Secured Debt
Professors Mertens and Neustadter
QUIZ - Fall 1996

(Answers at end of quiz)

(10% of Midterm Grade)

Approximate Time: 30-40 minutes

Ten Questions (worth 1 point each)

INSTRUCTIONS:

1.Write your Social Security # (or student ID #) on the Scantron card.

2.Answer questions by filling in the appropriate blank on the Scantron card
   with a #2 pencil.  Press hard. Circle only one choice.

3.Do not make extraneous marks on the Scantron card.

4.The quiz is open book. You may use your course materials and any
   materials you have prepared yourself or together with another person in the class. You may
   use a computer but may not access anything on the computer other than course materials or
   materials you have prepared yourself or together with another person in the class.

5.In any question where it might be relevant, ignore costs of foreclosure or litigation.

6.Be sure to circle your answer on the question sheet for your future reference. You may take
   the questions with you after the exam but please bring them to our next few classes. We will
   spend some time reviewing the questions and answers after the period for challenges expires.
 

THE FOLLOWING FACTS APPLY TO QUESTIONS 1 THROUGH 3:

     Graham has a $100,000 judgment against Hernandez for fraud. One year prior to judgment
in the lawsuit, Graham secured an attachment of undeveloped (and hence non-exempt) real
property owned by Hernandez, located in Santa Clara County. The property has an estimated
fair market value of $200,000 arid is encumbered by a deed of trust, securing a debt of
$150,000, which was of record prior to levy of the writ of attachment. Following levy of the
writ of attachment but before Graham obtained her judgment, another judgment creditor of
Hernandez, holding a judgment against Hernandez for $200,000, recorded an Abstract of (the
$200,000) Judgment in Santa Clara County. You may assume that Graham is not an insider as
defined in the Bankruptcy Code. We recommend that you diagram these events with a time
line.

1. Hernandez has filed an appeal from the Graham judgment and has also threatened bankruptcy but has offered to drop the appeal, avoid bankruptcy, and settle the case for $75,000 payable over 10 years at an interest rate to be negotiated. Graham is discussing her options with you, her lawyer. You advise;

     A.  The filing of the appeal by Hernandez has stayed any actions which Graham could take
           to enforce the judgment.

     B.   Graham's interest in the Santa Clara County real property owned by Hernandez is
            currently worthless because of the deed of trust and the Abstract of Judgment also 
            recorded against the property.

     C.   Graham may execute on the Santa Clara County real property owned by Hernandez
            but Graham will likely lose its interest in the real property if Hernandez files a
            bankruptcy petition within 90 days of the levy of the writ of execution.

      D.  If Hernandez defaults on the debt secured by the deed of trust, the beneficiary should
            not foreclose because of the other liens on the property.

      E.   None of the above.

2. Hernandez also owns and lives in a small cottage with an estimated fair market value of
$210,000. It is located in Santa Clara County, free and clear of any consensual or statutory
liens.  Hernandez is the sole proprietor of a small retail sporting goods store, operating from a
leased location in San Mateo County. It is now 1996. The lease expires in 2010. You advise:

      A.  Graham should immediately file an Abstract of Judgment in San Mateo County and
            Santa Clara County pending further settlement negotiations.

      B.   If Graham is interested in the proposed settlement mentioned in question #1, she could
             not secure the installment payments with a deed of trust on Hernandez' home because
             of the homestead exemption.

      C.   If Graham is interested in the proposed settlement mentioned in question #1, a deed of
             trust on Hernandez' home to secure the installment payments would not presently
             afford much security.

       D.   If Graham obtains a deed of trust on the leasehold to secure the installment payments
              and files a financing statement concerning this deed of trust in the office of the
              Secretary of State of California, the lien on the leasehold will be safe from avoidance
              in bankruptcy if no bankruptcy petition is filed within 90 days of the filing of the
              financing statement.

       E.   A and C.

3. Graham and Hernandez agree to the proposed settlement mentioned in question #1, secured
by a security interest in the inventory of the Hernandez sporting goods store mentioned above.
Which of the following is true?

       A.   The security agreement need not be in writing to be enforceable.

       B.   The security agreement should also cover after-acquired property.

       C.   If Hernandez defaults, Graham may exercise a right of set-off to reach funds in
              Hernandez' bank account.

       D.    If Hernandez defaults, Graham's security interest will extend to all funds received
               upon the sale of inventory which have been commingled with other funds in a
               Hernandez bank account and are traceable, even in the absence of a proceeds clause
               in the security agreement.

       E.    B and D.

THE FOLLOWING FACTS APPLY TO QUESTIONS 4 AND 5:

     Nash purchased a refrigerator from Sears pursuant to the terms of a conditional sale
contract which provided that Sears would retain title to the refrigerator until Nash completed
24 monthly installment payments specified in the contract at which time Nash would obtain title
to the refrigerator. Nash failed to timely make his 11th payment

4.At the time of failure to make the 11th payment, the amount owing under the retail installment
contract was $600.00 and the fair market value of the refrigerator was $300.00

      A.   This transaction is not governed by Article 9 because it is a conditional sale rather than
             a secured transaction.

      B.   Article 9 of the Commercial Code affords Nash a limited time within which to prevent
             a foreclosure sale of the refrigerator by reinstating the obligation.

      C.   If Sears repossesses the refrigerator, Sears will be liable to Nash for conversion.

      D.   Sears will violate the federal Fair Debt Collection Practices Act if it obtains possession
             of the refrigerator by telling Nash that it will foreclose on Nash's house if Nash doesn't
             let Sears into the house to repossess the refrigerator.

