Commercial Law

Question 1

To what does Article 2 apply?

Answer 1

Unless the context otherwise requires, Article 2 applies to the sale of goods. A “sale” consists in the passing of title from the seller to the buyer for a price.

Goods are all things that are tangible and movable at the time of identification to the contract; but not: (a) money in the sense of price to be paid, (b) investment securities, or (c) things in action.

• A “thing in action” is a personal right not reduced to possession, but recoverable by a suit at law.
  
  • For example, Article 2 does not apply to an insurance policy because it is a thing in action.

Question 2

When does title pass?

Answer 2

(1) Title cannot pass if the goods are not identified to the contract.
* Goods are identified to a contract if you can point to them and say “those are the goods being sold here.”
(2) Title passes when the seller delivers the goods.

• If the contract only requires seller to ship goods (not deliver them), title passes when the seller ships them.
• If the contract requires delivery at a destination, title passes on tender of the goods there.

(3) If sale is to occur without moving the goods,

• If the seller is to deliver a document of title, title passes upon delivery of the document of title.
• If at the time of contracting the goods are identified and no documents are to be delivered, title passes at time of contracting.

Question 3

Does Article 2 apply to realty?

Answer 3

No, realty is not movable.

But, Article 2 applies if a structure on the realty is to be severed by the seller and is sold separately from the realty.

Question 4

Does Article 2 apply to the sale of standing timber? The sale of crops?

Answer 4

Yes. A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto, or of timber to be cut is a contract for the sale of goods whether the subject matter is to be severed by the buyer or by the seller.

Question 5

Predominant Purpose Test v. Gravamen Test

Answer 5

Under the predominant purpose test, the court looks at four factors:

• (1) the language of the contract;
• (2) the nature of the business of the supplier of goods and services;
• (3) the reason the parties entered into the contract, and
• (4) the amounts paid for the rendition of the services and goods, respectively.

Under the gravamen test, where the gravamen of a lawsuit concerns the sale of goods, the UCC applies. Where it concerns the sale of non-goods, the common law applies.

• The gravamen test has found less acceptance than the predominant purpose test.

Question 6

What is a merchant?

Answer 6

A merchant is a person:

• (a) who deals in goods of the kind;
• (b) who otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction; or
• (c) to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

Question 7

Article 2 Contract Formation

Answer 7

Under Article 2, a contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

Since Article 2 does not give us a clear rule for when a contract for the sale of goods has been formed, we use the common law definition for formation.

A common law contract is formed if there is offer, acceptance, and consideration.

• Offer is the manifestation of willingness to enter into a bargain so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it.
• Acceptance is a manifestation of assent to the terms thereof made by the offeree in a manner invited or required by the offer.
• Consideration has two parts: bargain in exchange and legal value.
  
  • In a bargain in exchange, I give something to you to induce you to give me something. (And, of course you do the same to me.)
  • Legal value means that the thing exchanged is the kind of thing the courts find to have sufficient value to support a contract.

Question 8

What are the two different ways to accept a contract under Article 2? What if the goods are non-conforming?

Answer 8

There are two ways to encounter acceptance in Article 2:

• Sometimes we see acceptance as acceptance of an offer (part of contract formation). To accept an offer, a party can either:
  
  • (a) ship the goods (whether conforming or non-conforming), or
  • (b) make a prompt promise to ship the goods.
• At other times we see acceptance of goods (e.g., they are tendered to you and you take them).

Non-conforming goods:

• A shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer.

Question 9

Merchant’s Firm Offer Rule

Answer 9

If an offer is made by a merchant to buy or sell goods in a signed writing which gives assurance that it will be held open, then it is not revocable for the time stated even if there was no consideration for the offer. If the terms of assurance are on a form supplied by the offeree, then the form must be signed by the offeror.

If no time is stated, then it will be held open for a reasonable amount of time.

Question 10

Article 2 Battle of the Forms Step 1

Answer 10

A battle of the forms problem arises when there is an offer and acceptance that do not have the same terms and we are attempting to determine what the terms of the actual contract would be. Section 2-207, which deals with these problems, gives us three parts.

The first section tells us that if there is (a) a definite and seasonable expression of acceptance or (b) written confirmation sent within a reasonable amount of time, then there is an acceptance even when the terms of the acceptance vary from the terms of the offer, unless acceptance is expressly made conditional on assent to the additional or different terms.

Question 11

Article 2 Battle of the Forms Step 2

Answer 11

If there is an acceptance under the first section, the second section tells us what the terms are:

• (a) The additional terms are to be construed as proposals for addition to the contract. Without express acceptance of the term, it does not become part of the agreement.
• (b) Between merchants, such terms become part of the contract unless:
  
  • (a) the offer expressly limits acceptance to the terms of the offer;
  • (b) they materially alter it; or
  • (c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.

A clause materially alters the contract if it would result in unreasonable surprise or hardship for the buyer. Some examples:

• (i) a clause negating such standard warranties as that of merchantability or fitness for a particular purpose in circumstances in which either warranty normally attaches;
• (ii) a clause reserving to the seller the power to cancel upon the buyer’s failure to meet any invoice when due;
• (iii) a clause requiring that complaints be made in a time materially shorter than customary or reasonable.

Question 12

Article 2 Battle of the Forms Step 3

Answer 12

The third section tells us that conduct of the parties can create a contract when the writing doesn’t, and it tells us what the terms are in such a circumstance:

• (i) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the contract are those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of Article 2.
• (ii) It is not clear from the language of 2-207(2) what to do with different terms. Courts have developed two rules that are used in these circumstances:
  
  • (a) The majority view adopts the “knockout rule” in these circumstances: terms of the contract include those upon which the parties agree, and gap fillers provided by Article 2. Different terms are knocked out of the agreement.
  • (b) There are two minority views, both of which state that the offeror’s terms control, either because conflicting terms constitute material alterations, or because conflicting terms are outside the scope of 2-208(2) and thus are never considered.

Note: Although lawyers often take (3) to apply to oral contracts under the UCC, it appears to limit itself to written contracts.

Question 13

Article 2 Statute of Frauds

Answer 13

The UCC statute of frauds applies to contracts for the sale of goods for $500 or more. A writing satisfies the statute of frauds if:

• (1) it provides evidence a contract for sale has been made;
• (2) it lists a quantity; and
• (3) it is signed by the party against whom enforcement is sought.

Note: A writing is not insufficient if it omits or incorrectly states a term agreed upon. But the contract is not enforceable under this paragraph beyond the quantity of goods stated in the writing.

The UCC statute of frauds is a bar to enforcement of a contract: it does not determine whether a contract exists, only prevents enforcement.

Question 14

Merchant’s Written Confirmation Exception (Statute of Frauds)

Answer 14

Between merchants, if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the statute of frauds against such party, unless written notice of objection to its contents is given within 10 days after it is received.

• The writing is sufficient if it would meet the requirements of the statute of frauds with respect to that party.
• What is a reasonable time for taking any action depends on the nature, purpose and circumstances of such action. Course of dealings, usage of trade, or course of performance are material in determining a reasonable time.

Question 15

Specially Manufactured Goods Exception (Statute of Frauds)

Answer 15

A contract which does not satisfy the statute of frauds but which is valid in other respects is enforceable if the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement.

Question 16

Admission Exception (Statute of Frauds)

Answer 16

A contract which does not satisfy the statute of frauds but which is valid in other respects is enforceable if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made; but the contract is not enforceable under this provision beyond the quantity of goods admitted.

Question 17

Partial Performance Exception (Statute of Frauds)

Answer 17

A contract which does not satisfy the statute of frauds but which is valid in other respects is enforceable with respect to goods for which payment has been made and accepted or which have been received and accepted.

• Receipt and acceptance either of goods or of the price constitutes an unambiguous overt admission by both parties that a contract actually exists.
• Part performance by the buyer requires the delivery of something by him that is accepted by the seller as such performance. Thus, part payment may be made by money or check, accepted by the seller. If the agreed price consists of goods or services, then they must also have been delivered and accepted.

Question 18

Article 2 Parol Evidence Rule

Answer 18

(1) There is some writing
(2) In which the parties set out terms
(3) Those terms were intended as final
* There may be terms that are not included or that are included but not final
(4) Then the final terms can’t be contradicted by

• (a) Prior agreements
• (b) Contemporaneous oral agreements

(5) But they can be explained or supplemented by

• (a) Course of performance
• (b) Course of dealing
• (c) Usage of trade
• (d) Evidence of consistent additional terms
  
  • Unless the court concludes that the writing was a complete and exclusive description of the contract

Question 19

What is a “course of performance”?

Answer 19

A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists if:

• (1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and
• (2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance or acquiesces in it without objection.

Question 20

What is a “course of dealing”?

Answer 20

A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct.

Question 21

What is “usage of trade”?

Answer 21

A “usage of trade” is any practice or method of dealing having such regularity of observance in a place, vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar record, the interpretation of the record is a question of law.

Question 22

If you have evidence you want to introduce of course of performance and course of dealing and usage of trade, and those types of evidence appear to contradict each other, which has precedence over the others?

Answer 22

The express terms of an agreement and any applicable course of performance, course of dealing, or usage of trade must be construed whenever reasonable as consistent with each other. If such a construction is unreasonable, the priority is as follows:

• (1) express terms,
• (2) course of performance,
• (3) course of dealing,
• (4) usage of trade.

Question 23

In a contract subject to Article 2, may course of dealings and usage of trade evidence be introduced if that evidence contradicts an express term of the contract? What if the contract contains a merger clause?

Answer 23

Yes. If there is evidence of course of performance, course of dealings, or usage of trade, the evidence will be admitted even if the terms are not ambiguous, the terms seem to expressly contradict the evidence, and if there is a merger clause.

