1. For anonymity, use your assigned test number which was mailed to you.

2. Put your test number on this page and on all bluebooks.

3. If you do not know your test number, you may obtain it in the Registrar's Office (Cindy Egeness) during the first 30 minutes of the exam period.

4. If you do not use your test number, you will be deemed to have waived your privilege of anonymous grading.

5. TURN IN YOUR BLUEBOOKS AND THIS EXAM AT THE END OF THE PERIOD.

2. To submit as one's own work the work of another.

3. To engage in any conduct which tends to give an unfair advantage to any student in any academic matter.

GRADUATING SENIORS: If you are a graduating senior, note this fact on all bluebooks and this exam paper. DO SO CONSPICUOUSLY.

TYPING AREA: If you are going to type your examination, the typing area is located in Room 230. You must return the exam to this room at the conclusion of the exam period.

This exam consists of three questions. Please answer only the questions asked. There will not be time for extraneous matters and no credit will be given for extraneous matters. The exam is open books. You may use any materials you wish. You may not seek assistance from any other person. Please write legibly in black or blue ink. Good Luck.

  CREDITOR/DEBTOR

Fall 1999 Exam

QUESTION 1

(35 Points)

Debbie Debtor has retained you as counsel. She is a consumer who is having financial problems. She tells you the following: "I don't think I can handle this much longer. I can't pay my bills and it just keeps getting worse. The creditors are threatening and I don't know what to do. I have some property I need to keep, but they can have what I earn above living expenses." You talk to Debbie and find out she has a house worth $140,000 with a mortgage of $100,000 against it. She has a car worth $7,000 which she owns free and clear of any liens. Her disposable earnings are $400 per week. She has $200 in a bank account. She has no other property except her personal effects and some ordinary household items. Debbie also tells you, "I could have sold my great-grandfather's stradivarius violin to pay my bills. I gave it to my sister last year instead as I couldn't bear to think of it being outside of the family."

Debbie tells you the main source of her financial problems is student loans. "One student loan agency calls me all the time - even after I sent them a letter telling them to stop." She owes about $50,000 in student loans, has the mortgage and normal bills for food, utilities and the like. "Between the mortgage and my normal bills, I don't have anything left and that's in a good month. When something goes wrong, I'm in big trouble, like last month my furnace broke, so I owe the repair company $1,500. I don't know how I'll pay it. Now they are calling me asking for money." Debbie has asked you to tell her what she can do, how she can protect what property she has, whether there's anything she needs to be aware of and if she can lessen the stress caused by the creditors. What is your advice?

QUESTION 2

(30 Points)

Your client, Small Bank, has a $500,000 loan to Auto Parts Store. Your client calls you in a panic. Small Bank tells you that it has reports from an employee of Auto Parts that inventory is missing. Small Bank then immediately sent one of its employees to the store to inspect (as permitted in the loan and security agreement) and the bank's employee reports that instead of $800,000 of inventory that's suppose to be there, there's at most $200,000. This is very important to Small Bank because its primary collateral is the inventory. The owner of Auto Parts has been contacted by Small Bank and he has no explanation for where the inventory went. The missing inventory has not been reported as sales in the reports submitted by Auto Parts to Small Bank, so your client does not believe it has been sold (also this would constitute a years worth of sales in a period of less than a month for Auto Parts and this is not possible). Small Bank tells you they believe that the rest of the inventory will disappear if immediate actions are not taken and asks you to help. How do you advise Small Bank?

QUESTION 3

(35 Points)

Clifford Company has a loan with Big Bank. The outstanding amount of the loan is $5,000,000 and has three more years  until it matures. The parties have entered into a Loan and Security Agreement (the "Agreement"). The Agreement provides that the loan will accrue interest at a rate of prime + 1%. The Agreement further provides that Clifford will not sell its assets (except inventory in the ordinary course of business) without the prior consent of the Bank and will not move its assets without the prior consent of the Bank.

Clifford is approached by Paula Purchaser. Paula is beginning her own business and offers Clifford $2,000,000 for certain inventory and equipment (the "Sale"). Clifford's thinks this is a good deal for it and requests the Bank's permission to sell the assets. Clifford's has agreed to turn over the $2,000,000 in reduction of its obligations to the Bank.

The Bank notifies Clifford's that it will consent to the Sale only if Clifford agrees that the interest rate it pays be increased to prime + 3% (two percent on $3,000,000 equals $60,000 per year). Clifford's tries to persuade the Bank otherwise but to no avail. Clifford's claims that the Bank is not acting in good faith and sues the Bank. You are the judge. How do you rule?