South Carolina - Commercial Law Flashcards
UCC ARTICLE 9 > Scope of Article 9
- transactions creating security interests in personal property or fixtures
- SALES of accounts receivable (chattel paper; negotiable instruments)
- Transactions in the form of a lease that IN REALITY creates a security interest
- Agricultural liens: (only Art.9 rules of perfection/priority apply; the rest is statutory)
- Consignments: must be an “Article 9 Consignment” or a consignment disguised as a security interest (not c/l consignments)
UCC ARTICLE 9 > Types of Collateral
Goods (tangible collateral)
Intangible or Semi-Intangible Collateral
Proceeds
UCC ARTICLE 9 > Types of Collateral > “Goods”
CONSUMER GOODS: bought for use primarily for personal, family, or household purposes
INVENTORY:
FARM PRODUCTS: good used in farming operation (other than standing timber)
EQUIPMENT: catchall category ((good other than inventory, farm products, or consumer goods))
UCC ARTICLE 9 > Types of Collateral > ((Intangible or Semi-Intangible Collateral))
((Instruments: notes, drafts, and certificates of deposit;
documents:
Chattel Paper: records evidencing both a monetary obligation and a security interest in or lease of goods (e.g. promissory note and written security agreement);
Accounts: right to payment for goods, services, etc.
Deposit Accounts: (Art. 9 only applies (a) nonconsumer deposit accounts and (b) consumer deposit account that are claimed as proceeds of other collateral)
Investment PRoperty: stocks, bonds, mutual funds, brokerage accounts
Commercial Tort Claims
General Intangibles: (e.g., copyrights or goodwill)))
UCC ARTICLE 9 > Analysis on Bar Exam for a Secured Transactions Question
- SCOPE: does Article 9 apply to transaction/rights involved in the question
- ATTACHMENT: does creditor hold a security interest in the collateral that is enforceable against the debtor
- PERFECTION: Has a secured party properly perfected its security interest in the collateral
- PRIORITY: Is a secured party’s security interest entitled to priority over conflicting claims to the collateral
- DEFAULT: what are the rights and obligations of a secured party when the debtor defaults under the terms of a security agreement
UCC ARTICLE 9 > Types of Collateral > Proceeds
If secured party’s security interest attaches to any identifiable proceeds of the secured collateral
- whatever acquired upon sale, lease, or other disposition
- whatever is collected on an account of collateral
- Insurance to the collateral (To the extent of the value of collateral, and to the extent payable to the creditor)
UCC ARTICLE 9 > Scope of Article 9 > “Article 9 Consignment”
ELEMENTS
EXCLUSIONS
EFFECT
- Consignor must deliver goods to the consignee “FOR THE PURPOSE OF SALE”; and
- The consignee must be a merchant who “DEALS IN GOODS OF THAT KIND” under a name other than the name of the consignor
EXCLUSIONS
if consignee is an AUCTIONEER
value of goods is LESS than $1,000
Goods were CONSUMER GOODS
EFFECT
Creates a purchase-money security interest in the consigned goods
[[consignor - secured party
consignee - debtor
consigned goods are collateral]]
UCC ARTICLE 9 > Types of Collateral > True Lease vs. Lease as Security Interest
Lease is a SI if the rental obligation is NOT TERMINABLE, and either
A. lease term is equal/greater than remaining economic life of goods;
B. lessee BOUND to purchase goods at end of the lease or to renew lease for the remaining economic life of goods; OR
C. at end of lease, lessee HAS OPTION TO purchase goods or renew the lease for remaining economic life of the goods for NO/NOMINAL consideration
*UCC ARTICLE 9 > ATTACHMENT >
Definition
Elements
DEFINITION: process by which SI is created and becomes enforceable
ELEMENTS (RAV)
1. Secured party gives VALUE
- Debtor has RIGHTS in the collateral
- Debtor has AUTHENTICATED/ENCRYPTED (signed) a security agreement that SUFFICIENTLY DESCRIBES the collateral; OR secured party has possession/control
UCC ARTICLE 9 > ATTACHMENT > Sufficient Description of Collateral for Security Agreement Purposes
SUFFICIENT General descriptions (e.g., "inventory," "equipment")
INSUFFICIENT
Super-generic descriptions (e.g., “all personal property”)
UCC ARTICLE 9 > ATTACHMENT > What is required to attach after-acquired property
INVENTORY/ACCOUNTS
after-acquired inventory/accounts are automatically included
OTHER
must be explicitly included
[[Cf. Finance Statement]]
UCC ARTICLE 9 > Scope of Article 9 > Article 9 Consignment
What excludes consignments from being included in Article 9?
consignee is auctionee
value of consigned goods is less than $1,000
*goods were CONSUMER GOODS in the hands of the consignor immediately before they were delivered to the consignee
UCC ARTICLE 9 > ATTACHMENT > Proceeds > Identification of commingled cash proceeds
Use the “Lowest Intermediate Balance” Method:
- withdrawals from a commingled account are deemed made first from non-proceed funds and only when the non-proceed funds are exhausted are proceeds invaded, and
- subsequent deposits of non-proceed funds do not replenish invaded proceeds UNLESS the debtor made the deposit with an intent to make restitution
UCC ARTICLE 9 > ATTACHMENT > Attachment of future advances
only if the security agreement explicitly provides
UCC ARTICLE 9 > PERFECTION >
How to Perfect?
