payment and paying any reasonable expenses incurred by Jerry in taking possession of the car, notwithstanding Jerry's demand for payment in full.

Comerica Bank is considering lending $50 000 to Piat Co, a farm equipment dealer which 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