Problem 1: Does Article 2 of the Code apply in the following matters?(a) The sale of an insurance policy?      This is not a good. Although it is movable and tangible, it is a thing in action, which means that the only way to recover money owed to you is to bring an action or claim for the money you are entitled to.

(b) The sale of real property? The sale of a house apart from the realty?      This is not a good, but the sale of a house is a good under 2-107.

(c) The sale of building materials as part of a construction project?      This is a hybrid sale and will be discussed in the following cases.

(d) The sale of standing timber? Or crops?      This is a good under 2-107.(2)

(e) A defective spinal plate given a patient in a hospital operating room? The preparation of false teeth by a dentist? The injection of a drug (for which the patient was separately billed) into a patient’s eye as part of an operation?      The court said the first two are not goods, but services provided. However, the court said that an injection of a drug, which patient was separately billed, into a patient’s eye as part of an operation is a good.

(f) The sale of membership in a health spa?      This is not a good, its a service.

(g) The sale of the entire assets of a clothing store?      Even though Article 6 applies because this is a bulk sale, Article 2 also applies because these are goods.

(h) The sale of electricity?      This is a good.  

Problem 2 Portia Moot, a third year law student, sold her car to a fellow student. Does Article 2 of the UCC apply to this transaction? Would §2-314 apply to the sale?      Article 2 applies because this is a good; it is irrelevant that she is not a merchant. Article 2 applies to consumers also. However, §2-314 doesn’t apply because Portia is not a merchant in goods of this kind; this was a one-time sale.  

Problem 3:Are the following persons merchants?(a) Amanda, who quit her teaching job on Friday and on Monday opened a hat store?      Yes, there is no grace period. On Monday she is b/c she satisfies the 1st part of 2-104

(b) Tom Tiller, a farmer selling his produce to a wholesaler?      Produce is a good, if this is something that the farmer usually does, always sells produce, and then he is a merchant.  

CONTRACT FORMATION

Problem 6: On Dec 10, Ross, president of Ross Ice Cream, phoned Scott, president of Amundsen Ice Company, and negotiated the purchase of two tons of ice from Amundsen at $256/ton. As they talked on the phone, Scott picked up a memo pad enscribed “Amundsen Ice Company From the Desk of the President,” wrote on it “2 tons Ross Co.,” and then scribbled his initials on it. When the parties hung up the phones, Scott placed the memo on a spindle marked “Orders.” Ross wrote Scott a letter beginning “Dear Bob: this is to confirm our ice purchase deal . . . ,” which described their transaction completely. Scott received the letter on Dec 14.

On Jan 17, Scott phoned Ross and denied the existence of the contract and detailed in the Ross letter. Answer these questions:

(a) Does the memo pad note satisfy §2-201(1)?       Yes, it is a writing indicating the contract and signed (initials = signature) by Scott, the party against whom the enforcement is sought. .

(b) What legal effect did the Dec 14 letter have? Same result if Ross’s letter failed to mention the quantity? Even if the letter satisfies the SOF, is it conclusive as to the existence and terms of the contract?      It is a written confirmation under §2-201(2) and binds Scott because he didn’t object in writing within 10 days of receipt. If the confirmation didn’t mention quantity, it wouldn’t be effective because it doesn’t satisfy §2-201(1). No, satisfying the SOF just allows you to go to trial, it doesn’t prove your case.

(c) Did Scott’s denial of the terms contained in Ross’s letter avoid the operation of §2-201(2)? Suppose Scott had immediately written Ross a letter stating, “You haven’t stated the terms correctly. We only agreed to sell you 1.5 tons.” Would that letter be sufficient notice of objection?      No, he had to deny in writing. If he wrote a letter it would be a valid objection to the quantity, not the contract.

(d) If there had been no confirmation letter, suppose Ross files suit and Amundsen responds with a demurrer, may the trial court judge dismiss on the pleadings? If Scott admits the K formation in a deposition, would §2-201(3)(b) be satisfied? Does §2-201(3)(b) always require the judge to permit the matter to go to trial?      No, because there is still the spindle order form initialed by Scott to evidence the formation of a contract, this should satisfy the SOF. If Scott admits the K, §2-201(3)(b) would be satisfied.  

STATUTE OF FRAUDS

Problem 7: The city manager of Thebes, Utah, which is world-famous for its beautiful desert golf course, orally ordered a huge water tank to be made in the shape of a golf ball on a tee from Tanks of America. The price was agreed to be $30,000, and the city sent Tanks a down payment check of $3000, signed by the city comptroller and market “Tank” on the memo line. Tanks of America built the tank and were in the process of painting “City of Thebes” on the side when a representative of a newly elected city administration called and said that the new administration considered the K unenforceable. (a) Does the check satisfy §2-201(1)? Where is the quantity?      By putting “tank” on the memo line, this evidences the existence of a contract. If a quantity isn’t stated, the court presumes (on checks) that the quantity is one. So this satisfies §2-201(1). 

(b) What legal argument can Tanks make based on §2-201(3)(a) and 2-201(3)(c)? Does the City of Thebes have a good response to the §2-201(3)(c) argument?      Under 2-201(3)(a) the contract is still enforceable because the Tank is a one of a kind specially created for the buyer and not suitable for others in the ordinary course of seller’s business and the seller has partially performed already.  Under §2-201(3)(c) they could argue that they have accepted payment already, Thebes can’t really argue that they didn’t give a full payment to get out of §2-201(3)(c) because a court will usually enforce the contract when one payment is made on the sale of one item.

(c) If the city had promised to sign a written contract but had never gotten around to doing so, can promissory estoppel or equitable estppel be used to circumvent §2-201?       Yes, the code says unless it is specifically excluded from §2-201.  

Problem 8: Tomorrow, computer company, and Systems Unlimited, company specializing in advising other companies how to maximize their computer operations, entered into a written joint venture K by which Tomorrow promised to design and sell to Systems software that would enable the latter’s customers to receive engineering drawings by phone. The parties agreed that their arrangement was “non-exclusive” (meaning

either was allowed to deal with other buyers and sellers of the same product). The K described the obligations of the parties in some detail and stated that the K would terminate after 2 years unless renewed. In fact, after working with Tomorrow for only 6 months, Systems decided it could develop its own software cheaper than buying it from Tomorrow, so it faxed a letter to the latter stating that their K was at an end. Systems declined to purchase any further software. Tomorrow, which had incurred substantial startup costs in developing the software for this K, was astounded and promptly filed suit. Systems sought refuge in the SOF, arguing that the K signed by the parties stated no quantity. Does §2-201(1) always require a specific quantity?       The K is not insufficient because it doesn’t state a quantity; §2-201 only says that if it had stated a quantity, the K wouldn’t be enforceable beyond that quantity. (This applies when the quantity needed is unknown.) 

PAROL EVIDENCE RULE

Problem 9: Lawyers for Swinging Singles Magazine negotiated for an entire year with Space Age Aircraft to obtain a K for the construction of a special Swinging Singles airplane. (The plane was to be black and silver, with the Swinging Singles emblem painted on the tail; it was to contain a living room, a bed chamber, a swimming pool and hot tubs, and a dance floor.) The resulting 30 page K also contained a merger clause, stating that all prior negotiations were merged into the written K that contained all the terms of the agreement. Both parties signed the K. Does §2-202 bar the introduction of evidence of the following?

(a) An alleged pre-contract agreement that Space Age would provide free flying lessons to Hi Handsome, president of Swinging Singles? The K says nothing about this.       This may not have been certainly included in the written contract; therefore, there is not total integration.  So because this evidence doesn’t contradict the K, only supplements the K, the court would allow it in.

(b) An alleged pre-contract agreement that Swinging Singles could use the plane for 2 months, and if they didn’t like it, they could return it for a full refund?      This would not be allowed under §2-202 because it certainly would have been included in the contract, so this contract is already totally integrated.

OFFER AND ACCEPTANCE

Problem 10:Mastervoice TV ordered 20,000 fuses from GE, the order stating “reply by return mail.”  Instead of a formal reply, GE immediately shipped the fuses.  When the fuses arrived, they were found to be defective.  Mastervoice, which had to procure substitute goods elsewhere to meet its production schedule, sued GE for breach of warranty. 

At what moment was the K formed? Formed upon shipment.

Can GE make this defense: “There was never any K since our alleged act of acceptance (the shipment of defective goods) did not comply with requirements of Mastervoice’s offer (which contemplated only shipment of good fuses)”?

No, this is not a defense b/c 2-206 says that there can be an acceptance even with non-conforming goods.  (If ship non-conforming goods then there is an acceptance, but if ship green dolls instead of blue dolls this is a counteroffer not an automatic acceptance.)  GE should have sent a note to Mastervoice so there would be no automatic acceptance.

Instead of the above, assume that when GE received the order it discovered that it no longer manufactured the type of fuses Mastervoice wanted, but that it did carry a very similar type of fuse that it believed would suit Mastervoice’s needs.  The shipping manager for GE was unable to get through to the relevant people at

Mastervoice, so in the end GE shipped the slightly different fuses along with a cover note saying, “These are similar to the fuses you ordered but may not be right for you.  If they are not suitable, we will gladly take them back without charge.”  Is GE now in breach b/c it shipped non-conforming goods?  See 2-206(1)(b)

No, GE is not in breach b/c they sent the letter along with it which constitutes a counteroffer.  This leaves it in Mastervoice’s hands now. 

Problem 11: For years P Dreamer had wanted a Rolls Royce Silver Shadow with burgundy-colored trim.  He saw one on the lot of Posh Motors.  After Dreamer had dickered loud and long with Paula Posh, president of Posh Motors, they finally agreed on a price.  Dreamer said he wanted to clear the deal with his wife before signing anything, so Posh promised she would hold the car for Dreamers until the next day at noon.  When Mr. and Mrs. Dreamer arrived at the dealership the next day, and the car was gone.  Posh made a better deal with another buyer.  Do the Dreamers have a good cause of action?  See §2-205.  Does §1-103 help?

There is no good COA here, b/c a signed writing is missing, a requirement for 2-205 (firm offer rule). 1-103 doesn’t help b/c there is no writing.BATTLE OF THE FORMSProblem 12:The Magic Carpet Co. had a long and profitable business relationship with Alibaba Carpet Manufacturers of Baghdad, Illinois.  55 times Alibaba had sold carpets to Magic carpet.  Each sale was carried out in the following manner.  A partner of magic carpet called Alibaba’s order department and ordered a certain quantity of carpet at the price listed in the catalogue.  After each oral order was made, the credit department was consulted to determine if Magic was paid up.  Then, if the credit was okay, the order department of Alibaba typed the information from the order on one of its printed acknowledgement forms, each of which had the following information on its face: The acceptance of your order is subject to all of the terms and conditions on the face and reverse side hereof, all of which are accepted by buyer; it supersedes buyer order’s form, if any.  It shall become a contract either (a) when signed and delivered by buyer to seller and accepted in writing by seller, or (b) at seller’s option, when buyer shall have given to seller specification of assortments, delivery dates, etc…, or when buyer has received delivery of the whole or any part thereof, or when buyer has otherwise assented to the terms and conditions hereof.  The provisions on the reverse side of the form provided, among other things, that the seller disclaimed all warranties, express or implied, each form was signed by an employee of Alibaba and mailed to Magic.  Shortly thereafter, the carpet was shipped.  Magic always received the acknowledgement before the carpet.  They placed each form on a file, accepted delivery of the carpet and paid for it promptly.  On the 56th sale, the accepted and paid-for carpet proved to be non-conforming.  Magic sued Alibaba for breach of warranty.  Alibaba replied that its form disclaimed all warranties.

a. Was a K formed between Magic Carpet and Alibaba?  See 2-207. Yes, b/c there is definite and seasonable expression of acceptance by Magic Carpet.

b. Was the disclaimer of warranties part of that contract? See 2-207(2). No, b/c it is a material alteration to disclaim general warranties (Comment 4 to 2-207).  Although merchants are involved here (define) the term doesn’t become part of the contract.  

Problem 13:Humpty Dumpty Corp. (HDC) was a company that demolished old buildings to clear sites for new construction.  HDC proposed to sell a large quantity of used bricks to the Kings Horses Company on the condition that Kings Horses would pick up the bricks and haul them away.  The seller made a formal written offer, stating the quantity (2.5 tons), the price (22,000) and a delivery date of June 15.  Kings Horses accepted, enclosed a check for 22,000, and changed the delivery date to July 20.  The president of HDC calls you and asks if Kings has breached the K if it does not pick up the bricks on June 15.  What do you advise him?  See 2-207(3) and official comment 6.  See also 2-309.

Changing of the delivery date was a widely divergent or critical term.  So there is no K b/c there was not a seasonable expression of acceptance.

Then go to 2-207(3).  Did the parties act if they had a K?  Yes.  So then all terms which are not the same are knocked out. 

Delivery date is knocked out (b/c the forms didn’t agree) and 2-209 comes in.  Delivery date will then be a reasonable time.

If the partners discuss the terms of the documents AFTER they exchange forms, does §2-207 still apply?

Yes, §2-207 still applies. In determining whether the buyer assented to the proviso, what is the underlying principle behind

2-207? One of the principles underlying §2-207 is neutrality.  If possible, the section should be interpreted so as to give neither party to a K an advantage simply b/c it happened to send the first or in some cases the last term.  (This disposes of the common law Last Shot Rule.)

Have proviso clause.  Did they assent?  No b/c need to come forward and express your assent, behavior is not enough to assent to proviso language.  So then land in paragraph 3.

Is 2-207(3) disadvantageous to either party? 2-207(3) will often work to the disadvantage of the seller b/c he will wish to undertake less responsibility for the quality of his goods than the Code imposes or else with to limit his damages liability more narrowly than the Code would.

What is MM argument, and why did the court reject it? MM argued that Krack assented to the disclaimer when it continued to accept the tubing and pay for it once MM indicated that it was willing to sell tubing only if its warranty and liability was limited.  MM’s argument was outweighed by public policy.

How does a seller in MM position protect itself? Do not act as if there is a K when the buyer disputes a term of the contract.  If this happens don’t ship the goods b/c the disputed disclaimer will be thrown out. 

Problem 14:Would the following clause in the seller’s acknowledgement to the buyer’s order form be a material alteration under 2-207(2)(b): “Any disputes concerning this contract shall be subject to binding arbitration”?      Yes, an arbitration clause is treated as a material alteration in most jurisdictions.  

Who carries the burden of proving the additional or different term is a material alteration? The person who is opposing the inclusion of the additional term under 2-207(2).

What if neither party introduces evidence of material alteration? Then the term will be included in the K.

What are the two elements if surprise, and how does a party establish that? A material alteration is one that would “result in surprise or hardship if incorporated without express awareness by the other party.”  (1) Subjective (what the party actually knew) or (2) Objective (what the party should have known).  To carry the burden of showing surprise, a party must establish that, under the circumstances, it cannot be presumed that a reasonable merchant would have consented to the additional term.

Typically, when do courts find that hardship materially alters a contract? Typically, courts that have relied on hardship to find that an additional term materially alters a K have done so when the term is one that creates or allocates an open-ended and prolonged liability.

If cannot find surprise or hardship, then there is no material alteration.Problem 16:On April 25, Plastic Furniture Mart sent a purchase order for 100 tables to the Ersatz Manufacturing Co.  In addition to the usual boilerplate language, the purchase order also stated, “BUYER OBJECTS IN ADVANCE TO ANY TERMS PROPSED BY SELLER THAT DIFFERS IN ANY WAY FROM THE TERMS OF THIS PURCHASE ORDER.”  Ersatz received the order, and on May 3 it sent back its own acknowledgement form, which disclaimed all warranties and contained this clause: “THIS IS NOT AN ACCEPTANCE UNLESS BUYER ASSENTS TO ALL CHANGES MADE BY THIS ACKNOWLEDGEMENT FORM.”  Neither party read the details of the other’s form.  On May 6, Ersatz

shipped the tables.  Is there a contract?  See 2-207(3).  Did Ersatz make a warranty as to the conditions of the tables?  See 2-314.  On May 3, was there a K?

Get to paragraph 3 b/c there is proviso clause.  There is a contract under 2-207(3) b/c the parties performed as if they had a contract.

There was an implied warranty of merchantability. No, there was no conduct yet indicating there was a contract.

WARRANTIESProblem 21:

a. The Salesman at the lot of Smiles Pre-owned Vehicles told the woman buying the car that it was in “A-1 shape.”  She bought the car, but it broke down the next day, stranding her in the country.  Was this oral statement mere puffing?  Is it an easier case if the seller tells the buyer that the used car is in “mint condition”?

o This is mere puffing, whereas “mint condition” is more of an express warranty. b. When the farmer looked over the young chickens he was contemplating purchasing from the

poultry company, he complained that they looked pretty scruffy.  The salesman explained that that was b/c they were on half-feed and that when they were placed in full-feed, they would “bloom out, straighten up, and fly right,” and they would “do a good job in your chicken house.”  The farmer purchased the chickens, and 2 months later they starting dying in droves.  The farmer sued, claiming breach of an express warranty.  Is he right?  Is this a question of law or of fact for the jury?

