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NCA Commercial Law practice questions

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Question 1Sale of Goods

Under a contract for the sale of goods, when does property in specific goods generally pass to the buyer?

  1. When the contract is signed by both parties
  2. When payment is made in full
  3. When the parties intend it to pass Correct answer.
  4. When the goods are delivered to the buyer

Explanation

The central rule is that property passes when the parties intend it to pass, and intention is gathered from the contract terms, conduct of the parties and circumstances of the case. Delivery and payment are relevant evidence of intention but are not automatic triggers in themselves.

Question 2Sale of Goods

In a contract for the sale of unascertained goods, what must generally happen before property can pass to the buyer?

  1. The buyer must have paid a deposit
  2. The goods must have been delivered to a carrier
  3. The goods must be ascertained and appropriated to the contract Correct answer.
  4. The seller must have obtained insurance

Explanation

No property can pass in unascertained goods until the goods are identified and unconditionally appropriated to the particular contract. Only once goods are ascertained and set aside for that contract does property become capable of transferring.

Question 3Sale of Goods

A seller delivers goods that are fit for their ordinary purpose but the buyer had expressly told the seller they were needed for a particular unusual purpose, and the buyer relied on the seller's skill. Which term is most likely breached if the goods fail for that purpose?

  1. The implied condition of fitness for a particular purpose Correct answer.
  2. The implied condition of merchantable quality only
  3. The implied condition of correspondence with description
  4. The implied condition as to title

Explanation

Where the buyer makes known the particular purpose and relies on the seller's skill or judgment, an implied condition arises that the goods are reasonably fit for that purpose. The ordinary-purpose standard does not capture this tailored reliance.

Question 4Sale of Goods

Which implied term protects a buyer against a seller who does not have the right to sell the goods?

  1. The implied condition of correspondence with description
  2. The implied warranty of quiet possession
  3. The implied condition as to title Correct answer.
  4. The implied condition of satisfactory quality

Explanation

The implied condition as to title assures the buyer that the seller has the right to sell the goods at the time property is to pass. A breach of this condition can entitle the buyer to reject the goods and recover the price.

Question 5Sale of Goods

A buyer discovers the goods infringe a third party's trademark that was disclosed to the seller before the contract. Which implied term is most directly engaged?

  1. The implied warranty of freedom from encumbrances and undisclosed charges Correct answer.
  2. The implied condition of satisfactory quality
  3. The implied condition of fitness for purpose
  4. The implied condition of sale by sample

Explanation

The implied warranty protects the buyer from charges or encumbrances over the goods in favour of third parties that were not disclosed before the contract. A known trademark claim disclosed to the seller engages this warranty.

Question 6Sale of Goods

Where a contract is a sale by sample, which comparison must the bulk satisfy?

  1. The bulk must correspond only in quantity with the sample
  2. The bulk must correspond with the sample in quality and be free from defects not apparent on reasonable examination of the sample Correct answer.
  3. The bulk must be identical in price to the sample transaction
  4. The bulk must match the sample only if the buyer inspects it

Explanation

In a sale by sample there is an implied condition that the bulk corresponds with the sample in quality and that the buyer can reasonably compare bulk and sample. The bulk must also be free of defects that reasonable examination of the sample would not reveal.

Question 7Sale of Goods

A contract states goods are sold 'as they stand' with no other description. What effect does this have on the implied condition of correspondence with description?

  1. It transfers property immediately on signature
  2. It may exclude the description condition because no description is relied upon Correct answer.
  3. It automatically preserves all implied conditions
  4. It converts the contract into a sale by sample

Explanation

If goods are sold with no reliance on a description, the implied condition that goods correspond with description has nothing to attach to and may be excluded. The exact effect depends on construction of the contract and any statutory limits on exclusion.

Question 8Sale of Goods

What is the standard implied by the condition of satisfactory quality?

  1. The quality the buyer demands after delivery
  2. The quality a reasonable person would regard as satisfactory, taking account of description, price and relevant circumstances Correct answer.
  3. The highest quality available in the market
  4. The quality the seller subjectively believes is adequate

Explanation

Satisfactory quality is judged by the objective standard of a reasonable person, considering the goods' description, the price and other relevant circumstances. It is not measured by the seller's belief or the buyer's later demands.

