Deck 28: Secured Transactions

Question 1

Where security devices are agreed to in advance as terms in the contract,they are often called

A)non-consensual security interests.
B)collateral security.
C)consensual security interests.
D)the pledge of assets.
E)the creditor back-up system.

Answer 1

C

Question 2

Jack and Reba purchased some furniture on a conditional sale contract.This couple carries no insurance on their household goods.The furniture is stolen one Sunday afternoon.Who will most likely take the loss?

A)the thieves,since this is a liability claim and they are to blame
B)the merchant,since they still hold title and have insurance covering their insurable interests
C)the state,since this is a criminal case
D)the bailee,since this is a bailment for value on the sale of goods
E)this couple,because the conditional sale contract gives them strict liability

Answer 2

E

Question 3

Use this fact situation to answer the related questions that follow. A purchases a video business from B,who takes back a chattel mortgage on the inventory,which is composed of DVDs.The chattel mortgage states that it covers after-acquired property.B then registers this mortgage under the provincial PPSA.A few months later,A needs to purchase more DVDs and goes to his bank to borrow the money for the purchase.In turn,the bank takes a chattel mortgage for the amount of its loan,registers its chattel mortgage,and gives A the money.A then buys the DVDs.
In this case,under PPSA legislation,the bank has

A)a purchase money security interest.
B)a guarantee.
C)a chattel mortgage.
D)a promissory note.
E)a bill of exchange.

Answer 3

A

Question 4

A,a manufacturer,enters into a conditional sales agreement with B,a retail seller of goods,under which A supplies 100 amplifiers to B.The manufacturer registers the agreement under provincial PPSA legislation.B now sells one amplifier to C and a few days later defaults on the conditional sales agreement.In this case,the manufacturer

A)can both sue C for the value of the amplifier and retake possession of it from C.
B)can only retake possession of the amplifier from C.
C)can only sue C for the value of the amplifier.
D)can only look to B and its security agreement.
E)none of the above

Question 5

Phillip,who has a loan on his car at the bank,has placed his car on consignment at the local used car lot.His law professor tells Phillip that consignments can amount to a secured type of credit.If this is true,who is the creditor?

A)the consignor
B)nobody,because in this case,the professor is wrong
C)the next purchaser of the car
D)the consignee
E)the bank

Question 6

A decides to purchase B's office,which consists of an industrial condominium unit and inventory and equipment.However,A only has enough money for the deposit and B agrees to help him.In this case,to help A finance the purchase,

A)a mortgage/charge on the condominium unit and a chattel mortgage on the inventory and equipment.
B)B will give A a mortgage/charge on both the condominium unit and the inventory and equipment.
C)B will enter into a conditional sales agreement with A.
D)B will give a chattel mortgage on the condominium unit and a mortgage/charge on the inventory and equipment.
E)a mortgage/charge on the condominium unit and a floating charge on the inventory and equipment.

Question 7

Use this fact situation to answer the related questions that follow. A enters into a conditional sales agreement with B,a truck dealership,for the purchase of a truck that B has ordered from the manufacturer but will not receive for another month,during which time A must make his first payment.
In this case,under PPSA legislation,attachment occurs

A)if B delivers the truck to A before the agreement is signed.
B)when A makes his first payment.
C)on the signing of the agreement and delivery of the truck to A.
D)when B takes possession of the truck from the manufacturer.
E)immediately on the signing of the agreement.

Question 8

A bill of sale can be used as an instrument of credit.Which document is the bill of sale most like when it is used as an instrument of credit?

A)a consignment agreement
B)an assignment
C)a negotiable instrument
D)a chattel mortgage
E)a pledge

Question 9

Use the fact situation in Q8 to answer the related question that follows. Also in this case,as between B and the bank,

A)neither B's security interest nor the bank's have priority over the other.
B)the bank has no security.
C)the bank's security interest has priority over B's.
D)B's security interest has priority over the bank's security interest.
E)none of the above

Question 10

Which one of the following requires permission from the security holder before the item(s)used as collateral can be sold?