This is an express warranty.  If it this were a gray area and an oral statement then they jury would decide it, but if it were a written statement then the judge would decided it as a matter of law.

c. Portia Moot, a 3 year law student, had taken the course in sales, so when she went to buy a used car, she listened very carefully to the sales pitch.  The smarmy salesman was quite friendly, but he only made 2 statements about the car she bought: “This is a great car!” and “You’re going to love it!”  In fact, the car broke down a great deal, and Portia quickly grew to hate it.  Does she have a COA here?

This is mere puffing b/c this is an opinion. d. Assume that the car salesman told Portia that the used car she was contemplating purchasing had

been thoroughly inspected by the car dealership’s crack repair department and was “mechanically in perfect condition.”  However, Portia was suspicious about the reliability of the car and before she bought it, she took it to her own favorite mechanic for an inspection.  She didn’t buy the car until her mechanic cleared it as fine.  When the car broke down a few days later, she decided to bring suit on the express warranty.  What defense will the car dealership raise?

There was no reliance, b/c she didn’t rely on the car dealerships mechanic, instead she relied on her own mechanic to purchase the car. 

Problem 22:Upon graduation from law school, Andrew Loner hung out his shingle and waited.  Mr. and Mrs. Consumer were his first clients, and they told him the following story.  2 weeks earlier they has visited a wallpaper store, Paper and Paste and inquired about vinyl wallpaper for their dining room.  The salesman told them that the “finest” wallpaper in the store was Expenso-Paper, a vinyl wallpaper selling at $25 a roll.  When he learned that the Consumers had never before put up wallpaper, the salesman assured them that Expenso-paper “goes up easily, can be put on with any paste, and dries immediately.”  He said that it “would look wonderful” and moreover, that Expenso-Paper “was used by Mary Magic,” the famous movie star, in her dining room.  He showed them a sample book, and they picked out a pattern they liked and ordered 10 rolls.  When the paper arrived the next week, it proved to be very stiff and hard to work with.  It tore easily and refused to stay flat on the wall (it either bubbled or, due to its heavy weight, fell down on drying).  In addition, it was dyed a darker color than the version of the pattern in the sample book.  The final result was that the Consumers’ dining room looked terrible.  To top it off, the Consumers discovered that Mary Magic did not own a home (she lived in hotels.)  Upon complaining to Paper and Paste, the Consumers were told

by the manager that Expenso-Paper needs a special brand of paste, to wit, Expenso-Paper.  They were also told that Expenso-Paper was an inferior brand and that next time they should buy Super Wall, a better product that the store carried.  The Consumers told Loner that they signed the K without reading it and that the statement about Mary Magic’s dining room was made after they signed the agreement.  Loner (and you) have to answer these questions:

1. Which of the salesman’s representations amount to express warranties? a. Finest?

This is an opinion, more so than an express warranty.  (Puffing) b. Goes up easily?

This is an express warranty. c. Can be put on with any paste?

This is an express warranty. d. Dries immediately?

This is an express warranty. e. Would look wonderful?

This is an opinion. (Puffing) 2. Do you see any other express warranties?  Is the Mary Magic statement part of the basis of the

bargain, arising as it did after the K was signed?  See 2-209(1); Official Comment 7 to 2-313. Precise time when affirmation is made is not material (comment 7).  Some

affirmations after the fact can be considered to become the basis of the bargain, but courts are skeptical about this.  So this did not become part of the basis of the bargain. 

Problem 23:Balding Paul bought a wig from Hair, Inc.  He became annoyed when the wig changed colors slightly from season to season.  He did not do anything about it until one day, while thumbing through a newspaper, he noticed an ad for Hair, Inc., that claimed that their wigs did not shrink or change color.  On checking back, he discovered that Hair has run an identical ad during the week prior to his purchase of the wig.  He sues.  On the witness stand Paul confesses that he never saw the as until a year after his purchase of the wig.  Is this admission fatal on his theory of recovery on a theory of express warranty?

No, b/c the court will look at public policy to help decided that the company can handle the risk more than the consumer can.

Problem 22:Consider the following:

a. Are cigarettes that cause lung cancer merchantable if used over a period of years?  If the seller’s advertisements stated that the cigs were “mild,” would that create an express warranty?

Are these fit for their ordinary purpose?  If you can prove that the ordinary purpose is to get some high and to be pleasurable, then it would not be fit for the ordinary purpose b/c getting cancer is not the ordinary purpose.  Courts are reluctant to say that cig manufactures breach the implied warranty of merchantability b/c this would open the floodgates for all manufacturers of similar products.   

b. Officer Krupke, a NY police officer by profession, sold his family car to his next-door neighbor, Maria, telling her it was a “good car.”  In fact, it was falling apart and blew up the first time she drove it.  Has Krupke breached the implied warranty of merchantability?  See 2-104(1); Official Comment 3 to 2-314; 1-203.  Should §2-314 be extended so that the warranty is made by all sellers?

No, he is not a merchant with respect to goods of this kind, so there is no implied warranty of merchantability.

Problem 23:Natty Bumpo was driving through upstate NY when a deer ran in front of his car.  He swerved to avoid it and ran into a tree.  His major injuries came from his sudden contact with the inside of the driver’s door,

where he smashed up against sharp points on the door handle, the window lever, and an ashtray.  Natty sued the car manufacturer, the Mohican Motor Co., for breach of the warranty of merchantability.  His theory was that the manufacturer should have designed a much safer car.  The manufacturer’s defense was that the car was fit for ordinary purpose and that Natty has misused it.  How should this come out?

Natty should win; cars should be created for more than just driving.  They should predict for foreseeable accidents.

Problem 26:When Christopher Wren finished building a recreation room in his basement, he wanted a heater for it.  He saw an ad for the A-1 Hotblast Heater, which seemed to be what he needed.  A good friend of Wren’s named Inigo Jones ran a nearby appliance store.  Wren went there and told Jones that he wanted the heater for the new room.  Jones knew the room well; he had helped build it.  When the heater arrived, it worked perfectly, but it simply did not have the capacity to heat the room.  May Wren sue Jones for breach of either 2-314 or 2-315?  See Comment 5 to 2-315.

Is there a breach of implied warranty of merchantability?  No b/c the heater is doing what it is intended to do (heating) but it is just not heating the whole room.  Is there a breach of implied warranty of fitness for a particular purpose?  Yes, b/c the seller knew why the goods were being purchased and he relied on his friend’s skill.  (Although this may go both ways.)

Problem 25:Harold Thumbs went to the Easy Paint Store and bought a can of green paint, which the store mixed on the premises from various pigments.  Harold used the paint on his dining room walls, but due to a miscalculation on his part, he ran out when he was half finished.  He took the empty paint can back to the store.  He told the clerk that he was only half done with the job and needed another cam, which the clerk promptly mixed and sold to him.  Harold finished the painting and then noticed 2 things: (1) the dried paint gave off an offensive odor and (2) the paint from the second can did not match the first.  What causes of action does he have?

He has an action for a breach of an implied warranty of merchantability b/c the paint smells and it is not for its ordinary use.  There is a breach of implied warranty of fitness for a particular purpose for the wrong paint color b/c the paint store knew what color he had already purchased and he relied on them to give him the same color.

 Problem 28:Donald Souse ordered a martini at the Tired Executives Club.  When he bit into the olive, he cracked his new $2000 dentures on a pit.  Is there a COA under either 2-314 or 2-315?

If you used the reasonable expectation test, there would be no breach of implied warranty of fitness for a particular purpose b/c olives in martinis are not supposed to be pitted. 

Problem 29:Carry Nation, on the advice of her beautician, Parker Pillsbury, bought a hair due names “Intoxicating Fragrance” and proceeded to use it in accordance with the instructions on the package.  Unfortunately the product contained the alcohol, to which Ms. Nation was allergic, and she suffered considerable burn damage to her scalp and ears.  When she sued the manufacturer, Harper’s Hair Products, Inc., the basic defense was that only 0.5 percent of the population had this allergic reaction.  Is this a good defense?

The implied warranty of merchantability would kick in here b/c this hair dye was to be used for its “ordinary purpose.”  The courts are struggling with whether ordinary purpose means for the “ordinary purpose without regard for the extraordinary purpose” or the other way?   

DISCLAIMERS AND LIMITATIONS ON WARRANTIESProblem 30When Portia went to buy a new car, she asked the salesman how many miles to the gallon it would get. He replied that it would get “between 30 and 35 m.p.g. in the city and 40 to 45 on the highway.” Delighted, she bought the car. The very best the car ever did, even in highway driving, was 27 m.p.g., and Portia was upset. When she threatened a lawsuit, the dealership pointed out the following three clauses in the contract she had signed that it relied on to avoid liability. This contract said nothing about miles per gallon of gas. In your opinion is there any way around these clauses?(1) “This is the entire contract, and there are no other matters agreed to by the parties that are not contained herein.”

o First, must consider the Parol Evidence Rule.  This statement does not contradict the writing (b/c the writing was silent on how many m.p.g. the car would get) so it would be permitted in to supplement the K.     

(2) “There are no other express or implied warranties except those contained herein.”o First, look at express warranties.  Under 2-316(1) courts are not likely to let you disclaim

express warranties.  Second, look at implied warranties.  In order to disclaim or limit the implied warranty of merchantability under 2-316(2) it must mention merchantability and must be conspicuous.  This disclaimer does neither, so it is ineffective as to the implied warranty of merchantability.  In order to disclaim the implied warranty of fitness for a particular purpose under 2-316(2), the exclusion must be in writing and be conspicuous.  This is in writing but it is not conspicuous (not in bold, doesn’t draw attention to it).  This clause is not enforceable.  

(3) “No salesperson has the authority to give express warranties other than those contained herein.”o This is not a disclaimer of warranties by itself.  This is a statement of agency law.  Courts

struggle with this issue and there are inconsistent answers for this issue. Problem 31:(a) A statement buried in the fine print of a used car purchase agreement states that “There are no express or implied warranties that are part of this sale.”       (1)  Are the implied warranties effectively disclaimed?

o No, this doesn’t disclaim either the implied warranty of merchantability or the implied warranty of fitness for a particular purpose.  (Make sure do a separate analysis for both of these on exam)

      (2) If the car dealership asks you to redraft this clause so as to comply with the Code, what changes would you  make in the language? 

o Add the special words and make it conspicuous.       (3) What changes would you make in the physical appearance of the clause in the contract? Is it all right to put  the disclaimer in a clause labeled “Warranty?”

o Change the color, font, the size, etc…  Don’t only put it in Bold.      (4) Can the car dealer win the legal dispute by arguing that usage of trade (§1-205) permits the burial of warranty disclaimers in the fine print?

o Comment 4 in §1-205 says that it is very difficult to allow you to say that usage of trade

will trump out an established code provision. (b) The words “as is” are written with soap in large letters across the front windshield of the used car. Is this effective to disclaim implied warranties? Express warranties? Must the “as is” language be conspicuous?

o Implied Warranties: 2-316(3)(a) all implied warranties would be disclaimed by “as is” language.  The express warranties are hardly ever disclaimed. 

(c) The car salesman asks the buyer, “Would you like to examine the car?” and the buyer, who is in a hurry says, “No.” Effective disclaimer?

o Official comment 8 under §2-2-316 says that it is not sufficient that the goods are available for examination, there must be a demand by seller to inspect the goods.  This language is probably not considered a demand.

(d) Remember Ted Traveler (Problem 18), who walked into the men’s room of the bus depot and bought an expensive watch? We decided there was no warranty of title in that transaction. However, a warranty of quality is a separate question. Are there implied warranties in this sale?

o No, under §2-316(3)(c) says that implied warranties are excluded by course of dealing or course of trade.

Problem 32:Joe College bought a new car from Flash Motors, relying on the seller’s extravagant claims about the car’s superior qualities. He signed a purchase order on August 1, and the car was delivered two weeks later. In the glove compartment he found the warranty booklet and on reading it was dismayed to learn that the actual written warranty was very limited in coverage. Is he bound by the written warranty’s terms? What argument can he make?

o This goes to the timing of when drawn to attention of disclaimer.  Answer is dependant

on which case the court adopts (Bowdoin = not effective or Rinaldi or Pro CD). Problem 33:On November 1, Jack of Portland, Maine, bought a snowmobile from King Cold Recreationland. Jack used the snowmobile to get to work during the week in the winter and for fun on the weekends. The contract that he signed stated that the seller warranted that the vehicle was merchantable, but that, in the event of breach, “the buyer’s remedy was limited solely to repair or replacement of defective parts.” Moreover, the contract conspicuously stated that the seller was not responsible for “any consequential damages.” One week after he received the snowmobile, Jack noticed a strange rumble in the engine. He took the machine back to the King Cold service department. The machine was returned to him in three days allegedly repaired. These events repeated themselves three times over the next three weeks. Four weeks after he bought the snowmobile, Jack was seriously injured when it blew upwhile he was riding. The machine, which cost $1,200, was destroyed. Jack temporarily lost the use of his left arm, incurred hospital expenses of $2,500, and lost pay of $1,600. Moreover, when he did return to work, he had to rent a snowmobile for $40 a week until spring (16 weeks – spring is very late in Maine = $640). In addition, a $350 camera he was carrying was also destroyed. Jack brought suit against King Cold. King Cold defended on the ground that its liability was limited to the cost of repair or replacement. Jack argued that the remedy limitation was “unconscionable” and failed of its “essential purpose.” All the parties pointed to §2-316(4), §2-302, §2-719, and §2-715.  How should this suit come out?

o Jack should recover for all losses except the camera under §2-719(3).  All other losses are as a result of the personal bodily injury, so these are recoverable b/c limitations of those remedies would be per se unconscionable.  The loss of the camera is a commercial loss for a consumer good and therefore is not allowed under §2-719(3).  Jack should also recover the loss of the snowmobile b/c it “failed its essential purpose” under §2-719(2).    

DEFENSES IN WARRANTY ACTIONSProblem 34:Pearl, a farmer, exhibited to Dave samples of her apples, but said that the bulk of the apples had less color and were one fifth smaller in size than the samples. Dave said, “Bring your apples to my warehouse; such size apples are worth $3 a bushel, and I will pay you that for them.” Pearl agreed to do so. The next day Pearl delivered 150 bushels of apples to Dave’s warehouse. These apples were not as good, on an average, as the samples and were one third smaller in size than the samples were. Dave, without inspecting the apples, delivered them 10 days later to his commission merchant, who the same day sold them on the market, bringing only $1.50 per bushel. The commission merchant, immediately upon making the sale, called Dave and informed him of the price brought by the apples. Dave was disgusted and decided to wait until Pearl billed him for the apples, at which time he would give her a piece of his mind. Sixty days later Pearl billed Dave in the amount of $450 for the 150 bushels of apples. Dave refused to pay, telling Pearl that the apples hadn’t measured up to the contract. Pearl sues Dave. Dave contends that Pearl breached an express warranty under the UCC since a contract of sale by sample was involved. What result?

   We are dealing with apples here and they are perishable goods, which makes the reasonable time a lot shorter than it would be for other goods.  Dave did not give Pearl a reasonable notice within a reasonable period of time so he is barred from making a claim b/c he remained silent. 

Problem 35:Icarus Airlines ordered 40 new airplanes from the Daedalus Aircraft Company. 20 were to be delivered on May 8 and the rest on November 10. The first shipment actually came on September 9, but Icarus didn’t complain. The second came on January 12 of the next year. On January 30 the president of Icarus wrote Daedalus that “We are very disappointed by your late shipment, which has caused us much expense and inconvenience.” 3 months later Icarus sued, claiming some $24 million in damages caused by the delayed deliveries. In its answer Daedalus responded by stating that it had received no notice of the breach as to the first shipment and that the notice concerning the second shipment was defective because it didn’t announce Icarus’s intention to claim a breach as a result of the late delivery. At trial, Icarus countered by stating that no notice is required where, as here, the breach is obvious to the seller. As to the lack of formal notice of breach in the January letter, Icarus pointed to Official Comment 4 to §2-607 (which tells us that content of the notice must let the seller know there is trouble with the transaction and should be watched). 

(a) As the trial court judge, how would you rule on the notice issues?The code requires in §2-607(3)(a) the buyer must within a reasonable time notify the seller of the breach or be barred from any remedy.  Icarus did not give notice of the breach but only gave notice of the facts of the breach, so Icarus is barred from any remedy. 