Question 24

Article 2 Unconscionability

Answer 24

Look at the following for determining if unconscionability was present:

• (1) Use the context of the general commercial background and the commercial needs of the particular trade or case,
• (2) Look to see if the clauses involved are so one-sided as to be unconscionable under the circumstances existing at the time of the making of the contract.
• (3) Avoid oppression and unfair surprise.

In sum, a clause is unconscionable if it is too one-sided and is therefore oppressive or its inclusion creates “unfair” surprise.

If the court finds that the contract or any clause of it was unconscionable at the time it was made, the court may (a) refuse to enforce the contract, (b) enforce the remainder of the contract without the unconscionable clause, or (c) it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

Question 25

Open Price Term (UCC Gap Fillers)

Answer 25

The parties if they so intend can conclude a contract for sale even though the price is not settled. In such a case the price is a reasonable price at the time for delivery if:

• (a) nothing is said as to price;
• (b) the price is left to be agreed by the parties and they fail to agree; or
• (c) the price is to be fixed in terms of some agreed market or other standard as set or recorded by a third person or agency and it is not so set or recorded.

A price to be fixed by the seller or by the buyer means a price for him to fix in good faith.

When a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault of one party the other may at his option treat the contract as cancelled or himself fix a reasonable price.

Where, however, the parties intend not to be bound unless the price be fixed or agreed and it is not fixed or agreed there is no contract.

Question 26

What is the Article 2 duty of good faith and fair dealing?

Answer 26

“Good faith” means honesty in fact and the observance of reasonable commercial standards. The subjective part is “honesty in fact” and the objective part is “observance of reasonable commercial standards.” There are three scenarios under a good faith analysis:

• (1) The party is a non-merchant → Subjective analysis only.
• (2) The party is a merchant → Subjective and objective analysis.
• (3) The party is a merchant and there is a posted/market price → Objective analysis only.

Question 27

What if there is a lack of a term identifying assortment of the types of goods?

Answer 27

An agreement for sale which is otherwise sufficiently definite to be a contract is not made invalid by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and within limits set by commercial reasonableness.

Question 28

When does identification occur under Article 2?

Answer 28

Identification occurs when the buyer receives a special property and insurable interest in the goods. Identification occurs:

• (a) At a time explicitly agreed to in the contract;
• (b) If the goods already exist and are identified, then when the contract is made;
• (c) If the goods are future goods (other than crops and unborn animals), then when goods are shipped, marked, or designated by the seller as goods to which contract refers; or
• (d) If the goods are future crops or unborn animals, then when the crops are planted or become growing crops or when the young are conceived; or if for either crops to be harvested or unborn animals to be born within 12 months, then later of the next harvest season or when the crops become growing crops or when the young are conceived, whichever is longer.

The product of a lumbering, mining, or fishing operation, though seasonal, is not within the concept of “growing.” Identification under a contract for all or part of the output of such an operation can be made early in the operation.

Question 29

Can goods be identified if they are undivided shares in an identifiable bulk?

Answer 29

Undivided shares in an identified fungible bulk, such as grain in an elevator or oil in a storage tank, can be sold. The mere making of the contract with reference to an undivided share in an identified fungible bulk is enough to effect an identification if there is no explicit agreement otherwise.

In other words, identification occurs at the time the contract is made.

Question 30

When does risk of loss pass from seller to buyer if the contract authorizes or requires delivery by a carrier?

Answer 30

If no destination is specified, risk passes once delivered to carrier.

If destination is specified, risk passes once tendered for delivery at destination to buyer.

Question 31

If goods are to be delivered without being moved (e.g., they are with a bailee), when does risk of loss pass to buyer?

Answer 31

The basic idea is that risk passes once the buyer has the right to the goods. This is spelled out with some specificity:

• (a) On buyer’s receipt of negotiable document of title
• (b) On bailee’s acknowledgement of buyer’s right to goods
• (c) On buyer’s receipt of a non-negotiable document of title or other written direction to deliver.

A “bailee” means the person who by a warehouse receipt, bill of lading, or other document of title acknowledges possession of goods and contracts to deliver them.

Question 32

If the agreement does not specify shipment by carrier or that goods are to be delivered without being moved, when does risk of loss pass to buyer?

Answer 32

If seller is a merchant, risk passes on buyer’s receipt of goods

If seller is not a merchant, risk passes on tender of delivery to buyer.

Question 33

What are Article 2 delivery terms?

Answer 33

Delivery terms are terms used in the contract that tell us about the price of goods and when the risk of loss shifts from the seller to the buyer. There are a number of delivery terms, but they all correspond to just two types of contracts:

• Shipment contract → Risk shifts once to carrier.
• Destination contract → Risk shifts once to buyer.

Question 34

“Free on board” (FOB)

Answer 34

The “FOB” term is used when the price for the goods identified includes delivery at the seller’s expense only to a specified point. FOB always indicates a location. The risk of loss shifts at that location.

• FOB origin address → This is a shipment contract because the risk of loss passes to buyer when goods are placed in shipper’s hands.
• FOB destination → This is a destination contract because the risk of loss passes to buyer when carrier tenders for delivery to buyer.

Question 35

“Free alongside” (FAS)

Answer 35

FAS is used when the goods are to be delivered to a named port. The risk shifts to buyer once:

• (1) the seller properly delivers alongside the vessel identified,
• (2) the seller gives the carrier a receipt for the goods, and
• (3) the seller receives a bill of lading from the carrier.

The use of FAS can create either a shipment or destination contract:

• (a) If the FAS vessel term names the point of shipment, a shipment contract is created. In that case, risk of loss and title pass when the goods are tendered alongside the vessel at the point of shipment.
• (b) If the FAS term uses the point of destination, a destination contract is formed under which the risk of loss and title will pass when the goods are delivered alongside the vessel at the destination.

Question 36

“Cost, insurance, freight” (CIF)

Answer 36

The term “CIF” means that the price includes in a lump sum the cost of the goods and the insurance and freight to the named destination. This creates a shipment contract.

A CIF is a shipment contract with risk of loss passing to buyer upon placing the goods in the hand of the carrier and:

• (1) seller obtains a negotiable bill of lading to the named destination;
• (2) seller loads the goods onto the carrier and obtains a receipt from carrier showing freight has been paid for;
• (3) seller obtains policy or certificate of insurance;
• (4) seller prepares an invoice of goods and any other documents required for shipment; and
• (5) seller forwards and tenders with commercial promptness all the documents in due form with endorsements necessary to perfect buyer’s rights.

“C&F” (cost & freight) makes a shipping contract. A C&F contract is a shipment contract where risk of loss passes to buyer on shipment.

Question 37

Delivery “Ex-Ship”

Answer 37

Unless otherwise agreed, a term for delivery of goods “ex-ship” (which means from the carrying vessel) is not restricted to a particular ship and requires delivery from a ship which has reached a place at the named port of destination where goods of the kind are usually discharged. Under such a term, unless otherwise agreed:

• (a) the seller must discharge all liens arising out of the carriage and furnish the buyer with a direction which puts the carrier under a duty to deliver the goods; and
• (b) the risk of loss does not pass to the buyer until the goods leave the ship’s tackle or are otherwise properly unloaded.

Question 38

What is the warranty of title?

Answer 38

Under the warranty of title, there is a warranty by the seller of goods that:

• (1) title is good;
• (2) the transfer of title is rightful;
• (3) the goods are free of a security interest; and
• (4) the goods are free of any other encumbrance of which the buyer at time of contracting has no knowledge.

A purchaser cannot gain more title from the seller than the seller had.

Note: there is no element relating to the seller’s subjective belief about title, so the seller cannot argue that they thought they had good title.

Question 39

Is the warranty of title an implied warranty?

Answer 39

Yes and no. It is an implied warranty in that it is read into every contract and you have to use very specific language to disclaim it. But it won’t be called an “implied” warranty in Article 2. That term only applies to the warranties of quality (merchantability and fitness).

Question 40

What is required to disclaim the warranty of title?

Answer 40

A warranty of title will be excluded or modified only by

• (a) specific language or
• (b) by circumstances which give the buyer reason to know that the person selling does not claim title in himself or that he is purporting to sell only such right or title as he or a third person may have.

Question 41

When are goods “entrusted” to a person?

Answer 41

“Entrusting” includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor’s disposition of the goods have been such as to be larcenous under the criminal law.

The basic idea is that I entrust you with my goods if I deliver them to you or acquiesce to you retaining possession.

Question 42

What happens if A entrusts B with A’s goods and B sells them to a third party?

Answer 42

If B is a merchant of those kinds of goods then B can transfer title to a buyer in the ordinary course of business. The basic idea is that we want to protect people who buy, in the ordinary course, out of inventory.

Question 43

Who is a buyer in the ordinary course of business? Who can be a BIOC?

Answer 43

A buyer in the ordinary course of business is a person who buys goods in good faith without knowledge that the sale violates the rights of another person in the goods, in the ordinary course from a person in business of selling goods of that kind, but not from a pawnbroker.

• The “ordinary course” includes the customary practices of the seller’s kind of business or the seller’s own customary practices.

A BIOC may buy for cash, by exchange of property (barter), or on credit.

A person cannot be a BIOC unless they have possession or the right to possession against the seller.

Question 44

What rules apply to a BIOC who is a merchant?

Answer 44

A merchant buyer has a heightened duty of inquiry when a reasonable merchant would have doubts or questions about the seller’s authority to sell.

This is to be assessed using all of the facts and circumstances surrounding the sale.

Question 45

What is an “express” warranty?

Answer 45

There are three ways a seller can make an express warranty:

• (a) The seller can make an affirmation of fact or a promise to buyer relating to the goods.
• (b) The seller can provide the buyer with a description of the goods.
• (c) The seller can show the buyer a sample or model.

The seller’s outward manifestations must become part of the basis for the bargain.

Proof of the buyer’s reliance is not necessary to prove the existence of an express warranty.

Specific intention by the seller to make a warranty is not necessary.

