PEPPERDINE UNIVERSITY SCHOOL OF LAW

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

in Bankruptcy--

Essay Portion

SPRING 2000	TOTAL NO. OF PAGES:	4

PROFESSOR	Scarberry	TIME:	Two (2) Hours

____________________________________________________________________________

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. I will weight the essays equally in my grading of this portion of the exam.

2.	The exam is open book and open notes. You may use any written or printed material you wish on this exam, but you may not share materials you bring with other students. You are also permitted to use a calculator.

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

4.	Good luck! Have a good summer.

Essay I--1 Hour

It is now May 3, 2000. DreamCo, a corporation, is a mattress manufacturer. Owen owns 100% of DreamCo's shares and also is DreamCo's president and chairman of its board of directors. In late 1999, DreamCo and SpringCo, a manufacturer of coiled springs used in the manufacture of mattresses, entered into negotiations for sale of springs from SpringCo to DreamCo. DreamCo believed they had formed a binding contract for sale of 5,000 to 10,000 springs per month (as ordered by DreamCo each month) from January, 2000, through December, 2001. SpringCo believed that no binding contract was formed but that there was simply an arrangement under which DreamCo would submit an order for springs each month, and SpringCo would decide each month whether to accept the order. They had definitely agreed that any springs to be delivered would be delivered by SpringCo's trucks on the 8th of the month and that payment for the springs would be due 15 days after delivery. For four months, DreamCo submitted orders, and SpringCo delivered springs on the 8th of each month. DreamCo paid for the January and February deliveries on time, but still has not paid for the March or April deliveries. In fact, DreamCo filed a chapter 11 petition 5 days ago, on April 28, 2000.

On May 1, 2000, DreamCo ordered 7,500 springs from SpringCo; the order stated that DreamCo would pay for the springs on delivery by cashier's check, instead of 15 days after delivery, and would even pay the day before delivery, if SpringCo so requested. SpringCo hasn't decided yet whether to deliver the ordered springs, and would prefer not to deliver any springs until DreamCo pays for the March and April deliveries.

Also on May 1, 2000, DreamCo sought an order from the bankruptcy court authorizing DreamCo to borrow immediately up to $100,000 from FinanceCo, secured by a security interest in all of DreamCo's assets. DreamCo did not attempt to obtain unsecured financing before seeking the court's approval of the secured financing. One of DreamCo's gene-ral unsecured trade creditors, TradeCo, objected to the secured financing on several meritorious grounds. The bankruptcy court erroneously granted the order sought by DreamCo, and TradeCo filed a notice of appeal in the district court. TradeCo did not seek a stay of the order pending appeal, and on May 2, 2000, FinanceCo lent DreamCo $60,000. FinanceCo knew of the appeal when it lent the funds, but believed that the bankruptcy court's decision was correct.

Also on May 2, without seeking court approval or giving notice to creditors, DreamCo entered into a contract to sell 2,000 twin bed mattresses to RetailCo for $50 per mattress, with payment due 90 days after delivery. Other mattress manufacturers often sell several thousand mattresses under one contract and often grant 90 days' credit. DreamCo's usual past contracts with RetailCo and other customers have been for 500 to 750 mattresses at $65 per twin bed mattress, with payment due 45 days after delivery. Owen owns 100% of RetailCo's shares.

Please discuss the following questions, which continue on the next page:

A. Is SpringCo entitled to refuse to deliver to DreamCo the springs ordered by DreamCo on May 1? Will SpringCo violate the automatic stay if it states that it will deliver the springs only if DreamCo first pays for the March and April shipments? Please advise SpringCo, taking into account the fact that the court may or may not hold that DreamCo and SpringCo formed a contract for 24 months of deliveries of springs. Do not discuss the statute of frauds.

B. Should the district court dismiss TradeCo's appeal? Is there any relief that TradeCo could obtain by way of the appeal?

C. Suppose that a trustee is appointed in DreamCo's chapter 11 case, and that the trustee decides not to perform the contract with RetailCo. Will RetailCo's claim for breach of contract damages be an administrative priority claim?

Essay II--1 Hour

The Acme Partnership ("AP") is a limited partnership which owns and operates three office buildings located in three different cities: the North Office Tower ("NOT") in Northville, the South Office Tower ("SOT") in Southville, and the East Office Tower ("EOT") in Eastville. First Bank ("FB") has a $3 million mortgage which was properly recorded two years ago on NOT. NOT's market value is about $2 million. Second Bank ("SB") has a $5 million mortgage which was properly recorded two years ago on SOT. SOT's market value is about $7 million. Third Bank ("TB") has a $2 million mortgage which was properly recorded two years ago on EOT. EOT's market value is about $12 million. There are no other mortgages on NOT or SOT, but Last Bank ("LB") holds a $15 million second mortgage on EOT, which it properly recorded a year and a half ago. All of the mortgages were in default when AP recently filed its chapter 11 petition. Assume AP has made no postpetition payments to the Banks except as may be noted below. Assume the contractual interest rate on all the mortgages is 12% per annum simple interest, which is the same as 1% per month.

A week after AP's filing, FB, SB, and LB sought relief from the automatic stay so as to foreclose on their mortgages. FB argued in the alternative (1) that its mortgage was not adequately protected due to the lack of an equity cushion, (2) that its mortgage was not adequately protected due to the failure of AP to make payments to FB equal to interest on the $2 million value of its mortgage, and (3) that AP lacked equity in NOT and could not show by clear and convincing evidence that a quick, successful reorganization was likely. Assume LB made the appropriate arguments that its mortgage lacked adequate protection. Assume AP convinces the court that it is maintaining NOT and EOT properly. Assume the court believes it is impossible to determine whether NOT and EOT will appreciate in value over the near term or depreciate in value. However, AP admits that it is not performing normal maintenance on SOT, contrary to the terms of the mortgage held by SB, and that, as a result, SOT is highly likely to depreciate in value by $200,000 per month. AP states that it will begin performing normal maintenance on SOT in five months, which will likely stabilize the value of SOT at about $6 million.

If the court denies FB's motion, AP is considering whether to file a proposed plan of reorganization that will pay FB $24,265.52 per month for ten years (120 months) on account of FB's secured claim, which, according to mortgage tables, is the right amount to pay off a $2 million mortgage at 8% per annum interest over ten years. The plan will provide for FB to retain a lien on NOT for all of the payments required by the plan. AP is not at all sure it can get any impaired class of claims to accept the plan, but it is sure that the class of limited partners' ownership interests will accept it. Assume 8% is a fair market interest rate for the mortgage FB will have under the plan. Also assume FB will make the section 1111(b)(2) election to have its claim treated as wholly secured.

Please separately discuss each of the three motions for relief from stay. Also please discuss separately whether the plan AP is considering would be fair and equitable with respect to the class that will contain FB's secured claim; and whether the plan is eligible for a section 1129(b) cramdown if the only impaired class that accepts the plan is the class consisting of limited partners' interests.