Columbia University School of Law
Secured Transactions (L6538)
Professor Avery Wiener Katz
December 2001 (self-scheduled)
1. The exam consists of 6 pages, including this cover sheet. Please check now to ensure your copy is complete.
2. The exam is open book; you are free to consult any written materials, and you should have available to you all the assigned course materials.
3. You may not communicate with any person about the contents of the exam while it is being administered, even if you have turned in or not yet picked up your own copy. If during the exam you have any questions regarding its administration, you should contact the office of Academic Services and they will contact me if necessary.
4. Your exam is due 24 hours after you pick it up, or at the end of the exam period, whichever is earlier. The exam period ends at 4 pm on Friday, December 21. You must return your exam in person, and also must return your copy of the exam questions.
5. There are three questions on the exam, each with a separate word limit. You may not use any leftover space from one question in answering another; and any attempt to use shorthand or nonstandard abbreviations will be counted as if full words were used. Answers exceeding the word limit will be penalized by reducing their score in proportion to the excess.
To ensure compliance with the word limit, you must provide a word count for each question. You may have your word processor program perform the count, or alternatively you may make a good faith estimate by counting the words in a sample paragraph or page and extrapolating to the length of the entire exam.
6. To ensure that you receive full credit for your answer, please: (a) write or print your exam ticket number on all parts of your exam; (b) begin your answer to each question on a new sheet of paper, or if you are writing in a bluebook, in a separate bluebook; (c) use double spacing and 1-inch margins, so that I have enough room to make notations on your exam.
7. Unless otherwise directed, you should assume that Revised Article 9 is in force and applies to any transactions or disputes you are asked to discuss.
8. Good luck on the exam; and for any of you graduating at the end of the term, best wishes. I will post grades on the class website as soon as they are ready, and will post a feedback memo as soon as possible after that.
QUESTION 1 (a of exam, 1000-word limit)
The law firm of Lemon, Melon, and Nomel ("LMN," or "the firm") agreed to represent a group of plaintiffs in environmental litigation against the Chemtron Corporation on a contingent fee basis. Under the fee agreement, LMN was to receive a one-third share of any recovery, but would not be entitled to any payments until the conclusion of litigation. Because the Chemtron case constituted 70% of LMN’s workload at the time, this arrangement resulted in severe cash flow problems for the firm’s partners. In order to finance expenses during the pendency of the litigation, accordingly, LMN borrowed $300,000 from First Bank, and pledged the fee receivable as security. The firm and each of its partners signed a set of notes, guaranties, and security agreements relating to the loan; and First Bank filed a financing statement in the Secretary of State’s office, listing the firm as debtor and listing the collateral as "accounts and other receivables, and proceeds thereof." Most of the $300,000 was then spent or distributed to the partners. The firm did maintain a bank account at First Bank, which currently holds a balance of approximately $50,000 — some fraction of which may be traceable to the original loan. The Chemtron case is still pending.
Following a disagreement among LMN partners regarding settlement strategy, however, Lemon, the founding partner, left the law firm and took the Chemtron plaintiffs ("the clients") with her. The clients, following Lemon’s directions, sent a letter to LMN terminating the original representation agreement, and then signed a new representation agreement naming Lemon as sole lawyer. Lemon’s former partners ("M&N") then sued her, demanding that she immediately cease representation of the clients, and that she return to the firm all materials related to the Chemtron litigation. They also requested the court to place a lien on any payments that Lemon might receive from the clients or that might be paid to Lemon on behalf of the clients. Lemon countersued, requesting dissolution of the partnership. This lawsuit is also still pending; no lien or any other relief has been granted.
Lemon has now approached Second Bank in hopes of obtaining financing for her new solo practice. She wants to borrow another $300,000 to finance the continuation of the Chemtron litigation, as well as her litigation against M&N. An independent expert retained by Second Bank to analyze the value of these claims reports that the environmental claim against Chemtron could be worth anything from zero to $12 million, with the most plausible settlement figure being $3 million. Under either representation agreement — the original LMN agreement, or Lemon’s subsequent solo agreement — potential attorneys’ fees would thus range from zero to $4 million, with the most likely amount being $1 million. The outcome of the partnership litigation is harder to evaluate. Lemon’s position is that her old firm is entitled to a portion of any recovery on the contingent fee as compensation for the work done prior to her leaving the firm, but that the portion of the recovery attributable to work she has done since leaving the firm should go to her alone. M&N’s position is that Lemon has converted partnership property, and that they are entitled to a full share in any recovery. Additionally, they argue that under the partnership agreement, no assets of the firm may be pledged as security without the unanimous consent of the partners. It is difficult to tell who will win in this litigation, and both sides seem eager to settle so as to avoid wasting resources that would be better spent pursuing claims against the firm’s opponents.
You have been asked to advise Second Bank on whether to lend to Lemon under these circumstances, and on what precautions to take to protect the bank’s interest in being repaid if the loan is made. What is your advice?
QUESTION 2 (a of exam, 1000-word limit)
Dragonfly Motor Sports is a franchised retail dealer for Zippo motorcycles. It operates a showroom from which it leases and sells motorcycles; and it also operates parts and service departments. Approximately 65% of Dragonfly’s revenues come from sales, some of which are for cash and some of which are under installment credit contracts. Approximately 10% of Dragonfly’s revenues come from leases, and the other 30% comes from the parts and service departments.
