Preview Extract
CHAPTER 15-SECURED TRANSACTIONS
TRUE/FALSE
1. Pharm-Ace holds a patent on a drug. Pharm-Ace used the patent (evidenced by the patent
certificate) to secure a $1 million loan from First Bank. The patent is chattel paper.
Answer: False
2. Revised Article 9 of the UCC only applies to goods and does not include intangibles such
as accounts or chattel paper.
Answer: False
3. A PMSI can be created only in goods and software.
Answer: False
4. Under Revised Article 9 of the UCC, electronic chattel paper may be used as collateral in a
secured transaction.
Answer: True
5. Bagsby owns a business selling insects for organic gardening. Bagsby is seeking a loan
from First Natural Bank. The loan officer is asking that the loan be secured by Bagsby's
inventory of insects, now owned or hereafter acquired. In order to do this, a new security
agreement will need to be signed each time Bagsby gets new insects or sells his insects.
Answer: False
6. Maddie enters into a secured consumer debt transaction with Friendly Bank. When Maddie
pays the loan in full, Friendly Bank is required to file a statement indicating that it no longer
claims a secured interest in the collateral. This statement must be filed within one month from
the date the debt is fully paid.
Answer: True
7. There is no way to attach a security interest in electronic chattel paper.
Answer: False
8. Micky, a mechanic, repaired Daphane's Dodge. Daphane failed to pay the repair bill of
$595. Since Micky was still storing the car, he could therefore claim a landlord’s lien on the
car.
Answer: False
9. Great State Bank and First Federal Bank have a security interest in TriColor's equipment. If
neither secured party is perfected, the first to sue or repossess has priority over the collateral.
Answer: False
10. Article 9 applies to any transaction intended to create a security interest in real property.
Answer: False
11. Spicy & Hot, Inc. is interested in expanding its Mexican food restaurant into a Mexican
food catering business. Spicy & Hot, Inc. buys a new delivery van from Van World. Spicy &
Hot, Inc. is a buyer in the ordinary course of business when purchasing the van.
Answer: True
12. For a security interest to attach, there must be an agreement.
Answer: True
13. Masterview, Inc. purchased a new computer system, which included some computer
programs. When Masterview developed financial troubles, two competing creditors of
Masterview claimed the right to repossess the computer system and the programs. The UCC
distinguishes “software” from “goods” and treats them differently for some purposes, which
would be important in this situation.
Answer: True
14. First Federal had a perfected security interest in Vicor's printing press. Second Credit had
a security interest in the same press, but its interest was not perfected. First Federal takes
priority over Second Credit.
Answer: True
15. First Federal loaned Madeline $20,000 to purchase a new van. The van was for
Madeline's personal and family use. First Federal's security interest is a purchase money
security interest which perfects only upon filing a financing statement.
Answer: False
MULTIPLE CHOICE
1. All but which of the following may be used as collateral in a secured transaction under
UCC Revised Article 9?
a. Bank deposit accounts.
b. Personal injury tort claims of individuals.
c. Tort claims of a corporation.
d. A computer program if, by purchasing a computer, the buyer of the computer acquires the
right to use that embedded program.
e. Both b and c.
Answer: B
2. Donna defaulted on her loan owed to Second State Savings and Loan. The loan was
secured with Donna's car. Donna used the car for personal and family reasons. Which
statement is correct?
a. Second State may take Donna's car without a court order if this can be done without a
breach of the peace.
b. Second State may take Donna's car without a court order even if it means a breach of the
peace.
c. Second State may not take Donna's car because it is a consumer good.
d. Second State may not take Donna's car because perfection was automatic.
Answer: A
3. To perfect a security interest in a negotiable instrument, Second State Savings and Loan
should:
a. file a financing statement.
b. take possession of the instrument.
c. do nothing. Perfection is automatic.
d. secure a court order.
