Deck 23: Secured Transactions

Question 1

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.

Answer 1

True

Question 2

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

A)the assets that the debtor has.
B)whether other creditors have already taken security interests in the assets of the debtor.
C)whether the debtor will be able to pay the credit obligation.
D)whether someone can be found who will give a personal guarantee of the debtor's obligation to the creditor.
E)whether the debtor is a corporation.

Answer 2

C

Question 3

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.

Answer 3

False

Question 4

Gluco Inc is a large producer of pharmaceuticals.It enters into an agreement to supply Discount Drugs Inc,which operates a chain of drug stores in British Columbia,with its products.In its agreement with Discount,Discount gives Gluco a security interest in the drugs supplied until they are paid for.On July 1,2010,Gluco filed a financing statement to register this interest under the British Columbia Personal Property Security Act.Previously,on May 1,2010,Discount had given a security interest in all of its present and after-acquired property to Baker Bank,including inventory.The bank filed a financing statement to register its interest under the British Columbia Personal Property Security Act on May 1,2010.Gluco's security interest has priority over the Bank's because it is a purchase money security interest.

Question 5

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.

Question 6

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.

Question 7

Banks take collateral to secure the obligations of people who owe them money as a way to reduce the risks associated with non-payment.Having a security interest in collateral will not prevent a debtor from defaulting but will reduce the risk that the bank will be unable to recover what it is owed.

Question 8

Marissa bought some used computers from Jordan Human Resources Services where she worked.She does not have to worry about there being any security interests in the computers because a security interest is only enforceable against a purchaser of collateral if they were aware of the interest at the time they purchased the collateral and Marissa is not aware of any security interests in the computers she bought from Jordan.

Question 9

Which of the following is TRUE? A bank will be more likely to lend money to a borrower if the borrower grants the bank a security interest in its assets because

A)the security interest prevents the borrower from defaulting.
B)if the borrower defaults,the security interest guarantees that those assets can be seized by the bank,sold,and the proceeds used to pay back the loan.
C)if the borrower defaults,the security interest means that the bank has a right to seize the assets,sell them,and use the proceeds to pay back the loan.
D)if the borrower defaults,the bank will be able to get a court order allowing it to seize the assets,sell them,and use the proceeds to pay back the loan.
E)the bank does not have to worry about whether the loan is paid back because it can keep the debtor's assets.

Question 10

Muskoka Heritage Homes Inc builds vacation homes in a traditional style.In order to finance its acquisition of some earth-moving machinery,Laurentian Bank lent Muskoka $50 000.Muskoka gave Laurentian a security interest in all of its present and future assets to secure its obligation to repay the loan.Laurentian did not perfect its security interest.Subsequently,Muskoka had a dispute with one of its suppliers.The supplier sued and got a judgment against Muskoka,but had not yet taken steps to seize Muskoka's assets.Muskoka defaulted on its obligations to Laurentian.Laurentian has priority over the claim of the supplier,even though the supplier has successfully obtained a judgment.

Question 11

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?

A)Lease financing will be more expensive than secured bank financing.
B)Lease financing will be harder to get than secured bank financing.
C)Nothing.Secured bank financing and lease financing are exactly the same.
D)In a lease financing,Walid would not own the truck until he exercised the option to purchase in the lease.
E)In a lease financing,the lessor does not have to worry about being able to get the truck back.

Question 12

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.

Question 13

Simtech Inc needs $1 million 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 million 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 advanced money.

Question 14

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?

A)Eldon could buy the forklift truck for cash from the manufacturer.
B)Eldon could lease the forklift truck from the manufacturer with an option to purchase it for fair market value at the end of the lease.
C)Eldon could buy the forklift truck on credit from the manufacturer,with the manufacturer retaining title until payment has been made in full.
D)Eldon could borrow money from a bank,use the money to buy the forklift truck from the manufacturer,and give the bank a security interest in the forklift truck.
E)Eldon could rent the forklift month by month.

Question 15

Gisele operates an outdoor equipment store in premises rented from Orca Real Property Inc.Before she moved to these premises,she borrowed $10 000 from Imperial Bank for her business and gave Imperial a security interest in her present and future inventory and accounts receivable.Gisele defaults on her obligations to the bank and to Orca.Orca is entitled to seize Gisele's assets located in the space rented from Orca.