A)chattel mortgage
B)pledge
C)real estate mortgage
D)stock-in-trade
E)floating charges

Question 11

Some provinces have provided relief to conditional buyers by

A)making the buyer liable for any deficiency after resale of the goods.
B)not allowing any allowing equity position to accumulate with progression of payments.
C)knowing the resale of chattels to be "value destructive," requiring the conditional seller to turn over any surplus realized.
D)allowing the use of the acceleration clause.
E)giving recovery rights when debt is paid within a given period of time.

Question 12

Use the fact situation in Q6 to answer the related question that follows. Also in this case,B's security interest is perfected

A)immediately on B getting possession of the truck from the manufacturer.
B)when the truck is delivered to A.
C)immediately in signing the agreement.
D)immediately on registration by B of a financing statement.
E)all of the above

Question 13

What is the difference between a chattel mortgage and a conditional sale contract?

A)In a conditional sale contract the security is the property sold,whereas a chattel mortgage can have as security any chattels.
B)A chattel mortgage must be registered to affect third parties,whereas a conditional sale agreement does not need to be registered to affect third parties.
C)If there is default under a conditional sale contract,the seller can seize the goods and sue the buyer for any deficiency,whereas under a chattel mortgage the chattel mortgagee can only seize the goods.
D)A conditional sale is a personal obligation of the buyer,whereas a chattel mortgage does not bind the chattel mortgagor personally.
E)none of the above

Question 14

Regarding the remedies of a conditional seller,she or he

A)retains a lien on the title to the chattel.
B)has the right to possession of the chattel so long as the terms of the conditional sale agreement are being met.
C)loses ownership of the chattel as soon as the buyer makes his or her final payment.
D)takes title away from the buyer when he or she defaults.
E)is entitled to use force in recovering goods by self help.

Question 15

Use the fact situation in Q2 to answer the related question that follows. In this situation,if B takes back a chattel mortgage on the inventory,title to the inventory

A)remains with A.
B)is immediately transferred to A and retransferred to B.
C)remains with B until A has made the first payment.
D)remains with B until B gives notice to A to transfer title to B.
E)remains with B until A makes the last payment.

Question 16

The Hendersons have purchased their new riding lawnmower on a conditional sale contract.They have just been notified that the contract was assigned to a finance company.The Hendersons may now

A)have the protection of a holder in due course as guaranteed by the Bills of Exchange Act.
B)expect to have the same defences they had against the retailer.
C)have to sue for their rights under the contract.
D)be subject to all the personal defences that the seller has against the conditional buyer.
E)have the benefits of a cut-out clause.

Question 17

Each of the following may create consensual security interests EXCEPT

A)guarantees.
B)leases.
C)liens.
D)consignments.
E)accounts receivable.

Question 18

A purchases a chattel from B under a conditional sales agreement.A few days later and unknown to B,A sells the chattel to C,who believes A is the owner.At common law,B

A)cannot do anything.
B)can only sue C for the value of the chattel.
C)can only sue A for breach of the agreement.
D)can retake possession of the chattel from C.
E)none of the above

Question 19

Use this fact situation to answer the related questions that follow. A is buying a video business including the inventory of DVDs,which is valued at half the worth of the business,but A only has half the purchase price,so B agrees to help A out.
In this case,to help A buy the business,B will

A)take back a floating charge over the inventory.
B)take a chattel lease over the inventory for the balance of the purchase price.
C)take back a mortgage/charge on the inventory.
D)take back a chattel mortgage on the inventory.
E)none of the above

Question 20

B,a car dealership,sells A a car on terms that provide that A will have possession of the car for a period of three years,during which A will make monthly payments; however,ownership in the car remains with the dealership until A makes the last payment.In this case,A and the dealership have effected

A)a conditional sale.
B)a consignment.
C)a chattel lease.
D)a chattel mortgage.
E)a floating charge.

