Indiana Law Review


1979] SURVEY- CONTRACTS 81

land had been encumbered by a restrictive covenant which forbade

its sale to such minorities. The Supreme Court stated that, so long
as the agreements were voluntarily enforced, there was no "state

action" and, therefore, no constitutional infringment,
111 but conclud-

ed that the judicial enforcement of these restrictive agreements was

a violation of the fourteenth amendment.112

In light of Shelley, the majority's statement will not withstand

constitutional scrutiny. The use of restrictive covenants to exclude
churches from residential areas is clearly analogous to the method
attempted in Shelley. In both situations the court is requested to en-

force agreements which, except for the absence of state action, are

violative of constitutional protections. Thus, the judicial enforcement

of restrictive covenants totally excluding churches from residential

areas is an infringement of the right to religious freedom.

Alan Raphael*

V. Contracts, Commercial Law and Consumer Law

Harold Greenberg**

A. Contracts; Covenants Not To Compete.

The validity of an employment agreement containing a covenant
not to compete was sustained by the court of appeals in Advanced
Copy Products, Inc. v. Cool 1 Late in 1971, six months after the
employee had begun work as a copying machine sales and service
representative, the employer and employee executed a written
agreement which contained a covenant not to compete with the
employer for one year, the employment being terminable at will by
either party. In 1973, the parties executed a new agreement which
contained the same terms except: (1) The covenant not to compete

m
l<L at 13.

n2
Id. at 20. The court stated: "It is clear but for the active intervention of the

state courts, supported by the full panoply of state power, petitioners would have been
free to occupy the properties in question without restraint." Id. at 19. Thus, those who
seek judicial enforcement of racially restrictive covenants will be imbued with state ac-
tion so as to bring the covenants within the scrutiny of the fourteenth amendment.

The author wishes to extend appreciation to Gary Harter for his assistance in
the preparation of this discussion.

Associate Professor of Law, Indiana University School of Law— Indianapolis.
A.B., Temple University, 1959; J.D., University of Pennsylvania, 1962.

'SQS N.E.2d 1070 (Ind. Ct. App. 1977).



82 INDIANA LAW REVIEW [Vol. 12:81

was extended to five years and limited to eleven Indiana counties,
and (2) either party could terminte upon thirty-days notice. The
employee subsequently left the employer for a job with a com-

petitor, and the employer brought suit to enforce the covenant.

The trial court granted summary judgment in favor of the
employee on the ground that the covenant was not supported by
adequate consideration. More specifically, the court found the
employee's continued employment was not dependent on his signing
of the new agreement. Consequently, the continued employment did
not constitute consideration. With this particular finding, the court
of appeals agreed.2 However, the appellate court did not agree with

the trial court that the additional thirty-day notice provision was
also inadequate as consideration. Rather, the appellate court found

the added provision did constitute consideration sufficient to sup-

port the covenant. Accordingly, the court reversed and remanded
the matter for further proceedings.3

The court of appeals also found sufficient consideration to sup-
port a covenant not to compete in kkOSy Inc. v. LosureS in which the

principal issue was the reasonableness of the covenant. The
employee had worked as a coffee service salesman from 1967 to 1974
when he resigned rather than sign a covenant not to compete. The
employee returned in 1975 and signed a new employment agreement
in which he agreed not to compete in the coffee service business for

a period of three years " 'only in the areas of his past, present and

future employment with [the employer].'
" 5

As the court itself expressed:

The concept of "reasonableness" has assumed increased
importance in cases involving covenants not to compete. . . .

In determining whether or not a covenant not to compete is

reasonable, the court considers, in the circumstances of each

case, the legitimate interests of the employer which might

be protected by the covenant and the protection granted by

the covenant in terms of time, space, and the types of activity

proscribed.8

2
IdL at 1071. Because of this finding, the court of appeals was able to avoid the

question whether continued employment of the employee constituted sufficient con-

sideration for a covenant not to compete when the terms of the employment remain
unchanged. The court stated that the law on this point "is unclear." Id. In some states,
e.g., Pennsylvania, it is quite clear that continued employment (coupled with a threat

of termination) is not sufficient consideration to sustain such a covenant. See, e.g.,

John G. Bryant Co. v. Sling Testing & Repair, Inc., 471 Pa. 1, 10-11, 369 A.2d 1164,
1168-69 (1977), and cases cited therein.

