Johnson v. General Motors Corp.

Citations: 668 P.2d 139; 233 Kan. 1044; 36 U.C.C. Rep. Serv. (West) 1089; 1983 Kan. LEXIS 377Docket: 54,964

Court: Supreme Court of Kansas; August 4, 1983; Kansas; State Supreme Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

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The case involves John H. Johnson and E. Joan Johnson, who purchased a faulty 1981 Chevrolet Silverado pickup truck from Ed Roberts Chevrolet and subsequently sought to revoke their acceptance under K.S.A. 84-2-608 due to multiple defects and failures. After experiencing significant issues, including a stuck accelerator, oil leaks, and transmission failure during a trip, they attempted to return the truck for a refund on November 30, 1980, but General Motors Corporation (GMC) refused. The Johnsons continued to use the truck while pursuing legal action, during which some repairs were made under warranty.

The trial court ultimately found their revocation of acceptance justified but held a subsequent hearing to determine the setoff amount for the Johnsons' continued use of the truck, awarding GMC $4,702.94. The main issue on appeal is whether this setoff was appropriate, given that the Johnsons drove the truck an additional 14,619 miles after revocation. The Uniform Commercial Code (UCC) aims to streamline commercial transaction laws and encourages a liberal interpretation, while also allowing for the application of traditional legal principles unless explicitly overridden by UCC provisions.

Rejection and revocation are remedies for buyers wishing to return delivered goods. Rejection involves the buyer's refusal to accept goods, requiring notification to the seller. In contrast, revocation occurs after acceptance and the expiration of the rejection period, allowing a buyer to refuse goods if their nonconformity significantly impairs value, as outlined in K.S.A. 84-2-608. Revocation must happen within a reasonable time after discovering the defect and before any significant change in the goods' condition, and it is not effective until the seller is notified.

If a buyer properly rejects or revokes acceptance, they are released from payment obligations and entitled to recover any payments made. In cases of breach of warranty, recovery is limited to damages from defects present at the sale. The buyer retains a security interest in the goods for the purchase price and related custody expenses, as per K.S.A. 84-2-711. In a specific case, the buyers revoked acceptance of a truck purchased on October 7, 1980, notifying the seller on November 30, 1980, of their decision due to defects. The court found the revocation valid and timely, and GMC's refusal to accept the return did not affect the buyers' rights to recover payments made.

Upon rightful rejection or justifiable revocation of acceptance, a buyer retains a security interest in goods in their possession for any payments made and reasonable expenses incurred related to the goods. The buyer may hold and resell these goods similarly to an aggrieved seller. A revoking buyer's rights and duties mirror those of a buyer who rejects goods, thereby streamlining the standards for resolving commercial disputes under the UCC. After notifying the seller of rejection or revocation, a merchant buyer must follow reasonable seller instructions, or may choose to return, store, or sell the goods for the seller's account, with reimbursement for reasonable expenses. A buyer cannot retain proceeds from resale as damages unless properly determined.

In this case, the buyers did not utilize their UCC options following revocation but continued to use the truck, which could be seen as an acceptance of ownership, potentially invalidating the sale cancellation. Their continued use was not a voluntary acceptance given the lack of transportation alternatives. The buyers argue that limited circumstances may allow for the use of goods post-revocation without penalty, a matter not settled by prior Kansas case law, which typically involved immediate return of goods upon defect discovery. Historical decisions required purchasers to choose between rescission and damages, emphasizing prompt return of unsatisfactory goods as essential. There is judicial support for allowing a setoff for continued use after revocation, reflecting similar past cases.

In Stroh v. Am. Rec., the court determined that once plaintiffs effectively revoked acceptance of the mobile home, they had the same obligations as a buyer who rejects goods prior to acceptance. Under Colorado law (C.R.S. 1963, XXX-X-XXX), any subsequent dominion over the goods after rejection is considered wrongful, as it prevents the seller from regaining possession for resale or loss mitigation. Following their revocation on October 15, 1970, plaintiffs retained only a security interest for their purchase price but continued to occupy the mobile home until March 1972. Despite no instructions from the defendants post-revocation, plaintiffs’ continued occupancy was deemed wrongful, leading to the conclusion that defendants are entitled to damages. While the Uniform Commercial Code does not specifically provide for offset damages for wrongful use, existing Colorado law allows for the principles of law and equity to apply. Thus, since plaintiffs used the mobile home after their revocation, they are liable for the value of that use, resulting in an offset of the fair and reasonable use value during that period.

