Legal Concepts and Case Studies in Commercial Law, Exams of Law

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DEBTOR / CREDITOR EXAM #_________

Final Examination

Professor Hurn Fall 2010

Instructions: This examination is for three hours. It is fully “open book,” meaning you may refer to any written materials that you may have brought with you. However, you may not work with or consult any other person about your answers. Answer the multiple choice questions on the Scantron sheet provided and the short answers and essay in a Bluebook or by e-mail to the Registrar. Do not assume that familiar- looking questions are the same as those on old exams.

Unless otherwise indicated, assume all transactions occur in the USA in states with the uniform codes and statutes printed in your statutory supplement, with typical versions of other sorts of statutes. If something appears missing or mistaken, plainly state a corrective assumption and proceed with your answer

Remember to put your exam number on the answer forms and essays.

Multiple Choice (25 questions— up to 75 minutes suggested)

1. A crook persuaded a dealer to sell and deliver a valuable antique desk to the crook, paying with counterfeit money. Before the counterfeit was discovered, the crook sold and delivered the desk to a second dealer who had no notice of any wrongdoing. In an action by the original owner to recover the desk from the second dealer

a. The original owner will win because one can get no title from a thief. b. The original owner will win because counterfeit money is void. c. The second dealer will win because the crook took possession. d. The second dealer will win because the crook had voidable title.

(2-3) Clara had an old VW she drove in bad weather. It was entirely paid for and so old it no longer needed a certificate of title. She took it to Billy’s Used Car Sales and Repair Shop for a new head gasket. By the time the job was done, it was spring and Clara was in no hurry to pay. Billy notified her he was asserting a retaining lien. She ignored him. He then, without statutory authority, put the car on the lot with his regular inventory and sold it to a local college student.

2. In an action against Billy for conversion, Clara will

a. Win b. Lose because she entrusted the car to a dealer. c. Lose because Billy had a lien. d. Lose because Billy had the right of immediate possession.

3. Same facts, but Clara sues the college student for replevin, Clara will

a. Win b. Lose because she entrusted the car to a dealer. c. Lose because the Billy had a lien. d. Lose because Billy had the right of immediate possession.

4. Landlord was in financial trouble. His best asset was an office building leased to several tenants, in writing, for various terms of years. Landlord sold the building and assigned and delegated all the leases to Assignee, as of June 30. Assignee also signed a written assumption of the duties (utilities, upkeep, clearing walks and parking area, etc.). Before any of the tenants were notified of the assignment, the old Landlord, in return for lump-sum payments, extended the leases of several tenants. When the Assignee (new landlord) discovers this it may:

a. Disregard the extensions. b. Recover any provable loss in a warranty action against the old Landlord. c. Recover the amount of the lump sum payments from the tenants, leaving them to sue the old Landlord. d. Do either a. or b. but not both.

5. Assignments of contract rights NOT governed by UCC Article 9 fall under either the American Rule or the English Rule, depending on the state. Under the English Rule, when there are successive, irrevocable assignments of the same right, the owner is

a. The first person to whom assignment is made. b. The first assignee to notify the obligor under the original contract. c. The last assignee to take without notice of any prior conflicting rights. d. The last assignee for value without notice of any prior conflicting rights.

6. Same subject. When assignments ARE governed by Article 9 and there are successive, irrevocable assignments of the same right, the owner is

a. The first person to whom assignment is made. b. The first assignee to notify the obligor under the original contract. c. The first assignee to file in the Article 9 registry. d. The first assignee for value without notice of prior conflicting rights to file in the Article 9 registry.

7. Xavier had a $100 dollar bill (U.S. Federal Reserve Note) which had been distinctively defaced by someone drawing spectacles and a goatee on the picture of Ben Franklin. Yugo stole the bill. Yugo took the bill to the bank, got five $20 bills for it, and spent the money. If Xavier can prove the particular bill is still in the bank’s possession he may:

a. Recover the bill in replevin or its value in conversion. b. Recover only the bill’s value in conversion.

c. Recover nothing because legal tender operates generally the same way as bearer paper. d. Recover nothing because the defaced bill was no longer legal tender.