3363 N.E.2d at 1072.
4373 N.E.2d 899 (Ind. Ct. App. 1978).
h
I<L at 900.

fl/d



1979] SURVEY- CONTRACTS 83

Although an employer is not entitled to protection from the

employee's use of his own knowledge, skill, or information (other
than trade secrets and confidential information), the employer is en-

titled to protect the good will of its business. The protection is
allowed when good will is created by the contact and personal rela-
tionship of the employee with the employer's customers, and is par-

ticularly enforced as to businesses in which the competition is in-

tense and there is little practical difference between competitors.

The contract in Losure was drafted so as to limit the employee's
competitive activities only in those areas where the employee had
worked and had established customer contacts. Thus, this covenant
was dissimilar to those covenants found to be unreasonable because
they contained no geographical limits or attempted to impose limits

beyond the area in which the employee worked.7 Further, the three-

year duration was found to be reasonable under the circumstances.
The obvious lesson from these cases is that if the employer

carefully limits the scope and duration of the restriction and re-

quires the covenant as part of a new agreement, the covenant will
be enforced by the courts. The terms of the new agreement should
differ in some material way from the existing terms of employment.
An overreaching employer, however, may be held to have no restric-
tion whatsoever.

B. Commercial Law

1. Breach of Warrant by a Financing Seller. — Thompson
Farms, Inc. v. Corno Feed Products, 8 dealt with several significant
issues under article 2 of the Uniform Commercial Code (U.C.C.):9 (1)
Whether a secured financing agency could also be a seller, (2)
whether the on-site construction and sale of hog houses constituted
a sale of goods, (3) whether the buyer was required to plead notice
of alleged defects, and (4) whether the transaction involved express
warranties or implied warranties of merchantability and of fitness
for a particular purpose which might have been breached.

As a promotional device to increase sales of its livestock feed
products, Corno developed a hog-marketing plan which included
financing for the producer and blueprints for a specially designed,
time and labor saving hog house.10 Corno made no profit from the

'See Donahue v. Permacel Tape Corp., 234 Ind. 398, 127 N.E.2d 235 (1955);
Struever v. Monitor Coach Co., 156 Ind. App. 6, 294 N.E.2d 654 (1973).

8
366 N.E.2d 3 (Ind. Ct. App. 1977). For a discussion of the agency aspects of this

case, see Corporations, 1978 Survey of Recent Developments in Indiana Law, 12 Ind. L.
Rev. 94, 94 n.l (1978).

9
U.C.C. §§ 2-101 to 725. All sections hereafter cited to the U.C.C. are also found

in Ind. Code, title 26 (1976 & Supp. 1978).
10The houses, called "Corno Low Cost Pork Finishing Units," had slatted floors

and walls, and were to be built over a lagoon. It was estimated by Corno that by keep-



84 INDIANA LAW REVIEW [Vol. 12:81

sale of the hog houses themselves, but, apparently, earned its prof-
its from the sale of feed required to be purchased by any producer
who financed with Corno a purchase of the hog houses. A local
distributor was appointed to furnish the hog houses according to
Corno's plan and blueprints.

Corno's field representative presented a sales brochure, the

marketing plan, and the blueprints to Thompson Farms, which
agreed to enter the hog production business and to buy two hog
houses with Corno financing. The local distributor hired the crew
and purchased the materials for construction, but Corno's own
employees periodically inspected the construction, solved problems,

gave instructions to proceed, approved changes, and ultimately ap-

proved the final specifications upon completion. Corno and Thomp-
son Farms then entered "Installment Sale and Security
Agreements" which gave Corno security interests in the hog houses.
Corno's checks were drawn to the distributor and Thompson
Farms.11

The hog houses proved to be cold, wet, and drafty. Despite at-
tempted modifications, approximately twenty-five percent of the

2,000 young pigs placed in the houses died of pneumonia and
dysentery. Labor on the units consumed far more man-hours per day
than the one-hour per day represented by Corno in its original sales
presentation.

