Santa Clara University School of Law

Final Exam
UCC Article 9
Fall  2001

Professor Neustadter
6 essay questions
3-1/2 hours
Limited open book

Instructions

1. This examination is limited open book. You may bring to the examination and refer to all course materials, hard copy or electronic, and all notes, outlines, or other work product, hard copy or electronic, that you have produced alone or together with other persons registered in the course. You may not refer to anything else.

2. You may use a computer for reference to electronic materials, or for writing answers to the examination, or for both. You must use ExamSoft if you are writing the examination with a computer. If your computer crashes, you should hand write the remainder of the exam but may contact the proctor for a backup computer for access to electronic source materials. If your computer crashes, contact the proctor after the examination period is over to arrange for retrieval of what you had written on the computer before it crashed.

3. Answer all questions in this examination. Provide analysis supporting your conclusions. Conclusions without supporting analysis will not receive credit.

4. If you believe that additional facts are needed before reaching a conclusion, describe the kind of facts or give examples of facts that you would seek.

5. If you believe that there is a mistake or ambiguity in or any other problem with a question, identify in your answer what you think to be the mistake, ambiguity, or problem, and identify in your answer the assumptions that you are therefore making in answering a question. Do not attempt to contact Professor Neustadter. For an unforeseen difficulty affecting the administration of the exam (e.g. a missing page), contact the proctor.

For all questions, apply the Uniform Commercial Code. Do not apply any California non-uniform amendments.

Question 1

John, Sophia, and Ruben are general partners in a retail lumber business doing business under the fictitious business name of Sierra Lumber. Two of the partners live in Nevada and one lives in California. A general partnership is not a registered organization.

The original lumber storage area and original business offices of Sierra Lumber, both still used, are located on a parcel of real property located on the California side of the border. As a result of subsequent expansion of the business, additional offices, for one of the three partners, for the company controller, and for the company's sales manager, and an additional lumber storage area, are located on an adjacent parcel of real property located on the Nevada side of the border.

Reno Forklift, a corporation incorporated in Delaware, manufactures and sells forklifts. Its chief executive offices are located in Reno, Nevada. It sold and delivered a forklift to Sierra Lumber on secured credit. The partners of Sierra Lumber signed a retail installment contract that specified the terms of the purchase, including the amount of the debt, the amount of monthly payments, and the grant of a security interest from Sierra Lumber to Reno Forklift. The contract referred to the collateral as "equipment."

Reno Forklift filed a properly completed financing statement with the office designated in section 9-501(2) of the Nevada Commercial Code. The financing statement did not bear the signature of any of the partners of Sierra Lumber. Reno Forklift did not file a financing statement elsewhere.

Forklifts are not governed by certificate of title legislation.

Six months after Reno Forklift filed its financing statement, Sierra Lumber filed a petition under Chapter 7 of the Bankruptcy Code. The bankruptcy trustee seeks to avoid the security interest of Reno Forklift both because of the location of the filing of the financing statement and the failure of the financing statement to include a signature of any partner of Sierra Lumber. You are the bankruptcy judge. Do you grant the trustee the relief she seeks? Why?

Question 2

Assume the same facts as in Question 1 except that Sierra Lumber, while experiencing financial difficulties, has not filed a petition under the Bankruptcy Code. However, it has failed to make the last two monthly installment payments to Reno Forklift under its contract for the purchase of the forklift.

At the close of business each day, Sierra Lumber parked the forklift in an open air, fenced-in area that is patrolled at night by two guard dogs. The gate of the fence latches but does not lock and has never been padlocked.

An agent hired by Reno Forklift to repossess the forklift approached the fenced-in area one night at 3:00 A.M. She quieted the barking and snarling dogs with some meat thrown over the fence. She unlatched the gate, armed with a stun gun in case the dogs charged her, started the forklift with a key furnished by Reno Forklift, drove the forklift to the street, loaded it on her flatbed truck, and drove away. In leaving the fenced-in area, the agent failed to securely latch the gate. Several hours later one of the dogs escaped through the gate, ran into the street, and was accidentally killed by a passing motorist.

Reno Forklift has scheduled a foreclosure sale of the forklift and given the required notices, including a notice to Sierra Lumber.

You represent Sierra Lumber. The foreclosure sale has not yet occurred. Your client would like to cure the default, get the forklift back, and resume making payments on the contract. Your client has asked you whether that is possible and if the events surrounding the repossession might be used as negotiating leverage to accomplish that objective. Without considering bankruptcy options, what do you think and why?

