Holder in Due
Course
1. You just got a big raise at work and
want to celebrate by buying or doing something fun. You
settle on a hot tub
for the bargain price of $3,000. You don't have the cash, so
you're
going to have to finance it. Which of the following are possible
sources
of financing?
a. you go to your
local bank, take out
a loan, and pay for the hot tub in cash; you then make monthly payments
to the bank
b. the hot tub dealer finances the purchase
itself; you make monthly payments to the dealer
c. you sign a contract and promissory
note at the dealer's; the dealer sells the "paper" to a financing
institution
and you make payments to that institution
d. the dealer sends you to the financing
institution to which it sends all its credit customers; you make
payments
to the financing institution
e. all of the above
-note that (a) and (d) are similar
-but they are different and the difference becomes
siginificant later
Use the following additional facts to
answer
questions 2-5: Within a few months, and within the express warranty
period,
your prized possession starts to leak. The dealer promises to fix it,
but
always fails to show up. He delays until the warranty runs out, then
claims
he's no longer liable. Concluding that you've been soaked (sorry), you
decide to stop making payments. Assume the only law in effect is the
holder
in due course (HDC) provision of Vermont's UCC.
2. Under scenario (a), above, if you're
sued by the bank, can you raise the dealer's breach of warranty as a
defense?
-no; bank isn't involved in the transaction
3. Under scenario (b), above, if you're
sued by the dealer, can you raise the dealer's breach of warranty as a
defense?
-yes; can raise breach of warranty
4. Under scenario (c), above, if you're
sued by the financing institution, can you raise the dealer's breach of
warranty as a defense?
-no; this is the classic
holder-in-due-course situation
-3-302 (a) (2)
5. Under scenario (d), above, if you're
sued by the financing institution, can you raise the dealer's breach of
warranty as a defense?
-no; this is similar to (a), above
6. What is the public policy
behind
the HDC?
-free flow of commercial paper
-commerce runs on
money, on financing
-you don't want the
bank to worry about what took place in the underlying transaction
The following questions relate to the
opinion
of the New Jersey Supreme Court in Unico v. Owen:
7. What did Mr. Owen purchase from
Universal and what
were the terms of the deal?
-140 albums and a
"free" stereo record player
8. Did the New Jersey Supreme Court
seem to think the contract was fair
in general?
-no; see * p. 2
-classic "contract
of adhesion"
9. What did the court mean when it
said the contract was
"hyper-executory"?
-see ** p. 2
-Owen's obligation lasted 3 years
-but Universal's
delivery obligation lasted 5 1/3 years
-40% of albums,
though paid for, would still be in hands of seller
10. Owen signed a promissory
note;
what
did Universal do with the note?
-sold it to Unico
immediately
-Owen was required to make his payments to Unico
11. What happened to Universal and
what
was the effect on its compliance with its obligations under the
contract?
-became
insolvent and went out of business
-never delivered
another album other than the original 12
-Owen continued to
pay for 12 months, then stopped
12. What did Unico do when
Owen
stopped
making his payments?
-sued for
the balance of the note and 20% attorneys' fees (as provided in
contract)
13. Did the court find that
Unico was
entitled to the status of holder in due course?
-no
14. Why or why not?
-see * p. 3
-policy of free
negotiability of paper doesn't apply where parties are "closely
connected"
-were Universal and
Unico closely connected?
-see * p. 5-6
15. The contract included a
'waiver
of defenses" clause. What was the
practical effect of that clause?
-see * p. 7
-tried to accomplish by contract what HDC does by statute
-deprive consumer of
claims against holder of contract and note
16. How did the court rule on the
validity
of the waiver of defenses clause? What was its rationale?
-refused to
enforce it
-held that it was
contrary to public policy and unconscionable (citing Williams v. Walker
Thomas)
17. (True
or False) Vermont law prohibits
waiver of defenses clauses.
-sec. 2456 (see lecture notes sec. 1)
18. (True or False) In 1967, Vermont
passed
a law eliminating the holder in due course status in consumer
transactions
in this state.