Appellants reference the case Sanborn v. Aranosian, which involved the denial of a setoff after purchasers resold a vehicle, seeking a setoff for its use prior to revocation. The majority view supports granting a setoff for use following revocation. The trial court validated the buyers' revocation and allowed time for evidence on damages, but denied their request for an additional recess to present value evidence. The court's discretion in granting recesses is upheld. The buyers challenged the setoff calculation method for their use of the truck post-revocation. An expert testified that the truck's depreciation rate was 2.75% per month, leading to total depreciation of $6,216.71 over 20.33 months. Setoff was calculated based on vehicle price, monthly depreciation, and mileage, ultimately yielding an offset of $4,702.94 for post-revocation use. The principle behind revocation of acceptance aims to restore the buyer's economic position as if the goods were never received, allowing the seller to recover for significant buyer use. GMC argued that a uniform depreciation rate simplifies the calculation, regardless of mileage. The buyers attempted to revoke acceptance two months post-purchase, and GMC's refusal to accept the return led to litigation. The court later affirmed the validity of the buyers' revocation. However, GMC's depreciation method for calculating the setoff was deemed improper as it allowed recovery based on the time taken to resolve the acceptance issue rather than actual use duration.

The value of use for goods received by the buyer after revocation of acceptance is to be set off against the purchase price. GMC successfully introduced evidence from the Federal Highway Administration booklet, which was authenticated in accordance with K.S.A. 60-465, despite buyers' objections. The booklet indicated that the operational cost of a similar vehicle is 10.7 cents per mile after deducting various expenses. Given that the buyers drove the vehicle 14,619 miles after revocation, the setoff amount totals $1,564.23. 

The buyers contended that the trial court erred by not awarding prejudgment interest from the revocation date. K.S.A. 16-201 allows creditors to receive a 10% annual interest on due amounts unless otherwise agreed. Citing La Villa Fair v. Lewis Carpet Mills, Inc., it was noted that prejudgment interest can be awarded for rejected nonconforming goods from the payment date. The price paid for the truck ($11,119.65) is undisputed, and while a setoff does not change the liquidated nature of the claim, it is credited against the liquidated claim as of the due date. 

According to Phelps Dodge Copper Products Corp. v. Alpha Construction Co., a claim is considered liquidated when both the amount and due date are fixed or ascertainable through computation. Thus, the existence of a setoff does not prevent the recovery of interest on the remaining amount due, which should accrue from the original due date, reflecting the balance after applying the setoff.

A party that justifiably revokes acceptance under K.S.A. 84-2-608 is entitled to prejudgment interest from the date of the attempted revocation. Any setoff owed to the seller for the buyer's continued use of the goods after revocation must be deducted from the total judgment, which includes prejudgment interest. The setoff can only be applied after the seller refuses to accept the return of defective goods, and none is due on the revocation date. In this case, the setoff arose after the claim was due due to the seller's refusal to accept the return of a defective vehicle. Prejudgment interest will accrue from November 30, 1980, until the judgment date. Previous cases have permitted setoffs for the use of goods following revocation and have awarded interest on judgments. GMC's argument that direct contractual connection is required for prejudgment interest is countered by the lack of necessity for contractual privity in suing for defective goods. If GMC claims a setoff, it should also bear responsibility for prejudgment interest from the revocation date. GMC provided the warranty for the truck in question. The trial court's ruling on other issues is upheld, and while the awarding of a setoff to GMC is affirmed at $1,564.23, the decision to deny the plaintiffs prejudgment interest is reversed. Interest should be calculated on the total purchase price from the date of revocation until the judgment date at a rate of ten percent. The case is affirmed in part, reversed in part, and remanded for judgment consistent with this opinion.