Question 46

To create an express warranty must the warrantor use any formal words like “warrant” or guarantee”?

Answer 46

No. It is not necessary to the creation of an express warranty that the seller use formal words such as “warrant” or “guarantee” or that the seller have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.

Question 47

Can an express warranty be made after the contract has been made?

Answer 47

Yes. The precise time when words of description or affirmation are made or samples are shown is not material. The sole question is whether the language or samples or models are fairly to be regarded as part of the contract. If language is used after the closing of the deal (as when the buyer when taking delivery asks and receives an additional assurance), the warranty becomes a modification, and need not be supported by consideration if it is otherwise reasonable and in order.

Question 48

What is the implied warranty of merchantability?

Answer 48

A warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. The serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.

Goods to be merchantable must be at least such as:

• (1) pass without objection in the trade under the contract description;
• (2) in the case of fungible goods, are of fair average quality within the description;
• (3) are fit for the ordinary purposes for which such goods are used;
• (4) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved;
• (5) are adequately contained, packaged, and labeled as the agreement may require; and
• (6) conform to the promises or affirmations of fact made on the container or label if any.

Question 49

When are goods fungible?

Answer 49

“Fungible goods” means:

• (a) goods of which any unit, by nature or usage of trade, is the equivalent of any other like unit; or
• (b) goods that by agreement are treated as equivalent.

Question 50

What is the foreign substance-natural substance test? Is there a better test?

Answer 50

The implied warranty of merchantability with regard to food is not violated if the food contains a natural substance which a reasonable person would anticipate could be in the food.

Under the reasonable expectations test, the preferred test, the issue is whether the consumer reasonably should have expected to find the injury-causing substance in the food.

Question 51

What is the warranty of fitness for a particular purpose?

Answer 51

Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill to select or furnish suitable goods, there is an implied warranty that the goods shall be fit for such purpose.

Question 52

Does it matter for implied warranties if the buyer asks for the good specifically by name/brand?

Answer 52

Not for the warranty of merchantability. A specific designation of goods by the buyer does not exclude the seller’s obligation that they be fit for the general purposes appropriate to such goods.

However, a buyer’s insistence on a particular brand of good will not create a warranty of fitness for a particular purpose because he is not relying on the seller’s skill and judgement.

Question 53

How can you disclaim an express warranty?

Answer 53

If words or conduct seem to limit or negate an express warranty, then those words/conduct must be construed, wherever reasonable, as consistent with the words/conduct creating the warranty.

If this is not possible, then to the extent such construction is unreasonable, the limitation or negation is inoperative.

Question 54

What do you need to do to disclaim or modify the warranty of merchantability?

Answer 54

(1) The language must mention “merchantability” and
(2) If in writing, the disclaimer/modification must be conspicuous.

Question 55

What do you need to do to disclaim the warranty of fitness for a particular purpose?

Answer 55

The disclaimer or modification must be in a writing and must be conspicuous.

But, language to exclude all implied warranties of fitness is sufficient if it states: “There are no warranties which extend beyond the description on the face hereof.”

Question 56

When is a disclaimer conspicuous?

Answer 56

A term or clause is conspicuous when it is so written that a reasonable person against whom it is to operate ought to have noticed it. A printed heading in capitals is conspicuous. Language in a body of a form is conspicuous if it is larger or of other contrasting type of color. But in a telegram, any stated term is conspicuous.

The test is whether attention can reasonably be expected to be called to it.

Question 57

What affect do words like “as is,” or “with all faults” have on implied warranties? Can you disclaim the warranty of title with words like “as is”?

Answer 57

All implied warranties are excluded by expressions like “as is,” “with all faults,” or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty.

The warranty of title cannot be disclaimed with this language because these rules apply only to “implied” warranties and, for purposes of the UCC, the warranty of title is not an “implied” warranty. It can only be excluded by specific language or circumstances that give the buyer reason to know the person selling does not claim title or is only selling what title the seller has.

Question 58

Can a buyer claim breach of the implied warranty of merchantability if they inspect the goods?

Answer 58

No. When the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods, there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him.

Question 59

What triggers the buyer’s duty to accept the goods and pay for them?

Answer 59

The buyer’s duty to accept the goods and pay for them is conditioned on tender of delivery.

Question 60

If the contract for sale requires delivery at a particular destination (destination contract), how does the seller tender delivery?

Answer 60

Tender of delivery requires that the seller put and hold conforming goods at the buyer’s disposition and give the buyer any notification reasonably necessary to enable him to take delivery.

Note: tender must be at a reasonable hour, and the goods must be kept available for the period reasonably necessary to enable the buyer to take possession.

Question 61

If the contract for sale authorizes shipment of the goods to the buyer (shipment contract), how does the seller tender delivery?

Answer 61

(a) Put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case; and
(b) Obtain and promptly deliver or tender in due form any document necessary to enable the buyer to obtain possession of the goods or otherwise required by the agreement or by usage of trade; and
(c) Promptly notify the buyer of the shipment.

Question 62

Performance results in a breach if the performance isn’t conforming. What does “conforming” mean?

Answer 62

Goods or conduct including any part of a performance are “conforming” or conform to the contract when they are in accordance with the obligations under the contract.

Question 63

Under the common law, when is there substantial performance? Does substantial performance survive in Article 2?

Answer 63

Substantial performance occurs when:

• (a) there are minor defects or omissions (that can be remedied),
• (b) the party has performed in all material and substantive particulars, or
• (c) the contractual deviations or deficiencies do not severely impair the purpose of the contract requirements.

Yes, the law as to performance in installment contracts is substantial performance.

Question 64

What is the definition of an “installment contract”? When can the buyer reject an installment?

Answer 64

An “installment contract” is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause “each delivery is a separate contract” or its equivalent.

The buyer in an installment contract may reject any installment whose nonconformity substantially impairs the value of that installment. In general, if the non-conformity can be cured and the seller gives adequate assurance of the seller’s intent to cure, buyer must accept that installment.

• However, if the nonconformity of an installment substantially impairs the value of the whole contract, then there is a breach of the whole.

Question 65

What is the perfect tender rule? What is a “commercial unit”?

Answer 65

If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may:

• (1) reject the whole;
• (2) accept the whole; or
• (3) accept any commercial unit or units and reject the rest.

A “commercial unit” is a unit of goods that by commercial usage is a single whole for purposes of sale, the division of which materially impairs its character or value on the market or in use.

• It may be a single article (as a machine) or a set of articles (as a suite of furniture or an assortment of sizes) or a quantity (as a bale, gross, or carload) or any other unit treated in use or in the relevant market as a single whole.

Question 66

Can a party refuse to accept goods if they have just minor defects?

Answer 66

The duty of good faith is read into every contract subject to Article 2. As a result, a party must act honestly in rejecting delivery due to failure to perfectly conform to the contract. This provides a limit on the party’s ability to refuse tender of performance.

Question 67

A seller has a right to cure in some circumstances. What do we mean by cure? When does a seller have the right to cure?

Answer 67

A seller cures when the seller corrects a defect in the delivery.

• Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.
• Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.

Generally, the seller should be able to cure the defect provided he can do so without subjecting the buyer to any great inconvenience, risk, or loss.

Question 68

Under Article 2, when has a buyer “accepted” the goods?

Answer 68

(1) Acceptance of goods occurs when the buyer

• (a) after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity; or
• (b) fails to make an effective rejection, but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or
• (c) does any act inconsistent with the seller’s ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.

(2) Acceptance of a part of any commercial unit is acceptance of that entire unit.

Question 69

When has a buyer rejected the goods? What are the buyer’s obligations regarding rejected goods?

Answer 69

Rejection is generally regarded as the buyer’s refusal to keep delivered goods. A rejection is not effective merely because there has not been an express acceptance.

Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.

• After rejection, any exercise of ownership by the buyer with respect to any commercial unit is wrongful as against the seller; and
• If the buyer has before rejection taken physical possession of goods in which he or she does not have a security interest, the buyer is under a duty to hold them with reasonable care at the seller’s disposition for a time sufficient to permit the seller to remove them; but
• The buyer has no further obligations with regard to goods rightfully rejected.

Question 70

What is revocation? When is it effective?

Answer 70

The buyer may revoke her or his acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to her or him if she or he has accepted it:

• (a) on the reasonable assumption that its nonconformity would be cured and it has not been seasonably cured; or
• (b) without discovery of such nonconformity if her or his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller’s assurances.

Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.

A buyer who so revokes has the same rights and duties with regard to the goods involved as if she or he had rejected them.

Question 71

What happens when the buyer accepts the goods? What duty arises for the buyer? What rights does the buyer lose?

Answer 71

(1) The buyer must pay at the contract rate for any goods accepted.
(2) Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a non-conformity cannot be revoked because of it unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured.

Question 72

When does the risk of loss pass for non-conforming goods?

Answer 72

Where a tender or delivery of goods fails to conform to the perfect tender rule as to give a right of rejection, the risk of their loss remains on the seller until cure or acceptance.

• Note: the seller by his individual action cannot shift the risk of loss to the buyer unless his action conforms with all the conditions resting on him under the contract.

Question 73

Who bears the risk of loss for goods acceptance of which has been rightfully revoked?

Answer 73

The seller. Where the buyer rightfully revokes acceptance he may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as having rested on the seller from the beginning.

Question 74

Who bears the risk of loss for goods when the buyer is in breach?

Answer 74

Where the buyer of conforming goods repudiates or is otherwise in breach before risk of their loss has passed to him, the seller may, to the extent of any deficiency in his effective insurance coverage, treat the risk of loss as resting on the buyer for a commercially reasonable time.

Question 75

What does the term “seasonable” mean and how does it differ from “reasonable” in the context of time?

Answer 75

Section 1-205 provides the definitions of these terms:

• (a) Whether a time for taking an action is reasonable depends on the nature, purpose, and circumstances of the action.
• (b) An action is taken seasonably if it is taken at or within the time agreed or, if no time is agreed, at or within a reasonable time.

