Columbia University School of Law
Commercial Transactions (L6221)
Professor Avery Wiener Katz
December 10–19, 2003 (self-scheduled)
1. The exam consists of 7 pages, including this cover sheet. Please check now to ensure your copy is complete.
2. There are three questions on the exam, each with a separate word limit. To ensure compliance with the word limit, you must provide either an actual word count or a good faith estimate for each of your answers. Answers exceeding the limit will be penalized by reducing their score in proportion to the excess. You may not use any leftover space from one question in answering the other; and any attempt to use shorthand or nonstandard abbreviations will be counted as if full words were used.
3. The exam is entirely open book, and you are free to consult any written or electronically recorded materials. Additional research is discouraged, however; and full credit is obtainable using concepts discussed in class or contained in the assigned materials. You must provide reasonable citations for any sources that you use other than assigned course materials; and such citations count against the word limit. To the extent you rely on course materials, formal citations are not necessary, except that you will find it useful to refer specifically to statutory provisions when discussing them.
4. Your exam is due 24 hours after you pick it up, or at 4:00 p.m. Friday, December 19, whichever is earlier. You must return your exam in person, and must return your copy of the exam questions at the same time. If during the exam you have any questions regarding its administration, you should contact the office of Registration Services and they will contact me if necessary.
5. Please follow the instructions for each question carefully. If you feel that any of your answers depend on facts not provided in the question, you should say so, and state clearly any additional assumptions you are making.
6. In writing your exam answers, you should assume that the current version of the UCC is in force, as opposed to any proposed revisions that have not yet been widely adopted.
7. To ensure that you receive full credit for your answer, please: (a) include your exam ticket number on all pages of your exam; (b) begin your answer to each question on a new sheet of paper; (c) use sufficient margins and line spacing so that I have enough room to make notations on your exam; (d) if you write your exam by hand, write legibly.
8. I will notify you via e-mail when grades are ready, and will post a feedback memo on the website as soon as possible after that. Good luck on the exam; and have a good winter break. For those of you graduating at the end of the term, best wishes.
QUESTION 1 (40% of exam, 1200-word limit)
QUESTION 2 (40% of exam, 1200-word limit)
You are the bankruptcy trustee for E-Buy, an Internet retailer that has recently fallen on hard times and was forced to file for bankruptcy in October of this year. Like many other Internet retailers, E-Buy overexpanded during boom times, took on lots of debt, and then was unable to develop sufficient revenues to support its cash flow. In the last several months, E-Buy’s inventory overstock caught up with it, as the firm ran into trouble by shipping outdated inventory (i.e., older versions of electronic and computer equipment) to customers who thought they were buying more recent models. Many of these customers returned their purchased and instructed their credit card companies to charged back the transaction to E-Buy. Not all these returns were merited — in fact, in most cases E-Buy disclosed the relevant technical specifications in its online information pages – but the rate of customer returns and chargeback requests rose to the point where E-Buy’s acquiring bank for VISA and Master Card transactions increased its processing fee to 4% of purchase price, and adopted a policy of delaying payment on any credit card orders until two weeks after shipment, at which point most customer complaints will have arisen. The resultant cash crunch forced E-Buy to declare bankruptcy in order to avoid insolvency, and to enable it to get new financing that would take priority over existing debts.
E-Buy is now entering the last weeks of the holiday shopping season (which actually lasts well into January), and it is almost certainly worth maintaining its operations through for the time being in order to cut losses by selling off inventory at retail rather than wholesale prices. Once the holiday season is completed, however, it will be necessary to assess whether it is worth trying to save the E-Buy brand name after restructuring the company’s debt, or whether the brand name is damaged beyond the point of no return and needs to be retired or sold off to another online retailer. Industry analysts have expressed differing opinions on this issue in print, but the ultimate answer will probably have to await the outcome of sales in the coming months.
At this point, the major items on E-Buy’s balance sheet are as follows: with regard to assets, E-Buy owns significant amounts of business equipment (largely computer equipment used for web operations, shipping and packaging equipment, and warehouse fixtures), and inventory (both older inventory acquired from suppliers over the last year and a half, and some newer inventory acquired in the last few months using new sources of funding). It also holds some cash (mostly deposited in its bank account), some undeposited checks (some that were sent as payment for goods that have not yet been shipped), some credit-card receivables owing from VISA and MasterCard, some receivables on its computer installment sales program (under which E-Buy ships computers under a contract which requires the buyer to pay for the computer over a one-year or two-year period, and which retains a security interest for E-Buy in the shipped item until all contract payments are made). Also appearing on its balance sheet are patents it holds on its business model and on the computer algorithm it uses to make shopping recommendations to its online customers, and an unliquidated claim for patent infringement and unfair competition that it has pending against Destiny.com, one of its online retailing competitors (although E-Buy has assigned 30% of any recovery on this claim to its law firm up front, in a standard contingent fee arrangement.)