When Thompson Farms refused to make any further payments
to Corno, Corno sued for the amount due. Thompson Farms
counterclaimed, inter alia, for breaches of express warranties and of

the implied warranties of merchantability and of fitness for a par-

ticular purpose.
12 The trial court, however, ruled adversely to

Thompson Farms on all its affirmative defenses and counterclaims.
a. The Secured Financing Agency as Seller. — In an effort to

avoid liability as a seller, Corno contended that it was only a financ-
ing agency, not the seller of the hog houses, and that Thompson
Farms could look only to the distributor for relief.13 The appellate

ing a large number of hogs in a small place, only about an hour a day would be needed

to feed and check them. 366 N.E.2d at 7.

"Like Corno, the distributor made no profit from the sale of the hog houses. The

price charged to Thompson Farms equalled the cost of materials and labor without any

profit. Id. at 11.
l2
Id. at 5. Thompson Farms also included claims based on negligence and strict

liability in tort. These claims are not discussed by the court in its majority holding.

"See In re Sherwood Diversified Indus., Inc., 382 F. Supp. 1359 (S.D.N.Y. 1974);

Atlas Indus., Inc. v. National Cash Register Co., 216 Kan. 213, 531 P.2d 41 (1975), cited

in Thompson Farms, Inc. v. Corno Feed Prods., 366 N.E.2d at 13. In Sherwood Diver-

sified Industries and Atlas Industries, an equipment lessee selected equipment which

was shipped directly to his place of business by the manufacturer but was paid for by

the lessor who took a security interest in the equipment and collected monthly



1979] SURVEY- CONTRACTS 85

court determined: "[A] finding that Corno acted as a financing agency

does not preclude a finding that Corno is also a seller." 14 The facts
showed that Corno's own sales representative directly solicited
Thompson Farms and that he or his department was directly involved
in the construction. This situation led the court to conclude that Cor-

no's sales department was responsible for the sale. Moreover, the
court found, as a matter of law, that the distributor was Corno's
agent, thereby making Corno responsible as a principal and as seller
of the hog houses.15 Thus, the transaction was both a secured trans-
action and a sale, and Corno was liable as a seller.

b. "Goods" under Article 2. — Having concluded that the trans-
action was a sale, and since, in its judgment, the warranty provi-
sions of article 2 of the U.C.C. apply only to sales of goods,

16
the

court was next required to determine if the hog houses consituted
goods, ie., were they movable at the time of identification to the
contract.

17
In the loan agreement, the parties had referred to the

hog houses as "equipment" (along with feeders, bins, and waterers),

which was not to be abused or misused and could be repossessed, and
Thompson Farms had paid a single price for each hog house. Fur-
thermore, the court observed that Indiana courts had already con-

sidered a mobile home, electricity, and a car washing center to be
goods,

18
as had the Court of Appeals for the Seventh Circuit with

payments from the lessee. The lessor had nothing to do with the selection and merely
paid the manufacturer, took title, and entered a lease with the lessee. In both cases,

the transactions were considered sales by the manufacturer directly to the lessee, with
the lessor occupying the position of financing agency rather than that of seller. See

U.C.C. § 2-104(2).
14366 N.E.2d at 13 (footnote omitted).
15/d at 12-13.
16366 N.E.2d at 14-15. The court did note several cases from other jurisdictions

which have applied the U.C.C. to transactions analogous to a sale, but it did not reach
this issue because of the finding that a sale did, in fact, take place in this case. See id
at 14 n.9. The concurring and dissenting opinion disagreed with the court's determina-
tion that there was a sale of goods within the coverage of the U.C.C. Id. at 19-20
(Garrard, J., dissenting in part).

"U.C.C. § 2-105(1) states:

"Goods" means all things (including specially manufactured goods) which are
movable at the time of identification to the contract for sale other than the
money in which the price is to be paid, investment securities . . . and things
in action. "Goods" also include the unborn young of animals and growing
crops and other identified things attached to realty as described in the sec-
tion on goods to be severed from realty (Section 2-107).

U.C.C. § 2-107(1) essentially provides that a contract for sale of a structure to be

removed from realty by the seller is a contract for the sale of goods. A finding that the
hog houses were "goods," therefore, was not inconsistent with the Code.

