Chapter Three: Secured Transactions Multiple Choice Questions
5. Which of the following requirements is not necessary in order to have a security interest attach?
a. There must be a proper filing.
b. Value must be given by the creditor.
c. Either the creditor must take possession or the debtor must sign a security agreement that describes the collateral.
d. The debtor must have rights in the collateral.
6. Winslow Co., which is in the business of selling furniture, borrowed $60,000 from Pine Bank.
Winslow executed a promissory note for that amount and used all of its accounts receivable as collateral for the loan. Winslow executed a security agreement that described the collateral. Winslow did not file a financing statement. Which of the following statements best describes this transaction?
a. Perfection of the security interest occurred even though Winslow did not file a financing statement.
b. Perfection of the security interest occurred by Pine having an interest in accounts receivable.
c. Attachment of the security interest did not occur because Winslow failed to file a financing statement.
d. Attachment of the security interest occurred when the loan was made and Winslow executed the security agreement.
7. Attachment and perfection will occur simultaneously when
a. The security agreement so provides.
b. There is a purchase money security interest taken in inventory.
c. Attachment is by possession.
d. The goods are sold on consignment.
8. Burn Manufacturing borrowed $500,000 from Howard Finance Co., secured by Burn's present and future inventory, accounts receivable, and the proceeds thereof. The parties signed a financing statement that described the collateral and it was filed in the appropriate state office. Burn subsequently defaulted in the repayment of the loan and Howard attempted to enforce its security interest. Burn contended that Howard's security interest was unenforceable. In addition, Green, who subsequently gave credit to Burn without knowledge of Howard's security interest, is also attempting to defeat Howard's alleged security interest. The security interest in question is valid with respect to
a. Both Burn and Green.
b. Neither Burn nor Green.
c. Burn but not Green.
d. Green but not Burn.
3Q-2 9. Which of the following transactions would illustrate a secured party perfecting its security interest by taking possession of the collateral?
a. A bank receiving a mortgage on real property.
b. A wholesaler borrowing to purchase inventory.
c. A consumer borrowing to buy a car.
d. A pawnbroker lending money.
10. Grey Corp. sells computers to the public. Grey sold and delivered a computer to West on credit.
West executed and delivered to Grey a promissory note for the purchase price and a security agreement covering the computer. West purchased the computer for personal use. Grey did not file a financing statement. Is Grey's security interest perfected?
a. Yes, because Grey retained ownership of the computer.
b. Yes, because it was perfected at the time of attachment.
c. No, because the computer was a consumer good.
d. No, because Grey failed to file a financing statement.
11. A secured creditor wants to file a financing statement to perfect its security interest. Under the UCC Secured Transactions Article, which of the following must be included in the financing statement?
a. A listing or description of the collateral.
b. An after-acquired property provision.
c. The creditor’s signature.
d. The collateral’s location.
12. If a manufacturer assigns 90% of its accounts receivable to a factor, perfection will occur by
Filing a financing
statement Possession Attachment
a. Yes Yes No
b. Yes No No
c. No No Yes
d. No Yes No
13. Perfection of a security interest permits the secured party to protect its interest by
a. Avoiding the need to file a financing statement.
b. Preventing another creditor from obtaining a security interest in the same collateral.
c. Establishing priority over the claims of most subsequent secured creditors.
d. Denying the debtor the right to possess the collateral.
14. Under the UCC Secured Transactions Article, which of the following actions will best perfect a security interest in a negotiable instrument against any other party?
a. Filing a security agreement.
b. Taking possession of the instrument.
c. Perfecting by attachment.
d. Obtaining a duly executed financing statement.
15. Mars, Inc. manufactures and sells VCRs on credit directly to wholesalers, retailers, and consumers.
Mars can perfect its security interest in the VCRs it sells without having to file a financing statement or take possession of the VCRs if the sale is made to a. Retailers.
b. Wholesalers that sell to distributors for resale.
c. Consumers.
d. Wholesalers that sell to buyers in the ordinary course of business.
