Deck 32: Credit and Security

Question 1

The method by which a secured party obtains a priority interest in a debtor's collateral is attachment.

Answer 1

False

Question 2

A secured party perfects a claim by filing a financing statement with the debtor.

Answer 2

False

Question 3

A lien protects a creditor's claim for the payment of a debt.

Answer 3

True

Question 4

When a debtor defaults, a secured creditor can give up the security interest and sue on the underlying debt.

Question 5

When two conflicting security interests are unperfected, the last to attach has priority.

Question 6

When a debtor defaults, a secured party who does not choose to retain the collateral must give it back to the debtor in exchange for cash.

Question 7

Liens generally do not take priority over other claims to the same property.

Question 8

A party who owes payment or performance of a secured obligation is a secured party.

Question 9

Every interest in personal property that guarantees the payment or performance of an obligation is a security interest.

Question 10

Improper filing of a financing statement can render the security interest unperfected.

Question 11

A financing statement is a legal term for the debtor's bank statements and list of assets.

Question 12

The first security interest to be perfected is the last in priority over other perfected security interests.

Question 13

Attachment ensures that a security interest between a debtor and a secured party is effective.

Question 14

When a security interest is attached, it has priority over any perfected security interests.

Question 15

Any transaction in which debt payment is guaranteed by personal property is a secured transaction.

Question 16

A security interest can cover property in which the debtor has future rights.

Question 17

When a debtor defaults, a secured creditor cannot take peaceful possession of the collateral without going to court.

Question 18

A floating lien is a security interest retained in collateral that may actually change like when inventory turns over.

Question 19

To create an enforceable security interest, a debtor does not need to have legal rights to the collateral.

Question 20

To create an enforceable security interest, the collateral must be held by a neutral third party until the debt is paid.

Question 21

The right of contribution is a right that the debtor has to receive contributions from the surety or guarantor.

Question 22

A third party who agrees to be primarily responsible for the debt of another is a guarantor.

Question 23

A writ of execution is a court-ordered seizure and taking into custody of property before a judgment is obtained on a past-due debt.

Question 24

There is no legal process where a creditor can gain access to a debtor's property that is being held by a third party.

Question 25

Reese applies for a credit card at Sell-Mart. The application gives Sell-Mart a security interest in any goods that Reese buys with the card until she pays for them in full. In this situation, the secured party is

A) Reese.
B) Sell-Mart.
C) the credit card.
D) the goods that are bought with the credit card.

Question 26

Any payment of the principal obligation by the debtor will discharge the surety or the guarantor from the obligation.

Question 27

Market Credit Inc. is the secured party in a secured transaction with National Sales Corporation. Market Credit is

A) the debtor.
B) the creditor.
C) the security interest.
D) the collateral.

Question 28

Generally, the surety or guarantor cannot avoid liability on the obligation with a defense that is available to a principal debtor.

Question 29

Auto Sales & Finance wants to get paid for its goods and services, so it will not sell goods or lend funds unless payment is guaranteed by some personal property and not just by a promise. This is the concept of

A) bad faith.
B) fiduciary duty.
C) a secured transaction.
D) a fair debt collection practice.

Question 30

An artisan's lien is a security device through which a creditor can recover payment for labor and materials furnished in the repair of personal property.

Question 31

A guarantor has a right of reimbursement for any payments the guarantor made on the debt.

Question 32

A court's order to seize a debtor's property is known as a writ of attachment if it is issued after a judgment.

Question 33

An artisan's lien exists as long as the debtor maintains possession of the goods.

Question 34

A creditor can demand payment from the surety from the moment that the debt is due.

Question 35

A third party who agrees to be primarily responsible for the debt of another is a surety.

Question 36

A mechanic's lien normally takes priority over perfected security interests in the property.

Question 37

A creditor can request that certain property of a debtor be seized to pay a debt.

