Fall
1998 Exam
This
exam consists of two 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
book.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.
Question
1 (50 points)
Your
law firm represents Clarissa Creditor.Clarissa
has a judgment against Danny Debtor in the amount of $30,000 which he has
not paid. Clarissa Creditor has hired your firm to collect the judgment.
The senior partner of your firm has asked you to prepare an analysis of
the best way to collect the debt. Specifically, you have been asked to
(1) determine which assets to attach first to collect on the judgment;
(2) state the most efficient means for Debtor to attach the assets, and
(3) the amount you think will be recovered.
In
the course of the discussion, you learn that Danny Debtor has the following
assets. A house worth $120,000 with a mortgage of $90,000, a car worth
$8,000 that he owns free and clear of any liens and a boat worth $2,000.
There are two bank accounts; one located in Minnesota with $1,000 in it,
the other with a Wisconsin bank that contains $5,000. His disposable earnings
are $600 a week. Minimum wage is $5.15 an hour.
How
do you respond to your senior partner?
Question
2 (50 points)
Debtor,
Inc. is your client. You have a meeting with Diana Debtor, the president
of Debtor, Inc. You represented Debtor, Inc. in its negotiations with Creditor
National Bank (ACNB@)
for a $5,000,000 line of credit. The line of credit requires CNB to advance
funds to Debtor, Inc. up to $5,000,000 as long as no event of default exists
and the collateral value exceeds the amount of the outstanding loans (e.g.
if collateral is worth $4,000,000 CNB is required to loan no more than
$4,000,000 as long as there is no event of default). What constitutes an
event of default and the formula for calculating the collateral amounts
are set forth in the loan documents.
At
your meeting with Diana Debtor you learn the following: There are certain
events of default existing under the loan documents. Debtor, Inc. is required
to maintain net worth, its ratio of assets to liabilities and cash on hand
at certain levels. It has failed to do so for the period just ending. Each
of these failures is an event of default. Also, it has failed to timely
produce its financial reports required under its loan documents which is
an event of default. In the past there have been similar events of default,
but in Diana Debtor=s
words, Anever
have we missed the ratios by so much or had so many events of default at
one time.@
In the past CNB has not acted on the events of default. She does not have
an explanation for why the company missed its ratios.
CNB
has sent Debtor, Inc. a letter that states unless Debtor, Inc. hires one
of the three consultants listed in the letter to manage Debtor, Inc. on
or before December 24, 1998 (17 days from now), CNB will cease making advances
due to the events of default. Diana Debtor informs you that if this happens,
the business will fail. She does not think she can find alternative financing
before December 24, 1998 and does not want to hire a consultant because
she does not want to lose control of her business. She tells you she does
not understand why CNB is doing this because Athere
is more than $5,000,000 of collateral.@
She wants to know what action she should take. She tells you she has always
appreciated your straight forward succinct answers and asks you to provide
her with your advice. Please do so.