Question 3

Assume the same facts as in Question 1 except that Sierra Lumber, while experiencing financial difficulties, has not filed a petition under the Bankruptcy Code. It still owes money on but has not defaulted on its retail installment contract with Reno Forklift and therefore there has been no repossession.

Your client Forrest Green is a sole proprietor operating a lumber business in Salem, Oregon. On vacation in Lake Tahoe, he wandered into Sierra Lumber simply to say hello to people in the same kind of business. He struck up a conversation with the controller of Sierra Lumber who offered to sell him the forklift in question. The two agreed in writing to the sale "subject to the approval of Forrest Green's lawyer."

Forrest Green has come to you for advice about the deal. In your opinion, what should be done, if anything, prior to giving your client the go-ahead on the deal, and why?

Question 4

Lake Street Bank periodically purchases a batch of retail installment contracts that customers of Reno Forklift sign in favor of Reno Forklift. These purchases are without any recourse against Reno Forklift. One of its batch of purchases included the retail installment contract signed by Sierra Lumber (see Question 1).

A. What, if anything, must occur to enable Lake Street Bank to collect payments from Sierra Lumber in the absence of a default by Sierra Lumber?

B. What are Lake Street Bank's options if Sierra Lumber defaults in making payments?

C. Assume that immediately after Sierra Lumber purchased the forklift from Reno Forklift (see Question 1), Reno Forklift filed a proper financing statement in the correct location with respect to its security interest in that forklift. Also assume that at no time after purchasing the batch of contracts that included the contract signed by Sierra Lumber did Lake Street Bank either file a financing statement or take possession of the retail installment contracts. After Lake Street Bank's purchase of the contracts, Sierra Lumber filed a Chapter 7 bankruptcy petition. May the bankruptcy trustee avoid Lake Street Bank's security interest in the forklift? Why or why not?

D. Assume that immediately after Sierra Lumber purchased the forklift from Reno Forklift (see Question 1), Reno Forklift filed a proper financing statement in the correct location with respect to its security interest in that forklift. Also assume that at no time after purchasing the batch of contracts that included the contract signed by Sierra Lumber did Lake Street Bank either file a financing statement or take possession of the retail installment contracts. After Lake Street Bank's purchase of the contracts, Reno Forklift filed a Chapter 11 bankruptcy petition. May the debtor-in-possession avoid Lake Street Bank's security interest in the retail installment contracts? Why or why not?

Question 5

Karla Kravitz, once flush with income from her job at a Silicon Valley start-up but now struggling with finances after being laid off, approached ABC Finance for a $30,000 bill consolidation loan. As collateral for the loan, Karla offered her personal collection of movie star wedding rings. She had acquired the rings from divorced or divorcing movie stars in the years that she was earning substantial income.

You are counsel to ABC Finance. Your client wants to know whether it is permissible to take a security interest in the rings? What is your response and why?

Question 6

Assume the same facts as in question 5 and assume (whether or not true) that it is permissible for ABC Finance to take a security interest in the rings.

ABC Finance agreed to make the loan on the additional condition that Karla's brother cosign the promissory note (i.e. the brother agreed to pay in the event of Karla's default). Karla signed the promissory note and a security agreement granting ABC Finance a security interest in the rings. The security agreement adequately described the collateral. Karla's brother cosigned the note. The note called for repayment of the loan, plus $8,000 in interest, over a period of five years. ABC advanced Karla the funds.

ABC Finance did not take possession of the rings, but did file a financing statement in the correct location. The financing statement listed the name of the debtor as Karla Cravitz.

After repaying $20,000 of the $30,000 loan, Karla defaulted in her loan payments and voluntarily relinquished possession of the rings to ABC Finance. Eleven weeks later, in July, because of illness of office staff, ABC Finance had not yet noticed a foreclosure sale. ABC Finance then asked Karla, but not Karla's brother, for her agreement that the sale could be held anytime before the end of the calendar year. She agreed to that proposal in a signed writing.

ABC Finance sold the rings In November of the same year for $5,000 at a properly noticed and commercially reasonable foreclosure sale. Karla filed bankruptcy shortly thereafter. ABC Finance sued Karla's brother for the deficiency. What defense, if any, does Karla's brother have to the deficiency claim, and what claim for damages, if any, does Karla's brother have against ABC Finance?

End of examination