16. Larkin is a wholesaler of computers. Larkin sold 40 computers to Elk Appliance for $80,000. Elk paid
$20,000 down and signed a promissory note for the balance. Elk also executed a security agreement giving Larkin a security interest in Elk's inventory, including the computers. Larkin perfected its security interest by properly filing a financing statement in the state of Whiteacre. Six months later, Elk moved its business to the state of Blackacre, taking the computers. On arriving in Blackacre, Elk secured a loan from Quarry Bank and signed a security agreement putting up all inventory (including the computers) as collateral. Quarry perfected its security interest by properly filing a financing statement in the state of Blackacre. Two months after arriving in Blackacre, Elk went into default on both debts.
Which of the following statements is correct?
a. Quarry's security interest is superior because Larkin's time to file a financing statement in Blackacre had expired prior to Quarry's filing.
b. Quarry's security interest is superior because Quarry had no actual notice of Larkin's security interest.
c. Larkin's security interest is superior even though at the time of Elk's default Larkin had not perfected its security interest in the state of Blackacre.
d. Larkin's security interest is superior provided it repossesses the computers before Quarry does.
3Q-3 17. Sax purchased from Bosch Tools a new saw for his home workshop for cash. One week later, Sax was called by Cary Finance. Cary explained to Sax that it had been financing Bosch's purchases from the manufacturers and that to protect its interest it had obtained a perfected security interest in Bosch's entire inventory of hardware and power tools, including the saw which Sax bought. Cary further explained that Bosch had defaulted on a payment due to Cary, and Cary intended to assert its security interest in the saw and repossess it unless Sax was willing to make payment of $100 for a release of Cary's security interest. If Sax refuses to make the payment, which of the following statements is correct?
a. Even if Sax had both actual notice and constructive notice via recordation of Cary's interest, he will prevail if Cary seeks to repossess the saw.
b. Cary's security interest in the saw in question is invalid against all parties unless its filing specifically described and designated the particular saw Sax purchased.
c. Sac must pay the $100 or the saw can be validly repossessed and sold to satisfy the amount Bosch owes Cary and any excess paid to Sax.
d. Sax will not take free of Cary's security interest if he was aware of said interest at the time he purchased the saw.
18. Under the Secured Transaction Article of the UCC, which of the following purchasers will own consumer goods free of a perfected security interest in goods?
a. A merchant who purchased the goods for resale.
b. A merchant who purchased the goods for use in its business.
c. A consumer who purchases the goods from a consumer purchaser who gave the security interest.
d. A consumer who purchases the goods in the ordinary course of business.
19. On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators. This comprised Ace’s entire inventory and was financed under an agreement with Rome Bank that gave Rome a security interest in all refrigerators on Ace’s premises, all future acquired refrigerators, and the proceeds of sales. On July 12, Rome filed a financing statement that adequately identified the collateral. On August 15, Ace sold one refrigerator to Cray for personal use and four refrigerators to Zone Co. for its business. Which of the following statements is correct?
a. The refrigerators sold to Zone will be subject to Rome’s security interest.
b. The refrigerator sold to Cray will not be subject to Rome’s security interest.
c. The security interest does not include the proceeds from the sale of the refrigerators to Zone.
d. The security interest may not cover after-acquired property even if the parties agree.
20. 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 properly filed the financing statement pursuant to the UCC Secured Transactions Article. On April 27, 1989, Acorn sold one of the motors to Wilks for use in his charter business. Wilks, 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 Wilks is
a. Subject to the GAC security interest because Wilks should have known that GAC financed the inventory purchase by Acorn.
b. Subject to the GAC security interest because Wilks purchased the motor for a commercial use.
c. Not subject to the GAC security interest because Wilks 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.
21. Under the UCC Secured Transactions Article, perfection of a security interest by a creditor provides added protection against other parties in the event the debtor does not pay its debts. Which of the following parties is not affected by perfection of a security interest?
a. Other prospective creditors of the debtor.
b. The trustee in a bankruptcy case.
c. A buyer in the ordinary course of business.
d. A subsequent personal injury judgment creditor.
3Q-4 22. Wine purchased a computer using the proceeds of a loan from MJC Finance Company. Wine gave MJC a security interest in the computer. Wine executed a security agreement and financing statement, which was filed by MJC. Wine used the computer to monitor Wine's personal investments. Later, Wine sold the computer to Jacobs, for Jacobs' family use.
