Test Bank Chapter 29 Security Interests In Personal Property

Business Law, 17e (Langvardt)

Chapter 29 Security Interests in Personal Property

1) A security interest is said to be a property interest in the collateral.

2) Safeco Corporation manufactures toys for distribution to retailers. In Safeco's hands, the toys are consumer goods.

3) The two-step process for obtaining an enforceable security interest consists of attachment and perfection.

4) Article 2 of the UCC governs security interests in personal property.

5) A security interest is not legally enforceable against a debtor if it is not attached to one or more particular items of the debtor's property.

6) Where the creditor has possession of the collateral, the security agreement may be oral.

7) A security agreement may grant a creditor a security interest in the after-acquired property of the debtor.

8) Under revised Article 9, the UCC allows a security agreement to be created by the consumer online.

9) Attachment of a security interest is a necessary condition for its perfection.

10) Each state specifies by statute where the financing statement has to be filed.

11) Perfection by mere attachment of the security interest does not require giving public notice.

12) Control is the only available perfection method if the collateral is a deposit account.

13) The basic priority rule for competing security interests is that the first secured party to attach wins.

14) If there are conflicting security interests, but neither has been perfected, then the interest that attaches to the collateral first will have priority.

15) The secured party whose interest in fixtures is perfected will have priority where the security interest is perfected prior to the time the goods become fixtures.

16) Tom takes his car to be repaired at Smith Auto Garage. Tom was surprised at the total of the bill and refuses to pay the total of the work performed. Smith Auto Garage holds onto Tom's car based on a mechanic lien. Tom stops making payments on the car to Northshore Credit Union, which has a perfected security interest in Tom's car. Smith Auto Garage will get their full amount of their lien prior to Northshore Credit Union receiving funds from a sale of Tom's car.

17) If the debtor defaults on his agreement with the creditor, one of the creditor's options is to repossess the collateral and then sell it.

18) The debtor defaults on his agreement with the creditor, the creditor repossesses the collateral, and the creditor then sells the collateral. The creditor may retain any surplus if the amount realized on the sale exceeds the amount of the debtor's debt.

19) The attachment of the security interest takes place in a legal sense rather than in a physical sense.

20) A creditor who sells consumer goods to a consumer on credit has a purchase money security interest in the goods.

21) Wonder Widget Company manufactures widgets that are sold to retailers. The retailers, in turn, sell these widgets to consumers for their own use. These widgets are:

A) inventory in the hands of Wonder.

B) equipment in the hands of the consumers.

C) equipment in the hands of the retailers.

D) consumer goods in the hands of Wonder.

22) According to the Code classifications of collateral, which of the following includes dock warrants and dock receipts?

A) Chattel paper

B) Documents of title

C) Deposit accounts

D) General intangibles

23) According to the Code classifications of collateral, investment property includes:

A) patents, copyrights, software, and franchises.

B) checks, notes, drafts, and certificates of deposit.

C) stocks, bonds, and commodity contracts.

D) bills of lading, dock warrants, dock receipts, and warehouse receipts.

24) ________ refer(s) to the goods used or bought primarily for personal purposes.

A) Inventory

B) Fixtures

C) Consumer goods

D) Equipment

25) Revised Article 9 of the UCC, which governs secured transactions, has been adopted in how many states?

A) 50 states

B) 42 states

C) 23 states

D) 14 states

26) Under the UCC, for a security interest to attach, the:

A) debtor must agree to the creation of the security interest or the secured party must have possession of the property.

B) creditor must properly file a financing statement.

C) debtor must be denied of all rights in the collateral.

D) creditor must take and hold the collateral.

27) Which of the following are automatically covered as of the time the security interest attaches to the collateral?

A) Future advances

B) Loaned funds

C) Sale expenses

D) Proceeds

28) What type of agreement is required in nearly all security interest transactions?

