Deck 23: Secured Transactions

Question 1

A financing agreement between a lender and a borrower where the borrower pledges certain collateral for the loan is called a secured transaction.

Answer 1

True

Question 2

Pfeffy Industries borrows money from the Bank of Chicago for an expansion but does not offer any collateral to secure the loan. If Pfeffy Industries goes bankrupt, the Bank of Chicago will be the first in line to be repaid for any debt in a bankruptcy proceeding.

Answer 2

False

Question 3

A person can use a checking account as collateral in a secured transaction.

Answer 3

True

Question 4

A security interest is created when an interest in real property is used to secure payment of an obligation.

Question 5

Noah secures a loan with the following "all furniture currently owned and hereafter acquired." This is an example of a floating lien.

Question 6

Jackson offers his 1985 Yugo as collateral to a loan that he secured. A half year later Jackson sells the Yugo to Lee and therefore, the car will no longer be collateral to the loan.

Question 7

Perfecting a security interest is the process by which a secured lender can protect its security interest from other creditors who might assert claims against the same collateral.

Question 8

To perfect their security interest Georgia files a UCC-2A financing statement with the secretary of state where the lender resides.

Question 9

Juan gives his class ring to Maren to use as collateral for a loan she made to him. This collateral is said to be perfected by possession.

Question 10

As a general rule, the party that has the largest amount of interest secured has priority over all others when multiple creditors have a perfected a security interest on the same collateral.

Question 11

Wyatt wishes to buy a new combine for his farm to harvest the wheat. The cost of the new combine is about $500,000.00 for which he must secure a loan to purchase. The bank that is willing to loan him the amount requires Wyatt to put up collateral to ensure that if he is unable to repay that loan that the bank will be able to seize the asset to repay the loan. This situation is called

A) A promissory note
B) A secured transaction
C) A fiduciary transaction
D) A collateral loan

Question 12

Wrett purchases a new four-wheeler with a loan from his bank. The bank requires that he use his car, which is paid off, as collateral for the loan he secured from the bank. The value of the 4-wheeler is $2500.00. The value of the car is $15,000.00. Wrett defaults on his loan for the 4-wheeler and thus is forced to sell his car to repay the loan. Which statement below is true regarding this secured transaction?

A) Wrett must dispose of his car and apply the proceeds to the loan and if there is any surplus the money belongs to Wrett.
B) Wrett must hand over physical possession and title to the car.
C) Since the value of the car far exceeds the value of the 4-wheeler, the bank must accept an alternate good closer to value of the 4-wheeler.
D) The bank will sell the car for the value of the loan of the 4-wheeler, not the actual fair market value of the car.

Question 13

The assets a buyer has pledged to secure a loan is called

A) Securing title
B) Fiduciary agreement
C) Collateral
D) Forfeiture asset

Question 14

All of the following statements are true about when secured transactions are used, except

A) The lender views a borrower's credit history as risky.
B) The UCC requires that all loans must be a secured transaction.
C) The lender feels contractual obligations may not be enough for the debtor to honor her obligations.
D) The borrower will generally benefit from lower interest rates.

Question 15

When a loan lacks collateral, it is called a

A) Risky loan
B) Illegal loan
C) Unenforceable loan
D) Unsecured loan

Question 16

Trent is broke and needs cash immediately to pay off a debt he incurred. He visits the local pawn shop and leaves his grandfather's watch in exchange for $100.00 cash. This is an example of what type of loan?

A) Unsecured loan
B) Secured loan
C) Chattle loan
D) UCC loan

Question 17

All of the following may be used as collateral for a secured transaction except

A) Seeds and crops
B) A promissory note
C) A patent
D) Future profits of a business

Question 18

Nancy offers her mother's wedding ring as collateral for a loan from a creditor. Shortly after entering into the agreement, Nancy fails to pay back the loan according to the schedule agreed upon. What remedies might the creditor have?

A) The creditor can take possession of the ring.
B) The creditor, after two missed payments may retake possession of the ring.
C) The creditor may take Nancy to court to seek payment according to the terms of the loan.
D) The creditor may seek criminal charges against Nancy.