Question 38

To create an enforceable security interest between Finance Corporation and Global Trade Inc. with a written security agreement, the agreement must contain a description of

A) the debtor.
B) the creditor.
C) the surety.
D) the collateral.

Question 39

Federal law provides a framework to protect debtors from losing all their income in order to pay judgment debts.

Question 40

Equity Bank lends funds to Fabrication Company to add a storage unit to Fabrication's factory. Payment of the loan is guaranteed by Fabrication's supply of inventory. The law covering this transaction comes from

A) local building ordinances.
B) state manufacturing regulations.
C) federal banking rules.
D) the Uniform Commercial Code.

Question 41

Kris borrows from Lender Inc. and Mortgage Company, using the same collateral for both loans. Mortgage Company perfects the security interest but Lender does not. Kris defaults on both loans. The party with first rights to the collateral is

A) Kris.
B) none of the choices.
C) Lender Inc.
D) Mortgage Company.

Question 42

Building Company adds a warehouse to the property of Corporate Complex, but the owner does not pay. Building files a lien on Corporate's property. The property

A) can be held to guarantee payment of the debt.
B) must be sold to provide payment of the debt.
C) must be returned to the debtor within a certain period of time.
D) none of the choices.

Question 43

Business Sales Inc.'s debt to Cartage Company is past due. Cartage brings a legal action against Business Sales to collect. To ensure that a judgment in the creditor's favor will be collectible once the court issues its judgment, Cartage asks the court to order the seizure of the debtor's property. This is a request for

A) an artisan's lien.
B) a mechanic's lien.
C) a writ of attachment.
D) a writ of execution.

Question 44

Rancho West owes Silo & Barn Inc. $5,000 on their contract for building a barn, but refuses to pay. To collect, Silo files a mechanic's lien, under which security for the debt is represented by

A) Rancho's personal property.
B) Rancho's real estate.
C) the $5,000 owed on the contract.
D) property held by a third party.

Question 45

Lenders Bank files a financing statement regarding a transaction with Metro Company. To be valid, the financing statement must contain all of the following except

A) a description of the collateral.
B) a statement of the purpose for the transaction.
C) Lenders' name.
D) Metro's name.

Question 46

The payment of Cathy's debt to Debt Collection Corporation is guaranteed by Cathy's personal property. Debt Collection is most likely to perfect its interest by

A) insuring the property for the full amount of its value.
B) calculating the precise amount of the debt.
C) correcting grammatical errors in the parties' written agreement.
D) filing a financing statement with the appropriate authority.

Question 47

Debt Financing Inc. and Equity Lending Company are secured parties with perfected security interests in property owned by Fleet Shipping Inc. Priority between these security interests is generally determined by

A) the amount of the claim.
B) the custom in the trade.
C) the time of perfection.
D) the "float" of the liens.

Question 48

Kelly's Autos Inc. borrows funds from Lenders Finance Company under a security agreement. Later, Kelly's buys new vehicles to add to its inventory. Lenders has a security interest in the new vehicles

A) if the security agreement included an after-acquired property clause.
B) if Lenders has not yet filed a financing statement.
C) if Kelly's bought the new vehicles with Lenders' funds.
D) none of the choices.

Question 49

Bayside Marina borrows funds from Credit Union secured by Bayside's equipment in the marina shops. If Credit Union fails to perfect its claim to the collateral, the claim will be reduced to that of

A) an unsecured creditor.
B) a state of local official.
C) a secured party.
D) a debtor.

Question 50

Greg borrows funds from Home Bank secured by Greg's car. Greg defaults on the debt. Home Bank's options include

A) retaining the security interest and pursuing a judicial remedy.
B) destroying the collateral and collecting the unpaid debt from Greg.
C) having Greg put in debtor's prison until the debt is repaid.
D) taking peaceful possession of the collateral and keeping it.

Question 51

Country Financial Corporation is a secured party with a security interest in property owned by Delta Farms. Perfection of this security interest may not protect Country Financial against the claim of

A) a bank.
B) a buyer in the ordinary course of business.
C) a subsequent lien creditor.
D) a trustee in bankruptcy.

