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Santa Clara University School of Law Final examination Instructions 1. This examination is limited open book. You may bring to the examination and use all assigned course materials and any notes, outlines, or other work product that you have produced alone or together with other persons registered in the course. You may not refer to any other materials. 2. Answer all six questions in this examination. Support conclusions with analysis. 3. The final resolution of some questions might require additional facts. For such questions, describe the kind of facts or give examples of facts that you
would seek. 5. Assumptions about governing law: a. Assume that California law governs any issues involving enforcement of money judgments and assume that California has adopted the Uniform Fraudulent Transfer Act. b. If dollar amounts in the Bankruptcy Code are relevant, you may apply either the amounts given in your 2001 statutory supplement or the inflation adjusted amounts that took effect on April 1, 2001, whichever you prefer. c. Do not apply provisions of pending bankruptcy reform bills.
Rachel is a college senior majoring in Spanish. She arranged with Beth, the sole proprietor of a near-by day care center, to introduce some of the children at the day care center to Spanish language, art, and culture. Beth agreed to pay Rachel $25/hr. for 5 hours of instruction each week. Beth specified the time for instruction (4:00-5:00 p.m. each weekday afternoon), provided the facilities (a room in the day care center), and provided supplies (paper, duplicating, crayons, etc.). Beth told Rachel that she trusted Rachel to design her own curriculum and lesson plans and to teach in the style that Rachel thought best. Beth told Rachel that for help with any disciplinary problems or emergencies Rachel could call upon a day care worker in an adjacent room who was responsible for the care and supervision of other children. Beth also provided Rachel with instructions about how and when to release students to parents or others who came to pick up children. At the end of each of the first two months, Beth paid Rachel without deducting any amounts for federal or state tax withholding or any other deductions. For the third month of Rachel's work Beth didn't pay Rachel at all. Soon thereafter Beth closed the day care center and took a job as a receptionist for a lawyer. Rachel obtained a judgment in small claims court against Beth for money that Beth still owed Rachel. Rachel garnished Beth's wages. Beth's new boss filed a claim of exemption on her behalf seeking to protect 100% of her wages from Rachel's garnishment. Applying California law, how should the court rule on Beth's claim of exemption and why? Relevant portions of California's wage garnishment law (from the California Code of Civil Procedure) follow. 706.011. As used in this chapter: . . . (c) "Employee" means a public officer and any individual who performs services subject to the right of the employer to control both what shall be done and how it shall be done. (d) "Employer" means a person for whom an individual performs services as an employee. (g) "Person" includes an individual, a corporation, a partnership or other unincorporated association, a limited liability company, and a public entity. 706.050. Except as otherwise provided in this chapter, the amount of earnings of a judgment debtor exempt from the levy of an earnings withholding order shall be that amount that may not be withheld from the judgment debtor's earnings under federal law in Section 1673(a) of Title 15 of the United States Code. 706.051. (a) For the purposes of this section, "family of the judgment debtor" includes the spouse or former spouse of the judgment debtor. (b) Except as provided in subdivision (c), the portion of the judgment debtor's earnings which the judgment debtor proves is necessary for the support of the judgment debtor or the judgment debtor's family supported in whole or in part by the judgment debtor is exempt from levy under this chapter. (c) The exemption provided in subdivision (b) is not available if any of the following exceptions applies: (1) The debt was incurred for the common necessaries of life furnished to the judgment debtor or the family of the judgment debtor. (2) The debt was incurred for personal services rendered by an employee or former employee of the judgment debtor. (3) The order is a withholding order for support under Section 706.030. (4) The order is one governed by Article 4 (commencing with Section 706.070) (state tax order). Question 2 Beth (the day care operator from Question 1) had operated the day care at her home. Children played in her back yard on swings, slides, and other playground equipment, some of which her own children had used prior to Beth's start of the day care center and some of which Beth had purchased for the day care center. Shortly after closing her day care center, Beth donated all the swings, slides, and other playground equipment to Marge, a neighbor with six children who had frequently taken over for Beth at the day care center when Beth was called away on emergencies or urgent business. Beth hadn't been able to pay Marge for the help and Marge hadn't asked for compensation, so Beth told Marge that this gift was a way of paying Marge for all her help. Beth didn't keep any of the equipment for use by her own children because she knew that she was soon to lose her home to a bank foreclosure and would be moving her family to an apartment. When Rachel (also from Question 1) graduated from college and got her teaching credential, she applied to teach Spanish at schools attended by Beth's children. Rachel was not hired and she soon learned that the reason was defamatory comments that Beth had made about Rachel to school officials. Rachel sued and obtained a judgment against Beth for defamation. In an order of examination proceeding, Rachel learned of the gift of playground equipment from Beth to Marge. Advise Rachel whether she would be entitled to levy execution on the playground equipment or to a money judgment against Marge and explain why. The following two provisions of the California Code of Civil Procedure may be among those statutes relevant to answering the question: 704.020. Household furnishings, appliances, provisions, wearing apparel, and other personal effects are exempt . . . [i]f ordinarily and reasonably necessary to, and personally used or procured for use by, the judgment debtor and members of the judgment debtor's family at the judgment debtor's principal place of residence. 