Question 21

Bill owns a small factory,which manufactures seatbelt parts for the automobile industry.Although business has steadily increased for the past two years,the company still owes the bank a significant amount of money.In fact,to secure start-up monies,the company was required to provide a chattel mortgage to the bank including an after-acquired property clause.Bill becomes aware that a machine used to manufacture seatbelt parts has become available from a local manufacturer.However,Bill's company cannot pay cash for the machine and cannot provide the manufacturer with any security in relation to its existing assets.A special priority can in fact arise if the manufacturer reserves a security interest in the seatbelt-making machine itself.This interest is known as

A)an unperfected security interest.
B)a perfected security interest.
C)an attachment or performance of agreement.
D)a purchase-money security interest (PMSI).
E)a floating charge.

Question 22

One of the rights of a lending bank in the event a borrower defaults is the right to sell the security without notice to the borrower.

Question 23

A properly registered security interest is generally effective against all third parties.

Question 24

Self-liquidating financing is usually the best form of financing for

A)doctors.
B)students.
C)teachers.
D)lawyers.
E)farmers.

Question 25

When dealing with security interest,the failure of a creditor to register

A)will result in a legal offence,which invalidates the creditor's interests.
B)would always be quite foolish.
C)may be a matter of too much trouble and expense.
D)will risk that the debtor can prevail in a lawsuit.
E)allows the provisions in the Sale of Goods Act to govern where there is an innocent third party.

Question 26

Sonny bought a computer from The Bad Guys on a conditional sales contract.Two months later Sonny sold the computer to Fred without mentioning it was not paid for.Can The Bad Guys recover the computer from Fred?

A)No,they cannot,provided Fred is an innocent third party.
B)No,they cannot,since this is a consumer transaction where title is guaranteed.
C)Yes,they can,but it would be easier for them to get the money from Sonny.
D)Yes,they can,if the security device is properly registered with the province.
E)Yes,they can directly from Fred,or they can force Sonny to retrieve the computer.

Question 27

If an owner sells you goods that have been pledged as security for a loan,the claim against those goods is known as

A)a contract pledge.
B)a secured transaction.
C)security interest.
D)creditor interests.
E)collateral.

Question 28

Can the chartered banks require security for loans outside section 427 of the federal Bank Act?

A)Yes they can,namely,guarantees by third party.
B)No,they can only require security for those types of security listed in the Act.
C)Yes,they can,namely,pledge of shares and bonds.
D)Yes,they can,namely,assignment of book debts.
E)Yes,they can,namely,warehouse receipts and order bills of lading.

Question 29

Self-liquidating financing is usually the best form of financing for farmers.

Question 30

Milton ordered a fancy telescope from a catalogue,using his bank credit card.When it arrived it seemed quite different from the telescope of the catalogue description.Neither the catalogue company nor the manufacturer would take the telescope back.Milton now wants the chartered bank that issued the credit card to reverse the charges.Does Milton have a legal claim against the bank?

A)Yes,the federal Bank Act requires chartered banks to be advocates for consumers in respect to credit card purchases.
B)No,Milton must pursue remedies through the Better Business Bureau.
C)Yes,they are the assignee of the seller.
D)No,the bank is a lender to Milton and not an assignee of contracts from sellers.
E)Yes,he has,but who can afford to sue a chartered bank?

Question 31

Banks that have perfected security for loans as required by the Bank Act always have priority over any other form of security registered under provincial PPSA legislation.

Question 32

Which of the following is NOT included in the categories of persons to whom a bank may loan money under the Bank Act?

A)doctors
B)farmers
C)fishermen
D)manufacturers
E)aquaculturalists

Question 33

An acceleration clause permits a chattel mortgagor to pay off the mortgage more quickly.

Question 34

An unsecured creditor is no different from a creditor who fails to register a security interest under provincial PPSA legislation.

Question 35

Sometimes conditional sale contracts exist between the manufacturer and the retailer.How does the consumer know she or he is getting clear title to the goods purchased?

A)In this case the Mercantile Agency Rule would be suspended.
B)Because if she didn't,it would fly in the face of consumer expectations.
C)She doesn't know for sure,that's wherein the problem lies.
D)The federal Personal Property Security Act guarantees it to consumers.
E)By provincial statute-buyer acquires good title if the goods are resold in the ordinary course of business.

Question 36

At common law,a bona fide purchaser for value without notice acquires ownership in goods from a seller who appears to own them,but does not.

