Problem.Default
A. For the past six months, Marlene has consistently made payments late on a loan she obtained to purchase an automobile (as much as 20 days after the monthly due date). On several occasions she tendered $100 less than the $500 monthly amount due . The creditor, secured by a security interest in the automobile, has to this point refrained from comment or action, but the latest tender, 25 days late and $200 short, was the last straw. The secured creditor wishes to repossess the automobile but has sought your counsel before doing so. What do you advise? Consult our sample security agreement, U.C.C. 1-103 and Official Comment 3 to 9-601 before venturing a conclusion.
B. You are in-house counsel for a savings and loan. The savings and loan has just received notice from State Barn Insurance Company that a borrower who secured her loan from the savings and loan with a deed of trust on real property has failed to pay the most recent premium for her homeowner's insurance policy and that State Barn will be cancelling the policy (on which the savings and loan is named as secondary beneficiary) unless the premium is received within two weeks. What do you advise? Consult our sample deed of trust before venturing a conclusion. Would your advice be different if the loan were secured instead by personal property? Consult our sample security agreement.
C. Celebrating your retirement from the practice of law, you are enjoying a round of golf at the local links with an old friend, a fellow retiree, Lucien Badame. Lucien asks you about a problem he is having with his mortgage company, the fifth in a series of companies to acquire his mortgage since he bought the house over 25 years ago. During the past year he has received letters from the mortgage company advising him that he must purchase flood insurance on the real property. The company has failed to respond to his communications (both written and oral) that demonstrate that he is not in a local flood plain. In its most recent letter, the mortgage company stated that it had purchased a year of flood insurance for him at a cost of $890.00 and that absent his immediate reimbursement of that premium the company would establish an impound account to recapture that amount and to pay for future premiums by adjusting the amount of his monthly mortgage payments and sending him new mortgage payment coupons. Lucien says that he hasn't been able to find a copy of his mortgage and he can't afford to hire a lawyer. As you face a long iron approach shot over water he asks for your advice.
D. 1. 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 $675,000, part of which Gateway agreed to pay in monthly installments. The purchase agreement was reflected in a written document, signed by both parties, that included a clause expressly warranting the jet to be free from defects in material or workmanship for a period of one year and a clause in which Gateway granted a security interest in the jet to Eliason to secure payment of the balance of the purchase price. Two months after the purchase, the jet developed engine problems that required $50,000 worth of repair. Claiming a breach of warranty, and citing U.C.C. 2-717, Gateway notified Eliason that Gateway would be withholding the next several months of installment payments as reimbursement for the cost of repairs. U.C.C. 2-717 provides: "The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract." If Gateway withholds for the stated purpose, has he defaulted under a security agreement?
2. Same facts as in D.1, above, except that Gateway paid cash for the jet and now wants to rescind the deal ("revoke acceptance of the goods" in Article 2 terminology) and thereby obtain a refund of the purchase price. Assuming that Gateway would be justified in revoking acceptance, if Eliason refuses Gateway's request, may Gateway treat the jet as collateral, sell it, apply the proceeds of sale to the amount he wants back from Eliason, and thereafter pursue Eliason for any deficiency? Even if there is no written security agreement? See U.C.C. 2-711(3) and U.C.C. 9-110(1).
3. Suppose that Eliason sold his residence, not his jet, to Gateway and took a seller carry-back promissory note secured by a deed of trust. A few months after moving in, Gateway discovered severe damage to hardwood floors that Eliason had concealed with the placement of Persian rugs. After refinishing the floors at considerable expense, Gateway, citing fraud, notified Eliason that Gateway would be withholding the next several months of installment payments as reimbursement for the cost of repairs. U.C.C. 2-717 does not apply because U.C.C. Article 2 applies to transactions in goods. In the relevant jurisdiction, there is no statute concerning real estate that is comparable to U.C.C. 2-717. If Gateway withholds for the stated purpose, has he defaulted under the deed of trust?