704.060. Tools, implements, . . . furnishings, . . . equipment, and other personal property are exempt to the extent that the aggregate equity therein does not exceed . . . $5,000, if reasonably necessary to and actually used by the judgment debtor in the exercise of the trade, business, or profession by which the judgment debtor earns a livelihood. Question 3 In connection with their divorce, Ned and Nora agreed that Ned would buy out Nora's interest in their jointly owned Volkswagen Passat by paying her $10,000, half its value at the time, in monthly installments over a two-year period. The agreement granted Nora a security interest in the Passat to secure payment of the $10,000 and Nora timely and properly perfected that security interest pursuant to applicable state law. Ned missed many of the payments but whenever Nora threatened to repossess the car Ned came up with some payment that got her to defer taking any action. Two years after making the agreement, with the principal amount of the debt having risen to $12,000 because of missed payments and resulting interest, Ned filed a Chapter 7 petition to forestall what he knew to be an imminent repossession of the car. The Passat's value had by that time declined to $8,000, in part because Ned had failed to properly maintain it, but he loved the car and wanted to keep it. The day after the first meeting of creditors, Ned sent Nora a check for $8,000 (the money came from a post-petition loan from Ned's sister) and asked for her to release the security interest in the car. Nora did not cash or deposit the check or respond to Ned for one month. Then she sent the check back to Ned with a note that she was not willing to accept his proposal. A week later Ned filed a motion with the bankruptcy court asking for an order compelling Nora to release her security interest in the car in exchange for payment of $8,000. How should the bankruptcy court rule on this request and why? Part of your answer should consider the potential applicability of the following excerpt from Official Bankruptcy Rule 4007: A complaint to determine the dischargeability of a debt under § 523 (c) shall be filed no later than 60 days after the first date set for the meeting of creditors under § 341(a). Question 4 Debtor filed a Chapter 7 petition on April 1, 1996. The court granted the debtor a discharge on July 1, 1996. Notwithstanding the discharge, two pre-petition creditors undertook the following collection activities against the debtor after the discharge. One creditor, an agency of the United States government holding a claim against the debtor for a government guaranteed student loan, obtained a judgment against the debtor and began to garnish the debtor's wages after the debtor stopped making student loan payments in 2001. Another creditor, a victim of an automobile accident injured because of the debtor's operation of a motor vehicle, which operation was unlawful because of the debtor's intoxication, obtained a $100,000 tort judgment against the debtor in 1997 and caused an Abstract of Judgment to be filed in the Santa Clara County Recorder's Office in 1998. However, the debtor did not have any interest in real property in Santa Clara County until he inherited his mother's residence upon his mother's death in February 2003. Debtor filed another Chapter 7 petition in June 2002. He listed the unpaid student loan and the tort judgment on his bankruptcy schedules. The court granted the debtor a discharge in October 2002. (a) Thereafter, through the appropriate procedure, the debtor brought to the bankruptcy court the question of whether the balance of the unpaid student loan was discharged by the discharge granted in the debtor's second Chapter 7 case. (Bankruptcy Rule 4007 permits this procedure.) How should the bankruptcy court rule on that question and why? (b) At the end of 2003, debtor contracted to sell the residence that he had inherited from his mother. In that process, he obtained a title report on the property that reflected a lien in favor of the creditor who had obtained a tort judgment against him. Thereafter, through the appropriate procedure, the debtor brought to the bankruptcy court the question of whether the lien should be avoided on the ground that the debtor's discharge in the second Chapter 7 had discharged the debt prior to the time that the debtor had acquired any interest in the real property. (Bankruptcy Rule 4007 permits this procedure.) How should the bankruptcy court rule on that question and why? Question 5 Debtor's three-year Chapter 13 plan, proposing a 50% payment to unsecured creditors, was confirmed on June 1, 2000. On December 15, 2000, debtor's aunt died. The aunt's will left $50,000 to debtor, an amount that the executor of the aunt's estate distributed to the debtor, following probate of the will, in August 2001. In September 2001, debtor, who until then lived in a rented apartment, used the $50,000 to make a down payment on a residence in California. On February 15, 2001, debtor won $25,000 in the lottery. Debtor immediately invested the $25,000 in stock of ABC Corporation. In November 2001 the standing Chapter 13 trustee discovered the events described above. The standing trustee estimates that the debtor's residence has a market value of $300,000 and has learned that the residence is encumbered by a first deed of trust securing a debt of $247,000. The residential exemption in California for this debtor is $50,000. The trustee has also learned that debtor's stock in ABC Corporation is now worth about $10,000. The standing Chapter 13 trustee has asked for your legal advice. She wants to know whether she would be successful in convincing the bankruptcy court to modify the debtor's Chapter 13 plan to require greater payment to unsecured creditors for the remaining term of the debtor's Chapter 13 plan. After reviewing sections 1329, 1306, 541(a), and 1325(a) of the Bankruptcy Code, provide that advice and your reasons for that advice. Question 6 Debtor is a limited partnership whose only asset is a 10-story office building in downtown San Jose. Bank One holds a mortgage on the office building to secure Debtor's $3.5 million debt to Bank One. Because of the recent recession, and the resulting increase in vacancies as the leases of tenants expired, the partnership has not been able to service its $3.5 million debt to Bank One or pay for routine maintenance of the building. On the eve of Bank One's scheduled foreclosure on the office building, debtor filed a Chapter 11 petition. Bank One promptly moved for relief from the automatic stay. At the hearing on Bank One's motion, an appraiser hired by Debtor testified that the building is worth $3.7 million. An appraiser hired by Bank One testified that the building is worth $3.25 million. An economist hired by Debtor testified that the local economy is likely to slowly recover from recession during the next 12 months. An officer of the San Jose Redevelopment Agency subpoenaed by Bank One testified that plans to redevelop a one-block area adjacent to the Debtor's office building with retail shops, including restaurants, have been shelved indefinitely. At the time of the hearing on the motion for relief from stay the debtor had prepaid for adequate insurance on the building for the ensuing 12 months. How is the bankruptcy court likely to rule on the motion and why?
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