Company/Business/Partnership Law
Instructions:-
Scenario
Denny has had a life-long dream of selling, restoring, and repairing motorcycles. On January 1, Denny went to BigBank and obtained a $100,000 line of credit to start his business. Denny properly signed a Security Agreement giving BigBank collateral in all “after acquired property.” On January 2, BigBank filed a properly prepared Financing Statement with the Washington Department of Licensing. With the line of credit from BigBank Denny purchased equipment such as tools, and other goods to outfit his store/garage (which he already owns free and clear of any mortgage).
On January 3, Denny called Manny – a builder of motorcycles – to see if he (Denny) could order two motorcycles the first of every month for the next six (6) months; beginning in February (Each motorcycle is worth $10,000 wholesale). On January 4, Manny faxed Denny, on Manny’s business letterhead, indicating that Manny would first be able to send Denny motorcycles on March 1, FOB: Fast Delivery Service (FDS). Denny noticed the different beginning date and the method of delivery, but did not contact Manny about the discrepancies. In the same fax, Manny also inquired as to how Denny wished to pay for the motorcycles. On January 5, Denny signed properly filled out Security Agreement – specifically for the motorcycles as inventory – giving “the motorcycles and all prior and after acquired property” as collateral. That same day, Manny also filed a properly completed Finance Statement with Washington State Department of Licensing. Manny notified BigBank in writing of his secured interest in the motorcycles.
On January 10, Denny purchased a big screen television for his shop/garage from Terry’s Television. Denny signed a properly filled out Security Agreement giving Terry as collateral “the television and all prior and after acquired property.” Terry filed a Financing Statement with King County Department of Licensing; Terry did not notify BigBank or Manny about the loan to Denny.
On March 1, the first two motorcycles arrived without problems. On March 15, Manny sent an email to Denny stating that he could only deliver one (1) motorcycle in April; however, he would send three motorcycles on May 1. On April 1, only one motorcycle arrived. On May 1, FDS picked up the three motorcycles to deliver them to Denny. Manny notified Denny that FBS has the three motorcycles. On the way, one of the motorcycles fell off the delivery truck and was destroyed. Denny wrote to Manny telling Manny that he (Denny) would not pay for the destroyed motorcycle. On June 1, Denny received two motorcycles, selling one the same day. On June 2, the customer who purchased the motorcycle on June 1st returned the motorcycle stating that the transmission was broken (manufacturing defect) when the customer first tried to ride the motorcycle. Denny called Manny in regard to the inoperable motorcycle; Denny told Manny that Manny had breached their agreement and that Denny was not going to perform his remaining obligations under the agreement.
On July 1, Denny went out of business. At the time Denny owed BigBank $90,000; he owed Manny $80,000 (including the destroyed motorcycle); and Terry $5000 for the television. BigBank foreclosed on Denny. BigBank properly contacted the King County Sheriff’s Department, which in turn repossessed all the property in Denny’s shop/garage. BigBank gave Manny and Terry 15-days’ notice of its intent to sell Denny’s property at a Sheriff’s Auction.
Denny has brought a breach of contract claim against Manny, averring that Manny has breached their agreement because of one of the motorcycles had a broken transmission. Manny has filed a counter claim asserting that Manny may not repudiate the contract and must continue to perform for the duration of the agreement.
Denny is not incorporated and would be personally liable for any debts or liabilities.