Question 16

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.

Question 17

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.

Question 18

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.

Question 19

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 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.

Question 20

Which of the following is TRUE? A conditional sale is

A)a sale in which the seller refuses to give possession of the goods to the buyer until the buyer meets certain conditions,including providing assurances that the seller will get paid.
B)a sale in which the buyer gets possession of some goods but the seller retains title until the buyer pays the purchase price.
C)a sale in which the buyer gets possession of the goods and title to them but payment of the purchase price is deferred.
D)a sale in which the buyer refuses to buy the goods until certain conditions are met.
E)a sale in which the buyer has the option to return the goods for a refund.

Question 21

The registration systems established under provincial personal property security laws in most provinces are superior to the systems that existed previously.Which of the following best describes why the new systems are better?

A)A creditor can search in one place to find all security interests in the property of a debtor.
B)The priority of all security interests and other types of claims against a debtor are determined under personal property security law.
C)Most security interests in a debtor's assets in a province are governed by one set of rules.
D)A creditor need only make one registration against a debtor to perfect a security interest in the debtor's assets no matter where they are situated in Canada.
E)The interests taken by banks in a debtor's assets under the Bank Act are now governed under provincial personal property security law.

Question 22

TevCo Inc supplies tennis racquets to Olympus Sports Inc,a retail sporting goods store.TevCo and Olympus have entered into a supply agreement which provides that TevCo has a security interest in all racquets it supplies until they are paid for by Olympus.TevCo filed a financing statement to register its security interest on January 1,2011.Prior to that date,Olympus had entered into an agreement with the Bank of Ottawa for an operating line of credit.As part of that agreement,Olympus gave the bank a security interest in all its present and future assets.The bank filed a financing statement to register its interest on December 1,2009,indicating an interest in all of the debtor's assets including inventory.On March 1,2012,TevCo delivered to Olympus its first shipment of 100 tennis racquets.Olympus never paid for them.A few days later,Olympus went into default under its agreement with the bank.Both TevCo and the bank claim to be entitled to the tennis racquets.Which of the following best describes the legal position of the two secured parties?

A)TevCo's security interest prevails over the bank's because it is a purchase money security interest.
B)The bank's security interest prevails over TevCo's because it was perfected first and TevCo does not have priority as a purchase money security interest in inventory because it failed to give notice to the bank.
C)The bank's security interest prevails over TevCo's because it registered first,even though TevCo has a purchase money security interest.
D)TevCo's security interest prevails over the bank's because conditional sellers always prevail over other secured parties with respect to the assets they sell.
E)TevCo's security interest prevails over the Bank's because Olympus defaulted on its obligation to TevCo before it defaulted on its obligation to the bank.

Question 23

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,

A)the security interests of suppliers of goods would never have first priority in the goods supplied.
B)where other secured parties already have security interests that extend to after-acquired property,a subsequent supplier of goods would not be entitled to first priority for its security interest in the goods supplied.
C)suppliers of inventory would be unable to obtain a security interest in the inventory supplied.
D)debtors would never be able to obtain inventory financing.
E)a financial institution that financed the acquisition of goods by a debtor would never be able to get first priority for its security interest in the goods acquired.

Question 24

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

A)the registries under the personal property security laws of each province and the registry under the Bank Act.
B)the registry under the Saskatchewan personal property security legislation.
C)the registries under the Saskatchewan personal property security legislation and the Bank Act.
D)the separate registries in each province for conditional sales,chattel mortgages,assignments of book debts,and under the Bank Act.
E)the registry under the Bank Act.

Question 25

The Canadian Imperial Bank of Commerce has lent $100 000 to Cryo Corp,a corporation manufacturing medical equipment.Cryo carries on business in Ontario.The bank has taken a security interest in Cryo Corp's inventory under s 427 of the Bank Act.Which of the following is TRUE?

A)The Bank does not need to register its interest because it is protected automatically under the Bank Act.
B)The bank should register its interest with the office of the Bank of Canada nearest Cryo's place of business as well as by filing a financing statement under the Ontario Personal Property Security Act.
C)The bank should register its interest only with the office of the Bank of Canada nearest Cryo's place of business.
D)The bank should register its interest only by filing a financing statement under the Ontario Personal Property Security Act.
E)The bank cannot register its interest by filing a financing statement under the Ontario Personal Property Security Act because such interests are excluded from the scope of the Act.

