Debtors' & Creditors' Rights
(Bankruptcy)

Old Exams - Spring 1997 - Prof. Ferriell

Question 1

Question 2

Question 3

Syllabus

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Sample Exam Instructions

Please label your answer to each Section and question clearly

 Darla and Dave Diamond have been married for 2 rocky years. Their marriage followed closely on the heels of Dave=s divorce from his former wife, Marlene. They are contemplating engaging your firm to file a chapter 7 bankruptcy petition on their behalf. Review the following information regarding their financial situation and draft answers to each of the questions posed. The number in parenthases indicates the number of points available for the association item.

 Section A - Dave & Darla=s property & secured debts. What is the likely disposition of each of the following items of Dave & Darla=s property if they file a chapter 7 case?

1. (3) Dave=s 1985 Mazda RX7 worth approximately $1200;

2. (3) Darla=s 1994 Volkswagen Paseo worth $8000 and subject to a perfected security interest securing Darla=s debt to Motorists Credit Co in the amount of $9,500; the monthly payments, including interest and principal are $300.

3. (3) A refrigerator worth $320 & a freezer worth $250;

4. (3) Darla=s engagement ring is worth $800;

5. (3) $2000 worth of Ohio college tuition credits, purchased by Dave for the benefit of his and Marlene=s children; he bought these tuition credits on the advice of a bankruptcy attorney he spoke with last month, money previously held in an IRA.

Section B - Dave & Darla=s unsecured debts. What is the likely treatment of each of the following unsecured debts owed by Dave & Darla.

1. (3) Dave=s monthly $500 child support payments to Marlene in support of Dave and Marlene=s two children: Mike (9) & Marsha (7) ; Dave is currently four months ($2000) behind in these payments;

2. (3) Dave=s uninsured liability to Stan Stevens in connection with an auto accident involving Dave & Stan. The default judgment Stan obtained against Dave included damages of $10,000 for medical bills and pain & suffering suffered by Stan together with $3000 property damage to Stan=s car;

3. (3) A $1000 criminal fine imposed on Dave for violation of Ohio=s drunk driving statute in connection with the auto accident involving Stan & Dave;

4. (3) Dave=s $3000 obligation to First State Bank; this amount was, borrowed to pay Marlene=s tuition at the Franklin Beauty & Truck Driving Academy; Dave agreed to incur and pay this debt as part of his and Marlene=s divorce settlement.

5. (3) $2200 to Diamond Bank for amounts charged against Dave & Darla=s Diamond Bank Visa account during the past month and a-half. This amount was charged by Darla at the checkout counter at the supermarket where Darla customarily charged more than the amount of her groceries in order to obtain cash change which she used to pay other expenses. The $800 cash she proposes to pay you for representing her in a bankruptcy proceeding was withdrawn from her credit account in this manner.

6. (3) $300 owed to the IRS as taxes and early withdrawal penalties for the funds withdrawn from Dave=s IRA, used to purchase tuition credits mentioned above.

Section C - Other Facts Relating to Dave & Darla=s Bankruptcy. Explain how the following facts, if true, would affect Dave & Darla=s chapter 7 bankruptcy case.

1. (3) Dave & Darla=s combined income is $1800 per month. Their living expenses, excluding payments to any creditors are $1100 including money for rent on their apartment, food, and utilities.

2. (3) Dave is currently the named beneficiary of his Uncle Bob=s will and stands to inherit $20,000 upon Bob=s death. Dave is concerned, however, that his uncle will disapprove of Dave=s filing a bankruptcy petition, and may disinherit him in favor of Dave=s cousin Sam. Dave & Sam are Bob=s only heirs.

3. (1) You represented Dave in the drunk driving case. He still owes you $2,000.

Confine your answer to 4 pages in a bluebook

XYZ Corp. conducts a video rental business and is considering filing a chapter 11 petition. It has the following debts:

• $300,000 to City Bank secured by a senior purchase money mortgage on the land and building on which XYZ=s two video rental locations are situated. The combined value of these properties is only $250,000.
• $50,000 to various trade creditors.
• $100,000 to Joe Schmidt. Joe is a college friend of Sam Mayhew, the owner of all of the stock of XYZ Corp.
• $28,000 to the IRS for income withholding, social security, and medicare taxes in connection with XYZ=s employees for the past 3 years.

XYZ has proposed the following plan or reorganization:

• Payment of $250,000 to City Bank over the next 15 years in regular monthly installment payments of $1000 per month for the next 250 months (20 years & 10 months);
• A total of $100,000, over the next 10 years, at the rate of $10,000 per year, to the class of general unsecured creditors defined to include the trade creditors and Joe Schmidt;
• $28,000 to the IRS, in its own class, over a the next seven year period in equal annual installments of $4,000
• Retention by Sam Mayhew of 100% of the outstanding stock of the corporation in exchange for a $1,000 capital contribution from Sam.

In addition to the real estate, XYZ=s assets consist of $130,000 worth of videos, equipment, and accounts receivable.

Joe Schmidt and $33,000 worth of claims among the trade creditors are likely to vote in favor of the plan. The remaining $17,000 of trade creditors, likely to vote against the plan, consist of 10 creditors owed approximately $700 each and one creditor owed $10,000.

XYZ Corp.=s projections indicate that it is likely to earn $25,000 per year above its operating expenses. This amount will be available to make payments to creditors under the plan.

Draft a memo 1) explaining the likely objections to the plan and whether they are likely to be successful; and 2) identifying possible alternative strategies that could possibly result in confirmation of a plan to rehabilitate the business.

Confine your answer to 2 pages in a Bluebook

Bob Boneyard is an excavation subcontractor. He mostly digs basements and trenches for foundation footers for several home renovation contractors in his area.. Because of a downturn in the local economy, and a reduction in home renovation projects, Bob has had less work than usual for the past 18 months and is considering filing a chapter 13 petition. Among his more valuable assets is the backhoe he uses for nearly all of his work. Although expensive, a backhoe is really nothing more than a large, motorized, self-propelled shovel, capable of digging 25 gallons of dirt at a time.

The backhoe Bob uses is a Caterpillar Brand small size backhoe suitable for use in the residential yards in which Bob customarily works.

After examining the agreement between Bob and City Caterpillar, from whom Bob acquired the backhoe, you have concluded that it is unclear whether the agreement, although characterized as a lease, is really a security agreement. The agreement provides that Bob cannot assign his contract without City Caterpillar=s permission and that the lease will be immediately terminated if Bob fails to make any of the required lease payments. Bob has missed the last two payments, and last week received a letter from City Caterpillar purporting to exercise the right of termination and demanding that Bob return the backhoe.

Another lawyer in your firm has been assigned to determine whether the agreement is a lease or a security agreement. Your job is to figure out why it matters.

Draft a short memo explaining the effect of the determination of whether the agreement is an equipment lease or a secured sale upon the treatment of City Caterpillar=s rights in Bob=s chapter 13 case?

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Last Revised: 02/19/99