Automatic Perfection
Perfection by Possession
Perfection by Control
Perfection by Filing
UCC ARTICLE 9 > PERFECTION >
What automatically perfects
- PMSI in CONSUMER GOODS*
Small-scale ASSIGNMENTS of accounts or payment intangibles
SALES of promissory notes/payment intangibles (sale of note itself, not SI in note)
*Temporary automatic perfection of security interests in PROCEEDS
UCC ARTICLE 9 > PERFECTION > Automatic Perfection
How is a PMSI Created
(1) credit advanced or loan made for the PURPOSE of enabling the debtors to ACQUIRE the collateral; AND
(2) the credit or loan proceeds were ACTUALLY USED to acquire the collateral
UCC ARTICLE 9 > PERFECTION > Automatic Perfection > PMSI in Consumer Goods
Limitation of automatic perfection in PMSI in consumer goods (to whom does it not extend?)
A buyer of consumer goods from the debtor takes free of a perfected security interest if the buyer buys
- without knowledge of the security interest
- for value
- the goods as a consumer goods: primarily for personal, family, or household purposes, and
- before a financing statement is filed covering the goods
UCC ARTICLE 9 > PERFECTION >
Temporary automatic perfection of security interests in proceeds
How can this temporary automatic perfection become permanent
For proceeds of secured collateral, secured party gets an automatic perfection in the proceeds for TWENTY (20) DAYS from the debtor’s receipt of the proceeds
CONTINUANCE
(1) Comply with Statutory Requirements: Security interest in the proceeds is perfected within the 20-day period;
(2) Same Office Rule: financing statement would be filed in the same office (as original collateral); OR
(3) Identifiable Cash Proceeds Rule: Proceeds are identifiable cash proceeds
UCC ARTICLE 9 > PERFECTION > FILING
Requirements of a Finance Statement
- Signature is NOT required
- Authorization from Debtor is required!
REQUIREMENTS (if “seriously misleading,” interest not perfected)
- Name of the Debtor;
- Name of the Secured Party (or its representative);
- Indication of the Collateral Covered
--------- SORTA REQUIREMENTS (if violated/omitted, interest still perfected)
- Mailing Address for the Secured Party
- Mailing Address for the Debtor
UCC ARTICLE 9 > PERFECTION > Filing > Name of the Debtor
Individuals
Registered Organizations
Other Named Organizations
Unnamed Organizations
Trade Names
INDIVIDUALS: name on Driver’s License or ID Card (NOT birth certificate)
REGISTERED ORGANIZATIONS: Name listed on articles of incorporation filed with secretary of state (“name listed on organization’s public organic record”)
OTHER NAMED ORGANIZATIONS (e.g., partnerships): organizational name
UNNAMED ORGANIZATIONS: names of person comprising the debtor
TRADE NAMES: *not effective
UCC ARTICLE 9 > PERFECTION > Filing >
“Indication of Collateral Covered” For financing statement purposes
- Super Generic Indication
- After Acquired Property
SUPER-GENERIC INDICATIONS (“all assets,” or “all personal property”): is sufficient! (cf. security agreements)
AFTER-ACQUIRED PROPERTY: Automatic–does not need to be included in the after security agreement
UCC ARTICLE 9 > PERFECTION > Information in Financing Statement that is erroneous AT TIME OF FILING
Errors must be “serious misleading” to invalidate financing statement (result in unperfected interest)
Errors in name ARE “seriously misleading,” UNLESS filing office’s “standard search logic” would disclose the financing statement
UCC ARTICLE 9 > PERFECTION > Authorization to File Financing Statement
Debtor MUST authorize (or ratify) a secured party’s filing of a financing statement
Can be done only in WRITING: by debtor authorizing FINANCING STATEMENT OR by debtor authorizing SECURITY AGREEMENT
UCC ARTICLE 9 > PERFECTION > Security Agreement’s Place of Filing
[[With secretary of state in the]] Jurisdiction in which the debtor is located:
- individual: principal residence
- registered organization: where organized
- other organization: principal place of business (if more than one, then chief executive office)
UCC ARTICLE 9 > PERFECTION > Fixture Filings
Fixture Filings Must Include
(“FURRY FIXTURES NEED DAIRY”)
FIXTURE FILING MUST INCLUDE
- Information necessary for a FINANCING STATEMENT, plus
- indication it covers FIXTURES (or timbers or as-collected minerals);
- Indicate it is to be FILED for record in the real property records;
- provide a sufficient DESCRIPTION of the property
- If debtor doesn’t have an interest of record in the real property, provide the NAME of the record owner
UCC ARTICLE 9 > PERFECTION > Fixture Filings
Where to file
in state where collateral is located. In office where mortgage covering the related property would be recorded.
UCC ARTICLE 9 > PERFECTION >
How long is a financing statement effective
How to extend the effectiveness of a fixture filing
Effect of a Lapse
EFFECTIVENESS
Five (5) years
EXTENSION:
by filing a CONTINUATION STATEMENT within the last six months of financing statement’s effectiveness
LAPSE EFFECT: deemed never perfected
UCC ARTICLE 9 > PERFECTION > Post-Filing Changes that render information in filed financing statement seriously misleading
Debtor Changes location
Financing Stt effective for FOUR (4) MONTHS, and must refile against debtor in new jurisdiction.
