Professor Avery Katz
May 2-9, 1994
Preliminary instructions:
1. Your exam is due at the registrar's
office 24 hours after you pick it up, or at 6 PM on
Monday, May 9, whichever is earlier.
If you use a word processor, you are expected to take
precautions against mechanical failure, accidental
erasure, and similar misfortunes, sufficient
to allow you to meet the deadline. Please
note that the registrar's office is open only from 9
am to 4 pm on weekends.
2. Please type your exam if it
is convenient to do so; otherwise, please write legibly. If you
write your exam by hand, please also submit
a typed version of it to the registrar's office by
the end of the day on Friday, May 13.
Please begin each essay question on a new sheet of
paper and staple each essay question separately
(or if you are writing in a blue book, use a
separate blue book for each question) as I
will separate them to do the grading . Please also
write your exam ticket number on the first
page of each essay question. I will not read any
material that appears on scrap paper.
3. The exam is open book; you are
free to consult any written materials, and you should have
available to you the assigned course materials.
4. Until the examination is completed
at 6 PM on the 9th, you may not communicate with any
person about the contents of the examination,
whether or not you or the other person have
started or completed the exam. If during
the exam you have any questions regarding its
administration or substance, you should contact
the registrar's office and they will contact me
if necessary; this will preserve the Law Center's
policy of anonymous grading.
5. There are two questions having
equal weight in determining your grade. Each question has a
1500-word length limit. Any attempts
to use shorthand or nonstandard abbreviations (other
than the names of the hypothetical parties)
will be counted as if full words were used. You
may not use any leftover space from one question
in answering the other. Answers
exceeding the length limit will be penalized
by reducing their score in proportion to the
extent of the excess.
I will assume for purposes of administering
the limit that a typical double-spaced typed page
with 1-inch margins contains about 300 standard English words
when using 12-pitch fixed-
width type (12 words per line times 25 lines per page), or about
250 words when using 10-
pitch type. Alternatively, if you use proportional spacing
or a different size typeface, you
may make a good faith estimate by counting the words in a sample
paragraph and
extrapolating to the length of your entire exam.
6. Good luck on the exam, and for
those of you graduating at the end of the term, best wishes.
On my honor and aware of the student disciplinary code, I swear
or affirm that I have
neither given nor have I received any unauthorized aid from any other
person or persons,
nor have I used any unauthorized materials in writing my answers to
this examination.
Exam #
(please sign with exam number only)
Date
Time received: Time returned:
After visiting several dealerships, Carp settled on a pearl-gray Chrysler
Cardoza from Denton
Motors, at a price of $18,000. He paid $1800 down and signed
a sales contract providing for the
balance of the price to be paid in monthly installments over the next
five years, and granting
Denton a security interest in the car. The sales contract contained
two pages of printed terms
including the following term on the second page, which appeared in
slightly larger typeface than
the rest of the language on that page, and which was set off from the
rest of the language by 1/4"
of blank space:
"5. LIMITATION OF WARRANTY.
"(a) The seller warrants its motor vehicles to be in accordance with
its published specifications or
those specifications agreed to in writing at time of sale. Seller
makes NO OTHER
WARRANTY, EXPRESS OR IMPLIED, and makes NO WARRANTY OF
MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE."
"(b) Seller's obligation under this Warranty is expressly limited to
repairing or replacing, at our
option, any product or part not meeting specifications within six months
of date of delivery.
UNDER NO CIRCUMSTANCES SHALL SELLER BE LIABLE FOR ANY
CONSEQUENTIAL DAMAGES directly or indirectly resulting from a warranty
claim."
"(c) Seller's obligation under this warranty shall be owed only to the
original purchaser, except
that the original purchaser may transfer its rights under this warranty
to a successor as part of a
transfer of its entire business. No assignee of Seller shall
have any obligations under this
warranty."
The contract also contained a term, to be separately initialed by the
purchaser, stating:
9. PURCHASER'S ACCEPTANCE. I warrant that I have inspected
the particular motor vehicle
I am buying and that it is in good working order and without defects.
I agree that by taking
delivery I accept the motor vehicle under all applicable laws, and
release the Seller from liability
for any defect reasonably observable by such inspection.
These terms, or terms with similar language, are found in the standard
sales contracts of most
sellers of automobiles in the United States.
Carp bought his car in April 1993. Before taking delivery, the
sales agent guided him through a
"walk-through" inspection, and he took the car for a brief test drive.
When he signed the sales
contract, Carp also signed a UCC-1 financing statement and a security
agreement, and initialed
the purchaser's acceptance clause; but he did not read any of the terms
of the contract. After all,
he reasoned, what was the point; they could be deconstructed in countless
ways. And the car
seemed fine. Denton properly filed the financing statement, and
sold Carp's contract and security
agreement to Chrysler Motors Acceptance Corporation, without recourse,
for credit against funds
that had been advanced to finance its inventory.