Question 19

Caleb offers "all dirt bikes currently owned and hereinafter acquired" as collateral to purchase a building for his dirt bike repair shop. This is an example of a

A) Fixture lien
B) Floating lien
C) Determinable lien
D) True lease

Question 20

In order to ensure that a security interest is enforceable, all of the following must occur, except

A) The lender has offered the approval of a loan.
B) The debtor has a rightful legal claim in the collateral.
C) The debtor recorded the security interest within the county in which the property is located.
D) The debtor has authenticated an agreement that describes the collateral.

Question 21

Kahl Printing enters into a loan with Universal Bank wherein Kahl Printing uses all of its printing press equipment as collateral. Kahl Printing, including all the business assets, is bought by Scotty Printing. Shortly thereafter, Kahl Printing defaults on its loan to Universal Bank. Which of the following statements is correct?

A) Universal Bank may bring legal actions against the previous owners of Kahl Printing.
B) Universal Bank may sue the owners of Scotty Printing.
C) The security interest stays with the assets of Kahl Printing upon transfer of ownership of the business to Scotty.
D) Universal Bank may reclaim the printing press equipment.

Question 22

Which of the following statements below is correct about a pawnbroker?

A) A pawnbroker is always considered a buyer in ordinary course of business.
B) A pawnbroker always retains physical possession of the real property offered as collateral.
C) A pawnbroker retains the right to a security interest even if the property is sold to a buyer in the ordinary course of business.
D) A pawnbroker, in most cases, is engaged in illegal usurious activities.

Question 23

Cody is a regular client of Bear Paw Productions and purchases their world famous furniture to furnish the hotels he owns. Unknown to Cody, Bear Paw recently took out a loan with Grizzly Bank and used "all the inventory of furniture at Bear Paw Productions" as the collateral as a security interest. Bear Paw Productions defaults on its loan with Grizzly Bank. Which of the following statements is correct?

A) Cody will be able to keep all of inventory furniture that he purchased.
B) Grizzly Bank will be able to reclaim the furniture that Cody purchased as it was collateral.
C) Cody will be required to repay the remainder of the loan Bear Paw Productions owes to Grizzly in order to keep the furniture.
D) Grizzly Bank will have the option of pursuing legal action to enforce the terms of the loan against Cody or Bear Paw Productions.

Question 24

A person who buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods from a person in the business of selling goods of that kind is called

A) Unsecured purchaser
B) Buyer in the ordinary course of business
C) Good faith client
D) Fiduciary buyer

Question 25

In Morgan County Feeders v. McCormick, the court ruled

A) Cattle will always be considered equipment for a farm.
B) Cattle will always be considered inventory for a farm.
C) To determine if cattle are equipment or inventory, the court must determine what the predominant use is of the cattle.
D) To determine if cattle are equipment or inventory, the court must see how the owner listed them in legal documents.

Question 26

In Morgan County Feeders v. McCormick, the court determined that classifying a good as inventory, rather than equipment,

A) Meant that the security interest did not travel with the sale of the cows to a good faith buyer.
B) Meant that the security interest did indeed travel with the sale of the cows to a good faith buyer.
C) Meant that the security interest was illegal according to the UCC.
D) Meant that the purchaser had to assume the terms of the loan.

Question 27

When a debtor uses the same property as collateral for several loans a lender may want to protect his security interest from other creditors who may assert claims against the same collateral by

A) Entering into a contract with the other creditors.
B) Requesting the court determine that the other creditors' interests are invalid.
C) Perfecting a security interest.
D) Requesting title to the property.

Question 28

Scott perfected a security interest against Jaimie for a loan that she offered her car as collateral. Shortly thereafter, Jaimie declared bankruptcy. Which statement below is correct?

A) The bankruptcy proceedings always has a superior claim to any property.
B) All creditors will take a portion of the property in proportion to the amount of debt owed to each lender.
C) Scott will have a superior interest since he perfected the security interest in the car.
D) Once the proceeds from the bankruptcy are used to satisfy existing debt, Scott will then have a claim to the remaining proceeds.

