Chapter 23
Security Interests
in Personal Property
N.B.: TYPE indicates that a question is new, modified, or unchanged, as follows.
N A question new to this edition of the Test Bank.
+ A question modified from the previous edition of the Test Bank,
= A question included in the previous edition of the Test Bank.
TRUE/FALSE QUESTIONS
1. Secured transactions are governed by the Uniform Commercial Code (UCC).
2. The person who owes the payment of a secured obligation is the secured
party.
3. A debtor is the person in whose favor there is a security interest.
4. A security interest is not enforceable after the creditor’s rights have attached to
the collateral.
5. For a creditor to have an enforceable security interest, the debtor must have
rights in the collateral.
6. Attachment makes the security interest between a debtor and secured party
ineffective.
7. To create an enforceable security interest, the secured party must give value.
8. The failure to pay a debt as promised is known as default.
9. Perfection refers to the quality of the collateral that secures a creditor’s interest
in a debtor’s debt.
10. A security interest cannot be perfected without the filing of a financing
statement.
11. The method of perfecting a security interest does not depend on the
classification of the collateral.
CHAPTER 23: SECURITY INTERESTS IN PERSONAL PROPERTY 3
12. A financing statement must include the creditor’s signature.
13. A financing statement cannot be the same as the security agreement.
14. A security interest is enforceable only if the collateral is in the secured party’s
possession.
15. A financing statement must include a description of the collateral by type or
item.
16. The office in which a financing statement should be filed depends on the
creditor’s location.
17. A purchase-money security interest in consumer goods is perfected
automatically at the time of a credit sale.
18. A continuation statement is effective only if it is filed within six months before
the expiration of a financing statement.
19. A financing statement is effective for five years from the date of filing.
20. Proceeds consist of whatever is received when collateral is sold.
21. A security agreements may provide for coverage of after-acquired property.
22. Future advances against a line of credit can be subject to the same collateral.
23. The concept of a floating lien applies to a constantly changing inventory.
24. A floating lien cannot apply to the proceeds of a sale of after-acquired property.
25. The “first–in–time” rule means that an unperfected security interest takes priority
over a perfected security interest.
26. The last security interest to be perfected is the first in priority over any other
perfected security interests.
27. The first security interest to be perfected is the last in priority over any other
perfected security interests.
28. A buyer in the ordinary course of business has priority over any security
interest created by the seller.
29. To take goods free of any security interest, a buyer in the ordinary course of
business cannot know about the interest.
30. A secured party can release any collateral described in the financing
statement, thereby terminating its security interest in that collateral.
31. In most situations, a termination statement must be filed or sent within twenty
days after the debt is paid.
32. On default, unless the security agreement states otherwise, the secured party
has the right to take possession of the collateral.
33. To qualify as a commercially reasonable sale, a secured party’s sale of col–
lateral, after default and repossession, must be private.
34. Proceeds from the disposition of collateral after default on the underlying debt
are distributed equally among lienholders who have made demands.
35. The price that a secured party obtains on a sale of collateral is all that the
creditor can recover on the debt.
MULTIPLE CHOICE QUESTIONS
1. The payment of Brian’s debt to Chuck is guaranteed by Brian’s personal
property. This is
a. an attachment.
b. a secured transaction.
c. perfection.
d. a violation of most state laws.
2. The payment of Waldo’s debt to Main Street Bank is guaranteed by Waldo’s
personal property. This is governed by
a. the Uniform Commercial Code.
b. the Federal Trade Commission.
c. the U.S. Constitution’s commerce clause.
d. the Bankruptcy Reform Act of 2005.
3. Jane is the secured party in a secured transaction with Margaret. Jane could
also be referred to as the
a. debtor.
b. secured creditor.
c. collateral.
d. filing officer.
4. Jason is the creditor in a transaction with Carol, who is the debtor. Which of the
following requirements is not necessary for Jason to have an enforceable
security interest?
a. The collateral must be in Jason’s possession, or there must be a written
or authenticated security agreement.
b. Jason must give value to Carol.
c. Carol must have rights to the collateral.
d. The collateral must be tangible.
5. The payment of Frida’s debt to Gianini is guaranteed by Frida’s personal
property. Gianini is
a. a debtor.
b. a secured party.
c. a secured transaction.
d. a security interest.
6. The payment of Eden’s debt to Flem is guaranteed by Eden’s personal
property. This property is
a. a secured party.
b. a secured transaction.
c. a security interest.
d. collateral.
7. Clear Lake Credit Corporation lends funds to Donny, a consumer, to apply to the
cost of a boat, which is the collateral for the loan. An enforceable security interest
requires
a. a written agreement and Clear Lake’s possession of the boat.
b. a written agreement or Clear Lake’s possession of the boat.
c. the boat seller’s acknowledgement of the loan in writing.
d. Donny’s possession of the boat.
