This is a three-hour examination. It consists of three questions. Your answer to each question will be given equal weight when computing the final grade. Allocate your time accordingly.

This is an open book examination. During the examination you may consult any written materials except materials checked out of the law library.

Assume that the 1995 official text of the Uniform Commercial Code is in force in all relevant jurisdictions unless you are otherwise expressly directed. Where the text sets out alternate provisions (e.g., Sec. 9-401(1)), assume that the second alternative is in force.

Read each question carefully. Organize your answer before you begin to write and emphasize those points you think are most significant. If you find an ambiguity or if you need more facts, make reasonable assumptions and state these clearly in your answer. Be concise. Be clear. Good luck!

American Computer Emporium (ACE) was incorporated in Texas in 1994. Until 1997 ACE owned and operated five computer "supermarkets" in Texas at which it sold and serviced computer hardware, software and related products.

When ACE incorporated First National Bank of Waco made it a loan for working capital. At that time ACE executed a promissory note in the amount of the loan and secured that note by a written security agreement granting the bank a security interest in its "present and future inventory." The bank promptly filed a properly-completed and signed financing statement with the Secretary of State in which the collateral is described as "inventory." Between 1994 and 1997 ACE paid interest but made no payments of principal on the note. The bank nevertheless allowed ACE to renew the note annually.

In late 1997 ACE ran into financial difficulty and its board of directors, in consultation with financial advisers and bank officials, decided to restructure the business. A new company ("ACE PLACE Inc.") was incorporated under Texas law and the old corporation was merged into the new corporation. In December 1997 the bank allowed ACE PLACE to renew the note signed by ACE but the bank did not ask ACE PLACE to execute a new security agreement or financing statement.

During 1998 ACE PLACE bought software inventory from a new supplier. The supplier sold the software on credit. ACE PLACE executed (1) a security agreement granting the supplier a security interest in the new inventory sold by the supplier and (2) a properly-completed financing statement. Before supplier delivered any software to ACE PLACE it notified the bank in writing that it planned to supply ACE PLACE with software inventory. The supplier also filed the financing statement with the Secretary of State.

After a disastrous Thanksgiving weekend of retail sales in November 1998, ACE PLACE defaulted on December 1 payments to both the bank and the supplier. The supplier's manager seeks your advice on whether it can take back the software it supplied to ACE PLACE and whether the supplier's rights are prior to any rights the bank might have.

Phil Davis is the sole proprietor of an "adventure tour" firm. The principal activity of the firm is to guide tours to remote parts of the world. Within the United States, the firm also organizes white-water rafting in Colorado and hot-air balloon tours in Arizona and New Mexico. Mr. Davis resides in Dallas but frequently leaves Dallas to lead tours or to supervise the rafting and balloon activities.

First National Bank of Dallas has provided working capital loans to Mr. Davis. To secure these loans, Mr. Davis executed a written security agreement granting the bank a security interest in all the firm's present and after-acquired accounts and equipment. The bank filed a signed financing statement covering this collateral with the Texas Secretary of State.

Mr. Davis has also bought some equipment on secured credit. For his air-balloon tours, for example, he purchased six of his hot-air balloons from a manufacturer in Illinois. In the contract of sale the manufacturer retained title to the balloons until full payment was made on all the balloons. Mr. Davis signed the sales contract and a financing statement. The manufacturer delivered the balloons to Phoenix, Arizona and two weeks after delivery it filed the financing statement with the Secretary of State in Arizona.

While being used in New Mexico, one of these balloons became entangled with an electric wire and one of the passengers was badly injured. The injury occurred six months after the balloons were delivered in Arizona. The injured customer sued Mr. Davis in an Arizona court and recovered judgment one year later. To satisfy the judgment, the sheriff in Phoenix levied execution on Mr. Davis' balloons, including the six balloons subject to the Illinois manufacturer's security interest. Soon afterwards, Mr. Davis heard from both the manufacturer and its Dallas bank that the judgment against him was an event of default under their respective security agreements.

The bank now consults you. Advise it on the relative rights of the claimants to the six balloons.

In 1995 Donald opened a revolving credit card account at Shears. The "Shearscharge Agreement" provided that Donald granted a security interest in every item purchased on credit from Shears to secure all outstanding debts owed by Donald to Shears. Donald subsequently used the card for purchases of clothes and household items. He maintained a relatively low outstanding balance and he carefully kept all the credit card slips.

In 1997 Donald purchased a boat to use for recreational fishing. He made a down payment and charged the rest to his Shears account. The charge slip set out quantify (One), the catalog identification for the boat (AVD1-H2P), and the price ($6,500). Donald signed at the bottom of the front of the credit card slip. On the back of the slip, as usual, was the following legend:

PURCHASED UNDER MY SHEARSCHARGE AGREEMENT, INCORPORATED BY REFERENCE, I GRANT SHEARS A SECURITY INTEREST IN THIS MERCHANDISE UNTIL PAID, UNLESS PROHIBITED BY LAW.

Donald did not read the back of the slip.

Donald used the boat in 1997 and 1998 but after he lost his job in July 1998 he failed to make the usual minimum payments on the Shears account. After requesting and not receiving full payment of the account, Sears sent an independent "repo" man to repossess the boat. Acting at night and using wire clippers to cut through the fence of the marina where Donald kept the boat, the repo man broke the lock retaining the boat to a mooring, removed the boat, and delivered the boat to Shears the next morning.

Donald consults you about what rights and remedies, if any, he might have. Advise Donald.