Jacobs was unaware of MJC's security interest. Wine now is in default under the MJC loan. May MJC repossess the computer from Jacobs?
a. No, because Jacobs was unaware of the MJC security interest.
b. No, because Jacobs intended to use the computer for family or household purposes.
c. Yes, because MJC's security interest was perfected before Jacobs' purchase.
d. Yes, because Jacobs' purchase of the computer made Jacobs personally liable to MJC.
23. Under the Secured Transactions Article of the UCC, what would be the order of priority for the following security interests in consumer goods?
I. Financing agreement filed on April 1.
II. Possession of the collateral by a creditor on April 10.
III. Financing agreement perfected on April 15.
a. I, II, III.
b. II, I, III.
c. II, III, I.
d. III, II, I.
24. A party who filed a security interest in inventory on April 1, 1993, would have a superior interest to which of the following parties?
a. A holder of a mechanic's lien whose lien was filed on March 15, 1993.
b. A holder of a purchase money security interest in after-acquired property filed on March 20, 1993.
c. A purchaser in the ordinary course of business who purchased on April 10, 1993.
d. A judgment lien creditor who filed its judgment on April 15, 1993.
25. Noninventory goods were purchased and delivered on June 15, 1993. Several security interests exist in these goods. Which of the following security interests has priority over the others?
a. Security interest in future goods attached June 10, 1993.
b. Security interest attached June 15, 1993.
c. Security interest perfected June 20, 1993.
d. Purchase money security interest perfected June 24, 1993.
26. On June 15, Harper purchased equipment for
$100,000 from Imperial Corp. for use in its manufacturing process. Harper paid for the equipment with funds borrowed from Eastern Bank.
Harper gave Eastern a security agreement and financing statement covering Harper's existing and after-acquired equipment. On June 21, Harper was petitioned involuntarily into bankruptcy under Chapter 7 of the Federal Bankruptcy Code. A bankruptcy trustee was appointed. On June 23, Eastern filed the financing statement. Which of the parties will have a superior security interest in the equipment?
a. The trustee in bankruptcy, because the filing of the financing statement after the commencement of the bankruptcy case would be deemed a preferential transfer.
b. The trustee in bankruptcy, because the trustee became a lien creditor before Eastern perfected its security interest.
c. Eastern, because it had a perfected purchase money security interest without having to file a financing statement.
d. Eastern, because it perfected its security interest within the permissible time limits.
27. Roth and Dixon both claim a security interest in the same collateral. Roth's security interest attached on January 1, 1989, and was perfected by filing on March 1, 1989. Dixon's security interest attached on February 1, 1989, and was perfected on April 1, 1989, by taking possession of the collateral. Which of the following statements is correct?
a. Roth's security interest has priority because Roth perfected before Dixon perfected.
b. Dixon's security interest has priority because Dixon's interest attached before Roth's interest was perfected.
c. Roth's security interest has priority because Roth's security interest attached before Dixon's security interest attached.
d. Dixon's security interest has priority because Dixon is in possession of the collateral.
28. On May 2, Safe Bank agreed to loan Tyler Corp.
$50,000. Tyler signed a security agreement and financing statement covering its existing equipment.
On May 4, Safe filed the financing statement. On May 7, State Bank loaned Tyler $60,000. State had notified Safe on May 5 of its intention to make the loan. Tyler signed a security agreement and financing statement covering the same existing equipment. On May 8, State filed the financing statement. On May 10, Safe loaned Tyler $50,000. If Tyler defaults on
3Q-5 both loans, who will have a priority security interest in the equipment?
a. State, since it was the first to perfect its security interest.
b. State, since it properly notified Safe prior to making the loan.
c. Safe, since it was the first to file.
d. Safe, since it has a purchase money security interest in the equipment which was perfected within the permissible time limits.
29. Under the UCC Secured Transactions Article, what is the order of priority for the following security interests in store equipment?
I. Security interest perfected by filing on April 15, 1994.
II. Security interest attached on April 1, 1994.
III. Purchase money security interest attached April 11, 1994 and perfected by filing on April 20, 1994.
a. I, III, II.
b. II, I, III.
c. III, I, II.
d. III, II, I.
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Items 30 and 31 are based on the following