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McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
2) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
3) 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?
4) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
5) 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?
6) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
7) 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?
8) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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?
9) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
10) 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?
11) 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
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
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?
12) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
13) 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?
14) 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.
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
15) 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?
McInnes/Kerr/VanDuzer: Managing the Law: The Legal Aspects of Doing Business, Fourth Edition
Chapter 23: Secured Transactions
