Multiple Choice Questions (50 percent)
1. On January 1, Bank loans $3 million to Debtor, and Debtor grants to Bank a security
interest in all of Debtor’s accounts receivable. On February 1, Debtor files for bankruptcy.
Five days later, Bank files a financing statement against Debtor in the Secretary of State’s
office. Which statement is true?
a. The original grant of a security interest is a voidable preference because it was
within 90 days of bankruptcy.
b. The filing in the Secretary of State’s office is a fraudulent conveyance because it
will “hinder, delay, or defraud” Debtor’s other creditors.
c. The Bank’s set off rights against the accounts receivable are valid even though the
Bank’s security interest runs afoul of the strong arm clause.
d. The filing violates the automatic stay.
2. On August 1st, Franklin Inc., which is in the business of selling kites, sells its outstanding
supply of plastic sheeting to Orville Inc. for $2 million. At the time the market price of the
plastic wrap is $5 million. On November 18, Franklin Inc. files for bankruptcy. Which
statement below is true?
a. The debtor in possession may not recover the plastic because the property was
transferred outside of the 90-day preference period.
b. The debtor in possession may not recover the plastic because as a result of the sale
to Orville, Inc. it is no longer property of the estate.
c. Provided that Franklin Inc. was insolvent on August 1st, the debtor in possession
can recover the plastic wrap as a fraudulent conveyance but only if Orville
purchased it in bad faith.
d. If Franklin recovers the plastic Orville will have a lien on the plastic for $2 million.
3. SlumLord LLC operates an apartment building, which it owns. SlumLord owes Bank $1
million, secured by a non-recourse mortgage on the apartment building. In addition,
SlumLord owes $10,000 to various trade creditors. Due to a depressed housing market,
the apartment building, which was previously valued at $1.5 million is now worth only
$500,000. SlumLord files for bankruptcy and proposes a plan in which Bank will be paid
$500,000 in cash immediately, the trade creditors will be paid in full, and SlumLord will
retain ownership of the apartment building. May the plan be confirmed over Bank’s
objections?
a. No. The plan unfairly discriminates by paying the trade creditors in full while
paying Bank only a third of the value of its claim.
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b. No. Bank can vote against the plan, and to cram down there must be at least one
class of impaired creditors that votes in favor of the plan.
c. Yes. Bank is not impaired under the plan and thus is deemed to have accepted it.
d. Yes. Bank receives at least as much under the plan as it would receive in a chapter
7 liquidation, thus satisfying the “best interests” test.
4. F-Mart is a struggling retailer. Bank has a security interest in all of F-Mart’s inventory.
Much of the inventory is sold on credit. F-Mart then uses the proceeds of these sales to
purchase additional inventory. F-Mart has filed for bankruptcy. May it continue to use its
cash flows to purchase inventory without seeking the permission of the court?
a. Yes, the purchase of inventory is in the ordinary course of business.
b. Yes, the Bank is fully protected because it continues to have a security interest in
the inventory purchased by F-Mart’s customers.
c. No, the sale threatens Bank’s position as a secured creditor.
d. No, F-Mart must first seek the permission of the bankruptcy court before making
major purchases like the replenishment of inventory
5. Shortly after filing for bankruptcy, Skruggs Inc. purchases 300 banjos from Flatt Inc. When
Skruggs Inc. fails to pay for the banjos as promised, Flatt Inc. seeks to sue Skruggs Inc. in
state court. May it do so?
a. Yes. Flatt has the right to litigate his claim to judgment notwithstanding the
automatic stay.
b. No. The suit is an effort to collect a debt and is thus forbidden by the automatic
stay.
c. No. Flatt must file a claim in bankruptcy court rather than suing in state court.
d. Yes, but only if Flatt can show that the state has a special regulatory interest in the
sale of banjos.
6. XYZ Inc. is in Chapter 11 and is seeking to confirm its plan of reorganization. It has three
classes of secured creditors: Class A, consisting of 3 banks who made a total of $5.6
million in loans to XYZ Inc; Class B, consisting of all of XYZ Inc’s bond holders whose
outstanding bonds have a face value of $15 million; and, Class C, consisting of all other
creditors, a heterogeneous group of 2,463 individuals and corporations with claims totaling
$3 million. The plan calls for paying Class C 100 cents on the dollar in cash upon
confirmation. Class A will receive notes with a total value of $2.8 million. Class B will
receive a new bond with a value of 25 cents and 3 shares in new equity for every bond with
a face value of $1. Class A and Class B have voted to accept the plan. Class C, however,
did not vote to accept the plan and a majority of its members object to the plan.
