Georgetown University Law Center
Examination in Commercial Law: Sales and Secured Transactions
(24 Hours)
 

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.
 



 HONOR STATEMENT

 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:




QUESTION 1:  50% of exam; limit of 1500 words.
 
 
Professor Carp decided to buy a new car.  Since he lives within walking distance of the law
school where he teaches jurisprudence and legal philosophy, he does not drive much, and wanted
the car primarily for weekend outings.  In fact, this is the first new car he has ever purchased;
previously he made a practice of buying his elderly parents' used car every few years.  He does
not have much business experience, and doesn't remember much commercial law from the course
he took many years ago in law school.  Nor does it come up much in his scholarly research on
the hermeneutics of the West key number system.

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.



QUESTION 2:  50% of exam; limit of 1500 words.
 
 
In December 1992, the Permanent Editorial Board of the UCC published the Final Report of its
special Study Committee to review Article 9.  This report has now been turned over to a drafting
committee under the joint sponsorship of the American Law Institute and the National
Conference of Commissioners on Uniform State Laws.  Amendments are anticipated to be ready
for introduction in the various state legislatures in 1996.

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?