Question 9Sale of Goods

A buyer inspects goods before purchase and the inspection ought to have revealed a defect. How does this affect the satisfactory quality claim?

  1. The buyer cannot rely on that defect if the examination ought to have revealed it Correct answer.
  2. The inspection makes the contract a sale by sample
  3. The buyer can always rely on the defect regardless of inspection
  4. The inspection transfers risk to the seller

Explanation

Where the buyer examines the goods before the contract and the examination ought to have revealed the defect, the buyer cannot later rely on that defect for a quality claim. The rule prevents buyers from complaining of matters a reasonable inspection would have exposed.

Question 10Sale of Goods

A seller ships goods that conform to the contract, but they are destroyed by an unforeseeable storm in transit. Who bears the loss where the contract does not provide otherwise and the seller is authorised to send the goods?

  1. The seller, because risk never passes before the buyer receives the goods
  2. The carrier, because it is a bailee of the goods
  3. The buyer, because risk generally passes to the buyer on delivery to the carrier in such cases Correct answer.
  4. Neither party, because the contract is automatically void

Explanation

Where the seller is authorised or required to send goods to the buyer, delivery to a carrier is prima facie deemed delivery to the buyer, and risk generally passes at that point. The buyer therefore bears loss occurring after that delivery to the carrier.

Question 11Sale of Goods

When does risk in specific goods generally pass to the buyer?

  1. When the goods are physically handed over
  2. When the contract is formed
  3. When property passes, unless the parties agree otherwise Correct answer.
  4. When the buyer pays the price

Explanation

The default rule ties risk to property, so risk passes when property passes, subject to contrary agreement. Parties frequently alter this default by express delivery or risk clauses.

Question 12Sale of Goods

What does the implied condition that goods correspond with their description require?

  1. That the goods are delivered within one week
  2. That the goods match the description by which they are sold Correct answer.
  3. That the goods are insured by the seller
  4. That the goods are of the highest available grade

Explanation

Where goods are sold by description, the goods must correspond with that description. The condition concerns identity and stated characteristics, not superlative quality or delivery timing.

Question 13Sale of Goods

A buyer who has accepted the goods later discovers a breach of condition. What is the buyer's general position?

  1. The buyer loses the right to reject but may still claim damages Correct answer.
  2. The buyer may rescind the contract for any breach
  3. The buyer may still reject the goods at any time
  4. The buyer loses all remedies including damages

Explanation

Acceptance of the goods generally extinguishes the right to reject for breach of condition, but the buyer retains a claim for damages. The breach is treated as a breach of warranty once the goods are accepted.

Question 14Sale of Goods

What is the effect of a buyer's wrongful refusal to accept conforming goods?

  1. The seller must store the goods indefinitely at its own cost
  2. The contract is automatically terminated
  3. The buyer may be liable for the price or damages for non-acceptance Correct answer.
  4. The seller loses the right to sue for the price

Explanation

A buyer who wrongfully neglects or refuses to accept and pay for conforming goods can be sued for the price or for damages for non-acceptance. The seller's remedies are preserved rather than extinguished.

Question 15Sale of Goods

A seller delivers a smaller quantity than agreed. How is this generally treated?

  1. The buyer may reject the whole delivery, but if accepted the buyer must pay at the contract rate Correct answer.
  2. The contract is automatically void
  3. The buyer must accept the shortfall without remedy
  4. The buyer must accept the goods and pay double

Explanation

A delivery of less than the agreed quantity entitles the buyer to reject the whole, subject to any agreed de minimis tolerance. If the buyer accepts the short delivery, payment is due at the contract rate for the quantity delivered.

Question 16Sale of Goods

A seller delivers more goods than the agreed quantity. What is the buyer's position under the default rule?

  1. The buyer may keep the excess without paying
  2. The buyer must reject the entire delivery in every case
  3. The buyer may accept the agreed quantity and reject the excess, or reject the whole Correct answer.
  4. The buyer must accept and pay for all the goods delivered

Explanation

Where more than the agreed quantity is delivered, the buyer may accept the contract quantity and reject the excess, or reject the whole delivery. The buyer cannot be compelled to pay for goods beyond the agreed quantity.

Question 17Sale of Goods

What is the implied condition regarding the time of delivery where a time is fixed in the contract?