8. A local contractor did grading and paving on credit, taking from each customer a downpayment and promissory note for the balance. These notes were subject to a properly created and perfected floating lien in favor of the local Bank. The customers are all businesses. Despite the ready flow of working capital which this provided, the contractor’s affairs became disordered and it defaulted on (breached) a number of contracts. These disputed claims triggered the default clause in the security agreement. In an action by the bank against the non-paying customers to collect on the notes

a. The bank will win if it had no notice of the contractor’s defaults when it made the security agreement. b. The bank will win even if it did have notice of the contractor’s defaults when it made the security agreement. c. The bank will lose only if it acquiesced in the contractor’s breaches. d. The bank is subject to all defenses good against the contractor.

9. A Debtor took grain in which Bank had a security interest and, completely without awareness by the Bank, put it into the warehouse of an honest warehouser in return for a negotiable warehouse receipt. Debtor then sold the receipt to an innocent grain processor. When this is all discovered:

a. The innocent processor is now the owner and the Bank may sue the debtor and warehouser for conversion. b. The Bank may foreclose on the grain, and the innocent processor may sue the warehouser on warranty of title. c. The Bank may foreclose on the grain, but the honest warehouser has no liability. d. The innocent processor is now the owner, and the Bank’s remedy is only against the debtor.

10. Patentee sold and assigned his invention to James on January 1, 2010. Patentee sold and assigned the same invention to Larry on February 1, 2010. Neither assignee was aware of any impropriety. If Larry recorded in the PTO on March 1, 2010 and James recorded on March 2, 2010 the patent belongs to:

a. James because he was the first assignee. b. James because his recording relates back to January 1. c. Larry because he was a BFPV who recorded first. d. Larry because his recording relates back to February 1.

11. Creditor #1 had a valid security agreement and took an accurate financing statement in proper form to the filing office. Creditor #1 paid the correct fee and the officer took the financing statement. Receipts and stamped copies prove this. However, due to a series of emergencies and power failures that day, the officers never indexed Creditor #1’s financing statement. Several months later Creditor #2 entered a valid security agreement on the same collateral and filed a proper financing statement which was in fact properly indexed. In a dispute between the two Creditors, which will have priority?

a. Creditor #1 because it has satisfied the requirements for an effective filing. b. Creditor #1 because Creditor #2 was negligent in trusting the debtor. c. Creditor #2 because the attempted first filing was ineffective. d. Creditor #2 because Creditor#1 was negligent, having had sufficient time to confirm its filing and failing to do so.

12. Which of the following facts will defeat the claims of a person otherwise qualified as the holder in due course of a negotiable instrument under UCC Article 3?

a. The original obligor was a minor. b. The instrument was issued to pay someone to commit a violent felony. c. EITHER fact will defeat a holder in due course. d. NEITHER fact will defeat a holder in due course.

13. In the absence of a special statute or government regulation, a common carrier’s liability for negligent damage of goods may:

a. Be unconditionally limited by the parties in the contract of carriage. b. Be limited by the parties in the contract of carriage if, and only if, the shipper is given the option of purchasing higher liability limits at the time of contracting. c. Be limited by the parties in the contract of carriage only to the extent of excluding liability for consequential damages. d. Not be limited.

14. A local business has gone bankrupt. During its operations it generated a substantial stream of chattel paper from its customers (of the type which included promissory notes). A local bank held a security interest in the chattel paper, perfected by filing in the Article 9 registry. The customers have been paying, but the business failed for other reasons. If the bank declares a default and forecloses on the chattel paper, it has the following rights:

a. Immediate, full payment of the balances of the customers’ notes. b. Immediate possession of the customers’ chattels. c. BOTH a. and b. d. NEITHER a. nor b.

15. Acme, Inc. had a commercial loan from Big Bank, secured by a security interest in all property that is subject to Article 9, perfected by filing in the correct Article 9 registry. It defaulted on the loan and voluntarily surrendered all collateral (essentially the entire business as a going concern). Big Bank sold it to your client, Consolidated Conglomerate, Inc. in a private sale with no further recording. Since then, Good Faith Acquisitions, Inc. (GFA) has been successfully competing with your client, claiming ownership of a patent originally owned by Acme and sold by Acme to GFA after your client bought it from the Bank. Assuming GFA is a bona fide purchaser without notice who recorded in the Patent Office, who owns the patent?

a. Your client because Article 9 recording sufficiently perfected the Bank’s lien. b. Your client because Acme had no title left to convey to GFA. c. GFA because Article 9 is completely pre-empted by the Patent recording statutes. d. GFA because your client failed to record in the Patent Office.

