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Santa Clara University
Secured Debt THE EXAMINATION RULES AS STATED IN THE CURRENT STUDENT HANDBOOK GOVERN THIS EXAMINATION, EXCEPT THAT THIS IS AN OPEN BOOK EXAMINATION. INSTRUCTIONS 1. This examination is open book. You may bring to the examination and use all assigned course materials and handouts, and any notes, outlines, or other work product which you have produced alone or together with other persons in the class, whether in hard copy or in electronic form. You may not refer to any other materials. 2. You may use your own laptop computer or a desktop computer located in the Toso Room of the Law Library both for reference and for typing of your answers. You should not load Examinator on your laptop computer for this examination. Save your answers to a floppy disk frequently throughout the examination. 3. If you are typing your answers on a computer, you may exercise the Save command after time for the examination is called. Immediately thereafter remove the floppy disk on which your answer is saved from the computer and place it in the examination envelope. If you are not already in the Toso Room, proceed immediately from the examination room to the Toso Room to print out your answers. 4. There are seven questions on the examination. Answer all of them. Estimates for the amount of time necessary to answer each question are provided. Each of the questions is based on an initial set of basic facts.
One question modifies the basic facts. 6. Support your conclusions with analysis.
Sarah owned land in Napa County, improved by a vineyard (i.e. grape vines). She sold her harvest annually to a local winery. She also owned some machinery, including trucks (collectively "machinery") used in grape harvesting. None of the machinery would be considered fixtures under California law. Sarah entered negotiations for sale of the land, vineyard, and machinery to Jim, a long time employee. The raw land, without the vineyard, was appraised at $500,000, and with the vineyard was appraised at $775,000. The machinery (including trucks) was appraised at $25,000. Sarah has decided to take a total of $775,000 for the land, vineyard, and machinery. A few months earlier, Sarah had advanced Jim $51,000 to help Jim pay tort damages he owed to someone Jim had assaulted in a bar room brawl. Jim still owes Sarah $50,000 of that amount. The debt is not evidenced by a note, but the two had agreed that Jim would repay the money with interest over 5 years. The debt is unsecured. As part of the deal for sale of the land, vineyard and machinery, Sarah wants to secure the total amount of $825,000 which Jim would owe (including the outstanding $50,000 debt). Jim has no down payment and no collateral to offer other than the land, vineyard, and machinery to be purchased and a 1992 pick-up truck which he owns free and clear. Sarah is considering the following three options for structuring the transaction: Option 1: One note for $825,000, payable with interest over 15 years, secured by the land, the vineyard, and the machinery; Option 2: One note for $775,000, payable with interest over 15 years, secured by the land and the vineyard, and a second note for $50,000, payable with interest over five years, secured by the machinery; Option 3: One note for $500,000, payable with interest over 15 years, secured by the land, a second note for $275,000, payable with interest over 15 years, secured by the vineyard, and a third note for $50,000, payable with interest over 5 years, secured by the machinery and by Jim's pick-up truck.
Question 1 (15 minutes) If the parties choose Option 1, how, including where, should Sarah perfect her liens? Question 2 (30 minutes) How do Options 1 and 2 compare with one another: A. On the issue of the right of Jim to reinstate following default and acceleration? B. On the issue of the right of Sarah to obtain a deficiency following foreclosure? Question 3 (15 minutes) Suppose that the parties agree to Option 3. Thereafter - Insurance on the machinery lapsed because Jim failed to make timely premium payments. Jim continued to make timely payments on the $50,000 note but defaulted in payments on the two larger notes. What rights, if any, does Sarah have to recover a money judgment against Jim on each of the three notes without foreclosure? Question 4 (30 minutes) Suppose that the parties agree to Option 1. Thereafter - Following Jim's default on the note, Sarah sued Jim on the note and obtained a money judgment following Jim's default in the lawsuit. Sarah recorded an Abstract of Judgment in Napa County. A week later, Jim filed a Chapter 11 proceeding. He plans to seek to: (1) avoid Sarah's judicial lien; and, (2) classify her claim as entirely unsecured. To what extent will he succeed? Question 5 (45 minutes) Suppose that the parties agree to Option 2 and that the security agreement relating to the machinery does not contain an after-acquired property clause. Thereafter - In violation of a clause in the security agreement, Jim sold the machinery without Sarah's consent to Neighbor for $20,000, taking in payment a $10,000 check and an unsecured promissory note in the amount of $10,000. The next day Jim endorsed the check over to Heavy Machinery Co. in partial payment for new machinery which Jim purchased for harvesting grapes. Heavy Machinery Co. retained and immediately perfected a security interest in the new machinery to secure payment of the balance of the purchase price. Two weeks after selling the machinery to Neighbor, Jim filed a Chapter 7 proceeding. Thereafter, Sarah learned of all of the facts described in the preceding paragraph. Advise Sarah of her rights: A. Against Neighbor relating to the machinery which Neighbor purchased; B. Against Neighbor and bankruptcy trustee to collect on the promissory note; and, C. Against Heavy Machinery Co. and the bankruptcy trustee relating to the new machinery which Jim purchased from Heavy Machinery Co. Question 6 (45 minutes) Modification of basic facts: At the time of negotiations with Sarah, Jim owned some undeveloped property in the mountains, subject to a purchase money deed of trust in favor of Mortgage America. Jim also owned a home in which he resided. Sarah and Jim agree to the following option (Option 4): One note for $775,000, payable with interest over 15 years, secured by the land, the vineyard, and the machinery, and a second note for $50,000, payable with interest over five years, secured by Jim's undeveloped property in the mountains. Thereafter- Jim defaulted on payments to Mortgage America. Mortgage America foreclosed on Jim's mountain property non-judicially. Sarah, without sufficient funds to bid at the sale, was sold out by a credit bid. Sarah sued Jim on the $50,000 note (under a clause providing that a default on any other obligation secured by the undeveloped mountain property will constitute a default on the $50,000 note). A. Does anti-deficiency legislation provide Jim a defense to the lawsuit? B. Assume that Sarah recovered a default judgment against Jim for $50,000 and recorded an Abstract of Judgment in the county where Jim's home is located. Six months later, Jim filed a Chapter 13 petition. Jim's home is worth $250,000 and is encumbered by a single deed of trust securing a note in the amount of $190,000. The homestead exemption is $50,000. How may Jim treat Sarah's claim or claims in the Chapter 13? Question 7 (30 minutes) Suppose the parties agree to Option 3. Thereafter - Jim defaulted on the $50,000 note and Sarah repossessed the machinery and Jim's pick-up truck. Sarah hired an auction company to deal with the collateral. Well in advance of the sale, the auction company ran advertisements of the sale in appropriate newspapers and trade journals and personally delivered a copy of the advertisement to Jim. The advertisement described a sale of "repossessed grape harvesting machinery, including vehicles" at a time and location given in the advertisement, accompanied by the name and telephone number of the auction company and an invitation to call the auction company to arrange for pre-sale inspection. Several prospective purchasers attended the sale although none had made arrangements for earlier inspection. At the sale, the grape harvesting machinery, including the trucks, plus Jim's 1992 pick-up truck were lined up side by side. The auctioneer announced that the items would be sold together, as a single lot. Net of repossession, advertising, preparation and other legitimate costs, the sale netted Sarah $35,000. She has sued for the deficiency. Is she entitled to a deficiency and, if so, how much?
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