Question 52

Gail borrows funds from Harbor Loans Inc. to buy a boat, which is the collateral for the loan. Gail defaults on the debt. Harbor Loans takes possession of the boat and notifies Gail that it will be sold to recover some of the unpaid debt. Before Harbor Loans sells the boat, Gail can pay the lender what she owes and take back the boat. This is

A) a deficiency judgment.
B) a floating lien.
C) the right of redemption.
D) a commercially reasonable sale.

Question 53

Equipment Supply Company holds a lien on Fertile Farm's equipment and supplies. The property can be sold to satisfy the debt

A) if, before the sale, notice is given to Fertile Farm.
B) if, before the sale, notice is given to Fertile Farm's other creditors.
C) if, before the sale, notice is given to the general public.
D) without notice.

Question 54

General Contractors Inc. holds a lien on Home Estate's real property. The property can be sold to satisfy the debt

A) if, before the sale, notice is given to Home Estate.
B) if, before the sale, notice is given to Home Estate's other creditors.
C) if, before the sale, notice is given to the general public.
D) without notice.

Question 55

To create an enforceable security interest between Mortgage Bank and National Property Company with a written security agreement, the agreement must be signed by

A) the debtor.
B) the creditor.
C) a surety.
D) a disinterested third-party witness.

Question 56

Secure Credit Inc. holds a security interest in inventory owned by Timber Products Inc. Secure can protect its claim to the inventory in the event Timber uses the inventory for a loan from another creditor by

A) assignment.
B) perfection.
C) redemption.
D) retention.

Question 57

Owen is given value by Payday Sales & Finance Company in the form of a commitment to sell goods on credit. In terms of creating an enforceable security interest, this is

A) the only requirement.
B) a factor but not a requirement.
C) not a factor nor a requirement.
D) a requirement.

Question 58

Construction Company has a claim against Diner's Café to satisfy a debt for work done on Diner's building. This claim takes priority over other claims against the same property. This is

A) a lien.
B) a fraud.
C) a guaranty.
D) a garnishment.

Question 59

Loan Company has a security interest against Manufacturing Inc. that is enforceable. In other words, with respect to the collateral, Loan's rights are

A) attached.
B) ensured.
C) perfected.
D) processed.

Question 60

Irma delivers her Jeep to be fixed at Kent's Auto Repair. Irma agrees to pay cash. Kent's performs, but Irma does not pay. Kent's keeps the Jeep until she pays. This is

A) a garnishment.
B) a mechanic's lien.
C) an artisan's lien.
D) a violation of most states' laws.

Question 61

Consumer Credit, Inc. (CCI), lends $1,000 to Dave. Eve acts as Dave's surety.  If Eve pays the loan, she gets

A) any right that Dave had against CCI.
B) any right that Dave or CCI had against her.
C) any right that CCI had against Dave.
D) none of the choices.

Question 62

Bert, Chaka, and Doug are co-sureties of Erica's debt to Finance Loan Company. Bert pays Erica's entire debt. Bert's right to seek proportionate payments from Chaka and Doug is the right of

A) contribution.
B) exemption.
C) reimbursement.
D) subrogation.

Question 63

Rosalyn inherits a diamond and ruby necklace from her mother that is in need of cleaning and reinforcement for the settings that hold the jewels. She takes the necklace to Janice's Jewelry Repair. Rosalyn pays 10 percent of the price in cash in advance with an agreement to pay the rest in cash when she picks it up. Janice finishes the work, and contacts Rosalyn who refuses to pay the rest of the price. What options does Janice have?   Explain how the option(s) work.