(b) What if on January 30 Icarus had filed suit against Daedalus rather than waiting 3 months? Would the notice requirement have been satisfied?

No, a lawsuit is not sufficient notice. Problem 36Alonso invited his good friend Sancho to dinner and served him a pheasant for the meal. The wine specially uncorked for the meal had been bottled by La Mancha Vineyards. It proved to be laced with poisonous chemical, but only Sancho drank enough to have a serious reaction: it put him in the hospital for 8 months. When he was discharged, he hired an attorney and filed suit against La Mancha Vineyards, which defended on the lack of notice required by §2-607(3)(a). How should this come out? If the person who had been injured had been Alonso and if he had given notice of breach to the retail seller, Carrasco Liquors, would that preserve his rights against the manufacturer, La Mancha Vineyards?

   Comment 5 says that various beneficiaries can collect for a seller’s breach, the beneficiary gets a reasonable time to give notice.  Alonso purchased the wine from the seller (who purchased it from La Mancha) and gave it to Sancho.  The courts typically allow Sancho in this situation to get around the notice issue here under Comment 5.  Alonso would still have to give notice.  Depends on who talking about.  Usually end users escape notice requirements.  

PRIVITYProblem 37:The Girard Instruments Corporation manufactured a pocket calculator called the Descartes 1000. It bought the paint used on the machine from the Hamilton Paint Company. Girard sold the calculators to the retailer, Leibnitz Department Store, which sold a calculator to Sylvester Cayley. He in turn gave it to his wife as a birthday gift. The Descartes 1000 was a popular gift. Joan Cayley used it all the time, as did the Cayley children (for homework) and even Mr. Gauss, the mailman, who borrowed it one day to compute the distance he walked on his route. After this last use, Mr. Gauss went home, where his dog, Diophantus, eagerly licked his hand and promptly dropped dead of lead poisoning. It turned out that the paint used on Descartes 1000 had an extraordinarily high lead content. All the Cayleys and Mr. Gauss became ill and, on recovery, brought suit for their pain and suffering, lost wages, medical expenses, and, in Mr. Gauss’s case, the value of his dog. Whom should they sue?

o A: Suit looks like, Sylvester can sue.  Joan can sue (member of household reasonably affected by product).  The children can sue assuming meet the same standard as Joan.  Mailman would not be considered a guest and would not meet the reasonable standard.  He cannot recover for his dog. In vertical privity only to the retailer (department store)

o B: Mailman would be able to sue (foreseeability).  Injury to mailman’s dog not be able to recover (must have bodily injury, not recover for the property damage here.  Can go all the way to the manufacturer under vertical privity.

o C: Everyone can sue.  Even mailman can recover for injuries to dog (property damage). 

 Hypo:What is the outcome under each of the alternatives?  You are a buyer and purchase a lawn mower. In mowing the lawn the first time, it tips over and the blade flies out and hits your child, a household guest, and cuts your fence and flies over to the neighbor’s yard and injures them.  Who can sue.

Alternative A: You can sue, your child can sue (if expected that they were likely to be affected by the goods.  Also prove for the guest that it was reasonable that they would be affected by the product.  Cannot recover for the property damage.  Can go after the retailer (Home Depot).  Home Depot is going to bring in the United Steel.

Alternative B: You can sue; your child and the guest can sue if reasonable they would be affected by the product.  Neighbor can sue if can show that was foreseeable that they would be affected by product.Alternative C:  Can go all the way up the chain.  Can recover the property damage and everybody can sue. 

§402A: Special Liability of Seller of Product for Physical Harm to User or Consumer:  (1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property, if     (a) the seller is engaged in the business of selling such a product, and     (b) it is expected to and does reach the user or consumer without substantial change in the  condition in which it is sold.   (2) The rule stated in subsection (1) applies although     (a) the seller has exercised all possible care in the preparation and sale of his product, and     (b) the user or consumer has not bought the product from or entered into any contractual  relation with the seller.    Problem 38:The axle on Python’s new car snapped in two while he was driving at a high rate of speed on the interstate. Python’s car skidded across the median and ran into a hitchhiker, Thumbs, killing him instantly. As Thumb’s attorney, decide which is the best cause of action: negligence, §402A, or §2-314?

o If sue in (K) warranty need privity and notice, and it is harder to get around.  In products don’t need either, so it is easier to sue under.  In B jurisdiction can go to the manufacturer (foreseeability test).  In C, stronger alternative.  In K also have to worry about the type of jurisdiction you are in.  

TERMS OF THE K—FILLING IN THE GAPSProblem 41:Edwin Drake wrote to the Watsons Flat Motor Oil Company and said that he wanted to buy 100 cases of its motor oil, some cases to be Type A (the expensive oil) and some to be Type B (a cheaper kind).  He said he would let the company know later how much he wanted of each type.  The company told him that Type B was selling for $30 a case, but that since the price of Type A was fluctuating, the sale price would have to be set by the company at the time of delivery.  Drake agreed.  The parties signed a written K for the delivery of 100 cases, types to be specified by Drake one week prior to the delivery date, which was set for April 8.  On April 1, the agent of the oil company called Drake and to ask how much would he take of each type.  Drake said, “April Fool! I’m not taking any,” and hung up the phone.  The company calls you, its attorney, for advice.  In the past dealings that it has with Drake, he always has ordered 100 cases and has taken 50 to 65 percent in Type A and the rest in Type B.  The usual price for Type A has been $50 a case, but due to a Middle East oil situation, the price has now jumped to $125 a case.  What should the company do?  See § 2-305, §2-311, §1-205.  If this were an international sale of goods under the CISG, what result?  See Article 65. 

2-305 tells us that a reasonable price would be set at the time of delivery taking into consideration the market price.

2-311 tells us there must be commercial reasonable.  2-311(2) tells us that it is the buyer’s option to pick how many of type A and type B are needed.  But there prior conduct would come into to dictate how many of each they would need.  Could not say need all of Type A b/c that wouldn’t be commercially reasonable.  If the essential terms of the K are not agreed upon at common law the courts were reluctant to fill in those terms, but now the courts are more willing.

What if Drake had simply said, “April Fool!” and hung up?  Is this a definite repudiation?  See §2-610, §2-611.  What action can the oil company take to clear up Drake’s ambiguous statement?  Read §2-609 and its Official Comment.

This is not a definite repudiation b/c it is not clear or specific enough.  This matters b/c then the buyer could ask for assurance.

2-609 tells us that you have a right to send a demand letter (in writing) demanding reassurance.  If they do not respond to the letter then this can be treated as a repudiation and you can sue immediately.  

PERFORMANCE—INSTALLMENT K’SProblem 51:Travis Galleries developed a market in copies of famous statues.  It ordered monthly shipments of the statues from Ersatz Imports, agreeing to take 12 shipments of 20 statues each over the coming year.  The first month all of the statues arrived upside down in their cartons.  The manager of Travis Galleries was amazed that most had survived the trip in this condition.  Only one was broken, and a phone call to Ersatz Imports resulted in a promise to ship a replacement at once.  The next month the statues were again package upside down, and half of them were broken.  Does §2-612 permit rejection for this reason?  Assume that Ersatz replaced the broken statues within a week, but that the next month the shipment contained no statues at all.  Instead, Ersatz had mistakenly shipped Travis poor copies of 20 French Impressionist paintings.  Travis Galleries called you, its attorney.  May it reject this shipment?  Under what theory?  May it now cancel the remainder of the Ersatz contract?

§2-612 doesn’t permit rejection b/c of the broken statues b/c this does not substantially impair the value of the statues.  When half are broken this is a substantial impairment of that shipment, but this is probably not at this point a substantial impairment to the entire K.   Can reject the shipment when didn’t get any of the right statues, and likely that this substantially impairs the value of the entire K b/c this is the third time they screwed up out of 12 times.  There is no bright line rule.  This would go to the courts.

Problem 52:Stella Speculator, a wealthy investor, signed a K with Swank Motors to buy five new cars.  All 5 were to be delivered on October 1.  When the cars arrived, she test drove each of them and then returned 2 of the cars, saying she would keep the other three.  She rejected the 2 cars b/c the audio system did not work in one of them (she was a great music lover) and the carpeting in the trunk of the other one was ripping.  Swank Motors offered to repair both defects.  When Speculator refused to permit the repair, Swank sued.  Answer the following questions:

a. Does the common law doctrine de minimis non curat lex (“the law does not notice small defects”) survive §2-601?  If so, in spite of the tiny defects, the cars would be conforming.  See Official Comment 2 to §2-106.  The Gindy case said “some defects do not justify rejection by the buyer but can be cured by replacement or repair.”

o Yes, the doctrine does survive §2-601(some courts says this).  Comment 2 to §2-106 says that cannot reject for tiny defects.  

b. A seller has a right to cure in some circumstances, See §2-508.  Is this section of use to Swank motors?

o Must first make sure if the goods were delivered within the time for performance.  If the

cars were delivered after then Swank Motors right to cure is already up. c. Suppose Swank can demonstrate that it is common for car seller to correct small defects.  Will

Swank succeed if it argued that such correction is a usage of trade (§1-205) and thus either that the goods are conforming of that b/c of this usage of trade, the parties have impliedly agreed that a §2-601 perfect tender is not required?  See §§1-102(3), 1-102(4), 1-201(3).

o This is a valid argument (the court will not throw this out), but they may not agree with it

when they hear it. CUREProblem 53:On August 8, Francis and Sophie Ferdinand ordered a new car from Princip Motors for $22,000.  The car was scheduled for delivery “no later than September 1” (it had special accessories that had to be installed at the factory).  On August 15, Princip Motors told the Ferdinands that the car was ready, so they picked it up.  Halfway home (3 miles from the dealership), the engine blew up without warning.  The Ferdinands

(neither were nor hurt), but the engine was destroyed.  On being informed that the Ferdinands wanted their money back, Princip made the following responses:

a. Princip offered to take the engine out of a car of the same model and install it in the original automobile (which was otherwise undamaged).

o No time problem here and notice was given.  What does cure mean?  Some courts say that seller may not have the right to cure if the buyer’s faith is shaken.  Courts are not uniform in what cure actually means.  It depends on the facts and circumstances.       

b. Princip refused to refund the money; instead, it claimed a right to give the Ferdinands a new car to be delivered fresh from the factory on August 20.  Does §2-508 require the Ferdinands to accept either of these cure offers?

o It can be argued that §2-508 does not require the Ferdinands to accept the cure b/c cure is not defined in the code.

o In resolving this problem, it may help you to know about the Shaken Faith Doctrine, developed in a similar situation by the court in a leading case.   Put one way, once a person’s faith is shaken, a vehicle loses not only its real value but becomes an instrument whose integrity is substantially impaired and whose operation is fraught with apprehension.  Put another way, “the court should be willing to take judicial notice of what all modern day consumers ‘know’ “things that do not work well at the start are not likely to work well in the future unless the original defect is minor in nature.”

REJECTION AND ACCEPTANCEProblem 54:Midwestern Seafoods, headquartered in Iowa, ordered 50 live lobsters from Maine Exports, “FOB Portland.”  On September 1, Maine Exports (ME) loaded the lobsters on board an airplane in Portland, from where they were flown to Boston and then to Des Moines.  ME failed to notify Midwestern Seafoods of the date of the flight until 2 days later, when Midwestern’s purchasing agent called to inquire.  He then made a few calls and located the lobsters in Des Moines, where they had been sitting for a day.  Midwestern signed a receipt and picked the lobsters up.  20 of them were clearly dying (15 due to bad handling by ME before they were handed over to the airline and 5 due to damage in transit); the other 30 were fine.  Midwestern decided, for reasons that are unclear, that it wanted none of the lobsters.

Is the seller’s failure to notify Midwestern of the shipment a ground for rejection? See §2-504 (above).

Under §2-504 these are grounds for rejection only if it is a material delay.  This is typically a question of fact for the jury.

May Midwestern reject b/c of the 20 defective lobsters?  See §§ 2-601, 2-503, 2-509(1), 2-510(1).

§2-510(1) tells us that if they failed to conform to the contract the burden stays on the seller until it is cured.  But under §2-601 they must give seasonable notice to the seller and a reasonable time to cure the defect.  

How quickly must Midwestern act if it wishes to reject?  What technical steps is it required to take?  See §2-602, 1-201(26), 1-204.

Reasonable time.  Give notice. Must Midwestern reship the goods to ME if the latter offers to pay the freight? See §2-602(2) and its Official Comment 2; §2-603, 2-604.

Midwestern is a merchant buyer.  Under §2-603(1) B/c of that they must reship them if ME offers to pay the freight.  Must comply with reasonable instructions and these are reasonable here.

If Midwestern decides to keep 30 of the lobsters for resale, is this allowed?  See §2-602(2)(a), 2-606; cf. §§2-601, 2-105(6).

Yes under §2-601, Midwestern can accept part of a commercial unit and reject the rest.

If Midwestern rejects the goods, must it give its reasons in the notice of rejection?  What penalty is there for not doing so?  See §2-605 and its Official Comment 2.

Under §2-605(1) if they reject the goods they do have to give their reasons in their notice. If they do not put in their notice, then you waive your right to object to that.

If Midwestern gives a valid notice of rejection within a reasonable period of time after the lobsters are delivered, what should it then do with the lobsters?  See §2-602(2).

Under §2-602(2) (the risk of loss remains on the seller) it says must take care of those lobsters.

Problem 55:Ulysses Sinon ran a dude ranch in Troy, Colorado.  He decided to erect a statue of a giant horse near the entrance to the ranch as a tourist attraction.  The horse was specially manufactured by Epeius of Paris and arrived in six boxes to be assembled by Sinon.  When the horse was put together, Sinon was displeased with the appearance of the tail.  The horse has been designed by Epeius, and the scale model Sinon had seen when he decided to buy the horse had had a different tail.  Sinon removed the tail and substituted one of his own design.  He returned the original to Epeius along with a letter of rejection,  In the meantime, Sinon painted the rest of the horse black (in the delivered state it was white) and used it extensively in advertising for the ranch.  The horse failed to attract new business to the ranch.  After three months of display, Sinon took it down and shipped it back to Epeius with a letter of rejection that stated the problem with the tail made the horse unattractive and unusable.  Epeius sues.  Did Sinon make a rejection or acceptance?  If the tail did not conform to the model, is that a ground for rejection?  See §2-601.  If Sinon had made a technical acceptance, does that fact preclude a suit for breach of warranty?  See §2-607(2).  What steps should Sinon take to preserve his legal rights?  See §2-607(3)(a).  What reasons lie behind the notice requirement?  See §2-508, 2-515.

The tail didn’t conform to the model so there is a breach of an express warranty.  Can he accept the body of the horse and reject the tail> (§2-508)…This horse in not a commercial unit, so he cannot reject the tail and just accept the body of the horse.  One commercial unit= the horse.  He painted the horse, which is inconsistent with his ownership, this suggests acceptance.  Technical acceptance doesn’t preclude him from a breach of warranty suit b/c the perfect tender rule doesn’t discuss remedies.  Under §2-607(3) must give the seller reasonable notice of the breach.  This gives the seller the right to cure.

REVOCATION OF ACCEPTANCE

Problem 58The day after Alice Bluegown bought her new car, the right rear fender fell off.  May she use §2-608 or must she give the car dealer a right to cure? 

Can argue she hasn’t even accepted the car b/c no reasonable time to inspect.  Can revoke acceptance if substantially impairs the value to her.  The bumper falling off possibly substantially impairs the value to her. 

Pretend she is sitting in your office expecting an immediate answer; glance at §2-608 and decided.  The next day she took the car back to have the fender repaired; this made her late for work.  The dealer fixed it, and the fender gave her no more trouble. However, the first time it rained all the paint washed off her car.  May she revoke now? 

Yes, more likely substantial impairment to her. She took the car back to the dealer when the rain stopped and rode the bus to work (late again).  The car dealer did a nice job repainting the car.  2 weeks later the engine quit on her when she was in the middle lane of a superhighway at rush hour.  The car had to be towed to the car dealer, and Alice missed an important sales meeting.  The car dealer fixed the engine.  Now Alice is back in your office.  The car’s trunk will not open.  Must she permit them to fix it, or can she revoke? 

She can revoke.  Bring up the Shaken Faith Doctrine. She has missed enough work to worry about hurting her career.  She’s also concerned that the car is going to keep breaking down right through and past the warranty period.  What do you advise?  Is §2-609 of use to her?  Is she decided to revoke acceptance and if the court agrees that this is allowed, would it also permit her to recover for the cost of the rental car used as a substitute transportation while she was attempting to

purchase a new car?  If she goes out and buys a new car, can she make the first car dealer pay for it?  See §2-712.

