July 2015 Second Example Ten-point Answers to Virginia Essay Questions
July 2015 - QUESTION 4 – VIRGINIA BAR EXAMINATION
Mack owned a John Deere farm equipment dealership in Appomattox, Virginia. On August 1, 2014, Mack borrowed $250,000 from Aberdeen Bank ("the Bank"). In connection with the loan, Mack signed a security agreement granting the Bank a security interest in all of Mack's "inventory" and assigning Mack's "accounts and chattel paper" to the Bank. The Bank properly perfected its security interest.
On August 15, 2014, Mack purchased a tractor for cash from Bob, a local used equipment dealer, and received an executed bill of sale from Bob. Unknown to Mack, Bob had stolen the tractor several weeks before from Goolsby, a resident of nearby Buckingham County.
On September 1, 2014, Farmer, a local farmer, after inspecting the bill of sale from Bob to Mack, purchased the tractor from Mack for $20,000. Farmer made a $5,000 down payment and signed an installment sales contract, agreeing to pay Mack the balance of the purchase price, plus interest, in monthly installments over the next 12 months. The installment sales contract granted to Mack a security interest in the tractor and specified that all payments would be made directly to Mack. Farmer timely paid the October, November and December payments.
Mack missed his December 1, 2014 note payment. The Bank immediately declared Mack in default, as permitted by Mack's note and security agreement. The Bank also properly notified Farmer by letter of Mack's default and instructed Farmer to make all future payments on his installment sales contract directly to the Bank.
Farmer immediately went to Mack's store to inquire about the Bank's letter. Mack told Farmer: "Continue to make your monthly payments to me. The Bank has no right to collect from you. Our contract is just between you and me."
Three weeks later Farmer was served with a complaint in an action filed by Goolsby in the proper circuit court. In the complaint Goolsby sought to recover possession of the tractor, alleging that the tractor had been stolen from him.
Farmer filed his timely answer, asserting the affirmative defenses that (i) as a good faith purchaser for value, his claim to the tractor was superior to Goolsby's, and (ii) any right of Goolsby to recover the tractor should be conditioned on Goolsby's reimbursing Farmer for the amounts he had paid to Mack.
|(a)||Should Farmer ignore the Bank's letter and, as directed by Mack, continue making payments to Mack? Explain fully.|
|(b)||What are the merits of Goolsby's suit to recover the tractor, and how should each of Farmer's affirmative defenses be resolved? Explain fully.|
|(c)||If Goolsby prevails in his action against Farmer, is Farmer liable to Mack and the Bank for the remaining payments on the installment sales contract? Explain fully.|
|(d)||If Goolsby prevails in his action against Farmer, what remedy, if any, does Farmer have against Mack? Explain fully.|
July 2015 - QUESTION 4 – EXAMPLE ANSWER #1
The Farmer should not ignore the Bank's letter, and should not continue making payments to Mack. The Bank has a properly attached and perfected security interest in Mack's present and after acquired inventory, as well as a valid assignment to his right to payment under accounts and chattel papers. A security interest attaches when value is exchanged from creditor to debtor, when there is a properly executed written security agreement, and when the debtor has rights in the collateral offered as security for the creditor's loan. A debtor has rights in after acquired inventory, which may serve as proper collateral in a secured transaction.
In this case, the Bank's security interest attached to after acqured inventory and assignment of the accounts and chattel paper because value was exchanged in the form of a loan, the Mack had rights in all of these items, and Mack and the Bank signed a proper security agreement. These attached security interests were perfected when the Bank properly filed the financing statement with the State Corporation Commission of Virginia, the state in which the debtor is located. According to the express terms of the security agreement, upon Mack's default, the Bank had as immediate assignment of all of Mack's rights under his accounts receivable and chattel paper.
Because the assignment was lawful and the Bank gave proper notice of the assignment to Farmer, Farmer should stop making payments to Mack and should start making payments to the Bank in order to satsify his debt. Farmer's installment payment contract with Mack would be considered chattel paper, and Bank has been properly assigned rights to collect on the chattel paper due to Mack's default. Farmer had been duly notified of Mack's default and should stop paying Mack in favor of paying the Bank.
Goolsby will recover the tractor from Farmer, and Farmer should lose on both of his affirmative defenses. A seller can only pass title to the buyer to the extent that he himself has good title. The rightful owner of stolen property will have good title to the property as against the rest of the world. The rightful owner will not be subject to the defense that a later possessor is a good faith purchaser for value, and the rightful owner's recovery will be unconditional.
In this case, the tractor was stolen from Goolsby by Bob. It is entirely irrelevant that Mack did not know that the tractor was stolen, nor is it relevant that Farmer was a good faith purchaser for value. Bob did not have good title to the tractor. Therefore, Bob was not able to pass good title to Mack, who was in turn unable to pass good title to Farmer. Goolsby is the only person in the world with good title to the tractor, and as such will be able to recover it from Farmer regardless of Farmer's good faith purchase for value and unconditionally as to Farmer's recovery from Mack. Goolsby has superior title to the tractor, and Farmer will lose both of his affirmative defenses.
Farmer will not be liable to Mack or the Bank for the remaining payments. Under the UCC, every time a merchant seller sells a good to a buyer, the seller implicitly warrants that the seller is conveying good title to the property to the buyer. In this case, Mack breached his warranty of good title because he did not in fact have good title in regards to the tractor. Because Mack did not convey good title to the tractor to Farmer, and as a result Farmer lost the tractor to Goolsby, Mack has breached the warranty of good title and Farmer will be released from liability to Mack under the installment sales contract.