18Jones v. Abriani, 350 N.E.2d 635 (Ind. Ct. App. 1976) (mobile home); Helvey v.
Wabash County REMC, 151 Ind. App. 176, 278 N.E.2d 608 (1972) (electricity); Abbett v..
Thompson, 148 Ind. App. 25, 263 N.E.2d 733 (1970) (car washing equipment). The



86 INDIANA LAW REVIEW [Vol. 12:81

regard to a one-million-gallon water tank to be assembled in place.19

The hog houses, therefore, were held to be goods.20

c. Notice of Defect- Section 2-607(3)(a) of the U.C.C. requires:
"[T]he buyer must within a reasonable time after he discovers or
should have discovered any breach notify the seller of breach or be
barred from any remedy . . . ." 21 Consistent with decisions in other
jurisdictions

22 and with the Official Comment to section 2-607, the
court held that the required notice is a substantive condition prece-

dent so that the party claiming breach of warranty must allege that
notice of defect was given.23 Thompson Farms had satisfied this re-
quirement.24 The court declared that Corno's general denial was not
sufficient to put the question of notice in issue under Trial Rule 9(C)
which requires a specific denial of a properly pleaded condition

precedent.25

d. Express and Implied Warranties. — The court reiterated the
rule that implied warranties are not made; they are implied by law
for the protection of the buyer and must be liberally construed.26

The court specifically found that an implied warranty of fitness for a
particular purpose under U.C.C. section 2-315 did exist because Corno
knew the particular purpose for which Thompson Farms intended to
use the hog houses and, in fact, had told Thompson Farms how to
use them.27 Whether this implied warranty had been breached and
the damages arising therefrom were facts to be determined by the
trial court on remand.28

Abbett court was not required to rule on the "goods" issue because the parties agreed

the U.C.C. governed the transaction and that the only real issue was revocation of ac-

ceptance. The written agreement between Corno and Thompson Farms, describing the

hog houses as equipment which could be repossessed, may have been the factor which
weighed most heavily.

19Pittsburgh-Des Moines Steel Co. v. Brookhaven Manor Water Co., 532 F.2d 572

(7th Cir. 1976) (applying Illinois law).
20366 N.E.2d at 16.
21U.C.C. § 2-607(3)(a).

^Page v. Camper City & Mobile Home Sales, 292 Ala. 562, 297 So. 2d 810 (1974);
L.A. Green Seed Co. v. Williams, 246 Ark. 463, 438 S.W.2d 717 (1969); Winter v.

Honeggers' & Co., 215 N.E.2d 316 (Iowa 1974); Annot., 53 A.L.R.2d 270 (Supp. 1976),
cited in Thompson Farms, Inc. v. Corno Feed Prods., 366 N.E.2d at 16.

23366 N.E.2d at 17.
24
In its counterclaim, Thompson Farms had alleged, " 'That the plaintiff was duly

notified of the defects in said hog houses and of the breach of express warranty and

implied warranties, but Plaintiff has failed to make the said hog houses conform to said

warranties." Id.
26/d
w
Id. at 18 (citing Woodruff v. Clark County Farm Bureau Coop., 153 Ind. App. 31,

42, 286 N.E.2d 188, 194 (1972)).

"/d at 18-19.
280n the issue of express warranty, the court was unable to determine from the

record whether the trial court had found that no express warranty existed because it

::



1979] SURVEY- CONTRACTS 87

2. Warranty of Title. — In McDonald's Chevrolet, Inc. v.
Johnson, 29 the court found that the defendant-seller had void, rather

than voidable, title to a motor home and that, therefore, the seller
had violated the warranty of title mandated by section 2-312(l)(a).30

Murphy rented the motor home from its owner in Texas for thirteen
days, immediately left the state, obtained titles to the motor home
in Alabama and Nebraska, and ultimately used it as a trade-in on a
truck purchased from McDonald's in Indiana. Johnson purchased the

motor home from McDonald's, only to have it seized by the police
thirteen months later.

McDonald's contended that it was a good faith purchaser from
Murphy who possessed voidable title under section 2-403 of the
U.C.C.