Question 26

Orange Bank was going to lend Fasgo Inc $1 million.As security for the repayment of the loan,Fasgo was going to give Orange Bank a general security interest in all its present and future assets.The parties have decided that the agreements will be signed and the financing will be completed on Friday.Orange Bank should file a financing statement to register its interest a few days before the completion of the transaction because

A)it will save time at the completion of the transaction on Friday if the filing is done ahead of time.
B)the filing will perfect the security interest of Orange and it is in the bank's interest to perfect its interest as soon as possible.
C)the filing will prevent any other person from obtaining a security interest in the assets of Fasgo.
D)once the financing transaction is completed on Friday,the priority of the bank's security interest will be determined by reference to the date of the filing.
E)Fasgo will be bound to give the security when the filing is made.

Question 27

Info-Tech Ltd is a distributor of computers.Info-Tech borrowed $500 000 from the Bank of Montreal in 2008.In its written agreement,Info-Tech agreed pay back the loan over four years.As security for the loan,it gave the bank a security interest in all of its present and future assets.The bank never filed a financing statement to perfect its interest.In September 2009,Info-Tech still owed $400 000 to the bank.It also owed $40 000 to Computer Sales Inc,its primary supplier.Info-Tech defaults on its loan payments and its payments to Computer Sales.Computer Sales sues Info-Tech and gets a judgment for $40 000.It then takes possession of Info-Tech's inventory and starts selling it off.The bank finds out and claims that its security interest prevails over Computer Sales.Which of the following best describes the legal position of the parties?

A)The bank is entitled to the inventory because its interest attached before the judgement in favour of Computer Sales.
B)Computer Sales is entitled to the inventory because,as a supplier it has a purchase money security interest.
C)Computer Sales is entitled to the inventory because,as a judgment creditor in possession of the inventory,it prevails over the bank's unperfected security interest.
D)The bank is entitled to the inventory because it has a security interest in the inventory and Computer Sales does not.
E)The bank is entitled to the inventory because it is owed much more than Computer Sales.

Question 28

Able Finance Corp carries on a lending business in Saint John,New Brunswick.Athos Transport has asked Able to acquire a truck trailer and then lease it to Athos for five years in return for monthly payments which will cover the full amount of the purchase price plus 10 percent.At the end of the lease term,Athos has an option to buy the trailer for $100.Assuming that Able and Athos enter into this transaction,which of the following is TRUE? The New Brunswick Personal Property Security Act

A)applies to this transaction because,in substance,it gives Able a security interest in the trailer.
B)does not apply to this transaction because the form of the transaction is a lease.
C)applies to this transaction because the lease is for a term exceeding one year.
D)applies to this transaction because this lease is equivalent to secured bank financing.
E)does not apply to this transaction because,under the lease,Able will have title to the trailer,not a security interest.

Question 29

Marissa Inc carries on an automobile parts manufacturing business in Ontario.Marissa has just finished negotiating a loan in the amount of $50 million 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?

A)Marissa can sell its production equipment free of the security interest of National Bank.
B)Marissa can sell inventory in the ordinary course of its business free of the security interest of National Bank.
C)The security interest that Marissa has given to National Bank means that no supplier can get a security interest in any products it supplies that ranks ahead of National Bank's.
D)Any new assets that are acquired by Marissa will not be subject of the security interest of National Bank.
E)Marissa can sell any of its assets until the security interest of National Bank crystallizes.

Question 30

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?

A)The bank is entitled to the truck because its security interest was created before any interest that Jacqueline has in the truck.
B)The bank is not entitled to the truck because it has not filed a financing statement to perfect its security interest.
C)Jacqueline's possessory lien on the truck prevails over the bank's security interest.
D)Jacqueline's possessory lien is excluded from the application of the Ontario Personal Property Security Act,so the bank's security interests prevails over her interest.
E)The bank is entitled to the truck because Shazad did not give Jacqueline a security interest in the truck.

