STUDENT I.D. NO.                            

THESE EXAMINATION QUESTIONS MUST BE RETURNED AT THE END OF THE EXAMINATION.

SANTA CLARA UNIVERSITY
SCHOOL OF LAW

FINAL EXAMINATION

DEBTORS' AND CREDITORS' RIGHTS                                        APRIL 30, 1996
PROFESSOR NEUSTADTER                                                          SPRING
4 QUESTIONS (WITH SUBPARTS)
3-1/2 HOURS

The revised examination rules issued in July, 1994 apply to this examination, except that this is a limited open book examination. 
 

Instructions

1.  During the examination you may consult your casebook, Bankruptcy Code, handouts distributed in class, and any notes, outlines or other work product prepared by you either individually or in working with other members of the class.  You may not consult any other material. 

2.  Apply California law to the extent the facts of a question imply that it is appropriate to do so.

3.  Each of the 4 questions has subparts.  Answer the interrogatories in all subparts.

4.  Provide authority and analysis to support your conclusions.

5.  In determining an appropriate grade for your examination, I look for ability to identify issues, demonstrated understanding of legal principles and relationships, skill in using the statutory law we have studied, accuracy, clarity and creativity of analysis, organization and conciseness of response, and good English expression.

6.  Recommended time allocations:

     Question 1 (Parts A and B):       3/4 hour
     Question 2 (Parts A, B and C):  1/2 hour
     Question 3 (Parts A, B and C):  1 hour
     Question 4 (Parts A, B and C):  1-1/4 hour

Question 1 (Parts A and B)  (Recommended time: 3/4 hour) 

     Ernie is an individual proprietor operating a small delicatessen in San Francisco, California.  Ernie owed Sal, a former delicatessen employee, $5,000 for unpaid wages.  Sal decided to relocate to Italy.  In anticipation of the move, Sal assigned his claim for wages to Bill Gates, a friend who is the billionaire owner of Microsoft.  Bill Gates paid Sal $4,500 in exchange for the claim (the $500 discount reflecting the risk Bill Gates was taking and the fact that any recovery on the $5,000 claim might take some time).

Part A 

     Bill Gates obtained a default judgment against Ernie on the assigned claim.  By the time of the judgment Ernie had sold his delicatessen and had begun work as an employee of a catering service.  To enforce the judgment, Bill Gates initiated the procedure for wage garnishment.  Ernie timely filed a claim of exemption which will convince a judge that Ernie requires all of his earnings to support himself and his family.  What percentage, if any, should the judge permit Gates to garnish?

Part B

     Assume that Bill Gates obtained a judgment against Ernie on the assigned claim, but disregard any other facts stated in Part A.  Instead, assume that Ernie has continued to operate his delicatessen and that he filed a Chapter 13 petition (assume he is eligible under section 109) one day after a sheriff, executing a writ on the Gates judgment, seized some of the delicatessen equipment. 

     The wages which had been owed to Sal were earned by Sal during the six months preceding the filing of the petition.

     Ernie's Chapter 13 plan proposes to pay all unsecured creditors, including Gates, 50% of the amount owing.  Gates wants  more and objects to confirmation of the plan.

     Assume that the plan satisfies the best interest of creditors requirement, the disposable income requirement, and the feasibility requirement.  Should the court confirm the plan?  If not, how, if at all, should Ernie amend the plan to overcome the obstacle to confirmation?

Question 2 (Part A, B and C)  (Recommended time: 1/2 hour)

     Patient Paul recovered a $1,000,000 judgment for medical malpractice against Doctor Dan in San Jose Superior Court.  Doctor Dan's insurance only covers and has paid $500,000 of the judgment. 

     Upon obtaining judgment, Patient Paul caused an Abstract of Judgment to be recorded with the County Recorder of Santa Clara County.  At the time the Abstract was recorded, Doctor Dan owned a mansion in Santa Clara County valued at $2,000,000, already encumbered by a properly recorded mortgage securing a debt in the amount of $1,700,000.  Assume that Doctor Dan is eligibile for a $100,000 homestead exemption for this mansion.

     One week after the Abstract was recorded, Doctor Dan borrowed $100,000 from a partner in his medical practice which Doctor Dan secured by giving his partner a mortgage on Doctor Dan's mansion.  The partner immediately and properly recorded this mortgage.

     A month after recording the Abstract, Patient Paul caused the sheriff to levy a writ of execution on Doctor Dan's mansion. 

     Assume that you represent an unsecured creditor of Doctor Dan with a judgment against Doctor Dan for $20,000.  The unsecured creditor has sought your assistance in collecting the judgment.  You hired a private investigator who informed you of all of the facts mentioned above.  It is less than 90 days after Patient Paul's levy on the mansion but more than 90 days after Patient Paul  recorded the Abstract.

     Assume that you can show that Doctor Dan has fewer than 12 unsecured creditors and that Doctor Dan is not generally paying his debts as they become due.

Part A

     Would you recommend that your client commence an involuntary Chapter 13 against Doctor Dan?

Part B

     Would you recommend that your client commence an involuntary Chapter 7 against Doctor Dan if the private investigator informs you that all of Doctor Dan's assets in addition to the mansion are fully encumbered by properly perfected security interests?