The rental car- some courts say yes and some courts say no.  Courts won’t allow you to get a new car b/c it would be a windfall.  May be able to deduct the value b/w the two cars. 

Problem 59Suppose in the last Problem the K b/w the dealer and Bluegown explicitly limits the remedy for breach to repair or replacement of defective parts.  The dealer argues that all defects have been promptly and successfully repaired and that the remedy of revocation of acceptance is therefore unavailable to Bluegown.  See §2-719(2).

Yes, the seller is allowed to limit the remedy, but the buyer can get around this if the remedy fails its essential purpose.

Problem 60Arthur Author ordered an expensive computer (the ION # 740) from ION Business Machines.  ION sent him model # 745, a newer and better version of the machine he had ordered, at the same price.  When he saw the computer, he liked it and wrote them a letter of acceptance, enclosing a check in payment.  However, when he began to use it, he was horrified to learn that the computer was turned on by a hidden switch under the front panel.  Arthur Author’s father had lost a finger when he reached under a machine to activate it.  Arthur has witnessed the accident as a child.  Arthur sent a notice of revocation of acceptance to ION, stating that the #745 brought back childhood memories that kept him from wanting the computer.  Does §2-608 permit him to revoke for this reason?  See Official Comment 2.  Is §2-508(2) relevant?  How would you advise ION to respond to Arthur Author’s letter?

First, must decide if this substantially impairs the value “to him,” the buyer.  Yes, this is a substantial impairment to him subjectively.  Is this really right?  Some courts will struggle even though the comment says “to him,” but the majority of courts reads its subjectively (like it says).

Problem 61 After his car had broken down with the same defect six times Zack Taylor decided to revoke acceptance and return the car to Fillmore Motors, the dealership that had sold him the vehicle but that had been unable to repair it.  To Zack’s dismay, he discovered that Fillmore Motors had gone bankrupt and was out of business.  Zack is now in your office with this issue: may he revoke acceptance against the manufacturer of the car (which had covered its product with a limited warranty?)  Note that the Magnuson-Moss Warranty Act might help consumers in this situation.  Section 110(d) of the Act allows civil action against the warrantor that includes both legal and equitable relief.

There is a split among jurisdictions.

Problem 63 Ambiance Hotel decided to acquire 10 horse-drawn carriages to be specially designed to carry its guests around the tourist areas of the scenic city in which it is located.  It had the plans for the carriages transmitted to Buggies, Inc., a carriage manufacturer, which assured Ambiance that there would be no problem with the creation of the carriages.  Ambiance financed this transaction by having Octopus National Bank purchase the carriages from Buggies, Inc., and then lease them to Ambiance for a 10-year period.  Assume that this transaction qualifies as a finance lease; See §2A-103(1)(g).

a. If the carriages are delivered to the hotel and Ambiance rejects them b/c they are the wrong color, must Ambiance pay the lease amounts to Octopus National Bank?  (You may assume that the finance lease contained a “hell or highwater” clause.) See §2A-407(1), 2A-515.

o No b/c the clause doesn’t kick in until the goods have been accepted. b. If the hotel accepts the carriages, but becomes upset when they constantly break down, can it

revoke its acceptance and refuse to pay the lessor?  See §§2A-407, 2A-516 and its Official Comment, 2A.

o No b/c most likely still going to have to pay them come hell or highwater. 

WEEK 5Risk of Loss: No Breach 

Problem 46William College (non-merchant buyer) bought a car from Honest John, the friendly car dealer. He paid the price in full, and Honest John promised delivery on the next Monday.  On Monday, the car was ready, and Honest John phoned College and said, “Take it away.”  College said he was busy and that he would pick it up the next day, to which Honest John agreed.  That night the car was stolen from the lot due to no fault of Honest John, who had taken reasonable precautions against such a thing.  Who had the risk of loss?  See §2-509(3) and Official Comment 3.  Might Honest John claim he was a bailee so that §2-509(2) applies?  (Risk of loss, no breach- §2-509)

o Seller is a merchant so risk of loss passes to buyer when the buyer receives the goods says §2-509(3).  Did the buyer receive the goods?  No, the buyer has not received the goods which means the risk of loss is still on the seller.

Problem 47Janice Junk (non-merchant) decided to hold a garage sale to clean up her home and get some extra cash.  In the course of the sale, which was a huge success, her neighbor, Barbara Bargain, offered Junk $200 for her piano, and the 2 women shook hands.  Junk said to Bargain, “Take it away.  It’s yours.”  Bargain replied that she would come get it the next day with four strong friends and a truck.  That night Junk’s home burned to the ground, and the piano was destroyed.  Did the risk of loss pass from Junk to Bargain?  See §2-503.  If Bargain never picked up the piano and if it was destroyed in a fire 6 months after the sale, what result?  See §2-709(1)(a).

o Under §2-509(3) for a non-merchant seller the risk of loss will pass to the buyer when the seller tenders delivery.  Under §2-503, the risk of loss will remain with the seller here b/c it hasn’t been a reasonable time for the risk of loss to pass over to the buyer.  When talk about a piano they will need some time to move it.

o Clearly 6 months is reasonable time to pick up the piano, but we just don’t know when the time is where the seller can assume the buyer is never coming to pick up the goods. 

Delivery Terms  Shipment Contracts : a sales K where the seller need only get the goods to the carrier and then the

buyer will take on the risk of loss. Destination Contracts : where the parties agree that the carrier must deliver the goods before the

risk passes from seller to buyer. Official Comment 5 to §2-503 : Article 2 makes a presumption in favor of a shipment K.  When a

K is silent on risk of loss, typically this presumption will come into play. Delivery terms :  merchants have created a shorthand method of stating whether the sale calls for a

shipment or a destination K by using abbreviations, such as (F.O.B.- free on board; F.A.S.- free along side; CIF- cost, insurance, freight; C. & F.- cost and freight; and ex-ship-off the ship).  These are not only delivery terms but also price terms and inform the buyer that the price quoted includes freight paid to the point indicated.

1. C.I.F. and C. & F. indicate a shipment K.  C.I.F. means the price stated includes the cost of the item, the insurance premium, and the freight charge.  C. & F. is the same but without the buyer’s agreeing to pay insurance.

2. F.A.S. and Ex-ship are delivery terms used in connection with ships.  Read §2-319(2) and §2-322, and use them in answering Problem 47 below.

3. F.O.B. can indicate either a shipment or a destination contract.  In a K it is always followed by a named place (like F.O.B. Pittsburgh).  The risk of loss passes at the named place.  Thus, if the named place is the seller’s warehouse, the F.O.B. term calls for a shipment K; if it is the buyer’s store, a destination contract results.

§2-319: F.O.B. and F.A.S. Terms(1) Unless otherwise agreed the term F.O.B. (which means, "free on board") at a named place, even though used only in connection with the stated price, is a delivery term under which

a. When the term is F.O.B. the place of shipment, the seller must at that place ship the goods in the manner provided in this Article (Section 2-504) and bear the expense and risk of putting them into the possession of the carrier; or

b. When the term is F.O.B. the place of destination, the seller must at his own expense and risk transport the goods to that place and there tender delivery of them in the manner provided in this Article (Section 2-503);

c. When under either (a) or (b) the term is also F.O.B. vessel, car or other vehicle, the seller must in addition at his own expense and risk load the goods on board.  If the term is F.O.B. vessel the buyer must name the vessel and in an appropriate case the seller must comply with the provisions of this Article on the form of bill of lading (Section 2-323).

(2) Unless otherwise agreed the term F.A.S. vessel (which means, "free alongside") at a named port, even though used only in connection with the stated price, is a delivery term under which the seller must

a. At his own expense and risk deliver the goods alongside the vessel in the manner usual in that port or on a dock designated and provided by the buyer; and

b. Obtain and tender a receipt for the goods in exchange for which the carrier is under a duty to issue a bill of lading.

Problem 48Seller in NYC contracted to sell 80 boxes if clothing to buyer in Savannah, GA.  The delivery term was “$1,800 F.A.S. S.S. Seaworthy, N.Y.C.”  Seller delivered the 80 boxes to the dock alongside the S.S. Seaworthy and received a bill of lading from the ship as a receipt.  Before the boxes could be loaded, the dock collapsed, everything thereon disappeared into the water.  Under §2-319(2) must buyer pay the $1,800 anyway?  What if the delivery term had been “Ex-ship S.S. Seaworthy, Savannah,” and the boxes had been properly unloaded just before the dock collapsed?  Would §2-322 make the buyer pay?

Under §2-319(2), the requirements were met so the risk of loss shifts over to the buyer. Under §2-322, the requirements are met, so the buyer passes over to the buyer.   

Problem 49Seller in Detroit, MI contracted to sell and ship 50 automobiles to buyer in Birmingham, AL.  Assume lightning strikes, destroying the vehicles after the carrier has received them but before they are loaded on board the railroad car that was to take them to Birmingham.  Who had the risk of loss if (a) The K said, “F.O.B.  Detroit” See §2-319(1)(a));

o The risk of loss is going to pass to the buyer after the seller duly delivers them, which

they did here. (b) The contract said, “F.O.B. railroad cars Detroit” (See §2-319(1)(c)); or

o The risk of loss is not going to pass until the seller actually loads the goods onto the

carrier, and here they were not, so the ROL is on the seller. (c) The contract said, “C.I.F. Birmingham” (See §2-320)

o Not a definitive answer here.  The Code is ambiguous, so this would have to be

litigated.

Problem 50The dispatcher for Perfect Pineapples, Inc. had just finished loading five boxcars of the company’s product on board the cars of an independent railroad carrier when he received a notice from PPI’s sales department that the company had agreed to sell one boxcar load to Grocery King Food Stores “F.O.B. seller’s processing plant.”  The dispatcher agreed to divert one of the boxcars to Grocery King, but before he could do so, a hurricane destroyed all 5 boxcars and their contents.  Who bears the risk of loss?  See Official Comment 2 to §2-509.

o Official Comment 2 to §2-509 tells us that once the goods are afloat the seller must identify the goods in order for the risk of loss to pass over to the buyer.  None of the box cars were identified so the ROL did not pass to the buyer here.

Problem 51

The University of Beijing in China ordered video equipment to be shipped from Applied Technology, Inc., in San Jose, CA.  If nothing is said about the subject, as a matter of international law, will this create a shipment of a destination contract?  See CISG Articles 67 and 69.  If the parties had been negotiating for the purchase of this equipment but had not gotten around to signing the contract until the goods were already on board an airplane crossing the Pacific Ocean, does the buyer have the risk of loss only from the moment of the signing of the K or from the delivery of the equipment to the air carrier?  See Article 68.

Under the CISG, if the parties fail to agree a destination K will result.  From the signing of the K. 

Problem 52Dime-A-Minute Rent-A-Car rented a new sports car to Joseph Armstrong.  Due to a snafu at the rental office, Armstrong did not sign a rental agreement.  As he was leaving the rental car lot, the car was struck by a city bus due to no fault of Armstrong (who was not hurt).  The sports car was totaled.  Dime-A-Minute demanded that Armstrong look to his insurance to replace the car.  Did he have the risk of loss here?  See §2A-219.  If he had signed a rental agreement making him responsible for the car, would that agreement be valid?  See §§1-102(3) and 2A-108.

There is a strong presumption the ROL would remain on the lessor in a situation such as this. The question would be is this or is this not unconscionable.  This would be litigated.

NoteIn risk of loss, both the UCC and the CISG, presupposes that neither of the parties is in breach of their agreement at the moment when the risk would normally pass.  If this is not true (for instance, when the seller is in breach b/c the goods do not conform to the warranties made in the K), §2-509 does NOT apply.  The relevant section is §2-510 (§2A-220 for leases and Articles 66 and 70 for the CISG).  

Risk of Loss: Breach 

Problem 64The Lamia Museum’s director Mandrake Griffin, ordered three new pieces for the museum: an Egyptian sphinx, an Old World gargoyle, and an Etruscan statue of a centaur.  These objets d’art were purchased under separate contracts from Empusa Exports of London, England.  All were to be shipped “F.A.S. S.S. Titanic” on or about April 9, on their way to the museum, which was located in NJ.  The parties agreed that NJ law would apply.  Prior to April 9, Empusa Exports received a call from Griffin canceling the purchase of the centaur statue.  Empusa protested the cancellation, but agreed to ship the other two pieces.  Empusa’s manager discovered that the sphinx was phony, but kept her mouth shut and shipped it anyway.  She also discovered that the gargoyle’s condition was such that it could not survive the exposure to sea air, so she decided to send it by air in spit of the K’s F.A.S. Titanic term.  This decision proved wise since the Titanic encountered an obstacle on its sea voyage and foundered, taking the sphinx with it.  The gargoyle arrived in good condition, and Griffin wrote a letter to Empusa accepting the gargoyle and enclosing the museum’s check.  A week later Griffin learned that the gargoyle was not from the “Old World” but instead had been cast in Hoboken many years ago and had somehow found its way to Europe.  He sent Empusa a letter demanding that the museum’s money be returned and stating that he canceled the sale.  Before Empusa could respond, two things happened: the museum burned to the ground, and the centaur statue was stolen from Empusa’s warehouse (through no fault of Empusa, which was not negligent in guarding it).  Both the museum and Empusa were fully insured.  Answer these questions:

a. By shipping the other two objects after the museum refused to take the centaur statue, did Empusa waive its right to sue for the repudiation?  See §2-106(4).  Would §1-207 have helped Empusa?  What should it have done to use this section?

Under §2-106(4), the answer is probably not.  §1-207 would have helped Empusa, by shipping the other two and rejecting the other one this is probably enough.   

b. Which party took the risk of loss on 1. The centaur?

The buyer breached and the seller is protesting the breach.  The buyer is the one at fault.  Under §2-510, insurance becomes important.  The ROL is on the buyer to the extent to any deficiencies in the seller’s insurance, but here the seller and the buyer are fully insured.  There are no deficiencies in sellers insurance (the sellers insurance will cover everything) so there is nothing for the buyer’s insurance to cover.

2. The sphinx? Seller ships phony sphinx.  Under §2-510(1) the ROL is on the seller b/c the

seller did not make a perfect tender (did not conform to the K). 3. The gargoyle?

Under §2-510(2) the buyer rightfully revokes acceptance.  The ROL is on the seller over and above B’s insurance.  Buyers insurance is going to cover all of this.

c. When Empusa shipped the gargoyle by air instead of by sea could Lamia have treated this as an imperfect tender and rejected the gargoyle for that reason?  See §2-614.

§2-614(1) tells us that where the manner of shipment becomes impracticable reasonable substitute should be used and must be accepted.  They can’t object and say that you didn’t give a perfect tender b/c it was impracticable to ship it by sea.  This is a bad argument. 

d. The Lamia Museum’s insurance policy with the Pegasus Insurance Company contains two clauses relevant to §2-510.  One provided that on payment of a claim the insurance company was subrogated to any claim its insured had against any other person.  The other stated that the policy should not be deemed to provide protection for any claim where the risk of loss rested with another person.  What is the effect of these provisions?  See Official Comment 3 to §2-510.

Insurance companies cannot get around there obligations by inserting provisions like these.  They are not effective. 

Impossibility of Performance 

Problem 65V had always wanted a sundial for his garden, and he ordered one for $250 from Horology. The latter had 12 sundials of the type V ordered in its storage room when an earthquake shook the building. All 12 fell over, and all but three were smashed. The remaining three were slightly damaged. V, on being informed of the problem, insisted on the right to look over the three remaining sundials and to select one for his purchase, possibly at a reduced price due to the damage. Horology comes to you. Is §2-613 or §2-615 relevant? Must it let V pick out a sundial, and must if offer to let him purchase at a reduced price, or can it simply cancel without fear or legal liability? For the test for impossibility of performance in international sales, see CISG Article 79. 

§2-615 would apply here b/c the goods are not yet identified (that this particular sun dail goes to this particular person). 

§2-615 tells us that no it must not let V pick out a sundial, no he can allocate how he is going to deliver them as long as it is fair and reasonable.  He cannot be arbitrary; he must act in a fair and reasonable manner.

Problem 66Suppose the following, using the basic facts of the last Problem. When Horology received V’s order, one of their salespersons immediately put a red tag on one of the sundials. It said, “Hold for V.” Then the earthquake occurred, and miraculously only V’s sundial was destroyed.  The other 11 sundials, all exactly like V’s, were undamaged. When V demanded his sundial, Horology pleaded §2-613. Will that section excuse them?

§2-613 only applies when the goods have been identified and  they have not been identified here so this will not excuse Horology.  For §2-613 to apply the K language must specify that that the goods must be identified.  It would have to be required.