16. Your client is a regular customer of a local art dealer. Last week she bought, paid a fair price for, and took home a valuable sculpture. Now she has learned that there was a recorded tax lien against the dealer when she made her purchase. She knew nothing about the lien or any of the dealer’s financial problems. She is worried about losing the sculpture and/or her money. You should tell her:

a. She has nothing to worry about so long as she was a buyer in the ordinary course. b. She could lose the sculpture, but the government would have to reimburse her for the price she paid. c. The sculpture is subject to the government’s lien because the federal tax lien statute pre- empts UCC Article 2. d. She could lose the sculpture, but only if the dealer declares bankruptcy within 90 days of her purchase.

17. Debtor was being sued for a large sum. In addition to exempt property, Debtor had $15,000 in cash, a sum much less than his legitimate debts. One of these debts was to an unrelated Friend who had loaned Debtor over $20,000 to carry him through a period of unemployment. Debtor gave Friend the $15,000 in the form of a cashier’s check which Friend deposited in his personal bank account. Debtor lost the lawsuit and no non-exempt property was found. If the transaction with Friend is discovered:

a. Friend is liable to the judgment creditor for up to $15,000. b. Friend is liable to the judgment creditor for up to the whole amount of the judgment debt. c. Friend is liable to the judgment creditor only if and to the extent that he still has traceable funds. d. Friend is not liable.

18. Same facts as in the previous question except that the friend was also Debtor’s brother.

a. Friend is liable to the judgment creditor for up to $15,000. b. Friend is liable to the judgment creditor for up to the whole amount of the judgment debt. c. Friend is liable to the judgment creditor only if and to the extent that he still has traceable funds. d. Friend is not liable.

19. You represent a creditor of Pepperoni Pete’s Pizza House, Inc. Your client has a properly perfected first priority lien on the Corporation’s business equipment. The debtor has defaulted on the loan and is insolvent. Yesterday it assigned all its assets to a local accountant in trust for the

benefit of its creditors. You’ve gotten a call telling you this and inviting negotiations for a work- out. Your client is furious and wants to foreclose on the collateral. No bankruptcy has been filed. In this situation:

a. The transfer is Fraudulent. You may set it aside and foreclose on the collateral. b. You may replevy the collateral and foreclose on it following ordinary Article 9 procedure. c. You may ignore the transfer because this is a voidable preference preempted by the federal Bankruptcy Code. d. The assignment is effective and you must negotiate with the trustee.

20. Which of the following liens can capture property acquired by the debtor after the lien is recorded?

a. Attachment Lien b. Federal Tax Lien c. Execution Lien d. Both b. and c.

21. You are a trustee in bankruptcy. The debtor had licensed copyrighted software to Licensee, whose entire business is built around the program. The license is exclusive for the Licensee’s particular line of business. There are other potential licensee’s who are willing and able to pay a higher royalty. You want to reject the original license and make a more lucrative deal. You

a. May reject the license agreement. b. May reject the license if and only if the Court finds that the resulting gain to the estate outweighs the harm to the original licensee. c. Must permit the original licensee to use the software on a non-exclusive basis so long as it pays the agreed royalty. d. Must permit the original licensee to use the software on an exclusive basis so long as it pays the agreed royalty.

22. The passage of title in a sale of goods automatically controls

a. Who has an insurable interest in the goods. b. When it first becomes possible for the buyer to get specific performance of the contract. c. What jurisdiction may levy a sales tax. d. All of the above.

23. Creditor sold Debtor an industrial robot system on credit, securing a legally sufficient written security agreement (PMSI). However, it delayed recording its financing statement for over a month. Eighty days after it recorded, Debtor filed for bankruptcy. Creditors security interest is:

a. Enforceable because it was a contemporaneous exchange perfected before the bankruptcy. b. Enforceable because PMSI’s are insulated from the stay and avoiding powers. c. Voidable because it is a preferential transfer.

d. Voidable because the Trustee has the rights of a judicial lien creditor.