After driving the car for two weeks, however, Carp discovered
that it emitted an unpleasant
sulfurous odor when the air conditioner was on. This was on the
first really warm day of spring,
and the first day that he had the air conditioner on for any sustained
length of time. He called the
dealership to complain, but the sales manager, Lax, told him that the
problem was minor and
would dissipate over time as the car was driven. Carp was not
satisfied with this explanation (he
suffers from asthma and the odor made him feel short of breath), but
decided to wait and see if
Lax was right. He kept the car for another few weeks, but on
the occasions that he used the car
with the air conditioner, the odor remained. Toward the end of
May, he took the car back to the
dealership and demanded that Lax either replace the car or replace
the air conditioner. Lax
refused, saying that Carp was unusually sensitive and that the problem
would dissipate. He
offered Carp a spray can of car air freshener as an accommodation to
use in the meantime. When
Carp turned this down angrily, Lax tried to assuage him by offering
him what Lax characterized
as a "goodwill gesture" --- a set of velour floor mats, with list price
of $200, free of charge. Carp
turned this down as well.
Over the next month or so, Carp wrote several complaining letters to
the owner of the dealership,
the Chrysler customer service office, Chrysler Motors Acceptance Corporation
(to whom he has
been making his payments), and Lee Iacocca. During this period
of time, he continued to drive
the car on occasion, grumbling about the car to whomever happened to
be riding in it at the time.
His passengers typically admitted that they could detect an odor when
the car was started up,
although none were as bothered by it as Carp was. Finally, in
desperation, Carp called up a
public radio talk show on the subject of automobile repair to ask for
advice. After ridiculing
Carp for several minutes, the radio hosts explained that the problem
was not with the air
conditioner, but with the catalytic converter. According to the
hosts, many catalytic converters
in new cars emit such odors, though it sounded like the problem might
be somewhat worse in
Carp's car than is usually the case. The problem tends to go
away after the car is driven 3500 to
5000 miles, as the catalytic converter is broken in. The only
other approach is to replace the
catalytic converter, which costs upwards of $1000, and this will not
necessarily solve the
problem. The hosts advised Carp to use a higher octane brand
of gasoline, and to drive with the
window open a crack for the first ten to fifteen minutes after starting
the car, until the odor goes
away after 5000 miles. Failing that, they suggested, he should
drive with a clothespin on his
nose.
Carp typically drives less than 5000 miles in a year, and he does not
want to wait for the catalytic
converter to break in. He has only put 1100 miles on the car
in the three months he has been
driving it. Furthermore, he is angry at Lax for dismissing his
original complaints and not owning
up to a problem with the catalytic converter, and he was embarrassed
to be teased over the radio.
It also happens that his parents have decided that it is time to trade
in their five-year-old Volvo
for a sports car. He now would like to get out of the sale, so
he could buy his parents' old Volvo.
He has called the dealership and left messages to this effect, but
Lax has not returned his phone
calls. Furthermore, he has just read a disturbing report in the
local newspaper; Denton Motors is
facing financial difficulties and its owners, under pressure from Chrysler
Motors Acceptance
Corporation and other creditors, are rumored to be considering a Chapter
11 filing.
It is now July 1993, and it is near the end of the model year for 1993
cars. Denton and other
dealers are now selling their remaining Cardozas at cut-rate prices
in order to clear the lots for
the incoming 1994 models. The model Carp bought for $18,000 is
now selling for $15,000 off
the dealer's lot, after factory incentives. It is too soon for
there to be an established bluebook
price for used 1993 Cardozas, but in past years, one-year-old cars
have usually sold for about 25
to 30% off their original sales price (in part because buyers infer
from sellers' willingness to sell
the cars so soon that the cars are more likely to be lemons, that is,
of below average quality.)
You are Professor Carp's former research assistant, now practicing law
at a commercial litigation
firm. He calls you for advice. What do you tell him?
What courses of action are open to him in
his dispute with Denton? How should he proceed, and what advice
would you give him on how
to buy a car next time?
Note: In answering this question, you should analyze the problem
under the assumptions that the
UCC governs the transaction and that Denton, not Chrysler, is the seller.
You may ignore any
provisions of Federal or state consumer protection or products liability
law (such as the
Magnuson-Moss Warranty Act) that may pre-empt or supplement the UCC
in consumer sales,
though you should not ignore the Bankruptcy Code to the extent it is
relevant.
Among the changes and clarifications recommended by the Study Committee are the following:
a. ) Competing PMSI's:
It is unclear under the current Article 9 who has priority between
two competing purchase money security interests,
such as one creditor financing the
down payment and another financing the unpaid
balance. The Study Committee
recommended that the two PMSI's take pro rata
(that is, in proportion to the amount each
has lent). This is in contrast to most
of the case law, which has awarded priority based on
the first-to-file rule of 9-312(5).
b. ) Double debtor problem:
Under the current Article 9, there is uncertainty regarding who
has priority where Debtor 1 grants a security
interest to Secured Party 1, and then
conveys the collateral without authority to
Debtor 2, who then grants a security interest
(or has already granted one in after-acquired
property) to Secured Party 2 (as in Bank of
the West v. Commercial Credit Financial Services).
The Study Committee recommended
that Secured Party 1 should prevail unless
it has failed to perfect.
c. ) Good faith: As part
of the revision process for Article 1, it has been proposed to change
the definition of "good faith" in §1-201(19)
from "honesty in fact" to "honesty in fact and
the observance of reasonable commercial standards
of fair dealing." The Study
Committee endorsed this change and recommended
that a similar definition be
incorporated into Article 9.
Discuss the merits of these three proposals (with regard to the third
one, you need not confine
yourself to the effect on Article 9). What difference would they
make? Would they be in the
interests of debtors, secured creditors, unsecured creditors, creditors
as a group, debtors and
creditors as a group, or anyone else?