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a. The plan should be approved because all classes have accepted the plan.
b. The plan should be rejected because it is not “fair and equitable”
c. The plan should be rejected because it violates the absolute priority rule.
d. The plan should be rejected because all creditors should share equally through new
equity in the future profits of the firm.
7. Able owns a Stradivarius violin, which he contracted to rent to Baker for a single
performance in return for $2000 paid by Baker up front. Able repudiates the contract and
Baker successfully sues in state court. The court finds that it is impossible to calculate
Baker’s damages and issues an injunction commanding Able to make the violin available
to Baker on the day of the performance. Able then files for bankruptcy. May Baker petition
the state court to enforce its injunction against Able?
a. No. The automatic stay stops all legal actions against Able.
b. No. Baker must file a claim for money damages and proceed in bankruptcy court.
c. Yes. Able’s obligation to comply with the injunction is a regulatory obligation.
d. Yes. Baker’s right against Able is not a “claim” because it cannot be reduced to an
obligation to pay money.
8. Barn has a contract with Investor to board Investor’s racehorses for 12 months in return for
$2400 to be paid in advance. Investor has paid $2350 to Barn before filing for bankruptcy.
May Investor assume the contract with Barn?
a. No. Under ordinary contract law principles Barn could not be required to accept
performance from anyone other than Investor because this is a personal contract.
b. Yes. The right to board the racehorses at Barn is property of the estate and a
valuable asset that should be available to Investor’s creditors provided that Investor
can pay the $50 that he owes under the contract.
c. Yes. This is an executory contract and Barn may not walk away because of
Investor’s insolvency.
d. No. This is not an executory contract.
9. Under ABC Inc.’s Chapter 11 plan, Class A and Class B both consist of unsecured creditors
with the same level of priority. Class A will be given 75 cents on the dollar for their claims
in cash up front. Class B will be paid with a mixture of 25 cents on the dollar in cash up
front and bonds with a discounted present value of 50 cents per dollar. Does the plan
unfairly discriminate between the classes?
a. No. Because both classes consist of unsecured creditors, neither class is entitled to
full payment.
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b. Yes. Because the bonds will be paid out over time they are less valuable than cash
and thus the absolute priority rule is violated.
c. No. Class B and Class A both receive the same value on their claims.
d. Yes. Class B and Class A are treated differently despite having the same priority.
10. XYZ Corp. is in Chapter 11 bankruptcy. The debtor in possession proposes four classes
of creditors. Class A consists of all of XYZ Corp.’s ordinary bondholder, who hold
unsecured claims. Class B consists of XYZ Corp.’s founder and CEO, who made a $1
million unsecured loan to XYZ to provide start-up capital. Claim C consists of all of XYZ
Corp.’s “junk bondholders,” who hold subordinated unsecured claims. Class B consists of
Bank, who is owed $300,000 on a revolving line of credit secured by XYZ’s inventory.
Bank challenges the proposed classification.
a. The judge should reject the proposed classes because all of the bondholders should
be in a single class.
b. The judge should reject the proposed class because Class B appears to be
gerrymandered to generate a positive vote on the plan.
c. The judge should allow the proposed classes because they follow the distinction
between creditors’ priority.
d. The judge should allow the proposed classes because the classes are defined by the
manner in which the underlying claims arose.
11. Jack accidentally ran over Jill in his 4×4 while fetching a pail of water, causing serious
bodily injuries. Jack was drunk. At the time, he owed $500,000 to his cousin Vinny on a
gambling debt. (The debt is legally recognized under the law of the State of Wythe, which
applies to the transaction.) On April 13, 2019, Jill sues Jack for negligence. On July 15,
2019, before Jill obtains a judgment, Jack granted to Vinny a mortgage on his farm,
Blackacre, saying “I am going to lose to Jill, and I know that you are supporting Grandma.
Blackacre is worth at least $500,000 and I would be devastated if Grandma was to starve
because of me.” On February 5, 2020, Jill obtains a $1 million judgment against Jack and
obtains a judgment lien on all of Jack’s property, although the court stays any effort to
foreclose on the lien pending Jack’s appeal. Jack spends the next year unsuccessfully
appealing the verdict, and on February 3, 2020 files for bankruptcy. May the trustee
recover the mortgage on Blackacre?
a No, because Jill’s claim has a statutory priority in distribution under the
bankruptcy code.
b No, because the transfer was made outside of the 90-day preference period.
c Yes, because there is a federal policy favoring victims of drunk driving over
holders of gambling debts.
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d Yes, because the transfer to Vinny was made with the actual intent to defraud
Jill.