Question 76

Can a seller refuse to perform if the buyer is insolvent? When is a party insolvent?

Answer 76

Yes, the seller may refuse delivery if they discover that the buyer is insolvent, unless the buyer is paying cash for the items to be delivered.

A party is insolvent when they are unable to pay their debts as they mature (become due).

Question 77

What is a seller’s remedy if a buyer becomes insolvent after receiving goods purchased with credit?

Answer 77

Seller may reclaim the goods upon demand made within ten days after the receipt, but if misrepresentation of solvency has been made to the seller in writing within three months before delivery, the ten day limitation does not apply.

Question 78

What are liquidated damages? When are liquidated damages provisions enforceable?

Answer 78

“Liquidated damages” are a sum of money specified in a contract that states the total amount of compensation a non-breaching party should receive if the other party breaches the contract.

The amount of liquidated damages must be set at an amount that is reasonable in the circumstances. A term fixing unreasonably large liquidated damages is void as a penalty.

Question 79

What is the basic measure of common law expectation damages? How is each part of the equation calculated?

Answer 79

Expectation damages = loss in value + other loss – cost avoided – loss avoided

• Loss in value is the difference between value of the performance that should have been received and value of what was received.
• Other loss includes both incidental and consequential damages:
  
  • Incidental → Includes additional costs incurred after the breach in a reasonable attempt to avoid loss.
  • Consequential → Losses beyond general damages that the plaintiff would not have incurred but for the breach.
• Cost avoided is the amount saved by nonbreaching party because of not having to make expenditures that would have been incurred.
• Loss avoided is the amount saved by nonbreaching party by avoiding some loss.

Question 80

Seller’s Rights for Buyer’s Breach (Generally)

Answer 80

Question 81

What may a seller do when the buyer breaches and the goods have not yet been delivered?

Answer 81

Where the buyer wrongfully (a) rejects, (b) revokes acceptance of goods, (c) fails to make a payment due on or before delivery, or (d) repudiates with respect to a part or the whole, the aggrieved seller may:

• (a) withhold delivery of such goods;
• (b) stop delivery by any bailee as hereafter provided; or
• (c) cancel.

Question 82

What may a seller recover when a buyer fails to pay the price due for accepted goods?

Answer 82

When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages, the price:

• (1) of goods accepted or of conforming goods lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; and
• (2) of goods identified to the contract if the seller is unable after reasonable effort to resell them at a reasonable price or the circumstances reasonably indicate that such effort will be unavailing.

Question 83

What may a seller recover after reselling goods after buyer’s breach?

Answer 83

The seller may resell the goods concerned or the undelivered balance thereof. Where the resale is made in good faith and in a commercially reasonable manner the seller may recover the difference between the resale price and the contract price together with any incidental damages, but less expenses saved in consequence of the buyer’s breach.

• (a) Where the resale is at private sale the seller must give the buyer reasonable notification of his intention to resell.
• (b) Where the resale is at public sale:
  
  • (1) only identified goods can be sold except where there is a recognized market for a public sale of futures in goods of the kind;
  • (2) it must be made at a usual place or market for public sale if one is reasonably available and except in the case of goods which are perishable or threaten to decline in value speedily, the seller must give the buyer reasonable notice of the time and place of the resale;
  • (3) if the goods are not to be within the view of those attending the sale, the notification of sale must state the place where the goods are located and provide for their reasonable inspection by prospective bidders; and
  • (4) the seller may buy.

Question 84

What are incidental damages for a nonbreaching seller?

Answer 84

Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care, and custody of goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach.

Question 85

How are damages calculated in the event of non-acceptance or repudiation by the buyer?

Answer 85

The measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages, but less expenses saved in consequence of the buyer’s breach.

Question 86

What is a lost volume seller? What kind of damages can they receive?

Answer 86

The basic idea is that if the seller had capacity to produce more of the product, could have sold unit(s) in addition to those relating to broken contract, and the additional sale would have been profitable, then market price damages will not put them in the same position as a sale would have.

A lost volume seller may recover the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages, due allowance for costs reasonably incurred, and due credit for payments or proceeds of resale.

Question 87

Buyer’s Remedies for Seller’s Breach (Generally)

Answer 87

Question 88

What are the buyer’s remedies when the seller has breached but the buyer has retained the goods?

Answer 88

The basic remedy where the buyer retains the goods and notifies the seller of any breach is that the damages may be assessed in whatever manner is reasonable. But most of the time, the damages will be measured as value as promised minus value as received plus incidental and consequential damages. Notice this is the basic expectations damages formula.

Value is calculated at the time and place of acceptance.

Question 89

What are the four types of warranties the breach of which can be remedied for the buyer?

Answer 89

(1) Warranty of title,
(2) Express warranty,
(3) Implied warranty of merchantability, and
(4) Implied warranty of fitness for a particular purpose.

Question 90

How are incidental damages distinguished from consequential damages?

Answer 90

Incidental damages are normally incurred when a buyer (or seller) repudiates the contract or wrongfully rejects the goods, causing the other to incur such expenses as transporting, storing, or reselling the goods.

Consequential damages do not arise within the scope of the immediate buyer/seller transaction, but rather stem from losses incurred by the nonbreaching party in its dealings, often with third parties, which were a proximate result of the breach, and which were reasonably foreseeable by the breaching party at the time of contracting.

Question 91

When does a buyer have a right to cover? Can the buyer still recover damages from the seller?

Answer 91

If the seller has breached and the buyer does not receive the goods, the buyer may, without unreasonable delay and acting in good faith, reasonably purchase substitute goods.

Damages = Cost of cover minus contract price plus incidental and consequential damages minus expenses saved due to the breach.

Question 92

What kind of damages may the buyer recover if the seller breaches and buyer does not have the goods and does not cover?

Answer 92

The measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages, but less expenses saved in consequence of the seller’s breach.

Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.

Question 93

When does the buyer have a right to specific performance or replevin?

Answer 93

Specific performance may be decreed where the goods are unique or in other proper circumstances.

The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing.

Question 94

What is a UCC gap filler? Why do we use them?

Answer 94

It is a provision in the UCC that gives us a way to decide what a term means if that term is “missing” from the agreement.

Even though one or more terms are left open a contract for sale does not fail for indefiniteness if (1) the parties have intended to make a contract and (2) there is a reasonably certain basis for giving an appropriate remedy.

Question 95

What is the scope of Article 9?

Answer 95

Except as otherwise provided, Article 9 applies to:

• (1) a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract;
• (2) an agricultural lien;
• (3) a sale of accounts, chattel paper, payment intangibles, or promissory notes;
• (4) a consignment.

Question 96

What is a security interest?

Answer 96

A security interest is an interest in personal property or fixtures which secures payment or performance of an obligation.

In general, personal property is anything that is not real property. More precisely there are two types of personal property:

• Tangible personal property: things you can touch directly like animals, merchandise, jewelry, etc.
• Intangible personal property: things you cannot touch directly like the rights (embodied) in stocks, trust fund accounts, etc.

“Fixtures” means goods that have become so related to particular real property that an interest in them arises under real property law.

Question 97

What is collateral?

Answer 97

“Collateral” means the property subject to a security interest or agricultural lien. The term includes:

• (1) proceeds to which a security interest attaches;
• (2) accounts, chattel paper, payment intangibles, and promissory notes that have been sold; and
• (3) goods that are the subject of a consignment.

Question 98

What is a debtor?

Answer 98

“Debtor” means:

• (a) a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor;
• (b) a seller of accounts, chattel paper, payment intangibles, or promissory notes; or
• (c) a consignee.

Put simply, the debtor is the person who has the basic title to the collateral subject to the security interest.

Question 99

What is an obligor?

Answer 99

“Obligor” means a person that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral:

• (a) owes payment or other performance of the obligation,
• (b) has provided property other than the collateral to secure payment or other performance of the obligation, or
• (c) is otherwise accountable in whole or in part for payment or other performance of the obligation.

The term does not include issuers or nominated persons under a letter of credit.

Put simply, the obligor is the person (usually the debtor) who has to pay or perform an obligation arising out of the credit relationship.

Question 100

What is a secured party?

Answer 100

“Secured party” means:

• (a) a person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding;
• (b) a person that holds an agricultural lien;
• (c) a consignor; or
• (d) a person to which accounts, chattel paper, payment intangibles, or promissory notes have been sold.

Put simply, the secured party is the person who has a security interest in the collateral. (Also called the creditor.)

Question 101

What is an artisan’s lien? Does Article 9 apply to it?

Answer 101

An artisan’s lien is a kind of mechanic’s lien. A mechanic’s lien is a legal claim against some property arising out of work the person performed on that property for which the person has not been reimbursed (in full).

No, Article 9 does not apply to a lien, other than an agricultural lien, given by statute or other rule of law for services and materials.

Question 102

What is an agricultural lien?

Answer 102

An “agricultural lien” means an interest in farm products:

• (1) which secures payment or performance of an obligation for:
  
  • (a) goods or services furnished in connection with a debtor’s farming operation; or
  • (b) rent on real property leased by a debtor in connection with its farming operation;
• (2) which is created by statute in favor of a person that:
  
  • (a) in the ordinary course of its business furnished goods or services to a debtor in connection with a debtor’s farming operation; or
  • (b) leased real property to a debtor in connection with the debtor’s farming operation; and
• (3) whose effectiveness does not depend on the person’s possession of the personal property.

Question 103

What is a consignment?

Answer 103

“Consignment” means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and:

• (1) the merchant:
  
  • (i) deals in goods of that kind under a name other than the name of the person making delivery;
  • (ii) is not an auctioneer; and
  • (iii) is not generally known by its creditors to be substantially engaged in selling the goods of others;
• (2) with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery;
• (3) the goods are not consumer goods immediately before delivery; and
• (4) the transaction does not create a security interest that secures an obligation.

