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Chapter 19
OWNERSHIP AND RISK


Practice Test


1. CPA QUESTION On Monday, Wolfe paid Aston Co., a furniture retailer, $500 for a table. On Thursday, Aston notified Wolfe that the table was ready to be picked up. On Saturday, while Aston was still in possession of the table, it was destroyed in a fire. Who bears the loss of the table?

(a) Wolfe, because Wolfe had title to the table at the time of loss

(b) Aston, unless Wolfe is a merchant

(c) Wolfe, unless Aston breached the contract

(d) Aston, because Wolfe had not yet taken possession of the table

(d). CPA Examination, November 1989, #49.

3. Franklin Miller operated Miller Seed Co. in Pea Ridge, Arkansas. He bought, processed, and sold fescue seed, which is used for growing pasture and fodder grass. Farmers brought seed to Miller who would normally clean, bag, and store it. In some cases the farmers authorized Miller to sell the seed, in some cases not. Miller mixed together the seed that was for sale with the seed in storage so that a customer could not see any difference between them. Miller defaulted on a $380,000 loan from the First State Bank of Purdy. First State attempted to seize all of the seed in the store. Tony Havelka, a farmer, protested that his 490,000 pounds of seed was merely in storage and not subject to First State’s claim. Who is entitled to the seed?

First State gets it. UCC §2 326(3) creates a presumption in favor of creditors. When goods are delivered to be sold, the goods are subject to the creditors' claims unless the owner (Havelka) takes one of the statutory steps to protect himself, such as posting a sign indicating that he owns the merchandise. He did not do that here. The only issue is whether Havelka delivered the seed to sell. The court held that because Havelka. and other farmers had used Miller to sell seed in the past, which the bank knew, and because the stored seed was indistinguishable from the seed for sale, the purpose of §2 326 would be accomplished by protecting the creditor. The bank had no way of knowing that some of the goods that Miller appeared to own really belonged to others. First State Bank of Purdy v. Miller, 119 Bankr. 660, 1990 U.S. Dist. LEXIS 12407, (W.D. Ark. 1990).

5. John C. Clark, using an alias, rented a Lexus from Alamo Rent-A-Car in San Diego, California. Clark never returned the car to Alamo and obtained a California “quick title” using forged signatures. He then advertised in the Las Vegas Review Journal newspaper and sold the car to Terry and Vyonne Mendenhall for $34,000 in cash. The Mendenhalls made improvements to the car, had it insured, smog and safety tested, registered, licensed, and titled in the state of Utah. When Alamo reported the car stolen, the Nevada Department of Motor Vehicles seized the auto and returned it to Alamo. The Mendenhalls sued Alamo. The trial court concluded that the Mendenhalls had purchased the car for value and without notice that it was stolen, and were bona fide purchasers entitled to the Lexus. Alamo appealed. Please rule.

Clark was a thief. He obtained no title and could pass on no valid title to any purchaser. “The lower court seemed to equate Clark's fraudulently obtained but facially valid California "quick title" with voidable title capable of transferring ownership. The law does not support this conclusion.” Alamo was permitted to keep the auto; however, because the Mendenhalls had acted in good faith, the court held that they were entitled to the value of the improvements they had made. Alamo Rent-A-Car, Inc. v. Mendenhall, 937 P.2d 69 (Nev. 1997).

7. Universal Consolidated Cos. contracted with China Metallurgical Import and Export Corp. (CMIEC) to provide CMIEC with new and used equipment for a cold rolling steel mill. Universal then contracted with Pittsburgh Industrial Furnace Co. (Pifcom) to engineer and build much of the equipment. The contract required Pifcom to deliver the finished equipment to a trucking company, which would then transport it to Universal. Pifcom delivered the goods to the trucking company as scheduled. But before all of the goods reached Universal, CMIEC notified Universal it was canceling the deal. Universal, in turn, notified Pifcom to stop work, but all goods had been delivered to the shipper and ultimately reached Universal. Pifcom claimed that it retained title to the goods, but Universal claimed that title had passed to it. Who is right?

Universal is right. UCC §2401 provides that when goods are being moved, title passes to the buyer when the seller completes whatever transportation it is obligated to do. Pifcom completed its work by delivering to the trucking company, at which time title passed. Pittsburgh Industrial Furnace Co. v. Universal Consolidated Companies, Inc., 789 F. Supp. 184, 1991 U.S. Dist. LEXIS 19936 (W.D. Pa. 1991).

9. CPA QUESTION On September 10, Bell Corp. entered into a contract to purchase 50 lamps from Glow Manufacturing. Bell prepaid 40 percent of the purchase price. Glow became insolvent on September 19 before segregating, in its inventory, the lamps to be delivered to Bell. Bell will not be able to recover the lamps because:

(a) Bell is regarded as a merchant

(b) The lamps were not identified to the contract

(c) Glow became insolvent fewer than 10 days after receipt of Bell’s prepayment

(d) Bell did not pay the full price at the time of purchase

(b). CPA Examination, May 1990, #47.

11. CPA QUESTION Quick Corp. agreed to purchase 200 typewriters from Union Suppliers, Inc. Union is a wholesaler of appliances and Quick is an appliance retailer. The contract required Union to ship the typewriters to Quick by common carrier, “FOB Union Suppliers, Inc. Loading Dock.” Which of the parties bears the risk of loss during shipment?

(a) Union, because the risk of loss passes only when Quick receives the typewriters

(b) Union, because both parties are merchants

(c) Quick, because title to the typewriters passed to Quick at the time of shipment

(d) Quick, because the risk of loss passes when the typewriters are delivered to the carrier

(d). CPA Examination, May 1994, #45.





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