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FINAL EXAMINATION May 2, 1998 Commercial TransactionsI Professor Neustadter 5 Questions The examination rules stated in the Student Handbook apply to this examination, except that this is a limited open book examination as described below. Instructions 1. This is a limited open book examination. During the examination you may consult the Keating loose-leaf casebook on sales, the Lopucki and Warren casebook on secured credit, Selected Commercial Statutes (or other copy of the Uniform Commercial Code), class handouts, and any notes, outlines, charts, or other form of written work product which you have prepared yourself or in cooperation with another student or students enrolled in the class. You may not consult any other sources. 2. Support your answers with explanation and analysis. 3. I look for ability to identify issues, demonstrated understanding of legal principles and relationships, skill in using the statutory law we have studied, accuracy, clarity and creativity of analysis, and organization and conciseness of response. 4. Time estimates stated for each question reflect the approximate weight given to each question. The estimates reflect my best guess as to the relative length or difficulty of a question for most students. The time estimates are: Question 1: 60 minutes Question 2: 45 minutes Question 3: 30 minutes Question 4: 30 minutes Question 5: 45 minutes Question 1 (60 minutes) Michon, the president of a new start up company in Silicon Valley, scheduled a catered dinner at her home to thank prominent venture capitalists for financing the company. In anticipation of the dinner, she ordered place settings for twelve of an expensive set of new china, at a cost of $15,000, from Chinaworks, after seeing the china (known as Mediterranean Blue) in a store display. Via Federal Express, Chinaworks delivered the china undamaged to Michon's home. At the time of delivery, only Michon's caretaker was in residence, Michon and her family having just left for a month long vacation. The caretaker left the boxes unopened next to the china cabinet in the dining room and left a telephone message for Michon at Michon's hotel that the china had arrived. Michon received the message but did not reply. The dinner was scheduled for the day following Michon's return from vacation. Upon her return, she instructed her caretaker to ask the caterers to unpack the china and set the dining room table because she would be home from work just in time to shower and dress for dinner. As Michon sat down to dinner with her dinner guests, she noticed for the first time that the pattern on some of the individual pieces of china was blurred, unlike the crisp images she remembered from the store display. However, she did not interrupt the dinner to replace the china with other china from the china closet because she felt it would be embarrassing and disruptive. During dinner, one of her guests, returning from a phone call, stumbled, grabbed the dining room table cloth to regain balance, and in the process knocked several pieces of china to the hardwood floor where they shattered. There had been no blurred patterns on the pieces of china that shattered. The next day Michon called Chinaworks to request that they replace both the shattered china and the china with blurred patterns free of charge. Chinaworks told her that the china had been discontinued and there was no more Mediterranean Blue in stock. Michon demanded return of the entire purchase price. When Chinaworks refused, Michon stored the four sets of china whose patterns were not blurred, donated the remaining china (which either contained patterns which were blurred or which were incomplete because of the breakage of remaining pieces of the set) to a homeless shelter, and had her lawyer send a demand letter to Chinaworks reiterating her demand for return of the purchase price. What rights and remedies, if any, does Michon have against Chinaworks?
Melida agreed to sell to Ruben a juke box for $2,500 which Ruben wished to use in his recently opened 1950's style coffee shop. Melida agreed to accept payment 30 days after delivery, but did not take a security interest in the juke box to secure payment. Prior to his purchase of the juke box, Ruben had obtained a $20,000 loan from Star Bank to fund acquisition of new kitchen equipment for the coffee shop. The loan was secured by a security interest in all of Ruben's equipment, including after acquired equipment. Ruben picked up the juke box and took it to his coffee shop. Within two days he took the juke box for repair to a company that both repaired and sold juke boxes. He did not return the juke box to Melida or seek her reimbursement for projected repair costs because he had initialed a conspicuous clause in the sales agreement with Melida which disclaimed all warranties, including any implied warranty of merchantability (using the word ``merchantability"). Later, an employee of the juke box company, not realizing that the juke box was to be repaired, sold the juke box to Cher for $3,000. A week after Ruben took delivery of the juke box from Melida, Ruben called Melida and asked her for a 6 month extension of time to pay for the juke box. He told Melida that road construction outside his coffee shop which had just started was severely depressing patronage, and hence revenues, at the coffee shop. Melida refused and the next day sent a written letter to Ruben demanding return of the juke box. Assuming that Melida discovers Cher's possession of the juke box, is Melida entitled to return of the juke box free of (a) Cher's claim? (b) free of Star Bank's claim? Start your analysis with 2-702.
