PEPPERDINE UNIVERSITY SCHOOL OF LAW

FINAL EXAM:	Business Reorganization	TOTAL NO. OF QUESTIONS:	2

in Bankruptcy--

Essay Portion

SPRING 2002	TOTAL NO. OF PAGES:	5

PROFESSOR	Scarberry	TIME:	Two (2) Hours

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INSTRUCTIONS

1.	This portion of the exam consists of two essay questions and will count as two-thirds of your final examination grade. The multiple choice section will count one-third.

2.	You are permitted to use the casebook, the statutory supplement (annotated as you wish), your notes, and a calculator on this portion of the examination.

3.	Please use blue or black pen only (unless you are typing or using examsoft), and start each question in a separate bluebook.

4.	Thanks for making teaching worthwhile. (Well, this isn't an instruction, but I wanted to say it anyway.)

Essay I--1 Hour

DrillCo, a large corporation engaged in the business of drilling oil wells, filed its chapter 11 petition on May 12, 2001. After much negotiation with creditors, DrillCo filed its proposed plan of reorganization on October 1, 2001. SupCo, the holder of a large unsecured claim for drilling supplies sold to DrillCo, filed its own proposed plan on October 15, 2001. DrillCo had not previously obtained any relevant court order but moved on October 20, 2001 to have SupCo's competing plan stricken, arguing that SupCo had no right to file a plan. At a hearing held on November 5, 2001, the bankruptcy court refused to strike SupCo's plan but indicated that the issue could be reconsidered later. On December 15, 2001, the court approved DrillCo's disclosure statement.

On December 18, 2001, DrillCo mailed the following items to each of the creditors: (1) the disclosure statement, (2) a copy of its plan, (3) two ballot forms–one for DrillCo's plan and one for SupCo's plan–containing places for the creditors to indicate whether they were voting their claims to accept or to reject each plan, and (4) a cover letter urging the creditors to vote to accept DrillCo's plan and to vote to reject SupCo's plan. The cover letter said to mail the ballots to the clerk of the bankruptcy court.

On January 10, 2002, the court approved SupCo's disclosure statement. SupCo then sent its own mailing to the creditors, enclosing its disclosure statement, its plan, a ballot for its plan, a ballot for DrillCo's plan, and a cover letter. Not surprisingly, SupCo's cover letter urged creditors to vote their claims for SupCo's plan and against DrillCo's plan; it told the creditors to mail the ballots to the clerk of the bankruptcy court. SupCo's cover letter also revealed information not contained in either of the disclosure statements: DrillCo's president had once given a speech to a group of oil company executives stating that the most important goals of any executive should be to safeguard his or her job and to increase his or her salary.

The competing plans are fairly similar, except that SupCo's plan calls for replacement of all of DrillCo's officers and directors with new persons thought by SupCo to be more qualified. Each plan calls for general unsecured claim holders to receive, for each $100 of claim (1) $5 cash, (2) a seven year $10 promissory note payable with 10% annual interest, and (3) one share of stock in the reorganized DrillCo.

On March 15, 2002, the court held a hearing on confirmation of the DrillCo and SupCo plans for reorganization of DrillCo. Many of DrillCo's creditors had mailed ballots to the clerk's office; some used the ballots provided by DrillCo, and some used the ballots provided by SupCo. As you would expect, most of the creditors who used ballots supplied by DrillCo voted their claims to accept DrillCo's plan and to reject SupCo's plan. Most of the creditors who used ballots supplied by SupCo voted their claims to reject DrillCo's plan and to accept SupCo's plan. SupCo asked the court to designate (disqualify) all rejections of SupCo's plan that were voted on a ballot supplied by DrillCo. In turn, DrillCo asked the court to designate (disqualify) all the acceptances of SupCo's plan that were voted on SupCo supplied ballots and all the rejections of DrillCo's plan that were voted on SupCo supplied ballots. SupCo had also learned that TradeCo (one of DrillCo's trade creditors) had changed its mind and voted its claim in favor of DrillCo's plan and against SupCo's plan after DrillCo threatened to stop buying from TradeCo. SupCo specifically asked the court to designate TradeCo's votes.