Problem 67In the mid-1960s, in an effort to boost sales of its nuclear reactors, Westinghouse agreed to sell 27 utility companies 80 million pounds of uranium over the next 20 years. The average sale price per pound was $10. When Westinghouse made the sale, it actually owned only 15 million pounds of uranium. By the mid-1970s, the price or uranium had risen to $40 a pound. In late 1975, Westinghouse announced that it would not honor its contract. The utilities sued. Westinghouse argued that the best evidence in the late 1960s and early 1970 syndicated uranium prices would be stable over the long term. The Corporation claimed that the price rise was unforeseeable and that the contracts were excused under §2-615 as “commercially impracticable.” In particular, Westinghouse blamed the 1973 oil embargo and worldwide price fixing for the “unpredictable” price rises. How should the dispute be resolved? If you could advise Westinghouse on how to avoid this problem in the future, what would you suggest?

This dispute should be resolved in favor of the utilities.  The argument that the cost has risen to high that the K is impracticable is almost always a loser.

WEEK 6: Remedies 

Seller’s Remedies

Problem 69B Auto sold a new blue sports car to D on credit. He accepted the car and drove it for a month. He then sent B Auto a notice of revocation of acceptance and gave as his reason the recent repainting of his garage in a color that clashed with the blue car. The notice stated that D had parked the car down the block from his home (away from the clashing garage) and that B Auto should come and get it. D also refused to make any more car payments. Three days after B Auto received the notice, the car disappeared and has never been found. May the seller recover the price under §2-709? Who had the risk of loss? Would it make a difference if D had rejected the goods for the same reason?

o The goods were accepted here and there was not a proper revocation because you have no right to revoke because the goods clash with your garage. The seller may recover the price under §2-709.  The buyer has the risk of loss here because he took possession and did not have the right to revoke.  No, either way he needs a commercially reasonable reason to revoke or reject.

Problem 70Lannie was the sole proprietor of Light’s, a lighting fixtures business in Austin, Texas. She contracted to sell 80 neon light fixtures to Signs, a firm in San Antonio. The price was $1500 “FOB Austin” and the shipment date was to be March 15. On March 5, Signs phoned Light and told her that the deal was off, but Lannie refused to agree to a cancellation. She went to her warehouse and picked 80 of the fixtures from her large stock. Then she posted a notice on the bulletin board near the cash register in her store, stating that 80 of the fixtures would be sold to the person making the best offer. Carl (who was always buying these types of items) saw the sign and offered Light $1000 for the fixtures. Light sold Carl the goods and took payment. Now Light comes to you. She tells you that on March 5 the fixtures were selling on the open market at $800 for 80 and that on March 15 the price for 80 fixtures was $900 in Austin and $800 in San Antonio. Answer these questions:(a) Does the UCC permit Light to select goods from the warehouse after the buyer repudiates?      Yes under §2-704(1)(a) because it allows the seller to identify the conforming goods because they were still  in his possession.(b) Was the resale proper?      No, because requires commercially reasonable notification to the buyer which was not done here, so the  resale was not proper.(c) If Light’s damages are measured under §2-708(1), what amount may she collect? What amount under §2-706?      She would get $600 ($1500(contract price) - $900(market price at place of tender)) under §2-708(1), whereas under §2-706 she would get $500 ($1500(contract price) - $1000(resale price)).

(d) Does Light have the choice between the §2-706 (Resale) computation and the §2-708 (Repudiation) computation?

o No, they will get the remedy under §2-706 because they violated the code by not giving adequate notice to the buyer and the court will not reward them with the higher damage amount after such a violation. 

Problem 71Fun sells swimming pools. Its president comes to your law office with this problem. A customer named Esther ordered one of the standard above-ground pools, retailing for $2000. The pool’s components are purchased by Fun at a wholesale price of $800 and are assembled into the finished product. The assembly process costs the seller $400. Swimmer has now repudiated the contract, and Fun wants to sue. The current market price is $2000 for such a pool. Fun is sure it can find another buyer at that price if it resells the pool. Does it have damages? How are they measured?

o Under §2-708(2) they should still get $2000, because they are considered a “lost volume seller,” they could have sold 2 pools instead of just 1 but for the breach.

The problem with the sellers in Fun’s position (sellers having an unlimited supply of goods) is that if the law forces them to measure the damages under §2-706 or §2-708(1), they lose the profit they would have made from the sale to the second customer. A seller in such a position is called a lost volume seller.  The drafters meant for §2-708(2) to rescue such a seller from this dilemma, but the actual mechanics of the operation of the section aren’t clear. The problem arises in part from the undefined phrase “profit (including reasonable overhead),” which contains accounting terms having no fixed legal meaning.

Problem 72Milo, sales agent for CCC, negotiated a contract whereby his company was to design and manufacture a special computer that would regulate the timing of subway trains for the City of Plantation. The price was $20,000 FOB CCC’s plant in Atlanta. When the computer was half completed, the City of Plantation underwent a change of administration, and the new city leaders decided to dump the subway renovations. They phoned CCC and canceled the computer order. Now Milo phones your law office for advice. To help in your decision, Milo states that as scrap the computer and its components are now worth $5000. Milo has heard that three other cities have subway systems similar to Plantation’s, and if the computer is finished, they might by enticed to buy it at a price between $15,000 and $20,000.  On the other hand, it will cost CCC $9000 to complete the computer.(a) Should CCC stop the manufacture of the computer and sell it for scrap or complete manufacture and then try to resell it? See §2-704 and Official Comment 2.

o Under §2-704 Comment 2, the seller can complete manufacture, but not if it would clearly increase the damages from breach. Here they can complete manufacture if it is commercially reasonable, we would probably want to know if the other cities are likely to purchase this computer or not to determine if completion is commercially reasonable.

(b) If CCC completes manufactures and then, after a good faith effort, is unable to find a new buyer for the computer, can it made Plantation pay for the finished product? See §2-709(1)(b) and Official Comment 1 to §2-704.

o If they complete manufacture and can’t resell after a good faith effort to do so, the buyer

will have to pay for the finished product.

Problem 73Lawyer Portia decided to rent a computer from Machines and use it in her office. The computer arrived, and Portia found it most satisfactory, but her struggling practice made it difficult for her to make the lease payments on time. After she had missed two payments in a row, Machines sent a goon to her office to repossess the computer. Portia wasn’t there at the time, but her loyal secretary protested mightily when the good grabbed the machine – at one point blocking the door with her body – but she was shoved aside and

the computer was taken. The lease still had a year to run, with payments of $100 due each month. Machines sued Portia for $1200. (a) Was Machines repossession valid? What remedy does Portia have if it was not? See 2A-525.

o It is only valid if there was no breach of peace, there was a breach of peace here, so repossession is not valid. Therefore, Portia can seek an action for replevin. 

(b) Assuming there was no problem with the repossession, is the lessor required to try to mitigate damages by re-leasing the machine? See §2a-529.      Possibly depending on the actual language of the contract.(c) Could the lessor avoid any possible duty to mitigate by so stipulating in the lease agreement? See §1-102(3)      No, even if that was entered in the contract, it would not be valid. 

Buyer’s Remedies 

Problem 74The world famous pianist Cristofori made $50,000 a year giving concerts. Recently he decided to experiment with some new sounds. He purchased an electric piano for $3,000 from the Silbermann Electronic Music Company. The purchase was negotiated orally; there was no written contract. Cristofori practiced day and night to master the new instrument. After three months of arduous practice, he noticed a strange ringing in his ears. Subsequent medical examination revealed that Cristofori was going deaf. The cause was a high-pitched whine (above the level of human perception) emanating from the electric piano. On learning that the piano had done this to him, Cristofori took an axe and chopped the piano into unrecognizable bits. (This action ended his ability to revoke his acceptance; §§2-608(3), 2-602(2)(b).) When he calmed down, he brought suit against the piano company for breach of warranty. His damages were claimed as $1,755,505, based on the following elements: $3,000 was the cost of the piano, $2,000 was the doctor’s fees, $500 was paid to experts to examine the piano and determine if it was the cause of the ear problem, $750,000 was lost income for the next 15 years, $1,000,000 was the value of Cristofori’s hearing, and $5 was for the axe.  Sibermann Electronic Music defended by (1) denying that it had warranted the piano in any way and (2) proving that the whine was harmless to everybody in the world except Cristofori. (The company proved that the accident occurred to him only because of the bone structure of his skull coupled with the fact that he had a metal plate installed in his head as a result of an auto accident in his youth.) Answer these questions: (a) What warranty, if any, did the Silbermann Company breach? Does the company’s care in manufacturing the piano or the freakishness of the injury keep the warranty from being breached?

There was a warranty of merchantability. This was not breached because the piano was fit for its ordinary purpose, we don’t look at this person’s special circumstances.

(b) Which, if any, of Cristofori’s damaged are recoverable under §2-714? Damages for any non-conformity. Because he could have resold the piano for the

market price he is only entitled to incidental damages, no consequential damages. (c) Which, if any, of the items claimed are incidental damages under §2-715(1)?

Only the $500 for the payment to the expert. (d) The §2-715(2)(a) test of consequential damages with its “reason to know” language is a restatement of our old friend Hadley v. Baxendale. Is it relevant here?

No, because he isn’t entitled to any consequential damages because he didn’t cover.

Problem 75Sheila Spin made it to the finals of the USA Yo-Yo Championship, where she was widely thought to be a cinch to win the $10,000 first prize. The day of the competition she went into the Smalltime Drug Store owned by her Uncle Mort and told him that she wanted to buy a four-foot nylon yo-yo cord to use in the competition. Mort sold her one for $1.50 (he put it on her bill) and wished her luck. That she didn’t have. The cord was defective and broke during her first trick, thus eliminating her from the competition. When the bill came from the drug store, Sheila refused to pay it. In fact, she filed suit against Mort asking for $50,000 consequential damages. Every expert witness who testified stated that Sheila’s ability with the yo-yo was the greatest in the world. Mort defended on two grounds: (1) merely knowing about the intended

use of the yo-yo in the competition wasn’t enough to impose liability on him unless the parties had agreed to put this risk on him, and (2) her damages were too speculative. Answer these questions:(a) Does the UCC permit Sheila to refuse to pay the bill? See §2-717

Yes, §2-717 says that Sheila can refuse to pay the bill if the warranty has been breached and notice is given of the non-conformity. They should write “payment in full” for it, if they cash the check, this is acceptance of that payment only.

(b) Are the consequential damages for which Sheila asked too speculative? See Official Comment 4 to §2-715.

No, this wasn’t too speculative because she was likely to have won this competition according to all the experts. 

(c) Is knowledge of the possible consequential damages alone sufficient to impose liability on a seller? Or is Mort right in saying that the liability for consequential damages attaches only if the seller has agreed (expressly or impliedly) to assume the risk? See Official Comment 2 to §2-715.

The Uncle’s argument is the “tacit agreement” test, this has been rejected by a majority of courts.  Therefore, the risk was on him even without his agreement to assume this risk. 

Problem 76Rambo Trucks sold Hercules Moving Company a large moving van. The contract of sale limited the buyer’s remedy for breach of warranty to replacement or repair only and clearly disclaimed liability for consequential damages. The first day on the job, the truck proved incapable of climbing even small hills, so Hercules Moving Company revoked its acceptance of the truck. It claimed a security interest in the truck pursuant to §2-711(3) and pending sale stored it at a truck depot, which charged it $50 a day for storage. Must Rambo Trucks pay the storage charges, or is the company protected by the disclaimer of consequential damages? See §2-719(3), 2-715(1). 

Storage costs are incidental damages; therefore, under the UCC this disclaimer doesn’t eliminate incidental damages, but only consequential damages. Under common law, this disclaimer would  eliminate incidental damages as well because they are a subset of consequential damages.

Unaccepted Goods

Problem 77Mr. and Mrs. Transient ordered a 2002 Blocklong model mobile home for $8,000 from the Home on Wheels Sales Corporation, delivery to be made on May 20. The Transients planned on spending an additional $500 to build a foundational that the Blocklong trailer had to have for maximum utility. Due to widespread industry strikes, the price of trailers rose dramatically in the early spring, and on May 10 Home on Wheels informed the Transients that the deal was off. The Transients shopped around and on September 25 bought a 2003 Behemoth model mobile home for $15,000 from another dealer. The Behemoth was larger than the Blocklong model (it had a basement and a laundry room), but it didn’t require a foundation. The Transients then brought suit. Home on Wheels defended by offering to show that (a) the Behemoth was selling for $10,000 up to September 5 when the price rose to $15,000, and (b) the Behemoth always sells for $2,000 more than the Blocklong since the former is a snazzier trailer. What damages can the Transients get under §2-712? See Official Comment 2.

Under §2-712, they can get the difference between cost of cover and the contract price, so $7000.   However, they saved $500 from cover for not having to build a basement, so now they can only recover $6500.  The fact that the car they covered with always sells for $2000 more means that they can only recover $4500 because the trailer they received instead was worth $2000 more than the original.

Problem 78The Student Bar Association of the Gilberts Law School decided to hold a mammoth wine- and cheese-tasting party for the students, faculty, staff, and alumni. The SBA ordered the wine from Classy Caterers. They agreed to pay $1,000 for it, the wine to be delivered on March 30, the day of the party. Classy

Caterers ordered the wine from Grapes Vineyards in California, “FOB San Francisco” for $750, but Grapes Vineyards when bankrupt on March 25. Classy Caterers was able to find identical wine in its own city for $750, and it bought the wine on March 25 for that amount. On March 25, the price of similar wine in San Francisco to the site of the party would have been $100. The SBA paid Classy Caterers $1,000 for the wine. Classy Caterers filed claims for damages in the bankruptcy proceeding of its defaulting supplier. Compute the damages due Classy for the failure to deliver the wine under §2-712. Now do it under §2-713. See Official Comment 5 to §2-713.

Under §2-712, they could get cover minus contract price, so $0.  Under §2-713, they could get market price when buyer learned of breach minus contract price, less expenses saved, so $50.

Anticipatory Repudiation 

Problem 80The US Army contracted with the Hawaiian Cattle Company for the purchase of 1000 lbs. of beef. Delivery was set 6 mo. later, on Oct 8, the agreed price to be $5000. Shortly thereafter, the price of beef rose sharply, and Hawaiian Cattle repudiated the contract on July10, when the price was $6000. The Army’s procurement officer scrambled around and on July 15 discovered it was possible to cover by buying similar cattle from Texas at a cost of $7000. Instead, the Army sent Hawaiian Cattle a telegram stating that it didn’t accept or recognize the repudiation and expected performance on October 8. By October 8 the price had risen to $8000. The Army decided not to cover at all and instead served the troops beans. As general counsel for the Army, advise the Army of the amount it can recover from Hawaiian Cattle. Read §2-610, §2-713, and §2-723(1), Does it help to reconcile these sections to know that the drafters of §2-713 were thinking of a buyer who learns of the repudiation after the date set for the original performance, not (as in this Problem) before the due date?

Damages would be the difference between the contract price and the market price at the time of repudiation, even though §2-713 says at the time when buyer learned of the breach.  The courts have said go with the “commercially reasonable” time. Here the commercially reasonable time is at the time of the repudiation.

The Statute of Limitations 

Problem 82Jane bought a new car on April 1, 2002. The written warranty that came with the car read: “The manufacturer will replace any part found to be defective in the first five years.” Three years and 358 days after Jane purchased the car, the steering wheel came off in her hands. Luckily she was able to brake in time, and both she and the car were uninjured. She had the car towed to the dealer’s place that same day. The dealer kept the car for three months, promising each week that it would be repaired. At the end of that period, the dealer told her to come and get the car. On the way home the steering wheel again came off in her hands. This time Jane was not lucky, she was killed. You are the attorney for her estate. Answer these questions:(a) When did the COA accrue with regard to the effective steering wheel? With the delivery of the car? On the 358th day of the fourth year? On the day of the fatal accident?

Not with the delivery of the car b/c of the express extension of the SOL.  The SOL accrued somewhere between the 358th day and the day she was killed.

(b) Was the statute tolled during the three months that the car was in the shop? The courts split on this.

(c) If the manufacturer of a vehicle sold it to the dealership, and the dealership then resold the vehicle to a consumer, would the four-year period on the manufacturer’s implied warranty start running on the date of delivery to the dealership or on the date of the sale to the ultimate consumer? Would we reach the same result on an express warranty given by the manufacturer?

The implied warranty goes back to the date the manufacturer delivers it to the dealership, but if looking at express then the courts say the date is the dealership delivers the car to the purchaser.

(d) Should the courts draw a distinction as to when the COA accrues based on whether the injury is to

person or to property? Code sections week 7:

Courts have different positions.  It depends where you practice.

