Problem

Problem.Collection of receivables

A. Barry Eliason, CEO of Pinnacle Corp., decided to sell his private jet because his late night arrivals at the local airport violated a city noise ordinance. Bill Gateway, Chairman of the Board of Macro Corp., bought the jet for $3,675,000, part of which Gateway agreed to pay in monthly installments. The purchase agreement included the following terms: a statement of Gateway's installment payment obligation; Gateway's grant of a security interest in the jet to Eliason to secure the payment obligation; Eliason's express warranty that the jet would be free from defects in material or workmanship for a period of one year following execution of the agreement. A few months after execution of the agreement, Eliason sold the contract with Gateway to Pinnacle Corp.

1. Does Article 9 and Article 9 vocabulary apply to the sale from Eliason to Pinnacle Corp? Recall U.C.C. 9-109(a)(3) and check the exclusions in U.C.C. 9-109(d). After the sale to Pinnacle Corp., to whom should Gateway make payments? Will such payments reduce Gateway's obligation under the contract he signed? See U.C.C. 9-607(a), U.C.C. 9-406(a) - (c).

2. If Gateway refuses to pay Pinnacle Corp. after Pinnacle notifies Gateway that Gateway should direct future payments to Pinnacle, does Pinnacle Corp. have any recourse against Gateway? Against the jet? Against Eliason? See U.C.C. 9-607(a), U.C.C. 9-608(b).

3. Suppose that the jet developed engine problems after Eliason sold the contract to Pinnacle Corp. Gateway then notified Pinnacle Corp. of his intention to withhold payments as reimbursement for the cost of repairs. If Gateway withholds for the stated purpose, has he defaulted under the agreement? See U.C.C. 9-404. Would your answer be different if the document signed by Gateway included a clause providing that he would not assert against an assignee any claim or defense that he may have against Eliason? See U.C.C. 9-403. Would your answer be different if Gateway had signed two documents for the benefit of Eliason: a promissory note and an agreement granting a security interest in the jet to secure payment of the promissory note? See Commentary.Assertion of claims and defenses against assignees; Official Comment 2 to U.C.C. 9-403.

B. Consider the transactions described in Questions F, G, H, and I of Problem.Identifying collateral. How are U.C.C. 9-607 and U.C.C. 9-608 relevant to those transactions?

C. Your client financed the purchase of a certified pre-owned (i.e. used) car two months ago under the terms of a retail installment contract executed with the car dealer. The car dealer assigned the contract to its floor plan lender. Pursuant to the requirements of the Federal Trade Commission Holder-in-Due-Course Regulations (16 C.F.R. Part 433), the contract contains the following notice: "Any holder of this consumer credit contract is subject to all claims and defenses which the debtor could assert against the seller of goods or services obtained pursuant hereto or with the proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor hereunder."

Sale of the car was accompanied by the dealer's 6 month express warranty against defects in material or workmanship. The terms of the warranty provided that in the case of a defect in material or workmanship, the buyer's exclusive remedy would be return of the car to the dealer for repair.

In the first three months following purchase, your client returned the car to the dealer three times for repair of the same two defects: malfunctioning cruise control and inoperative air conditioning. The dealer has not been able to effectuate completely satisfactory repairs and your client has lost faith in the dealer's ability to do so. Your client wants to return the car, get her down payment and monthly payments back, cancel her obligations under the contract, and recover damages if she has to pay a higher price to another dealer to purchase a comparable replacement vehicle. Your client does not want to return the car until the dealer agrees to her request, and the dealer has so far refused her request. Under U.C.C. Article 2, she would be entitled to the remedies she seeks (U.C.C. 2-711(1)) if the exclusive remedy of repair has failed of its essential purpose (U.C.C. 2-719(2)) and if, among other things, the defects substantially impair the value of the car to her (U.C.C. 2-608). Pending resolution of the dispute with the dealer, should she continue to make monthly payments to the floor plan lender? Does she risk repossession and liability for a deficiency if she withholds such payments? Is there anything you can recommend to reduce the risk of repossession? If the dealer becomes insolvent, may she recover the down payment and her monthly payments to date from the floor plan lender? May she recover damages from the floor plan lender? Would your answers differ if the contract assigned to the floor plan lender did not contain the notice required by the F.T.C. Holder-in-Due-Course Regulations? See U.C.C. 9-403(d) and U.C.C. 9-404(d).