Question 31

Battleford Bank lent Artegal Manufacturing Inc $50 000.The loan is secured by a general security agreement under which Artegal has given Battleford Bank a security interest in all of its equipment.The agreement provides that Artegal must deliver financial statements to the Bank every three months.Failure to do so is defined as a default under the agreement.Artegal fails to deliver financial statements for a three-month period,though it has not missed any loan payments.Which of the following is TRUE?

A)The bank is not entitled to take any enforcement action because Artegal's principal obligation to make the loan payments is not in default.
B)The bank may take enforcement action because Artegal has committed a default as defined in the security agreement.
C)The bank is required to take enforcement action because Artegal has committed a default as defined in the security agreement.
D)The bank must give Artegal time to cure the default before taking any enforcement action.
E)The bank can only take enforcement action if it demands that the financial statements be delivered and they are not.

Question 32

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?

A)The bank has priority over Melanie because it registered its security interest before Melanie registered hers.
B)Melanie has priority over the bank because her claim is for a larger amount of money than the bank's.
C)The bank has priority over Melanie because MMX and the bank began negotiating before Melanie's loan was made.
D)Melanie has priority over the bank as the bank's security interest did not attach.
E)The bank has priority over Melanie because Melanie has a close relationship with the corporation as its president.

Question 33

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

A)A secured party can perfect its security interest by filing a financing statement electronically.
B)A notice of each new security agreement between a secured party and a debtor is sent to all financial institutions.
C)Notice filings provide notice of the availability of hard copies of security agreements.
D)A secured party can register a security interest as soon as the security agreement is entered into.
E)The notice filing system provides a system of indefeasible validity to registered charges.

Question 34

Which of the following best describes why personal property security legislation requires that a secured party in possession of collateral act in a commercially reasonable way when disposing of it?

A)Secured parties are not in the business of disposing of the assets of their debtors and so need guidance as to how to do it.
B)If there were no legal requirement,secured parties are likely to act in a way which is unreasonable.
C)Secured parties are generally only interested in getting paid what they are owed plus their expenses associated with disposing of the collateral and not necessarily in obtaining the best price for the collateral.
D)Secured parties must dispose of the collateral quickly to avoid having to pay others with claims against the debtor and so may not act in a commercially reasonable manner.
E)Commercially reasonable behaviour is what parties expect in the marketplace.

Question 35

In June,Alicia borrowed $10 000 from the Toronto-Dominion Bank to start her record company.She agreed to give the bank a security interest in all of her assets,but the agreement was never recorded in writing.In July,she sold some CD-burning equipment to Record Supply Inc.Which of the following best describes the bank's claim against the equipment?

A)The bank can enforce its security interest in the equipment against Record Supply because the loan predated the sale of the equipment.
B)The bank cannot enforce its security interest in the equipment against Record Supply because the bank's interest never attached to the equipment.
C)The bank cannot enforce its security interest in the equipment against Record Supply because there is no privity of contract between the bank and Record Supply.
D)The bank can enforce its security interest in the equipment against Record Supply because the rights of secured creditors always prevail against people who buy goods that were subject to a security interest.
E)The bank cannot enforce its security interest in the equipment against Record Supply because it has not filed a financing statement to register its security interest.

Question 36

Oneal carries on a wholesale toy distribution business.He sells to his customers on credit,giving them 30 days to pay.Oneal is negotiating for an operating line of credit and his bank has asked him to assign his receivables to them as security for his obligations under the line of credit.Assuming that Oneal agrees to the assignment,which of the following is TRUE?

A)Oneal's customers will not be happy because they will have to pay their accounts to the bank.
B)If Oneal's receivables are more than the amount of the loan,the bank will be entitled to the surplus.
C)Oneal will be permitted to continue to collect his own receivables and carry on his business as usual,unless he defaults on his loan and the bank exercises its rights pursuant to the assignment agreement.
D)Oneal will not have to collect his receivables himself.
E)If Oneal defaults under the operating line of credit,his customers will not have to pay what they owe him.

Question 37

Jovan Co owns a building in Winnipeg in which Saturn Shoes Inc has rented a store premises since 2000.In 2012,Galaxy Shoes Inc agreed to supply Saturn with its inventory of shoes on credit.Under its agreement with Saturn,Saturn gives Galaxy a security interest in its shoe inventory.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?