31 and that it thereby acquired good title which it transferred

to Johnson. After an analysis of the term "voidable title," which is

not defined in the U.C.C, the court held that Murphy's title was
void and that the warranty of title had been breached.32

An alternative the court could have followed, and which would
have avoided the need to distinguish between void and voidable
title, would have been to find that the warranty of title includes a

warranty of quiet possession, which the Indiana and Official Com-
ments to section 2-312 state it does, and that Johnson's quiet posses-
sion was interrupted.33

3. Assignments.— In First National Bank v. Schrader, 3* the

had earlier found that there had been no sale or merely that there had been no ex-

press warranty. Similarly, the trial court had not determined whether Corno was a

"merchant," which is one of the requirements for the existence of an implied warranty

of merchantability. U.C.C. § 2-314. Both issues would be determined on remand.

Judge Garrard, who refused to characterize the transaction as a sale of goods,
would have found that no warranties under the U.C.C. applied, but would have

remanded for a finding as to the existence of express warranties under general con-

tract principles. 366 N.E.2d at 20-21 (Garrard, J., concurring in part).
29376 N.E.2d 106 (Ind. Ct. App. 1978).

""Id. at 109.
31
U.C.C. § 2-403 states:

(1) A purchaser of goods acquires all title which his transferor had or had
power to transfer except that a purchaser of a limited interest acquires
rights only to the extent of the interest purchased. A person with voidable
title has power to transfer a good title to a good faith purchaser for value.
When goods have been delivered under a transaction of purchase the pur-
chaser has such power even though

(a) the transferor was deceived as to the identity of the purchaser; or

(d) the delivery was procured through fraud punishable as larcenous
under the criminal law.
32/d at 108-09.

"See J. White & R. Summers, Handbook of the law under the Uniform Com-
mercial Code § 9-11 (1972).

M375 N.E.2d 1124 (Ind. Ct. App. 1978).



88 INDIANA LA W REVIEW [Vol. 12:81

court was asked to hold that the assignment of a retail installment
contract for the purchase of a used car was governed by the formal
requirements of articles 3 and 9 of the U.C.C. Not so, replied the
court.

35 Article 3
36

is restricted to negotiable instruments, le., drafts,

checks, notes, and certificates of deposit, and article 937 covers

secured transactions. This transaction involved neither a negotiable

instrument nor a secured creditor. It was a simple transaction in
goods under article 2, section 210, which provides for assignment of

contracts unless otherwise agreed. In the absence of such agree-

ment, there are no formalities required to validate the assignment.

4. Accomodation Parties; Tender of Payment— In Stockwell v.
Bloomfield State Bank, 38 a borrower's application for a loan was
denied for lack of security, but was subsequently approved when the
Stockwells also agreed to sign the note.39 When the note came due, a
second note was prepared and "co-signed by" the Stockwells. That
note was succeeded by a third note on which the bank ultimately
brought suit for principal, interest, and attorneys' fees. The
Stockwells tendered principal and interest but refused to pay the

fees. As defenses, they alleged failure of consideration, impairment
of collateral, and tender of payment which terminated their liability.

The court first found that the Stockwells were accomodation
parties under section 3-415 of the U.C.C.40 They had lent their names
so that the borrower could obtain the loan, and they received only

indirect benefit from the funds which were paid directly to the bor-
rower. Further, Stockwell wrote "co-signed by" before signing the

second note. While no single factor controlled, the entire trans-

action showed clearly that the Stockwells were accomodation
parties.

41

The finding that the Stockwells were accomodation parties
rather than co-makers had a direct effect on the defenses available

to them. In particular, failure of consideration was not available
since no separate consideration need run to an accomodation party.

The accomodation party's consideration is the primary obligor's

receipt of the proceeds of the loan.

The court found it unnecessary to determine if the tender
without attorneys' fees was sufficient to discharge the Stockwells

"Id. at 1125.

"U.C.C. §§ 3-101 to 121.

"Id. §§ 9-101 to 507.

"367 N.E.2d 42 (Ind. Ct. App. 1977).

"The Stockwells had leased a building to the borrower for the operation of a

business.

*°U.C.C. § 3-415 provides, in pertinent part: "(1) An accommodation party is one
who signs the instrument in any capacity for the purpose of lending his name to
another party to it."

"367 N.E.2d at 45.



