Fact Patterns 2

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Commercial Law I April 24, 2012Professor Langbein

Examination Preparation Materials

Fact Pattern 1 (40 questions)

Cranberry Enterprises, Inc. (CEI) is a Delaware corporation engaged in the business ofmanufacturing 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 yearsafter the closing date. CEIs obligation was secured by a security agreement which described thecollateral 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 theOffice 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), tofinance the acquisition of additional manufacturing equipment. The funds were disbursed by a wiretransfer on that date to Butterfly Tractor, Inc. (Butterfly), the vendor of the equipment. On September18, the equipment was delivered to CEI. On September 26, CEI placed the equipment in a facility ownedby Butterfly, where it was nevertheless used by CEI. On the same date, ILL notified Butterfly that ILLclaimed a security interest in the equipment. On September 30, Butterfly sent ILL a letter acknowledgingreceipt 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 ofConstantinople (BOC); and issuing a note to RISS in the amount of $1.2 million. The note to BOC wassecured by a security agreement dated December 4, 2010, which described the collateral as allinventory 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. CEItook delivery of the property on December 12, 2010. On December 2, 2010, RISS sent a letter to PBN


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stating that RISS intended to take a security interest in the acquired inventory, which PBN received onDecember 6, 2010. On November 28, 2010, BOC sent a similar letter, which PBN received on December3, 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 thecollateral as all inventory of CEI.

Blueberry Enterprises, Inc. (BBEI) was a Delaware corporation engaged in the business ofdeveloping and distributing computer video games. On April 15, 2005, BBEI borrowed $4.15 millionfrom Unstabank, N.A. (UBN). BBEI issued a note in that amount, payable in full 15 years after theclosing date. BBEIs obligation was secured by a security agreement which described the collateral asall equipment, inventory, accounts, deposit accounts, general intangibles, and fixtures, whether nowowned or hereafter acquired held by BBEI. UBN filed a financing statement with the Office of theSecretary of State of Delaware on May 9, 2005, describing the collateral as all personal property ofBBEI.

On January 6, 2011, BBEI and CEI filed articles of merger with the Office of the Secretary ofState of Delaware. Pursuant to this filing, BBEI and CEI were merged into CEI as of midnight, January7, 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.


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Fact Pattern 2 (20 questions)

Chiminigagua Mart, LLC (CHIMI) is a Florida limited liability corporation engaged inbusiness as a wholesale furniture distributor, which sells items of furniture to various retailers. CHIMIholds substantial inventory, most of it financed by Bachue Capital Corp. (BCC). Most of the inventoryis held in a warehouse in South Carolina. Under the terms of this arrangement, upon placing an order forinventory, CHIMI directs the invoice of its vendors to BCC, which pays the vendor. BCCs floor planlending arrangement is secured by a security agreement dated April 4, 2008, which describes thecollateral as all inventory, chattel paper, instruments, accounts, deposit accounts, and paymentintangibles, now owned or hereafter acquired by CHIMI. Under the terms of the arrangement, CHIMI isrequired, upon sale of an item of inventory subject to the security agreement, to forward a copy of theinvoice 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 theaccount). Any checks received are also to be deposited in this account, and no other funds are permittedto be deposited to the account. BCC also requires that all leases, notes, or other evidences ofindebtedness issued by customers are to be turned over to BCC, and copies of all credit card receivablesare to be sent to BCC, and payments on the receivables are to be deposited to the lockbox account. Thesecurity agreement provides that any failure to turn over any such document to BCC constitutes an eventof 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 BoBama (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 ofFlorida. Bochicas management office is located in Augusta, Georgia, where it conducts most of itsprocurement 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 NorthAugusta, 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 securityagreement. The terms of the notes range from one to five years. CHIMI regularly sells the notes and anyaccompanying security agreements to Nemcatacoa Leasing Partners, LLP (NLP), a South Carolinalimited partnership, for an amount of cash equal to 92% of the face amount of the note. The securityagreement 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 thisarrangement, all notes and security agreements, all of which are documented by paper transactions, arephysically delivered to NLP. NLP does not file a financing statement with respect to this arrangement.


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BCC is fully aware of, and has consented in writing to, the arrangements between NLP andCHIMI, in a document executed by BCC, CHIMI, and NLP. Under this agreement, the parties agree thatall checks and cash payments made either as purchase price or as payments on any outstanding notes, areto be deposited in the lockbox account at Guatavita. The document does not require CHIMI to deposit tothe Guatavita account disbursements from NLP to CHIMI which are made in connection with transfer ofany 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 soreceived. It is also agreed, in a separate writing, among NLP, Guatavita, Bochica, CHIMI, and BCC thatamounts due to NLP under the reimbursement agreement may be withdrawn from the account, on theinstructions 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 secondof its major customers, Chibchacum Patios, Inc. (CCCP). CHIMI makes cash and credit sales to CCCPidentical to those made to Bochica. CHIMI enters into a credit arrangement with a firm called CuzaCapital, Inc. (Cuza), under which CHIMI borrows 85% of the face amount of the notes it pledges toCuza, subject to a security agreement with Cuza. The term of each loan from Cuza matches the term ofthe notes pledged. CHIMI enters this arrangement, however, without informing BCC, nor does itdescribe the nature of its inventory financing with CHIMI to Cuza, about which Cuza does not otherwiseknow and about which Cuza does not inquire.

In contrast to its practice with respect to sales to Bochica, CHIMI does not deposit checks or cashreceived from CCCP to the Guatavita lockbox. CHIMI does not inform BCC of the receipt of any notesor security agreements received on the sale of inventory to CCCP, and does not turn such documents overto BCC, but rather transfers them directly to Cuza, in exchange for cash disbursements from Cuza, andthe execution of a note, subject to the terms described above, in favor of Cuza. Nor does CHIMI informBCC of such sales to CCCP. Any cash received with respect to notes issued by CCCP is paid to Cuzawithout informing BCC. As in the case of the arrangements with NLP, Cuza takes possession of all notesand security agreements issued by CCCP and pledged to Cuza pursuant to Cuzas arrangement withCHIMI.

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 managementdoubt 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 CHIMIsdealings with Cuza. On April 16, 2012, BCC declares CHIMI in default under CHIMIs loans. On April18, repossession agents hired by BCC appear at CHIMIs various outlets, seizing all inventory andequipment.

Documents

Fact Patterns 2