A)Galaxy is entitled to the shoes because it has a purchase money security interest in the shoes.
B)Jovan is entitled to the shoes because,as a landlord,it has a distraint right that prevails over most security interests.
C)Galaxy is entitled to the shoes because Jovan's distraint right is not given priority under the Manitoba Personal Property Security Act.
D)Jovan is entitled to the shoes because it has been Saturn's landlord longer than Galaxy has been Saturn's supplier.
E)Galaxy is entitled to the shoes because security interests always prevail over landlord's distraint rights.

Question 38

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?

A)The trustee in bankruptcy will treat Barings's security claim as an unsecured debt.
B)Barings's security interest was perfected so it is can be enforced against Donaldo's assets even though Donaldo is bankrupt.
C)Because Barings's interest had attached,it is enforceable against third parties like the trustee in bankruptcy.
D)Because Barings's has a security interest,the trustee has a discretion to treat it as a secured creditor.
E)Barring's security interest automatically is perfected by the bankruptcy and therefore takes priority.

Question 39

Perfection of a security interest in collateral means that

A)no other interest of any kind in the same collateral can rank ahead of the security interest.
B)the security interest only ranks ahead of unperfected interests in the same collateral.
C)if the security interest is perfected by filing a financing statement,it generally ranks ahead of any interest perfected after the date of registration as well as unperfected security interests in the same collateral.
D)no other security interest in the same collateral can rank ahead of the security interest.
E)no other creditor can obtain a perfected interest in the same collateral.

Question 40

Jerome is a farmer who has just agreed to borrow $100 000 from the Bank of Montreal to buy some new farm equipment.He has given the bank a security interest under s 427 of the Bank Act.Which of the following statements is FALSE?

A)The Bank Act limits the assets in which a security interest may be taken.In a security agreement,there is no restriction on the assets in which a bank may take a security interest.
B)Security interests under the Bank Act are registered under a separate system set up under the Bank Act.Security interests under security agreements are registered under provincial personal property security legislation.
C)A single registration of a security interest under the Bank Act is effective across Canada.Registrations under a province's personal property security laws are effective only in that province.
D)Only banks can take interests under the Bank Act.Anyone can take a security interest created in a security agreement.
E)Bank Act security clearly and always has priority over all prior registered provincial security interests.

Question 41

Destiny Drilling finances its latest operation 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.On December 12,Destiny required additional funding for the project,so they entered into a security agreement with CIBC,giving them rights in all their physical capital.CIBC files a one-year financing statement.On December 13 of the following year,Destiny defaults on both loans.Which of the following is true?

A)RBC should be paid first because they have a general security agreement.
B)RBC should be paid first because at the time of default,both interests are unsecured.
C)CIBC should be paid first because they perfected their interest.
D)CIBC should be paid first because their interest is smaller.
E)RBC should be paid first because their interest is larger.

Question 42

Pierce Electricians is a new company that contracts out for electrical work.Upon creating the company,they took out a loan from the Bank of Montreal with a perfected general security agreement as collateral.The agreement was registered on April 30.On June 1,Pierce realizes it needs to expand its fleet.In order to buy 15 new vans on credit,they create a PMSI with the dealer with the vans as collateral,which is registered on June 8.Which of the following statements is true?

A)If Pierce defaults,the GSA must be settled first.
B)If Pierce defaults,the PMSI must be settled first.
C)The PMSI isn't valid because it wasn't perfected within 5 days.
D)Because of the PMSI,the bank cannot recover its entire interest in the event of default.
E)The PMSI isn't valid because PMSIs cannot be used for physical capital.

Question 43

Taft has entered into a security agreement with Caesar after Caesar gave him a loan.The collateral in the agreement was Taft's car.The agreement outlined that Taft should use the car in accordance with the law and that it should be fully insured during the 3-year security agreement.Furthermore,if Taft does default,he has 10 days to remedy the default before he has to hand over the car.Which of the following is false?

A)If Taft is charged with a DUI,he has probably defaulted.
B)If Taft decides he doesn't need collision insurance,he has probably defaulted.
C)If Taft defaults he must be given 15 days notice before the car is sold.
D)If the car is worth more than the loan,Caesar must give the excess to Taft.
E)If Taft's car breaks down,he has probably defaulted.

