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Question 1

Under the Secured Transactions Article of the UCC, which of the following requirements is necessary to have a security interest attach?

Answer 1

• Debtor has rights in the collateral
• Proper filing of a security agreement
• Value given by the creditor

Question 2

Mars, Inc. manufactures and sells VCRs on credit directly to wholesalers, retailers, and consumers. Mars can perfect its security interest in the VCRs it sells without having to file a financing statement or take possession of the VCRs if the sale is made to:

CONSUMER

Answer 2

A seller who sells goods on credit and retains a security interest in the goods to secure the purchase price has a purchase money security interest (PMSI). A PMSI in consumer goods is automatically perfected; there is no need to file.

Question 3

Green was unable to repay a loan from State Bank when due. State refused to renew the loan unless Green provided an acceptable surety. Green asked Royal, a friend, to act as surety on the loan. To induce Royal to agree to become a surety, Green fraudulently represented Green’s financial condition and promised Royal discounts on merchandise
sold at Green’s store. Royal agreed to act as surety and the loan was renewed. Later, Green’s obligation to State was discharged in Green’s bankruptcy. State wants to hold Royal liable. Royal may avoid liability:

Answer 3

If Royal can show that State was aware of the fraudulent representations.

**Fraud on the surety by the principal debtor is not a defense unless the creditor knew of the fraud.

• An uncompensated surety can be bound as long as the surety’s promise is made before consideration passed between the principal debtor and the creditor. Here, State renewed the loan in exchange for obtaining the surety. Thus, there is sufficient consideration to bind Royal.
• Discharge in bankruptcy of the principal debtor does not discharge the surety.
• Nothing in the facts makes the arrangement here void at the inception.

Question 4

Under a personal services contract, which of the following circumstances arising after a
contract is made will cause the discharge of a party’s duties?

Answer 4

Illegality of the services to be performed.

If the services called for under a contract were legal at the time the contract was formed and then subsequently became illegal, the contract would be
discharged.

• The death of the party who is to receive the services does not usually result in discharge of duties under a personal services contract. However, death
  might make performance impossible therefore causing a discharge (e.g., if doctor contracts to perform a bypass operation on patient and patient dies before the operation can be performed, doctor is discharged from performing).
• Mere bankruptcy of the party to receive the services will not result in a discharge, although discharge is possible if the bankruptcy constitutes anticipatory repudiation, such as when it makes it very unlikely that the person receiving the services will be able to pay.
• A party can be discharged from a contract for impossibility or commercial impracticability, but a mere increase in costs does not make a performance impossible or impracticable.

Question 5

MINOR CONTRACTS

Answer 5

A minor may disaffirm a contract within a reasonable time after reaching majority, and two days is certainly a reasonable time.

• A minor has a right to disaffirm contracts despite the minor’s power to transfer good title to a good faith purchaser.
• A minor must disaffirm a contract within a reasonable time after reaching majority.
• A minor cannot ratify a contract until reaching majority.

Question 6

Brown cosigned Royal’s $50,000 note to State Bank. If Royal is later adjudicated
mentally incompetent, what would be Brown’s liability on the note?

Answer 6

**Liable to pay State on the due date of the note.
**
A surety is a person who agrees to be liable on someone else’s debt. The cosigner of a note is a surety. A surety is liable on the date just like a principal, and the surety is not discharged by the principal debtor’s bankruptcy or by the fact that the principal debtor became incapacitated

• A surety is primarily liable on the debt—just like a principal. A cosigner is a surety. A guarantor of collectibility can require a creditor to seek payment
  from the principal debtor first, but that is not the case with a cosigner.
• Sureties are liable whether compensated or uncompensated. However, an uncompensated surety will be liable only if he or she agreed to be a surety
  before the consideration passed between the creditor and the principal debtor (otherwise, there is no consideration to hold the surety to a promise).
• A surety is liable on the date just like a principal, and the surety is not discharged by the principal debtor’s bankruptcy or by the fact that the principal
  debtor became incapacitated.

Question 7

PAROL EVIDENCE

Answer 7

• The parol evidence rule prohibits evidence of prior oral or written agreements that seek to contradict the terms of a fully integrated contract (i.e., one
  intended as the complete agreement).
• However, the parol evidence rule does not prohibit introduction of subsequent agreements;

Question 8

Shipment of nonconforming Goods

Answer 8

Shipment of nonconforming goods constitutes a breach of contract. When there is a breach, risk of loss is generally borne by the breaching party
no matter whether the contract is “shipment” or “destination.”