1979] SURVEY- CONTRACTS 89

under section 3-604, since a proper tender must be kept open if

refused. The failure of the Stockwells to pay the amount tendered

into court rendered the defense ineffective.
42

5. Bills of Lading: Claims and Damages. —In Midwest Emery
Freight System, Inc. v. IMC, Inc.,*3 a consignor's goods, shipped on

January 20, 1972, were rejected by the consignee shortly after

delivery on January 21, 1972, and were returned to the carrier for

redelivery to the consignor. The shipment was left by the carrier at
a truckstop, and the redelivery to the consignor was not attempted
until approximately eighteen months later, in August 1973. The con-
signor had filed a claim for the lost goods in November 1972, and
refused the August 1973 delivery because the goods had
deteriorated to less than scrap value. The consignor's claim for
damages was filed in November 1973.

The original bill of lading provided that claims for loss, damage,
or delay would be precluded unless filed with the carrier, in writing,

within nine months after delivery. The appellate court rejected the
carrier's argument that the first claim had been filed more than nine
months after the January 1972 delivery. The trial court had ruled
that, when the goods were rejected by the consignee and returned
to the carrier for redelivery, a new contract of carriage had been
created under which no delivery had been attemp-
ted until August 1973. The finding of a new contract was not
challenged by the carrier and was, therefore, binding upon it,

thereby making the 1972 delivery irrelevant to the case.

On the issue of damages, the appellate court agreed that the
consignor was entitled to lost profits because the returned goods
had been totally damaged as a result of the carrier's conduct.
However, because the goods, as originally shipped, were already
defective, the consignor was entitled to receive the price of the
goods under its contract with the consignee less the amount it
would have cost to remedy the original defects and to perform the
contract properly.

44 This difference is what the consignor would
ultimately have received as profit and was the proper measure of
damages.

6. Accord and Satisfaction. —An injured motorcyclist in Tabani
v. Hester, 45 refused to accept a draft marked "All Claims" from the
tortfeasor's insurance company even though it was accompanied by
a letter which stated that the draft was without obligation. The in-
surance company then tendered a draft without the offending

*2Id at 46.
43
363 N.E.2d 1078 (Ind. Ct. App. 1977).

"Id. at 1080.
45366 N.E.2d 193 (Ind. Ct. App. 1977).



90 INDIANA LAW REVIEW [Vol. 12:81

language together with a letter which stated that the amount was
the largest the company would pay and that it was "a fair and
equitable conclusion" of the claim.

46 The cyclist cashed the check and
brought suit for the balance of his claim. The trial court held that
this conduct constituted an accord and satisfaction and granted the

tortfeasor's motion for summary judgment. The court of appeals
reversed.47

Accord and satisfaction is ordinarily a question of fact and

becomes a question of law, determinable upon motion for summary
judgment, only if the controlling facts are undisputed. "When the
debt is unliquidated, the money paid to operate as a full discharge
must be offered with either an express condition that acceptance is
in full satisfaction of the pending claim or the circumstances must
clearly indicate to the creditor that this condition is present."

48

Moreover, without the condition appearing on the draft, accord and

satisfaction may be implied only on a showing of the subjective in-
tent of the parties.

49 The cyclist's affidavit stated that he understood
he would be able to seek additional recovery. This clearly raised an

issue of fact which could not be disposed of by motion for summary
judgment.

C. Consumer Law; Truth in Lending

The issue confronting the court in Mirabal v. General Motors
Acceptance Corp. 50 was the proper amount of attorneys' fees to be
allowed, after an earlier court of appeals decision in the same case51

which involved interpretation and application of the Federal Con-
sumer Credit Protection Act (CCPA)52 and of Regulation Z of the
Federal Reserve Board.53 The earlier decision was the subject of
discussion in the 1977 Survey.54

The retail installment sales contract signed by the Mirabals in-
cluded an inaccurate disclosure of the annual percentage rate,

because the figure, apparently, had been taken from the wrong line
of the table or chart by the employee who completed the disclosure
form. About a week later, GMAC sent a letter explaining the error
and setting forth the correct rate, although the amount of the

"Id. at 194.

"Id at 195.

"Id. at 194 (emphasis added) (citations omitted).

"Id. at 195.

*°576 F.2d 729 (7th Cir. 1978) (per curiam).
51537 F.2d 871 (7th Cir. 1976).
52
15 U.S.C. §§ 1601-169H (1976).

