Secured Transactions

Question 1

What is bailment?

Answer 1

Possession of personal property without transfer of ownership

Question 2

What is a secured transaction?

Answer 2

Provides additional ways for creditors to collect from debtors by attaching collateral security to specified assets of the debtor

Question 3

What is the difference between personal property and real property?

Answer 3

Real property is just things like land and homes. Personal property includes things like chattel paper, documents of title, goods, instruments, intangibles, money, and investment property

Question 4

How can an unsecured creditor obtain a security interest?

Answer 4

By obtaining a court order to collect an overdue debt

Question 5

What happens when a debtor fails to pay a secured creditor?

Answer 5

They can proceed on their own to enforce their rights over the secured assets. For an unsecured creditor, they must obtain an execution order to seize assets even after obtaining a security interest

Question 6

What is the difference between a general, judgement, and secured creditor?

Answer 6

A general creditor has no security interest in debtor assets
A judgement creditor is an unsecured creditor who obtains an interest from the court
A secured creditor is a creditor with a security interest and takes precedence over the other two

Question 7

What happens if a creditor seizes property without notice?

Answer 7

They must give reasonable notice so they may be liable for damages

Question 8

What is a conditional sale contract?

Answer 8

A contract where a lessee pays to use an item for a certain term and can choose to purchase the item at the end of the term.

Question 9

What are the benefits of a conditional sales contract?

Answer 9

Gives the secured party a right to repossess goods if the debtor defaults.
The secured party can sue the debtor for unpaid balance
The owner of the goods does not have to transfer title

Question 10

What is a chattel mortgage?

Answer 10

Transfer of interest in personal property from a mortgagor to a mortgagee as security for a debt

Question 11

How can a chattel mortgage be established?

Answer 11

2 ways.

1. The seller of property takes back a mortgage on the property to collect debt from the buyer
2. The owner of the property mortgages it to a non-vendor lender as security

Question 12

What are some advantages of chattel mortgages?

Answer 12

Collateral in a chattel mortgage may be after acquired property which allows for flexibility. Chattel mortgages can include things not in deliverable state like goods in production and crops

Question 13

What happens when a lender uses a chattel mortgage>

Answer 13

The lender gets the right to sell the mortgaged property. If they receive a surplus over the debt, they must return it to the borrower. If they receive a deficit they can sue for the remaining amount

Question 14

What is a floating charge?

Answer 14

Adds a mortgage to all other assets that are not already mortgaged

Question 15

Why would you use a floating charge?

Answer 15

Makes is easier for a trustee to place the corporation in the hands of a receiver and manager who operate the business in the interest of bondholders. Also provides for flexibility in acquiring a security interest

Question 16

What is the PPSA?

Answer 16

The Personal Property Security Act which governs many different types of securities and applies to every transaction that creates a security interest

Question 17

What are the three requirements to obtain a security interest under the PPSA?

Answer 17

Creation, attachment, and perfection

Question 18

What is creation under the PPSA?

Answer 18

When the creditor and debtor enter into a security agreement that gives the creditor an interest in the debtor’s personal property

Question 19

What is attachment under the PPSA?

Answer 19

Occurs on performance of the agreement by debtor and creditor. Essentially finishes the trade

Question 20

What is perfection under the PPSA?

Answer 20

Establishing priority of the security interest by registering it. Protects the creditor’s security interest

Question 21

What are the two ways a security interest can be perfected?

Answer 21

Creditor takes physical possession of the assets to end false impression of ownership.
Creditor registers an financing statement in the PPSA system which future creditors can then search for existing interests. The first creditor to perfect their interest gets priority

Question 22

What is the effect of security interest priority on purchasers?

Answer 22

Possession of the goods usually creates an appearance of ownership which can mislead people
Purchasers are unable to rely on ignorance to keep possession of goods with a security interest because they can search the PPSA database of perfected interests

Question 23

What is the effect of security interest priority on other creditors?

Answer 23

Creditors must update their registration whenever changes occur or their security interest could be picked up by a different creditor.