  1. Delivery time matters only if the buyer complains
  2. Delivery may occur at any reasonable time after the fixed date
  3. Delivery time is never a condition
  4. Delivery must occur at the fixed time, and time is generally of the essence Correct answer.

Explanation

Where a time for delivery is fixed, delivery must occur at that time, and stipulations as to time are generally treated as of the essence in commercial sales. Late delivery can therefore entitle the buyer to reject and claim damages.

Question 18Sale of Goods

A term in a commercial contract excludes all implied conditions as to quality. How will a court most likely approach it?

  1. It will ignore all express terms in the contract
  2. It will treat the clause as converting the sale into a gift
  3. It will automatically enforce any exclusion clause as written
  4. It will construe the exclusion strictly and may refuse to enforce it if it is unreasonable or unclear Correct answer.

Explanation

Exclusion clauses are construed strictly against the party relying on them, and statutory controls may render unreasonable exclusions ineffective. Clear wording and fair dealing are essential for such a clause to operate.

Question 19Sale of Goods

What is the meaning of 'merchantable quality' in older sale-of-goods terminology?

  1. Goods that are sold at a discount
  2. Goods fit for the purposes for which goods of that kind are commonly bought, having regard to description and price Correct answer.
  3. Goods that are the finest of their kind
  4. Goods that the seller personally approves

Explanation

Merchantable quality historically meant fitness for the ordinary purposes for which such goods are bought, judged with reference to description and price. Modern statutes often replace it with the satisfactory quality standard.

Question 20Sale of Goods

A buyer agrees to buy goods 'subject to inspection on arrival'. When is the property most likely to pass?

  1. When the contract is signed
  2. When the goods leave the seller's warehouse
  3. When the carrier issues a bill of lading
  4. When the buyer indicates acceptance after inspection or otherwise does the act adopting the transaction Correct answer.

Explanation

Where goods are delivered to the buyer on approval or on sale-or-return terms, property passes when the buyer signifies approval or does an act adopting the transaction. A mere inspection right delays the passing of property until that approval.

Question 21Sale of Goods

Which of the following best describes an implied warranty of quiet possession?

  1. The goods will be delivered without any noise
  2. The seller will not raise the price after delivery
  3. The buyer will enjoy quiet possession of the goods free from disturbance by the seller or a third party with a superior claim Correct answer.
  4. The buyer will receive a refund on request

Explanation

The warranty of quiet possession assures the buyer of undisturbed enjoyment of the goods against lawful claims by the seller or third parties. It is distinct from the condition as to title, although the two often operate together.

Question 22Sale of Goods

A consumer buys a kettle that works but has a scratched surface that does not affect function. Under a satisfactory quality analysis, which factor is most relevant?

  1. Only the buyer's subjective disappointment
  2. Only whether the kettle boils water
  3. Only the seller's manufacturing cost
  4. The description, price and circumstances, including whether a reasonable buyer would accept the scratch Correct answer.

Explanation

Satisfactory quality considers the description, price and relevant circumstances, and asks whether a reasonable person would regard the goods as satisfactory. Cosmetic defects may matter depending on price and expected standard.

Question 23Sale of Goods

A seller delivers goods in installments, and one installment is defective. Under a general installment-delivery analysis, what is the key question?

  1. Whether the goods were insured
  2. Whether the breach is severable and whether the defect goes to the root of the whole contract Correct answer.
  3. Whether the buyer has paid for all installments
  4. Whether the seller used a particular carrier

Explanation

In installment contracts the court examines whether the breach affects the whole contract or is severable to a particular installment. A serious defect may justify terminating the entire contract, while a minor one may sound only in damages.

Question 24Sale of Goods

What does the implied condition of correspondence with description require when goods are sold by description and also by sample?

  1. The bulk need only match the description
  2. The bulk must both correspond with the description and match the sample Correct answer.
  3. The sample overrides the description in all cases
  4. The bulk need only match the sample

Explanation

Where a sale is both by description and by sample, both implied conditions operate cumulatively. The bulk must correspond with the description and also correspond with the sample in quality.

Question 25Sale of Goods

A buyer who has not yet paid discovers the seller has no title to the goods. Which remedy is most consistent with the implied condition as to title?

