Online Quizzes and Answers for Business Law Today, Seventh Edition s2

BLTS-10E PRACTICE QUIZ CHAPTER 20: SECURED TRANSACTIONS

1. When payment of 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.

ANS: 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 describes a secured transaction. d. Incorrect. A liquidation occurs when assets are sold under bankruptcy proceedings.

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.

ANS: 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. 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.

ANS: a. Incorrect. 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. It means that the debtor has failed to pay the loan as promised. d. Incorrect. It means that the debtor has failed to pay the loan as promised.

4. 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 the collateral.

ANS: a. Incorrect. Attachment gives the creditor an enforceable security interest in the collateral. b. Incorrect. This is not what attachment means in the context of secured transactions. c. Correct. Attachment is the process by which a secured creditor’s interest “attaches” to the property of another (collateral) and the creditor’s security interest becomes enforceable. d. Incorrect. This is not what attachment means in the context of secured transactions.

5. Collateral is generally divided into which of the following classifications?

a. Tangible and intangible collateral. b. Immovable and movable collateral. c. Chattel and personal collateral. d. Business and consumer collateral.

ANS: a. Correct. These are the two classifications into which collateral is generally divided. b. Incorrect. These are not the two classifications into which collateral is divided. c. Incorrect. These are not the two classifications into which collateral is divided. d. Incorrect. These are not the two classifications into which collateral is divided.

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.

ANS: 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 the 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. Under Article 9 of the UCC, a financing statement must be filed under the name of:

a. the creditor. b. the debtor. c. the lienholder. d. county in which the secured transaction occurred.

ANS: a. Incorrect. A financing statement must be filed under the name of the debtor. b. Correct. A financing statement must be filed under the name of the debtor. c. Incorrect. A financing statement must be filed under the name of the debtor, and the debtor, in this situation, is not the lienholder. d. Incorrect. A financing statement must be filed under the name of the debtor.

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 so 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 interest is perfected.

ANS: 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 by possession.

9. A purchase-money security interest (PMSI) is created when:

a. a postal money order is issued to a buyer. b. a security interest in a copyright is perfected. c. collateral is moved to another jurisdiction. d. a seller or lender extends credit to the buyer for part or all of the purchase price of consumer goods.

ANS: a. Incorrect. A PSMI does not involve the issuance of a postal money order. b. Incorrect. A PSMI is not created when a security interest in a copyright is perfected. c. Incorrect. A PSMI is not created when collateral moves. d. Correct. A PSMI is created when a seller or lender (typically of consumer goods) extends credit for part or all of the purchase to a buyer.

10. One of the basic remedies for default is:

a. execution and levy. b. conversion. c. trespass. d. perfection.

ANS: a. Correct. A creditor may seek an execution (a court decree or judgment concerning the debt) and a levy (obtaining funds from the seizure and sale of the debtor's assets) as a remedy for default. b. Incorrect. A creditor may not wrongfully retain the debtor's personal property. c. Incorrect. A creditor may not wrongfully enter onto the debtor's property. d. Incorrect. Once a default occurs, the creditor may not perfect his or her security interest in the collateral.