Otherwise, interest deemed never perfected against a purchaser for value
*remember Same Office Rule
UCC ARTICLE 9 > PERFECTION > Post-Filing Changes that render information in filed financing statement seriously misleading
Transfers:
(I) Transferee is in Same State
(II) Transferee is in Different State
(I) SAME STATE: interest remains perfected
(II) DIFFERENT STATE: SI remains perfected for ONE (1) YEAR. Must refile against debtor within that time. Otherwise SI become unperfected and deemed never perfected against a purchaser for value
UCC ARTICLE 9 > PERFECTION > Post-Filing Changes that render information in filed financing statement seriously misleading
Name Change
Financing Statement filed against original name remains perfected as to collateral and anything acquired within FOUR (4) MONTHS after the name change.
Secured Party not perfected to anything acquired after four months, unless he amends the financing statement
UCC ARTICLE 9 > PERFECTION > Post-Filing Changes that render information in filed financing statement seriously misleading
New Debtor Problem:
(I) Situation
(II) Rule
SITUATION: when there is a merger of two entities or the incorporation of a person’s business who operated as a sole proprietor
RULE: if change causes financing statement to become seriously misleading, then secured party must refile against new debtor within FOUR (4) MONTHS
UCC ARTICLE 9 > PERFECTION > Filing
Motor Vehicles
follow certificate of title statute (exception: motor vehicles as inventory)
[[“under the state’s certificate of title law, security interests in motor vehicles required to be titled are perfected by notation on the certificate of title issued by the state.” i.e., not within Article 9]]
UCC ARTICLE 9 > PRIORITY > UNPERFECTED SECURITY INTEREST
When will a buyer of goods take free of an UNPERFECTED security interest?
- gives value
- without knowledge of security interest
- takes possession
- before collateral is perfected
[[don’t know if this beats PMSI perfected within 20 days]]
UCC ARTICLE 9 > PRIORITY > UNPERFECTED SECURITY INTEREST
Lienholders vs. unperfected security interest
Lienholder will prevail
Exception: PMSI filed within 20 days of delivery of collateral
UCC ARTICLE 9 > PRIORITY > Conflicts Between Secured Interests
Default Rule
First to FILE (financing statement) or PERFECT Rule
UCC ARTICLE 9 > PRIORITY > Conflicts Between Secured Interests
Exceptions to First to File/Perfect Rule
- After-Acquired collateral: if explicitly included in security agreement
- Subsequent Security Interest: if on same collateral as first security interest
* 3. PMSI
UCC ARTICLE 9 > PRIORITY > Conflicts Between Secured Interests > **Fun Hypo
July 1: SP-1 attaches/perfects interest in debtor’s equipment
August 1: SP-2 attaches/perfects interest in debtor’s equipment
September 1: SP-1 attaches (doesn’t perfect) interest in debtor’s equipment
What is the extent to which SP-1 has priority over SP-2
SP-1’s ENTIRE interest is superior to SP-2:
SP-1: filing fixes its priority with respect to ANY LOAN SP-1 makes secured by a SI in debtor’s equipment.
Such loan can be made under a future advance clause in the original agreement, or it can be made because of a subsequent, secondary security agreement
UCC ARTICLE 9 > PRIORITY > Conflicts Between Secured Interests > PMSI Exception
Cross-Collateralization and Transformation Rules
(I) Consumer Goods
(II) Non Consumer Goods
(I) Consumer Goods: Issue for the courts (but everyone says it destroys it) [[look to see if they’re independently administered, maybe?]]
(II) Non Consumer Goods: secured party must prove extent to which SI qualifies as a PMSI (usually, the PM collateral must secure a PM debt)
UCC ARTICLE 9 > PRIORITY > Conflicts Between Secured Interests > PMSI Exception
Creating a PMSI in equipment
- It must be a PMSI, and
2. must be perfected before/within 20 days after debtor receives possession
UCC ARTICLE 9 > PRIORITY > Conflicts Between Secured Interests > PMSI Exception
Creating a PMSI in Inventory
- Must be a PMSI
- Must be perfected when debtor gets possession (no grace period); and
- Financer must send AUTHENTICATED NOTIFICATION to holders of conflicting security interests, who must receive the notification BEFORE the debtor receives possession of the new inventory
- Holder(s) of conflicting SI must RECEIVE NOTIFICATION BEFORE debtor receives possession of the new inventory; and
- Notification includes financer has or expects to acquire PMSI in the inventory described AND must describe inventory
UCC ARTICLE 9 > PRIORITY > Secured Parties vs. Buyers of Goods
General Rule
SI continues in sold collateral, unless SP authorizes the sale of the collateral free of the security interest
UCC ARTICLE 9 > PRIORITY > Secured Parties vs. Buyers of Goods
Buyer in the Ordinary Course of Business–Elements
Takes free of perfected interest.
