SECURED DEBT     
FALL 1997

PROFESSORS NEUSTADTER & MERTENS

QUIZ

10 Questions (worth 1 point each)

Approximate Time:  45 min.

INSTRUCTIONS:

1. Write your social security # (or student ID #) on the Scantron card.

2. Answer by completely filling the appropriate blank on the Scantron card with a #2 pencil.  Press hard.  Select one answer only.

3. Do not make extraneous marks on the Scantron card.

4. The quiz is open book.  You may use your course materials and any materials you have prepared yourself or together with another person in the class.  You may use a computer but may not access anything on the computer other than course materials or materials you have prepared yourself or together with another person in the class.

5. In any question where it might be relevant, ignore costs of foreclosure or litigation.

6. Be sure to circle your answer on the question sheet for your  future reference.  You may take the questions with you after  the exam but please bring them to our next few classes.  We will spend some time reviewing the questions and answers after the period
for challenges expires.

QUESTIONS:

1.  Commercial Finance financed Dram Shop's acquisition of new office furniture.  Dram Shop signed a promissory note in favor of Commercial Finance which called for 59 monthly  payments of $1,000 and a 60^th and final payment of $25,000.  As a condition to this deal, Commercial Finance required that Dram Shop, Inc. grant Commercial Finance a security interest in the furniture purchased. 

Which of the following statements is true: 

A. Commercial Finance would be making a poor business judgment in entering this transaction if the useful life of the office furniture is 5 years. 

B. Commercial Finance might also have secured the debt by taking a deed of trust on the residence of the president of Dram Shop, Inc. even though the president of Dram Shop, Inc. would not be personally liable on the promissory note.

C. If Dram Shop, Inc. sells some of the office furniture, Commercial Finance will retain
a security interest in the identifiable proceeds of the sale even if the security agreement
between Commercial Finance and Dram Shop, Inc. failed to include a clause granting a
security interest in proceeds.

D. A and B

E. A, B, and C.   

2. Same facts as in Question No. 1.  Dram Shop files a Chapter 11 proceeding two months after consummation of the transaction described in Question No. 1. 

      Which of the following statements is true:

A. If Dram Shop were solvent on the date the transaction was consummated, other facts might nevertheless allow the debtor-in-possession to avoid the security interest as a preference. 

B. If Commercial Finance perfected its security interest the day before Dram Shop filed
the Chapter 11 proceeding, the debtor-in-possession can avoid the security interest under section 544 of the Bankruptcy Code.

C. If Commercial Finance perfected its security interest the day before Dram Shop filed
the Chapter 11 proceeding, the debtor-in-possession may be able to avoid the security
interest under section 547 of the Bankruptcy Code.

D. None of the above.

3.    Ms. Henderson received an unsolicited pre-approved First Bank credit card in the
mail from First Bank. The credit card agreement which Ms. Henderson signed and
returned to the bank did not contain any language securing credit card debt. The credit
card agreement set forth minimum monthly installment payments on any debt incurred through use of the credit card.  Ms. Henderson stopped making payments to First Bank
after incurring $20,000 of credit card debt.   First Bank filed a lawsuit against Ms.
Henderson for recovery of $20,000 plus late fees, interest and attorney fees. 

       Which of the following statements is true:

A. First Bank will be entitled to recover reasonable attorney fees even in the absence of
a clause in the credit card agreement authorizing recovery of attorney fees.

B. Ignoring interest, late fees, and attorney fees, First Bank is entitled to a judgment for
the full $20,000 principal owing even in the absence of an acceleration clause in the credit card agreement.

C. If First Bank obtains a judgment against Ms. Henderson issued by the Municipal
Court of Santa Clara County, it may obtain a judgment lien against undeveloped real
property owned by Ms. Henderson in Los Angeles County.

D. If Ms. Henderson files a Chapter 7 bankruptcy within 90 days of a judgment
obtained by First Bank against Ms. Henderson and before First Bank has taken any
steps to enforce the judgment, a bankruptcy trustee may avoid the judgment under
Section 547 of the Bankruptcy Code. 

E. None of the above. 

4.   Same facts as Question No. 3 except that the credit card agreement contains a
clause reading:  ``Debt incurred for goods purchased through use of this credit card shall
be secured by the goods purchased, by goods which the debtor owns at the time of
signing this agreement, and by goods which the debtor hereafter acquires." Ms.
Henderson purchased $20,000 worth of goods using her First Bank credit card.  If  she
fails to make any payment on this $20,000 debt, which of the following is true:

A. First Bank will violate the Fair Debt Collection Practices Act if it threatens
foreclosure on Ms. Henderson's house if she fails to pay the credit card debt. 

B. If part of the  goods purchased by Ms. Henderson through use of her First Bank
credit card was a used car, First Bank may repossess the used car. 

C. First Bank may repossess living room furniture which Ms. Henderson purchased with cash two months after her last use of her First Bank credit card.

D. The clause concerning security in the credit card agreement is, at least in part, an unfair act or practice under the Federal Trade Commission Credit Practices Rule. 

E. Both B and D.

5.   Same facts as in Question No. 3 (i.e. the credit card agreement did not contain any
clause securing the credit card debt).  After signing the credit card agreement but before
beginning to use her credit card, Ms. Henderson financed the purchase of a residence
with a loan from First Bank, secured by a first deed of trust on the residence.  The deed
of trust included the following clause:  ``This deed of trust shall secure a note in the
amount of $200,000 of even date herewith and shall also secure any and all future
obligations of debtor to bank." 