A) An authenticated security agreement

B) An international depositor's agreement

C) Foreign assignment agreement

D) Title conveyance agreement

29) The perfection of a security interest by filing a financing statement:

A) serves to protect the secured party's interest in the collateral against most creditors who acquire a security interest in the same collateral after the filing.

B) is necessary to enable the secured party to enforce its security interest against the debtor.

C) serves to give the public actual notice.

D) gives the secured party priority over all other parties who acquire an interest in the collateral after the filing.

30) Perfection by public filing of a financing statement in the appropriate public office serves as ________ notice to the world.

A) express

B) implied

C) constructive

D) public

31) In 2000, Samson Dsouza submits a financing statement to perfect his security interest against Kevin. In 2006, Samson tries to attach a security interest in the property. Will Samson succeed in the attachment of the security interest?

A) Samson will succeed since he has filed his financing statement.

B) Samson will not succeed because the financing statement lapsed.

C) Samson may enforce his security interest by filing a continuation statement.

D) The security interest will automatically be enforced.

32) Which of the following is a way of perfecting a security interest?

A) Mere attachment of security interest

B) Filing a private notice

C) Creditor making a private sale of the collateral

D) Debtor retaining the possession of the collateral

33) A ________ serves as constructive notice to the world that the creditor claims an interest in collateral that belongs to a certain named debtor.

A) model audit

B) financial report

C) financing statement

D) continuation statement

34) Which of the following is true about financing statements?

A) A financing statement never includes descriptions of the real estate.

B) A financing statement serves as implied notice to the world.

C) A financing statement is effective for a period of three years from the date of filing.

D) A financing statement must give the name of the secured party.

35) Which of the following elements is an exception that validates a financing statement, which covers goods that are to become fixtures, without it being lapsed?

A) Name of the debtor

B) Name of the secured party

C) Description of a real estate mortgage

D) Description of a nonfixture

36) The Total Household Appliance store sells a refrigerator to Alvin, on the condition of making payments in installments. In this case, to perfect its security interest, the store:

A) has to file its purchase money security interest.

B) need not file its purchase money security interest.

C) has to take possession of the refrigerator.

D) need not attach the refrigerator.

37) Edith purchases a television set from Big Al's Electronic Emporium, agreeing to pay Big Al in monthly installments on a 12-month payment plan. In order to have a perfected security interest in the television set, Big Al:

A) must file a financing statement with the appropriate public office.

B) must create a field warehousing arrangement.

C) should have Edith sign another contract recognizing Big Al's security interest.

D) should not do anything as it is already perfected.

38) Which of the following is most likely to be perfected by the secured party's possession of the collateral?

A) A security interest in inventory

B) A security interest in consumer goods

C) A security interest in general intangibles

D) A security interest in equipment

39) Which of the following is true about continuation statements?

A) A continuation statement must be filled after the lapse of the five-year period of the financing statement.

B) The continuation statement must be signed by the secured party.

C) The effectiveness of the financing statement has nothing to do with the continuation statement.

D) Continuation statements may be filed just once.

40) Which of the following is true about possession of collateral by the secured party as public notice?

A) Change of possession is a convenient way for perfecting most security interests in consumer goods.

B) Possession of collateral by the creditor is rarely executed to perfect a security interest in chattel paper and negotiable documents of title.

C) Possession is a possible way of perfecting a security interest in inventory which is achieved through a field warehousing arrangement.

D) Possession by the creditor is a practicable way of perfecting a security interest in equipment or farm products.

41) Which of the following is a means of obtaining control over the collateral?

A) The secured party becomes the bank's customer for the deposit account.

B) The debtor is the bank with which the deposit is maintained.

C) The bank has agreed to comply with the debtor's instructions regarding the funds in the account.

D) The debtor becomes the bank's customer for the deposit account.

42) Which of the following is the only form of perfection that occurs without the giving of public notice?