ELEMENTS
1. buys in Good Faith
2. Without knowledge sale violates the rights of another person (can know of the existence)
+ 3. in the ordinary course of business
+ 4. From a person in the business of selling goods of that kind
5. takes possession (or has right to possession)
((SI must be created by the buyer’s seller))
UCC ARTICLE 9 > PRIORITY > Purchasers of Chattel Paper
What is Chattel Paper
Record that evidences a monetary obligation AND provides either an SI in or lease of the goods
UCC ARTICLE 9 > PRIORITY > Purchasers of Chattel Paper
Applicability of Article 9 to chattel paper
applies to both SI in chattel paper OR the outright sale of chattel paper
This arrangement is sometimes called a “conditional sales contract” or a “retail sales contract”
UCC ARTICLE 9 > PRIORITY > Purchasers of Chattel Paper
How to perfect an interest in chattel paper
- financing statement
2. possession
UCC ARTICLE 9 > PRIORITY > Priority in Returned Goods
Setup:
- Corporation sells goods to buyer under a conditional/retail sales contract. Corporation gets a PMSI
- Corporation sells the conditional sales contract to Financer
- Buyer returns goods to Corporation
Who has a security interest? Who has priority
SECURITY INTERESTS
Both have perfected Security Interests
Corporation: after acquired inventory
Financer: Proceeds of the conditional sales contract (perfected for 20 days after return–more if it refiles)
PRIORITY: “if chattel paper purchaser has priority in the chattel paper, it has priority in the returned goods, even if its SI is unperfected.
[[This is the only situation in which unperfected beats perfected]]
Article 9 > Random
How to satisfy the statute of frauds
security agreement
possession or control
UCC ARTICLE 9 > PRIORITY > Deposit Accounts
How to perfect a security interest in deposit accounts
Control is the only way to perfect a SI in deposit accounts (as original collateral–not proceeds)
OBTAINING CONTROL
1. If secured party is the bank that maintains the account–Secured!
- Control Agreements: If you’re not the bank, get control through a control agreement–a three-party agreement executed by the debtor, secured party, and bank. Bank agrees to comply with secured party’s instructions on the disposition of the funds w/o further consent by debtor
- Become a Customer at the Bank, wrt the deposit account (*this is the only way to beat the bank!)
UCC ARTICLE 9 > PRIORITY > Deposit Accounts
SP’s SI in Identifiable Cash Proceeds VERSUS Bank’s SI Perfected by Control
SP’s SI by control agreement VERSUS Bank’s SI Maintained Perfected by Control
Bank wins
“Any SI in a deposit account perfected by control has priority over a SI perfected in some other way”
UCC ARTICLE 9 > PRIORITY > Deposit Accounts
The only way to beat the bank that has control over a deposit account
become a customer of the bank
UCC ARTICLE 9 > PRIORITY > New Debtor Priority Issues >
SETUP
- SP-1 gets a security interest in ABC Corp for current/after-acquired equipment
- SP-2 gets security interest in XYZ Corp for current/after-acquired equipment
- ABC merges into XYZ
Do the parties have perfected interests? Who has a superior interest?
PERFECTED INTERESTS
SP-1: has perfected interest for 4 months (under 9-508), and longer if refiles
SP-2: has perfected interest
PRIORITY:
Code says that in this situation, a party who is perfected solely because of 9-508 is subordinate to a security interest perfected by a financing statement against the “new debtor” (here, XYZ)
UCC ARTICLE 9 > PRIORITY > Fixtures
General Rule
First in time, first in right (wrt filing fixture filing)
UCC ARTICLE 9 > PRIORITY > Fixtures
PMSI
Establishes priority over previously recorded mortgage. Requires the following:
- Debtor has an interest of record in or possession of the real property;
- Fixture financer has a PMSI;
- Mortgage/Lien arose before goods became fixtures;
- fixture financer’s security interest was perfected by a fixture filing BEFORE 20 days AFTER the goods became fixtures
UCC ARTICLE 9 > PRIORITY > Fixtures
Readily Removable Fixtures
Fixture Financer has priority over any REAL PROPERTY ENCUMBRANCER, if
- He perfects (by any method) BEFORE the goods become fixtures
- The fixture is READILY REMOVABLE
UCC ARTICLE 9 > PRIORITY > Accessions
What’s an Accession
Definition: [[It’s like a fixture, but for personal property]] goods physically united with other goods so that identity of original goods are not lost
GENERAL RULE: first to file/perfect; PMSI
*exception: with motor vehicles: just follow certificate of title statute
UCC ARTICLE 9 > PRIORITY > Certificate of Title
Issue: Goods covered by SC certificate of title entered SC subject to a security interest perfected under the law of another jurisdiction
If perfected when SC issued certificate of title, the security interest remains perfected
Limited Exception: SP should refile in SC, because if after four months, debtor sells to a purchaser for value, the SI is deemed to have never been perfected
UCC ARTICLE 9 > DEFAULT >
Definition
Waiver
Not defined by the UCC. Defined by the security agreement (usually when debtor stops paying)
Lookout for WAIVER: if SP allows for late payment
UCC ARTICLE 9 > DEFAULT >
SP obtaining right to payment after default
SP may do so, but must act in a COMMERCIALLY REASONABLE MANNER
UCC ARTICLE 9 > DEFAULT > Taking Possession
SP can take possession w/ w/o judicial process, if secured party DOES NOT BREACH THE PEACE–conduct likely to result in physical violence
UCC ARTICLE 9 > DEFAULT >
Disposition of Collateral
Every aspect of disposition must be COMMERCIALLY REASONABLE
UCC ARTICLE 9 > DEFAULT >
[[“Commercially reasonable”]]
[[Commercially Reasonable: disposition conforms to REASONABLE COMMERCIAL PRACTICES among dealers in that type of property; disposition made in usual manner on recognized market; or disposition at price current on recognized market]]
[[South Carolina Public Sale Procedures are CONCLUSIVELY considered to be commercially reasonable in all aspects]]
UCC ARTICLE 9 > DEFAULT > Notice
When disposing/selling collateral, when is notice required
Always, unless collateral is
- perishable;
- threatens to decline speedily in value; or
- is a type customarily sold on a recognized market
UCC ARTICLE 9 > DEFAULT > Notice
Who must be notified
Secured party must send an AUTHENTICATED notification of disposition to
the debtor, and
any secondary obligor (e.g., guarantor)
UCC ARTICLE 9 > DEFAULT > Notice
Timeliness of notification
AFTER: default
Before: 10 days before the earliest time of disposition, as set forth in notification
UCC ARTICLE 9 > DEFAULT > Notice
Notification must include
Make up the rest, the important one is
the method of disposition (notice must state whether disposition will be private or public)
UCC ARTICLE 9 > DEFAULT >
SP’s Liability for Deficiency
- If SP purchases
- and proceeds are significantly below what a person other than the SP would pay,
Then, the amount of deficiency is calculated on the hypothetical sale to an unrelated secured party.