  1. The buyer must keep the goods and sue for a discount only
  2. The buyer may reject the goods and recover the price paid Correct answer.
  3. The buyer must resell the goods to a third party
  4. The buyer loses all remedies because payment was not made

Explanation

Breach of the condition as to title entitles the buyer to reject the goods and recover any price paid. The absence of payment does not strip the buyer of the right to treat the contract as repudiated for breach of condition.

Question 26Sale of Goods

Under the implied condition of fitness for purpose, on what basis must the buyer make the particular purpose known to the seller?

  1. Either expressly or by implication, so that the seller knows the buyer is relying on the seller's skill Correct answer.
  2. Expressly, in the written contract, so that the purpose becomes a term of the agreement
  3. Only after delivery, when the buyer discovers the goods are unfit
  4. Only where the buyer is a consumer and not a business

Explanation

The implied condition of fitness for purpose arises where the buyer makes known, expressly or by implication, the particular purpose for which the goods are being bought, and relies on the seller's skill or judgment. The reliance need not be spelled out in the contract. The purpose may be communicated in conversation or inferred from the circumstances.

Question 27Sale of Goods

A term is described as a 'condition' in a sale of goods contract. What is the consequence of the seller breaching it?

  1. The breach has no legal effect unless the buyer suffers actual loss
  2. The buyer must accept the goods but may claim a price reduction
  3. The buyer may treat the contract as repudiated and reject the goods, as well as claim damages Correct answer.
  4. The buyer may only claim damages and cannot reject the goods

Explanation

A condition is a term going to the root of the contract, so its breach entitles the buyer to treat the contract as repudiated, reject the goods and claim damages. The right to reject is sometimes called the right to treat the contract as at an end. The buyer may alternatively affirm the contract and claim damages.

Question 28Sale of Goods

Where a contract of sale is made by description, what must the goods supplied match?

  1. Only the seller's marketing materials, not the contract terms
  2. The description, even if the buyer has inspected the goods and could have seen a defect Correct answer.
  3. The buyer's subjective expectations about the goods
  4. Only the sample shown to the buyer before the contract

Explanation

Where goods are sold by description, the goods must correspond with the description. This applies even if the buyer has inspected the goods and a defect was apparent, because the buyer is entitled to receive goods matching the contractual description. The description may be found in the contract, catalogue or correspondence.

Question 29Sale of Goods

A seller agrees to sell 100 tonnes of wheat 'to be delivered in five monthly instalments of 20 tonnes each'. The first instalment is short by 5 tonnes. How should the buyer's rights generally be assessed?

  1. The buyer has no remedy because instalment contracts are excluded from the sale of goods rules
  2. Whether the shortfall entitles the buyer to treat the whole contract as repudiated depends on the ratio of the breach to the whole contract Correct answer.
  3. The buyer must accept the short instalment and can only sue for damages at the end of the contract
  4. The buyer may reject the whole contract automatically because any shortfall is a repudiation

Explanation

In an instalment contract, a defect in one instalment is a breach of that instalment, and whether it amounts to a repudiation of the whole contract depends on the seriousness of the breach relative to the whole contract. The buyer may reject the defective instalment and claim damages. Only a sufficiently serious breach justifies treating the entire contract as at an end.

Question 30Sale of Goods

A buyer agrees to buy a specific antique clock. Before the contract is made, the clock has already been destroyed by fire without the seller's knowledge. What is the position?

  1. The contract is void because the goods had perished before the contract was made Correct answer.
  2. The contract is valid and the seller must supply a substitute clock
  3. The seller is liable in damages for failing to deliver the clock
  4. The contract is voidable at the buyer's option only

Explanation

Where specific goods have perished before the contract is made and the seller did not know of the destruction, the contract is void. The parties are discharged from the outset. This rule applies to specific goods identified and agreed on at the time of contracting.

Question 31Sale of Goods

A buyer takes delivery of goods and then resells them to a third party before discovering a breach of condition. What is the buyer's position regarding rejection?

  1. The buyer may reject only if the third party returns the goods first
  2. The buyer must bring the claim on behalf of the third party
  3. The buyer has lost the right to reject by dealing with the goods inconsistently with the seller's ownership, but may still claim damages Correct answer.
  4. The buyer retains an unrestricted right to reject the goods and recover the price

Explanation

Once the buyer has accepted the goods by doing an act inconsistent with the seller's ownership, such as reselling them, the right to reject is lost. The buyer may still claim damages for the breach. Acceptance does not extinguish the claim for damages.