Question 44

In July,Monarch Taverns Inc borrowed $100 000 from the Bank of Commerce to finance its acquisition of a tavern.As security for Monarch's obligation to repay the loan,it gave the Bank a security interest in the tavern's inventory of spirits,then worth an estimated $50 000.Guillermo is an experienced businessman who has run several taverns.He is also the sole shareholder in Monarch.He signed a guarantee of Monarch's obligation to repay the Bank of Commerce.The corporation was represented by legal counsel in dealing with the Bank and Guillermo obtained the advice of an independent lawyer with respect to his obligations under the guarantee.After Monarch has operated the tavern business for six months,the value of the inventory has fallen to $20 000.Monarch has advised the bank of this.Which of the following statements best describes Guillermo's obligation to the Bank of Commerce?

A)Guillermo is relieved of his obligation under the guarantee because his risk is increased as a result of the decline in value of the collateral.
B)Guillermo is not liable under the guarantee because the guarantee exposed him to risk.
C)Guillermo is still liable under the guarantee.
D)Guillermo is not liable under the guarantee because the bank was aware of the decline in value of the collateral.
E)Guillermo is not liable under the guarantee because,as the sole shareholder of Monarch,he is not a separate legal person from the corporation.

Question 45

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?

A)Elise is still bound by her guarantee notwithstanding the changes to the principal obligation.
B)Elise is only bound by the guarantee up to the amount of Sally's original liability under the loan because she did not consent to the increase in the interest rate or the increase in the amount of the loan.
C)Elise is still bound by her guarantee because the increase in the interest rate and the extension of the term are not significant changes.
D)Elise is not bound by her guarantee because Sally is not in default on the principal obligation.
E)Elsie is only obliged to pay the bank the principal but not the increased interest.

Question 46

A true consignment

A)is a situation in which ownership is held by the consignee until the item is sold.
B)is a type of lease.
C)involves an immediate transfer of title between the consignor and consignee.
D)is a type of security interest.
E)is an arrangement where ownership remains with the consignor until the goods are sold and the consignee is not obliged to pay anything to the consignor until the goods are sold.

Question 47

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?

A)Joan's interest in the furniture is subject to Peter's security interest.
B)Joan's bought the furniture free of Peter's security interest because Sarah is not in the business of selling furniture.
C)Joan bought the furniture free of Peter's security interest because security interests of close family relatives are not enforceable against third parties.
D)Joan bought the furniture free of Peter's security interest because she had no notice of it.
E)Joan is obliged to give the furniture to Peter.

Question 48

A lien

A)generally lies outside the scope of provincial personal property security legislation.
B)usually occurs as a result of the Bank Act.
C)cannot be enforced unless the debtor previously agreed to that possibility.
D)is necessary only if the debtor has re-acquired possession of the relevant property.
E)almost always arises at common law rather than under statute.

Question 49

Chester owns and operates a farm.As a result of financial difficulties in Chester's 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.This 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?

A)Chester's best option is to declare bankruptcy.
B)Chester's only hope of purchasing the new thresher is to persuade his bank to forgive part of his existing debts.
C)Chester's best option is to secretly purchase the new thresher on credit,without disclosing that fact to the bank that holds the old security interest.
D)A purchase money security interest is available to Chester only if his bank agrees to lend him more money and to take a new form of security over the new thresher.
E)A thresher vendor is entitled to acquire a purchase money security interest and to enjoy priority over the bank's security interest without the bank's consent.

Question 50

Arvid purchased a television from Beula.Under the terms of that contract,Arvid was entitled to immediate possession,but he was not entitled to receive ownership until he paid the full price.The contract required him to pay the total price of $5000 in 10 equal instalments of $500 each.The parties have created an arrangement known as a

A)lease and option to purchase.
B)conditional sales contract.
C)consignment.
D)chattel mortgage.
E)leveraged acquisition.

Question 51

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?

A)MagicBank may decide to keep the car in full satisfaction of the debt owed by Horwood.
B)MagicBank may decide to sell the car.
C)MagicBank may decide to lease the car.
D)Whatever MagicBank decides to do,it must act in a commercially reasonable manner.
E)Magicbank may dispose of the car in whatever way it thinks is necessary to obtain the money it is owed.

Question 52

The process of distraint

A)is available against any tenant who fails to pay rent.
B)occurs when property is sold under the terms of a chattel mortgage.
C)applies to any property found on leased premises.
D)is not governed by PPS legislation.
E)arises as a result of an agreement between the parties.