DrillCo has once again asked the court to strike SupCo's plan; in effect this is a motion to reconsider the Nov. 5, 2001 ruling. CredCo, one of DrillCo's trade creditors whose votes are not being challenged, rejected both plans and objects to confirmation of either one, without regard to whether any or all classes may have accepted the plans.

You are the judge. You think it is fine for one who properly solicits acceptances or rejections to provide a ballot form to the person solicited. None of the parties disputes that as a general matter; their motions are on other grounds. You are also willing to reconsider your Nov. 5, 2001 ruling and to reverse your ruling if it was incorrect. Expert testimony indicates that the total reorganization value of DrillCo's assets (not including the cash that is on hand to pay the amounts that must be paid on the effective date) is $20 million. Under either plan the reorganized DrillCo will have $12 million in liabilities and 400,000 shares of stock outstanding. Expert testimony also suggests that the disclosure statements understated DrillCo's liquidation value. The disclosure statements said that general unsecured claimholders would probably receive about 20% payment in a liquidation; now it appears that the correct figure is about 28%.

Please explain how you will rule (and why you will so rule) on

(A)	SupCo's motions to disqualify votes;

(B)	DrillCo's motions to disqualify votes;

(C)	DrillCo's motion to strike SupCo's plan; and

(D)	CredCo's objection to confirmation.

Essay II--1 Hour

Dreary Towers LP ("DT") is a limited partnership which owns and operates a large office complex (the "Towers") consisting of three triangular office buildings. DT leases office space to law firms, accounting firms and others. DT bought the Towers three years ago using $25 million borrowed from Bank and gave Bank a properly recorded mortgage on the Towers to secure the loan.

A large accounting firm known as Anderdaughter was one of DT's major tenants but recently vacated the premises and ceased paying rent. As a result DT was unable to make its regular monthly mortgage payment to Bank. Bank accelerated the entire debt and threatened foreclosure. DT filed a chapter 11 petition yesterday. DT still owes Bank $24 million on the mortgage. It is not clear how much the Towers are worth. Some appraisers might value the Towers as high as $28 million, others as low as $20 million.

DT has retained your firm as its bankruptcy counsel. The partner in charge of the case is developing her strategy. It seems likely Bank will seek relief from the automatic stay within the next several weeks. If that happens she is considering arguing that the Towers are worth $28 million. She would like you to analyze briefly whether a successful argument for such a high value might later create difficulties in the case, for example, at plan confirmation time. She would also like you to analyze whether the bankruptcy court would be likely to grant relief from stay if the court concluded that the Towers were worth (a) $28 million, (b) $24.5 million, or (c) $20 million. She wants you to assume that DT is willing to pay Bank whatever is left over out of the rents received by DT after payment of expenses of operating and maintaining the Towers.

One of DT's managers told the partner that another accounting firm, Price-Waterhouse- Coopers (PWC) is interested in renting the space vacated by Anderdaughter. But PWC wants the following terms (1) a ten year lease with an option for another twenty years, (2) rent equal to what Anderdaughter was paying minus 10%, (3) the rent could not be raised during the entire ten to thirty years of the lease. The partner wants to know whether DT would need court approval before entering into such a lease with PWC.

Finally, the partner wants you to think about what should be included in your law firm's application to the court for approval to be hired as DT's counsel. DT's general partner Gil (who is in charge of managing DT's affairs under partnership law) owns a 35% interest in DT. Your law firm has represented Gil in the past and is considering whether to represent him in connection with the chapter 11 case. The partner wants a brief analysis of the problems that might be created if the firm represented Gil in connection with the chapter 11 case. Also, the partner wants to know whether the firm needs to disclose its past representation of Gil in its employment application, if it is not going to represent Gil in connection with the case.

You've developed the following information, which may be helpful to you in providing the requested analysis. Tenants in the Towers generally have three to five year leases, each of which provides for yearly increases in rent. Several tenants are worried about the bankruptcy case and are considering leaving when their leases are up. Business in the area is improving, but there still is quite a bit of open office space in buildings within a few miles of the Towers. Office buildings in the area usually lease space for one to seven years; very seldom is a lease as long as eight years, even including the entire period for which tenants may have options to renew their leases. Gil is not only DT's general partner; he also has another business which leases space from DT in the Towers. Gil's lease is at a very low rent. His lease will expire in about three months, and he intends to have DT renew it for another two years with no increase in the rent.

Please provide the partner with the requested analyses.