Question 3 (30 minutes) Clara Hoffman is the sole proprietor of a publishing company that specializes in the publication of historical documents. She recently purchased a previously undiscovered set of letters written by John Steinbeck, famous 20th century American author. The letters were not copyrighted. Before publishing them, Clara agreed that they could stand as security for a $10,000 loan made to her best friend Nel by Nel's boss Peter Kerwin to help Nel pay for uninsured medical expenses. Clara and Peter took all steps necessary to create an enforceable security interest in the Steinbeck letters. Nel defaulted on repayment of the loan to Peter Kerwin. Clara voluntarily surrendered the Steinbeck letters to Peter Kerwin following Nel's default. Peter sold the letters to the local Steinbeck museum for $5,000 without having sought other bidders. Nel's debt to Peter at the time of sale of the letters was $10,000 and Peter incurred no costs in connection with the sale. Following sale to the museum, Peter sued both Clara and Nel for a $5,000 deficiency. To what extent, if at all, are Clara and Nel liable to Peter for a deficiency? In answering the question, assume that the jurisdiction has adopted amendments to Article 9 which read, in relevant part, as follows: ACTION IN WHICH DEFICIENCY OR SURPLUS IS IN ISSUE. (a) In an action arising from a transaction, other than a consumer transaction, in which the amount of a deficiency or surplus is in issue, the following rules apply: (1) A secured party need not prove compliance with the provisions of this part relating to disposition of collateral unless the debtor places the secured party's compliance in issue. (2) If the secured party's compliance is placed in issue, the secured party has the burden of establishing that the disposition of collateral was conducted in a commercially reasonable manner. (3) If a secured party fails to prove that disposition of the collateral was conducted in a commercially reasonable manner, the liability of a debtor for a deficiency is limited to an amount by which the sum of the secured obligation exceeds the greater of: (A) the proceeds of the disposition; or (B) the amount of proceeds that would have been realized had the noncomplying secured party proceeded in a commercially reasonable manner. (4) For purposes of paragraph (3)(B), the amount of proceeds that would have been realized is equal to the secured obligation unless the secured party proves that the amount is less than that sum. (b) The limitation of the rules in subsection (a) to transactions other than consumer transactions is intended to leave to the court the determination of the proper rules in consumer transactions. The court may not draw from that limitation an inference as to the nature of the proper rule in consumer transactions, and the court may continue to apply established approaches. DEFINITIONS. "Consumer transaction" means a transaction to the extent that: (A) an individual incurs an obligation primarily for personal, family, or household purposes; (B) a security interest secures the obligation; and (C) the collateral is held or acquired primarily for personal, family, or household purposes.
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Question 4 (30 minutes) Assume that we are still considering the uncopyrighted Steinbeck letters from Question 3, a loan from Nel's boss Peter to Nel secured by the Steinbeck letters held by Clara Hoffman, and an enforceable security agreement. However, assume the following somewhat different and additional set of facts. Clara Hoffman was a veterinarian, not a publisher. She discovered the Steinbeck letters in a trunk which her grandfather had given to her and was considering donating them to the local Steinbeck museum because ``these letters really don't belong to me, they belong to the country." Peter Kerwin was represented by a lawyer in connection with the loan transaction. Clara executed a financing statement prepared by Peter's lawyer which listed the name of the debtor as Clara Hoffman and which contained an accurate and complete statement of other information required in a financing statement. Peter's lawyer filed the financing statement with the office of the Secretary of State, in the State of Utopia, on June 1, 1998. You may assume that the law of the State of Utopia was the correct law to apply in determining how to perfect a security interest in the Steinbeck letters. The State of Utopia has adopted the 2nd alternative version of UCC 9-401(1). On July 1, 1998, Peter's lawyer filed another copy of the same financing statement with the appropriate office in the county where Clara lived. On September 15, 1998, Clara filed a Chapter 7 bankruptcy. On October 15, 1998, without having repaid Peter Kerwin, Nel filed a Chapter 7 bankruptcy, but shortly after filing the bankruptcy Nel executed a legally enforceable agreement reaffirming her debt to Peter Kerwin (i.e. a new post-bankruptcy promise to pay the debt). Did Peter Kerwin's lawyer commit malpractice?
Question 5 (45 minutes) Assume that we are still considering the uncopyrighted Steinbeck letters from Question 3 and a loan from Nel's boss Peter to Nel. However, assume the following somewhat different and additional set of facts. Clara, a veterinarian, had been going through the attic of her mother's home at her mother's suggestion because Clara had told her mother: ``I'd like to find some family heirlooms - - you know, like portraits, lamps, furniture or other stuff like that - - to decorate my home." Clara's mother had responded: ``Take what you want, but I might want to have some of it back one day." Clara found the Steinbeck letters beneath the lining of an old trunk stored in the attic. The letters had been written to Clara's grandfather and the trunk had passed to Clara's mother under the grandfather's Last Will and Testament. Without telling her mother about discovery of the Steinbeck letters, Clara took the trunk (letters included) and some other stuff from her mother's attic. A few weeks later, Clara loaned the letters to the local Steinbeck museum for display on condition that the museum not disclose the source of the letters. When Clara agreed that the letters could serve as security for the loan to Nel, Clara didn't want anything written down that would reveal her connection to the letters. So she, Nel, and Nel's boss did the following: (1) Nel signed a promissory note in favor of Peter Kerwin in the amount of $10,000; the note did not mention security; (2) Clara and Peter orally agreed that the letters would serve as collateral for Nel's obligation under the promissory note; (3) Peter and the museum orally agreed that the museum would return the letters to Clara only after confirming with Peter that Nel had repaid the loan. The parties took no other steps in furtherance of the transaction. Two months after the transaction described in the previous paragraph, Clara filed a Chapter 7 bankruptcy petition. From information disclosed in the bankruptcy forms which Clara filed with the bankruptcy court, the trustee learned all of the information described above. Nel had by then defaulted on the promissory note but as of the time Clara filed her bankruptcy petition, Peter had not obtained possession of the letters. In the appropriate bankruptcy proceeding, the trustee and Peter have asserted a claim to the Steinbeck letters. You are the judge. The parties await your ruling. As between the trustee and Peter, who gets the Steinbeck letters and why? Clara's mother might also have a claim to the letters, but do not discuss her rights in bankruptcy. Discuss her property rights in the letters, if she has any, if you think that her property rights might be relevant to the dispute between the trustee and Peter.
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