Answer: B
4. George's Wholesale agrees to purchase 1,000 pounds of bananas from Chickadee Exports
at 39 cents per pound. George's does not have the money for the bananas now, but promises
to pay in two months. Chickadee Exports wants to make the sale, but is worried about waiting
for the payment, knowing the bananas are not “appealing” collateral. So, Chickadee prepares
an instrument claiming George’s $400 sorting machine as collateral. George's never signs the
agreement, but accepts the shipment of bananas. This is an example of a:
a. check.
b. security interest.
c. promissory note.
d. None of the above.
Answer: D
5. Great State Bank loans money to Seth, securing the loan with property owned by Seth.
Great State Bank is advised by its attorney to file a financing statement. Great State Bank
doesn't understand why it should spend the extra money for this filing, since Seth has told
them that he has no other creditors. Why should Great State Bank file a financing statement?
a. There are criminal penalties for failing to file.
b. The financing statement allows Great State Bank to repossess the collateral on default
without a court order.
c. The financing statement will protect Great State's priority rights with other creditors by
giving notice to other creditors that it claims a security interest in the collateral.
d. Filing the financing statement is necessary to complete the attachment requirement in order
to create a security interest.
Answer: C
6. First Bank loaned $400,000 to Thomas, taking a security interest in his yacht. Thomas
defaulted on the loan and First Bank repossessed the boat. First Bank sold the yacht at a
public sale. The sale yielded $50,000 more than the debt. First Bank:
a. must pay Thomas the $50,000.
b. is entitled keep the $50,000.
c. must share the $50,000 equally with Thomas.
d. must pay the surplus to the Secretary of State.
Answer: A
7. Which of the following parties can defeat a perfected security interest?
a. A "buyer in ordinary course of business."
b. A buyer of consumer goods if the buyer is not aware of the security interest, gives value for
the goods, will continue to use the goods as consumer goods, and the secured party has not
filed a financing statement.
c. A buyer who purchases chattel paper or an instrument in the ordinary course of business,
and then takes possession.
d. All of the above are correct.
Answer: D
8. At her neighbor's garage sale, Constance buys a vanity dressing table from her neighbor,
Carlos, for $160. Constance purchased the vanity table for her own personal use, without any
knowledge that Carlos had signed a security agreement giving All Purpose Furniture, Inc. a
security interest in the vanity table. All Purpose Furniture did not file a financing statement.
Constance does not know that Carlos is still paying off the purchase money security interest
and owes All Purpose Furniture, Inc. $400. Under these circumstances:
a. Constance takes the vanity table subject to All Purpose's security interest because All
Purpose's security interest automatically perfected. A perfected security interest takes priority.
b. Constance takes the vanity table free of All Purpose's security interest because she is a
buyer of consumer goods
c. Constance takes the vanity table free of All Purpose's security interest because she is a
buyer in the ordinary course of business.
d. Constance must pay All Purpose $400 or the table must be resold, and she and All Purpose
will proportionately share the proceeds from the sale of the table.
Answer: B
9. Wanderlust gave a security interest in his Conestoga wagon to Iowa Bank who perfected its
security interest by filing a financing statement with the appropriate officials in Iowa. Five
months later, Wanderlust hit the trail again, moving to Montana. If Iowa Bank wants to
continue its perfected interest in the Conestoga wagon, it should:
a. file a continuation statement for another five years in Iowa before Wanderlust moves on.
b. re-perfect by filing a financing statement in the appropriate place in Montana, according to
Montana law, within four months of Wanderlust's entering Montana.
c. repossess the Conestoga wagon.
d. file a continuation statement for another four months in Iowa before Wanderlust moves on.
Answer: B
10. Which of the following is correct concerning termination statements?
a. A secured party must file a termination statement when consumer goods are involved and
the debtor has paid for them.
b. The termination statement clears the debtor's public record with regard to old, irrelevant
financing statements so that the same collateral can be used again to secure a future loan.
c. The secured party must file a termination statement within 20 days of a consumer debtor's
demand, provided the debtor has paid the full debt.
d. All of the above are correct concerning termination statements.