A) Perfection by public filing

B) Perfection by attachment

C) Perfection by possession

D) Perfection by control

43) In which of the following cases will perfection by attachment not be effective?

A) The goods were sold on a conditional sales contract to the consumer.

B) The creditor has lent money to enable a consumer to buy goods.

C) The consumer good is a motor vehicle.

D) The goods were sold on a time-payment plan to the consumer.

44) For which of the following is the filing of a financing statement necessary for perfection to occur?

A) A security interest in documents of title

B) A security interest in chattel paper

C) A security interest in consumer goods

D) A security interest in general intangibles

45) Which of the following is true about perfection of fixtures?

A) Automatic perfection does not apply for consumer goods that are yet to become fixtures.

B) A creditor who relies on attachment for perfection will prevail against other creditors who hold an interest in the good to which the consumer good is attached.

C) Fixture filing is always necessary to perfect the security interest in any good.

D) A creditor with a security interest in a consumer good that will become a fixture, obtains perfection merely by attachment of her security interest to a consumer good.

46) Smith Auto Sales has a secured loan on its inventory through Northshore Credit Union, which Northshore filed in February. In March, Smith Auto Sales has another secured loan on its inventory from GMAC credit. GMAC files its security interest in May. Which creditor will have priority in the event of a default by Smith Auto Sales?

A) Neither will have priority and both will share equal revenue from the sale of inventory.

B) Northshore will have priority and it will have its debt satisfied prior to GMAC receiving funds.

C) Since GMAC came last, it will have priority and will have its debt satisfied before Northshore.

D) Since there is a conflict with the security with the inventory, neither security interest will be recognized and both creditors will get nothing.

47) Mark filed a financing statement on Daniel's collateral on March 2. However, attachment of this interest did not occur until March 4. Meanwhile, Charles, who had attached a security interest on the same collateral on March 1, filed a financing statement on March 3. Which interest has priority and why?

A) Mark's interest has priority because he filed the security interest before Charles did.

B) Charles' interest has priority because he attached the security interest first.

C) Mark's interest has priority because his attaching was the latest.

D) Charles' interest has priority because his filing was the latest.

48) Carter sold a $20,000 boat to Davis on credit for personal use. As part of the deal, Davis completed an installment note payable to Carter and a security agreement giving Carter a security interest in the boat, which was attached on July 1. Carter never filed a financing statement. On August 1, Davis borrowed $15,000 from Bank, by completing a security agreement giving the Bank a security interest in the boat. This interest attached on the same day and the Bank filed a financing statement on August 6. Davis defaulted on both his installment payments to Carter and his loan obligation to the Bank. Each of these parties wants to satisfy Davis's obligation by repossessing and selling the boat. Whose security interest in the boat has priority and why?

A) Bank's interest has priority because Carter never filed a financing statement.

B) Carter's interest has priority because his security interest was perfected before Bank's interest.

C) Bank's interest has priority because Carter failed to attach his security interest.

D) Bank's interest has priority because the Bank perfected the interest within ten days after Davis received the collateral.

49) Which section of the UCC governs the prioritization of competing security interests in collateral for secured loans?

A) 2-201

B) 3-343

C) 6-230

D) 9-322

50) Which of the following corresponds to the priority rule for purchase money security interests in inventory?

A) The PMSI has priority if it is perfected at the time the debtor receives possession of the inventory.

B) The PMSI has priority if it is perfected within 20 days after the debtor receives possession of the inventory.

C) The PMSI has priority if the holder of the competing security interest received notification within three years before the debtor receives the inventory.

D) The PMSI has priority when it has been filed or perfected before the other interest on the same collateral.

51) A perfected purchase money security interest in a manufacturer's stock has priority over a conflicting security interest in the same stock if the notification states that the person expects to acquire a purchase money security interest in stock of the debtor and describes the stock. Which of the following priority rules does this statement correspond to?

