1.
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The term that refers to an arrangement where a third party becomes secondarily liable for the payment of another's debts is:
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| surety arrangement |
| guaranty arrangement |
| attachment |
| garnishment |
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2.
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When a surety or guarantor pays the debt owed to the creditor, the surety or guarantor acquires all of the creditor's rights against the debtor. This is called the:
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| right of redemption |
| right of subrogation |
| right of guaranty |
| right of reimbursement |
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3.
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The law permits a secured creditor to use self-help to take physical possession of the goods pledged as collateral as long as the self-help:
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| occurs within certain hours of the day |
| is done with the assistance of the sheriff |
| does not cause a breach of the peace |
| occurs only after the debtor is given written notice |
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4.
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If Mary buys a television set for use in the waiting room of her office, the television set would be classified as:
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| consumer goods |
| inventory |
| equipment |
| it would depend on the primary use of the seller |
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5.
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How might a secured creditor perfect a purchase money security interest in consumer goods?
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| automatic perfection |
| by filing |
| by taking possession of the collateral |
| all of the above |
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6.
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Michael turns 18 and is anxious to buy his first car. He needs to borrow $3000. The Second National Bank agrees to lend Michael the money if someone will act as a surety. Sue agrees to act as his surety. Michael borrows the money and buys the car. Michael makes the payments, as promised, for a year and then runs out of money. Second National proceeds against Sue as surety. What are Sue's options?
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| She can force Second National to first sue Michael. |
| If she is forced to pay Second National, she is subrogated to their rights. |
| If she is forced to pay Second National, she can sue Michael on the underlying debt. |
| two of the above |
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7.
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Barb borrows money from the Friendly Financing Company (FFC) to buy new furniture. She grants FFC a security interest in "all consumer goods now owned or hereafter acquired." She signs the security agreement on June 3 and gets the money on that date. On June 10, she acquires a new couch. On July 3, she acquires a new television set. If she defaults on her loan to FFC, which of the following is a true statement?
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| The security agreement applied to after-acquired property. |
| The security agreement applied to the couch acquired on June 10. |
| Barb did not acquire rights in the collateral until she bought the couch and the television set. |
| all of the above |
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8.
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Jane has had her television set for over 12 years. It doesn't even have a remote control! Her kids can't believe how deprived they are. They finally talk Jane into buying a brand new 32 inch television from the Appliance Boutique for $1200. She finances the sale, giving the Appliance Boutique a security interest in the television set to secure repayment. Appliance fails to file a financing statement. Is their security interest perfected?
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| yes |
| no |
| Perfection is not the issue. One files a financing statement to make the security interest good against the debtor. |
| Perfection is not the issue. This agreement is not covered by Article 9. |
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9.
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On March 17, Larry borrows $10,000 from the First National Bank giving them a security interest in his machinery to secure repayment. First fails to file a financing statement. On April 19, Larry borrows $15,000 from the Second National Bank giving them a security interest in the same piece of equipment. On April 21, Second National Bank files a financing statement covering the collateral in the proper place. If Larry defaults on both loans and the equipment is only worth enough to satisfy one creditor, who has priority?
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| First National has priority; they obtained their security interest before Second National. |
| First National has priority; they were the first to attach. |
| First National has priority; they were the first to perfect. |
| Second National has priority; they were the first to perfect. |
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10.
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Dan owns and operates a card shop. On February 14, he borrows $10,000 from the Last National Bank giving Last a security interest in "all inventory now owned or hereafter acquired." Last fails to file a financing statement. On April 20, Dan buys a shipment of Mother's Day cards from PaperMache, Inc. He buys the cards on credit promising to pay within 30 days. Unfortunately, he is out of business in 30 days. Neither creditor has been paid. Both are claiming an interest in Dan's inventory. Who has priority?
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| Last National Bank has priority; secured creditors have priority over unsecured. |
| PaperMache, Inc. has priority; since Last National failed to file, the security interest is null and void. |
| Neither party has priority; whoever rushes to judgment first will win. |
| It doesn't matter, they will both get paid eventually anyway. |
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11.
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Denise borrows $15,000 from the Oakview National Bank, granting Oakview a security interest in "all inventory now owned or hereafter acquired" to finance the loan. Oakview promptly files a financing statement covering the security interest in the proper location. A few months later, Denise buys additional inventory on credit from Supplier, Inc. giving Supplier a security interest in the inventory to secure payment of the purchase price. Denise acquires the inventory on June 3; Supplier, Inc. notifies Oakview of the security interest and files a financing statement on June 7. Denise fails to pay either party and both claim and interest in the inventory. Who has priority?
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| Oakview National Bank has priority; they were the first to perfect and file. |
| Supplier, Inc. has priority; they have a purchase money security interest and purchase money secured parties always have priority over prior perfected secured parties. |
| Oakview National Bank has priority; in order to gain priority over prior perfected secured parties, a party with a purchase money security interest in inventory must be perfected at the time the debtor acquired the collateral. |
| two of the above |
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12.
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Sue wants to buy new furniture. To finance the purchase, she granted the Furniture Store a security interest in the furniture, including a breakfront, entertainment center, and cherry desk. Furniture Store files a financing statement covering the security interest. When it becomes clear to Sue that she will not be able to make the payments as promised, she sells the entertainment center to her next door neighbor, Janet. She uses that money to pay other debts and defaults on her payments to the Furniture Store. Furniture attempts to repossess the furniture. They take the breakfront and the cherry desk and discover that Janet has the entertainment center. Can they recover the entertainment center from Janet?
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| Yes, they had a perfected security interest and perfected security interests beat even bona fide purchasers, like Janet. |
| Yes, because they filed a financing statement. |
| No, Janet is a consumer buyer buying from a consumer seller and as such takes free of the security interest even if the secured party filed a financing statement. |
| No, this is an exception to the perfection-priority rule. |
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13.
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If you operated a business in which you issued credit as part of your business, which of the following would protect you best?
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| Make sure your security agreement requires a co-signer who will be primarily liable of the debt |
| Make sure you record your security agreements. |
| Hire a really intimidating repo man or woman who promises to "get tough" when necessary. |
| Both A and B are good ideas |
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14.
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Why might a creditor file a financing statement in the case of a purchase money security interest in consumer goods?
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| to perfect the security interest |
| there is no advantage |
| to gain priority over consumer buyers of the collateral |
| to make the security interest enforceable against the debtor |
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15.
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What is the significance of being the subordinate security interest?
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| You get paid after the party with priority; it is just a matter of timing. |
| Your security interest is invalid. |
| You probably don't get paid. The debtor usually doesn't have enough money to pay all his creditors. The secured party with priority can get paid out of the collateral. The subordinate secured party is left with a cause of action against a debtor without much money. |
| The subordinate party is out of luck. He or she had no way to prevent the loss and was just unlucky. It is proof of the statement, "better to be lucky than smart." |