8. Olaf is the creditor in a transaction with Phil. Once certain requirements are
met, Olaf’s rights will attach, which means that Olaf will have
a. an indivisible ownership right to Phil’s property.
b. an enforceable security interest in Phil’s property.
c. a notice affixed to Phil’s property.
d. the permission of a court to seize Phil’s property.
9. Jim files a uniform financing statement giving notice to the public that he has a
secured interest in collateral belonging to Phil, who is the debtor named in the
statement. This uniform statement form is now used in
a. all states.
b. no states.
c. only one state—Pennsylvania.
d. some states with several different forms used in other states.
10. Sally is the secured party in a transaction with Lilly, who is the debtor. Sally
files a financing statement with the appropriate state official. The financing
statement must contain
a. Lilly’s signature.
b. Sally’s bank account information.
c. Lilly’s credit report.
d. a photograph of the collateral.
11. The payment of Jose’s debt to Klint is guaranteed by Jose’s personal property.
The process by which Klint can protect himself against the claims of third
parties to this property is
a. attachment.
b. default.
c. perfection.
d. termination.
12. The payment of John’s debt to Kirsten is guaranteed by John’s personal
property. Kirsten is most likely to perfect her interest by
a. attaching a bright label to John’s property.
b. calculating the precise amount of John’s debt.
c. correcting grammatical errors in the parties’ written agreement.
d. filing a financing statement with the appropriate authority.
13. The payment of Hu’s debt to Ian is guaranteed by Hu’s personal property. To
give notice of his interest in Hu’s property to other creditors, Ian is most likely to
a. attach a bright label to Hu’s property.
b. e-mail other potential creditors.
c. file a financing statement with the appropriate authority.
d. publish a collection notice in local newspapers.
14. Khalil holds a security interest in inventory owned by Luc. Khalil protects his
claim to the inventory in the event of Luc’s default by
a. assignment.
b. perfection.
c. redemption.
d. retention.
15. Kathy is the secured party in a transaction with Julie, who is the debtor. The
collateral is a 2007 Chevrolet F150 pick-up truck. Kathy files a financing
statement in which she describes the collateral as “a vehicle.” To perfect
Kathy’s interest this is
a. not sufficient.
b. sufficient.
c. sufficient as long as the financing statement also includes Julie’s
signature.
d. sufficient as long as the financing statement also includes the location of
the collateral.
16. The payment of Yves’s debt to Zac is guaranteed by Yves’s personal property.
Their agreement identifies Yves’s property by serial number. To establish Zac’s
interest, this is most likely
a. irrelevant.
b. not sufficient.
c. sufficient if it accurately describes the collateral.
d. sufficient unless it is too tedious to review.
17. Fiona borrows $1,000 from Garden State Bank, using her motorcycle as col-
lateral. To perfect its security interest, the bank must file its financing statement
with
a. the secretary of state.
12 UNIT THREE: COMMERCIAL TRANSACTIONS
b. the county clerk.
c. the city treasurer.
d. the ward alderman.
18. Angie borrows $20,000 from First Line Credit using a field of timber trees as
collateral. To perfect its security interest, First Line Credit must file its financing
statement with
a. the county clerk.
b. the mayor.
c. the city counsel.
d. the secretary of state.
19. Corporate Bank wants to perfect its security interest in inventory owned by
Outdoor Outfitters, Inc. Most likely, a financing statement should be filed with
a. the bank manager.
b. the county clerk.
c. the U.S. Department of the Interior.
d. the secretary of state.
20. Saf-T Lenders, Inc., takes possession of Tiara’s stock in Urgent Care Corporation to
perfect Saf-T’s security interest in the stock. This is
a. after-acquired property.
b. a pledge.
c. a purchase-money security interest.
d. a violation of most state laws.
21. The payment of Paul’s debt to Ryan is guaranteed by Paul’s 2002 Honda Civic.
Ryan filed the financing statement on July 1, 2012. If Ryan does nothing else,
the financing statement will be effective until
a. July 1, 2013.
b. July 1, 2014.
c. July 1, 2017.
d. July 1, 2022.
22. Valley Furniture Store sells household consumer goods on credit for which
Valley files a financing statement to perfect a security interest in the goods.
With the filing of subsequent continuation statements, the effectiveness of the
statement can be continued
a. indefinitely.
b. for no longer than five years.
c. for no more than six months.
d. up to five years and six months.
23. City Bank’s financing statement in collateral owned by Delta Waters
Corporation will expire in less than a year. Filed timely, a continuation
statement could extend the effectiveness of the financing statement for
a. one year.
b. two years.
c. five years.
d. ten years.
24. Everyday Loans, Inc., issues a line of credit in Glade Electronics Corporation
under a security agreement. Later, Glade buys new HD-TVs to add to its
inventory. Everyday has a security interest in the new inventory
a. if the security agreement included an after-acquired property clause.
b. if Everyday has not yet filed a financing statement.
c. if Glade bought the inventory with Everyday funds.
d. under no circumstances.