Negotiability 

Problem 83When law student Portia Moot went to buy a used car from a man who sold it through the newspaper, the seller told her he refused to take her personal check, demanding instead a cashier’s check payable to his order.  Portia went to Octopus National Bank and paid the bank the amount required, and the bank then issued the cashier’s check, with Portia’s car seller being named as payee.  The bank gave the check to Portia, and she in turn handed it over to the payee.  What is the name that the Code gives to Portia in this situation?  See §3-103(a)(11).

Portia is considered the remitter by the Code.

Notes If the drawee on a draft is not a bank, Article 3 still applies, but the instrument no longer meets the

technical definition of a check (which requires that the drawee be a bank). A negotiable instrument containing a promise to pay money is a note and one containing an order

to pay money is a draft.

Problem 84Texas millionaire Howard Chaps signs all of his checks with a small branding iron that prints a fancy X on the signature line.  Are his checks negotiable?  See §1-201(39); Official comment 39.

Yes, his checks are negotiable.  §1-201(39) tells us that as long as the symbol was executed or adopted by the party with the present intention to authenticate the writing the symbol will be fine.

Problem 85Walter Capitalist is the sole proprietor of the Capitalist Company.  He signs all of the store’s checks by writing “Capitalist Company” on the drawer’s line, but the checks are drawn of his personal checking account at the Octopus National Bank.  Can the bank treat the checks as if Walter had signed his own name?  See §3-401(b).

Yes b/c §3-104(b) says that a signature may be made (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with the present intention to authenticate a writing.

Problem 87Whenever it mails out a check, the Adhesion Insurance Company marks it “Void after 90 days.” Is such an instrument technically negotiable?

o This is a conditional promise, so No.

Problem 88The promissory note contained this clause: “ The collateral for this note is a security interest in the maker’s art collection; for rights duties on default, see the security agreement signed this day creating the security interest.”  Does this clause destroy the negotiability?  See §3-106(b)(i) and its OC 1, 3rd paragraph.

o This does not destroy its negotiability.  The official comment tells us that in some cases it may be convenient not to include a statement concerning collateral, prepayment, or acceleration, but rather refer to a security agreement, mortgage or loan agreement for that accompanying statement.  §3-106(b)(i) allows a reference to the appropriate writing for a statement of these rights.

Problem 89The promissory note stated that the rate of interest was “2% above the prime rate as of the date of maturity.”  The prime rate is the interest charged by banks to their best customer and can be ascertained by reference to financial publications.  Does the fact that the holder of the note has to consult sources outside of the instrument in order to calculate the interest due destroy negotiability?  See §3-112

o No, §3-112 tells us that the amount or rate of interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument.

E. “Courier Without Luggage” RequirementPA Justice Gibson once said that a negotiable instrument must be a “courier without luggage.”  This means that the instrument must not be burdened with anything other then the simple and clean unconditional promise or order; it cannot be made to truck around other legal obligations.  If the maker of a note adds any additional promises to it, the note becomes non-negotiable b/c the prospective holder is then given notice that the note is or may be conditioned on the performance of the other promise.  §3-104(a)(3) contains a few exceptions. 

Problem 90Do the following clauses in an otherwise negotiable promissory note destroy negotiability?

a. “Maker agrees that signing of this note also indicates acceptance of the contact of sale for which it is given.”

Yes, b/c it carries another obligation. b. “Maker agrees and promises that if the holder of this note deems himself

insecure at any time, he may so inform the maker, who will then supply additional collateral in an amount and kind to be specified by the holder.”

No, under §3-104(a)(3)(i) says you can mention additional collateral. c. “Maker agrees to let the holder select and attorney for the maker; at any time the

holder directs, said attorney is hereby given the authority to confess judgment against the maker in any appropriate court.”

No, under 3-104(a)(3)(ii) allows this. d. On the front of a check: “By cashing this check, the payee agrees that the drawer

has made payment in full of the debt drawer owed to payee as a result of the purchase of a 2002 Ford, made on January 24, 2002.”  The revised version of Article 3 drops any discussion of the effect of this language on negotiability, but §3-311 regulates the contractual result of such a restriction.

Yes, this is an instruction in addition to the payment of money which isn’t allowed.

e. “Maker hereby grants the payee a security interest in the collateral described below.”

No, under 3-104(a)(3)(i) this doesn’t destroy negotiability.

Problem 91Do the following clauses in a promissory note destroy negotiability?

a. “Payable 30 days after sight.” 3-108(b), so No

b. “Payable in 11 successive monthly installments of $2,414.92 each and in a final payment of $2,415.03 thereafter.  The first installment being payable on the ___ day of ___, 20__, and the remaining installments on the same date of each month thereafter until paid.”

Yes, blanks left in contemplation refer to 3-108(b), not 3-108(a).

c. “Payable on November 8, 2010, but the holder may demand payment at any time prior thereto if he deems himself insecure.”§1-208.

Yes, acceleration clause okay if follow definite time or on demand.  So its okay here.

d. “Payable when the sun comes up tomorrow.” If undated you wouldn’t know when its due, if dated it’s okay.

e. “Payable on November 8, 2010, but if my potato crop fails that year, payment shall be extended until November 8 of the following year.”

No under 3-108(b)(iv), extension to a further definite time. f. “Payable on November 8, 2010, but the maker hereby reserves the option to extend the time of

payment until he can pay without serious financial hardship.” Yes, under 3-108(b)(iv), to indefinite time.

g. “Payable 120 days after my rich uncle Al dies.”  Such notes are called post-obituary notes. (No idea when he is going to die, so no definite time.) Date isn’t definite, not

really ascertainable, so yes. h. “Payable 100 years from today, but if my rich uncle Al dies before this note is due, it shall become

payable 10 days after distribution of his estate to his heirs.” (This is a definite time.  Acceleration clauses are allowed.) Second portion will

occur 1st, so this is an acceleration clause which is allowed.  So no. i. “Payable on my next birthday.”

No. 

Problem 92Do the following clauses in a promissory note create bearer paper?

a. “Pay to John Smith.” o No.  This is non-negotiable.  This is not order paper b/c this is not paid to the order of

John Smith, so must go to the common law. b. “Pay to the order of John Smith or bearer.”  See Official comment 2 to §3-109.

o Yes, this still means the check is payable to bearer.  Bearer trumps order language if both

listed. c. “Pay to bearer.”

o Yes. §3-109(a)(1). d. “Pay to the order of Cash.”

o Yes. §3-109(a)(3). e. “Pay to a Merry Christmas.”

o Yes, this would be considered bearer paper b/c this is definitely not an identified person. 

Comment 2 to §3-109. 

Problem 93Do the following clauses create order or bearer paper, or do they make the instrument non-negotiable for failure to create either?

a. “Pay to the order or (blank).”  See §3-115 and OC 2. o Bearer paper until filled in, then its order paper. b. “Pay to John Doe’s estate.”  See §3-110(c)(2)(i). o Non-negotiable b/c no order or bearer paper used. c. “Pay to the order of the President of the US.”  See §3-110(c)(2)(iv). o Order paper

d. The drawer of a check drew a line through the words “the order of” that were printed on the check prior to the space for the payee’s name.  Is the check, as altered, negotiable?  See §3-104(c).  If the drawer of a check or the maker of a promissory note wants to destroy negotiability, what should be done?  See §3-104(d).  Why would this ever be desirable?

o It’s okay.  To destroy negotiability they should write “non-negotiable” on it inconspicuously.  Desirable to protect drawer or maker… allows them to use defenses down the road, even against HDC. 

H. Consumer NotesHow do you negotiate the paper? §3-201

1. Order Paper Indorsed by the proper person (who thereby becomes the Indorser),

AND The delivery of the instrument to the transferee (who thereupon

qualifies as a Holder) Note : An indorsement is a signature placed on an instrument by the

payee or any later transferees. 2. Bearer Paper 1. Needs no indorsement

Delivery of the instrument to the transferee (who thereupon qualifies as a Holder) 

Special and Blank Indorsement1. Order Paper : when a payee wants to transfer it to another person, the

drawee bank will require the payee’s indorsement. §3-501(b)(2)(iii). 2. Blank Indorsement : when the payee simple signs the back of the

instrument.  Legal effect?  It converts the paper into bearer paper. 3. Special Indorsement : to preserve the “order” character, the original payee

may specify a new payee by writing “Pay (name.”  The new payee becomes a holder as soon as the instrument is delivered.  (Do not need “pay to the order of” here).

4. Negotiability is not affected by the language written on the instrument during the course of negotiation.

 Problem 94David Hansen banked with the Mechanical National Bank (MNB).  Hansen owed 50 to Egger and decided to pay him by writing out a check for $50, using one of the checks MNB furnished him when he opened his account.  He gave the check to Egger, who wrote his name on the back of the check.  Egger gave the check to his wife Cynthia, who took it down to the Cornucopia Grocery (CG) and asked the manger to cash it.  The manager paid Cynthia $50 and then took the check and wrote “Pay to CG” just above Egger’s signature.  When Billy Speed, the Check Collection Services’ messenger, came by, the manager gave the check to him for delivery to the Octopus National Bank, where the grocery store had an account.  Speed delivered the check to the bank, where the bank’s check processing machine merely stamped the words “ONB” on the back of the check.  ONB then forwarded the check to the MNB.

a. To which parties should these labels be attached: drawer, drawee, payee, or depository bank? o Drawer: David Hansen; drawee: Mechanical National Bank; payee: William Egger; Dep.

Bank: ONB b. Did the following people qualify as holders: David Hansen, Egger, Cynthia, the manager of CG,

CG, Billy Speed, ONB, and MNB?

o All holders except: David Hansen, and Mechanical National Bank (drawers and drawees

aren’t holders) c. If Egger had failed to indorse the check, but simply deposited it in his account with ONB, would

the bank have been a holder?  See §4-205. o Yes, depository banks are holders, even if not endorsed, if put in payee’s account (4-205)

d. What was the legal effect of the language written on the check by the grocery store manager? o It made the bearer paper into order paper (3-205(c)).

e. Which of the parties are properly called indorsers?  See §3-204. o William Egger and manager of the Grocery Store and ONB (3-204)

 Problem 95A check was made payable to “Mary and Donald Colpitts.”  Must both payees indorse it in order to negotiate the instrument?  What if the check were payable to “Mary or Donald Colpitts”?  Must both payees indorse now?  Finally, what if it simply is payable to “Mary Colpitts, Donald Colpitts” with no connecting word?  Are 2 indorsements needed here?  See §3-110(d) and OC 4.

o Both parties must endorse to negotiate the instrument.  Then only one needs to endorse

the instrument when nothing is specified, it’s considered “or.”  Problem 96When Portia Moot received her 1st paycheck from the law firm that recently hired her, she was annoyed to discover that it was made out to “Portia Mort.”  When she took the check to her bank to cash it, she mentioned the problem to the bank clerk, who promptly called you, the bank’s attorney.  What steps would you suggest the bank follow in this situation?  See §3-204(d) and its OC 3.

o Bank should have her endorse the way written on check and the correct way (3-204(d))

Problem 97Desert Paradise, Inc. (DP), initiated a scam in which hundreds of middle-class people signed promissory notes in order to invest in the supposed development of a retirement community to be built in the Southwest.  Desert Paradise, the payee on all of these notes, sold them in bulk to ONB.  Rather than indorsing its name hundreds of times of each of the notes, DP had its indorsement printed on a separate sheet of paper, which it then folded into each note, not connecting it and any way other then the fold.  DP’s officials absconded with the money and left the desert untouched.  ONB demanded payment from the makers of the notes, and when they tried to raise defenses of breach of K and fraud, ONB claimed to be a holder in due course, so as to take free of these defenses.  Is ONB even a holder?  See §3-204(a) and the OC 1 (last paragraph).  A separate paper used for indorsements is called an allonge, and the last sentence of §3-204(a) says that it must be affixed to the instrument.  What does “affixed” mean?  Would a paper clip do the trick?  A staple?

o ONB is not a holder b/c folding and paper clipping does not mean affixed; stapling is

affixed.

Problem 98When Laura Lawyer’s briefcase was stolen, it contained her monthly paycheck from the law firm for which she worked, made payable to her order.  She has not indorsed it.  The thief who stole the briefcase forged her name to the back of the check and transferred it to an innocent party, Grocery.  When the latter tried to cash the check at the drawee bank, the bank alerted Laura, and she arrived at the bank immediately.  Can she retrieve the check from the Grocery?  See §3-306.

o Yes, forgery is not effective to negotiate the instrument.  (3-306).  Cornocopia is not a

holder.

Problem 99Assume that on receiving her paycheck, Laura had signed her name to the back of the instrument, which was then blown out a window and landed at the feet of a criminal, Harry.  Harry took the check to the

Grocery and told the manager that he was Lance lawyer, Laura’s father, and asked the manager to cash it for him.  The manager made Harry indorse the instrument (reason: to make Harry contractually liable thereon (§3-415(a)), so Harry wrote “Lance Lawyer” under Laura’s name.  Is the Grocery a holder?

o Yes, this was bearer paper, so anyone in possession is a holder.  Problem 100Assume that Laura wanted to indorse the instrument over to her mother, so on the back she wrote “Pay to Lilly Lawyer” and then signed her own name.  Thus indorsed, the instrument was blown out the window, and Harry found it.  He indorsed “Lilly Lawyer” under Laura’s name and transferred the check to Grocery.  Is the Grocery a holder?  See §3-205(a).

o No, forgery is not effective to negotiate, so Cornocopia is not a holder.  Lilly had to

endorse first.  Rule:  The rule here is that ay unauthorized indorsement of the payee’s name or any special indorsee’s name is not a valid negotiation and gives subsequent transferees no legal rights in the instrument no matter how innocent they are or how far removed from the forgery.   The same rule applies to missing indorsments of the payee of special indorsee; later possessors of the instrument do not qualify as holders.  BUT once an instrument becomes bearer paper, subsequent unauthorized signatures have no effect on the holder status of later takers, since valid indorsements are not required to negotiate bearer paper (§3-201(b)).  

Problem 101Laura never had a course in commercial paper, so when she received her paycheck, she simply wrote her name on the back and mailed the check to her mother.  Her mother needed some reason to hold onto the check for a week before cashing it, so she wrote “Pay to Lilly lawyer” above Laura’s indorsement.  Has the check now become order paper requiring the mother’s indorsement for further negotiation?  See §3-205(c)?

o Yes, under 3-205(c), holder can make bearer paper into order paper.  

Holders in Due Course (HDC) 

Problem 103Zach bought a car for his business from Fillmore, signing a promissory note for $23,000 payable to Fillmore. Fillmore sold the note to the Pierce Financing Company for $22,800, a $200 discount. The car fell apart, and Zach refused to pay. Is the finance company (assuming good faith and lack of notice) a HDC for the $23,000 or $22,800? If Millard Fillmore, the owner of Fillmore, owed his mother $21,000 and gave her the note with the understanding that the extra $2000 was a Mother’s Day gift, would the mother be a HDC for the full amount?

The Finance company is a HDC for the $23,000.  Millard would be a HDC for only the $21,000 because she gave no value for the other $2000. 

Problem 104Tom tricked old Mrs. Nodding into writing a check payable to Tom (she thought he was the agent for a local charity). The check for $1000 was drawn on her bank, First County Bank. Tom took the check to his bank, Last National Bank, and after indorsing it, put it in his checking account. Last National Bank sent the check to First County Bank for payment, but by the time it got there Mrs. Nodding had stopped payment so that the check was dishonored and returned to Last National. Is Last National Bank a HDC? This question will be important if Tom has skipped town and Last National decides to sue Mrs. Nodding under §3-414.

It depends on whether they have had to give money out of their own pocket.  If the bank permitted Tom to get the money before the check was cleared through the drawee bank, and there is not $1000 in Tom’s account, the Last National Bank would be a HDC because they would have to pay out of their pocket. 

Problem 105

Same situation as Problem 104 except that when Tom deposits the $1000 check in his account, the account contains $500. Later that afternoon he withdraws $500. Is the bank a HDC for any amount? See §4-210(b) (the FIFO rule: First in, First out.) What result if he withdraws $750?

The bank is not a HDC because they have failed to give value themselves; they aren’t out of pocket anything. However, if he withdrew $750, the bank would be a HDC for the $250. 

Problem 106The corporate treasurer of the Business Corporation was having major troubles paying his personal bills, so finally he decided to embark on a life of crime. He used a corporate check to pay his American Express bill, making the check out to “Amerex Corp., 770 Broadway, NY, NY 10003” (the actual address of American Express). On the corporate check requisition form he wrote a phony explanation that this check represented shipping expenses. This caused no suspicions at Business Corporation and, thus encouraged, he did it every month for two years. When Business Corporation finally figured out what had happened, it sued American Express in quasi-contract for all the money it had received in this fashion. American Express replied that it was a HDC of these checks and, as such, was not amenable to this suit. Business Corporation pointed to the suspicion circumstances and to UCC §3-302(a) and 3-307 (arguing that the corporate treasurer was a fiduciary). How should this be resolved?