Question 64

Fact Pattern 32-1 Petro Refinery asks Quality Bank for a loan to increase its inventory. Quality requires Rob, Petro's president, to sign a personal guaranty to pay the debt if Petro defaults. Meanwhile, to make a sale of refined oil to Slick Lubricants Inc., Petro asks Slick's outside accountant Tina to co-sign a credit application.
Refer to Fact Pattern 32-1. Tina signs the application. According to the terms, if Slick defaults, Petro can look to her for payment without first pursuing legal remedies against Slick. Tina is

A) a surety.
B) a lienor.
C) a guarantor.
D) a creditor.

Question 65

Fact Pattern 32-1 Petro Refinery asks Quality Bank for a loan to increase its inventory. Quality requires Rob, Petro's president, to sign a personal guaranty to pay the debt if Petro defaults. Meanwhile, to make a sale of refined oil to Slick Lubricants Inc., Petro asks Slick's outside accountant Tina to co-sign a credit application.
Refer to Fact Pattern 32-1. Rob is a guarantor. The guaranty is required to be in writing because

A) the debtor has a right of redemption.
B) the co-signer has a right of contribution.
C) the main purpose rule applies.
D) the main purpose rule does not apply.

Question 66

Nell's debt to Olsen is past due. Olsen obtains an order of garnishment to require Nell's employer Pro Service, Inc., to pay part of Nell's paycheck to Olsen. The law

A) limits the amount that can be taken from Nell's take-home pay.
B) permits Olsen to dismiss Nell because her wages are garnished.
C) practically does not allow Olsen to collect the awarded amount.
D) requires Pro to retain Nell as an employee until the debt is paid.

Question 67

Brewery Company's debt to Credit Service is past due. Credit obtains a judgment against Brewery, but the firm refuses to pay. Credit asks the court to order the seizure of Brewery's property. This is a request for

A) an artisan's lien.
B) a mechanic's lien.
C) a writ of attachment.
D) a writ of execution.

Question 68

Ralph is a surety for Susie's loan from Town Credit Inc. Ralph's right to "step into the shoes" of Town Credit, after paying Susie's debt, and exercise any of the creditor's rights against Susie is the right of

A) contribution.
B) redemption.
C) reimbursement.
D) subrogation.

Question 69

Kyle is a surety for Loren's loan from Metro Bank. Kyle's right to be reimbursed by Loren after having paid her debt is the right of

A) contribution.
B) redemption.
C) reimbursement.
D) subrogation.

Question 70

Refresh Inc.'s debt to Spring Water Company is past due. Spring brings a legal action against Refresh to collect the debt. Spring asks the court to order Tempo Bank, in which Refresh has an account, to pay a portion of the funds to Spring. This is a request for

A) a writ of execution.
B) an order of garnishment.
C) an order that would violate most state laws.
D) an artisan's lien.

Question 71

Rashi is a student at State University. In need of funds to pay for tuition and books, Rashi asks Tiempo Loans, Inc., for a short-term loan. The lender agrees to make a loan if Rashi will have someone who is financially responsible guarantee the loan payments. Umberto, a well-known businessperson and a friend of Rashi's family, calls Tiempo and agrees to pay the loan if Rashi cannot. Because of Umberto's reputation, the loan is made. Rashi is making the payments, but because of illness he is unable to work for one month. He asks Tiempo to extend the loan for three months. The lender agrees, raising the interest rate for the extended period. Umberto is not notified of the extension (and thus does not consent to it). One month later, Rashi drops out of school. All attempts to collect the remainder of the loan from Rashi fail. Can Tiempo assert a claim against Umberto on the debt?

Question 72

Fact Pattern 32-1 Petro Refinery asks Quality Bank for a loan to increase its inventory. Quality requires Rob, Petro's president, to sign a personal guaranty to pay the debt if Petro defaults. Meanwhile, to make a sale of refined oil to Slick Lubricants Inc., Petro asks Slick's outside accountant Tina to co-sign a credit application.
Refer to Fact Pattern 32-1.  After the loan agreement is signed, Slick agrees to a higher rate of interest without telling Tina. Tina is

A) discharged from the agreement.
B) liable at the higher rate of interest.
C) liable at the lower rate of interest.
D) liable for the principal only.