12. On June 1, Bank obtains a security interest in ACME Corp.’s equipment and files a
financing statement in the Secretary of State’s office. On July 3, victim obtains a tort
judgment against ACME Corp. and obtains a judgment lien against ACME Corp.’s
equipment. On August 1, ACME Corp. files for bankruptcy. On that day, the equipment
has a value of $100,000, Bank is owed $500,000, and Victim is owed $100,000. The
debtor-in-possession discovers that Bank failed to properly describe the equipment in its
financing statement and uses the strong-arm clause to avoid the security agreement. Which
statement is true?
a. Bank continues to have a secured claim because it is over secured.
b. Bank must provide the debtor-in-possession with adequate assurances in order to
retain its secured claim.
c. Victim’s judgment lien is given priority in the equipment over ACME Corp.’s
unsecured creditors under the Butner principle.
d. The equipment will now be used to satisfy the claims of all of ACME Corp.’s
unsecured creditors.
13. Manufacturer has purchased $1 million of iron ore from Mine on credit. On August 1st
,
Mine obtains a judgment against Manufacturer on the debt and gets a lien on
Manufacturer’s factory. Mine, however, is in financial distress, and seven days later
Manufacturer purchases $1 million of Mine bonds from a frustrated investor for $750,000.
A month later, Manufacturer, in conjunction with other Mine creditors, successfully
petitions the court to declare Mine bankrupt and the bankruptcy court appoints a trustee.
Which statement is true?
a. The automatic stay precludes Manufacturer from exercising its rights under the
judgment lien.
b. Manufacturer may claim a set-off right of $1 million against its debt to Mine.
c. Manufacturer’s set-off rights are valid, but only up to $750,000.
d. Manufacturer holds an unsecured claim of $1 million against Mine and no set-off
rights.
14. On April 1, Debtor owes Bank $100,000 and has an account with Bank containing
$243,371.83. On April 15, Debtor writes a check to the IRS for $213,371.83 in payment of
taxes. On April 30, Debtor makes a payment to Bank of $20,000 from a separate account
with Broker. On May 15, Bank credits $3,500 to Debtor’s account as payment of interest
and return of fees erroneously taken from the account by Bank a year previously. On June
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1, Bank sets off the full amount of the account against Debtor’s loan. On June 15, Debtor
filed for bankruptcy. Which statement is true?
a. The trustee may recover the full amount of the set-off as a voidable preference.
b. The trustee may recover $13,500 from the Bank.
c. The trustee may recover $30,000 from the Bank.
d. The trustee may recover $23,500 from the Bank
15. On January 1, Pyro purchased bonds issued by Debtor with a face value of $100,000 for
$25,000. On February 1st, Pyro negligently lights Debtor’s field on fire. Bank, concerned
that the fire will make Debtor unable to repay money owed to Bank, calls its loan and
begins foreclosing its mortgage on Debtor’s field. Debtor promptly files for bankruptcy. A
month later, Debtor successfully sues Pyro in the bankruptcy court for the fire and obtains
a judgment of $500,000. May Pyro claim an offset against the judgment based on its bonds?
a. No. The judgment was rendered post-petition.
b. No. Tort claims cannot be offset against ordinary debts.
c. Yes, but only for $25,000.
d. Yes, for the full $100,000 face value of the bonds.
16. Debtor has a long-term supply contract with Oil Corp. that fixes the price of fuel at $0.80
per gallon and allows the Debtor to purchase “no less than 10,000 gallons of fuel and no
more than 50,000 gallons by October 1, 2017.” The contract also provides that “neither
party to this contract may assign, delegate, or transfer any right or duty under this contract,
nor may Debtor resell any fuel acquired under this contract.” The contract was signed on
October 1, 2015, and by February 1, Debtor had ordered and paid for 3,583 gallons of fuel.
On that date, Debtor filed for bankruptcy. May Debtor sell its rights under the contract to
a third party?
a. No. This is not an executory contract under the Countryman test.
b. No. The contract prohibits the Debtor from reselling the fuel and the Butner
principle requires that this obligation be unchanged by bankruptcy.
c. No. Because Oil Corp. could not be required to accept performance from someone
other than Debtor, the contract may not be assumed.
d. Yes. The contract may be assumed and assigned in bankruptcy.
17. Baker sells Blackacre to Able for $5,000. The contract of sale grants to Baker an option to
repurchase Blackacre at any time prior to August 1, 2018, for $10,000. If Baker exercises
the option, title to Blackacre automatically transfers to Baker and he has one year in which
to pay the purchase price. Finally, the contract provides that in the event of Able filing for
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bankruptcy, the option is automatically triggered unless Baker provides written notice to
the contrary within seven business days. In April, 2016, Able files for bankruptcy and
Baker does not provide any written notice within the seven-day period. Which statement
is true?
a. Blackacre is no longer property of the estate, but the estate does have a $10,000,
claim against Baker.
b. Unless assumed under 365, the option contract is rejected, giving Baker a
prepetition claim for damages and relieving Able of all obligations under the
contract.
c. Blackacre remains property of the estate because the contract as written is
unenforceable under the bankruptcy code.
d. (b) and (c) are both true.