Question 32Sale of Goods

A seller delivers goods that are fit for their ordinary purpose but the buyer had told the seller the goods would be used in a particular high-temperature process, and they fail in that process. Which implied term is most directly engaged?

  1. The implied warranty of quiet possession
  2. The implied condition of correspondence with description
  3. The implied condition of fitness for the buyer's particular purpose Correct answer.
  4. The implied condition of satisfactory quality only

Explanation

Where the buyer makes known the particular purpose for which the goods are bought and relies on the seller's skill or judgment, the implied condition of fitness for that purpose applies. The goods must be reasonably fit for that disclosed purpose. The ordinary-purpose standard of satisfactory quality is a separate and less specific test.

Question 33Sale of Goods

What does the implied warranty of quiet possession entitle the buyer to expect?

  1. That the buyer will enjoy possession of the goods free from interference by the seller or anyone claiming under the seller Correct answer.
  2. That the goods will be free from any charge or encumbrance in favour of a third party
  3. That the goods will be delivered within a reasonable time
  4. That the goods will be of satisfactory quality

Explanation

The implied warranty of quiet possession assures the buyer that they will enjoy possession of the goods without disturbance by the seller or anyone claiming through the seller. It is distinct from the warranty of freedom from encumbrances. Both protect the buyer's title-related interests.

Question 34Sale of Goods

A buyer and seller agree that property in specific goods will pass on payment, but the goods are delivered to the buyer before payment. When does property pass?

  1. On delivery, because delivery always transfers property
  2. On payment, because the parties agreed property passes at that point Correct answer.
  3. When the seller demands payment in writing
  4. When the buyer resells the goods to a third party

Explanation

Where the parties agree that property in specific goods will pass at a particular time, that agreement governs. Delivery does not override an express agreement about when property passes. The seller may therefore retain title until payment even though the buyer has possession.

Question 35Sale of Goods

A seller delivers goods that are of satisfactory quality but are accompanied by a document containing a false statement about their origin. Which implied term is most likely breached?

  1. The implied condition of fitness for purpose
  2. The implied condition as to time of delivery
  3. The implied condition of satisfactory quality
  4. The implied condition of correspondence with description Correct answer.

Explanation

Where the goods are sold by description, the goods must correspond with the description, and a false statement about origin may mean the goods do not match the contractual description. The description can extend to matters such as origin and composition. Quality and fitness are separate tests.

Question 36Sale of Goods

A commercial buyer and seller agree that the seller excludes liability for breach of the implied conditions as to quality, and the exclusion is clear and prominently displayed. How will a court most likely treat the clause?

  1. It will be effective only if the buyer is a consumer
  2. It will be void automatically because implied conditions can never be excluded
  3. It will be effective if it satisfies the reasonableness test applicable to commercial contracts Correct answer.
  4. It will be read as excluding only the implied warranty of quiet possession

Explanation

In commercial contracts, exclusion of the implied terms is permitted, but the clause must satisfy the statutory reasonableness requirement. The court assesses factors such as bargaining strength and the clarity of the term. A clear and prominent clause is more likely to be reasonable.

Question 37Sale of Goods

A buyer rejects goods as non-conforming and the seller refuses to take them back. What is the buyer's position regarding the goods?

  1. The buyer must retain the goods indefinitely until the seller collects them
  2. The buyer becomes the owner of the goods and may keep them without payment
  3. The buyer must take reasonable care of the goods and may, in some circumstances, resell them after notice Correct answer.
  4. The buyer must destroy the goods immediately

Explanation

A buyer who rejects goods must take reasonable care of them while they remain in the buyer's possession. Where the seller fails to collect them, the buyer may have a right to resell after giving notice. The buyer is not entitled to keep the goods without paying.

Question 38Sale of Goods

A buyer agrees to buy goods on 'sale or return' terms. When does property in the goods pass to the buyer?

