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SANTA CLARA UNIVERSITY SCHOOL OF LAW
Commercial Transactions I December 6, 1995 The revised examination rules issued July 1994 apply to this examination1 except that this is a limited open book examination as described below.
1. This is a limited open book examination. During the examination you may consult your casebook, Selected Commercial Statutes (or other copy of the Uniform Commercial Code), class handouts, and any notes, outlines, charts, or other form of your own written work product. No other sources may be consulted. 2. Support your answers with explanation and analysis. 3. I look for ability to identify issues, demonstrated understanding of legal principles and relationships, skill in using the statutory law we have studied, accuracy, clarity and creativity of analysis, organization and conciseness of response, and good English expression 4. Time estimates follow each question. These estimates may not be accurate for all students. The estimates reflect my best guess as to the relative length or difficulty of a question. The time estimates total 3 hours and 15 minutes, i.e. 15 minutes less than the total amount of time allocated for the examination. The following basic set of facts apply to all questions. Additional facts are provided in each question as needed. All facts are cumulative, unless otherwise indicated.
Gametech is a corporation the primary business of which is the purchase and distribution, through sale, of video game machines (hereafter "machines") used in arcades, such as arcades in malls, amusement parks, and miniature golf courses. Gametech purchases different brands and types of video game machines from different manufacturers. In September, 1995, Gametech purchased $50,000 worth of machines from VideoMania. Gametech paid $5,000 on delivery and promised in writing to pay the balance, plus interest, in stated installments over a three year period.
Question 1 (estimated time: 30 minutes) Gametech failed to pay its first two monthly installments to VideoMania. In investigating the situation, VideoMania's collection department learned: (a) Prior to the purchase transaction, VideoMania had reviewed a financial statement summarizing the financial condition of Gametech. The financial statement, which had been prepared by an independent auditor hired by Gametech, significantly overstated income and understated expenses. However, in deciding to sell to Gametech, VideoMania ultimately did not rely on the financial statement because it decided to sell on secured credit. (b) Through an oversight, Gametech had failed to sign a written security agreement, prepared in connection with the purchase transaction, in which Gametech granted VideoMania a security interest in the machines. You are in-house counsel to VideoMania. The collection department wants to know whether it can get its hands on the machines sold to Gametech and, if so, how it should go about doing so. The collection department also wants to know what money damages it can get from Gametech if VideoMania gets the machines back and resells them to other purchasers for less than $45,000. In framing your answer, you may need to tell the collection department what additional facts, if any, you need to know. For purposes of all ensuing questions, assume that in connection with its purchase of machines from VideoMania, Gametech did sign a written security agreement granting VideoMania a security interest in the machines purchased to secure the balance of the purchase price
Question 2 (estimated time: 15 minutes) Suppose that VideoMania manufacturers its machines and runs its business in Mexico. As in-house counsel to VideoMania, you handle all of the documentation for secured financing. Describe the additional information you need (either facts, applicable law, or both) in order to determine where to file a financing statement for the transaction with Gametech, and explain how and why that information, together with any relevant information provided to this point in the facts, would lead you to the correct conclusion. Question 3 (estimated time: 45 minutes) Fairways is a corporation which operates miniature golf courses. In 1994 Fairways purchased $20,000 worth of machines from Gametech for use in arcades at its miniature golf courses. These machines, purchased by Gametech in 1993 from a manufacturer other than VideoMania were free of any encumbrance. Each of these machines was programmed to award a complimentary game to a video game player when the player achieved certain goals in the game (e.g. reaching a castle to rescue a heroine from a monster) After a few months, each of the machines developed the same malady: they failed to give complimentary games when earned. As a result, players would complain to an employee working in the arcade who would then have to verify that a complimentary game had been earned and give the player a token to be used to play the game again. Fairways asked Gametech to correct the problem but Gametech has done nothing for six weeks, during which Fairways has continued to use the machines. Fairways has approached you to ascertain its legal rights. a. What will you be looking for in the written contract between Fairways and Gametech? Why? b. What information external to the written contract between Fairways and Gametech should you seek? Why? c. Looking only, for the moment, to U.C.C. 2-608, do you that think Fairways would have a right to revoke acceptance of the machines? Assuming a right to revoke acceptance (and looking elsewhere in the Code, if needed), would that right be jeopardized by Fairways' continuing use of the machines pending resolution of the dispute?
Question 4 (estimated time: 45 minutes) As a result of negotiations concerning the dispute mentioned in Question 3, and in settlement of that dispute, Gametech agreed to ship Fairways $20,000 worth of machines without cost in replacement of the defective machines purchased by Fairways in 1994. In return, Fairways agreed to release any claim against Gametech for the defective machines. As a result of the same negotiations, Fairways agreed to purchase additional machines at a cost of $30,000. To fulfill its commitment, Gametech shipped to Fairways the machines it had purchased from VideoMania. However, Gametech failed to comply with a provision in the security agreement with VideoMania requiring that sale of collateral could be undertaken only with the prior written consent of VideoMania. Fairways operates miniature golf courses in California, Arizona and Oregon. The machines obtained from Gametech are to be used at Fairways' miniature golf courses in all of those states. Gametech has no facility of any kind in any of these three states. Should VideoMania be concerned about the events described in this question? If so, why, and what, if anything, can VideoMania do to protect its interests?
Assume that the agreement between Fairways and Gametech described in Question 4 was reflected in two documents: a purchase order from Fairways and a sales acknowledgment from Gametech. The purchase ordered contains the term "F.O.B. E.Z. Store Warehouse, Los Angeles, California." E.Z. Store is an independently owned and operated warehouse in which Fairways stores equipment for a rental fee. The sales acknowledgment contains the term "F.O.B. VideoMania" (because the machines, though previously purchased by Gametech from VideoMania, were still being stored by VideoMania). In Question 4 we assumed that the machines reached Fairways safely. Here, in contrast, assume that all of the machines were destroyed by an accident en route from VideoMania to Fairways. Must Gametech now be concerned again about Fairways' complaint, described in Question 3, concerning the defective machines? Assume that by applying U.C.C. 2-207(1) you have already reached a correct conclusion that the two documents do not form a contract and that the starting point for your analysis should be U.C.C. 2-207(3). For the question to follow, assume that the machines were not destroyed en route but instead arrived safely.
Assume that Gametech had agreed with Fairways to accept $10,000 worth of discount coupons (for use at Fairways miniature golf courses) plus $20,000 from Fairways in payment for $30,000 worth of machines. Gametech intended to give these coupons to prospective customers as a promotional tool at an upcoming video machine convention. Several months later, but before the convention, Gametech ran into serious financial difficulty, defaulted on its obligation to VideoMania, and then filed a Chapter 11 bankruptcy petition. As between the debtor-in-possession and VideoMania, who is entitled to the discount coupons under the following alternative assumptions: a. At the time it executed the security agreement with Gametech, VideoMania filed properly completed financing statements covering the machines sold to Gametech in all the proper locations but has done nothing since. b. VideoMania had never filed any financing statement in connection with its dealings with Gametech. However, one week before the filing of the bankruptcy petition, a representative of VideoMania who was meeting at Gametech headquarters with the president of Gametech to discuss the default, had surreptitiously taken the coupons from the president's office by putting them in her briefcase while the president was using the restroom.
End of examination
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