357
Chapter 29
Secured Transactions
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
B1. A security agreement is an agreement that creates or provides for a security interest.
B2. A security interest is not enforceable after the creditor’s rights have attached to the
collateral.
B3. A security interest is enforceable only if the collateral is not in the debtor’s possession.
B4. For a creditor to have an enforceable security interest, the debtor must have title to
the collateral.
358 TEST BANK 2—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B5. A debtor’s signature or authentication is required to create a security interest.
B6. Perfection is usually accomplished by filing a financing statement.
B7. A security agreement can be filed to perfect a security interest.
B8. In most states, a financing statement must be filed centrally in the appropriate state
office.
B9. Where or how to perfect a security interest sometimes depends on the classification
of collateral.
B10. Certificate-of-title statutes establish perfection requirements for security interest in
certain types of goods.
B11. A security interest in collateral does not give the secured party a security interest in
the proceeds acquired from the sale of that collateral.
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B12. A floating lien “floats” with an item of property, such as a specific piece of inventory,
as its ownership transfers from seller to buyer.
B13. If two conflicting security interests are unperfected, neither interest has priority.
B14. The perfection of a security interest will always protect a secured party against other
third parties having claims to the collateral.
B15. A buyer in the ordinary course of business takes the goods free from any security
interest created by the seller unless the buyer knows of its existence.
B16. A secured party can release any collateral described in the financing statement,
thereby terminating its security interest in that collateral.
B17. When the debtor has fully paid the debt, if the secured party perfected the security
interest by filing, the debtor is entitled to a termination statement.
B18. The rights and remedies of secured parties are not cumulative—if a creditor is
unsuccessful in enforcing rights by one method, he or she cannot pursue another
method.
360 TEST BANK 2—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B19. On default, a secured party who chooses not to retain the collateral must dispose of it in a
commercially reasonable manner.
B20. Proceeds from the disposition of collateral after default on the underlying debt are
distributed equally among lienholders who have made demands.
MULTIPLE CHOICE QUESTIONS
B1. 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.
B2. Rich Financial, Inc., files a financing statement regarding a transaction with Supreme
Business Company. To be valid, the financing statement must contain all of the
following except
a. a description of the collateral.
b. a statement of the purpose for the transaction.
c. Rich’s name.
d. Standard’s name.
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B3. The payment of Dylan’s debt to Ezra is guaranteed by Dylan’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 U.S. Chamber of Commerce.
B4. 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.
B5. Darling is the secured party in a secured transaction with Elmo. In this transaction,
Darling
a. has a security interest.
b. owes payment.
c. owes performance.
d. owns collateral.
B6. The payment of Lewellyn’s debt to Miklos is guaranteed by Lewellyn’s personal
property. Miklos is most likely to perfect his interest by
a. insuring Lewellyn’s property for the full amount of its value.
b. calculating the precise amount of Lewellyn’s debt.
c. correcting grammatical errors in the parties’ written agreement.
d. filing a financing statement with the appropriate authority.
362 TEST BANK 2—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B7. Sterling Bank wants to perfect its security interest in timber owned by Ridgeline
Lumber, Inc. Most likely, a financing statement should be filed with
a. the local chamber of commerce.
b. the county clerk.
c. a federal loan officer.
d. the secretary of state’s office.
B8. Rollo’s Super Store sells goods to consumers and businesses in a rural county in the
Midwest. Most of the goods are sold on credit. Rollo’s often takes a security interest
with the goods as collateral. Classification of the collateral determines
a. when or how to perfect a security interest.
b. the terms of a sale.
c. the effective time duration of credit.
d. the general rules of priority.
Fact Pattern 29-1B (Questions B9–B10 apply)
Call’s Farm & Ranch Supply, Inc., uses its inventory as collateral for a loan from Deland County
Bank. The bank files a financing statement with the secretary of state in the state in which
Call’s was chartered. One year later, Call’s changes its name to Big C’s, Inc.
B9. Refer to Fact Pattern 29-1B. Deland County Bank’s perfection will remain effective for
a. four months after the date of the name change.
b. five business days after the date of the name change.
c. six years after the date of the original filing.
d. no time.
B10. Refer to Fact Pattern 29-1B. To continue the effectiveness of its perfected interest,
Deland County Bank must file
a. a continuation statement after the original filing expires.
b. an amendment to the financing statement before the period expires.
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c. a new financing statement immediately.
d. a notice of repossession with all interested creditors.
B11. Comfort Furniture Store sells household consumer goods. To create a purchase-
money security interest, Comfort Furniture must
a. assign, to a collecting agent, a portion of its accounts payable.
b. assign, to a collecting agent, a portion of its accounts receivable.
c. extend credit for part or all of the purchase price of the goods.
d. refer purchasers to a third-party lender.
B12. Reliable Bank’s financing statement in collateral owned by Sunsource Energy
Corporation will expire in less than a year. With the filing of subsequent continuation
statements, the effectiveness of the bank’s 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.
364 TEST BANK 2—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B13. 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.
B14. Kettlecorn Investments, Inc., and Lone Tree Bank are secured parties with security
interests in property owned by Metal Fabrication 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 or attachment.
d. the “float” of the liens.
Fact Pattern 29-2B (Questions B15–B16 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 both loans.
B15. Refer to Fact Pattern 29-2B. 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.
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B16. Refer to Fact Pattern 29-2B. Suppose that two weeks after GLC takes possession 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.
B17. Quantum Financial Corporation is a secured party with a security interest in property
owned by Revolving Sales Company. Perfection of this security interest may not
protect Quantum 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.
B18. Khalil holds a security interest in inventory owned by Luc. Khalil assigns his interest in
the inventory to Mal. Mal becomes the secured party of record
a. automatically.
b. if Khalil advises Luc of the assignment.
c. if Mal advises Luc of the assignment.
d. if Mal files a uniform amendment form.
366 TEST BANK 2—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B19. Roni, a debtor, wants to confirm the amount of her outstanding secured debt with
Swifty Loan Corporation. Roni can ask Swifty to confirm her view of the debt, without
charge, every
a. month.
b. six months.
c. year.
d. five years.
B20. Gravel & Sand, Inc., buys a backhoe on credit from Heavy Equipment Corporation, but
does not make a payment on the loan for several months. Heavy repossesses the
backhoe by towing it from a public street. Green sues Heavy for breach of the peace.
Gravel & Sand will probably
a. not prevail, because Heavy did not use judicial process.
b. not prevail, because the repossession was not a breach of the peace.
c. prevail, because Gravel & Sand did not default on the loan.
d. prevail, because the repossession was a breach of the peace.
ESSAY QUESTIONS
B1. Edie needs $1,500 to buy textbooks and other school supplies. Frank agrees to loan
Edie $1,500, accepting as collateral Edie’s car. They put their agreement in writing and
sign it. Edie keeps possession of the car. Does Frank have an enforceable security
interest? How can Frank let other creditors know of his interest in the car?
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B2. Delgado is a retail seller of television sets. He sells a 3D HD TV set to Cummings.
Cummings cannot pay cash, so she signs a security agreement, paying a certain
amount down and agreeing to pay the balance in twelve equal installments. The
security agreement gives Delgado a security interest in the set. Cummings makes six
payments on time then goes into default because of unexpected financial problems.
Delgado repossesses the set. Can he keep it in full satisfaction of the debt? Explain.