Following First Bank's financing of Ms. Henderson's purchase of her residence, Ms.
Henderson incurred $20,000 debt on her First Bank credit card but failed to make any
payments on the credit card.  She has not defaulted on payments on the note to First
Bank executed in connection with her purchase of her residence.  Ms. Henderson does
not maintain any deposit or checking account with First Bank. 

Which of the following is true:

A.  It is clear that First Bank may initiate foreclosure on  Ms. Henderson's residence.

B.  First Bank may exercise a right of set off.

C.  It is clear that California Code of Civil Procedure Sec. 726 will give Ms. 
Henderson an affirmative defense to any suit for money damages by First Bank on the credit card obligation.

D.  If First Bank obtains a judgment against Ms. Henderson for $20,000, First Bank
may be precluded from executing on Ms. Henderson's residence by a homestead
exemption.

E.  C and D.   

THE FOLLOWING FACTS BASIC FACTS APPLY TO QUESTIONS 6 THROUGH 10:

BASIC FACTS:

     Dave Debtor owns a 50-unit apartment complex which has a fair market value of
approximately $1 million.  The apartment complex is encumbered by a first deed of
trust securing a note in the amount of $750,000 which is held by Botch Bank, a second
deed of trust securing a note in the amount of $150,000 held by Sink Savings, and a
third deed of trust securing a note in the amount of $25,000 held by Got-Ya Inc., a
corporation which sold the complex to Dave Debtor.  All deeds of trust contain
standard clauses and are properly recorded.
 

6.  Dave Debtor defaults on all notes.    The holder of the third deed of trust, Got-Ya Inc., is the first to schedule a foreclosure sale.  A third party intends to bid at that sale.
If that third party sought your advice prior to bidding at the sale, you should tell her:

A. To bid no more than $1 million (assuming she is convinced that that is truly the fair market value of the property).

B. Prior to bidding at the sale, she should reinstate the first and second.|

C. She should examine the deeds of trust held by the first and second prior to bidding in
order to determine if they contain due-on-sale clauses, as these clauses could affect her
if she is the successful high bidder at the sale.

D. A and C.

E. B and C.

7.    Assume Dave Debtor approaches Sink Savings, the holder of the second, for an additional loan of $75,000, which he needs to re-roof and to install sprinklers in the complex in order to bring it up to the new fire code.  Sink Savings' deed of trust contains a future advance clause which states that, as long as a note specifically references this deed of trust, the note is secured by it.    Sink Savings will only loan the
amount if the additional amount is also secured by its second deed of trust.  It opens up
an escrow for the purpose of funding the loan.  The holder of the third, Got-Ya, has
been asked to subordinate to the additional $75,000.  Which of the following is true:

A. Sink Savings should submit escrow instructions stating that escrow is authorized to
disburse the $75,000 when it can provide proof of title insurance insuring that Sink
Savings holds a second deed of trust on the property which secures a debt of
$225,000.

B. Assuming Got-Ya, the holder of the third, is willing to subordinate, Got-Ya should
submit to escrow a subordination agreement which states that the subordination
agreement is effective if the funds advanced by Sink Savings are used for the purposes
stated.

C. Got-Ya should assure itself that the value of the property will increase enough so that
it may maintain its margin of security.

          D.  A and B.

          E. A, B and C.

8. Dave Debtor approached Sink Savings, the holder of the second, for an additional advance of $100,000 to install tennis and racket ball courts in the complex.  Got-Ya, the holder of the third, refused to subordinate, so Sink Savings agreed to make the loan,
secured by a fourth deed of trust on the complex.  This note was due and  payable in
90 days, on October 1, 1997.   Dave Debtor was unable to come up with the money
by that date.  Sink Savings seeks your advice.  Assuming all the deeds of trust contain a
typical rents and profits clause, you should advise Sink Savings:


A. That Sink Savings can insist that Dave Debtor pay the $100,000 debt in full if he is
going to save the property from foreclosure.

B. That Sink Savings may make a demand on the tenants of the complex to pay the rent
to it since it has a perfected security interest in rents and profits.

C. If Sink Savings begins a non-judicial foreclosure, it will not be affected if Dave
Debtor files bankruptcy.

D. A and B.

E. B and C.

9. Re-read the Basic Facts.  Assume Dave Debtor defaults on all three notes.  Botch Bank begins a non-judicial foreclosure.  The holder of the second, Sink Savings, comes to you for advice.  You should advise Sink Savings that it:

A. May reinstate Botch Bank's note if it wants to avoid being a sold-out junior.

B. May begin its own judicial or non-judicial foreclosure action prior to the time Botch
Bank holds its foreclosure sale.

C. Must file a suit on its note now, prior to Botch Bank's foreclosure sale, in order to
preserve its right to recover its debt.

D. A and B.

E. A, B and C.

10. Assume that when the seller, Got-Ya, carried back the note secured by the third
deed of trust, it had both Dave Debtor and Dave Debtor's dad (Dad) sign the note
even though Dad was not on the title to the property.  Only Dave Debtor signed the
deed of trust.  Dave defaulted. Unbeknownst to Dad, Got-Ya sent Dave a deed of
reconveyance,.  Got-Ya can anticipate the following:

A. If it sues Dad on the note, Dad will be able to successfully raise California Code of Civil Procedure  726 as a defense.

B. If it sues Dad on the note, Dad will be able to successfully raise as a defense that
Dad was never a trustor on the deed of trust.

C. If it sues Dave Debtor on the note and if Dave allowed a default judgment to be
entered,  Got-Ya will not be able to execute on the apartment complex to satisfy its
judgment.

D. A and B.

E. A and C.

END OF QUIZ