Question 29

All of the following are methods of perfecting a security interest except

A) Filing a UCC-1 financing statement.
B) When the borrower physically transfers possession to the lender.
C) Issuing chattel paper to memorialize the financing and secured interest.
D) Having the court issue a court order declaring a perfection.

Question 30

Roberto Financing is incorporated in Delaware and does business throughout all 50 states in the United States and in China and India. If it wants to file a UCC-1 financing statement to perfect a security interest on collateral, where would be allowable according to the law?

A) In any state in which it does business.
B) Delaware.
C) In the federal government.
D) In the United Nations.

Question 31

Which of the following types of collateral are required to be perfected by filing a UCC-1 financing statement?

A) Goods
B) Equipment
C) Deposit accounts
D) Intangibles

Question 32

Trent delivers his prized, one of a kind, oil painting of Frank Gotch, a famous wrestler from long ago, to Canon Bank as collateral for a loan, and Canon Bank hung the oil painting in its lobby. Shortly thereafter, Trent enters into another loan with Kenland Bank uses the same painting as collateral. Trent defaults on both loans at the same time. According to Article 9 of the UCC which entity has a perfected security interest?

A) Trent because he is the rightful owner of the painting.
B) Canon Bank in that the security interest was perfected by possession.
C) Kenland Bank because it is the most recent lender.
D) Canon Bank and Kenland Bank both have an equal perfected security interest.

Question 33

An automatically perfected security interest in consumer goods when a merchant or lender offers financing to a borrower to purchase goods is called a(n)

A) Floating lien
B) UCC-2 perfecting statement
C) Purchase-money security interest
D) Perfection by operation of law

Question 34

If a lender wishes to automatically perfect a security interest in business equipment, the lender must.

A) Ensure the goods are within the borrower's possession within 20 days of the agreement and file a UCC-1 financing agreement.
B) File a declaration of interest describing the good used as collateral.
C) Notify other creditors doing business with the debtor of the nature of the collateral.
D) Verify by judicial proceeding that the borrower uses the equipment in the ordinary course of business.

Question 35

Eunice purchased a station wagon from Lindy's Auto Store. To finance the purchase she entered into a finance agreement with Lindy's in writing which stated the terms of the finance agreement. Eunice then drove the car home. Which statement below is correct?

A) The debt Eunice owes to Lindy's Auto Store is not perfected.
B) The debt Eunice owes to Lindy's is perfected by possession.
C) The debt Eunice owes to Lindy's is automatically perfected.
D) The debt Eunice owes to Lindy's is perfected by control.

Question 36

When a client of a brokerage firm borrows money to make additional investments and offers securities as collateral it is called purchasing on

A) Unsecured securities
B) Perfected security
C) Margin
D) Transfer agency

Question 37

The Bank of Edwards on July 1^st and Legacy Bank on July 2^nd both entered into a loan agreement with Julius. On July 3^rd, Legacy Bank filed a UCC-1 financing statement and on July 5^th, the Bank of Edwards did as well. In this situation, if Julius defaults on his loan with both banks, who has priority?

A) The Bank of Edwards
B) Legacy Bank
C) Both banks have the same priority
D) The bank which loaned the largest amount of money to Julius.

Question 38

Juan delivers possession of his car to Magic Bank and Financial Services as collateral on a loan on September 1^st. The next week he uses the same car as collateral in another loan from Truman Financial on September 8^th. Truman Financial files a UCC-1 financing statement that same day on September 8^th. A month later, Juan defaults on both loans. Which bank has priority?

A) Magic Bank and Financial Services
B) Truman Financial
C) Both banks have equal priority.
D) The bank which loaned the largest amount of money to Juan.

Question 39

Orlando Bank filed a UCC-1 financing statement on March 22^nd for a car, valued at $45,000, that Donald offered as collateral on a $1000.00 loan. Donald also offered the same car as collateral to Kissimmee Bank for a $5000.00 loan. Kissimmee bank filed a UCC-1 financing statement on March 24. Donald ended up defaulting on both loans. Which statement below is correct?

