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?