UCC ARTICLE 9 > DEFAULT >
Debtor’s Right of Redemption: when must it occur
Must occur before disposition, acceptance, or collection of the collateral
UCC ARTICLE 9 > DEFAULT > Debtor’s Remedies
Actual Loss: For SP’s failure to comply with Article 9
Statutory Damage: $500 for each violation of
- failing to properly release collateral
- failing to properly release an account debtor from obligations to SP
- filing of UNAUTHORIZED financing statement
- failure to cause the SP of record to file or send a termination statement
UCC ARTICLE 9 > DEFAULT >
[[Statutory Minimum Damage]]
[[If the collateral subject to the disposition was CONSUMER GOODS, a debtor can recover the statutory minimum damages:
- Credit Service Charge, plus 10 percent of the principal of the obligation in the case of a LOAN, OR
- the time-price differential, plus 10 percent of the cash price in the case of a sale]]
UCC ARTICLE 9 > DEFAULT >
Presumption Rule
Absolute Bar Rule
PRESUMPTION RULE: (nonconsumer transactions): Arises if SP breaches Part 6, and wants to recover a deficiency judgment. A rebuttable presumption arises that goods would have sold for full amount of the debt had there been no breach
ABSOLUTE BAR RULE (consumer transactions): Arises if SP breaches Part 6 and seeks to recover a deficiency judgment. A rebuttable presumption arises that the collateral would have sold for the full amount of the secured obligation had there been no breach
UCC ARTICLE 9 > DEFAULT >
Strict Foreclosure definition
After default, SP can send debtor an AUTHENTICATED PROPOSAL to retain the collateral in full/partial satisfaction of the secured obligation
UCC ARTICLE 9 > DEFAULT >
Notice require for strict foreclosure
Authenticated Notice to debtor and other perfected secured parties
UCC ARTICLE 9 > DEFAULT >
Debtor’s consent to strict foreclosure
For Partial Satisfaction: requires debtor to actively consent
For Full Satisfaction: debtor can actively consent, or debtor’s silence may act as acceptance
ARTICLE 2 > SCOPE > Which ones of these fall within Article 2?
Installation of electrical switchboard
Contract for design, government approval, and sale of an incinerator
contract for sale and installation of shutters with a writing entitled “terms of sale”
Contract for the sale and erection of an airplane hangar
Doctors who insert breast implants
Counterfeit surgical mesh
home security system
Installation of electrical switchboard: Not a sale of goods
Contract for design, government approval, and sale of an incinerator: Sale of goods
contract for sale and installation of shutters with a writing entitled “terms of sale”: sale of goods
Contract for the sale and erection of an airplane hangar: sale of goods
Doctors who insert breast implants: not a sale of goods
Counterfeit surgical mesh: sale of goods
home security system: not a sale of goods
ARTICLE 2 > SCOPE > Predominant Factor Test
For hybrid contracts, look to predominant purpose of transaction. Consider:
- Contract’s language
- Nature of supplier’s business
- Relative value of goods versus services
ARTICLE 2 > WARRANTIES > Language or Conduct that Creates an Express Warranty
- Affirmation of fact or promise relating to the quality of the goods
- Description of the goods
- Sample of the goods
- Model of the goods
Lacy says look for reliance on the warranty
ARTICLE 2 > WARRANTIES > “Merchant” for purposes of Implied Warranty of Merchantability
Definitionally higher standard: must have expertise in respect to the goods sold (not just based on business practices)
ARTICLE 2 > WARRANTIES > “Merchantability”
Fit for ordinary use; pass without objection in the trade
ARTICLE 2 > WARRANTIES > When does Warranty for Fitness for a Particular Purpose arise
Seller has reason to know buyer is relying upon seller’s skill or judgment to select suitable goods
Seller has reason to know of the particular purpose for which the buyer was purchasing the goods
Buyer relied upon seller’s skill or judgment to select suitable goods
ARTICLE 2 > WARRANTIES > Disclaimer of Express Warranties
In SC, you CANNOT disclaim express warranties
(be on guard of a seller using the PER to (ineffectively) disclaim an oral express warranty)
ARTICLE 2 > WARRANTIES > How to disclaim the implied warranty of merchantability
- must mention the word merchantability
- If in writing, must be conspicuous
ALSO
specific language which calls buyer’s attention to the exclusion and makes it plain that there is no implied warranty
PREsale inspection of sample or model (mere opportunity is sufficient)
Course of dealing, course of performance, and between merchants, trade usage
ARTICLE 2 > WARRANTIES > How to disclaim the implied warranty of fitness for a particular purpose
- Must be in writing and must be conspicuous
ALSO
specific language which calls buyer’s attention to the exclusion and makes it plain that there is no implied warranty
PREsale inspection of sample or model (mere opportunity is sufficient)
Course of dealing, course of performance, and between merchants, trade usage
ARTICLE 2 > WARRANTIES > If language of a disclaimer creates ambiguity
construed against the seller
ARTICLE 2 > WARRANTIES > Warranties that can be made before/after sale
Express warranties can be made before or after the sale
Implied warranties CANNOT be made after the sale
ARTICLES 3/4 > Elements of a Negotiable Instrument
(“Wesley Snipes Unconditionally Understood Fair Public Policy”)
- Signed writing
- Unconditional Promise or Order
- A fixed amount of money (w/ or w/o interest or other charges)
- Payable to Order or Bearer (when issued or first in possession of a holder)
- Payable on demand or at a definite time
- Contains no undertaking or instruction given by the maker/drawer except as authorized by the code
ARTICLES 3/4 > Define
Note
Draft
NOTE: Maker’s promise to pay Payee
DRAFT: Drawer’s order to Drawee/Payor to pay Payee
ARTICLES 3/4 > Define
Issue
Present
Negotiate
Holder
Issue: when drawer delivers check to payee
Present: when holder attempts to enforce the check against the drawee.