A) Orlando bank will receive all the proceeds from the sale of the car because Orlando bank perfected its security interests first.
B) Orlando bank will receive the amount of the outstanding loan and the remaining proceeds will revert to Donald.
C) Kissimmee Bank will receive all the proceeds from the sale of the car because it loaned Donald the largest amount.
D) Orlando bank will have priority in the security to cover the cost of the loan and the remainder will go to Kissimmee as second in priority of a perfected security interest.

Question 40

If a borrower is in default, the lender has all the following options except

A) Repossess the collateral by judicial action.
B) Allow the borrower time to cure the default.
C) Repossess the collateral by judicial action and sell the collateral.
D) File criminal charges against the borrower for theft.

Question 41

In James v. Ford Motor Credit, the court ruled

A) A repo agent cannot remove a good if the debtor objects to it.
B) The fact that the repo agent removed the car from a public area and exercised control over the car for over an hour meant that the repossession did not breach the peace.
C) A debtor has a right of self-help at any time if he believes his good has been wrongfully possessed.
D) Ford Motor Credit cannot delegate the responsibility to a third party, including the repo agent.

Question 42

Ronald Finance was a secured lender to Shirley who used her car as a collateral. Shirley defaulted on her loan and an employee of Ronald Finance sneaked over to Shirley's house at night and removed her car. Which statement below is correct?

A) A secured lender can take any method necessary to retrieve collateral when a person has defaulted on a loan.
B) Only a repo agent can retrieve collateral in any method necessary when the debtor has defaulted on a loan.
C) A repo agent and a Sheriff from the county in which the collateral is presently located must repossess the collateral together.
D) Ronald Finance can contact a repo agent service and the repossession must occur in a way that does not breach the peace.

Question 43

All of the following scenarios may trigger a default except

A) Sally does not make a payment on a loan by the due date.
B) Bob dies before he pays off his loan.
C) Tom destroys his car that he offered as collateral on a loan.
D) Joe declares bankruptcy.

Question 44

Why might a lender require that a loan be secured with collateral?

Question 45

Explain the process that one must establish to secure an interest that is enforceable? And give an example of each of the requirements.

Question 46

Angelina, a resident of Florida, borrowed some money from Italiano Bank to pay for her college tuition bill of $10,000. She offered her car, valued at $20,000 as collateral for the loan. Next she decided that she wanted to go on an extravagant trip to Bali, and to finance the trip she got another loan, for $10,000, from Italiano Bank and delivered a G.B. Rielle original work of art, valued at $15,000, to the bank to hold onto as collateral for the loan for the trip. Before leaving for Bali, she also bought a kayak for $1000.00 from a store to take on the trip with her and borrowed the money from a friend, Maddie, promising to pay her back. On her way to the airport to fly out to Bali, she realized that the plane ticket she purchased was for the next month when she would be in school. Therefore, she quickly borrowed additional money, $2000.00 from New York Finance to purchase another plane ticket and used her car again as collateral. New York Finance immediately filed a UCC-1 financial statement with the secretary of state in Florida. After her grand excursion Angelina realized she could not pay her loans back on her meager wage as a taco delivery driver. Therefore, she defaulted on all of her loans. Explain the order of priority of the loans and who would get repaid for the defaulted loans if the loan amounts remained the same as when originally loaned.

Question 47

In general, explain why creditors see seizing collateral as a least preferred option when the borrower defaults on a loan. Give some examples.

Question 48

Mika enters into a loan with correct Bank to purchase business equipment for her auto repair supply shop for $5000.00. For collateral, she delivers her computer to correct Bank. Correct Bank memorializes this transaction in writing and adds the phrase, "all computers and tools currently owned and hereafter acquired." Shortly thereafter, Mika defaults on her loan with True Bank and they sell the computer that she delivered to correct Bank originally for $500.00. True Bank realizes that it needs more money to be made whole so they tell Mika to hand over all her equipment for them to sell to satisfy the debt she owes. Mika refuses stating that the computer of which they had possession was the only computer used for collateral. A long time customer of Mika, Breshnev, purchases his socket parts to repair his cars as he normally does, not knowing of Mika's financial issues. Finding that out, correct Bank also wants those tools sold to Breshnev as they claim they were used as collateral as well. Given the facts above what assets may correct Bank use as collateral?