Question 104

What is a consignee? What is a consignor?

Answer 104

“Consignee” means a merchant to which goods are delivered in a consignment.

“Consignor” means a person that delivers goods to a consignee in a consignment.

Question 105

What is the definition of a lease? Who are the parties?

Answer 105

“Lease” means a transfer of the right to possession and use of goods for a term in return for consideration, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease.

• “Lessee” means a person who acquires the right to possession and use of goods under a lease. Unless the context clearly indicates otherwise, the term includes a sublessee.
• “Lessor” means a person who transfers the right to possession and use of goods under a lease.

Question 106

How do you distinguish a true lease from a sale of goods with a security interest?

Answer 106

A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:

• (a) the original term of the lease is equal to or greater than the remaining economic life of the goods;
• (b) the lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
• (c) the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or
• (d) the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.

Question 107

What is “nominal” consideration?

Answer 107

Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised.

Additional consideration is not nominal if:

• (a) when the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or
• (b) when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.

Question 108

To what extent does Article 9 not apply?

Answer 108

Article 9 not apply to the extent that:

• (1) a statute, regulation, or treaty of the United States preempts this article;
• (2) another statute of this State expressly governs the creation, perfection, priority, or enforcement of a security interest created by this State or a governmental unit of this State;
• (3) a statute of another State, a foreign country, or a governmental unit of another State or a foreign country, other than a statute generally applicable to security interests, expressly governs creation, perfection, priority, or enforcement of a security interest created by the State, country, or governmental unit; or
• (4) the rights of a transferee beneficiary or nominated person under a letter of credit are independent and superior under Section 5-114.

Question 109

What does Article 9 not apply to?

Answer 109

Article 9 does not apply to:

• (1) a landlord’s lien, other than an agricultural lien;
• (2) a lien, other than an agricultural lien, given by statute or other rule of law for services or materials;
• (3) an assignment of a claim for wages, salary, or other compensation of an employee [Garnishments]; and
• (4) a sale of accounts [business’s accounts receivable], chattel paper, payment intangibles, or promissory notes as part of a sale of the business out of which they arose.

Question 110

What is a landlord’s lien?

Answer 110

A landlord’s lien is a state statute (or common law right in some states) that gives the landlord the right to seize the tenant’s property if the tenant does not pay on time.

Question 111

What is chattel paper?

Answer 111

“Chattel paper” means a record or records that evidence both a monetary obligation and a security interest in specific goods. Think promissory note + security agreement.

Question 112

What is a health-care-insurance receivable? Is it subject to Article 9?

Answer 112

“Health-care-insurance receivable” means an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health-care goods or services provided or to be provided.

Yes, because Article 9 does not apply to a transfer of an interest in or an assignment of a claim under a policy of insurance, other than an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment.

Question 113

What is a right to recoupment? How does it differ from a setoff? Are either of them subject to Article 9’s reporting requirements?

Answer 113

A right to recoupment arises when the defendant raises their own claim against the plaintiff arising from the same transaction.

A setoff occurs when the two parties have obligations running to each other from different transactions and one party wants to cancel (part/all) of the obligation owed provided the other party does the same.

Neither are subject to Article 9’s reporting requirements.

Question 114

Does Article 9 apply to non-consensual liens?

Answer 114

No. For example, a landlord’s lien can arise either through statute (non-consensual) or through agreement (consensual). If it is by agreement, it is a consensual lien to which Article 9 applies.

Question 115

What is a judgment as opposed to a settlement? Can it be subject to Article 9?

Answer 115

A judgment is a court’s final determination of the rights and obligations of the parties in a case. A settlement occurs where the parties negotiate an end to the judicial action and where there is no judgment of the court as to the matter.

Article 9 does not apply to “an assignment of a right represented by a judgment, other than a judgment taken on a right to payment that was collateral.”

Question 116

What are the three categories of collateral in Article 9?

Answer 116

(1) Tangible property (goods)
(2) Quasi-tangible property
(3) Intangible property

Question 117

What are “goods” under Article 9?

Answer 117

Question 118

What types of collateral are quasi-tangible?

Answer 118

Question 119

What types of collateral are intangible?

Answer 119

Question 120

What are payment intangibles?

Answer 120

Payment intangible: a general intangible under which the account debtor’s principal obligation is a monetary obligation.

• They include “no note” loan agreements where the payment obligation is in the loan agreement and there is no promissory note evidencing a promise to pay.
• They also include participation interests in loans. When a bank makes a loan (and gives money to the debtor) it has a right to a stream of income (the monthly payments). But the bank is not in the business of collecting streams of income. It wants to give more loans. So it will often sell “participations” in the loan (usually big commercial loans) to other banks. These participating banks only have a right to collect money from the Lending bank, not the borrower.

Question 121

What is an “account”?

Answer 121

An account is a right to payment of a monetary obligation, whether or not earned by performance:

• (1) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of,
• (2) for services rendered or to be rendered,
• (3) for a policy of insurance issued or to be issued,
• (4) for a secondary obligation incurred or to be incurred (this is when someone undertakes a suretyship obligation)
• (5) for energy provided or to be provided, (Think JEA selling electricity to Manufacturing Co. on credit. Then JEA sells that accounts receivable to another company. This is called “factoring.”)
• (6) for the use or hire of a vessel under a charter or other contract,
• (7) arising out of the use of a credit or charge card or information contained on or for use with the card,
• (8) as winnings in a lottery or other game of chance.

Question 122

What is a chose in action?

Answer 122

A chose in action is a personal right to demand money or property by an action. (Also called a thing in action.) It includes: contracts, covenants, and promises which confer on one party a right to recover a personal chattel or a sum of money from another by action. Examples:

• Money due under a contract
• Damages arising from a breach of a contract,
• A check,
• An interest in a pension and profit-sharing plan,
• The right to receive payment under an insurance contract and the proceeds from such policy.

Question 123

What do we use to determine whether a good is inventory or equipment?

Answer 123

The principal use. Factors determining principle use include:

• (1) whether the goods are for immediate or ultimate sale, and
• (2) whether the goods have a relatively long or short period of use in the business.

Goods are equipment if they are used in business and they are fixed assets or have a relatively long period of use.

Goods are inventory when they are used up or consumed in a short period of time in the production of some end product. Goods can be inventory even if not held for sale.

Question 124

What are the two documents often associated with a secured transaction? What does each do?

Answer 124

The security agreement is the contract between the debtor and creditor.

The financing statement is the notice (to the world) that creditor claims a security interest in the collateral.

Question 125

What is a record?

Answer 125

Information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form.

Question 126

In order for a security agreement to be enforceable between the parties it must “attach.” When does a security agreement attach?

Answer 126

In order for a security interest to be enforceable against the debtor with respect to the collateral (called “attachment”):

• (1) Value must have been given for the security interest;
• (2) The debtor must either:
  
  • (a) have rights in the collateral, or
  • (b) have the power to transfer rights in the collateral to a secured party; and
• (3) One of the following must be met:
  
  • (a) debtor has authenticated a security agreement,
  • (b) collateral is in possession of secured party,
  • (c) if collateral is certificated security, it has been delivered to the secured party, or
  • (d) Secured party has control (deposit accounts, electronic chattel paper, investment property, letters-of-credit rights).

Question 127

When is a financing statement sufficient?

Answer 127

A financing statement is sufficient only if it:

• (1) provides the name of the debtor;
• (2) provides the name of the secured party or a representative of the secured party; and
• (3) indicates the collateral covered by the financing statement.

Question 128

When does a financing statement sufficiently identify the name of the debtor if the debtor is a registered organization?

Answer 128

If the debtor is a registered organization or the collateral is held in a trust that is a registered organization, only if the financing statement provides the name that is stated to be the registered organization’s name on the public organic record most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization that purports to state, amend, or restate the registered organization’s name.

• “Registered organizations” are organizations that have to file to do business. E.g., corporations, Limited Liability Partnerships, Limited Liability Companies.
• “Public organic record” means a record that is available to the public for inspection and is a record consisting of the record initially filed with or issued by a State or the United States to form or organize an organization and any record filed with or issued by the State or the United States which amends or restates the initial record.

Question 129

When does a financing statement sufficiently identify the name of the debtor if the collateral is being administered by a personal representative of a decedent?

Answer 129

If the collateral is being administered by the personal representative of a decedent, only if the financing statement provides, as the name of the debtor, the name of the decedent and, in a separate part of the financing statement, indicates that the collateral is being administered by a personal representative.

Question 130

When does a financing statement sufficiently identify the name of the debtor if the debtor is an individual?

Answer 130

If the debtor is an individual to whom this state has issued a driver license that has not expired or to whom the agency of this state that issues driver licenses has issued, in lieu of a driver license, a personal identification card that has not expired, only if the financing statement provides the name of the individual that is indicated on the driver license or personal identification card.

• If the debtor is an individual to whom this does not apply, only if the financing statement provides the individual name of the debtor or the surname and first personal name of the debtor.

Question 131

Is a financing statement effective even if it has minor errors?

Answer 131

A financing statement substantially complying with the requirements is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. A financing statement that fails sufficiently to provide the name of the debtor in accordance is seriously misleading.

If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor, the name provided does not make the financing statement seriously misleading.

Question 132

If a debtor is a sole proprietor and has both an individual and a business name, should the parties use the business name or the individual name on the financing statement?

Answer 132

The individual name. A financing statement that provides the name of the debtor is not rendered ineffective by the absence of a trade name or other name of the debtor. However, a financing statement that provides only the debtor’s trade name does not sufficiently provide the name of the debtor.

In the case of a registered partnership, the partnership name is the correct name to use.

Question 133

If an organization changes its name after filing a financing statement and fails to refile after the name change, is the security interest lost?

Answer 133

No, if a name change occurs after the filing of a financing statement that makes the filed-under-name seriously misleading, it has no effect on the effectiveness of the original financing statement.