A) PMSI in noninventory collateral

B) PMSI in inventory collateral

C) Buyer in the ordinary course of business

D) Artisan's and mechanic's lien

52) Cutco Lawn Products Manufacturing Company sells 100 riding lawn mowers to the Smith Hardware Company, a retailer in the same industry. Smith pays for the mowers with a $50,000 loan from the Bass Bank. The Bank takes a security interest in the mowers to secure payment of the loan, and perfects it by filing. Later, Smith sells one of the mowers to Carl, a consumer, who buys in good faith and in the ordinary course of Smith's business. However, Carl knows that the Bank has a security interest in the mowers. Smith defaults on its loan payments, and the Bank moves to repossess all the mowers. Can it repossess the mower sold to Carl?

A) Since the Bank attached its security interest, it may repossess the mower from Carl.

B) Since Carl bought the mower in good faith, the bank may not repossess his mower.

C) Since Carl knew about Bass's security interest, the bank may repossess his mower.

D) Since the mower is in Carl's possession now, the bank has no right over this third party.

53) Generally, a buyer in the ordinary course of business can take property free from any security interest. Which of the following buyers is an exception?

A) A person who is a consumer of durable goods

B) A person buying inventories from a wholesaler

C) A person buying farm products from a farmer

D) A person who is a consumer of perishable goods

54) A buyer in the ordinary course of business:

A) is subject to the security interest created by his seller.

B) takes free from the security interest created by the secured party.

C) takes free from the security interest created by his seller.

D) is subject to the security interest created by the secured party.

55) A retailer of consumer goods who relies on attachment of a security interest to perfect it does not prevail over a bona fide purchaser:

A) who has knowledge of the security interest.

B) who gives value for the goods.

C) who buys goods for household use.

D) who resells the good in the absence of a financing statement.

56) Acorn Marina Inc. sells and services boat motors. On April 1, 1989, Acorn financed the purchase of its entire inventory with GAC Finance Company. GAC required Acorn to execute a security agreement and financing statement covering the inventory and proceeds of sale. On April 14, 1989, GAC filed the financing statement pursuant to the UCC. On April 27, 1989, Acorn sold one of the motors to Mike for use in his charter business. Mike, who had once worked for Acorn, knew that Acorn regularly financed its inventory with GAC. Acorn has defaulted on its obligations to GAC. The motor purchased by Mike is:

A) subject to the GAC security interest because he should have considered the fact that GAC financed the inventory purchased by Acorn.

B) subject to the GAC security interest because he purchased the motor for commercial use.

C) not subject to the GAC security interest because he is regarded as a buyer in the ordinary course of Acorn's business.

D) not subject to the GAC security interest because GAC failed to file the financing statement until more than 10 days after April 1, 1989.

57) With regard to a prior perfected security interest in goods for which a financing statement has been filed, which of the following parties is most likely to have a superior interest in the same collateral?

A) A buyer in the ordinary course of business who purchased the goods from a merchant

B) A subsequent buyer of consumer goods who purchased the goods from another customer

C) The trustee in bankruptcy of the debtor

D) Lien creditors of the debtor

58) A typewriter, which was subject to a prior UCC security interest, was delivered to Ed Fogel for repair. Fogel, who is engaged in the business of repairing typewriters, repaired the typewriter. However, the owner of the typewriter now refuses to pay for the services performed by Fogel. The state in which Fogel operates his business has a statute, which gives Fogel a mechanic's lien on the typewriter. Fogel's mechanic's lien:

A) takes priority over a prior perfected security interest under all circumstances.

B) is subject to a prior perfected purchase money security interest under all circumstances.

C) is subject to a prior unperfected security interest where the statute is silent as to priority.

D) takes priority over a prior perfected security interest unless the statute expressly provides otherwise.

59) Which section of the UCC defines what constitutes default in a secure transaction?

A) 2-205

B) 3-104

C) The UCC does not define default; it is defined in private agreements between the parties.