If the goods were conforming, the risk of loss in a “shipment contract” would pass to the buyer as soon as the goods were placed in the hands of the
carrier

Question 9

Under the Sales Article of the UCC, which of the following rights is(are) available to the buyer when a seller commits an anticipatory breach of contract?

Answer 9

• Demand assurance of performance
• Cancel the contract

There is no right to punitive damages under contract law in general, even on anticipatory breach.

Question 10

Sales Article of UCC

Answer 10

• A contract for the sale of a used car by a nonmerchant is governed by the Sales Article of the UCC.
• The Sales Article of the UCC (Article II) applies to sales of goods.
• Goods are defined as tangible, movable personal property.
• UCC Article II is not limited to merchants,
  although a number of UCC rules depend on whether one or more of the parties are merchants.
• Contracts for personal services, such as construction of a house by a professional builder, is covered by common law contracts, not the Sales Article of the UCC.
• Contracts for intangible personal property, such as stock sold on the stock exchange, is covered by common law contracts, not the Sales Article of the
  UCC.
• Contracts for real estate, such as land sold by a real estate agent, is covered by common law contracts, not the Sales Article of the UCC

Question 11

Parc, on behalf of Global Motor House, a chain motel, contracted with Furn Brothers Corp. to buy hotel furniture and fixtures. Global had instructed Parc to use Parc’s own name and not to disclose to Furn that Parc was acting on Global’s behalf. Who is liable
to Furn on this contract?
Parc Global
A. No No
B. Yes Yes
C. No Yes
D. Yes No

**Choice “B” is correct. Yes - Yes.

Answer 11

The third party to a contract with an agent for an undisclosed principal may elect to hold** either the subsequently discovered principal or the agent liable**.

Question 12

Patch, a frequent shopper at Soon-Shop Stores, received a rain check for an advertised sale item after Soon-Shop’s supply of the product ran out. The rain check was in writing and stated that the item would be offered to the customer at the advertised sale price for an unspecified period of time. A Soon-Shop employee signed the rain check. When Patch returned to the store one month later to purchase the item, the store refused to honor the rain check. Under the Sales Article of the UCC, will Patch win a suit to enforce the rain check?

Answer 12

The rain check satisfied the requirements of a “firm offer” because it involved the sale of goods, the seller was a merchant, it was in writing and signed by the merchant, and the writing included words of firmness (i.e., a promise to keep the offer open).

If no time is stated, as in this case, the offer is irrevocable for a reasonable time, up to three months.

Question 13

In determining whether the consideration requirement to form a contract has been
satisfied, the consideration exchanged by the parties to the contract must be:

Answer 13

. Legally sufficient.

To be effective, consideration must be legally sufficient, which means something that the law recognizes as consideration

Question 14

Under the Sales Article of the UCC, which of the following circumstances best describes
how the implied warranty of fitness for a particular purpose arises in a sale of goods
transaction?

Answer 14

The seller knows the particular purpose for which the buyer will use the goods and knows the buyer is relying on the seller’s skill or judgment to select
suitable goods.

The implied warranty of fitness for particular purpose arises when the seller knows the particular purpose for which the buyer will use the goods and that
the buyer is relying on the seller to choose suitable goods.

• The warranty does not arise unless both prongs are present; the buyer must inform the seller of a particular purpose and must rely on the seller to select suitable goods. The seller need not be a merchant.
• This choice is incorrect not only for the same reason that choice
• seller need not be a merchant for the warranty of
  fitness to arise; nonmerchant sellers can make the warranty.

Question 15

Kaye contracted to sell Hodges a building for $310,000. The contract required Hodges
to pay the entire amount at closing. Kaye refused to close the sale of the building.
Hodges sued Kaye. To what relief is Hodges entitled?

. Compensatory damages or specific performance.

Answer 15

When a contract for the sale of real property is breached, the nonbreaching party can either recover compensatory damages (damages that
compensate for the breach) or obtain specific performance (forced performance).

• In contract cases, punitive damages are generally not awarded.
  Moreover, a party generally is not limited to consequential damages (the collateral
  damages that result from a breach); the actual damages that result from the breach are
  also recoverable (compensatory damages).
• Damages are designed to compensate for nonperformancen while specific performance forces performance. These are alternative remedies. A party
  cannot obtain specific performance and recover compensatory damages.
• In contract cases, punitive damages are generally not awarded.

