Commercial Law I Professor Langbein

April 24, 2012

Examination Preparation Materials

Fact Pattern 1 (40 questions)

Cranberry Enterprises, Inc. (CEI) is a Delaware corporation engaged in the business of manufacturing and selling mobile telephones and related equipment. On June 16, 2006, CEI borrowed $7.55 million from Piggibank, N.A. (PBN). CEI issued a note in that amount, payable in full 10 years after the closing date. CEIs obligation was secured by a security agreement which described the collateral as all equipment, inventory, accounts, chattel paper, instruments, deposit accounts, and fixtures, whether now owned or hereafter acquired by CEI. PBN filed a financing statement with the Office of the Secretary of State of Delaware on June 8, 2006, describing the collateral as all equipment, inventory, accounts, chattel paper, instruments, general intangibles, deposit accounts, and fixtures, whether now owned or hereafter acquired by CEI. On September 14, 2009, CEI borrowed $3.8 million from Iniquity Leasing Ltd. (ILL), to finance the acquisition of additional manufacturing equipment. The funds were disbursed by a wire transfer on that date to Butterfly Tractor, Inc. (Butterfly), the vendor of the equipment. On September 18, the equipment was delivered to CEI. On September 26, CEI placed the equipment in a facility owned by Butterfly, where it was nevertheless used by CEI. On the same date, ILL notified Butterfly that ILL claimed a security interest in the equipment. On September 30, Butterfly sent ILL a letter acknowledging receipt of ILLs September 26 letter, and stating that Butterfly held the equipment subject to the security interest. ILL filed no financing statement with respect to ILLs security interest. On December 4, 2010, CEI acquired certain inventory from Research in StandStill, Inc. (RISS). CEI paid for this inventory by paying $600,000 in cash; borrowing $1 million from the Bank of Constantinople (BOC); and issuing a note to RISS in the amount of $1.2 million. The note to BOC was secured by a security agreement dated December 4, 2010, which described the collateral as all inventory held by CEI. The note to RISS was secured by a security agreement dated December 1, 2010, which described the collateral as all inventory, whether now held or hereafter acquired by CEI. CEI took delivery of the property on December 12, 2010. On December 2, 2010, RISS sent a letter to PBN

stating that RISS intended to take a security interest in the acquired inventory, which PBN received on December 6, 2010. On November 28, 2010, BOC sent a similar letter, which PBN received on December 3, 2010. RISS filed a financing statement on December 21, 2010, describing the collateral as all personal property of CEI. BOC filed a financing statement on January 14, 2011, describing the collateral as all inventory of CEI. Blueberry Enterprises, Inc. (BBEI) was a Delaware corporation engaged in the business of developing and distributing computer video games. On April 15, 2005, BBEI borrowed $4.15 million from Unstabank, N.A. (UBN). BBEI issued a note in that amount, payable in full 15 years after the closing date. BBEIs obligation was secured by a security agreement which described the collateral as all equipment, inventory, accounts, deposit accounts, general intangibles, and fixtures, whether now owned or hereafter acquired held by BBEI. UBN filed a financing statement with the Office of the Secretary of State of Delaware on May 9, 2005, describing the collateral as all personal property of BBEI. On January 6, 2011, BBEI and CEI filed articles of merger with the Office of the Secretary of State of Delaware. Pursuant to this filing, BBEI and CEI were merged into CEI as of midnight, January 7, 2011. On March 2, 2012, at 9:44 a.m., CEI filed for protection under Chapter 7 of the Bankruptcy Code, in the United States District Court for the District of Delaware.

Fact Pattern 2 (20 questions)