Negotiate: When a transferee (other than maker/drawer) transfers possession of an instrument to another person
ARTICLES 3/4 > Legal Doctrines
Merger Doctrine
when a person obligated to pay money in an underlying transaction issues an instrument, the underlying obligation is merged into the instrument
((Effect: obligation is suspended until it is paid/dishonored–it has to be by someone entitled to enforce the instrument: so stolen checks are no good to discharge underlying obligation))
ARTICLES 3/4 >
Authorization of Altered/Blank Checks
If check is altered: it is authorized to the initial amount
If check is blank- it is authorized to the amount filled in
ARTICLES 3/4 > Liability on an Instrument: Signature
Unauthorized Signature
Ineffective to render person whose name was signed liable on the instrument;
Can be effective to make the unauthorized signer liable
ARTICLES 3/4 > Liability on an Instrument: Signature
Liability of a Principal for Agent’s Signature
IF AUTHORIZED: Liable whether agent signs her own name or principal’s name.
IF UNAUTHORIZED: Liable only if ratified or estoppel
ARTICLES 3/4 > Liability on an Instrument: Signature
Liability of an Agent for Agent’s AUTHORIZED signature
AUTHORIZED: agent is NOT liable if it UNAMBIGUOUSLY shows it was made on BEHALF of the Principal and it IDENTIFIES the Principal
Otherwise (if agent signs own name and doesn’t disclose principal): Agent is liable to HDCs. Agent liable to other holders (unless agent shows original parties did not intend)
ARTICLES 3/4 > Liability on an Instrument: Signature
Liability of an Agent for Agent’s UNAUTHORIZED signature: Fictitious Payee/Imposter
Indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee –> in favor of a person in GF payee the instrument or take it for value or collection
ARTICLES 3/4 > Liability on an Instrument
Maker signs, but does not deliver a NOTE
constitutes a personal defense (cannot be asserted against a HDC)
ARTICLES 3/4 > Liability on an Instrument: Drawer’s Liability
Only obligated after presentment and dishonor (presentment to and dishonor by the drawee)
“Without Recourse”: usually works for drawer, but not on checks
ARTICLES 3/4 > Liability on an Instrument
Each person’s liability on an instrument
Maker:
Drawer:
Drawee:
Acceptor:
Indorser:
Transferor:
Accommodation Party:
Maker: primarily
Drawer: secondarily (if drawee signs, drawer is discharged)
Drawee: none (if drawee signs, becomes primarily liable)
Acceptor: primarily
Indorser: Secondarily
Transferor: secondarily
Accommodation Party: depends
ARTICLES 3/4 > Liability on an Instrument: Indorser’s Obligation
Secondarily liable
Liability is conditioned upon dishonor of the receipt
Indorser can disclaim liability by indorsing “without recourse” ((exclusion must be express if using it for transfer warranty))
ARTICLES 3/4 > Liability on an Instrument: Accommodation Party
Definition
signs an instrument for the purpose of incurring liability on the instrument without being a direct beneficiary of the value given for the instrument.
ARTICLES 3/4 > Liability on an Instrument: Accommodation Party
Guaranty of Payment
Guaranty of Collection
GUARANTEE OF PAYMENT: Holder can go after either the accommodation party or the accommodated party first
GUARANTEE OF COLLECTION (must be explicit): can only go after accommodation party after seeking judgement from accommodated party or if seeking such judgment would be futile
ARTICLES 3/4 > Liability on an Instrument: Accommodation Party
What cool, special defenses can an accommodation party assert?
