The examination rules stated in the Student Handbook govern this examination, except: (1) this is a limited open book examination, and (2) you may use a computer, may save your answers to a disk, and must print them out immediately following the examination.

For reference, you may use your book, including statutes (electronic format or hard copy), your notes, outlines, and any other material that you have prepared alone or together with any other person in the class.

1. All questions are based on an initial set of basic facts. Each question adds to or varies the basic facts.

2. The total number of points on the exam is 100. The number of points and suggested time is indicated for each question.

3. Start the answer to each question in a separate bluebook or, if you are typing the exam, start each answer on a separate page. Write on one side of the page only. If your handwriting is difficult to read, skip lines.

4. Think through a question and organize your answer before you start to write.

5. If a question is ambiguous in any material way, point out the ambiguity and explain how a resolution of the ambiguity would affect your answer.

6. Assume any deed of trust or security agreement contains standard clauses. All transactions take place in California. Where the U.C.C. is applicable, apply the California version. Remember that the version of the U.C.C. in our materials is the California version.

Walt Water ("Water") is the sole shareholder of a corporation formerly known as Videoworld. The principal business of Videoworld was the operation of a video arcade. Videoworld owned free and clear the real property on which the video arcade is located (hereafter referred to as "Video Arcade Land").

When a large adjacent parcel of land (hereafter referred to as "Adjacent Land") went on the market, Water decided that Videoworld should expand its business to include a water slide, miniature golf course, miniature race track, and skate board facility. Upon embarking upon these expansion plans, Videoworld changed its corporate name to Waterworld.

Waterworld purchased the Adjacent Land for a price of $500,000, a fair market price at the time. It made a cash down payment of $50,000, obtained a $300,000 loan from the Bank of Brazil secured by a first deed of trust on the Adjacent Land, and obtained a $150,000 loan for the balance of the purchase price from Security Bank. Security Bank’s note was secured by a second deed of trust on the Adjacent Land. To summarize this purchase transaction:

Because of declining property values, Waterworld was unable to obtain construction financing to complete the facilities. Absent income from the facilities, Waterworld defaulted on the notes to both Bank of Brazil and Security Bank. Although purchased for $500,000, the value of the Adjacent Land may have dropped to as low as $400,000.

Bank of Brazil non-judicially foreclosed on the Adjacent Land. At the foreclosure sale, Security Bank entered a high bid of $300,001 (you may use $300,000 for the purposes of your analysis). Advise Security Bank about what it can and should do now regarding its note, on which a balance of $150,000 still remains owing.

As described in Question 1, Bank of Brazil non-judicially foreclosed on the Adjacent Land after Waterworld defaulted. However, Bank of Brazil, not Security Bank, was the high bidder at its sale.

In addition to the Basic Facts, assume that Security Bank had also secured its $150,000.00 note with a second deed of trust on the personal residence of Water, as well as with a guarantee from Gina Guarantor. Further assume that the note secured by a first deed of trust on Water’s personal residence is in default but that Security Bank is keeping the first current.

Yesterday Security Bank recorded its Notice of Default. The foreclosure department has just turned the file over to you, the bank’s general counsel, for review. You note that there are no waivers in Gina’s guarantee. What will you advise Security Bank to do at this point? Are there any additional facts you need to ask your foreclosure department to ascertain before making final decisions? Include in your advice a discussion of any fair value limitations that might apply.

Question 3: (15 points) (Suggested time: 30 minutes)

To start the original video game arcade, Videoworld had purchased video game machines for the arcade with the proceeds of a $100,000 loan from Bank of Argentina. The note evidencing this loan was secured by a security interest in "all video game machines now owned or hereafter acquired." The security interest was enforceable under 9-203 of the Commercial Code. The security interest was perfected by a properly filed financing statement naming Videoworld as the debtor. The video game machines are not fixtures under state law.

After Videoworld changed its corporate name to Waterworld, the Bank of Argentina failed to file a new financing statement.

Assume that Waterworld was able to obtain construction financing for the facilities and that upon completion of construction, which took six months, Waterworld purchased additional video game machines with cash on hand. A week later it borrowed $200,000 from Bank of Chile, evidenced by a $200,000 note, which it used to acquire a fleet of race cars for the race track. The $200,000 note was secured by a security interest in "all equipment of Waterworld." The security interest was enforceable under 9-203 of the Commercial Code. The security interest was perfected by a properly filed financing statement.

During the first full year of the operation of Waterworld’s facility, revenues from the video arcade portion of the business fell sharply. Waterworld defaulted on its payments to Bank of Argentina. The Bank of Argentina, still owed $75,000 on its note, repossessed all of the video game machines located on Waterworld premises, and sold them for $50,000 at a properly noticed and properly conducted foreclosure. Upon discovering these events, Bank of Chile properly declared its note in default and demanded that Bank of Argentina remit all of the proceeds of the sale to the Bank of Chile. The Bank of Argentina refused.

How should this be resolved? Why?

Assume that the Bank of Argentina paid the Bank of Chile $25,000 in settlement of the dispute described in Question 3 and that this payment reduced Waterworld’s debt to Bank of Chile on the $200,000 note to $175,000. Assume further that the $200,000 note to Bank of Chile was also secured by a first deed of trust on the Video Arcade Land.

What course of action, if any, is now available to Bank of Chile with respect to: (a) the debt; (b) the race cars, which are used on a race track built on the Adjacent Land; or ( c ) the Video Arcade Land?

Assume that because of declining video game machine revenues, Waterworld filed a Chapter 11 proceeding before Bank of Argentina repossessed any video game machines, that those machines are worth $75,000, and that Waterworld owes Bank of Argentina $50,000 and Bank of Chile $200,000.

Also assume (despite any contrary conclusion that you might have reached in response to a previous question) that the Bank of Argentina’s debt was secured by a first priority security interest, unavoidable in bankruptcy, in all of the video game machines, and that Bank of Chile’s debt was secured by a second priority security interest, unavoidable in bankruptcy, in all of the video game machines.

Finally, assume that the debt to Bank of Chile is secured by a first priority security interest, unavoidable in bankruptcy, in the race cars, and by an unavoidable first deed of trust on the Video Arcade Land. Due to neglect and uninsured vandalism, the fleet of race cars is worth only $25,000. The Video Arcade Land is currently worth $125,000. However, the municipality in which the Video Arcade Land is located may rezone the Video Arcade Land within the next two years. If rezoning occurs, the value of the Video Arcade Land is likely to increase dramatically.

Given these facts:

1. What would you advise Bank of Argentina about its chances for prevailing on a motion seeking relief from the automatic stay to permit it to foreclose on the video game machines?
2. Would you advise Bank of Chile to make the 1111(b) election? Why or

why not? If it made the 1111(b) election, to what treatment would it minimally be entitled under a Chapter 11 plan of reorganization?