Question 53

Errol contracts with XYZ Construction to build his company,OP Finance,a new high-rise office building.The building will cost $3 million.OP Finance has a very high accounts receivable balance.In order to pay XYZ,Errol arranges a loan from CIBC.Which of the following is the most desirable for CIBC?

A)Take a conditional sale of the building,retaining ownership until OP pays the loan
B)Take assignment of accounts receivable
C)Take a general security agreement
D)Take a security interest in the building
E)Use a floating charge

Question 54

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?

A)If and when the floating charge crystallizes,it will become entirely impossible for the company to sell any of its assets.
B)If the parties use a floating charge,then the interest rate that the borrower is required to pay will fluctuate according to the bank's general lending rate.
C)The floating charge will crystallize as soon as the company receives the loan money from the bank.
D)If the company sold an asset after the floating charge crystallized,the purchaser acquires the property subject to the bank's security if this is not a PPSA jurisdiction.
E)The concept of a floating charge was abolished when the PPS legislation was enacted.

Question 55

Kajal wanted to borrow $500 000 from a bank in order to start up a new business.Because the bank was not convinced that the business would succeed,it insisted upon having repayment of the loan guaranteed.Kajal therefore persuaded her father,Ameen to sign as guarantor.As the bank had feared,Kajal's business failed,and as a result,Kajal cannot afford to repay the entire loan.The bank therefore insists that Ameen is liable to pay as guarantor.Which of the following statements is TRUE?

A)The bank must collect from either Kajal or Ameen,and it cannot recover some of the loan from one and the rest from the other.
B)If the guarantee agreement contains a clause that prevents Ameen from relying upon any defence that Kajal could have used against the bank,a court will declare that clause to be void.
C)Ameen is not liable on the guarantee if,without his consent,Kajal and the bank agreed,after the original documents were signed,to modify the rate of interest.
D)Given the relationship between Kajal and Ammen,a court will not enforce the guarantee unless the bank proves that the arrangement was to Ameen's financial advantage.
E)The bank cannot enforce the guarantee unless it has already tried to recover payment from Kajal.

Question 56

The process of perfection

A)is necessary to the enforcement of any type of security interest.
B)may be satisfied by possession in some circumstances.
C)refers to the creditor's ability to successfully enforce a security by receiving a payment of money.
D)is available,free of charge,under the provincial personal property security system.
E)can be used in substitution for the process of attachment.

Question 57

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?

A)Purchase the furniture outright.
B)Arrange a conditional sale in which he pays the full price within one year.
C)Lease the furniture from the vendor with the option to purchase.
D)Rent the furniture.
E)Buy the furniture on credit with his condo as collateral.

Question 58

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?

A)Because Tucker retained ownership under the conditional sales contract,SCD could not possibly pass good title to the car to Ingrid.
B)Ingrid is entitled to retain the vehicle only if she proves that (i)she was unaware of the conditional sales contract and (ii)SCD was entitled,under the sales conditional contract,to transfer good title to a purchaser.
C)Ingrid is entitled to retain the vehicle only if Tucker failed to perfect its security interest.
D)Ingrid can retain the vehicle,even if Tucker had a perfected security interest and she knew about it,as long as she paid fair market value.
E)SCD sold the vehicle to Ingrid in the ordinary course of its business and so Ingrid receives it free of the security interest of Tucker.

Question 59

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?

A)A creditor with a security interest under PPS legislation has an absolute right to immediately seize the relevant assets and to permanently retain that asset for itself.
B)If an asset is seized by a creditor,VFFI is not entitled to redeem that collateral by paying the full amount of the missed payment that caused it to go into default under the security interest.
C)A creditor with an unperfected security interest has priority over any lien created by law,but not over another unperfected security interest that attached earlier.
D)As between competing creditors with security interests registered under provincial personal property security legislation,priority is determined by the date and time of registration rather than by perfection.
E)The first secured party to seize has priority over all other secured parties regardless of the time of registration of the security interests.

Question 60

Albert carried on a jewellery 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 jewellery 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?

