COMMERCIAL PAPER - PROF. FERRIELL
FINAL EXAM - SPRING 1993
(REVISED - APRIL 2006 - TO REFLECT CHANGES IN THE LAW SINCE THE EXAM WAS GIVEN)
READ THESE INSTRUCTIONS
BUT DO NOT READ BEYOND THE INSTRUCTIONS
UNTIL SPECIFICALLY INSTRUCTED TO DO SO
FAILURE TO FOLLOW THIS OR ANY OTHER INSTRUCTION WILL LEAD ME TO QUESTION YOUR
ABILITY TO FOLLOW STATUTORY RULES AND MAY RESULT IN AN ADVERSE IMPACT UPON YOUR GRADE.
1. This is a three (3) hour exam consisting of two (2) essay questions.
2. Essay question I is worth 70 possible points. Essay question II is worth 30 possible points.
3. I strongly encourage you to spend no more than 2 hours on Essay Question I, and no more than 1 hour on essay question II.
4. Your grade for the course will be determined by your performance on this final exam, as modified, as explained in the syllabus, according to your performance on quizzes given during the semester.
5. Limit your answer to essay question I to five (5) pages in a bluebook. Limit your answer to essay question II to three (3) pages in a bluebook. A "page" according to Webster, is "one side of a leaf in a book." You may write on both sides of the page if you wish, but each side you write on is a page. Leave the customary margins and do not write more lines than the number of lines printed on the page. I will not read and you will not receive credit for anything written beyond these limits, except that if you insist on writing on every other line I will make an appropriate adjustment in the number of pages I will read.
6. Be sure to put your exam number on your bluebook(s).
7. You may leave the room during the exam if necessary due to illness (including nicotine addiction) or incipient incontinence. You may not, however, consult any materials or engage in any conversation with any other person simply because you are in a different room.
8. You may have with you and may use during the exam your copy of the assigned statutory materials. It may contain annotations made by you in the ordinary course of class preparation. Annotations made in your handwriting in the margins of code sections discussed in class, included on the syllabus, or mentioned in the text will be rebuttably presumed to have been included in the ordinary course of class preparation. Annotations made in the inside covers, on blank pages at the beginning or end, or on pages not originally included by the publisher, or not in your handwriting, will be rebuttably presumed to have been made outside the ordinary course of class preparation and may thus be in violation of this rule and of the honor code. Your copy of the assigned statutory materials may also contain tabs or markers to assist you in locating sections of the materials.
You must not have other written materials with you in the examination room.
9. When the time allocated for the exam is over, stop writing immediately! Failure to follow this instruction will result in a sanction of 30 points taken away from your score on the examination.
10. You must not talk to anyone about anything from now until everyone has finished taking the exam. Even then, take care to ensure that the person with whom you are talking is not scheduled to take the exam at a later date or time due to a conflict.
11. As noted above, Failure to follow any of these instructions will leave me with the impression that you are unable to read and understand statutory material and therefore will reflect adversely on your grade on the exam.
12. I will not answer any questions about the exam once it has started. However, if you "freeze" or are otherwise unable to continue, please see me outside the exam room or in my office and I will do my best to calm you down and get you started. If you find a question ambiguous or difficult to answer because of what you believe is a typographical or other error on the exam itself, answer the question as best as you can. After the exam is over, notify me of the ambiguity or possible mistake in a way which will not reveal which exam is yours.
13. Unless otherwise indicated by a particular question, assume that the official 1990 version of the Uniform Commercial Code applies to all of the transactions described in this exam.
14. Your answers should indicate your understanding of the correct application of the principles embodied in the materials we have studied, particularly those in the Uniform Commercial Code and relevant federal statutes. Your answers should also indicate your abilities to use the Code through its language and its official comments. An answer to any of the questions consisting of a simple "yes", "no", "maybe", or other cryptic response will not receive any credit. Credit will be given only if the answer is supported by an analysis based upon the U.C.C., other relevant statutes, or appropriate common law or policy considerations. Reference to specific code language will probably be helpful, but a full and correct analysis will receive full credit even though a code section is neither quoted nor cited.
15. Good Luck!
ESSAY QUESTION I - 70 POSSIBLE POINTS - 2 HOURS
LIMIT YOUR ANSWER TO 5 PAGES IN A BLUEBOOK
On April 1, Danny Drawer wrote a negotiable check for $500.00 to the order of Paula Payee on Danny's account at First State Bank (FSB). Danny hand delivered the check to Paula the same day. Upon receipt of the check Paula wrote the following on the back of the check:
"Pay Izzy Indurian"
Paula Payee
She then wrote a note to Izzy which said: "here's the money I owe you" and placed the note, together with the check in a stamped envelope, addressed it to Izzy, and clipped it to her mailbox for the postal carrier to take the next day.
The next day, April 2, before the postal carrier could collect the envelope Fred Forger stole it from Paula's mailbox. Fred, who was acquainted with Izzy, deftly forged Izzy's signature on the back, and persuaded a clerk at a local "Quick-Mart" (QM) to give him cash for the check.
