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SANTA CLARA UNIVERSITY
SECURED
DEBT
DECEMBER 4, 1997 4 ESSAY QUESTIONS 3 ½ HOURS The examination rules stated in the Student Handbook govern this examination, except: (1) this is a limited open book examination, and (2) you may use a computer, may save your answers to a disk, and must print them out immediately following the examination. For reference, you may use your book, including statutes (electronic format or hard copy), your notes, outlines, and any other material that you have prepared alone or together with any other person in the class. You may also refer to any handouts given in class except that you may not refer to the quiz that you took earlier in the semester, to the answers to that quiz, or to sample quizzes, essay questions, or sample answers which have been distributed.
INSTRUCTIONS 1. All questions are based on an initial set of basic facts. Each question adds to the basic facts. 2. The total number of points on the exam is 90. (The quiz was worth 10 points.) Points and time allocation for each question are as follows: Question 1: 20 points; 40 minutes Question 2: 25 points; 50 minutes Question 3: 20 points; 40 minutes Question 4: 25 points; 50 minutes Additional unallocated time: 30 minutes 3. PLEASE start the answer to each question in a separate bluebook or, if you are typing the exam, start each answer on a separate page. Write on one side of the page only. If your handwriting is difficult to read, skip lines. 4. Think through a question and organize your answer before you start to write. 5. If a question is ambiguous in any material way, point out the ambiguity and explain how a resolution of the ambiguity would affect your answer. 6. Assume any deed of trust or security agreement contains standard clauses. All transactions take place in California. Where the UCC is applicable, apply the California version. Remember that the version of the UCC in our materials is the California version.
BASIC FACTS: THE UPS AND DOWNS OF MEL DOWN Mel Down, a successful computer programmer, decided to switch careers. He decided to start a candle making business. However, being practical, he knew that he would have to continue to do some consulting in the computer area in order to make ends meet. Mel quit his job and set about finding a location which could serve both as his residence and as the site for both the candle making and computer consulting businesses. He found a house in Santa Clara County. The house included an attic with adequate work space for his computer consulting business. The property also had a detached structure where he could set up his wax-warming machine and the other equipment he needed for his candle making business. In addition, the house also had a basement suitable for the storage of large quantities of wax. Remember that each question adds to the basic facts. Question 1 (20 Points) (Suggested time: 40 minutes) -Mel entered into an agreement to purchase the property described above. Although the structures themselves were small, the parcel itself was large; in fact, Mel ascertained that it was large enough to divide into two parcels: one parcel with the residence and detached structure and one undeveloped parcel. Mel and the seller, Sells, agreed to cooperate in getting the parcel divided. (Sells agreed to pay the expenses; Mel agreed to do the leg work.) The benefit to Mel was that he hoped that he could sell the undeveloped parcel if he needed additional money. The benefit to Sells was that Mel agreed to the following terms (among others) in the purchase contract: ``Buyer to pay $350,000.00 for the undivided parcel with residence and detached structure. The price will increase to $375,000.00 if and when the parcel is divided. Buyer to pay $35,000.00 down and obtain a new institutional loan in the amount of $315,000.00 secured by a first deed of trust. After the parcel split, Buyer agrees to execute a $25,000 note (to make up for the difference in purchase price between the undivided parcel and the divided one) in favor of Seller. This $25,000 note is to be secured by a second deed of trust on the parcel on which the residence and detached structure are located." Escrow closed. Belgium Bank loaned Mel $315,000.00 which was secured by a first deed of trust on the entire undivided parcel. This deed of trust was properly recorded. Three months after moving in, Mel succeeded in dividing the parcel. As promised, Mel executed a $25,000.00 note, naming Sells as payee, and a second deed of trust on the parcel with the residence and detached structure. This deed of trust was duly recorded. Mel's businesses never got off the ground. Although Mel tried to sell the undeveloped parcel, he could not find a buyer who would pay enough to make it financially worthwhile to sell, as Belgium Bank refused to release its deed of trust from that parcel unless it received a payment of $50,000.00. Mel has defaulted on his payments to both Belgium Bank and to Sells, and Belgium Bank recorded a Notice of Default approximately four weeks ago. Sells has retained you to collect his $25,000.00, represented by the note and secured by the deed of trust on the parcel with residence and detached structure. The total amount Mel now owes the Belgium Bank, including foreclosure costs and late charges, is $340,000.00. A drive-by appraisal indicated that the parcel with residence and detached structure would sell on the open market for approximately $300,000.00 and the undeveloped parcel would bring about $50,000.00. What course of action will you follow? Explain fully.