D) 9-102

60) Which of the following statements is true regarding a secured creditor's disposition of the collateral after the debtor's default?

A) The debtor cannot redeem the collateral after his default.

B) The collateral must be disposed of by private sale.

C) The creditor may opt not to repossess the collateral and instead sue the debtor on his underlying obligation.

D) If the proceeds realized from the sale of the collateral exceed the various expenses that must be satisfied from those proceeds, the surplus goes to the creditor.

61) A secured creditor repossesses the collateral from the debtor and sells it to satisfy the debt. Which of the following is paid first?

A) Debt of the creditor

B) Consequential damages suffered by the creditor due to the debtor's default

C) Court costs

D) Expenses of repossessing, storing, and selling the collateral

62) Which of the following statements about a creditor's right to repossess collateral is false?

A) The Code authorizes a creditor to repossess collateral when the debtor defaults.

B) The creditor can obtain the collateral through self-help if she can obtain possession peacefully.

C) If the collateral cannot be obtained without disturbing the peace, the creditor must go through the courts to repossess the collateral.

D) If the collateral is intangible, the secured party can get payments made to her, even if performance has not been rendered to the debtor.

63) Bonn, a secured party, intends to sell collateral at a private sale after the debtor defaults. Which of the following statements is false?

A) The debtor has the right to redeem the collateral until Bonn actually disposes of it.

B) As long as the debtor was given notice of the private sale, he cannot object to it, claiming that it is commercially unreasonable.

C) Bonn must notify the debtor of the private sale.

D) Bonn must notify the debtor of the time and place of the private sale.

64) Which of the following is an option for the secured creditor when the debtor defaults?

A) Transfer the collateral on to another creditor.

B) Forget the collateral, and sue the debtor on his note or promise to pay.

C) Sell the collateral and keep the surplus if any.

D) Repossess the collateral and conduct a public sale without the knowledge of the debtor.

65) In which of the following orders are the proceeds from the sale of collateral by the secured party distributed?

A) Debtor, creditor's debt, selling expenses, and junior interests

B) Selling expenses, creditor's debt, junior interests, and debtor

C) Creditor's debt, selling expenses, debtor, and junior interests

D) Junior interests, debtor, selling expenses, and creditor's debt

66) If a creditor fails to comply with Article 9 and loses his preferred claim, he becomes a(n) ________ if the debtor is declared bankrupt and may have little chance of recovering the money owed.

A) special creditor

B) preferred creditor

C) general creditor

D) universal creditor

67) A(n) ________ is a lien given by a debtor to his creditor to secure payment or performance of a debt or obligation.

A) fixture

B) security interest

C) attachment

D) future advancement

68) Which of the following is not one of the Code classifications of collateral?

A) General tangibles

B) Instruments

C) Accounts

D) Goods

69) According to the Code classifications of collateral, instruments include:

A) patents, copyrights, software, and franchises.

B) stocks, bonds, and commodity contracts.

C) checks, notes, drafts, and certificates of deposit.

D) bills of lading, dock warrants, dock receipts, and warehouse receipts.

70) An example of chattel paper is a:

A) dock warrant.

B) bill of lading.

C) document of title.

D) conditional sales contract.

71) According to the Code classifications of collateral, general intangibles include:

A) bills of lading, dock warrants, dock receipts, and warehouse receipts.

B) patents, copyrights, software, and franchises.

C) checks, notes, drafts, and certificates of deposit.

D) stocks, bonds, and commodity contracts.

72) Which of the following is the "catchall" category for Code classifications of collateral?

A) General intangibles

B) Chattel paper

C) Goods

D) Instruments

73) Which of the following is not a class of goods?

A) Equipment

B) Farm products

C) Software

D) Fixtures

74) Which of the following is not classified as inventory?