B3
12 C.F.R. § 226.2(f) (1977).

MBepko, Contracts, Commercial Law, and Consumer Law, 1977 Survey of Recent
Developments in Indiana Law, 11 Ind. L. Rev. 100, 119-22 (1977).



1979] SURVEY- CONTRACTS 91

payments remained unchanged.55 The Mirabals filed suit for violation

of the CCPA and recovered a judgment of approximately $8,000 based
on seven specific violations of the Act. The Court of Appeals for the
Seventh Circuit sustained the findings of violation but reduced the

judgment to $2,000 because, according to the court, the CCPA per-
mitted a maximum recovery of $1,000 per litigant regardless of the
number of disclosure violations in a single disclosure statement. The
court remanded the case for entry of judgment in the amount of

$2,000 plus costs and attorneys' fees which were allowable by

statute.

On remand, the Mirabals' attorney alleged that he had expended
350 hours on the case: 120 at trial and 230 on the first appeal, and

that GMAC's attorneys had been paid $30,000 for handling the case.
These facts were not disputed. The district court allowed attorneys'
fees of $2,000, from which the Mirabals appealed. The court of ap-
peals affirmed.56

The analysis of the court of appeals deserves particular atten-
tion.

Although the determination of hours necessary to effec-

tively handle a case is not subject to exact determination,

the amount which petitioner claims to have spent on the pre-
sent case seems clearly out of proportion with the amount in
controversy. Moreover, Congress has limited the liability of

Truth in Lending Act violators to $1,000 per violation. 15

U.S.C. § 1640(a). To grant attorney's fees greatly in excess of
a client's recovery requires strong support from the cir-
cumstances of the particular case. The instant case involved
a one-time individual claim based mainly on a bona fide
arithmetical error. . . .

Additionally, to grant large attorney's fee awards on the
basis of relatively small injury would encourage suits which

do not further the client's interest or the public's interest.57

The court appears to have said that it will not sanction mam-
moth fees in suits based on inadvertent, one-time, technical viola-
tions accompanied by little or no harm to the borrower or to the
public. The court's reference to the "amount in controversy,"
however, causes some concern. Consumer transactions involving
more than one disclosure statement are the exception rather than
the rule. With the $1,000 per disclosure statement per plaintiff
limitation in effect, to have the amount in controversy serve as any

•"The Mirabals denied receiving the letter. 576 F.2d at 730.

"Id. at 731.
s7d at 730-31 (emphasis added).



92 INDIANA LAW REVIEW [Vol. 12:81

basis for determining attorneys' fees would certainly have a chilling

effect on private actions to redress violations of the CCPA. This is
particularly true if the lender is resisting strenuously, as the dissent

thought GMAC to be doing,58 and the consumer's counsel can envi-
sion long hours and work fighting a corporate giant. Instead, the em-
phasis should be placed on the other elements noted by the

court— the circumstances of the case and the nature of the violation

and injury to consumer and public, without relation to the amount in
controversy.59

The court also rejected the contention that the amount of at-
torneys' fees paid by GMAC was indicative of what the borrowers'
attorney should be paid and stated again the rule that it is an abuse

of discretion to determine attorneys' fees solely on the basis of

hours spent times billing rate.60

During this survey period, a case involving truth in lending

litigation under the CCPA reached the Indiana Supreme Court. In
Holmes v. Rushville Production Credit Association. 61 the court
denied transfer, leaving the decision of the court of appeals62 in full

force and effect. The dissent from the denial of transfer,63 however,
raises some important questions pertaining to the facts of the case.

The credit association had brought an action to recover the

balances due on two notes. The borrowers raised various defenses,
including violations of the disclosure requirements of the CCPA and
Indiana's Uniform Consumer Credit Code.64 The court of appeals in-
itially affirmed the trial court's decision in favor of the lender.

