ACCT 511 RESEARCH PROJECT 1 PROMPT

QUESTION

Research Project 1 Prompt
You have a client named Takem’s Appliances and
Electronics, LLC, owned and operated by Tommy Takem. Takem’s is located in a
rural area of Southwest Virginia, and the majority of its customers are poorer
residents of the Appalachian regions of Virginia, Tennessee, Kentucky, and West
Virginia. Since his business is located in a rural area where there is little
competition, Tommy tends to charge about 10–20% more than most other retail
outlets.
Tommy recently came up with an idea for expanding his
business. He decided to begin selling his appliances and electronics
door-to-door in the above described regions. Until recently, it had been
working great. He hired some great salespeople who really know how to “apply
the pressure and turn up the heat.” Further, since he is providing a service to
these folks by bringing the goods to their homes, he charges about 30% more
than he would if the customers came to the store. Obviously, the salespeople do
not mention this fact to the customers.
Further, since many of the customers are poor, relatively
uneducated and unsophisticated, and have poor credit, the vast majority of the
sales are financed by Takem’s. The salespeople get the customers to sign a bill
of sale, a security agreement, and a negotiable promissory note. When these
documents are processed back at the office, the clerk then files a financing
statement covering the goods sold to the customer in the appropriate state
office. For this, Takem’s charges a 15% application fee and the maximum rate of
interest allowed by law. The default rate is high, but through a combination of
collections, repossessions, fees and charges, higher prices, and markups, etc.,
Takem’s is doing very well.
Recently, Tommy received a letter from a disgruntled
customer named Sally Walker (an elderly widow lady who lives alone in the hills
of Southwest Virginia—her children and grandchildren have all moved out of the
area.) She has fallen behind on her payments on her new laptop computer, and
Tommy had started collection efforts. He had not yet referred it to a lawyer.
The letter is very well written (which would be unexpected since Sally is not
very well educated.) It indicates that her granddaughter, who recently
graduated with an MS in Accounting from Liberty University Online helped her
with it. It argues that the entire deal is unconscionable and therefore
unenforceable. Further, it asserts that Sally has paid enough for the computer
and will not be paying any more. Finally, it threatens to sue for punitive
damages and write letters to the editors of various local papers throughout the
region if Takem’s pushes the matter further.
Tommy is very upset. He wants to know whether the argument
in the letter has any merit. Should he take the threats in the letter seriously
or should he just proceed with collections? In other words, is his business
model legal? Further, he wants to know what he could do to protect himself in
the future. Would setting up a financing company that he also owns and selling
the notes to the financing company such that the financing company becomes a
holder in due course help? Finally, he wants to know what you think about his
business model—regardless of whether you conclude that it is legal, is it
moral/ethical?

ANSWER:

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