  1. Immediately on delivery, regardless of the buyer's decision
  2. When the seller sends an invoice
  3. When the buyer signifies approval or retains the goods beyond the agreed return period Correct answer.
  4. Only when the buyer pays the full price in cash

Explanation

On a sale or return, property passes to the buyer when the buyer signifies approval or adoption of the transaction, or retains the goods beyond the agreed period without giving notice of rejection. Until then, the goods remain at the seller's risk as to property. The buyer has an option to return the goods.

Question 39Sale of Goods

A buyer discovers that the seller had no title to the goods and that a third party has a better claim. The buyer has already paid the price. Which remedy best reflects the implied warranty of quiet possession?

  1. The buyer must return the goods and forfeit the price
  2. The buyer may only claim against the third party
  3. The buyer has no remedy because the seller did not act dishonestly
  4. The buyer may claim damages for breach of the warranty of quiet possession Correct answer.

Explanation

The implied warranty of quiet possession entitles the buyer to damages if possession is disturbed by a third party with a better title. The buyer need not prove dishonesty by the seller. The warranty protects the buyer's lawful possession.

Question 40Sale of Goods

A contract for the sale of unascertained goods states that risk passes to the buyer on delivery. The goods are damaged before delivery but after they have been appropriated to the contract. Who bears the loss?

  1. The carrier, because the goods were in transit
  2. The buyer, because appropriation always transfers risk
  3. The seller, because risk passes only on delivery under the express term Correct answer.
  4. Risk is shared equally between buyer and seller

Explanation

The parties may agree when risk passes, and an express term that risk passes on delivery displaces the default rule. Risk therefore remains with the seller until delivery despite appropriation. Appropriation identifies the goods but does not by itself transfer risk where the contract provides otherwise.

Question 41Secured Transactions (Personal Property Security)

Under a typical personal property security statute, when does a security interest generally attach to collateral?

  1. When value is given, the debtor has rights in the collateral, and a security agreement is authenticated Correct answer.
  2. When the debtor physically delivers the goods to the secured party's warehouse
  3. When the debtor signs a promissory note alone without any agreement language
  4. When the secured party files a financing statement in any office

Explanation

Attachment requires three elements operating together: the secured party gives value, the debtor has rights in or power to transfer rights in the collateral, and either a security agreement is authenticated or the creditor takes possession or control. Filing affects perfection and priority, not attachment itself. A bare note without a granting clause normally does not create an enforceable security interest.

Question 42Secured Transactions (Personal Property Security)

A creditor wants to perfect a security interest in a debtor's inventory by filing. Which filing office is normally correct under a typical PPSA-style regime?

  1. The central statewide filing office designated by the statute Correct answer.
  2. The office in the county where the debtor keeps its bank accounts
  3. The local land registry office for the debtor's principal residence
  4. The nearest courthouse in the secured party's home district

Explanation

Personal property security statutes generally direct financing statements for most collateral, including inventory, to a single central filing office, so searchers can find all filings in one place. County, courthouse, and land registry offices are used for real property recording, not for general personal property security filings. Central filing also supports the notice system that underpins priority.

Question 43Secured Transactions (Personal Property Security)

Which event generally causes a security interest to become unperfected after it had been perfected by filing?

  1. The secured party fails to continue the financing statement before it lapses Correct answer.
  2. The debtor pays a different creditor in the ordinary course
  3. The debtor changes its trade name without changing its legal name
  4. The collateral is moved to another warehouse in the same state

Explanation

A filed financing statement has a limited effective period and lapses unless a continuation statement is filed within the statutory window. Lapse destroys perfection even though the underlying security interest may remain attached. Ordinary payments to other creditors and intrastate movement of goods do not by themselves defeat a filing.

Question 44Secured Transactions (Personal Property Security)

A buyer purchases goods from a seller in the ordinary course of the seller's business, and the goods are subject to a perfected inventory security interest. What is the usual effect on the buyer's title?

  1. The buyer takes free of the security interest if the statutory ordinary-course conditions are met Correct answer.
  2. The buyer takes subject to the security interest unless the secured party consents in writing
  3. The buyer takes free only if the secured party has not filed a financing statement
  4. The buyer takes free only if the buyer searches the registry before paying

Explanation

An ordinary-course buyer of inventory generally takes free of a security interest created by the seller, even if the security interest is perfected and the buyer knows about it. The policy protects the normal flow of commerce and the buyer's reasonable expectations. The protection does not depend on a registry search or on the absence of a filing.