25. Joan borrows money from Jake under a security agreement. After borrowing
the money, Joan buys a new kayak. The kayak is considered
a. a floating lien.
b. after-acquired property.
c. a future advance.
d. proceeds.
26. Middling Credit Corporation asks Little Supply Company to agree to a security
agreement that provides for coverage of the proceeds from the sale of after–
acquired property. This is
a. a first-in-time rule.
b. a floating lien.
c. a funds guaranty.
d. in violation of secured transactions law.
27. Pete borrows $5,000 from Willy in a secured transaction using Pete’s BMW as
collateral. Pete then borrows $7,000 from Janet using the same car as
collateral. Neither Willy nor Janet perfects their security interests. Pete defaults
on the loans. The party with priority is
a. Willy, because his interest was the first to attach.
b. Janet, because Pete owes her more money.
c. Janet, because her interest was the second to attach.
d. Willy, because Pete owes him less money.
28. Lena borrows from Mac and Nicol, using the same farm equipment as collateral
for both loans. Only Nicol has a perfected security interest. Lena defaults on
both loans. The party with first rights to the collateral is
a. Lena.
b. Mac and Nicol, in proportion to Lena’s debt to each.
c. Mac only.
d. Nicol only.
16 UNIT THREE: COMMERCIAL TRANSACTIONS
Fact Pattern 20-1(Questions 29–20 apply)
General Leasing Company (GLC) buys equipment for use as inventory, borrowing $1
million from Helpful Finance Corporation for a security interest in the equipment. The
next day, GLC borrows $500,000 from Interstate Bank, also for a security interest in
the equipment. GLC defaults on the loans.
29. Refer to Fact Pattern 20-1. Suppose that Helpful perfects its security interest
when GLC takes possession of the equipment. In that circumstance, the party
with priority to the collateral on GLC’s default would be
a. GLC.
b. Helpful and Interstate proportionately.
c. Helpful only.
d. Interstate only.
30. Refer to Fact Pattern 20-1. Suppose that two weeks after GLC takes pos–
session of the equipment, Helpful and Interstate file financing statements, with
Interstate filing first. In that circumstance, the party with priority to the
equipment is
a. GLC.
b. Helpful and Interstate proportionately.
c. Helpful only.
d. Interstate only.
31. Idle Investments, Inc., and Harbor Bank are secured parties with security
interests in property owned by GR8 Manufacturing Corporation. Priority
between these security interests is generally determined by
a. the amount of the claim.
b. the custom in the trade.
c. the time of perfection.
d. the time the security agreement was signed.
32. Quotient Financial Corporation is a secured party with a security interest in
property owned by Retail Sales Company. Perfection of this security interest
may not protect Quotient Financial against the claim of
a. a bank.
b. a buyer in the ordinary course of business.
c. a subsequent lien creditor.
d. a trustee in bankruptcy.
33. Elias repays his debt, incurred to buy consumer goods, to Fidelity Bank and
immediately files a written request for a termination statement. Fidelity
a. must comply within one month of receipt of the letter.
b. must comply within twenty days of receipt of the letter.
c. must refund $500 to Elias.
d. need not comply.
34. Sweetwater Café defaults on debts to Town & Country Bank and Uno Loan
Company. Town & Country perfected its security interest before Uno. Town &
Country takes possession of the collateral in which it has a security interest. On
a sale of the collateral, the proceeds will be applied first to
a. Sweetwater’s previous payments on the debts.
b. Sweetwater’s unpaid payments on the debts.
c. the balance of Sweetwater’s debt to Town & Country.
d. the balance of Sweetwater’s debt to Uno.
35. Hal’s Hardware store defaults on a debt to Intrastate Bank, which takes
possession of the collateral securing the debt. Intrastate sells the collateral.
The proceeds from the sale are applied first to
a. Hal’s debt to Intrastate.
b. Hal’s debts to other creditors.
c. Intrastate’s fees for the sale.
d. payments Hal’s made on the debt to Intrastate.
ESSAY QUESTIONS
1. Sara needs $1,500 to buy textbooks and other school supplies. Tomas agrees
to loan Sara $1,500, accepting as collateral Sara’s car. They put their
agreement in writing and sign it. Sara keeps possession of the car. Does
Tomas have an enforceable security interest? How can Tomas let other
creditors know of his interest in the car?
2. Efrem owns Fans & Players, a retail sporting goods shop. When Great Hill
Lodge, a new ski resort, is built in the area, Efrem decides to expand and
borrows a large sum from Hometown Bank. The bank takes a security interest
in Efrem’s present inventory and any after-acquired inventory as collateral for
the loan. The bank properly perfects the security interest by filing a financing
statement. Efrem’s business is profitable, and he begins doubling his inventory.
A year later, an avalanche destroys the ski slope and lodge. Efrem’s business
takes a turn for the worse, and he defaults on his debt to the bank. The bank
seeks possession of his entire inventory, even though the inventory is twice as
large as it was when the loan was made. Efrem claims that the bank has rights
to only half of his inventory. Is Efrem correct? Explain.