Part # 1: Agreement 45 Points
Using IRAC answer the following questions:
- Determine the type of agreement between Denny and Manny. 5 Points
- Was there a properly formed agreement between Denny and Manny? (You must analyze all elements of formation). 10 Points
- Does the fact that Manny’s response differs from Denny’s initial inquiry void the agreement? 5 Points
- Does the agreement comply with the Statute of Frauds? 5 Points
- Was there a modification of the agreement; and if so was it valid? 5 Points
- Who was at risk for the motorcycle which was destroyed while being shipped? 5 Points
- Are there any warranties involved in regards to the motorcycle with the broken transmission? 5 Points
- May Denny discontinue performance, because of the broken transmission? 5 Points
Part # 2: Credit 30 Points
Using IRAC answer the following questions:
- Is BigBank’s secured interest a loan or a PMSI (If PMSI, what type)? Has it attached and has it been perfected? 5 Points
- Is Manny’s secured interest a loan or a PMSI (If PMSI, what type)? Has it attached and has it been perfected? 5 Points
- Has Terry’s secured interest a loan or a PMSI (If PMSI, what type)? Has it attached and has it been perfected? 5 Points
- Who (BigBank, Manny, or Terry) has priority for any funds derived from the sale of motorcycles at the Auction? 5 Points
- Who (BigBank, Manny, or Terry) has priority for any funds derived from the sale of the television at the Auction? 5 Points
- May BigBank, Manny, or Terry attempt to repossess any of the motorcycles purchases by Denny’s customers? 5 Points
Solution
Company/Business/Partnership Law
Part # 1: Agreement
Issue 1: Determine the type of agreement between Denny and Manny
Rule: This is a sale of goods agreement is accordance with the Uniform Commercial Code (UCC) Article 2. The article governs the sale of movable goods at the time of sales. The UCC Article 2 states that a Sales contract should show an evidence of an agreement (Beatty & Samuelson , 2012).
Analysis: First, on 3rd January, Denny contacted Manny to inquire if he could make an order of two motorcycles the first day of every month for six months. The delivery was to commence in February with each motorcycle costing $10,000. Second, Manny faxed Denny a reply indicating that he (Manny) would deliver the first motorcycles on 1st of March. Third, the mode of delivery would be FOB: Fast Delivery Services (FDS).
Conclusion: There exist sales of the good contract between Denny and Manny. The contract is governed by Article 2 of UCC.
Issue 2: Was there a properly formed agreement between Denny and Manny?
Rule: First, for a contract to be enforceable in the State of Washington, mutual assent, i.e., offer and acceptance, must exist. And, second, consideration must exist. An offer is communicated to the second party. The second party, in return, sends a valid acceptance to the offeree. The Acceptance letter should demonstrate an agreement with the terms proposed in the offer (Mann & Roberts, 2012).
Analysis: Denny made a valid offer when he contacted Manny to order two motorcycles to be delivered at the beginning of each month for six months. The delivery would commence starting February, and each motorcycle would be worth $10,000. The fax Manny sent to Denny by Manny that he would deliver the first motorcycles on 1st March constituted a valid acceptance. The fax had Manny’s official letterhead. The fax also indicated the mode of delivery as FOB. The $10,000 cost of each motorcycle is regarded as a consideration.
Conclusion: Yes, there existed a properly formed agreement between Denny and Manny.
Issue 3: Does the fact that Manny’s response differs from Denny’s initial inquiry void the agreement?
Rule: If the acceptance of an offer is timely and definite then it creates a contract even when different or additional terms are included on top of those captured in the offer. A contract can only be void only when the offeror objects the new terms within a reasonable time or when the new terms include a new deal (material) which was part of the initial deal.
Analysis: Denny did not contact Manny after realizing that their acceptance fax contained discrepancies in the delivery dates. Denny wanted the first delivery to be made at the beginning of February while Manny indicated that he was able to make the first delivery on 1st March. Therefore, Denny accepted the additional terms by Manny.
Conclusion: The agreement cannot be deemed as void by the fact that Manny’s response differs from Denny’s initial inquiry.
Issue 4: Does the agreement comply with the Statute of Frauds?
Rule: According to the UCC Article 2, a contract that is worth at least $500 cannot be enforced unless there exists a signed writing by the defendant showing the existence of an agreement between the two parties. The signed writing should also indicate the agreement quantity for it to be enforceable (Mann & Roberts, 2012).
Analysis: Although the value of each motorcycle is indicated to be $10,000, there was no any signed writing showing a contract. Likewise, the acceptance response faxed by Manny to Denny did not indicate the quantity of the motorcycles to be sent each month.