65 On
rehearing, the court of appeals vacated its earlier opinion and

MSee id. at 733-34.
59The dissenting opinion expressed the belief that strong support from the cir-

cumstances of the case to support an award of higher fees did exist, particularly since

the trial court had found numerous violations of the CCPA, and the borrowers were
brought into the appellate court by GMAC's appeal. Id. at 733-34 (Swygert, J., dissen-
ting). However, it was the trial court which had declared that expenditure of 350 hours
on this case was " 'utterly unnecessary' " and awarded $2,000 based on its evaluation

of the case and of the work of the borrowers' attorney. The dissenting opinion faulted
the trial judge for not detailing specifically the reason counsel's expenditure of so

much time was utterly unnecessary. Id. at 732-33 (Swygert, J., dissenting).
"Id. at 731.
61371 N.E.2d 379 (Ind. 1978) (per curiam).
92Holmes v. Rushville Prod. Credit Ass'n, 353 N.E.2d 509 (Ind. Ct. App.), opinion

temporarily withdrawn and case remanded, 355 N.E.2d 417 (Ind. Ct. App.), supplemen-

tal opinion, 357 N.E.2d 734 (Ind. Ct. App. 1976), transfer denied, 371 N.E.2d 379 (Ind.

1978) (per curiam).
M371 K.E.2d at 379-81 (Hunter, J., dissenting).

"Ind. Code §§ 24-4.5-1-101 to 6-203 (1976 & Supp. 1978).
85353 N.E.2d 509 (Ind. Ct. App.), opinion temporarily withdrawn and case remand-

ed, 355 N.E.2d 417 (Ind. Ct. App.), supplemental opinion, 357 N.E.2d 734 (Ind. Ct. App.

1976), transfer denied, 371 N.E.2d 379 (Ind. 1978) (per curiam).



1979] SURVEY- CONTRACTS 93

remanded the case for consideration of the disclosure violation
defenses with which the trial court initially had failed to deal.66

After reconsideration at the trial level, and a second appeal by the

borrowers, the court of appeals affirmed the trial court's findings as

to the alleged disclosure violations and reinstated its prior opinion,

as modified.
67

It was the borrowers' petition to transfer this last
decision which was denied by the supreme court.68

From the facts as they appear in Justice Hunter's dissenting
opinion, there were several violations of the CCPA, yet the court of
appeals affirmed on the basis of the trial court's finding of substan-

tial compliance. Moreover, the court of appeals upheld the findings

of proper disclosure by " '[according due regard to the trial court's

opportunity to assess the witnesses' credibility . . . ." 69 This result

seems directly at odds with the CCPA's requirement of strict com-
pliance with its terms.70 The dissenting justice expressly recognized
the issue, would have reversed the court of appeals, and would have

awarded damages under the CCPA.71 It would be useless to
speculate why the court denied transfer. If the court felt that the
result would have been the same, perhaps it should have granted
transfer and affirmed in a brief opinion which would reinforce,

rather than cast some doubt on, the required strict compliance with
the CCPA as applied in Indiana.

"355 N.E.2d 417 (Ind. Ct. App.), supplemental opinion, 357 N.E.2d 734 (Ind. Ct.

App. 1976), transfer denied, 371 N.E.2d 379 (Ind. 1978) (per curiam).
87357 N.E.2d 734 (Ind. Ct. App. 1976), transfer denied, 371 N.E.2d 379 (Ind. 1978)

(per curiam).
M371 N.E.2d 379 (Ind. 1978) (per curiam).
*9
Ia\ at 381 (Hunter, J., dissenting) (quoting 357 N.E.2d at 734).

70Three defenses are available to lenders for failure to make proper disclosures:
(1) Correction of error and appropriate adjustments (15 U.S.C. § 1640(b)), (2) proof that

"the violation was not intentional and resulted from a bona fide error notwithstanding
the maintenance of procedures reasonably adapted to avoid any such error" (15 U.S.C.

§ 1640(c)), and (3) demonstration of action in conformity with then existing rules,

regulations, and interpretations of the Federal Reserve Board (15 U.S.C. § 1640(f)). See

D. Rothschild & D. Carroll, Consumer Protection § 12.01, at 331-32 (2d ed. 1977).
None of these defenses applied in Holmes. (1) and (3) clearly did not, and (2) "was pro-
vided to avoid imposing 'strict liability' for unavoidable clerical errors upon creditors."
Mirabal v. General Motors Acceptance Corp., 537 F.2d at 879 (citing Haynes v. Logan
Furniture Mart, Inc., 503 F.2d 1161, 1167 (7th Cir. 1974)).

71
371 N.E.2d at 381 (Hunter, J., dissenting).