WILLIAM MITCHELL COLLEGE OF LAW
CREDITOR/DEBTOR Spring 2005 Exam
Professor Gendler
(Two Hours)
QUESTION 1
(35 Points)
Donald Debtor was in financial trouble. He was behind on his mortgage payments, his car payments and his credit cards. Donald saw an advertisement from the Friendly Finance Company. In the ad, Friendly talked about consolidating his debts into one easy monthly payment. Donald made an appointment with Friendly. At his meeting, the debt counselor explained that Friendly would pay off his credit card bills and that Donald would make one payment a month to Friendly. The payments would be a little lower because Friendly would charge a lower interest rate. Friendly would do so because it would take a security interest in all his personal property, including his car, as collateral. Donald jumped at the idea. Donald needs his car to travel to his job. The Bank that had the first lien on his car retained its lien and Friendly took a second lien. As such Donald was still required to make his monthly car payments to Bank.
Donald failed to make his monthly payments to Friendly. He did however make a couple payments to Bank on his car. Donald filed a chapter 7 petition under the Bankruptcy Code. At the time he filed his car was worth $5,000 and he owed the Bank $5,500 on the car. Donald owed Friendly $23,000 at the time of filing. Donald received a discharge under Chapter 7. This discharged the debt of Friendly (and other debts). During his bankruptcy case, the Bank approached Donald about his car. Donald asked if he could keep his car if he made payments. The Bank agreed and the Bankruptcy Court approved the reaffirmation of the Bank’s debt. Donald thought this was best because he needed a car and the Bank agreed because if Donald didn’t make the payments it could repossess the car and this was it’s only hope to come out whole. Donald made all his payments to the Bank and the Bank released its lien when it received the final payment.
At this time, Friendly claimed it still had a lien on the car. Donald argued that Friendly had nothing for the lien to attach to since at the time he filed bankruptcy the amount of the lien to the Bank exceed the value of the car and that Friendly’s debt was discharged in the bankruptcy. Friendly agreed that its debt was discharged, but maintained its lien remained in place and that it had the right to the car or its value. You are the bankruptcy judge and the case is before you. Who wins Donald or Friendly and why?
CREDITOR/DEBTOR
Spring 2005 Exam
QUESTION 2
(30 Points)
Large Lender made a loan to Debtor Inc. The loan was secured by all personal property of Debtor Inc. Debtor Inc. executed a Promissory Note and Security Agreement. Large Lender properly and timely filed a UCC-1 Financing Statement in March 2002.
Debtor Inc. sold some of its equipment to BB Company. The equipment was sold outside of the ordinary course of business. Despite this, no one requested that Large Lender release its lien on the equipment and Large Lender did not release its lien.
In December 2001, Bank had made a loan to BB Company. BB Company executed a Promissory Note and Security Agreement and Bank properly and timely filed a UCC-1 Financing Statement in December 2001. Bank’s security interest extended to “all property now owned or hereafter acquired by BB Company.”
During February 2005 both Debtor Inc. and BB Company fail. Bank and Large Lender each claim a priority on the equipment sold from Debtor Inc. to BB Company. Neither Bank nor Large Lender have sufficient collateral to satisfy the obligations owed to them and cannot be made whole.
What are the arguments of Large Lender and Bank to the equipment? Which secured party is entitled to the equipment?
CREDITOR/DEBTOR
Spring 2005 Exam
QUESTION 3
(35 Points)
1. Arne Smith recently passed the bar sum and obtained employment as an associate attorney in a law firm in St. Paul, Minnesota. Arne was asked by his supervising attorney to assist in representing one of her best clients, T&H Trucking Company, in two of debtor-creditor matters. Arne picked up the following files:
File 1: Miller Companies has a judgment against Pat Chamberlain, an employee of T&H. Miller Companies mailed a garnishment disclosure form, and no other documents, to T&H. T&H wants to know how it should respond to Miller Companies. T&H also wants to know what it should do if it subsequently receives all of the statutorily required garnishment documents from Miller Companies (i.e., what are the garnishee's duties). Briefly discuss your advice to T&H.
File 2: T&H recently told Arne that it wanted a junkyard lawyer to send a tough dunning letter to a deadbeat account and to call and harass this deadbeat until they pay. What issues should Arne be aware before he sends out his demand letter and makes his phone calls?