BLT&E-7e: Practice Quiz
Chapter 32:
Secured Transactions
1. Whenever the payment of a debt is guaranteed by personal property owned by the debtor or in which the debtor has a legal interest, the transaction is known as:
a. a bankruptcy.
b. a conversion.
c. a secured transaction.
d. a liquidation.
Answers:
a. Incorrect. If a debtor fails to repay loans he may end up in bankruptcy, but this type of arrangement is known as a secured transaction, not as bankruptcy.
b. Incorrect. A conversion occurs if someone wrongfully fails to return the personal property of someone else.
c. Correct. This accurately describes a secured transaction.
d. Incorrect. A liquidation occurs when assets are sold.
2. A secured party in a secured transaction is:
a. the party who owes payment.
b. the party who owes performance.
c. the party who owns the collateral.
d. the party in whose favor there is a security interest.
Answers:
a. Incorrect. This party is the debtor.
b. Incorrect. This party is also the debtor.
c. Incorrect. Once again, this party is the debtor.
d. Correct. The secured party is the party in whose favor a security interest exists.
3. A security agreement:
a. is an agreement that provides for a home security system.
b. is another term for collateral.
c. can only be formed by parties who are engaged in consumer transactions.
d. creates or provides for a security interest.
Answers:
a. Incorrect. This is not what an Article 9 security agreement is.
b. Incorrect. A security agreement provides that a debtor’s collateral will be used as security for the payment of a debt.
c. Incorrect. Security agreements are used in commercial as well as consumer transactions.
d. Correct. This is what a security agreement does.
4. When a debtor defaults on a loan, it means that:
a. the debtor has collateralized the loan.
b. the debtor has failed to pay the loan as promised.
c. the debtor made a material misrepresentation on the loan application.
d. the debtor has paid the loan and is free and clear of any further obligations to the creditor.
Answers:
a. Incorrect. When a debtor defaults on a loan, it means that the debtor has failed to pay the loan as promised.
b. Correct. This is the meaning of the word default.
c. Incorrect. When a debtor defaults on a loan, it means that the debtor has failed to pay the loan as promised.
d. Incorrect. When a debtor defaults on a loan, it means that the debtor has failed to pay the loan as promised.
5. In the context of secured transactions, attachment:
a. is the seizure and sale of the collateral on the debtor’s default.
b. refers to a floating lien.
c. gives the creditor an enforceable security interest in the collateral.
d. means that the creditor has taken possession of (“attached”) the collateral.
Answers:
a. Incorrect. This is not what attachment means in the context of secured transactions.
b. Incorrect. This is not what attachment means in the context of secured transactions.
c. Correct. This is what attachment means in the context of secured transactions.
d. Incorrect. This is not what attachment means in the context of secured transactions.
6. Perfection is the legal process by which secured parties:
a. protect debtors against excessive claims by other debtors.
b. protect themselves against the claims of third parties who want their debts satisfied out of the same collateral.
c. protect themselves against the claims of third parties who have security interests in the secured party’s collateral.
d. protect debtors against excessive claims by other creditors.
Answers:
a. Incorrect. Perfection protects the secured party’s interests, not those of the debtor.
b. Correct. Perfection protects the secured party against the claims of third parties who want their debts satisfied out of the same collateral.
c. Incorrect. Perfection does not protect the secured party against such claims.
d. Incorrect. Perfection protects the secured party’s interests, not those of the debtor.
7. A floating lien is created by a security agreement that provides for a security interest in:
a. proceeds, after-acquired property, and future advances.
b. proceeds, previously acquired property, and future advances.
c. proceeds, after-acquired property, and previous advances.
d. proceeds, after-acquired property, and extraneous advances
Answers:
a. Correct. A security agreement that gives the secured party a security interest in all of these types of property is known as a floating lien.
b. Incorrect. A floating lien would not cover previously acquired property.
c. Incorrect. A floating lien would not cover previous advances.
d. Incorrect. There is no such thing as an extraneous advance.
8. Suppose that Clarissa has a security interest in a Renaissance painting that Paolo owns. Clarissa takes the painting and stores it in her garage. In this situation:
a. Clarissa has improperly perfected her interest.
b. Clarissa has failed to file a financing statement, and thus the security interest is invalid.
c. Clarissa may only perfect this interest by delivering the collateral to the secretary of state’s office.
d. Clarissa’s security interest is perfected.
Answers:
a. Incorrect. By taking possession of the painting, Clarissa has properly perfected her security interest.
b. Incorrect. Clarissa does not need to file a financing statement to have a valid security interest in the painting.
c. Incorrect. There is no legal requirement that Clarissa deliver the painting to a government official in order to perfect her security interest.
d. Correct. Once she took possession of the painting, Clarissa perfected her security interest.
9. For how long is a financing statement effective after the date of filing?
a. For six months.
b. For one year.
c. For four years.
d. For five years.
Answers:
a. Incorrect. The statement is effective for longer than this.
b. Incorrect. The statement is effective for longer than this.
c. Incorrect. The statement is effective for longer than this.
d. Correct. The statement is effective for five years from the date of filing.
10. When two perfected secured creditors have rights to the same collateral, which party takes priority?
a. The party who attached first.
b. The party who filed or took possession first.
c. The party who signaled a willingness to negotiate first.
d. The party who converted first.
Answers:
a. Incorrect. Among unperfected parties, the first to attach takes priority; but among perfected secured creditors, the party who filed or took possession first has priority.
b. Correct. Among perfected secured parties, the first to file or take possession takes priority.
c. Incorrect. The party who first signaled a willingness to negotiate does not take priority.
d. Incorrect. Conversion is a tort, and the first to commit a tort does not necessarily take priority.