Answer: D
11. Morefield Custom Design sends 30 recliners by rail to Danville Furniture. To show where
the goods will be shipped and who gets them when they arrive, Morefield will obtain ____,
which can be used as collateral in a secured transaction.
a. a warehouse receipt.
b. a bill of lading.
c. chattel paper.
d. a deposit account.
Answer: B
12. Great State Bank took a security interest in Gresham, Inc.'s meat processing equipment.
Gresham defaulted on the loan. Which statement is correct?
a. Great State Bank may take possession of the collateral.
b. Great State Bank may ignore its rights in the collateral and sue Gresham for the money
owed.
c. Both a and b are courses of action that Great State Bank may follow.
d. Neither a nor b are courses of action that Great State Bank may follow.
Answer: C
13. Landscaper Lottie used her machinery, employee labor, and her expertise to landscape
Opal's new guest home. Opal fails to pay for the landscaping because she has run out of
money. Lottie files a lien against the real property. This lien is called:
a. an artisan's lien; her landscape design is a work of art.
b. a landlord's lien; Opal is planning to rent the guest house to a tenant.
c. a mechanic's lien; it was created by improving real property.
d. a purchase money security interest.
Answer: C
14. Which of the following is an example of a purchase money security interest in consumer
goods?
a. A doctor purchasing a computer on credit to create a Webpage to make services and
information available to her patients.
b. A doctor purchasing on credit a blood glucose monitor to check his own blood sugar levels.
c. A doctor purchasing a TV/VCR unit on credit to place in her office waiting room.
d. A doctor purchasing an exercise bike for his employees to use over the lunch hour.
Answer: B
15. Wedney, Inc. sold a meat processing machine to Yoro Chickens, taking a security interest
in the machine. Yoro Chickens defaulted on the loan. Wedney repossessed the machine.
Wedney would like to retain the machine to use as a model. Which of the following
statements is correct?
a. Wedney must notify the debtor that it intends to retain the machine and give Yoro 20 days
to object.
b. By taking possession, Wedney automatically foreclosed on the collateral. Wedney has valid
title and need do nothing else.
c. Since the machine is equipment, Wedney cannot retain the machine. Wedney must dispose
of the collateral in a commercially reasonable manner.
d. Wedney can retain the machine but must pay Yoro the surplus, the difference between the
fair market value of the machine and the amount of the debt.
Answer: A
16. Wedney, Inc. has a purchase money security interest in one of Yoro Chicken's meat
processing machines. Wedney filed a financing statement on the day the machine was
delivered, perfecting its interest. Great State Bank already had a security interest in the
machine. Which party has superior priority rights in the meat processing machine?
a. Wedney. A PMSI in collateral other than inventory takes priority over a conflicting security
interest if the PMSI is perfected at the time the debtor receives the collateral or within 20
days after he receives it.
b. Great State Bank, since it had an earlier security interest.
c. The party who is first to repossess the collateral.
d. The creditors have equal priority.
Answer: A
17. Florence borrows $1,500 from Fremont, leaving her gold necklace with Fremont as
collateral. Two weeks earlier, Florence had borrowed $1,000 from Corner Bank. Florence
signed a security agreement and a financing statement giving Corner Bank a security interest
in the same gold necklace. The financing statement is filed in the appropriate location. If
Florence defaults on both loans, which creditor has the superior rights to the necklace?
a. Fremont, because his loan was the first to attach.
b. Fremont, because possession takes priority over filing.
c. Corner Bank, because Fremont did not perfect his interest.
d. Corner Bank, because Fremont did not have a written security agreement.
Answer: B
18. Wombart Manufacturing sells a machine on credit to Cryslie Printing Co. Wombart insists
on a security interest in the machine to:
a. give itself a legal interest in the machine.
b. give itself a legal interest in all of Cryslie’s property.
c. establish a priority claim in the machine ahead of other creditors of Cryslie.
d. Both a and c.
Answer: D
19. Which of the following may not be used as collateral within the scope of UCC Article 9?
a. Certificates of deposit.
b. Accounts receivable.
c. Goodwill.
d. A 250-acre farm.