      E.   None of the above.

5. Assume that Sears sues Nash and recovers a default judgment for $600.00 plus interest, costs and attorney's fees.

      A.   The sanction effect of the one form of action rule bars Sears from repossessing or
             seeking judicial foreclosure of the refrigerator.

      B.   Sears has committed an unfair practice under the Federal Trade Commission Credit
             Practices Rule.

      C.   Sears must first seek to enforce its judgment by executing on the refrigerator.

      D.   Sears can surmount the problem encountered by the secured creditor in Stone
             Machinery v. Kessler by having a sheriff gain possession of the refrigerator through
             levy of a prejudgment writ of possession obtained by Sears in a claim and delivery
             proceeding.

      E.   C and D.

THE FOLLOWING FACTS APPLY TO QUESTIONS 6 THROUGH 10:

     Assume Betty Buyer and Sammy Seller have entered into an agreement under which Betty
is buying Sammy's apartment complex (located in the state of California) for the sum of $2
million. The parties have agreed that Betty will pay $250,000 down, will obtain a new loan in
the amount of $1.5 million secured by a first deed of trust on the property and that she will get
a new loan for $250,000 secured by a second deed of trust.

6.   Assume that Sammy has an outstanding loan secured by the property. That loan, held by
Banker's Bank, has a balance due of $900,000. In addition, a judgment lien has been recorded
reflecting a judgment owed by Sammy to Anco Inc. in the amount of $200,000. Betty instructs
the escrow company that she will take title subject to her new loans as a first and a second and
that she wants title insurance insuring her title subject only to those encumbrances. In addition
to Betty's instructions, the parties will submit escrow instructions as follows:

       A.   Betty's $1.5 million lender will instruct the escrow company to release the funds of its
              loan when the company is ready to issue a title insurance policy insuring that its deed
              of trust is in first position on the apartment complex.

       B.   Banker's Bank will instruct the escrow company to record its Deed of Reconveyance
              when it is ready to issue a check payable to it in the amount of $900,000.

       C.   Anco Inc. will instruct the escrow company to record an Acknowledgment of Full
              Satisfaction of Judgment when it is ready to issue a check in the amount of $200,000

       D.   A and B.

       E.   A, B and C.

7.Assume escrow closed as planned. Shortly after taking title, Betty suffered some major
financial reversals and defaulted on her loans. The holder of the first has just recorded a Notice
of Default. The holder of the second has sought your advice about its options. You should tell
it:

        A. He has the right to reinstate the first, which means he will have to pay all the installment
             payments due plus whatever costs are permitted by statute for reinstatement.

        B. He has the right to begin either a judicial or non-judicial foreclosure but will most
             likely be sold-out by the first if he does nothing.

        C. He can wait for the first to hold its foreclosure sale, but, if the sale does not bring
             enough to pay off his debt, he will be barred by Code of Civil Procedure Section 726
             from suing Betty on the note.

         D.   A and B.

         E.   A, B and C.

8.Assume the same facts as in #7, except project yourself into the future. The two deeds of
trust are executed on 2/1/97, the date escrow closed. Both the first and second deeds of trust
have a rents and profits clause in them and both permit the appointment of a receiver to collect
the rents and profits. Assume the first has an "additional security" type assignment of rents
clause and the second has an "absolute conditional upon default" type clause. Which of the
following statements are accurate?

         A.  The first will be entitled to the rents which subsequently accrues if it obtains the
               appointment of a receiver.

         B.  If the debtor defaults and then two months later files bankruptcy, the rents for those
              two months, assuming they are maintained in a separate account of the debtor, are the
              property of the second and not of the bankruptcy estate.

         C.  If, upon default, the junior makes a demand on the trustor/assignor to pay it the rents
              which subsequently accrue and if the trustor refuses, the rents will belong to the
              trustor until the junior takes a further step of enforcement.

          D.  A and B.

          E.  A and C.

9.The holder of the first, mentioned in #7 above, is concerned because Betty has defaulted on
the loan and because there are indications that Betty may be filing bankruptcy shortly. The
lender knows that Betty has a substantial Hong Kong bank account in its branch which is
located there. (Betty, of course, assumes the account is safe from the reaches of a California
court.) The lender also believes that the value of the apartment complex has been drastically
reduced because the city where it is located has just enacted some very stringent rent control
measures. The bank freezes Betty's Hong Kong account and begins a non-judicial foreclosure.
Betty has retained you. Which of the following statements are accurate?

           A.   If you file an action on behalf of Betty to enjoin the foreclosure sale, you will have
                 exercised your one form of action under Code of Civil Procedure Section 726.

           B.   The bank's action of freezing the Hong Kong bank account directly undercuts the
                  policy of CCP 726 barring multiplicity of actions, one of the policies underlying the
                  one form of action rule.

           C.   If the bank reconveys its deed of trust on the property pursuant to the debtor's
                  request, it will be precluded from suing on the note under CCP 726

           D.   B and C.

           E.   None of the above.

10.Assume that the senior note was payable interest-only with a balloon payment due in one
year. The junior note was a fuilly amortized fifteen year note. If Betty defaults on the senior
because she is unable to pay the balloon payment when due, the junior can declare that its note
is in default and accelerate.     A. True  B. False

END OF QUIZ

Answers:   E, E, E, E, D, E, D, A, E, A