-sec. 2455 (see lecture notes sec. 1)
-the risk of seller misconduct is now on the______
(bank)
-note that what we're talking about here is
allocating the risk of loss due to seller misconduct--moving it from
the consumer to the financier
19. (True
for False) To avoid the effect
of laws such as Vermont's, sellers began referring consumers to certain
financing institutions rather than selling their paper to those
institutions.
-this is scenario (d), above, and as we
saw consumers could not raise claims and defenses
-this allocates
risk back to the consumer rather than to the bank
20. The FTC issued its Preservation of
Claims and Defenses (a/k/a HDC) Regulation in order to
a. protect consumers in states that hadn't
passed laws like Vermont's eliminating HDC status
b. protect consumers in cases where sellers
arranged financing to circumvent laws like Vermont's
c. both of the above
d. neither of the above; the FTC Regulation
permits the HDC status
-take a look at the FTC Rule here
-note the way it
works--contract has to have a clause extending defenses to creditor
-note definition of
"purchase money loan" makes it applicable to referrals
-note also that it applies to "claims" as well as
"defenses"
-effect is that consumers can sue the
creditor as well as the merchant for wrongdoing
-though amount
of recovery limited to amounts paid
21. Consumers today can rely on the
following
basis/bases to raise defenses that they have against the merchant in a
suit by a creditor
a. that the creditor and merchant are
"closely connected" and thus not entitled to HDC status
b. state laws like Vermont's
c. the FTC regulation
d. all of the above
-explain likely exam question here
The following questions relate to the
Florida
Court of Appeals decision in Tinker
v. Demaria Porsche
22. Who was Tinker and what happened
that resulted in this lawsuit?
-bought used Jaguar
-was represented to
have its original engine, be in good condition, and never having been
in accident
-all were untrue
-had been "totaled"
by insurance company and titled as a "parts car"
23. What was Tinker's claim against
DeMaria?
-fraud and
misrepresentation
24. What was the bank's claim against
Tinker?
-counterclaimed for
unpaid balance on loan
25. How did the jury rule on each
claim?
-for Tinker on the
fraud claim ($8250)
-for the
bank for the balance of the loan ($4500)
-note that court ruled NOV in favor of the bank on
the fraud claim
26. On what basis did Tinker argue on
appeal that the lower court
verdicts were inconsistent?
-the jury's
finding of fraud should have been a defense to the bank's claim on the
unpaid balance
27. Was the FTC notice in the
contract?
-yes; see * p. 2
28. What did the Court of Appeals say
was the policy
behind requiring that notice?
-see ** p. 2-3
29. So, for whom did the court rule
and why?
-Tinker; dealer's
fraud was a defense to bank's claim
-see * p. 3
The following questions relate to the opinion
of the Vermont Supreme Court in State v. Custom Pools
30. Who was
Custom Pools and what was it selling?
-door-to-door
seller of backyard swimming pools
31. What were
some of the classic door-to-door
and home improvement scams that you learned about this semester that
were
used by Custom Pools?
-bait & switch
-use of the
"clipboard" technique to obtain second mortgages
32. What did Custom do with the contracts and
mortgages?
-sold to Gramatan
Bank; Gramatan then sold them to Chemical Bank
33. Who were the defendants in the
lawsuit by the State of Vermont?
-Chemical, Gramatan
and Custom
34. What did
Custom Pools do after being
sued?
-went out of
business (typical)
-owner was being prosecuted for tax fraud
35. The court said it was clear that consumers
could use the defense of fraud if sued by Chemical or Gramatan. On what
basis did the court go a step further an hold that the AG could sue
them for consumer fraud? What was the key language of the consumer
fraud act?
-see * p. 2; key
word is "using"
-did the defendants
"use" any "method, act or practice declared illegal?
-yes, they used the
documents obtained fraudulently by Custom
36. What did
the Supreme Court of Vermont
say about the role of “allocation of risk” in its decision?
-see ** p. 2
37. What do
you think about this decision?
Has the law finally gone too far to protect consumers?