Question 2 (25 points) (Suggested time: 50 minutes) Instead of faltering, as in Question 1, Mel's candle making business flourished and soon outgrew the ``cottage" environment. Mel developed a business plan to move the business to a larger location and calculated that he would need $50,000.00 to do so. He approached Fink Finance (``Fink") for a loan. Fink carefully searched the real property records as well as the UCC filings. Fink found that Mel owned two pieces of real property: the residence parcel and the adjacent undeveloped parcel which Mel had split off. A deed of trust securing a $315,000.00 note with Belgium Bank as beneficiary encumbered both parcels, and an additional deed of trust securing a $25,000.00 note naming Sells as beneficiary encumbered the parcel with residence and detached structure. The UCC records revealed nothing under Mel's name. Fink was wary about Mel's ability to repay the loan. As was her practice in situations like this, she decided to inspect the premises where Mel currently had his business, that is, Mel's residence. The inspection revealed that the house was located on the edge of a quaint shopping area, and that Mel had taken advantage of the location by turning the living room into a small candle outlet. The outlet seemed to be doing a thriving business but more space was obviously needed. Fink's sharp eye noted that the candles were displayed on several valuable antique display cases. Further inspection revealed several items of expensive candle making equipment as well as a high-powered computer on which Mel designed his unique candles. Fink, more confident now about Mel's business acumen, decided to make the loan, but she drove a hard bargain. She insisted that Mel borrow $75,000.00, pay off Sells (who held the second on the parcel with residence and detached structure), and secure Fink's loan with deeds of trust on both parcels of real property and by security interests in the antique display cases, all the candle making equipment and inventory, and Mel's computer. In addition, she insisted on a guarantee from Mel's friend and shopkeeper, Buzzy. Buzzy agreed to give the guarantee but refused to waive any of her rights as a guarantor. The deal was done (and all appropriate paperwork was completed and properly recorded). Unhappily, shortly after obtaining the $75,000.00 and paying off Sells, Mel was severely burned by hot wax. He had no medical insurance and used the remaining $50,000 of the loan from Fink to pay his medical expenses. He was unable to make candles for several months and the resulting decline in income made default on his loans inevitable. Upon Mel's default, Fink, who gives her borrowers no leeway, immediately recorded a Notice of Default which included all the real and personal property. Simultaneously, Fink, a self-starter, used the Polo Press book How to File Your Own Lawsuit and Win to file a complaint against Buzzy on her guarantee, although Fink has not yet served the complaint. After a causal conversation with you at last night's Christmas party at which you raised some questions Fink had not considered, Fink has retained you to collect its debt. Fink informs
you that she is sure the value of all the security will not cover the $75,000.00 owed, especially in light of Belgium Bank's deed of trust on the property. You have discovered that Belgium Bank has not yet
declared a default. Will you follow through with Fink's non-judicial foreclosure? Its lawsuit against Buzzy? Advise Fink of all its options and the advantages and disadvantages of each. Question 3 (20 points) (Suggested time: 40 minutes) Assume the parcel was split as previously discussed and that Belgium Bank held a deed of trust on both parcels. Assume further that Mel paid off the $25,000 note to Sells with the proceeds of an inheritance and took a deed of reconveyance from Sells. Finally, assume that Mel never obtained a loan from Fink Finance. Waxes, Inc. (``Waxes") supplied Mel with his requirements for wax on an unsecured credit basis. When Mel's business began to falter, Mel fell behind in his payments to Waxes. Waxes, owed $10,000, exhausted collection efforts and eventually filed suit. With no defense to the suit, Mel suffered entry of a default judgment. Immediately thereafter, Waxes recorded an Abstract of Judgment with the Santa Clara County Recorder's Office (well after the recording of the Belgium Bank's deed of trust) and also filed a Notice of Judgment Lien with the California Secretary of State. Waxes also examined Mel following judgment in an Order of Examination proceeding and