Can assert accommodated party’s defenses
Can obtain reimbursement from accommodated party
SURETYSHIP DEFENSES: accommodation party discharged if
- holder releases principal obligor
- holder party extends time for payment
- holder party modifies the instrument, or
- holder party impairs the collateral securing payment
ARTICLES 3/4 > Persons entitled to enforce the instrument: Holders
Negotiation of Order instruments
Negotiation of Bearer Instruments
ORDER INSTRUMENTS: negotiated by transfer of possession AND indorsement of the holder
BEARER INSTRUMENTS: negotiated by transfer of possession alone
ARTICLES 3/4 > Persons entitled to enforce the instrument: Holders
SETUP:
1. Buyer gives Seller a check for $1,000 payable to the order of seller.
- Thief steals check from seller before seller indorses it.
- Thief forges seller’s indorsement and cashes the check at Country Store.
Is Country Store Liable?
NO
Indorsement is unauthorized
Once you have an unauthorized indorsement, NO subsequent transferees can be holders.
ARTICLES 3/4 > Persons entitled to enforce the instrument: Holders
Missing indorsement on order paper
Not valid
exception: If seller deposits in his account, his depository bank is still a holder
ARTICLES 3/4 > Persons entitled to enforce the instrument: Holders
Restrictive Indorsement
Limiting payment to a particular purpose or prohibiting further transfers/negotiations: INVALID
Limiting indorsement “for deposit”/”for collection”: VALID. If cashed at a non-bank, non-bank will be liable for conversion
ARTICLES 3/4 > Persons entitled to enforce the instrument:
Who is entitled to enforce the instrument?
- Holders
- Nonholders in possession with rights of a holder; or
- Person not in possession, but entitled to enforce (e.g., lost, stolen, or destroyed)
ARTICLES 3/4 > Persons entitled to enforce the instrument: Nonholders in Possession w/ Rights of Holder
who/what are they
Persons that receive a check from a holder. (can’t be a thief).
ARTICLES 3/4 > Persons entitled to enforce the instrument: Person not in possession, but entitled to enforce
Must post bond, and show
- that you (or a direct transferor to you) was entitled to enforce when it was stolen/lost/destroyed
- must establish you didn’t lose possession of the instrument by transfer or legal process, and
- Must establish why you can’t obtain possession of the instrument
ARTICLES 3/4 > Persons entitled to enforce the instrument:
Discharge Defense: Definition
Who does it work for and defend against?
Rebuttable PResumption arises when…
DEFINITION: when instrument is already paid to a party entitled to enforce the instrument
WORKS FOR: party who signed an instrument
WORKS AGAINST: party looking to enforce (except Holder in Due Course w/o notice)
REBUTTABLY PRESUMED IF: maker has possession of the note
ARTICLES 3/4 > Persons entitled to enforce the instrument:
SETUP
- Maker issues note to payee for underlying obligation
- Payee assigns note
- Maker pays underlying obligation
Is Maker discharged
Yes, in SC he sure is. This is an exception for notes in SC
ARTICLES 3/4 > Accord and Satisfaction
Elements
Conspicuous statement that instrument is being tendered as full satisfaction of the claim, and
- Tendered in GOOD FAITH as full satisfaction of the claim
- Claim was unliquidated or subject to a BONA FIDE DISPUTE
- claimant obtained payment of the instrument (you get 90 days to change mind)
ARTICLES 3/4 > Accord and Satisfaction
Exception
Claimant is an organization that gave prior notice that full satisfaction tenders were to be sent to a designated person/place, and the obligee didn’t send it to that person/place.
ARTICLES 3/4 > DEFENSES
REAL DEFENSES
(“FFAIIIDDDSS”)
Fraud in Factum
Forgery
Alteration
Inancy
Illegality
Incompetency
Duress
Discharge through Bankruptcy
Discharges known by HDC
Suretyship Defenses
Statute of Limitations
ARTICLES 3/4 > DEFENSES
Personal Defenses
HDC Does not take subject to these defenses -------- Lack/Failure of consideration Breach of Warranty Fraud in the inducement Misrepresentation Mistake
ARTICLES 3/4 > DEFENSES
Claims to an instrument
These are “ownership” or “possessory” claims:
Right to rescind negotiation of an instrument (i.e., must show you have a possessory right)
If Trustee deposits check payable to trust in Trustee’s personal account, and bank has knowledge of this
ARTICLES 3/4 > HOLDER IN DUE COURSE
Effect of HDC Status
Takes clear of claims of recoupment, personal defenses, and claims of ownership/possessory claims
ARTICLES 3/4 > HOLDER IN DUE COURSE
How to become a holder in due course
(HAVING W)
- Person is a HOLDER of a NEGOTIABLE INSTRUMENT
- Instrument does not bear APPARENT forgery/alteration and is not so IRREGULAR or INCOMPLETE as to call its authenticity into question
- Must take for VALUE
- Must take in GOOD FAITH
- Must take WITHOUT notice [[ACK]]
- overdue or been dishonored
- unauthorized signature or alteration
- any defense or claim to it
ARTICLES 3/4 > HOLDER IN DUE COURSE
Voluntary transferees of HDCs
Aren’t HDCs, but have rights of a HDC
ARTICLES 3/4 > HOLDER IN DUE COURSE