American Express is a HDC because they have given value up front, expecting to get a payment back in return.  The abbreviation of their name was allowed by the court because several people actually pay their bills this way with this abbreviation.

Problem 107Fred wrote a check on Jan 5, 2008, but mistakenly put down 2007 as the year. He saw his error, crossed out the last digit, and wrote 8 above it. Can anyone become a HDC of this instrument?

Something is only an alteration if it is an unauthorized change. Here he authorized the change, he did it himself, so this is not considered an alteration and someone can become a HDC. 

Problem 108Ace Finance Company was the payee on a promissory note signed by John Maker. On its face the note calls for John to make 12 monthly interest payments before the note matures. Ace sold the note at a discount to Big Town Bank. If the note has written on it, in big letters, a penciled notation, “Missed Paying First Installment,” can Big Town Bank ever qualify as a HDC?

Yes. Under §3-304(c), a missed interest payment is not the same as a missed principal payment.  Under §3-304(b), only when principal payments are missed and the holder is put on notice can they lose HDC status. 

Problem 109Dan Drawer wrote a check dated April 30 to Dr. Paine, his dentist, for $80, in payment for services rendered. Dr. Paine was not aware that the check fell to the floor behind his desk, where it lay until the end of August, when the janitor found it. Dr. Paine then indorsed the check over to his local grocery store on August 31, and it bounced on Sept 3, when the drawee bank informed the manager of the grocery store that Dan had stopped payment because the dental work had been done badly. Is the grocery store a HDC?

No, the date was on the check, so the grocery store was clearly on notice that the check was overdue because more than 90 days had passed since it was issued.     

Problem 110When Ellen found out that the computer she had purchased didn’t work, she was furious and decided not to pay the promissory note she was furious and decided not to pay the promissory note she had signed. The note stated that it was “payable at Busy State Bank” (which in this case means that the bank would pay the note when presented and then expect reimbursement from the maker.) Harold, the head cashier at the bank, took Ellen’s phone call and promised not to pay the note when it was presented. Four months went by, and, on one hectic afternoon, the bank paid the note by accident. Harold said he had forgotten the request not to pay. The bank now demands payment, claiming to be a HDC. Is it?

No. Problem 108 involves the “forgotten notice doctrine,” which permitted a holder to forget notice and thus become a HDC if sufficient time passed between the notice and the acquisition of

the instrument.  The UCC does seem to retain the “forgotten notice doctrine” under §1-201(25), but the courts don’t like this doctrine at all.

Problem 111Giant bought some machinery from Tractors, and in payment executed a promissory note payable to the order of Tractors for $2000. Tractors sold the note without indorsement to the Friendly Finance Company for $1500. The maker of the note refused to pay the note when it matured, stating that the machinery didn’t operate properly. Friendly decided to sue Giant, and the day before the lawsuit was filed, Friendly’s lawyer noticed that the note had never been indorsed by Tractors. He had Tractors’ president specially indorse the note over to Friendly right away, and then the suit was filed. Is Friendly a HDC?         Friendly had notice before the indorsement so they are not a HDC.

Problem 112Happy, the used car salesman, sold Manny a lemon car, taking in payment a promissory note for $2000 made payable to the order of Happy. Happy discounted the note with Alfred, a local licensed money broker, who paid him $1700 and took the note without knowledge of the underlying transaction. Alfred’s daughter Jessica had a birthday shortly thereafter, so Alfred indorsed the note in blank and gave it to her as a present. When the note matured, Manny refused to pay it to Jessica, the car had fallen apart and he felt that he shouldn’t have to pay for a pile of junk. Is Jessica a HDC?      She is not an actual HDC, but she has the rights of a HDC because Alfred was a HDC. 

Problem 113If in the above Problem Jessica had thereafter made a gift of the note to her husband, Lorenzo, would Lorenzo have HDC rights? Does it matter if Lorenzo, prior to the gift, knows of Manny’s problems with the car? If Manny won’t pay, is Alfred liable to Lorenzo? See §3-305(a)(2) and 3-303.

Lorenzo would also have rights of a HDC under the shelter rule. Mere knowledge of the problems wouldn’t strip him of his HDC rights. Alfred was a HDC and Lorenzo has rights of a HDC, the actual HDC will win out.   

Problem 114After Lorenzo (from the last Problem) acquired the note, he sold it for $1800 to Portia, a local attorney. She had no notice of problems with the instrument. When she presented it to Manny for payment, he refused to pay and instead filed for bankruptcy. May she recover from Alfred? See §3-305(b). If she does and prevails Alfred will reacquire the instrument. Does the shelter rule give him Portia’s HDC rights? Does Alfred reacquire his original HDC status when he gets the instrument back? Could he sue Jessica or Lorenzo?

She is an actual HDC, so yes. No, he gets his own rights back, not hers.

Problem 115Stephen bought a sailboat from Jack, paying $500 down and signing a $1000 promissory note for the balance due. Stephen loved everything about the boat except the color, and he promptly repainted it his favorite color black. Prior to the sale Jack had told Stephen that the boat was constructed so that it wouldn’t sink even in the roughest weather. This proved to be untrue when the sailboat went down in the first storm that came along, and it cost Stephen $300 to have it dredged from the bottom and restored. In the meantime, Jack had given the promissory note to his father as a birthday gift, and his father presented it to Stephen for payment at maturity. May Stephen assert his damages against the father’s demand for payment? Same result if the boat never sank, but Jack’s dog bit Stephen on the leg one week after the delivery of the sailboat, and Stephen incurred $100 in medical bills as a consequence?

Yes, even though he has no value (and is not a HDC) the father has an argument to enforce it under the shelter rule… He would take shelter under Jack as a HDC.  Reason why father cannot lock this defense in recoupment is b/c the seller who is HDC cannot shield himself from a claim in recoupment.  (2nd part)… this is setoff and Stephen cannot use setoff here.  This is not a valid claim to reduce the amount owed on the note. 

 Problem 116

When Ronald, newly rich, moved to NYC, he was impressed by the Brooklyn Bridge when he first saw it. Simon, a con man, told Ronald that he was the owner of the bridge (a lie, of course), and offered to sell it to him for $2,000,000 (described as a bargain). Ronald paid $20,000 cash as a down payment and signed a promissory note, payable to Simon, for the rest. Simon negotiated the note to a finance company, which claimed to be a HDC. When Ronald discovered that Simon lacked title to the bridge, he refused to pay the note. Does he have a real defense of fraud here?

This is fraud but just not essential fraud, which is required to be good against a HDC.  This is personal defense, and this is not good against a HDC. 

Problem 117A child prodigy, Thomas, had been playing the piano since he was 3 and making professional tours of the world since he was 12. He looked much older than he 17 years. He signed a promissory note for $800 payable to the order of Mercy Music Company as payment for a piano, planning a tour with it. The company was unaware of Thomas’ age. The payee endorsed the note over to Big National Bank for $725. When the fist payment came due, Thomas refused to pay. He told the bank to come pick up the piano – he was disaffirming the sale. Who wins?      The kid wins b/c he is an infant and under 3-305(a) this is a real defense which is valid against a HDC. 

Problem 118Childe, 17, received a check for $1000 from his employer and decided to use it to buy a car from Byron Auto, a used car dealership. He picked out the car he wanted, indorsed the check in blank, and handed it over to the salesman. Byron Auto indorsed the check on the back and cashed it at its own bank the Crusaders National Bank. Before this bank could present the check to the drawee bank, Childe decided to buy a horse instead of a car, so he returned the car to the dealer and asked for the check back. Informed that the bank had it, Childe called up the bank and informed it of his rescission of the K. When the bank refused to return the check to Childe, he filed suit, asking the court to restrain the bank from presenting the check to the drawee and to order replevin of the check. How should the court rule? It is clear that a HDC takes subject to the defense of infancy, but does it take subject to a claim to the instrument based on infancy? See §3-202, §3-305(a) and (b), and §3-306.

Under 3-306, if the bank is HDC, they take free of the claim to the instrument and the child won’t get the check book.  But if the bank isn’t a HDC the bank doesn’t take free of the claim to the instrument and the childe can get the check book.  

Problem 119When she heard her creditors fighting over priorities on her doorstep, Elsie knew that she had no choice but bankruptcy. Among the debts that she reported to the bankruptcy court was the loan she had taken from Point National Bank, which was evidenced by a promissory note she had signed. In due course the bankruptcy proceeding culminated in the judge’s ordering that Elsie be discharged from all her scheduled debts. Two years later, the promissory note surfaced in the possession of Shadbolt State Bank, which claimed quite convincingly to be a HDC. Must Elsie pay? See §3-305(a)(1) and (b). 

No, under 3-305(a)(1)(4) which says discharge of the obligor in insolvency proceedings.  This is a real defense that would be good against a HDC.  Discharging bankruptcy is always a real defense. 

Problem 120Malvolio, a traveling salesman, bought a new car from Valentine Auto, signing a note for $18,000. The payee discounted the note for $16,000 to the Orsino Finance Company, which notified Malvolio that he should make all future payments to them. Malvolio immediately sent them a check for the outstanding balance (he had come into some money when his aunt died). He asked for the note back, but Orsino was evasive. A week later Malvolio received a note from the Olivia Finance Company saying that his note had been assigned to them and that he should direct his payments to their office. When Malvolio protested, they made HDC noises and became quite nasty. Malvolio, worried, comes to you for advice. What should he do? See §3-501(b)(2); read §3-601 and 3-602. Does Malvolio have remedies outside the Code? Think back to Contracts.

Personal defense her (discharge by payment).  Should have gotten the actual note back b/c if it gets in the hands of  a HDC then the fact that you already paid it is not a real defense against a HDC and you may have to pay on it again.    

Problem 121Slick, an expert con man, went into John’s and told John, the owner, that he was Money, the richest man in town. John was too awed to ask for identification. Slick then picked out several very expensive pieces of jewelry and signed Money’s name to a promissory note to pay for them. Slick skipped town with the jewelry. When the note matured, the Tenth National Bank (a HDC to whom John has negotiated the paper) presented it to Money for payment. May Money refuse to pay a HDC?

Yes.  This is not an effective authorized signature under 3-403. Under 3-305(a) there is no party to pay the instrument b/c this was an unauthorized signature.  He never signed the document himself.  So this an effective defense b/c the party never signed the document.    

The Underlying Obligation Problem 124Aunt Fran was unable to pay the annual rent on her hat shop, so she asked the LL, Simon, to accept instead a promissory note from her to him for the amount of the rent, the note to be due in 3 months in the future. Simon took the note and immediately discounted it with a local bank. A week later (an before the note matured), Simon brought suit against Aunt Fran for non-payment of the rent (the underlying obligation being the lease agreement). Can she defend by saying that the note somehow suspended his right to sue on the underlying obligation?

Yes. The common law doctrine of merger stated that once an instrument was offered and accepted in satisfaction of an underlying obligation, the obligation merged with the instrument, and until the instrument was dishonored the underlying obligation was suspended (unavailable as a cause of action). 

Problem 125Suppose in the last Problem Aunt Fran had paid her rent by giving a cashier’s check to Simon. The check was drawn by ONB on itself (the very definition of a cashier’s check – see §3-104(g)). Simon took the check down to ONB and was dismayed to discover that the bank had failed and was now closed. He returned to Aunt Fran and demanded the rent money. What should she tell him? See §3-310(a).      Her obligation is gone so she should tell him to take a hike. 

Problem 126When Aunt Fran told Simon that she was not liable for the rent as long as the note was outstanding, he got it back from the bank and tore it up. May he now sue her for the rent even though the note has not yet matured? See §3-604, 3-310(b)(4), 3-309. If the cancellation had been a clerical error, what result?

She is going to argue that she made a mistake. Some courts would allow him to say that this wasn’t an  intentional act. 

Problem 127Winkin, Blinkin, and Nod signed the following promissory note:      Oct. 1, 2010      $3000      On or after 6 months from date, we promise to pay to the order of      Grimms National Bank, the sum of three thousand dollars ($3000). We, along       with all sureties and subsequent endorsers, waive all rights to presentment,      notice of dishonor, and protest, and all parties hereto agree to any extension      of time granted by the holder to the makers.                        Wilbur Winkin                        Barney Blinkin                        Harry Nod

Grimms National Bank indorsed the note in blank and discounted it to Anderson Finance Co. When the note matured, Anderson sued only Winkin, demanding the entire amount. May he defend on the basis that Anderson should have sued all three of them, since the note contains the words “we promise to pay”? If Anderson wins, can Winkin sue Blinkin for $2000? $1000? See §3-116.    No, it is perfectly ok to sue one of the three makers.  They are jointly and severally liable.  Anderson can sue (according to the agreement that they were equally liable) Winkin for$ 1000.  If one is insolvent and you paid the entire $3000  then you can go after the other one (split amongst 2) for $1500. 

Problem 141Grosvenor finally paid off an old debt to Bunthorne by giving him a check drawn on the Patience National Bank. Bunthorne took the check to the bank and demanded payment. The bank asked him to sign his name on the back, but Bunthorne refused, saying “I will never put my name on any check Grosvenor has touched.” If the bank declines to pay the check, has a technical dishonor occurred? See §3-501(b)(3)(i), 3-501(b)(2)(iii). This may be important because Grosvenor’s §3-414 obligation is conditional on a dishonor, and he can no longer be sued on the underlying obligation that is suspended until dishonor by §3-310.

When the check is presented the bank can return the check for failure to sign under §3-501, which is not a technical dishonor.  

Problem 142When Grosvenor gave Bunthorne a check to pay off an old debt, Bunthorne negligently lost it behind the sofa and didn’t find it for 8 months. The bank it was drawn on refused to pay it because it was suspiciously old (§4-404). Is Grosvenor still liable on this check? See §3-414(f). Would he be if the drawee bank had folded 5 months after the check was written but before it was presented? If Bunthorne had indorsed the check the day after it was issued to him and then cashed it at the corner drugstore and the drugstore mislaid it for 5 months before the drawee bank dishonored it, is Bunthorne still liable to the drugstore? See §3-415(e).        Probably yes, but loophole if the drawee bank causes the problem itself.  (e) says you are entitled to 2 things as the drawee before you have to pay: presentment and dishonor. 

Problem 143A promissory note contains a clause stating, “All parties to this note hereby waive all rights to presentment, notice of dishonor, and protest . . . .” Is a clause like this buried in the fine print on the front side of a note sufficient to deprive indorsers of their right to notice of dishonor? See §3-504(a)(iv) and (b)(ii).

Yes, that is effective.  §3-504 doesn’t say anything about where the waiver must be located.  The waiver would be effective, but negotiability is not destroyed.  

Problem 144 Fortune was walking along the street, his pockets stuffed with money and checks he had won with a dazzling display of his prowess in the game of stud poker, when he was stopped by a creditor, one Mr. Holdit. Holdit demanded payment of a long-due $50 obligation, and Fortune was glad to indorse over to him a check for that amount that Fortune had won from Deuces; Fortune was named as payee on the check. After giving the check to Holdit, Fortune thought better of the whole transaction so he contacted Deuces, the drawer, the next day and persuaded him to stop payment on the check. Holdit held onto the check for 6 weeks and then took it to his bank, the Creditors National, and cashed it. Creditors National presented the check to the drawee bank, which dishonored it whereupon Creditors National reclaimed its money from Mr. Holdit. Holdit, now very mad, sued Fortune on his indorser’s obligation. Was Fortune discharged by the delay in presentment? See §3-415(e). Was the presentment delay excused within the meaning of §3-504(a)(iv)?

Normally answer if yes, but under these facts the answer is no b/c of his urging to stop payment he doesn’t have a right to expect that the instrument would be paid in the first place, so this would be considered a waiver. §3-504(a)(iv).  This is an example of excuse.

Problem 128Billy wrote out a check payable to the order of Snow to pay for some carnival equipment. Snow cashed the check at Drug Store, indorsing his name on the back. Drug Store then indorsed the check and deposited it in

its account at Jordan State Bank. This bank also indorsed the check and then presented it to the drawee bank, Rodgers National Bank, which dishonored it because Billy had no money in his account, marking it NSF. The check was returned to Jordan State Bank. You are the bank’s attorney, and it calls you with three questions:

1. Drug Store has suddenly gone out of business and there is no money in its account. Can Jordan State Bank sue Snow and, if so, on what theory? Read §3-415(a).

      Yes, under the indorser obligation.2. If Jordan State Bank sues Snow, may he raise his defenses (say, that the Drug Store had failed to

pay him any money when he indorsed it over to them), or is the indorser liability found in §3-415 strict liability?