Part C 

     Would your answer to Part B change if the private investigator told you that all of Doctor Dan's assets in addition to the mansion are fully encumbered but that the security interest in some equipment in Doctor Dan's office worth $20,000 is not properly perfected under Article 9 of the Commercial Code?

Question 3 (Part A, B and C)  (Recommended time: 1 hour)

     On May 16, 1996, a week after returning from her honeymoon, a woman with lots of pre-marital debts filed a Chapter 7 petition to make her marriage a truly fresh start.  At the time of filing she owed $10,000 to GMAC for the purchase of a Pontiac; the debt was secured by a security interest in the Pontiac.  The Pontiac is worth $6,000.  Debtor's mother was a co-signer on the loan. 

     Debtor lived in a state which has not opted out of the federal bankruptcy exemptions.  Because she lived in a rented apartment, she chose the 522(d) exemptions and thus easily put the equity in the Pontiac beyond reach of the trustee.

     Debtor and GMAC signed a reaffirmation agreement on September 2, 1996.  The agreement called for repayment of $10,000 on the same terms as previously agreed and provided that GMAC would retain its lien.  The agreement contained all required disclosures.  The agreement said nothing about debtor's mother.  The court granted debtor a discharge on September 4, 1996.  GMAC filed the reaffirmation agreement with the court on September 10, 1996.  When filed, the agreement was accompanied by the appropriate declaration from the debtor's lawyer.

Part A 

     Suppose the Pontiac was demolished in an automobile accident a few days after the debtor had inadvertently allowed the automobile insurance to lapse.  Thereafter, the debtor defaulted on payments under the reaffirmation agreement.  May GMAC seek collection from debtor's mother?

Part B 

     Same as Part A except that the question is:  May GMAC seek collection from debtor?

Part C 

      Disregard the additional facts given in Part A but continue to apply the facts stated in the first three paragraphs of the question.   Also assume that debtor's husband unexpectedly died in October 1996 and that debtor was the sole beneficiary under her husband's $50,000 life insurance policy.

i.   Is there some way debtor could now force GMAC to accept $6,000 to release its lien on the Pontiac?

ii.  Considering section 727(d) of the Bankruptcy Code, is there something debtor should now do?

iii. Assuming no priority claims, will any part of the $50,000 life insurance proceeds be available to the unsecured creditors listed in debtor's bankruptcy petition?

Question 4 (Part A, B and C)  (Recommended time: 1-1/4 hour)

     Jane and Sarah, a gay couple, registered their domestic partnership under a San Francisco city ordinance which permits such registration.  Under the law of the State of Calfornia, their partnership is not recognized as a legally valid marriage.  Thus, no community property or other marital rights accrue to Jane and Sarah.

     Shortly after registering, Jane and Sarah adopted a child, following all appropriate procedures for an adoption.  Such an adoption is permitted under California law.

     Several years after the adoption, Jane and Sarah decided to separate.  They agreed, in writing, that:

     1.   Jane would assume primary custody of the child;
     2.   Sarah would make monthly payments to Jane to help Jane support the child     
           until the child's 18th birthday;
     3.   Sarah would retain an exclusive interest in her longstanding law practice and
           would pay Jane $25,000 to purchase what they thought Jane's community
           property interest in the law practice would have been under California law
           had they been legally married.

     You should assume that this written agreement is an enforceable contract under California law.

     A year after the agreement, Sarah filed a Chapter 7 petition.  She listed both monetary obligations to Jane in her Chapter 7 schedules.  Upon filing the petition, Sarah stopped paying Jane any money.  Both parties continue to reside in California.  

Part A 

     Prior to Sarah's discharge, may Jane attach attorney fees owed to Sarah by Sarah's clients?

Part B

     Assume that, prior to Sarah's filing of the Chapter 7 petition, Jane had obtained a state court judgment against Sarah for amounts owing on both obligations under their agreement but that Jane had done nothing to enforce the judgment before Sarah filed her petition and had not taken any action in the Bankruptcy Court with respect to the judgment before Sarah obtained her discharge.  May Jane execute on:

i.   $10,000 worth of computer equipment in Sarah's law office acquired by Sarah after the filing of the Chapter 7 petition?

ii.  Library books in Sarah's law office which she had properly claimed as exempt in the Chapter 7?  In addition to sections of the Bankruptcy Code we have studied that you may deem relevant to this question, you should also consider Bankruptcy Code section 522(c).

Part C

     Assume that Sarah had filed a Chapter 13 petition rather than a Chapter 7 petition, that Sarah's confirmed 3 year plan provided for full payments of monthly child support to Jane during the period of the plan but only 50% payment on other unsecured debts, including the debt to purchase Jane's interest in the law partnership.  Assume further that after one year of payments under the plan, Sarah obtained a hardship discharge from the bankruptcy court pursuant to section 1328(b) of the Bankruptcy Code. 

     After Sarah was granted this discharge, she continued to pay Jane child support but failed to pay any more of the other obligation.  May Jane seek to collect the portion of that other obligation that was not paid in the Chapter 13?  You will need to consult the balance of section 1328 of the Bankruptcy Code to enable you to answer this question.

End of examination