18. XYZ Corp. manufacturers banjo strings. It has a requirements contract with Wire Inc.,
under which Wire Inc. agrees to supply all of the wire demanded by XYZ Corp. at a fixed
price of $0.03 per inch for a period of 5 years. Any wire ordered must be paid for within
60 days of the order. In the event of insolvency or “any other good faith basis for Wire
Inc.’s insecurity under this agreement,” all purchases will be for cash on delivery. The
contract also states that in such a case, Wire Inc. may, at its discretion, increase the purchase
price on wire to $0.05 per inch. 3 years after signing the contract, XYZ Corp. files for
bankruptcy. It then cures all defaults under the agreement and assumes the contract. Wire
Inc. does not alter its prices but does demand cash on delivery.
a. Having assumed the contract, XYZ Corp. must now abide by its terms and pay Wire
Inc. COD.
b. The contract would be invalid under the bankruptcy code had Wire Inc. tried to
raise its prices but will be enforced as written at the $0.03 per inch price.
c. Wire Inc. may demand COD, but XYZ has a right offset the purchase price by any
damages suffered as a result.
d. XYZ Inc. is entitled to pay for wire purchases within the 60-day period rather than
COD.
19. ABC Inc. owes $1 million to Investor. On June 1, ABC Inc. incurs $1 million of
indebtedness to Bank. However, rather than paying money to ABC Inc., Bank pays $1
million to Investor. On July 1, ABC Inc. files for bankruptcy.
a. As debtor-in-possession, ABC Inc. may recover the $1 million paid to Investor as
a voidable preference.
b. As debtor-in-possession, ABC Inc. may avoid the debt to Bank as a fraudulent
conveyance because it never received any cash in return for the debt.
c. Bank has a claim for $1 million against ABC Inc. and Investor may not be sued.
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d. Investor must return the $1 million to ABC Inc. but has a set-off right against Bank
for the amount of its loan.
20. Payment Masters, Inc. provides “payroll management services” to large corporations. It
has a $1 million revolving line of credit with Bank, which is partially secured by Payment
Masters Inc.’s $500,000 in outstanding accounts receivable. In addition to the receivables,
Payment Masters Inc. owns an office building valued at $1 million. On January 13, Client
Corp. sues Payment Masters, Inc. alleging that they embezzled $2 million of Client Corp.’s
money. On July 3, Client Corp. gets a $2 million judgment against Payment Masters, Inc.
and records a judgment lien against all of its real property. Six weeks later Payment
Masters, Inc. files for bankruptcy. Which statement is true?
a. The debtor in possession may void Client Corp.’s judgment lien as a voidable
preference.
b. The debtor in possession may not void Client Corp.’s judgment lien as a voidable
preference because it arose simultaneous with the judgment.
c. The debtor in possession may void Client Corp.’s judgment lien under the strongarm clause.
d. The debtor in possession may not void Client Corp.’s judgment lien unless Bank
would be able to void the judgment lien under applicable state law.
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Essay Question (50 percent)
Flixnet provides a video streaming service focused on classic horror films and romantic comedies.
It has approximating 1,500 copyright licenses from movie studios that allow it to stream films for
the next five years. Under the terms of the contracts, Flixnet pays the studio fees based on the
number of views of the studio’s films each month. For their part, the studios remain free to license
the copyrights to third parties, but if any of those third parties are video streaming services, the
studios agree to pay 3 percent of any resulting licensing fees to Flixnet as a “competition loss
abatement bonus.”
Facing stiff competition from other video streaming companies and a falling demand for horror
movies from the 1970s, Flixnet files for bankruptcy. Its library of copyright licenses includes 153
films from various studios that Netflux, one of its competitors, has long wished to stream. The
studios have, however, refused to license the films to Netflux directly because of concerns about
being associated with Netflux’s core business, which consists of Albanian porn movies.
In order to continue to operate in Chapter 11, Flixnet proposes that it assume all its copyright
license agreements. In addition, it wishes to assign its rights under 153 of the licenses to Netflux
for a considerable profit. Since the studios negotiated their original license agreements with
Flixnet, the market value of video streaming rights has increased markedly. Accordingly, the
studios object to Flixnet’s efforts to assume the contracts. They hope of renegotiate more favorable
fee arrangements. In addition, they strenuously object to the assignment of any licenses to Netflux.
May Flixnet assume the contracts over the objections of the studios? May it assign the 153 licenses
to Netflux?
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