Question 45Secured Transactions (Personal Property Security)

What is the principal function of a financing statement in a personal property security system?

  1. It replaces the security agreement as the source of the creditor's rights
  2. It gives public notice that a secured party may claim an interest in described collateral Correct answer.
  3. It proves that the debtor actually received value for the obligation
  4. It transfers ownership of the collateral to the secured party on default

Explanation

The financing statement is a notice document that alerts the world to a possible security interest and enables later searchers to discover the claim. It is not a conveyance and does not prove value was given. The security agreement, not the filing, establishes the parties' substantive rights.

Question 46Secured Transactions (Personal Property Security)

A secured party holds a perfected security interest in a debtor's equipment. The debtor defaults. Which remedy is normally available to the secured party without prior judicial process?

  1. Automatic vesting of title to all collateral in the secured party
  2. Entry into the debtor's home over the debtor's objection
  3. Repossession of the collateral, provided it can be done without a breach of the peace Correct answer.
  4. Immediate sale of the debtor's entire business without notice

Explanation

On default, a secured party may generally take possession of the collateral using self-help only if that can be accomplished without a breach of the peace. Otherwise, judicial process is required. The creditor may not seize unrelated assets or force entry over objection, and strict foreclosure requires proper notice and consent.

Question 47Secured Transactions (Personal Property Security)

Which collateral type is most commonly perfected by the secured party taking control rather than by filing?

  1. Office furniture kept at the debtor's premises
  2. Raw materials stored in the debtor's warehouse
  3. A deposit account maintained at a bank Correct answer.
  4. A delivery truck used in the debtor's business

Explanation

Deposit accounts are typically perfected by control, which may be achieved through a control agreement with the depositary bank or by the secured party becoming the account holder. Filing is not the standard method for deposit accounts as original collateral. Vehicles, furniture, and inventory are normally perfected by filing or notation on a certificate of title.

Question 48Secured Transactions (Personal Property Security)

A security interest in a consumer's household goods secures a purchase-money obligation. Which statement best describes the typical priority rule against a conflicting earlier perfected interest?

  1. The later interest prevails only if the debtor is a business entity rather than a consumer
  2. A properly perfected purchase-money security interest in the goods generally has priority over an earlier floating lien on the same goods Correct answer.
  3. The two interests share priority equally and proceeds are divided pro rata
  4. The earlier perfected interest always prevails regardless of the nature of the later obligation

Explanation

Purchase-money security interests receive special priority because they enable debtors to acquire new goods; a properly perfected PMSI in consumer goods generally beats an earlier general lien on the same collateral. The priority is not limited to business debtors, and it is not a pro rata sharing arrangement. The earlier interest does not automatically prevail over a qualifying PMSI.

Question 49Secured Transactions (Personal Property Security)

A debtor's exact legal name changes after a financing statement was filed under the old name. What is the usual consequence for perfection against a subsequent purchaser?

  1. The filing becomes void immediately and cannot be cured by amendment
  2. The filing shifts automatically to the new name without any further action
  3. The filing becomes seriously misleading and loses effectiveness unless amended within the statutory period Correct answer.
  4. The filing remains fully effective forever because the debtor is the same legal person

Explanation

A financing statement is indexed by the debtor's name, so a change of the debtor's legal name can make the filing seriously misleading as to later searchers. Statutes typically require an amendment within a set period, often four months, to preserve effectiveness. The filing does not self-update, and it is not automatically void without an opportunity to amend.

Question 50Secured Transactions (Personal Property Security)

A secured party repossesses and sells collateral on default. Which obligation applies to the disposition under a typical statute?

  1. The secured party must sell at the highest price obtainable anywhere in the world
  2. The secured party need not account for any surplus to junior interest holders
  3. The secured party may keep all proceeds even beyond the secured obligation
  4. The secured party must give reasonable notification of the time and place of the sale to interested parties Correct answer.

Explanation

A default disposition must be commercially reasonable and, in most regimes, the secured party must send reasonable notice of the time and place to the debtor and other interested parties. Proceeds are applied to the obligation, and any surplus must be accounted for and paid to junior interests. The creditor cannot retain excess proceeds.