Answer: D
20. On April 10, Amy agreed to buy a riding lawn mower from Mowers Plus, signing a
promissory note and security agreement giving Mowers Plus a security interest in the mower.
On April 15, Amy took delivery of the mower. On May 1, Mowers Plus filed a financing
statement. Which of the following is correct?
a. Despite the agreement, Mowers Plus could not create a security interest in the mower since
it is a consumer good.
b. Mowers Plus has attachment of a security interest in Amy's mower.
c. Mowers Plus completed the attachment of a security interest in the mower when it filed the
financing statement on May 1.
d. The security interest has not attached, but attachment is unimportant to enforceability of a
security interest.
Answer: B
21. Byron bought a 50' yacht from Myrtle's Marina by entering into a note and security
agreement promising the yacht as collateral for the purchase money security interest. When
Byron faced some tough financial times, he failed to make three monthly payments. Myrtle's
Marina repossessed the yacht by removing the yacht engine and advertised a public auction
of the yacht. Byron appealed to his good friend Charles and managed to pay off the debt
balance and the Marina's expenses of repossessing and advertising the sale. Byron's actions
represent:
a. strict foreclosure.
b. redemption.
c. silent bidding at the auction.
d. an artisan's lien.
Answer: B
22. If repossessed collateral is sold or otherwise disposed of by the creditor, the time, place,
manner, and method of disposal must be:
a. commercially reasonable.
b. scheduled with the debtor so that the debtor is able to attend.
c. court ordered.
d. perfected.
Answer: A
23. A security interest in money may be perfected by:
a. filing a financing statement.
b. creating a PMSI.
c. possession only.
d. redemption.
Answer: C
24. The initial term for which a financing statement will be effective is:
a. one year.
b. five years.
c. ten years.
d. two years.
Answer: B
25. Country Bank, located in Indiana, loaned Chmelik $5,000 and obtained a security interest
in a copyright Chmelik owns. Chmelik lives in Illinois, but works in Indiana. In order to
perfect its interest, Country Bank files a financing statement in Indiana. The financing
statement provides Chmelik’s correct name, his business address, and a reasonable
description of the copyright used as collateral. Is the financing statement sufficient?
a. Yes, it meets the UCC requirements for contents and filing.
b. No, if the debtor is an individual, the secured party must file in the state of the debtor’s
principal residence, which in this case would be Illinois.
c. No, the contents of the financing statement are incomplete.
d. Both b and c are correct.
Answer: D
ESSAY
1. Gateway sold a big-screen TV and entertainment center to Iris for $2000 on credit. Iris
signed a promissory note and gave Gateway a security interest in the TV and entertainment
center. Gateway filed a financing statement in the appropriate public office. When Iris
defaulted on her monthly payments owing a balance of $1780, Gateway's attorney made
arrangements to have the TV and entertainment center repossessed. The attorney then placed
classified ads in the local newspaper to sell the goods. The attorney's fees are $300, the repo
company charged $150, and the advertising costs are $50.
(A) If Iris chooses to redeem the property, how much must she pay to Gateway to recover the
property?
(B) If Iris does not redeem and the TV and entertainment center are sold for $1750, how will
the money be disbursed?
Answer: (A) Up to the time that the secured party disposes of the collateral, the debtor has the
right to redeem it. This means that the debtor can regain possession of the collateral if she
pays the full balance of the note plus any expenses incurred by the secured party up to the
time of the debtor's redemption. Here, if Iris wants to redeem the TV, she will need to pay
Gateway $2280 ($1780 + $300 + $150 + $50 = $2280.) In most states, attorney's fees are
included if the note or security agreement provides for this.
(B) If Iris does not redeem and the TV and entertainment center sell for $1750, the sale
proceeds will be distributed as follows:
This leaves a deficiency balance of $530. Gateway can sue Iris to obtain a general unsecured
judgment for this deficiency balance.
