1
Chapter 30
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 financing statement is an agreement that creates or provides for a security
interest.
B2. Attachment gives the debtor a defense against a creditor’s attempt to enforce a
security interest in the debtor’s collateral.
B3. A security interest is enforceable only if the collateral is in the creditor’s
possession.
B4. For a creditor to have an enforceable security interest, the debtor must have
rights in the collateral.
2 TEST BANK B—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B5. Authentication means to sign, execute, or adopt any symbol on an electronic
record that verifies that the person signing has the intent to adopt or accept the
record.
B6. Perfection is usually accomplished without filing a financing statement.
B7. The UCC requires that a financing statement be filed under the name of the
creditor.
B8. In general, it is sufficient to provide only the debtor’s trade name (or fictitious
name) in a financing statement for perfection.
B9. Either the security agreement or the financing statement—but not both—must
describe the collateral in which the secured party has a security interest.
B10. A security agreement need not be in writing if the collateral is transferred to the
secured party.
B11. A purchase-money security interest in consumer goods is perfected
automatically at the time it is created.
B12. A security interest can cover property in which the debtor has ownership or
possessory rights in the present or in the future.
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B13. When more than one party claims an interest in the same collateral, a
perfected secured party’s interest has priority over the interest of most other
parties.
B14. On a debtor’s default, he perfection of a security interest will not 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 security interest is perfected.
B16. The debtor has the right to request a confirmation of the unpaid debt or list of
collateral without charge every six months.
B17. Any breach of the terms of the security agreement can constitute default.
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.
B19. On default, a secured party who chooses not to retain the collateral must dispose of
it in a commercially reasonable manner.
4 TEST BANK B—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
B20. Proceeds from the disposition of collateral after default are distributed in a
certain order with any surplus generally going to the debtor.
MULTIPLE CHOICE QUESTIONS
B1. Janet is the secured party in a secured transaction with Michelle. Janet could
also be referred to as the
a. debtor.
b. secured creditor.
c. collateral.
d. filing officer.
B2. The payment of Fritz’s debt to Gianini is guaranteed by Fritz’s personal
property. Gianini is
a. a debtor.
b. a secured party.
c. a secured transaction.
d. a security interest.
B3. 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.
CHAPTER 30: SECURED TRANSACTIONS 5
B4. 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.
B5. Lenders Bank files a financing statement regarding a transaction with Metro
Construction 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. Lenders’ name.
d. Metro’s name.
B6. The payment of Olinda’s debt to Pari is guaranteed by Olinda’s personal
property. Pari is most likely to perfect her interest by
a. insuring Olinda’s property for the full amount of its value.
b. calculating the precise amount of Olinda’s debt.
c. correcting grammatical errors in the parties’ written agreement.
d. filing a financing statement with the appropriate authority.
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B7. 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 if the financing statement also includes Julie’s signature.
d. sufficient if the financing statement also includes the location of the
collateral.
B8. 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.
B9. Super Discount Store sells goods to consumers and businesses in several
states in the Midwest. Most of the goods are sold on credit. Super Discount
often takes a security interest with the goods as collateral. The state in which a
financing statement should be filed depends on the location of
a. the debtor.
b. the collateral.
c. the store in which the goods were sold.
d. the place from which Super Discount manages its operations.
B10. Home2U Stores, Inc., sells household consumer goods. To create a purchase-
money security interest, Home2U 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.
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d. refer purchasers to a third-party lender.
B11. 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.
B12. 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.
B13. Debit & Credit Financing, Inc., and Equity Lending Company are secured
parties with security interests in property owned by Fleet Shipping 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.
B14. Dredging, Inc., borrows $50,000 from Equity Financing Corporation in a
secured transaction using Dredging’s equipment as collateral. Dredging then
borrows $70,000 from First Choice Lenders, Inc., using the same equipment as
8 TEST BANK B—UNIT SIX: CREDITORS’ RIGHTS AND BANKRUPTCY
collateral. Neither Equity Financing nor First Choice perfects its security
interest. Dredging defaults on the loans. The party with priority is
a. Equity Financing, because its interest was the first to attach.
b. First Choice, because Dredging owes it more money.
c. First Choice, because its interest was the second to attach.
d. Equity Financing, because Dredging owes it less money.
Fact Pattern 30-1B (Questions B15–B16 apply)
Resource Drilling Company buys equipment for use in its operations, borrowing $1
million from Security Finance Corporation for a security interest in the equipment. The
next day, Resource Drilling borrows $500,000 from Touchstone Loans, also for a
security interest in the equipment. Resource Drilling defaults on both loans.
B15. Refer to Fact Pattern 30-1B. Suppose that Security Finance perfects its se-
curity interest when Resource Drilling takes possession of the equipment. In
that circumstance, the party with priority to the collateral on Resource Drilling’s
default would be
a. Resource Drilling.
b. Security Finance and Touchstone Loans proportionately.
c. Security Finance only.
d. Touchstone Loans only.
B16. Refer to Fact Pattern 30-1B. Suppose that two weeks after Resource Drilling
takes possession of the equipment, Security Finance and Touchstone Loans
file financing statements, with Touchstone Loans filing first. In that circum-
stance, the party with priority to the equipment is
a. Resource Drilling.
b. Security Finance and Touchstone Loans proportionately.
c. Security Finance only.
d. Touchstone Loans only.
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B17. Rural Financial Corporation is a secured party with a security interest in
property owned by Strawberry Fields, Inc. Perfection of this security interest
may not protect Rural 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.
B18. A-One Loans, Inc., holds a security interest in kitchen and restaurant
equipment owned by Brunch n’ Lunch Bistro. A-One assigns its interest in the
equipment to Commercial Investments Corporation. Commercial Investments
becomes the secured party of record
a. automatically.
b. if A-One advises Brunch n’ Lunch of the assignment.
c. if Commercial Investments advises Brunch n’ Lunch of the assignment.
d. if Commercial Investments files a uniform amendment form.
B19. Pizza Now!, a delivery, dine-in, or takeout restaurant, buys a delivery vehicle
on credit from Quality Auto & Truck Dealers Corporation, but does not make a
payment on the loan for several months. Quality Auto repossesses the vehicle
by towing it from a public street. Pizza Now! sues Quality Auto for breach of the
peace. Pizza Now! will probably
a. not prevail, because Quality Auto did not use judicial process.
b. not prevail, because the repossession was not a breach of the peace.
c. prevail, because Pizza Now! did not default on the loan.
d. prevail, because the repossession was a breach of the peace.
B20. 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
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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.
ESSAY QUESTIONS
B1. Town Loan Center agrees to loan Sara $1,500, accepting as collateral her car.
They put their agreement in writing and sign it. Sara keeps possession of the
car. Does Town Loan have an enforceable security interest? How can Town
Loan let other creditors know of its interest in the car?
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B2. Digital Devices is a retail seller of entertainment media. Digital Devices sells a
3D HD TV set to Edmund. Edmund cannot pay cash, so he signs a security
agreement, paying a certain amount down and agreeing to pay the balance in
twelve equal installments. The security agreement gives Digital Devices a
security interest in the set. Edmund makes six payments on time then goes into
default because of unexpected financial problems. Digital Devices repossesses
the set. Can the creditor keep it in full satisfaction of the debt? Explain.