Question 134

Article 9 places different constraints on the description of the collateral in the security agreement and the financing statement. What is the requirement for the security agreement?

Answer 134

Except as otherwise provided, a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described. A description of collateral reasonably identifies the collateral if it identifies the collateral by:

• (a) specific listing;
• (b) category;
• (c) a type of collateral defined in the UCC;
• (d) quantity;
• (e) computational or allocational formula or procedure; or
• (f) any other method, if the identity of the collateral is objectively determinable.

However, a description of collateral as “all the debtor’s assets” or “all the debtor’s personal property” or using words of similar import does not reasonably identify the collateral.

Question 135

Article 9 places different constraints on the description of the collateral in the security agreement and the financing statement. What is the requirement for the financing statement?

Answer 135

A financing statement sufficiently indicates the collateral that it covers if the financing statement provides:

• (a) a description of the collateral as required for the security agreement; or
• (b) an indication that the financing statement covers all assets or all personal property.

Custom and usage of trade may also be used to determine whether a financing statement sufficiently identifies the collateral.

At a minimum, the financing statement must put creditors on notice that they should inquire of the potential debtor as to whether property is subject to another security interest, also known as inquiry notice.

Question 136

What does it mean if the security agreement describes the collateral as “all inventory now or after acquired”? What is this called?

Answer 136

It is a floating lien. When a business secures debt using inventory, the business wants to be able to sell some of that inventory and will want to replace what it sells.

This could be a problem if the lien the creditor had on the inventory was on the precise items in the inventory at that moment in time the money was loaned, the business wouldn’t be able to sell because selling would diminish the creditor’s protection.

So what happens in a floating lien is that the lien covers whatever is in inventory from the moment of creation of the lien and then shifts to whatever is in inventory as the inventory changes over time.

Question 137

Is there a problem if the financing statement describes more collateral than is part of the security agreement?

Answer 137

No. In terms of notice, there is no harm in the financing statement including more collateral than the security agreement because the security agreement controls. It puts creditors on inquiry notice. They can inquire as to whether the collateral is/is not covered and in so doing avoid harm.

Question 138

What is attachment? How is it different from perfection?

Answer 138

Attachment is the process where the security interest in favor of a creditor becomes effective against the debtor.

Perfection is the process by which a security interest in favor of a creditor becomes effective against the world.

Question 139

What is necessary for attachment to occur?

Answer 139

All three must be true before the security interest attaches to the collateral:

• (1) the creditor must give value,
• (2) the debtor must have some rights in the collateral, and
• (3) a security agreement is authenticated by the debtor, or the creditor must have possession or control of the collateral (pursuant to an oral agreement with the debtor).

“Value” means consideration for a simple contract.

Question 140

Do you have to have ownership of property in order to grant another person a security interest in it?

Answer 140

No, all a debtor has to have are rights in the collateral. A security interest is attached to the collateral only to the extent of the debtor’s rights in the collateral.

Question 141

If the debtor only has possession of the collateral, is that sufficient to support the debtor granting a creditor a security interest in the collateral?

Answer 141

No, mere possession is not sufficient.

Question 142

What are the four ways that perfection usually occurs?

Answer 142

• (1) Filing (the presumed/default manner for many types of collateral),
• (2) Possession/Pledge,
• (3) Control, and
• (4) Automatically (perfection occurs at the moment of attachment).

Question 143

What if you perform all of the things you need to for a security interest to perfect before the security interest attaches? Assume the security interest attaches at a later date, when does the interest perfect?

Answer 143

Once the security interest attaches, the interest will at the same time be perfected: A security interest is perfected when it attaches if the applicable requirements are satisfied before the security interest attaches.

Question 144

When is an agricultural lien effective?

Answer 144

An agricultural lien is effective when the agricultural lien becomes enforceable by the agricultural lien holder against the debtor.

When that will occur is governed by the statute creating the agricultural lien.

Question 145

Must a creditor file a financing statement if they are in possession of the collateral?

Answer 145

No. When a creditor has possession of the collateral, it is sufficient to perfect the creditor’s interest in the collateral: The filing of a financing statement is not necessary to perfect a security interest in collateral in the secured party’s possession

Question 146

If a creditor has possession of the collateral, is that sufficient for attachment to have occurred?

Answer 146

No, for attachment to occur:

• (1) Creditor has possession of the collateral,
• (2) Debtor has an interest in the collateral, and
• (3) Creditor has given value for the security interest.

Question 147

When can perfection by pledge happen?

Answer 147

Perfection by pledge can only happen if the collateral can be possessed by the creditor (and therefore be perfected by possession):

• Goods
• Negotiable instruments
• Certificated securities
• Money
• Tangible chattel paper

The following types of collateral cannot be physically possessed so perfection cannot occur through possession:

• Accounts;
• Commercial tort claims;
• Deposit accounts (but can “control” deposit accounts);
• Certain investment property;
• Letter-of-credit rights or L/C’s; or
• Oil, gas minerals before extraction.

Question 148

When does perfection by possession start and how long does it last?

Answer 148

If perfection of a security interest depends upon possession of the collateral by a secured party, perfection occurs no earlier than the time the secured party takes possession and continues only while the secured party retains possession.

Question 149

What are the pros/cons of perfecting by pledge?

Answer 149

It is a strong protection of the creditor’s interest.

But, the creditor in possession has a duty to care for the collateral which means the creditor may incur costs.

And if the property is very large, you may need to store it in a warehouse, and then you’ll want something like a negotiable warehouse receipt to entitle you to possess.

For the debtor it can be not good because using the collateral for economic gain generally requires possession.

Question 150

If a creditor is in possession of the collateral, what duties does the creditor have with regard to that collateral?

Answer 150

A secured party shall use reasonable care in the custody and preservation of collateral in the secured party’s possession.

In the case of chattel paper or an instrument, reasonable care includes taking necessary steps to preserve rights against prior parties unless otherwise agreed.

The rule of reasonable care is confined to the physical care of the chattel, whether an object such as a horse or piece of jewelry, or a negotiable instrument or document of title.

Question 151

May a creditor in possession of collateral use it? If so, when?

Answer 151

The secured party may use or operate the collateral:

• (a) for the purpose of preserving the collateral or its value;
• (b) as permitted by an order of a court having competent jurisdiction; or
• (c) except in the case of consumer goods, in the manner and to the extent agreed by the debtor.

Question 152

How does perfection occur when the collateral is in possession of a third party?

Answer 152

Perfection through possession by a third party occurs when the person in possession authenticates a record acknowledging that it holds possession of the collateral for the secured party’s benefit.

Question 153

What is a document of title?

Answer 153

In order to facilitate a person taking title to goods without moving them, merchants developed paper that represented the goods and gave holder title to the goods.

“Document of title” includes bill of lading, dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which

• (1) in the regular course of business or financing
• (2) is treated as adequately evidencing that the person in possession of it is entitled to receive, hold, and dispose of the document and the goods it covers.

Question 154

How do we determine if someone has “possession” of the collateral from the debtor?

Answer 154

In determining whether a particular person has possession, the principles of agency apply.

The debtor cannot qualify as an agent for the secured party for purposes of the secured party’s taking possession.

And, under appropriate circumstances, a court may determine that a person in possession is so closely connected to or controlled by the debtor that the debtor has retained effective possession, even though the person may have agreed to take possession on behalf of the secured party. If so, the person’s taking possession would not constitute the secured party’s taking possession and would not be sufficient for perfection.

Question 155

What is the automatic/temporary perfection for certificated securities?

Answer 155

A security interest in certificated securities, negotiable documents, or instruments is perfected without filing or the taking of possession for a period of 20 days from the time it attaches to the extent that it arises for new value given under an authenticated security agreement.

After the 20-day period has expired, if filing is required but did not occur, the interest will no longer be perfected.

Question 156

What is meant by automatic perfection? What kinds of secuirity interests perfect automatically?

Answer 156

It means that no action is needed other than having the security interest attach for the security interest to be perfected.

The following security interests are perfected when they attach:

• (1) A purchase-money security interest in consumer goods, except as otherwise provided;
• (2) An assignment of accounts or payment intangibles which does not by itself or in conjunction with other assignments to the same assignee transfer a significant part of the assignor’s outstanding accounts or payment intangibles;
• (3) A sale of a payment intangible;
• (4) A sale of a promissory note;
• (5) A security interest created by the assignment of a health-care-insurance receivable to the provider of the health-care goods or services;
• (6) A security interest created by an assignment of a beneficial interest in a decedent’s estate.
• (7) A sale by an individual of an account that is a right to payment of winnings in a lottery or other game of chance.

Question 157

Who is given a purchase money security interest and in what circumstances?

Answer 157

A purchase money security interest is granted to sellers or lenders who extend credit to the debtor so the debtor may purchase the collateral. The credit must be used to fund the purchase.

Question 158

What is required for a security interest to attach to consumer goods that are to be acquired after the fact?

Answer 158

A security interest does not attach under a term constituting an after-acquired property clause to consumer goods unless the debtor acquires rights in them within 10 days after the secured party gives value.

Question 159

What is a purchase money obligation?

Answer 159

Purchase-money obligation means an obligation of an obligor incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used.

Question 160

According to Article 9, if we have an obligation that is in part a PMSI and in part not, how do we allocate payment of the debt?

Answer 160

In a transaction other than a consumer-goods transaction, if the extent to which a security interest is a purchase-money security interest depends on the application of a payment to a particular obligation, the payment must be applied:

• (a) in accordance with any reasonable method of application to which the parties agree;
• (b) in the absence of the parties’ agreement to a reasonable method, in accordance with any intention of the obligor manifested at or before the time of payment; or
• (c) in the absence of an agreement to a reasonable method and a timely manifestation of the obligor’s intention, in the following order:
  
  • (1) to obligations that are not secured; and
  • (2) if more than one obligation is secured, to obligations secured by purchase-money security interests in the order in which those obligations were incurred.