2. Faith owns a copyright in a book she recently wrote. She applies for a $10,000 loan
through Cumberland Bank and wants to use the copyright as collateral. Explain if and how
the bank can perfect a security interest in such collateral.
Answer: A copyright is a part of a residual category of collateral called “general intangibles”
under Revised Article 9 of the UCC. Cumberland Bank could perfect a security interest in the
copyright if the bank chooses to accept the copyright as collateral. Although there are several
ways for a secured party to perfect a security interest, filing a financing statement is the only
way to perfect an interest in general intangibles. The financing statement must give the names
of all parties and reasonably describe the collateral. The bank must file the statement in the
state of Faith’s principal residence.
3. Explain the difference between attachment and perfection.
Answer: A security interest has to attach to the collateral before the legal relationship between
the secured party, the debtor, and the debtor's collateral is created. Attachment requires that
the secured party and the debtor make a security agreement and either the debtor has
authenticated a security agreement describing the collateral or the secured party has
possession or control of the collateral; the secured party has given value to obtain the security
agreement; and the debtor has rights in the collateral. Attachment protects against the debtor.
Perfection of a security interest protects the secured party against parties other than the
debtor. Perfection means letting the rest of the world know that the secured party claims a
security interest in the debtor's collateral promised under the attachment. The most common
way to perfect is by filing a financing statement with the appropriate state agency. A valid
security interest can be created even though the interest is never perfected.
4. Fowler Bros. has applied to Gibralter Bank for a $50,000 loan for its business expansion. If
Fowler Bros. plans to use its account at Gibralter Bank as collateral, discuss what the bank
needs to do for a security interest to attach.
Answer: Attachment is a vital step in a secured transaction. For an enforceable security
interest to be created, or to attach, three steps must occur: the parties must make a security
agreement and either the debtor has to authenticate a security agreement describing the
collateral or the secured party has to obtain possession or control of the collateral, the secured
party must give value to obtain the security agreement, and the debtor must have rights in the
collateral. Ordinarily the agreement is in writing and signed by the debtor or electronically
recorded and authenticated by the debtor. In this case, however, it will be sufficient if the
parties have an oral agreement since the bank, the secured party, has control of the deposit
account being used for collateral. The second element, value, is the money the bank loans.
The third element is that the debtor has rights in the collateral. Fowler Bros. has a legal right
to its deposit account in Gibralter Bank.
5. Aubry purchased a washing machine, a freezer, and a refrigerator from Gateway
Appliances on credit, giving Gateway a security interest in the appliances. The appliances
were for Aubry's household use. Gateway did not file a financing statement. Six months later,
Aubry had a garage sale and sold the appliances to Tam. Tam bought the appliances for her
student rental property. Aubry left town owing money on the appliances. If Gateway can trace
the appliances to Tam, can Gateway repossess the appliances? Explain in detail.
Answer: Yes. Generally with consumer goods, a buyer takes the goods free of a security
interest if he is not aware of the security interest, he pays value for the goods, he is buying for
his own family use, and the secured party has not yet filed a financing statement. Here,
however, Tam bought these items for her business venture, the rental property. She is not
buying the items for her personal use. So, even though Gateway did not file a financing
statement, it can retrieve the property if the items can be traced to Tam.
6. Ken decided to open a retail boat dealership. He expects that many of his sales will be
credit sales. What should Ken do to protect his interests in the collateral in the credit sales
that he makes?
Answer: The UCC gives special treatment to security interests in most consumer goods.
Merchants cannot file financing statements for every consumer good they sell, so the Code
provides in Section 9-309 that a purchase money security interest (PMSI) in consumer goods
perfects automatically, without filing. However, the rules for perfection differ slightly for
security interests in movable goods, such as boats. Because boats, cars, and motor vehicles
are numerous and mobile, most states have created special laws to deal with security interests
in these goods. Ken should check his state's laws, but in most states, a security interest is
noted directly on the boat's certificate of title.
Test Bank For Introduction to Business Law
Jeffrey F. Beatty, Susan S. Samuelson
9781133188155
