Santa Clara University
School of Law

Debtors' and Creditors’ Rights                                             May 11, 1999
Professor Neustadter                                                             Spring 1999
Essay (7 questions, several with subparts)                          3.5 hours

1. This examination is limited open book. You may refer to the books assigned for the course, to items distributed in class or through electronic reserve, and to your notes, outlines, or any other work product that you produced either alone or in cooperation with another student in the class. You may not refer to any other materials.

2. Provide analysis supporting your conclusions.

3. 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, and organization and conciseness of response.

4. There are seven questions on the examination. Several of the questions have multiple subparts. Answer all subparts of each question. I have suggested time allocations for each question, but the amount of time necessary to answer a question will likely vary somewhat for each student. I will award credit roughly in proportion to the amount of time allocated for a question.

    Your client is a single parent. In Fall 1998 your client's teenage daughter started her freshman year at Harker Academy, a private high school without religious affiliation that is well known for providing a high quality education. Tuition for each year ($10,000 per child) was payable in advance. Harker Academy accepted credit cards for tuition payments. Your client charged the $10,000 tuition to his Master Card.

    After your client’s default on payments to Master Card, Master Card sued your client in California state court, obtained a judgment, and initiated garnishment.

    Five and a half years ago your client received a discharge in a Chapter 7 case that he had filed a little over six years ago. Your client barely earns enough money to make ends meet. His expenses include $150/month for special dietary and veterinary care for a 13 year old dog that has been with the family since the dog was a puppy and $350/month lease payments on a 1998 Jeep sports utility vehicle.

    A few weeks ago your client inherited $10,000 worth of IBM stock and, while insolvent, gave the stock to his son and daughter-in-law as a wedding gift.

    a. Other than negotiating a satisfactory settlement with Master Card and other than filing under the Bankruptcy Code, is there anything that can be done to stop or reduce the amount of the wage garnishment?

    b. Is there anything to preclude your client from receiving a discharge if he were file a Chapter 7 tomorrow? Do not discuss Bankruptcy Code 707(b).

    You represent another client who has been making payments under a five year confirmed Chapter 13 plan. Six months short of completing payments required by the plan, the client was been laid off work and can no longer make payments under the plan. The client returned to you for advice. You consider the possibility of seeking a hardship discharge under Bankruptcy Code section 1328(b). You review the client’s file. Which of the following facts that you see from the client’s file is relevant to the question of whether the court will grant a hardship discharge? For each fact set forth below, explain why the fact is or is not relevant.

    a. Two months before you filed the Chapter 13 petition, the client moved from another state to the state in which the Chapter 13 petition was filed.

    b. The client has just found another job at a wage below that which he was previously earning. He could complete payments under the plan if the six months worth of remaining payments were spread out over twelve months.

    Your review of the file for the client described in Question 2 also reminds you of the following facts. About five years ago, prior to filing the Chapter 13 petition, your client had incurred a $10,000 debt to Master Card to pay tuition for his son’s senior year at Harker Academy (a high school), just like the other client described in Question 1. $2,500 remains due to Master Card on that debt. If the court were to grant a hardship discharge (notwithstanding any contrary conclusion you might have reached in answer to Question 2), what should you tell the client about the debt to Master Card?

    Note: In addition to sections of the Bankruptcy Code that we studied, you will need to consult section 522(c) in formulating an answer to at least some subparts of this question.

    Your next client is a sole proprietor who runs a small vacuum cleaner sales, service and repair store. He is a lifetime resident of California. You filed a Chapter 7 on his behalf. At the time of filing the Chapter 7, your client rented an apartment, had minimal household furnishings and clothing, and owned nothing else other than the inventory and equipment of his business. The equipment consisted of tools, display racks, a computer, and a van that he used both for his business and for his personal driving. (He also had a month-to-month tenancy for the location at which he ran his business but you may ignore any issues presented by this lease for purposes of the questions posed below.) At your suggestion, he chose the California bankruptcy exemptions and properly claimed all of his assets other than his inventory as exempt. His inventory of vacuum cleaners was subject to a purchase money security interest in favor of Bank.