Question 161

According to Article 9, what do we do with consumer goods transactions that are mixed PMSI and non-PMSI?

Answer 161

The limitation of the rules to transactions other than consumer-goods transactions is intended to leave to the court the determination of the proper rules in consumer-goods transactions. The court may not infer from that limitation the nature of the proper rule in consumer-goods transactions and may continue to apply established approaches.

Question 162

When does a financing statement not need to be filed?

Answer 162

Except as otherwise provided, a financing statement must be filed to perfect all security interests.

The filing of a financing statement is not necessary to perfect a security interest:

• (1) Interests that flow out of the collateral (if you perfect the SI in the collateral, you perfect in these other rights);
• (2) PMSI, assignment of accounts/payment tangibles, sale of payment tangible, sale of promissory note, assignment of a health-care-insurance receivables to the provider of health-care goods/services;
• (3) Cars, boats, etc. things that have a title that, by statute, notes the SI;
• (4) Security interest in goods in possession of a bailee are perfected by issuance of a negotiable document of title in name of secured party;
• (5) In certificated securities, documents, goods, or instruments which is perfected without filing, control, or possession;
• (6) In collateral in the secured party’s possession (pledge);
• (7) In deposit accounts, electronic chattel paper, electronic documents, investment property, or letter-of-credit rights which is perfected by control;
• (8) Perfected proceeds.

Question 163

Where should the secured party file their financing statement?

Answer 163

The office in which to file a financing statement to perfect a security interest or agricultural lien is:

• (1) The office of the clerk of the circuit court, if:
  
  • (a) The collateral is as-extracted collateral or timber to be cut; or
  • (b) The collateral is goods that are or are to become fixtures and the financing statement is filed as a fixture filing.
• (2) The Florida Secured Transaction Registry in all other cases, including cases in which the collateral is goods that are or are to become fixtures and the financing statement is not filed as a fixture filing.

Question 164

For how long is a financing statement effective? What happens when that period is over?

Answer 164

Except as otherwise provided, a filed financing statement is effective for a period of five years after the date of filing.

After the five year period, the financing statement lapses until a continuation is filed. When a financing statement lapses, the security interest is unperfected unless perfected by some other method.

Question 165

When must you file a continuation statement and how long does that extend perfection?

Answer 165

It must be filed no more than six months before the expiration of the five-year period.

If the continuation is filed, the security interest is perfected for five more years starting as of the day the financing statement would have been ineffective.

Question 166

When does a secured party have an obligation to terminate a financing statement?

Answer 166

Generally, a secured party is not obligated to terminate a financing statement.

However, if there is no outstanding obligation of the debtor and no commitment on the part of the secured party to make further advances, or if the debtor did not authorize the filing of the initial financing statement, the secured party must, on demand of the debtor, within 20 days, file a termination statement or provide one to the debtor. In the case of consumer goods, the secured party must file the termination statement within one month after there is no obligation or commitment, or if the debtor demands it, within 20 days of the demand.

Note: If no termination statement is filed, a filing remains effective for the whole five years, even if the original obligation for which it was filed has been satisfied.

Question 167

Who is the secured party of record?

Answer 167

A secured party of record with respect to a financing statement is a person whose name is provided as the name of the secured party or a representative of the secured party in an initial financing statement that has been filed.

Question 168

Does Article 1 allow the parties to choose the law of a state to govern a transaction?

Answer 168

Yes. Except as otherwise provided, when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties.

A transaction bears a reasonable relation to the state if a significant enough portion of the transaction occurred therein.

Question 169

What state’s law applies when the parties have not agreed on a state’s law to apply?

Answer 169

In the absence of an agreement, the Code applies to transactions bearing an appropriate relation to this state.

Where a transaction has significant contacts with a state which has enacted the Act and also with other jurisdictions, the question what relation is “appropriate” is left to judicial decision.

If the transaction occurs in a state which has not adopted the UCC, it is not one that can bear an appropriate relation to the transaction.

Question 170

What is the general rule for what state’s law applies to perfection, the effect of perfection, and priority?

Answer 170

The law of the state of the debtor’s location: Except as otherwise provided, while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral.

Question 171

What happens when the security interest is perfected through pledge, the debtor is in jurisdiction A, but the collateral is in jurisdiction B?

Answer 171

We use the law of the jurisdiction in which the collateral is located: While collateral is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a possessory security interest in that collateral.

Question 172

How do we decide which state’s rules govern for negotiable documents (certificates of title, warehouse receipts) and instruments?

Answer 172

While negotiable documents, goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the local law of that jurisdiction governs:

• (1) perfection of a security interest in the goods by filing a fixture filing;
• (2) perfection of a security interest in timber to be cut; and
• (3) the effect of perfection or nonperfection and the priority of a nonpossessory security interest in the collateral.

Question 173

How do we decide the rules for as-extracted collateral?

Answer 173

The local law of the jurisdiction in which the wellhead or minehead is located governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in as-extracted collateral.

Question 174

Where is the “location” of an individual (a natural person) for purposes of the § 9-301 choice of law analysis? What about organizations?

Answer 174

The individual’s principal residence.

If the organization has only one place of business, then that place. If it has more than one, its chief executive office.

Question 175

What happens if the debtor’s residence does not have a recording system for security interests?

Answer 175

Filing should occur in the District of Columbia. It is also a good idea to file in the state where the property is located as well.

Question 176

If goods are covered by a certificate of title, which state’s laws govern perfection?

Answer 176

The local law of the jurisdiction under whose certificate of title the goods are covered governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in goods covered by a certificate of title from the time the goods become covered by the certificate of title until the goods cease to be covered by the certificate of title.

Question 177

What is voidable title?

Answer 177

Voidable title occurs where there is a voluntary transfer of title where the rightful owner has assented to the transfer but there is some defect or problem that would allow the original owner to reclaim title. A person with voidable title can pass good title to a good faith purchaser for value, where a person whose title is void (e.g., someone whose car has been stolen) cannot. Some examples which create voidable title:

• (a) the transferor was deceived as to the identity of the purchaser, or
• (b) the delivery was in exchange for a check which is later dishonored, or
• (c) it was agreed that the transaction was to be a “cash sale”, or
• (d) the delivery was procured through fraud punishable as larcenous under the criminal law.

Question 178

If a vehicle with a perfected security interest in one state is moved to another state, what are the rules for priority?

Answer 178

If the certificate of title issued in the new state does not note the secured party’s interest in the vehicle, the following parties have priority over the secured party:

• (1) A buyer of the vehicle who is not in the business of selling vehicles who purchases for value and receives delivery of the vehicle without knowledge of the security interest; and
• (2) A secured party who perfects a security interest in the vehicle without knowledge of the other security interest after the clean certificate of title is issued in the new state.

Question 179

What is the priority order for simple dispute claims? (Chart)

Answer 179

Question 180

What is a lien creditor?

Answer 180

“Lien creditor” means:

• (a) a creditor that has acquired a lien on the property involved by attachment, levy, or the like;
• (b) an assignee for benefit of creditors from the time of assignment;
• (c) a trustee in bankruptcy from the date of the filing of the petition; or
• (d) a receiver in equity from the time of appointment.

Question 181

What are the two “scenarios” under which a purchase money security interest can arise?

Answer 181

(a) Seller directly finances the sale taking a security interest in the goods.
(b) Lender finances the sale taking a security interest in the goods–to the extent the money loaned is used to buy the goods.

Question 182

When is a purchase money security interest in consumer goods perfected?

Answer 182

A purchase-money security interest in consumer goods is perfected when it attaches.

Note that this does not apply to equipment, which is goods other than inventory, farm products, or consumer goods.

Question 183

Does it matter how quickly after attachment a secured party files a financing statement in a purchase money security interest?

Answer 183

Yes, there is a 20 day grace period. If a person files a financing statement with respect to a purchase-money security interest before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer, lessee, or lien creditor which arise between the time the security interest attaches and the time of filing.

Question 184

What is a deposit account?

Answer 184

Deposit account means a demand, time, savings, passbook, or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument.

Question 185

When does a secured party have control of a deposit account?

Answer 185

A secured party has control of a deposit account if:

• (a) The secured party is the bank with which the deposit account is maintained (even if debtor has right to direct disposition of funds from account),
• (b) The debtor, secured party, and bank have agreed, in an authenticated record, that the bank will comply with instructions originated by the secured party directing disposition of the funds without further consent of the debtor, or
• (c) The secured party becomes the bank’s customer with respect to the deposit account. (The account gets put into the secured party’s name).

Question 186

What are the rules governing priority of security interests in the same deposit account? (Chart)

Answer 186

Question 187

Can a financing statement perfect a security interest in a deposit account?

Answer 187

No. A security interest in a deposit account may only be perfected by control.

Question 188

What are the exceptions regarding buyers and the effectiveness of the terms of a security agreement?

Answer 188

• A buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.
• A buyer, other than a secured party, of tangible chattel paper, tangible documents, goods, instruments, or a certificated security takes free of a security interest or agricultural lien if the buyer gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected.

Question 189

Under Article 9, what is a “possessory lien”?

Answer 189

In this section, “possessory lien” means an interest, other than a security interest or an agricultural lien:

• (1) which secures payment or performance of an obligation for services or materials furnished with respect to goods by a person in the ordinary course of the person’s business;
• (2) which is created by statute or rule of law in favor of the person; and
• (3) whose effectiveness depends on the person’s possession of the goods.

Question 190

In Florida, how can a statutory lien holder enforce their lien?

Answer 190

All liens on real or personal property provided by statute are enforceable by persons in privity with the owners, except when otherwise provided, as follows:

• (1) By retention of possession of the property on which the lien has attached for a period of not exceeding 3 months by the person entitled to the lien, if the person was in possession at the time the lien attached.
• (2) By action.