A)The bank has no interest because the sale of equipment by Albert was a business decision.
B)The bank's interest follows the equipment into the hands of Bruce.
C)Bruce takes the equipment free of the bank's interest because the bank's interest is not perfected and Bruce was not aware of it.
D)The bank's interest follows the equipment into the hands of Bruce because the bank did not consent to the transfer.
E)The bank never had any interest in the equipment because it failed to file a financing statement to perfect its interest.

Question 61

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?

Question 62

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?

A)Based on the agreement,Theron's father has guaranteed the new terms of the loan too.
B)The new terms are not enforceable because they weren't in writing.
C)Theron's father's liability is limited to the original agreement.
D)The guarantee was never enforceable because the collateral was not equivalent to the loan.
E)The guarantee is not enforceable if Theron's father does not allow the bank to explain the extent of the guarantee to him.

Question 63

Francesca carries on an investment business in Ontario.She borrowed $50 000 from Barry.Francesca gave Barry a security interest in all her present and future personal property.Barry never filed a financing statement to register his interest under the Ontario Personal Property Security Act.Subsequently,she borrowed $20 000 from Toronto Bank to invest in the shares of Argus Corp.The bank took a security interest in the shares and required Francesca to deposit the share certificates with the bank.Subsequently,Francesca defaulted on her obligations to Barry and to the bank.Who is entitled to the shares?

Question 64

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?

Question 65

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?

Question 66

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?

Question 67

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?

A)Ione has to hand over the collateral and has 30 days to repay the credit and get the collateral back.
B)After the creditor has seized the collateral,Ione can redeem the collateral by satisfying the debt.
C)Once the creditor has seized the collateral,they can use it before the debt is repaid.
D)If the collateral is sold,the proceeds always cover the debt.
E)Once she defaults,Ione has no way of recovering the collateral.

Question 68

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?

Question 69

Isis wants to buy a car,but cannot afford to pay cash,so she has to finance the car using credit.She is eager to get the car and drive out of the dealership.Which of the following is not a requirement of the dealership?

A)Allowance of a minimum of 30 days to remedy any default on the credit
B)Disclosure of the interest rate
C)Disclosure of the costs of the car
D)Disclosure of the payment scheme
E)Allowance for the buyer to retain possession unconditionally once two-thirds of the price has been paid

Question 70

Norman Cheese Inc operates a retail store selling specialty cheeses.Global Cheese is Norman's exclusive supplier.Global and Norman have an agreement under which Norman's buys cheese on credit,with the purchase price payable 30 days after delivery.As security for its obligation to pay,Norman has given Global a security interest in all of its cheese.Norman defaults on his obligation to pay Global.Global takes possession of Norman's cheese inventory and begins selling it for its own account.Desperate to save his business,Norman agrees to sell Karen all of his cheddar cheese.Karen has no knowledge of Global's interest in the cheese or the fact that the cheese is now in Global's possession.Does Global have an interest in the cheese sold to Karen?

Question 71

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.

Question 72

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?

Question 73

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?

Question 74

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?

Question 75

Baton Trucks Inc sold trucks in Alberta.Baton bought its trucks from Cold Automotive Inc.Under the terms of its agreement with Cold,Baton had agreed to give Cold a security interest in all of the trucks it acquired from Cold until they were paid for.Baton sold two trucks to Del's Flowers Inc in July.Del's paid for them but did not pick them up right away.Del's was run by Wendel,a friend of the president of Baton and knew about the security agreement that Baton had with Cold,though not its specific terms.Baton defaulted on its agreement with Cold,and Cold seized all of the trucks on Baton's lot including the two that had been sold to Del's.Who is entitled to the two trucks bought by Del's?

Question 76

Sabra carries on a business selling women's clothing at a retail store.She borrowed $10 000 from the Bank of Nova Scotia and gave the bank a security interest in all of her inventory.The bank filed a financing statement to register its interest.Sabra's entire inventory was bought on credit.The supplier retained title in the clothes as security for the payment of the purchase price.The supplier did not perfect its security interest.About $5000 worth of inventory had not been paid for when Sabra defaulted on her loan.She had $8000 left to pay on the loan and the Bank seized all her inventory.Sabra thinks that the inventory was worth in excess of $12 000 if it were sold at full retail prices.The bank found another store to buy it for $9000.Should Sabra complain about the bank's disposition of the collateral?

Question 77

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?

Question 78

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?