Question 16

Under the** Sales Article of the UCC, in an F.O.B. place** of shipment contract, the risk of loss passes to the buyer when the goods:

Answer 16

Are delivered to the carrier.
In an F.O.B. place of shipment contract, risk of loss passes when the goods are placed in the hands of a carrier at the seller’s loading dock.

• Risk of loss would pass on identification only if the parties specifically so provided.
• In an F.O.B. place of shipment contract, risk of loss passes when the goods are placed in the hands of a carrier at the seller’s loading dock.
• In an F.O.B. place of shipment contract, it is not sufficient just to get the goods to the loading dock; risk does not pass until the goods are placed in the hands of a carrier there.

Question 17

Under the Sales Article of the UCC, which of the following statements is correct regarding a good faith requirement that must be met by a merchant?

Answer 17

The merchant must observe the reasonable commercial standards of fair dealing in the trade.

• The UCC imposes an obligation of good faith on both parties to a contract. For merchants, this includes the duty to observe reasonable commercial
  standards.
• Under the parol evidence rule, a merchant would not have to adhere to oral statements made before a written contract was made if the written contract appears to be a total integration of the entire deal.
• A merchant need not go beyond the warranties required by law.
• There is no rule requiring merchants to sell at the lowest prices.

Question 18

Agent of Undisclosed Principal

Answer 18

• As an agent for an undisclosed principal, the broker (agent) has the same actual authority as if the principal’s identity were disclosed.
• Actual authority depends on the communications between the principal and the agent and is
  unaffected by whether the principal’s identity is disclosed to third parties with whom the
  agent deals.
• Where the principal is undisclosed, both the agent and the principal can be held liable on contracts into which the agent enters on the principal’s
  behalf.
• Where the principal is undisclosed, there can be no apparent authority, because apparent authority is based on the principal’s communications with
  the third party with whom the agent deals, and when the principal is undisclosed there are no such communications.
• While a principal generally is not liable for the agent’s torts, there are some exceptions to this rule, and keeping the principal’s identity undisclosed
  does not negate these exceptions.

Question 19

Thorp was a purchasing agent for Ogden, a sole proprietor, and had the express authority to place purchase orders with Ogden’s suppliers. Thorp placed an order with Datz, Inc. on Ogden’s behalf after Ogden was declared incompetent in a judicial
proceeding. Thorp was aware of Ogden’s incapacity. Which of the following statements is correct concerning Ogden’s liability to Datz?

Answer 19

** Ogden will not be liable because Thorp’s agency ended when Ogden was
declared incompetent.**
* An agency is terminated by operation of law upon the incapacity of the principal; no notice is needed.
* An agent’s authority is terminated by operation of law upon the incapacity of the principal regardless of whether the authority was express, implied, or
apparent.
* Ogden will not be liable because of the incapacity; Ogden’s status as a disclosed vs. undisclosed principal is irrelevant.
* An agency is terminated by operation of law upon the incapacity of the principal; notice to the third party with whom the agent deals is not necessary.

Question 20

Which of the following concepts affect(s) the amount of monetary damages recoverable by the nonbreaching party when a contract is breached?

Answer 20

• Forseeability of damages
• Mitigation of damages

Consequential damages are recoverable for breach of contract only to the extent they are foreseeable. And in every case, a nonbreaching party has a duty to mitigate damages-a duty to make reasonable efforts to cut down on losses resulting from the breach. Failure to do so will preclude the party from collecting
damages that might have been avoided.

Question 21

GUARANTORS

Answer 21

Two parties have agreed in writing to act as Guarantors of collection on a debt owned by a person to a company. The debt is evidenced by promissory note, if the Debtor defaults then the company will be entitled to recover from the guarantors UNLESS
the company has not attempted to enforce the promissory note against the Debtor.

• The creditor must pursue the debtor before the creditor is entitiled to recobver from the guarantors.

Question 22

Under the UCC Secured Transactions Article, when collateral is in a secured party’s possession, which of the following conditions must also be satisfied to have attachment?

The debtor must have rights to the collateral.

Answer 22

The term attachment refers to the relationship between the debtor and the secured party (creditor).
There are 3 requirements for an attachment:
1. Agreement of the parties (either an authenticated record of the agreement or the
creditor’s having either possession or control of the collateral).
2. Value is given by creditor.
3. Debtor has rights in the collateral.