Furthermore, because Mack does not have valid rights of payment against Farmer as a result of Mack's breach, the Bank will also not have valid rights of payment against Farmer under their assignment. While the assignment itself was valid, Farmer's defense against payment to Mack will apply equally to the Bank. Mack cannot assign to Bank better rights to payment under chattel paper than Mack has himself. Therefore, Farmer will not have to make further payments to Mack or the Bank.
Farmer will be able to recover the payments he made to Mack under a theory of breach of the implied warranty of good title. As discussed above, Mack breached the warranty of good title by selling Farmer a tractor to which he did not have good title. Damages are calculated to put the nonbreaching party in the position they would have been in had the breaching party not committed the breach. If Goolsby recovers the tractor from Farmer, the value of the tractor to Farmer is $0. Therefore, Farmer should recover the full amount of the sales contract that he has paid thus far to Mack.
July 2015 - QUESTION 4 – EXAMPLE ANSWER #2
Part A: Farmer should not continue making payments to Mack, but to Bank:
Under UCC Article 9, a secured transaction is one in which a creditor pays value to a debtor, and the debtor grants the secured party an interest in his collateral, which the secured party can take possession of and/or sell upon the debtor's default. A security interest attaches when the creditor has given value, the debtor has rights in the collateral, and the parties have executed a security agreement. A security interest is generally perfected by filing a financing statement. A security interest in inventory, accounts, and/or chattel paper includes a security interest in all after-acquired such collateral, unless otherwise stated. Inventory includes all goods held for sale; accounts are the right to be paid. An interest attaches immediately when other collateral is acquired in which the secured party has a security interest, and upon the debtor's default, the creditor may repossess the collateral or rights to payment. A security interest traditionally follows the sale of goods; although the creditor may not go after the proceeds of the goods until default occurs, a party who takes goods in which the creditor has a security interest may be required to make payments directly to the creditor: he takes the goods subject to the security interest.
Bank had a perfected security interest in Mack's inventory, accounts, and chattel paper. This interest attached to all after-acquired collateral that is subject to the security interest. As such, the Bank's interest extended to Mack's right to be paid the remaining $15,000 on his sale of the tractor to Farmer. Because Mack defaulted on his loan to the Bank, Bank was able to require Farmer to make payments directly to them: they can see that their debt will be repaid.
Farmer should make payments directly to Bank, because of banks perfected security interest in Mack's accounts.
Part B: Goolsby will prevail in his replevin suit:
One who converts property acquires no title, and he cannot pass title to anyone, even a bona fide purchaser. Because a converter steals the property from the original owner, he only has void title, and can only pass void title to subsequent purchasers. The true owner may always recover his property that was stolen.
Goolsby will claim he has the right to recover the tractor because he is the true owner, and he never intended to part with the title. He will prevail. Bob stole the property from him, and as such, he is not able to pass along good title, even to a subsequent buyer in the ordinary course.
i. Farmer's claim that he is a good faith purchaser will fail:
A good faith purchaser (or bona fide purchaser) is one who takes for value, in good faith, without notice that the sale violates the rights of another in the property.
Farmer is such a purchaser: he paid value for the tractor, in good faith, from Mack, who was a merchant in farm equipment, but his right to the property is nonetheless inferior to the true owner's right to his property; thus this claim will fail.
ii. Farmer's claim that Goolsby's right to the tractor should be conditioned on his reimbursing Farmer for the amounts paid to Mack will also fail.
The true owner of property that has been stolen is under no duty to reimburse, or make whole, the parties who have subsequently purchased his stolen property. The true owner's rights are superior to all others, and even a party who unknowingly purchased stolen property may be liable for conversion. The true owner may seek replevin of his property without regard to the interests of subsequent purchasers of stolen property.
It is unfortunate for Farmer that he unwittingly purchased goods that had been stolen, but the law will not protect him above the true owner of the goods. As such, Goolsby will be under no obligation to make Farmer whole, because he was not at fault in the wrongs that transpired. Goolsby may seek remedies from Mack and/or Bob, but not the true owner who was not at fault.
Goolsby will prevail in his suit of replevin.
Part C: If Goolsby prevails in his action against Farmer, Farmer is not liable to Mack and the Bank for the remaining payments on the installment contract.
If a contract is later found void, it is rescinded and all the parties' rights and obligations are discharged. A contract may be void where the party did not have rights in the property at issue. In such a case, parties will not be liable to continue making pamyents (in the case of an installment contract). Instead, the non-breaching party may elect to sue for damages.
If Goolsby prevails in regaining possession of his tractor, Farmer's obligations to Mack will be discharged: the contract will be void. However, Mack will remain liable to the Bank for the security interest it had prior to the purchase of the tractor, but the payments involving the tractor will not be at issue in that repayment scheme.
Farmer's debt on the installment contract will be discharged.
Part D: If Goolsby prevails against Farmer, Farmer's remedy against Mack will be for breach of warranty of title.
Absent an indication to the contrary, implied in every UCC Sale of Goods contracts from a merchant is a warranty that the seller actually has title to the goods being sold. This is distinct from a quitclaim deed in property, for example, in which the buyer acquires only whatever title the seller has to give. Absent any expressions about the state of the title, this warranty is implied in the sale of goods, and a merchant who was later found not to have had title to the goods may be liable to a buyer of those goods for breach. A merchant is a person who has special skill or knowledge in goods of that kind.
Mack was a merchant in farm equipment: thus, there was an implied warranty of title in the tractor. If Goolsby is successful in his suit to reclaim the tractor, Farmer may sue Mack for breach of warranty of title, and he will likely prevail. Farmer was extra cautious, in that he inspected the bill of sale from Bob to Farmer, looking for any irregularities. He did not find them, but he will not be penalized for his trust of a merchant with an apparently clean bill of sale.
Farmer will prevail against Mack for breach of warranty of title.