Conclusion: No, the agreement does not comply with the Statute of Frauds.
Issue 5: Was there a modification of the agreement, and if so was it valid?
Rule: Even after a sales contract has been agreed upon; contract modification can be accepted if it is in good faith and necessary.
Analysis: Contract modification occurred when Manny wrote to Denny informing him he would deliver one motorcycle on April 1 contrary to the initial agreement of delivering two motorcycles each month for six months. Manny promised to send three motorcycles on May 1. Denny agreed to the modification (Meiners, Ringleb , & Edwards, 2014).
Conclusion: Yes there was contract modification. It was in good faith with both parties agreeing to make it valid.
Issue 6: Who was at risk for the motorcycle, which was destroyed while being shipped?
Rule: According to the UCC Article 2, if the contract allows the seller to ship the goods through a common carrier while the issue of risk of loss in not addressed in the contract, then the liability shifts to the buyer after the goods have been delivered to the carrier (Mann & Roberts, 2012).
Analysis: In his Fax, Manny indicated that he would use FOB, a Fast delivery service, to deliver the motorcycles. The issue of risk of loss was not indicated in the contract. Likewise, the motorcycles were destroyed while on the board of the carrier. Therefore, the risk of loss should shift to Denny, the buyer.
Conclusion: Denny was at risk because the motorcycles were destroyed while being transported to him.
Issue 7: Are there any warranties involved in regards to the motorcycle with the broken transmission?
Rule: According to the Implied Warranty of Merchantability, goods sold by an authorized merchant should be fit to serve its ordinary purpose. The goods should be warranted to satisfy the needs of the buyer sufficiently (Beatty & Samuelson , 2012).
Analysis: A customer returns a motorcycle that was sold by Denny on June 1 stating a manufacturing defect, i.e., a broken transmission. The motorcycle could not satisfy the ordinary need of the buyer hence Manny should be liable for repair or replacement.
Conclusion: Manny is responsible for the broken transmission. Manny breached the warranty of providing satisfactory goods.
Issue 8: May Denny discontinue performance, because of the broken transmission?
Rule: A buyer has a right to reject delivered good(s) if it does not conform to his/ her stated needs. However, in the case of minor nonconformity, the buyer must accept the goods and seek damages. Lastly, buyer must inspect the goods upon delivery (Meiners, Ringleb , & Edwards, 2014).
Analysis: After trying the motorcycle, the customer realized that it has a broken transmission. He returned it to Denny. Subsequently, Denny cannot discontinue performance because a broken transmission is considered to be a minor nonconformity; he should ask Manny to fix the issue.
Conclusion: Denny cannot discontinue performance because of the broken transmission.
Part 2: Credit
Issue 1: Is BigBank’s secured interest a loan or a PMSI (If PMSI, what type)? Has it attached and has it been perfected?
Rule: Attachment under the Sales of goods contract occurs when i) the debtor has rights in the collateral and ii) the secured party offers value. A security interest is considered to be perfect when it is enforceable against later claimants such as buyers, lien creditors, and secured parties. The filing is perfected when it is filled with the Washington Department of Licencing. It must indicate collateral besides being accurate and complete (Mann & Roberts, 2012).
Analysis: Denny obtained a $ 100,000 loan from the BigBank and subsequently signed a Security Agreement which gave the bank collateral in all “after acquired property.” The bank filed a Financing Statement with the Washington Department of Licencing on June 2nd. The statement was properly prepared.
Conclusion: BigBank’s secured interest and has it been perfected.
Issue 2: Is Manny’s secured interest a loan or a PMSI (If PMSI, what type)? Has it attached and has it been perfected?
Rule: Attachment under the Sales of goods contract occurs when i) the debtor has rights in the collateral and ii) the secured party offers value. A security interest is considered to be perfect when it is enforceable against later claimants such as buyers, lien creditors, and secured parties. A loan is considered to be secure Filing is perfected when it is filled with the Washington Department of licencing. It must indicate collateral besides being accurate and complete (Meiners, Ringleb , & Edwards, 2014).
