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McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
28) 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.
29) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
30) 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.
31) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
32) 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.
33) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
34) 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.
35) 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.
36) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
37) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
38) 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.
39) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
40) 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.
41) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
42) 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
43) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
44) 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.
45) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
46) 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.
47) 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
48) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
Essay Questions
1) 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?