The Zippo company loaned money to Dragonfly to finance its purchase of new motorcycles; in connection with this loan, Zippo took and perfected a security interest in Dragonfly’s inventory, including after-acquired property. Subsequently, Dragonfly decided to expand the secondhand side of its business, and applied to Commercial Bank and Trust ("Commercial") for additional financing. After extensive negotiations, Commercial agreed to provide Dragonfly with funds to buy used motorcycles; in exchange, Dragonfly signed a security agreement that granted Commercial a security interest in "inventory," which Commercial promptly perfected by filing. Under this loan agreement, furthermore, Commercial also required Dragonfly to hand over all title certificates relating to the motorcycles in its inventory. Commercial kept these title certificates in a lockbox, and released them only as Dragonfly made retail sales. It also required Dragonfly to turn over any lease or installment credit contracts it received from retail customers; these contracts were also kept in a separate lockbox.
Unfortunately, this arrangement with Commercial contravened a negative pledge clause that appeared in Dragonfly’s security agreement with Zippo, as well as an exclusive dealing clause that appeared in Zippo’s standard franchise contract. When Zippo discovered what Dragonfly had been doing, it gave notice that it was terminating Dragonfly’s franchise. Zippo also sent a letter to Commercial demanding the return of all title certificates and all sales and lease contracts. The letter indicated that if Commercial did not promptly comply with Zippo’s demand , Zippo would pursue legal action against Commercial, which might include tort claims for conversion and for intentional interference with contractual relations.
Independently, the "Gray Wolfpack," a group of recreational motorcyclists consisting primarily of senior citizens and organized under state law as a non-profit association, had acquired twenty motorcycles from Dragonfly under a contract that was styled as a lease but that entitled the Wolfpack to purchase the cycles at any time during the lease period for an amount equal to 85% of the remaining lease payments. Commercial retained possession of the title certificates for these motorcycles, but neither Commercial nor Dragonfly filed any sort of financing statement against the Wolfpack, even for precautionary purposes. Unfortunately the Wolfpack had difficulty attracting members and defaulted on their contract with Dragonfly. Before Dragonfly could get the motorcycles back, the Wolfpack filed for bankruptcy.
You have been retained by Commercial Bank to advise them in settlement negotiations with Zippo. To what assets are your clients entitled, and what potential liability do they bear to the other parties involved in the case?
QUESTION 3 (a of exam, 1000-word limit)
Dagwood, the owner of Coney Island Tanning Center, an unincorporated sole proprietorship, borrowed $60,000 from the Cozy Finance Company ("CFC") in order to buy business equipment, including tanning lamps, float tanks, exercise tables, and a sauna bath. He granted CFC a security interest in the equipment, and authorized CFC to file a financing statement covering the equipment, which CFC did ten days later. This financing statement listed the debtor as "Derwood Dagwood d/b/a Coney Island Tanning Center," and listed the collateral as "business equipment and inventory." For the debtor’s address, it provided Dagwood’s home address, not his business address. A year then passed by, during which Dagwood moved his residence to another address in the same town, and CFC was acquired by another company, Vulture Capital (VC). As part of the acquisition, CFC merged into Vulture and ceased to exist as an independent entity.
By this time, Dagwood had also fallen behind in his loan payments, and with accrued interest the outstanding amount on the loan was now $64,000. After a series of dunning letters and phone calls failed to induce Dagwood to bring his account up to date, VC sent a team of repossessors to Dagwood’s business premises. By plan, the repo team arrived on a business holiday, when Dagwood and other senior staff were away from the office. They obtained admission to the premises by presenting to an inexperienced assistant manager a document that, while purporting to be a court order, was actually issued by VC. The equipment was repossessed without objection and stored at a warehouse.
The next day, VC sent notice of foreclosure to Dagwood at his former home address, which had never been updated in company records. This notice stated that VC intended to sell the equipment at public auction if Dagwood did not promptly repay the equipment loan. Three weeks later, after advertising the event in a local newspaper, VC held a public foreclosure sale. No one showed up at the sale except VC’s representatives, who submitted a bid in the amount of $16,000 — 25% of the outstanding value of the loan. VC then sent Dagwood a letter demanding payment of the deficiency, $48,000. This second letter was sent to Dagwood’s business address via certified mail, and was received the next day. This was the first that Dagwood learned about the auction.
Dagwood did not have $48,000; and he was also facing tax liens and various unsecured claims he could not pay either. After consulting with his lawyer, Dagwood signed a contract in which he sold the exclusive right to use the trade name "Coney Island Tanning Center" to his brother-in-law Arnie, in exchange for $500; this contract also included a covenant not to compete with any similar business Arnie might choose to operate. He also paid Arnie (who is also his landlord) two months’ rent on his business premises, and then filed for bankruptcy.
You have been named as trustee in Dagwood’s bankruptcy proceedings. As part of your standard operating procedure when beginning a new case, you run a search for Article 9 filings against Dagwood, using his full legal name with middle initial, "Derwood P. Dagwood." Because the computer software used by the local filing office uses a particularly inflexible search logic that returns only literal matches, this search fails to uncover any financing statements filed against "Derwood Dagwood" or "Derwood Dagwood d/b/a Coney Island Tanning Center. " Had there been any financing statements filed against "Derwood P. Dagwood d/b/a Coney Island Tanning Center," it would not have uncovered those either.
Make a list of all the claims and defenses you plan to assert on behalf of Dagwood’s estate, and why. Please also include your best assessment of how likely your arguments are to prevail.