24. In Bankruptcy, when a third party takes property in violation of the automatic stay, the transfer is:

a. Voidable if action is brought within two years of the transfer. b. Voidable if action is brought within two years of the close of the case. c. Wholly void. d. Effective if it is in exchange for reasonably equivalent value, but the third party is subject to punishment for contempt.

25. Assume an insolvent debtor lives in a house on which there is a first mortgage and a mechanics lien for roofing work. After the recording of the mortgage and before the beginning of the roofing work, another creditor secured an attachment on the house. The property taxes are current (fully paid). There is a homestead right in a fixed amount. Of the following, who has the most senior claim to the real estate?

a. The mortgagee to the extent of the mortgage. b. The mechanic to the extent of his/her lawful claim. c. The attaching creditor to the extent of the attachment. d. The debtor to the extent of his/her homestead.

Short Answers (up to 30 minutes recommended)

1. You have been hired by the holder of a California final money judgment to collect it. The defendant owns commercial real estate in New Hampshire. You know of no other assets. Briefly explain the simplest way to secure the right to sell the real estate.
2. Same facts except that the only known asset subject to N.H. jurisdiction is a bank account. You have reason to believe the defendant will drain the account and hide the proceeds if he has warning that you have discovered it. What, if anything, should you do differently and why?
3. You represented wife in a divorce. The court awarded her the couple’s car. Before the divorce it was fully paid off and titled in the husband’s name. You have correctly sent a copy of the court order, application for new certificate, and fee to the DMV. You have the new certificate in wife’s name, but you don’t yet have possession of the vehicle. Is your client’s ownership as secure as it could be? Why or why not?
4. Your client, George, a previously healthy 47 year-old electrician, was severely injured by a negligent driver. George retained you, agreeing in writing to pay a contingent fee of one-third of the gross recovery by settlement or judgment. You have notified the defendant and its insurance company. Under local law this gives you a perfected lien on any proceeds of settlement or judgment. However, you have just learned that before the accident the IRS recorded a federal tax lien against George on which there is a large outstanding balance. Is your fee in jeopardy? Why or why not?

5. Most commercial bank loans are literally or practically demand loans. In class I explaied reasons that, short of a general bankers’ panic, financially sound borrowers should not fear exploitation or damage by their lender. Briefly state three of them.

Essay (up to 75 minutes suggested)

Harriet decided to go into the cigar business. She owned a small commercial building with a properly recorded mortgage on it held by Giant Bank who had bought it in the secondary market. She talked things over with the loan officer at her local bank (Little Bank). He was willing to extend a working capital loan, secured by a security interest in all personal property (tangible or intangible) used in or generated by the cigar business. This was properly documented and the financing statement properly filed.

Harriet had a cabinet maker build her a beautiful walk in-humidor. The cabinet maker took the precaution of filing a mechanics lien. Harriet also ordered a stock of inventory from two sources: General Cigar, which had her sign a purchase money security agreement covering all its shipments (perfected by filing); and Cigar Specialties, which sold on open account (i.e. on credit, unsecured). There was one other source of inventory. Harriet’s best friend made frequent trips to Canada where she purchased Cuban cigars, illegally importing them into the U.S. for Harriet to resell. These were kept with no labels in a box labeled “Harriet’s Private Stock.”

Part of the operation was a storage service for customers without large humidors. They paid a fee and were allocated individual compartments in Harriet’s humidor where they could keep their purchases. One such customer was Gail who, at the time Harriet was closed down, had $1, worth of paid-for cigars in her compartment, equally divided among the three sources of inventory.

What broke the business was a tip to the Customs Service, which raided Harriet’s shop, seizing all the contraband Cuban cigars (including those in Gail’s compartment). The US Attorney has instituted forfeiture proceedings against the cigars. The disruption and legal expenses have rendered Harriet insolvent. She has defaulted on all debts and claims mentioned in this question and the creditors are beginning to file actions. There have been no attachments because Harriet’s state does not provide for pre-judgment attachment in such cases.

Explain what persons have claims to each item or category of property mentioned, what the priorities are among overlapping claims, and why.

End of Examination