Question 37

Which of the following is NOT a form of security for bank loans?

A)chattel mortgage
B)assignment of office furniture
C)assignment of book debts
D)guarantee of a third party
E)mortgage of real estate

Question 38

Junior is interested in buying one of his neighbour's motor vehicles.They have agreed upon a price and Junior intends to ask his father for a small loan to assist in funding the purchase.Prior to completing the sale,it would also be wise for Junior to

A)register the agreement of purchase and sale under the PPSA.
B)conduct a PPSA search to determine whether or not any security interests have been registered.
C)conduct a sheriff search to determine if there are any outstanding judgments against his neighbour.
D)put title to the vehicle in his father's name.
E)conduct a title search of his neighbour's property.

Question 39

A mortgage on land gives the mortgagee security in the land in priority over other secured interests registered under provincial PPSA legislation.

Question 40

A prudent creditor who has entered into a chattel mortgage will always conduct a search of title in the local land titles office.

Question 41

Where a bank gives a loan,taking back and perfecting security under section 147 of the Bank Act,why is registration under provincial personal property security legislation a prudent practice?

Question 42

Charles Brown,a fisherman,gave security to a bank under section 427 of the Bank Act in order to finance the purchase of a fishing boat from Triumph Ship Builders Ltd.The bank duly registered the standard form of notice with the Bank of Canada in relation to the fishing boat.A year later,Charles sold the fishing boat to Sea Traders Inc.,who were marine mercantile agents.Sea Traders were unaware of the bank's section 427 security and made no attempt at searching for encumbrances against the fishing boat.Sea Traders in the normal course of business sold the fishing boat to Harold Walker,a bona fide purchaser for value.Charles left the country permanently after his sale to Sea Traders.Discuss the bank's position against each of Sea Traders,Charles Brown,and Harold Walker.

Question 43

Identify in relation to each of the statements below what security device is being described.
(1)The lender takes possession of the assets or of documents evidencing the borrower's ownership.
(2)The borrower retains possession of the property and the lender's security interest is in the title to specific goods or after acquired property.
(3)The seller retains title until the purchase price is paid but in the meantime the buyer has possession of the subject matter of the sale.
(4)The manufacturer or wholesale distributor retains title to the merchandise while the retailer obtains possession of the merchandise.

Question 44

In what way could a consignment contract be an indirect type of credit? Use an example to explain.

Question 45

When may a secured creditor choose not to register its security interest?

Question 46

Alvin Smith bought a car from XYZ Autos Inc.,a car dealership,for the price of $15 000.Alvin paid $5000 cash and entered into a conditional sales contract to finance the remaining $10 000.Alvin had obtained the $5000 from his bank and executed a chattel mortgage for $9000 in favour of his bank.This represented $5000 for the deposit and $4000 in existing indebtedness.After Alvin obtained the car,he provided the bank with a description and its serial number.The bank completed the chattel mortgage with this information and registered a financing statement under the prevailing personal property security legislation.XYZ Autos Inc.similarly registered a financing statement,but did this three days later than the bank.Alvin subsequently defaulted under both securities.Which of the creditors has priority to the car,and why?

Question 47

How might the assignment of book debts (owed to the assignor)seriously prejudice the position of general creditors and prospective general creditors?

Question 48

What is "perfection" of a secured interest under personal property security legislation? Why is "perfection" relevant to the rights of a secured lender?

Question 49

Why do you think that provincial legislators have enacted personal property security legislation?

Question 50

Explain what is meant by the term "financing leases."

Question 51

How is it that security devices mislead innocent third parties?

Question 52

Sometimes a lease agreement can be construed as a security agreement rather than a true lease.Why is this distinction important for the lessor to determine?

Question 53

Why is it important for a creditor who intends to give a loan taking chattels as security to first do a PPSA search?

Question 54

What advantage does a secured creditor have over an unsecured creditor when they both are forced to collect an overdue account?

Question 55

For consumer goods,how much value to a creditor is the right of repossession?

Question 56

Does a bank have a right of lien against property left in its safekeeping by one of its borrowers?