Chiminigagua Mart, LLC (CHIMI) is a Florida limited liability corporation engaged in business as a wholesale furniture distributor, which sells items of furniture to various retailers. CHIMI holds substantial inventory, most of it financed by Bachue Capital Corp. (BCC). Most of the inventory is held in a warehouse in South Carolina. Under the terms of this arrangement, upon placing an order for inventory, CHIMI directs the invoice of its vendors to BCC, which pays the vendor. BCCs floor plan lending arrangement is secured by a security agreement dated April 4, 2008, which describes the collateral as all inventory, chattel paper, instruments, accounts, deposit accounts, and payment intangibles, now owned or hereafter acquired by CHIMI. Under the terms of the arrangement, CHIMI is required, upon sale of an item of inventory subject to the security agreement, to forward a copy of the invoice to BCC, and to deposit any cash received in a lockbox account with the Bank of Guatavita (Guatavita), which account is carried in the name of BCC (although CHIMI is the owner of the account). Any checks received are also to be deposited in this account, and no other funds are permitted to be deposited to the account. BCC also requires that all leases, notes, or other evidences of indebtedness issued by customers are to be turned over to BCC, and copies of all credit card receivables are to be sent to BCC, and payments on the receivables are to be deposited to the lockbox account. The security agreement provides that any failure to turn over any such document to BCC constitutes an event of default under the security agreement. On April 8, 2008, BCC filed a financing statement in Florida describing its collateral as all inventory, now owned or hereafter acquired by CHIMI. Among CHIMIs largest customers is Bochica Interiors (Bochica), a 50-50 general partnership engaged in the furniture retail business under the trade name Bocachica Designs, whose partners are Bo Bama (Bo) and Missi Chica (Chica). Bochica has retail outlets throughout South Carolina, Georgia, Alabama, and Florida. The partnership agreement governing Bochica recites that the name of the partnership is Bochica Interiors, and that the agreement is to be governed by the law of the State of Florida. Bochicas management office is located in Augusta, Georgia, where it conducts most of its procurement and credit operations. Its warehouse and largest retail outlet are both located in St. George, South Carolina. Bo resides year round in Augusta, Georgia and Chica resides year round in North Augusta, which is located in South Carolina. Bochica purchases furniture from CHIMI, sometimes paying cash (checks or, in relatively rare cases, currency), but other times issuing either unsecured notes, or notes accompanied by a security agreement. The terms of the notes range from one to five years. CHIMI regularly sells the notes and any accompanying security agreements to Nemcatacoa Leasing Partners, LLP (NLP), a South Carolina limited partnership, for an amount of cash equal to 92% of the face amount of the note. The security agreement between NLP and Bochica provides that should collections on any of the note fall below 85% of the face amount, Bochica will reimburse NLP for the amount of the total shortfall. Pursuant to this arrangement, all notes and security agreements, all of which are documented by paper transactions, are physically delivered to NLP. NLP does not file a financing statement with respect to this arrangement.

BCC is fully aware of, and has consented in writing to, the arrangements between NLP and CHIMI, in a document executed by BCC, CHIMI, and NLP. Under this agreement, the parties agree that all checks and cash payments made either as purchase price or as payments on any outstanding notes, are to be deposited in the lockbox account at Guatavita. The document does not require CHIMI to deposit to the Guatavita account disbursements from NLP to CHIMI which are made in connection with transfer of any note, secured or unsecured, to NLP; but the document does require that CHIMI notify BCC of the receipt of any such disbursements, and that CHIMI account to BCC for the disposition of any funds so received. It is also agreed, in a separate writing, among NLP, Guatavita, Bochica, CHIMI, and BCC that amounts due to NLP under the reimbursement agreement may be withdrawn from the account, on the instructions of NLP, without the consent either of BCC or CHIMI. In early 2010, CHIMI enters into certain financing arrangements with respect to sales to a second of its major customers, Chibchacum Patios, Inc. (CCCP). CHIMI makes cash and credit sales to CCCP identical to those made to Bochica. CHIMI enters into a credit arrangement with a firm called Cuza Capital, Inc. (Cuza), under which CHIMI borrows 85% of the face amount of the notes it pledges to Cuza, subject to a security agreement with Cuza. The term of each loan from Cuza matches the term of the notes pledged. CHIMI enters this arrangement, however, without informing BCC, nor does it describe the nature of its inventory financing with CHIMI to Cuza, about which Cuza does not otherwise know and about which Cuza does not inquire. In contrast to its practice with respect to sales to Bochica, CHIMI does not deposit checks or cash received from CCCP to the Guatavita lockbox. CHIMI does not inform BCC of the receipt of any notes or security agreements received on the sale of inventory to CCCP, and does not turn such documents over to BCC, but rather transfers them directly to Cuza, in exchange for cash disbursements from Cuza, and the execution of a note, subject to the terms described above, in favor of Cuza. Nor does CHIMI inform BCC of such sales to CCCP. Any cash received with respect to notes issued by CCCP is paid to Cuza without informing BCC. As in the case of the arrangements with NLP, Cuza takes possession of all notes and security agreements issued by CCCP and pledged to Cuza pursuant to Cuzas arrangement with CHIMI. In January 2012, CHIMI hires Alexander Humboldt, a 2009 law school graduate who had spent 2 years looking for his first job. Humboldt, who had studied in the most highly respected legal ethics program in Florida (if not the entire USA), in March 2012 expresses to CHIMIs senior management doubt about the manner in which CHIMI handles the proceeds of the Cuza loans. On April 4, 2012, CHIMI discharges Humboldt. On April 12, 2012, Humboldt discloses to BCC the nature of CHIMIs dealings with Cuza. On April 16, 2012, BCC declares CHIMI in default under CHIMIs loans. On April 18, repossession agents hired by BCC appear at CHIMIs various outlets, seizing all inventory and equipment.