Exam 23: Secured Transactions

Sally borrowed $50 000 from Halifax Bank to renovate her basement.The loan was to be repaid in monthly instalments over five years.The interest rate was 5 percent.Sally's mother,Elise,guaranteed the loan.Elise was provided with independent legal advice before she signed the guarantee.After two years,Sally sought to increase the amount of the loan.After a few meetings,Sally and the bank agreed to increase the loan to $75 000 and to increase the interest rate to 7 percent.Which of the following statements regarding Elise's legal position is TRUE?

Caesar's School of Music wanted to substantially expand its operations.To do so,it required a loan of $2 million.Its banker agreed to that loan only on the condition that Caesar's grant security over all of its assets.That included both physical assets,such as guitars and tubas,and intangible assets,such as accounts receivable.It also included all the assets that the company held when the loan was created,as well as any assets that it subsequently acquired.Caesar's accepted those terms.Assuming that the general rules governing floating charges apply here,which of the following statements is TRUE?

Sarah,a public servant,gave a security interest to her brother Peter in all her assets to secure her obligation to repay a loan from Peter.Peter filed a financing statement to register his interest.Subsequently,Joan bought some furniture from Sarah.Joan had no knowledge of Peter's security interest.Which of the following statements best describes Joan's legal position?

Which of the following is TRUE? The most important factor that a creditor considers in making its decision to grant credit to a debtor is

Solomon Ltd carried on a boat building business.In July,as security for a loan in the amount of $15 000 from the Royal Bank,Solomon Ltd had given the bank a security interest in all its present and future assets.The loan provided that the interest rate would be 10 percent per year.Aaron Solomon is the sole shareholder and the president of Solomon Ltd.He gave the bank a personal guarantee of the corporation's indebtedness.In September,the corporation,acting through Aaron Solomon,agreed that the interest rate on its loan would be increased to 11 percent,if it was given the right to prepay the loan any time it wanted to.In November,Solomon Ltd defaulted on its obligations to the bank.The bank seized the assets of the corporation,but these were insufficient to satisfy the corporation's obligations to the bank.The bank demands payment of the shortfall from Aaron Solomon under the guarantee.Is Aaron Solomon liable to pay the shortfall to the bank?

Sam just moved from Montreal to Calgary and purchased a condo.He needs to furnish his new place,but he doesn't plan to stay long.He wants to rent out his condo next year and move back to Montreal.If he wants to rent out a fully furnished condo,which of the following can Sam not do?

Theron is starting a new business after graduating from university.In order to secure a loan of $100 000,he gets his father,who holds a diversified portfolio worth $1 million,to guarantee the loan and secure it with the portfolio.The guarantee is for "all obligations" of his son.After one year,before the loan is paid back,Theron decides to expand the business and increase the size of the loan to $200 000.Which of the following is true?

In Hamilton,Ontario,Ione has defaulted on her credit and the secured party is now looking to collect on the security agreement.As per the security agreement,she has 30 days to remedy the default.Which of the following is true?

Ornak Furniture Inc had an operating line of credit with the Bank of Brandon.Ornak had given the bank a security interest in all its present and future assets to secure its obligations under the line of credit.The bank had perfected its interest by registration in 2011.Cronin carried on business as a supplier of wicker furniture.In 2012,Cronin delivered 20 wicker chairs to Ornak.Ornak put the chairs on display in its showroom.Under the agreement that Ornak had with Cronin,Ornak was not obliged to buy the chairs,but the act of selling a chair to a customer constituted the agreement by Ornak to buy the chair from Cronin.For every chair sold,Ornak paid Cronin whatever it sold the chair for less 50 percent.In December 2009,Ornak defaulted on its obligations to the bank and the bank seized its assets including the chairs supplied by Cronin.The bank is entitled to the chairs.

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?

The process of distraint

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?

Heidi's sister,Tammy,started a dog breeding business.Tammy borrowed $50 000 from Royal Bank that she needed to start the business.The bank took a security interest in all of Tammy's assets.Heidi guaranteed Tammy's obligations to the bank.Tammy defaulted on her loan and the bank seized many of her assets,including the dogs.At the time of the seizure,the dogs were worth $100 000.Because the bank did not take adequate care of them,some of them died,and the total value of the dogs has declined to $50 000.Because of the bank's actions,Heidi is no longer fully liable under her guarantee.

Shariff's Car Depot (SCD)sells new and used cars.Because it perceived a demand for Tucker Hupmobiles,a type of retro-design vehicle,it purchased several directly from Tucker Auto Inc.Those purchases were made under conditional sales contracts.At the relevant time,SCD paid part,but not all the purchase price.As predicted,SCD received a great deal of consumer interest in the Hupmobiles.It sold one to Ingrid.Several days later,however,SCD fell into serious financial difficulties and defaulted on some of its debts.As it was entitled to do in the circumstances,Tucker purported to exercise its rights to recover all interest in the Hupmobiles that it had conditionally sold to SCD.Which of the following statements is TRUE?

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?

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,

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 installments 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.

The process of perfection

Perfection of a security interest in collateral means that

Blue Bank agreed to give Clarice an operating line of credit.Clarice gave Blue Bank a security interest in all the present and future assets of her home renovation business which she carries on in Thunder Bay,Ontario,to secure her obligations under the line of credit.The security agreement says nothing about Clarice's right to sell her assets.The bank has registered its security interest under the Ontario Personal Property Security Act.Clarice can sell any of her assets without the consent of the bank.