A) Raw materials

B) Work in process

C) Consumer goods

D) Materials used or consumed in a business

75) A stove in the hands of a manufacturer is classified as ________; if it is used in a restaurant it is ________; if it is used in a home it is classified as ________.

A) equipment; inventory; consumer goods

B) inventory; equipment; consumer goods

C) consumer goods; inventory; equipment

D) equipment; consumer goods; inventory

76) Which of the following is not one of the basic requirements for a security interest to be attached to the goods of a debtor?

A) The debtor must be a bona fide purchaser.

B) Either there must be an agreement by the debtor granting the creditor a security interest in particular property or the secured party must have possession of the property.

C) The creditor must give something of value to the debtor.

D) The debtor must have rights in the collateral or the owner of the collateral must agree to allow its use as collateral.

77) Which of the following statements about security agreements is false?

A) The security agreement must reasonably describe the collateral so that it can readily be identified.

B) The security agreement cannot require the debtor to insure the goods.

C) The security agreement usually contains a promise by the debtor to pay certain amounts of money in a certain way.

D) The security agreement usually specifies which events constitute a default.

78) In the case in the text, Palmatier v. Wells Fargo Financial National Bank, the court held that:

A) the sales order ticket proved that value was not given.

B) the sales order ticket failed to describe the collateral.

C) the sales order ticket failed to incorporate the terms of the credit card agreement.

D) the sales order ticket created a perfected purchase money security interest in the furniture.

79) Which of the following is not a way to perfect a security interest?

A) Debtor retains possession of the collateral

B) Automatic perfection

C) Filing a public notice of the security interest

D) Creditor takes control of the collateral

80) In the case in the text, In re Lance, the court held that the credit union's security interest in the snowmobile automatically perfected because:

A) the snowmobile was a consumer good.

B) the credit union filed a financing statement with the secretary of state.

C) the credit union possessed the snowmobile.

D) the credit union filed a continuation statement before the financing statement lapsed.

81) In Woven Treasures, Inc. v. Hudson Capital, L.L.C., the case in the text, the court held that Woven Treasures' security interest was unperfected because:

A) it did not pay value.

B) it never possessed the collateral.

C) it never filed a financing statement asserting its interest in the rugs.

D) the rugs were not consumer goods.

82) A ________ buys goods in the common course from a person who is in the business of selling goods of that kind.

A) bona fide purchaser

B) good faith purchaser

C) buyer in the ordinary course of business

D) buyer on credit

83) In the case in the text, In re Borden, the court concluded that when an artisan loses possession involuntarily:

A) the artisan does not necessarily lose the artisan's lien.

B) the artisan always loses the artisan's lien.

C) the artisan always retains the artisan's lien.

D) the artisan's security interest still has top priority.

84) As discussed in Giles v. First Virginia Credit Services, Inc., the case in the text, creditors that act improperly in repossessing collateral:

A) lose their security interest in the collateral.

B) must return the repossessed collateral.

C) are liable to the parties injured.

D) lose priority in bankruptcy proceedings.

85) Which of the following statements about a buyer's right to redeem is false?

A) The buyer must tender fulfillment of all obligations secured by the collateral.

B) The buyer must pay any expenses the secured party incurred in holding the collateral.

C) The buyer must pay any expenses the secured party incurred in preparing the collateral for disposition.

D) The buyer can redeem the property even after the creditor disposes of it.

86) What are the three basic requirements for a security interest to be attached to the goods of a debtor?

87) Why is filing a financing statement the only practical way to perfect a security interest in equipment?

88) What is the general priority rule established by the Uniform Commercial Code?

89) On July 1, Acledes Bank attaches and perfects a security interest in all of Playo Inc.'s present and after-acquired equipment. On July 15, Richard sells and delivers a new toy-manufacturing machine to Playo Inc. Richard attaches a security interest in the machine on July 16 and perfects it by filing on July 17. Which security interest has priority and why?

90) What are the three options available to a secured creditor regarding the collateral if the debtor defaults?