E-Buy’s major creditor is General Investors (GI), an Internet investment partnership that holds a promissory note for $12 million that was executed two years ago in E-Buy’s name by its then president. GI also took a security interest in all of E-Buy’s assets at the same time, memorialized by both a security agreement and financing statement. Both the security agreement and the financing statement referenced the collateral as “all assets, tangible and intangible, currently owned and after-acquired, and referred to E-Buy under its then name, eBuy. (The company changed its name from eBuy to E-Buy ten months ago, as part of a settlement of a trademark infringement suit brought by a retailer with a similar name.) The financing statement was updated two months ago to reflect the new spelling FS, but the security agreement was never updated in this regard. Additionally, the underlying loan was arranged as part of a partial buyout two years ago of the venture capital fund that had originally funded E-Buy’s startup operations. Some industry analysts have argued that the buyout was the source of E-Buy’s current problems, in that it left E-Buy with too little capital and forced it to refinance at higher risk adjusted rates, others, however, argue that E-Buy remained adequately capitalized after the buyout, but that the price paid in the buyout was too high in light of the forecasted business trends.
E-Buy also owes significant sums to Zyzyx, its main supplier of consumer electronic equipment. Whenever Zyzyx has provided goods in credit to E-Buy, it retained title to those goods pending full payment by E-Buy. The associated sales contracts also provided that Zyzyx’s interest it the goods it sold would be cross-collateralized; i.e., that Zyzyx would retain title to all goods it sold to E-Buy, even those that E-Buy had fully paid for, until E-Buy’s entire credit balance with Zyzyx was cleared. Zyzyx also has taken possession of some of the installment contracts that E-Buy has received from its retail customers upon delivery, although E-Buy stopped turning over such contracts to Zyzyx about three weeks ago. The value of goods remaining in E-Buy’s warehouses, and of the proceeds deriving from them, is unclear. Some of these goods are older models that lost economic value once equipment with more advanced technical specifications became available. Some of the receivables associated with the sale of such equipment is the subject of the aforementioned chargeback disputes; some are longer-term credit sales made under a special promotion that will not come due until April of next year.
E-Buy also owes various amounts to two other suppliers, Alpha and Beta, who were both unsecured creditors until recently, when they both agreed to extend E-Buy additional credit in exch for E-Buy’s signing a security agreement covering their outstanding loans. Alpha subsequently lent actual funds to E-Buy under this arrangement; Beta has yet to do so. Both creditors timely filed financing statements relating to these security interests, but neither one ever notified General Investors of these new arrangements.
Finally, E-Buy may owe money arising from the disputed Visa and MasterCard transactions to its acquiring bank, if it turns out that it is liable for the chargebacks. And there is also a small risk that E-Buy’s lawsuit against its competitor Destiny.com may turn into a liability, because Destiny has filed a counterclaim alleging defamation and antitrust claims. E-Buy’s lawyers report that these counterclaims are long shots to succeed, but one can never be sure about the outcome of such litigation.
Currently, the bankruptcy petition and automatic stay have prevented E-Buy’s creditors from reclaiming any of its assets, but some of them are bristling at delays in payment and at the prospect of a lengthy bankruptcy process. Zyzyx in particular would very much like to recover some money on the consumer electronic items it has provided to E-Buy before those items depreciate further, and has petitioned the bankruptcy court for a lifting of the stay so that it retake possession of those items.
What actions would you take as trustee to protect E-Buy’s assets from attack, and to maximize the value of the estate for the creditors and for the owners of any reorganized firm that results from the bankruptcy proceedings? Note: if you conclude that there are no options available that would satisfy all parties, you may offer other suggestions for managing the conflict among them in a way that would maximize the continuation value of the firm.
QUESTION 3 (20% of exam, 600-word limit).
You have just been named to the long-range planning subcommittee of the Permanent Editorial Board for the Uniform Commercial Code (the “PEB”) , a group of lawyers jointly chosen by the American Law Institute and the National Conference of Commissioners on Uniform State Laws and charged with the tasks of studying problems that arise in the application of the UCC, promulgating official commentaries on important issues of statutory interpretation, and recommending amendments and revisions to the Uniform Text and Official Comments.
Your expertise lies in the area of secured transactions. In this area, the ALI and NCCUSL have recently completed the process, several years in the making, of promulgating a major revision of UCC Article 9. This revision was adopted in 1999 by both ALI and NCCUSL as a model statute, and was then was promptly adopted, with minor variations, in all 50 states and the District of Columbia. Subsequently, the PEB developed and issued a set of Technical Amendments to Revised Article 9, which addressed a variety of minor issues that came to attention during the multistate adoption process. These amendments were promulgated in 2001 and have so far been adopted by three states and introduced in one other. Once these amendments are promulgated and adopted nationally, the revision process will be completed and the PEB will turn its major attention to other areas of commercial law for the time being.
Nonetheless, the PEB’s work is never done, and you were invited onto the planning subcommittee in order to help advise the PEB on possible problems and issues that may merit attention over the longer term, as commercial parties adjust their transactional practices to revised Article 9 and to new technological and business developments as they arise. In this capacity, you have been asked to prepare a brief memorandum, to be discussed at an upcoming meeting of your subcommittee, outlining possible areas for the subcommittee to focus on in future study. In particular, the memo is supposed to identify one or two provisions of Article 9 (and/or related provisions of other Articles of the UCC such as Article 1) that might merit study in this regard. You should also, in the course of your discussion, identify what empirical information would be most useful in evaluating the need for future legislative reform, and how the PEB might go about acquiring such information.