• Attachment does not require a written security agreement; possession of the collateral is an alternative for proving the agreement.
  *Attachment (rights between debtor and creditor) does not require that the public be notified.
  *Attachment does not require that the secured party receive consideration; the secured party/creditor is the one who must give value in exchange for the security interest.

Question 23

Under the Sales Article of the UCC, which of the following events will result in the risk of
loss passing from a merchant seller to a buyer?

Answer 23

* Tender of the goods at the seller’s place of business
* Use of the seller’s truck to deliver the goods

In a noncarrier case, risk of loss passes from a merchant seller on actual delivery of the goods into the buyer’s possession. Mere tender at the seller’s
place of business does not pass the risk. Neither does the seller’s using its truck to deliver the goods. (Note that since the seller is using its own truck, this is a noncarrier case, no common carrier was involved.

Question 24

Under the UCC Sales Article, which of the following statements is correct concerning a contract involving a merchant seller and a non-merchant buyer?

Answer:-

Whether the UCC Sales Article is applicable does not depend on the price of
the goods involved.

Answer 24

• The Sales Article applies to all contracts for the sale of goods, regardless of price.
• The presumption is that all sales are final. A sale or return or sale on approval (both of which allow the return of the goods) is available only if the parties
  so provide.
• All parties are bound by the obligation of good faith under the UCC.
• The Sales Article covers all sales of goods. If the purchase prices $500 or more, a writing may be required to enforce the contract under the Sales
  Article’s Statute of Frauds, but the Sales Article still applies.

Question 25

In a principal-agent relationship that is** not** contractual, which of the following remedies is not available to the agent whose principal is guilty of violating a duty owed the agent?

Answer 25

• Specific performance is a court order to fulfill the terms of a contract.If the principal-agent relationship is not contractual, there are no contractual terms to fulfill.
• If a principal violates a duty owed the agent, whether or not the relationship is contractual, the agent may withhold further performance.
• If a principal violates a duty owed the agent, whether or not the relationship is contractual, the agent may recover future damages.
• If a principal violates a duty owed the agent, whether or not the relationship is contractual, the agent may recover damages for past services.

Question 26

Which of the following conditions must be met to form an agency?

The principal must possess contractual capacity

Answer 26

• Formation of an agency relationship requires a principal who has contractual capacity.
• Formation of an agency relationship requires consent of the parties, but consideration is not required.
• Formation of an agency relationship may be oral; a writing is not required.
• Because an agency relationship may be formed without a writing, the agreement need not be signed by both parties

Question 27

Which of the following actions will result in the discharge of a party to a contract?

Answer 27

• Prevention of performance
• Accord and satisfaction

Prevention of performance results in a discharge for breach of the implied duty of cooperation. A party to a contract will also be discharged through an accord and satisfaction.

Question 28

Duties of Agent

Answer 28

• An agent owes a duty of loyalty to his principal. This duty includes the duties not to self-deal, usurp opportunities, or have conflicts of interest with the
  principal.
• The agent has a duty to notify the principal of all issues known to the agent.
• The duty of indemnification is the duty to hold the agent harmless for liabilities the agent incurs on behalf of the principal

Question 29

In which of the following situations does the first promise serve as valid consideration for the second promise?

**A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 disputed debt.
**

Answer 29

• Anything having legally recognized value can constitute consideration. If parties legitimately disagree as to the amount owed under their
  contract, a promise to compromise, such as the parties are doing here, has legal value and constitutes consideration since both parties are giving up the right to litigate the dispute.
• A police officer’s promise to catch a thief for a victim’s promise to pay a reward. ===
  A promise to do something that one is already obligated to do has no legal value and is not valid consideration under the preexisting legal duty rule. A
  police officer has a preexisting legal duty to catch thieves; therefore, this promise cannot serve as consideration.
• A debtor’s promise to pay $500 for a creditor’s promise to forgive the balance of a $600 liquidated debt.===If parties legitimately disagree as to the amount owed under their contract, a promise to compromise has legal value and constitutes consideration since both parties are giving up the right to litigate the dispute. However, here the
  amount owed is liquidated, which means that it is not in dispute. A promise to compromise here has no legal value and cannot serve as consideration since there is no legitimate right to litigate a liquidated claim.
• A builder’s promise to complete a contract for a purchaser’s promise to extend the time for completion. == . A promise to do something one is already obligated to do has no value and is not valid consideration under the preexisting legal duty rule. Here, the builder already owed a duty to complete the contract, and so his second promise to do so is not valid consideration.