Question 191

Which has priority, possessory liens or security interests in the same goods?

Answer 191

A possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.

Normally a possessory lien has priority, but that priority requires the lienor furnish the services in the ordinary course of business. This is read to include a duty of good faith. If that duty is violated, the lienor will not retain priority over a perfected security interest.

Question 192

What is the definition of a fixture?

Answer 192

“Fixtures” means goods that have become so related to particular real property that an interest in them arises under real property law.

However, a security interest does not exist in fixtures that are ordinary building materials incorporated into an improvement on land.

Question 193

What is the test for a fixture in Florida?

Answer 193

Three part test:

• (1) whether the item has been annexed to the realty;
• (2) whether the item is appropriately applied to the use or purpose of that part of the realty to which it is connected; and
• (3) whether the party making the annexation intended the item to be a permanent accession.

The intention of the party making the annexation is the primary criterion; method of annexation and the character of the article annexed are factors to determine intent.

Question 194

What is a transmitting utility? Where should you file the financing statement for it?

Answer 194

“Transmitting utility” means a person primarily engaged in the business of:

• (a) operating a railroad, subway, street railway, or trolley bus;
• (b) transmitting communications electrically, electromagnetically, or by light;
• (c) transmitting goods by pipeline or sewer; or
• (d) transmitting or producing and transmitting electricity, steam, gas, or water.

As to most collateral, perfection by filing is governed by the law of the jurisdiction in which the debtor is located. However, the law of the jurisdiction in which goods that are or become fixtures are located governs perfection by filing a fixture filing.

As a consequence, filing in the filing office of more than one State may be necessary to perfect a security interest in fixtures collateral of a transmitting utility by filing a fixture filing.

Question 195

What is an “accession”? What effect does it have on a security interest?

Answer 195

“Accession” means goods that are physically united with other goods in such a manner that the identity of the original goods is not lost.

If a security interest is perfected when the collateral becomes an accession, the security interest remains perfected in the collateral.

However, a security interest in an accession is subordinate to a security interest in the whole which is perfected by compliance with the requirements of a certificate-of-title statute.

Question 196

What are “commingled” goods? What effect does commingling have on a security interest?

Answer 196

Commingled goods means goods that are physically united with other goods in such a manner that their identity is lost in a product or mass. For example, flour that becomes bread is commingled.

Once the original collateral becomes commingled goods, the original collateral cannot be identified. Therefore, the security interest in the original collateral is lost.

However, after the original collateral is commingled with the other goods, the secured party’s interest in the original collateral is transferred to the mass. If a security interest in collateral is perfected before the collateral becomes commingled goods, the security interest that attaches to the product or mass is perfected. If more than one security interest is perfected in this way, the security interests rank equally in proportion to the value of the collateral at the time it became commingled goods.

Question 197

What are proceeds?

Answer 197

Proceeds are what you get from collateral, more specifically:

• (a) Anything you get if you sell, lease, license, exchange or dispose of collateral is proceeds.
• (b) Any economic benefit you receive from possession of the collateral:
  
  • (1) If you rent the collateral, the rent is proceeds.
  • (2) If you have a promissory note as collateral, monthly payments on the note are proceeds.
  • (3) If you have a security (e.g., stocks), any cash dividends/distributions are proceeds.
• (c) If rights arise from ownership of the collateral (you have a copyright as collateral), then what you get as a result of those rights (royalties) are proceeds.
• (d) Claims for breach of warranty, casualty, infringement of use, impairment to rights in, etc. are proceeds.
• (e) Insurance payables.

Question 198

If the debtor sells the collateral, does the secured party lose their security interest?

Answer 198

No. The general rule is that a security interest survives disposition of the collateral. In these cases, the secured party may repossess the collateral from the transferee or, if appropriate maintain an action for conversion. The secured party can claim both any proceeds and the original collateral, but can only get one or the other.

Additionally, a security interest in collateral will also attach to any identifiable proceeds from the collateral. Identifiable proceeds of collateral are proceeds that can be identified as having come from the collateral.

Question 199

What happens if a secured party gains a security interest in cash proceeds which are then commingled with other cash? What is “tracing”?

Answer 199

Proceeds that are commingled with other property are identifiable proceeds if the proceeds are not goods, to the extent that the secured party identifies the proceeds by a method of tracing, including application of equitable principles, that is permitted under law with respect to commingled property of the type involved. There are at least 5 tracing principles employed:

• The lowest intermediate balance rule (LIBR), from trust accounting,
• The pro rata distribution hybrid of the lowest intermediate balance rule, used in more complicated commingling cases, where multiple trust funds are mingled,
• The first-in-first-out (FIFO) and the similar last-in-first-out (LIFO) rules from trust accounting,
• The community-out first rule, from community property rule, and
• The rule of approximate correctness from both trust and property law.

Question 200

When does a perfected security interest in proceeds become unperfected?

Answer 200

A perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds unless:

• (a) the following conditions are satisfied (same office rule):
  
  • (1) a filed financing statement covers the original collateral;
  • (2) the proceeds are collateral in which a security interest may be perfected by filing in the office in which the financing statement has been filed; and
  • (3) the proceeds are not acquired with cash proceeds.
• (b) the proceeds are identifiable cash proceeds; or
• (c) the security interest in the proceeds is perfected by filing a financing statement containing a description broad enough to cover the proceeds.

Question 201

If a secured party has possession of the collateral, who must pay for reasonable expenses associated with caring for the collateral?

Answer 201

If a secured party has possession of collateral, reasonable expenses, including the cost of insurance and payment of taxes or other charges, incurred in the custody, preservation, use, or operation of the collateral are chargeable to the debtor and are secured by the collateral.

Question 202

If a secured party has possession of the collateral, who has risk of loss or casualty for the collateral?

Answer 202

If a secured party has possession of collateral, the risk of accidental loss or damage is on the debtor to the extent of a deficiency in any effective insurance coverage.

Question 203

May a creditor in possession sell the collateral, in the absence of default or authorization in the security agreement?

Answer 203

No. The security agreement will likely have a choice of law provision making the state’s version of Article 9 governing law. Article 9 mandates that the debtor has the right to redeem the collateral. So if the creditor sells it without authorization in the contract, they have violated Article 9 and breached the contract.

Question 204

What kinds of things are usually considered “default”?

Answer 204

While Article 9 tell us what a secured party can do once the obligor has defaulted, it does not define “default.” Given that, the following are usually considered default:

• Failure to perform the promised obligation;
• Making of false or misleading statements in connection with making the agreement;
• The collateral being lost, stolen, damaged, or destroyed;
• The failure of the debtor to keep the collateral insured or in good repair/health (if an animal);
• A grant by the debtor of a security interest in the same collateral to any other party;
• Any levy upon or seizure of the collateral through judicial process;
• Failure of the debtor to notify the secured party changes to debtor’s name, address, organizational structure, or change to the location of the collateral;
• Death, dissolution, termination of existence, insolvency, or business failure of the debtor.

Question 205

Can a security agreement include clauses about acceleration and a party deeming itself insecure?

Answer 205

Yes. A term providing that one party or that party’s successor in interest may accelerate payment or performance or require collateral or additional collateral “at will” or when the party “deems itself insecure,” or words of similar import, means that the party has power to do so only if that party in good faith believes that the prospect of payment or performance is impaired. The burden of establishing lack of good faith is on the party against which the power has been exercised.

Question 206

What can a secured party do once the obligor/debtor has defaulted?

Answer 206

After default, a secured party has the rights provided by agreement of the parties. In addition, a secured party:

• (1) may reduce a claim to judgment, foreclose, or otherwise enforce the claim, security interest, or agricultural lien by any available judicial procedure; and
• (2) if the collateral is documents, may proceed either as to the documents or as to the goods they cover.

Question 207

When a secured party reduces its claim to a judgment, when is the lien considered to be perfected?

Answer 207

If a secured party has reduced its claim to judgment, the lien of any levy that may be made upon the collateral by virtue of an execution based upon the judgment relates back to the earliest of:

• (a) the date of perfection of the security interest or agricultural lien in the collateral;
• (b) the date of filing a financing statement covering the collateral; or
• (c) any date specified in a statute under which the agricultural lien was created.

Question 208

When may a secured party repossess after the debtor’s default?

Answer 208

After default, a secured party:

• (1) may take possession of the collateral; and
• (2) without removal, may render equipment unusable and dispose of collateral on a debtor’s premises.

A secured party may proceed:

• (a) pursuant to judicial process; or
• (b) without judicial process, if it proceeds without breach of the peace.

If so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.

Question 209

What does “a breach of the peace” mean?

Answer 209

A repossessing creditor commits a breach of the peace when its speech or conduct is such as to violate the public order, disturb the public tranquility, or has the potential of provoking violence or when its conduct incites or is likely to incite immediate public turbulence or leads to or is likely to lead to an immediate loss of public order and tranquility.

Breach of the peace does not require violence, physical confrontation, or threat. It may occur where a creditor repossesses over the unequivocal oral protest of the defaulting debtor even though no actual violence occurs. When the creditor repossesses by self-help because of the intervention of a police officer, it is a breach of the peace.

Question 210

What factors may be used in determining whether a foreclosure sale was held in a commercially reasonable manner?

Answer 210

• the type of collateral involved;
• the condition of the collateral;
• the number of bids solicited;
• the time and place of sale;
• the purchase price received or the terms of the sale;
• any special circumstances involved.

Question 211

Is the secured party required to wash the collateral prior to resale?

Answer 211

Although the UCC permits resale of the collateral in its present condition, the courts have nonetheless required reasonable, easily-taken action to fix up the collateral prior to sale. Official Comment 4 states that a secured party may not dispose of collateral in its then condition when, taking into account the costs and probable benefits of preparation or processing and the fact that the secured party would be advancing the costs at its risk, it would be commercially unreasonable to dispose of the collateral in that condition.