Exam 22: Secured Transactions

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?

Under a conditional sales contract, the buyer gets neither title nor possession of the goods subject to the contract until the full amount of the purchase price is paid.

Marlie carries on a business of selling new and used lamps.In 2009, she obtained an operating line of credit from the Bank of Nova Scotia.Marlie gave the Bank a security interest in all her present and future assets.Jordan is a dealer in imported chandeliers.He and Marlie agree that he will give her possession of a dozen chandeliers to sell on his behalf.Marlie is not obliged to pay for the chandeliers unless she keeps them for more than 30 days.Marlie goes into default on her loan.The bank seizes all of her inventory, including the 12 chandeliers.Jordan finds out about the seizure and demands the chandeliers, saying that they are his.Is Jordan entitled to get the chandeliers back?

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

Joshua had a licence to operate a nursing home in Scarborough.Under the legislation setting up the licensing scheme, the licence was fully transferable at the request of the licensee.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.

Anders runs a piano store.In order to finance his business, he has an operating line of credit from the New Brunswick Bank.His obligations to the bank are secured by security interest in all of his assets, but he is permitted to sell pianos.The bank has perfected its security interest by filing a financing statement under the New Brunswick Personal Property Security Act.Anders sells a piano to Mac.Does Mac get the piano free of the security interest that Anders has given to the bank?

MagicBank has lent $5000 to Horwood.As security for the repayment of the loan, Horwood gave MagicBank a security interest in his car.Horwood has defaulted on his payments.He still owes $4000.MagicBank has taken possession of his car.Horwood estimates that his car is worth $3000.Which of the following is FALSE?

Aruna ran a grocery store business in Niagara Falls.As security for a term loan to her, she had given Eaton Bank a security interest in her assets under s 427 of the Bank Act.Eaton Bank failed to register its interest under the Bank Act and made several other errors in creating the interest so that it was not effective under the Bank Act.Instead, Eaton Bank filed a financing statement under the Ontario Personal Property Security Act.Subsequently, Natasha lent Aruna $5000 and took a security interest in Aruna's assets.Natasha filed a financing statement under the Ontario Personal Property Security Act to perfect her interest.Later Aruna defaulted on her obligations to both Eaton Bank and Natasha.Whose interest in the assets of Aruna's grocery store business has priority? Would your answer be any different if Aruna's business had not been in Ontario?

On behalf of his company, OP Finance, Errol contracted with XYZ Construction to erect an office building.The building will cost $150 million.OP Finance has a very high accounts receivable balance.In order to pay XYZ, Errol arranges a loan from CIBc.From the bank's perspective, it would be best to obtain

Vegreville Food & Farm Inc (VFFI) operates a general store in a rural area of Saskatchewan.For a variety of reasons, the company has experienced continuing and substantial financial difficulties over the past 10 years.As a result, most of its assets are subject to one or more security interests.Those security interests are held by a number of creditors.VFFI recently found itself unable to meet its obligations and it has defaulted on a number of contracts.Creditors are now looking to execute upon their security interests.Which of the following statements is most likely to be TRUE?

Kathy has a horse farm where she raises thoroughbred horses to race.She had negotiated a loan of $25 000 from Commerce Bank to buy a new truck for the business.The bank took a security interest in all her present and future assets in a general security agreement.The bank registered its security interest in February 2010.A few months later, Kathy negotiated a loan in the amount of $200 000 from Canada Trust for the purpose of buying horses and equipment.Canada Trust took a security interest in all of Kathy's present and future assets under a general security agreement.Kathy spent the money to buy the horses, and they were delivered on June 15, 2010.Canada Trust registered its security interest by filing a financing statement on July 15, 2010.Kathy defaults on her obligations to Canada Trust and the bank.Both the bank and Canada Trust claim that its security interest has first priority.Who is entitled to Kathy's assets?

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?

Destiny Drilling financed its latest project with a general security agreement with RBc.They signed a security agreement and received the loan on August 1.RBC filled out the financing statement, but forgot to file it.On December 12, Destiny required additional funding for the project, so it entered into a new security agreement that gave CIBC rights in all Destiny's physical capital.CIBC filed a one-year financing statement.On December 13 of the following year, Destiny defaulted on both loans.Which of the following 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 regardless of whether they create a security interest.

Albert carried on a jewelry store business in Edmonton.He borrowed $10 000 from the Bank of Edmonton.As security for the repayment of his loan, Albert had given the bank a security interest in his inventory and equipment.The bank failed to file a financing statement to register its interest.Albert sold all his gem-cutting equipment to Bruce who carried on another jewelry store business because he had decided to get out of this aspect of the business.Bruce is not aware of the bank's security interest.Which of the following statements best describes the interest of the bank in the gem-cutting equipment?

Gratzia Cross Country Skiing Inc told Power Leasing Inc that it wanted to acquire a machine that cuts cross-country ski tracks.Gratzia enters into a lease under which 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.

Eldon leases tools and other equipment on a long-term basis to construction companies.He needs to buy a new forklift truck to lease in his business.Which of the following describes ways that Eldon could NOT acquire ownership of the forklift truck?

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?

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?