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McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
True/False Questions
1) 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.
a. True
b. False
2) 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.
a. True
b. False
3) 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.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
4) 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.
a. True
b. False
5) 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.
a. True
b. False
6) 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.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
7) 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.
a. True
b. False
8) 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.
a. True
b. False
9) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
shareholder’s security interest would have first priority because the shareholder advanced
its money first, before the bank advanced money.
a. True
b. False
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.
a. True
b. False
11) 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.
a. True
b. False
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
12) 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.
a. True
b. False
13) 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.
a. True
b. False
14) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
a. True
b. False
15) 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.
a. True
b. False
Multiple Choice Questions
1) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
2) 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.
3) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
4) 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.
5) 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.
6) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
7) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
8) 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.
9) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
10) 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.
11) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
12) 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.
13) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
14) 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.
15) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
16) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
17) 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.
18) 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.
19) 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.
20) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
e. The bank is entitled to the inventory because it is owed much more than Computer Sales.
21) 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.
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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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.
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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
24) 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.
25) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
26) 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.
27) 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.