Not Strict Liability, he may raise such a defense, however, it is a personal defense, so if it is against a HDC will not be effective.

3. If the bank does recover from Snow, will he have to pay the whole amount or do the indorsers divide up the indorsement liability and share it proportionately? See §3-116, 3-205(d). 

Will be entitled to the full amount from him. 3-116 allows for Joint and several liability which allows for contribution but only where indorser signs the agreement with the other indorsers.  He may or may not get contribution depending on how he signed the agreement. 

Problem 129Charlie Brown wanted to borrow $10,000 from the Peanuts National Bank, but the bank told him that it wouldn’t loan him the money unless his note was indorsed by four responsible people. Charlie explained his problem to his friend Lucy, and she signed her name to the back of the instrument. Charlie then took the note to another friend, Schroeder, who not only signed, but also persuaded his friend Pig Pen to add his name below Schroeder’s. Finally, Charlie had Peppermint Patty sign her name, at which point he took the note back to the bank, and it loaned him the money. When the note came due, the bank made a presentment of it to Charlie and demanded payment. He had used the money in a business venture that, predictably enough, was a moral but not a financial success, and so he was unable to pay the note (a dishonor). The Peanuts National Bank gave notice of dishonor to all four indorsers, but demanded payment of Peppermint Patty alone. She resisted, claiming she was liable at most for only ¼ of the amount ($2,500). See §3-415.

a. Is she right? §3-415 tells us that she is not right b/c she is contracted to pay that full amount.  As an indorser she made her self liable to the full amount.

b. If she pays $10,000, can she sue Pig Pen for the entire amount or only for part? See §3-116, 3-205(d).

§3-116 tells us that she is only able to sue for the proportionate amount.  This will be governed by the way in which they signed the agreement.

c. If she is sued, can she bring the other indorsers into the lawsuit? See §3-119 (explaining the so called “vouching in” notice.)

§3-119 tells us yes, she can bring the others into the lawsuit.d. If Charlie Brown comes back into the chips, can she sue him? On what theory?

Yes, she can sue under the issuer’s liability which is part of the maker’s liability under §3-412 and an accommodation party under §3-419(e). 

Problem 130Melody, a professional pianist, bought a piano from the Ivory Keys Music Company, signing a promissory note payable to the company for $3000. The day after the piano was delivered, the music company discounted the note to the Friendly Loan Company for $2700, indorsing the back, “Pay to Friendly Loan Company, Ivory Keys Music Company (Without Recourse).” The piano fell apart, and Melody refused to pay the note when it came due. Friendly Finance sued both Melody and the Ivory Keys Music Company. What is its cause of action against each? What defenses can each defendant raise?      The lawsuit against Melody is based on §3-412 (issuer’s liability) and she could raise the defense of failure of consideration (personal defense).  The lawsuit against music company is based on qualified

indorsement and they can not base liability on the music company b/c it said without recourse (which means will not incur indorser’s liability.  Friendly Finance has no COA against the music company.  

Problem 131Frank Family wanted to move out of his apartment and into his dream house.  He hired Quickie Contractor to build the house on land Family had purchased, requiring Quickie to get a performance and payment bond guaranteeing that Quickie would do the work and pay its laborer and suppliers.  Quickie got Big bank to issue the bond guaranteeing these matters.  Quickie went bankrupt half-way through the job, and Family called on Big Bank to finish the work.  Which of these parties is the surety?  Which is the principal?  Which is the creditor?  Identify the three contracts.

Big bank is the surety.  The principal is Quickie.  The creditor is Family.  The first K is b/w Family and Quickie.  The second K is b/w Big Bank and Family.  The third K is b/w Quickie and Big Bank.  

Problem 132Consider the following promissory note: FRONT:                                                                  December 23, 2010I, Mary Maker, promise to pay $4,000 to the order of Paul Payee on December 25, 2012, with interest at 8% per annum from date.                                                                            /s/ George Generous (He is an accommodation maker.)                                                                                    /s/ Mary MakerBACK:Pay to Ace Finance /s/ Paul Payee Ace Finance, comes to you early in 2013 and tells you that the note is in default, but that it failed to give notice of dishonor—a right that indorsers have but makers do not—to George Generous.

a. May Generous establish his status as surety against a holder in due course?  See §3-419(c) with its OC 3, §§3-205, 3-605(h).

The way George signed this note would put everyone who reads this note that he has signed this as a surety, however, just b/c you have notice is not going to prevent someone from becoming a HDC.

b. May Generous defend on the basis that he received no consideration for his undertaking?  See §3-419(b) and its OC 2.

No, §3-419(b) tells us that it doesn’t matter whether he received consideration.  B tells us that it doesn’t matter.

c. Is George an accommodation maker or an accommodation indorser?  See §§3-116(a), 3-204(a). He is an accommodation maker.  He would have liability as a maker, but he could have liability as a maker but will have protection as a surety. 

Problem 135When Saul Panzer needed to borrow money, his friend Rex Stout agreed to loan him $10,000 if Saul could get a co-signor.  Saul talked Orrin Cather into signing Saul’s promissory note as co-maker.  The note was payable to the order of Rex Stout, who loaned Saul the $10K and took the note in return for the money.  Rex indorsed the note and sold it as a discount to Archie Goodwin.

a. On the date the note matured, knowing that Saul Panzer, the maker, was in financial trouble and wanting to stop the running of interest, Orrin Cather, the co-signor, went to Archie Goodwin, the current holder, and offered to pay the note, planning to seek reimbursement from Saul.  Goodwin replied, “Let’s give poor Saul a chance to pay it off himself.”  A month later Saul went bankrupt, and Goodwin demanded that Cather pay the initial amount due plus interest for the extra month.  Cather refused, and Goodwin sued, adding a claim for attorney’s fees.  To what is he entitled, if anything?  See §3-603(c)’s first sentence.

§3-603(c) tells us that he is still going to be liable for the initial amount due, but he will not be liable for any additional interest since he tendered payment and was refused.

b. On the due date Saul went to Goodwin and offered to pay, but Goodwin said, “Look, I know you need money for your other bill—pay me next month.”  A month later Saul went bankrupt.  Can Goodwin now recover from Cather?  From Stout, the payee/indorser? See §3-603(b).

§3-603(b) tells us no, he tried to pay, they wouldn’t take his money and both parties would be discharged b/c they wouldn’t take his tender.

c. Instead of the above, assume that on the maturity date Orrin Cather went to Goodwin and offered to pay the debt, to which Goodwin made the same reply.  A month later Saul went bankrupt, and Orrin Cather filed for bankruptcy at the same time.  Is Stout, the payee/indorser, liable to Goodwin?

No, the refusal of Cathers tender discharged Stout’s obligation to pay.

Problem 136When Butch Byrd borrowed $10K from ONB, the bank not only made him get a surety, but also demanded that the inventory of Butch’s feed store stand as collateral.  Butch talked his brother Arnold into signing the promissory note as a guarantor and signed the necessary papers for the bank to get an Article 9 security interest in the inventory.  Unfortunately, the bank failed to file the Article 9 financing statement in the correct place, so when Butch had financial difficulties, other creditors prevailed over the bank’s attempt to claim the inventory.  The inventory was worth $6K.  What is the effect of the bank’s Article 9 difficulties on Arnold’s liabilities?  §3-605(e) and (g).      The effect was that Arnold is discharged of his liability up to the value of the collateral that is lost. 

Problem 137George and Martha Washington borrowed 10K from the Mt. Vernon Finance Co, both signing a promissory note for the amount borrowed.  To secure the note, the bank took a mortgage on Martha’s Vineyard, but failed to file its mortgage in the proper place.  Before the note matured, Martha filed for bankruptcy, and the bankruptcy creditors were able to get the vineyard free and clear of the bank’s mortgage.  Is George discharged in whole or in part by §3-605(e)?  By §3-605(f)?  If Martha had not filed for bankruptcy, but the vineyard was still lost when the state seized it b/c she hadn’t paid her taxes, is she discharged by the bank’s failure to perfect its interest in the vineyard?  As to all this, see OC 7 to §3-605.

§3-605(e) doesn’t apply to George, it only applies to an indorser or an accommodation party, he is a maker.  Under §3-605(f) George is discharged in to his extent of his contribution that is prejudiced by his impairment of that particular collateral.  Martha is not discharged b/c she has not suffered any harm.   

Problem 138When Jack Point borrowed 75K from Yeomen National Bank to start up his carnival business, the bank made him sign a promissory note in its favor and get a surety.  Point talked his good friend Wilfred Shadbolt into signing as an accommodation maker.  Is Shadbolt discharged by any of the following agreements between Yeomen National and Point?

a. When the note matured, Point told Yeomen that his business had gone bust and that he was thinking about filing a bankruptcy petition.  Worried that it would get nothing in the bankruptcy distribution, Yeomen persuaded him to pay all he could, a mere 5K, and then signed an agreement with Point excusing him from having to pay the rest of the debt.  The bank them demanded that Shadbolt pay the amount still due.  Does Shadbolt owe it?  §3-605(b).  Does the accord and satisfaction agreement b/w the bank and Point also bind Shadbolt, or may the latter still seek complete reimbursement from Point?  §3-419(e) and OC 3 to §3-605.

Yes, this is different from the common law.  He would be liable for the entire 70K remaining.  Yes, he can still seek reimbursement from Point (but this is tough b/c Point is about to file bankruptcy.

b. Assume instead that when the note matured Point went to the bank and asked for more time in which to pay.  The bank did this, giving Point an extra 6 months. No one notified Shadbolt of this extension.  At the end of the 6 month period, Point filed for bankruptcy instead of paying the note.  Was Shadbolt discharged by the bank’s actions?  Would your answer change depending on whether or not Point ever had the money to pay the note at any relevant period? 

§3-605(c) and its OC 4.  Who has the burden of proof on the issues?  Could Shadbolt, has he known of the extension agreement, have ignored it, paid the note, and then sued Point for reimbursement?

Shadbolt would be discharged if he could show some harm by extending that particular time.  The burden would be on him. Yes, it will depend on whether he had the money to pay the note.  If they will allow that, he could sue Point for reimbursement..

c. Assume instead that when the note was signed the bank also made Point put up 100 shares of stock as collateral for the debt.  Before the note matured Point went to the Bank and asked to have the stock back, saying he needed to take advantage of a stock split the issuing corporation was offering.  The bank returned the stocks to him, but made him agree to pay a higher rate of interest.  The original not contained a clause by which the surety automatically agreed in advance to any impairment of the collateral.  Has Shadbolt nonetheless been discharged?  Who has the burden of proof here?  §3-605(d) and OF 5.

2 issues here: impairment of the collateral and the higher interest rate.  The Burden of proof has shifted, it is on the bank to show that it doesn’t cause him harm otherwise the higher interest rate will discharge him.

d. Is there a simple way that the bank could have avoided all these issues ab initio?  §3-605(i) and OC 2.

Yes.  Have waiver clauses in agreement and then all these issues become moot

Problem 139In 2009 Rex Lear borrowed 5K from the Kent Lending Corp. and gave them his promissory note due June 8, 2012.  Rex had his daughter Cordelia sign as accommodation maker.  Early in 2012 Rex defaulted on the installment payments and in return for mercy by the lending company, he signed a new promissory note dated January 11, 2012, payable to the company September 25, 2012 for the same amount but with additional collateral.  The Kent Corp. kept the first note as security for the payment of the second.  Cordelia never signed the second note.(a) Can the payee sue on the first note prior to September 25, 2012?        Under §3-310(b)(2), No that first note is suspended during that particular time.  (b) If Lear does not pay the 2nd note when it matures, can Kent sue on the first note, or has it been paid and discharged by the second note?      If note 2 is dishonored, then Kent can sue on note 1.(c) Assume that Cordelia can prove that the failure of the lender to enforce its rights on the 1st note caused her major damages in that Lear’s financial situation deteriorated drastically b/w January 11 and September 25, 2012, and the collateral became worthless during the same period.  Is Cordelia still liable on the first note?

§3-605(c) tells us that she will be discharged b/c taking that second note worked to an extension of time b/c she it caused her severe damages. 

Problem 140Sam was the surety on a promissory note that Marty Make had given to the Dogfish Loan Company along with a pledge of 100 shares of Titanic Telephone stock to secure the loan for $800. Shortly after receiving the loan, Marty asked for the stock back, saying that he wanted to sell it and buy other stock that he would repledge as collateral.  Dogfish gave him back the stock, which Marty sold.  He used the proceeds to finance a bad day at the races.  A week later Dogfish transferred the note for value to the Hammerhead Loan Company, a bona fide purchaser.  Assume that Sam has been discharged under §3-605(e), (impairment of the collateral).  Is he still liable to Hammerhead?

This is a personal defense, so if Hammerhead is a HDC then Sam is still liable to Hammerhead unless he had notice of the impairment of the collateral , which we don’t know here. 

The Drawee’s Obligation

Problem 143

After he brought a successful Truth in Lending action against ONB, attorney Sam Ambulance made the mistake of continuing to bank at ONB.  At a time when his bank balance greatly exceeded that amount, Sam wrote an alimony check for 3K and gave it to his ex-wife, Sue.  B/c similar checks had bounced in the past, Sue hurriedly walked the check directly into the bank and presented it across the counter.  The teller who took the check alerted the bank’s manager who laughed evilly as he threw it back across the counter at Sue, informing her that Sam’s business was no longer welcome at ONB and that it refused to pay any more of his checks, even thought there was money in the account sufficient to meet the check.  You are the attorney who handled Sue’s divorce, so she calls you and asks what she should do.  §3-408, 3-401(a), 3-414, 4-402.

The drawee, not having signed the draft, is not liable on it.  The drawee, having signed nothing, incurs no contractual obligation (though it may still be liable to the drawer under §4-402. 

Problem 146George Generous gave a check for 5K to the Grapes of Wrath Church as part of the church’s drive to get money for a planned new building.  The church did not want to cash any checks it received until it had at least 20K worth of pledges.  On the other hand, the church didn’t want contributors to be able to back out and stop payment either, so the church’s lawyer advised the church directors to have all large checks certified.  This, the lawyer knew, would have the effect of making the certifying bank primarily liable on the check (§3-413(a)).  The church treasurer took George’s check down to the drawee bank and asked to have it certified, a presentment for acceptance.  The drawee bank refused, saying that its practice was never to certify gift checks.

a. Is that a dishonor so that the church should give George notice of dishonor?  See §3-409(d) and OC 4.

No, that is not a dishonor, so no need to give notice of a dishonor.b. What should the church’s lawyer advise it to do now?

Cash a gift check immediately. c. If the bank had certified the check but later refused to pay it, could the church sue George on

his drawer’s obligation?  See §3-414(c).  Same result is George had donated a certified check that the bank later dishonored?  See OC 3 to §3-414.

3-414(c) tells us that they could not sue him on the drawer’s obligation if they accepted it.  They certified it when the accepted it. 

Signature by an Agent 

Problem 145When tycoon J.B. Biggley wanted to borrow money for a business venture, he had his agent, J. Pierpont Finch, negotiate the loan from Wicket’s National Bank.  When Finch signed the promissory note payable to the bank, he simply wrote his name as “J. Pierpont Finch, Agent,” and failed to mention the name of his principal Biggley.  Is Biggley bound to this note?  See §3-402 and OC 1.

Yes.  It doesn’t matter whether he has been identified on the instrument.  Undisclosed principals are bound by the agent’s signature whether clearly identified or not. 

Problem 146In the last problem would Finch himself be liable to a HDC?  To Wickets National Bank?

Yes, the agent was probably not enough to unambiguously show that he was signing for someone else.  If Wickens wasn’t a HDC, he can defend by arguing that he was not expected or intended to be liable for this.  

Problem 147The president of Money Corporation was John Smith.  He signed three corporate promissory notes as follows:

1. “John Smith.”  Money Corporation was not mentioned in the note. 2. “Money Corporation, John Smith.”

3. “Money Corporation, John Smith, President.” In each case is he personally liable to a HDC of the instrument?

He is liable and so is Money if he was authorized to sign for them.  (2) This depends on whether the court says that John has unambiguously signed in an agency capacity.  (3) This is clear that he is an agent of Money, so he is not personally liable. 

Problem 150Kit Fielding was the corporate president of Francis Racing Stables.  The corporate checks had the words “Francis Racing Stables” printed prominently in the upper left-hand corner of the checks, but when Fielding went to sign the checks on the drawer’s line, he simply signed his name and did not sign the name of the company or in any way indicate that he was signing as an agent.  If the check is negotiated to a HDC and then dishonored by the drawee bank, may the HDC successfully impose personal liability on Fielding?  See §3-402(c) and OC 3.

No, so long as the check has the name of the corporation at the top of it, then and only then the signature on the drawer line (assuming its authorized) wouldn’t impose personal liability.