The clerk at Quick-Mart stamped the back of the check with the following: "Pay to the order of Merchant's Bank - Quick Mart Stores, Inc." Later that same evening, the check was deposited, together with numerous other checks taken by Quick-Mart, in Quick-Mart's account at Merchant's Bank (MB).
On April 3, Merchant's Bank indorsed the check and sent it to the Regional Branch of the Federal Reserve Bank (FRB), for collection. The FRB received it later that day, indorsed it, and sent it to First State Bank (FSB) for presentment.
The check arrived at FSB at 2:30 p.m. on April 4.
That same day, April 4, Paula ran into Izzy and inquired whether Izzy had received the check. Izzy replied that he had received no such check. Concerned about the check, Paula immediately called Danny and told him that she was concerned that the check might have been stolen. Danny, however, was unconcerned and attributed Izzy's failure to receive the check to a delay at the post office: after all, Danny thought, it had only been sent to Izzy two days earlier, on the 2nd.
The next day, April 5, when Izzy had still not received the check, Paula called Danny and insisted that he do something about the potential loss of the check. Early in the morning of April 5th, however, a clerk at FSB had run a batch of checks drawn on FSB through the bank's computerized check clearing equipment. The equipment scanned the MICR encoded account and check and amount numbers at the bottom of Danny's check, confirmed that Danny had funds sufficient to cover the check, debited the check to Danny's account and stamped "PAID" across the front of the check. Danny promised he would, and the next day, April 6, called FSB and alerted it to the possible theft of the check. Unfortunately, Danny was unable to identify the check by number, but was able only to advise FSB of the amount of the check, the name of the payee, and the name of the person to whom the payee, Paula, had indorsed it, Izzy.
FSB's head teller agreed to try to stop payment on the check even without the check number, charged Danny's account $15.00 for this service, and searched its records for the check. The teller discovered, of course, that the check had already been debited to Danny's account and was in a drawer with Danny's other checks which had already cleared his account. Despite this, at 4 p.m. on April 6, the teller recredited Danny's account and sent the check back to FRB marked, "dishonored."
FRB received it back from FSB on April 7 and returned it to MB later the same day. MB received it on April 8 and immediately debited Quick-Mart's account. Unfortunately, MB did not place the check in an envelope, or send any other notice to Quick-Mart, about the dishonor of the check, until April 10.
In the meantime, and because of the $500 debit to Quick-Mark's account, checks drawn on Merchant's Bank by Quick Mart, bounced due to insufficient funds.
ASSUME YOU REPRESENT QUICK-MART. DETERMINE WHETHER YOU MAY RECOVER THE $500 FROM Danny, Paula, Izzy, Fred, Merchant's Bank. Federal Reserve Bank or First State Bank.
ALSO DETERMINE WHETHER THERE IS ANYTHING YOU CAN DO ABOUT YOUR CLIENT'S CHECKS WHICH BOUNCED DUE TO INSUFFICIENT FUNDS BECAUSE OF THE DEBIT OF THE $500 BY MERCHANTS BANK.
EXPLAIN YOUR REASONING AS FULLY AS POSSIBLE WITHIN THE TIME ALLOCATED TO THIS QUESTION.
ESSAY QUESTION II - 30 POSSIBLE POINTS - 1 HOUR
LIMIT YOUR ANSWER TO 3 PAGES IN A BLUEBOOK
Martha Manning purchased $10,000 of inventory from Curt Creditor, but found herself temporarily unable to pay. When Curt threatened to sue Martha over the debt the parties entered into a settlement agreement which required Martha to give Curt a promissory note and security interest to assure payment. The note provided:
I, Martha Manning, promise to pay the sum of $10,000 to Curt Creditor, or his assigns, in 5 equal annual payments of $2,000, plus annual interest of 1% above the Prime Rate then published in the New York Times, on the outstanding principal balance, with payments due on the 15th day of May, starting in 1994. These payments will be made from income I receive from the trust fund established for my benefit by my father, Manny Manning. This note is secured by a separately executed security agreement granting Curt Creditor a security interest in all of my business equipment, as described in the attached security agreement.
Martha gave the note to Curt on May 3, 1993. On May 15, 1993, she made the first installment payment to Curt. A short while thereafter, on May 17, 1993, Martha discovered that the goods she had purchased from Curt were seriously defective and had no doubt that Curt had not only known about the defects when he shipped them to Martha, but that he had done so with the fraudulent intent to deceive her regarding the quality and nature of the goods.
Unfortunately, on May 10, 1993, and without Martha's knowledge or notice, Curt had signed the note and given it to Hanna Holden, as a retirement bonus to Hanna, in consideration of all of the years of faithful service she had rendered to Curt's business.
ASSUME THAT YOUR FIRM REPRESENTS HANNA. DRAFT A MEMO FOR THE PARTNER REPRESENTING HANNA INDICATING WHETHER HANNA IS LIKELY TO COLLECT THE NOTE FROM MARTHA. EXPLAIN YOUR REASONING FULLY.