E:\Exams\Bader\Commercial Finance

Commercial Finance Examination

Fall Semester, 1998

This examination consists of 4 questions. This is an open book examination, and you may use your notes, the Code, a hornbook, or any other materials.

I will not be present during the administration of the examination. If you think that any question is ambiguous, or that some fact is missing which is necessary to answer the question, please make whatever assumption you think is necessary to clear up the ambiguity or to supply the fact that you believe is missing, tell me what your assumption is, and continue to answer the question.

Please answer the call of the question, but do not discuss abstract principles of law which do not directly relate to the issues raised by the question. I want short, not long, answers; I do, however, expect you to provide me with an explanation of your answer which is sufficient to demonstrate that you know the material. Although the examination appears long you should have adequate time in which to do a good job.

Good Luck!

(10%)

Predator National Bank ("PNB") had a security interest in the equipment of the Weekend Construction Company for which it filed a financing statement in the proper place on May I, 1995. Big Bank ("BB") took a security interest in the same collateral and filed its financing statement on May 2, 1995, in the same place.

i. How long is PNB's financing statement effective? Explain.

ii. If PNB files a continuation statement on May 1, 1999, will it have a perfected security interest on June 1, 2000? Explain.

iii. If PNB files a financing statement on April I, 2000, and it is identical to the first financing statement, is that sufficient as a continuation statement? Explain.

II
(30%)

1. Betty Consumer bought a television set from Distortion TV, Inc., a retail store. A month later Distortion went bankrupt, and a minor functionary from the Predator National Bank ("PNB") showed up on her front porch and asked her to turn over the set. He explained than PNB held a perfected security interest in all of Distortion's inventory and that since Distortion had not paid off its debts to PNB, the bank was repossessing.

2. Rather than any of the above, Ms. Consumer (a savvy and empowered woman), although knowing that Distortion engaged in inventory financing with PNB, purchased a stereo system from Distortion, paying 25% down and executing an agreement giving Distortion a security interest in the stereo. Distortion delivered the stereo to Ms. Consumer and did nothing further. Ms. Consumer kept the stereo for one month when, in need of cash, she sold it to her dentist to use as an office sound system.

i. Unpaid, Distortion now attempts to repossess the stereo from the dentist. May it? Explain.

ii. Owing a monstrous debt to PNB, Distortion files a petition in bankruptcy. PNB attempts to repossess the stereo from the dentist. May it? Explain.

iii. The bankruptcy trustee attempts to take the stereo from the dentist.

iv. Would any of your answers change if, rather than a dentist, Ms. Consumer sold the stereo to her next door neighbor? Explain.

III
(30%)

All Things, a new department store, on June 1, gave a properly perfected security interest in all of its existing and after acquired inventory to Big Bank, which advanced $100,000 to All Things. All Things immediately used those funds to purchase its opening inventory, all of which consisted of clothing from various designers. All Things, on July 1 - belatedly coming to the conclusion that there was robust business to be done in furniture - gave a properly perfected security interest in all of its existing and after acquired inventory and accounts receivable to PNB, which advanced $100,000 to All Things to permit it to purchase furniture inventory. PNB have no notice to Big Bank. On August 1, All Things had a summer's end sale which produced $25,000 in cash, $25,000 in credit card slips, $25,000 in accounts receivable, and - in an extraordinary transaction - a 1955 Porsche speedster, which All Things took in trade for $25,000 of furniture.

The cash was immediately used by All Things to purchase new furniture inventory (All Things having sold all of its furniture during the sale). The credit card slips were immediately converted to cash and deposited in All Things' operating account. The accounts receivable were sent to All Things' credit department for collection. The Porsche speedster was sold by All Things for $25,000 to Michael, its President.

Unfortunately, All Things had grossly over estimated the market and only lasted until December 1, when both Big Bank and PNB attempted to repossess all of All Things' assets, which consisted of $10,000 in the operating account, $10,000 worth of furniture inventory, and $10,000 in uncollected accounts receivable. Both Banks also demanded that Michael turn aver the Porsche.

As between PNB and Big Bank, who (if either) gets:

IV
(30%)

PNB comes to you for advice. It is about to go into the consumer finance end of the banking business, and wants to design a system that will minimize its collection costs with respect to repossessions. PNB explains that its basic repossession strategy will be to use a uniformed off duty police offer to physically repossess collateral, and asks you what you think about each of the following provisions that it proposes to put into its consumer security agreements:

1. All borrowers waive their right to object to repossession on any basis other than that it involves a violent (as opposed to colorable) breach of the peace;

2. All borrowers will consent to repossession of secured collateral at any time and any place and agree that the bank may break locks or enter upon any premises where the collateral is located;

3. All borrowers will agree that the Bank will have the right, at its option, to strictly foreclose on all repossessed collateral;

4. All borrowers will agree, upon default and at the Bank's request, to assemble

5. All borrowers will agree that the Bank will have the right, in its sole discretion and judgment, and for any purpose, to declare the borrower in default and exercise its repossession rights.

What advice do you give the Bank?