    Prior to filing the Chapter 7, your client and his former spouse dissolved their marriage. In the marital dissolution agreement your client agreed to pay his former spouse $15,000 as a property settlement, not as support. During the Chapter 7 case that you filed on his behalf, the bankruptcy court found this $15,000 debt to be nondischargeable.

    Subsequent to your client’s receipt of his Chapter 7 discharge, he found himself unable to pay the $15,000 debt to his former spouse and she filed suit in California state court to obtain a judgment for the $15,000 debt.

    a. If the former spouse obtains a judgment and files a Notice of Judgment Lien with the California Secretary of State, would your client have any ground for a court order terminating the Notice of Judgment Lien as to any of the client’s equipment?

    b. Suppose that your client won $5,000 in the lottery a week after filing his Chapter 7 petition on the basis of a lottery ticket purchased a day after filing his petition. He used the money to purchase a piano to play in his apartment. Can he successfully resist an effort by his former spouse to execute on the piano to satisfy her judgment?

    c. Suppose that the trustee in the Chapter 7 had been able to avoid the security interest in the inventory, had liquidated the inventory, and had $20,000 to distribute to unsecured creditors. All other unsecured creditors were owed trade credit (e.g. utilities, cleaning supplies). Assuming that she had filed a proof of claim, would the former spouse have been entitled to payment in full before distribution to other unsecured creditors?

    d. Suppose that your client’s former spouse had obtained a judgment on the $15,000 debt and filed a Notice of Judgment Lien eighteen months prior to your client’s filing of a Chapter 7 petition. Would the lien have been avoidable?

    Suppose that your client from Question 4 filed a Chapter 11 instead of a Chapter 7 petition and that the filing occurred shortly after his former spouse had filed a Notice of Judgment Lien to enforce a judgment for the $15,000 debt described in Question 4. Assume that neither lien is avoidable and that the Bank’s lien has first priority on the inventory.

    The Bank holding a security interest in your client’s inventory sought relief from the automatic stay immediately after filing. At the time of the hearing three weeks later your client owed the bank $50,000 under a line of credit calling for interest at 10% per annum. At the time of the hearing on relief from stay, the debt to your former spouse, including enforcement costs and statutory post judgment interest accrued prior to the filing of the bankruptcy petition was $17,500. The inventory of vacuum cleaners is worth approximately $60,000. A discount vacuum cleaner sales (but not service or repair) store has recently opened two miles away from your client’s place of business. Would the Bank be entitled to relief from the automatic stay? If so, what kind of relief?

    Soon your next client will be filing a Chapter 7 petition. One of her assets is a car that she had purchased on credit. A credit union that had financed the purchase retained a security interest in the car to secure payment of the purchase price. She still owes $2,000. A local used car dealer has recently told her that he would pay $1,000 for the car.

    Assume that Congress has passed the amendments to the Bankruptcy Code quoted below and that the amendments will apply to your client’s Chapter 7.

    a. How much would your client have to pay to redeem the car if she purchased the car two years ago?

    b. How much would your client have to pay to redeem the car if she purchased the car six years ago?

    Amendment: Section 506 of title 11, United States Code, is amended by adding at the end the following:

    "(e) In an individual case under chapter 7, 11, 12, or 13--

           (1) subsection (a) shall not apply to an allowed claim to the extent attributable in whole or in part to the purchase price of personal property acquired by the debtor within 5 years of the filing of the petition;

           (2) if such allowed claim attributable to the purchase price is secured only by the personal property so acquired, the value of the personal property and the amount of the allowed secured claim shall be the sum of the unpaid principal balance of the purchase price and accrued and unpaid interest and charges at the contract rate;"

    Amendment: Section 506(a) of title 11, United States Code, is amended by adding at the end the following:

    "In the case of an individual debtor under chapters 7 and 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of filing the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purpose, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined."

End of examination