did some record searching, through which it learned the information described below. At the Order of Examination proceeding, Mel mentioned that he might be considering bankruptcy within the next few months. Waxes tells you that Mel had recently purchased some new expensive computer equipment from FutureWorld on secured credit (different from the computer mentioned in previous questions). Mel uses the new computer equipment for both his consulting business and candle making business, Mel's daughter uses the computer to do school research on the internet and to write papers for high school, and Mel's wife uses the computer to do home banking, keep financial records, and do record keeping and newsletters for a local garden club of which she is a member. The UCC records show that FutureWorld filed a financing statement listing the debtor as ``Nel Downe" (with Mel's address) on March 1, 1997, a few days after Mel's order for the new computer equipment, and that Waxes filed its Notice of Judgment Lien on March 5, 1997. The UCC records also show that FutureWorld filed a financing statement listing the debtor as ``Mel Down" (with Mel's address) on April 5, 1997. Waxes knows that the computer equipment was delivered to Mel sometime in March 1997, but doesn't know the exact date of delivery. Waxes wants to know whether it has any rights in the new computer equipment which Mel purchased from FutureWorld and if so what, if anything, it should do next regarding the computer equipment. What do you advise and why?
Question 4 (25 points) (Suggested time: 50 minutes) Assume that Mel's sister-in-law Rita, desiring to help Mel with his financial difficulties, advanced Mel $50,000 to pay off his debts to Waxes and FutureWorld and to give him some extra capital for his business. She insisted that the debt be secured by his van. Mel signed a promissory note and a written security agreement in favor of Rita, and Rita took the appropriate steps to reflect the security interest on the certificate of title to the van. No other party had a security interest in the van. Neither the note nor the security agreement contained an acceleration clause, a late payment fee clause, or an attorneys fee clause. Mel used the van to pick up supplies for his candle business, to make deliveries of candles to stores in which they were sold, and to ferry his daughter to and from school and to and from soccer practice, and to go grocery shopping. A year later, a few days after the first installment of Mel's repayment of the $50,000 loan was due, Mel called Rita to ask for an extension. Rita told Mel that she would think about it and get back to him in a week. Later the same day, Rita's sister told Rita that she (Rita's sister) was going to file for dissolution of her marriage with Mel. Upon hearing that news, Rita decided to repossess the van. The next day, she walked to Mel's house under the pretense of a friendly family visit and offered to take Mel's daughter to soccer practice. She borrowed his van to do so. Mel thanked his sister-in-law and went back to making candles. Rita drove Mel's daughter to soccer practice, arranged for the daughter to get a ride home with friends, and drove the van to a friend's house to store. That night Mel learned both about the divorce and about Rita's subterfuge. In a phone conversation with Rita he angrily demanded return of the van. She refused and told him that she was going to sell it. Her lawyer sent Mel the notice required by the Commercial Code, advising Mel that Rita was going to sell the van by private sale in two weeks. Mel immediately sent Rita a check for the first installment payment (including interest) on the $50,000 loan with a demand that she return the van. Rita immediately sent the check back to Mel. Two weeks later, without having contacted other potential buyers, Rita sold the van to her church for $15,000.00. In the newspaper classified advertising section, the asking price for the same make and model van with similar mileage, but in somewhat better condition, ranged from $20,000 to $22,000. Rita has filed an action against Mel seeking a deficiency in the amount of $35,000, plus interest. Mel has filed an answer and cross-complaint. The cross complaint alleges wrongful repossession and conversion. Evaluate the merits of the complaint and the cross-complaint. Would your evaluation be different if the note to Rita included an acceleration clause? If so, how? In addition, advise Mel what Chapter 7 would offer him with respect to Rita's claim for a deficiency.
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