Analysis: Denny signed a security agreement with the bank on January 5 specifically providing the motorcycles as collateral. He also filed a properly completed Finance statement with the Washington State Department of licensing. Manny went further wrote to the bank about his secured interest.
Conclusion: Manny has secured interest attachment which is perfected.
Issue 3: Has Terry’s secured interest a loan or a PMSI (If PMSI, what type)? Has it attached and has it been perfected?
Rule: Attachment under the Sales of goods contract occurs when the debtor has rights in the collateral to the secured party through oral agreements. A security interest is considered to be perfect when it is enforceable against later claimants such as buyers, lien creditors, and secured parties. A loan is considered to be secure Filing is perfected when it is filled with the Washington Department of Licencing. It must indicate collateral besides being accurate and complete (Beatty & Samuelson , 2012).
Analysis: Denny signed a security agreement after purchasing a screen television from Terry. Agreement gave Terry the right of the television and other acquired properties as collateral. Therefore Terry had a secured interest. Instead of filing the statement with Washington State Department of Licencing, Terry did so with the King County. He did not notify either Manny or Bigbank about the loan he offered Denny.
Conclusion: Although Terry’s secured interest was attached it had not been perfected.
Issue 4: Who (BigBank, Manny, or Terry) has priority for any funds derived from the sale of the motorcycles at the Auction?
Rule: There are three scenarios of addressing the priority of secured interests. In the case of two parties with unperfected, the first party to attach is given the priority. In the case of perfect versus unperfected, the perfected party has the priority over the unperfected party. Where both parties are perfected, then the first one to perfect or file is given priority unless the second party is a super priority. A super priority is regarded as a Perfected PMSI which is given priority over a first attachment (Beatty & Samuelson , 2012).
Analysis: Terry has no priority for any proceeds from the sales of motorcycles because his secured interests are not perfected. Although Bigbank and Manny have perfected secured interest, Bigbank’s was attached first. However, Manny has a super- priority because he has a perfected PMSI.
Conclusion: Manny has a priority for the proceeds from sales of the Motorcycles over the others at the Auction.
Issue 5: Who (BigBank, Manny, or Terry) has priority for any funds derived from the sale of the television at the Auction?
Rule: There are three scenarios of addressing the priority of secured interests. In the case of two parties with unperfected, the first party to attach is given the priority. In the case of perfected versus unperfected, the perfected party has the priority over the unperfected party. Where both parties are perfected, then the first one to perfect or file is given priority unless the second party is a super priority. A super priority is regarded as a Perfected PMSI which is given priority over a first attachment (Mann & Roberts, 2012).
Analysis: Terry has no priority for any proceeds from the sales of television because his secured interests are not perfected. Although Bigbank and Manny have perfected secured interest, Bigbank’s was attached first.
Conclusion: Bigbank has a priority for the proceeds from sales of the television over the others at the Auction.
Issue 6: May BigBank, Manny, or Terry attempt to repossess any of the motorcycles purchased by Denny’s customers?
Rule: A buyer is free from the unperfected security interest in the collateral if he/ she acted in good faith when purchasing the collateral even without the consent of the secured parties. The same case applies to perfected security where the buyer was not aware of any violation of the security agreement during the purchase (Beatty & Samuelson , 2012).
Analysis: All three parties have no right to repossess the motorcycles purchased by the customers’ of Denny.
Conclusion: BigBank, Manny, or Terry cannot repossess any of the motorcycles purchased by Denny’s customers.
References
Beatty, J. F., & Samuelson , S. S. (2012). Legal Environment. Chicago: South-Western College Pub.
Mann, R. A., & Roberts, B. S. (2012). Essentials of Business Law and the Legal Environment (11 ed.). New Jersey: Cengage Learning.
Meiners, R. E., Ringleb , A. H., & Edwards, F. L. (2014). The Legal Environment of Business. Chicago: South-Western College Pub.