“For Value” for the purposes of HDC Status
If instrument is taken in exchange for a promise of performance, holder gives value to the extent the promise has ALREADY been performed
I.e., an unperformed promise is NOT value
ARTICLES 3/4 > HOLDER IN DUE COURSE
“Good Faith” for purposes of HDC status
Honesty in Fact
Observance of Reasonable Commercial Standards of Fair Dealing
ARTICLES 3/4 > HOLDER IN DUE COURSE
When is a check overdue
When is a demand note over due
Check is overdue 90 days after its date
demand note is overdue one day after demand for payment is made
ARTICLES 3/4 > PRESENTMENT/TRANSFER WARRANTIES
To whom are presentment warranties made
Who makes presentment warranties
MADE TO: the ONLY person to whom a presentment warranty is made is the Drawee/Payor Bank
MADE BY: when check is presented to drawee/payor bank for payment, and the person presenting the check obtains payment upon presentment, THAT PERSON, as well as ALL PRIOR TRANSFERORS of the check make presentment warranties to the drawee/payor bank
ARTICLES 3/4 > PRESENTMENT/TRANSFER WARRANTIES
Presentment Warranties for a check
(“UAE”)
- Warrantor is or was at the time of the transfer a person ENTITLED to enforce the draft;
- Draft has not been ALTERED; or
- Warrantor has NO KNOWLEDGE that the signature of the drawer of the draft is UNAUTHORIZED
ARTICLES 3/4 > PRESENTMENT/TRANSFER WARRANTIES
Presentment Warranties for a Note
- The warrantor is or was at the time of the transfer a person entitled to enforce the draft
ARTICLES 3/4 > PRESENTMENT/TRANSFER WARRANTIES
Who makes Transfer Warranties
Who is a transfer warranty made to
MADE BY:
If indorsed, transfer warranty made to all subsequent transferees
If no indorsement, but consideration is made, warranty is made to immediate transferee
MADE TO:
Only made to people who take by transfer–NOT drawee/payor bank
ARTICLES 3/4 > PRESENTMENT/TRANSFER WARRANTIES
Transfer Warranties
(A CUBE)
- Transferor is ENTITLED to enforce the instrument
- Instrument has not been ALTERED
- All signatures ARE AUTHORIZED/authentic
- Instrument not subject to any DEFENSE/CLAIM
- Transferor has no KNOWLEDGE of insolvency [BANKRUPTCY] (wrt maker/drawer/acceptor)
ARTICLES 3/4 > CHECK COLLECTION PROCESS > The Midnight Deadline
General Rule
Midnight Deadline Definition
Regulation CC
GENERAL RULE: If a (payor/drawee) bank is presented with a check, it is accountable for it if it FAILS TO RETURN IT prior to the bank’s “midnight deadline”
“MIDNIGHT DEADLINE”: midnight on the banking day following the banking day on which it received the check
Regulation CC: protects payor bank by extending midnight deadline if payor bank uses a means of delivery that would ORDINARILY get the check to the presenting bank ON THE NEXT BANKING DAY AFTER THE DEADLINE [[essentially personal courier or same day delivery on day following midnight deadline]]
ARTICLES 3/4 > CHECK COLLECTION PROCESS
Checks drawn on insufficient funds
Not properly payable unless payor bank has agreed to pay overdrafts. (payor bank may elect to pay anyway)
ARTICLES 3/4 > CHECK COLLECTION PROCESS > Wrongful Dishonor
Who may bring it
When does it arise
WHO MAY BRING IT: only the drawer/customer
WHEN DOES IT ARISE: when bank wrongfully dishonors check
ARTICLES 3/4 > CHECK COLLECTION PROCESS > Stop Payment Order
Rule
When does Stop Payment Not Work?
Requires timely and sufficient notice
DOESN’T WORK WHEN:
- HDC
- Drawer would be liable on check anyway
- Cashier’s checks, certified checks, teller’s checks
ARTICLES 3/4 > CHECK COLLECTION PROCESS
Postdating check
Payor bank can pay postdate check prior to date on the check, UNLESS
Customer gives timely and sufficient notice
ARTICLES 3/4 > CHECK FRAUD
When must payor Bank recredit Drawer’s account for payments it makes on the defective check
- forged drawer’s signature
- Material Alteration; or
- Forged Indorsement
ARTICLES 3/4 > CHECK FRAUD
Situations when check fraud risk is shifted to the customer/drawee
Imposters
Fictitious Payees
Padded Payroll
ARTICLES 3/4 > CHECK FRAUD > Imposters (INDORSEMENTS)
Situation
Rule
Imposter Impersonates Payee
Indorsement in name of the payee is effective as the payee’s indorsement
ARTICLES 3/4 > CHECK FRAUD > Fictitious Payee (INDORSEMENTS)
Situation
Rule
Person identified as payee: (a) is not intended to have any interest in the instrument OR (b) is a fictitious person
Indorsement in the name of the payee is effective as the payee’s indorsement
ARTICLES 3/4 > CHECK FRAUD > Forged Drawer’s SIGNATURE
Rule
These checks are not properly payable. Unless the bank has a valid defense, a payor bank that charges a customer’s account for payment of a forged check MUST RECREDIT THE CUSTOMER’S ACCOUNT for the amount of the forged checks.
ARTICLES 3/4 > CHECK FRAUD > Forged Drawer’s SIGNATURE
Bank’s Defense to Forged Drawer’s Signature (3-406 exclusion)
Customer’s Counter Defense to Bank’s Defense
BANK’S DEFENSE:
- Drawer failed to exercise reasonable care
- failure substantially contributed to the making of the forged signature
CUSTOMER’S COUNTER DEFENSE
1. Payor Bank failed to exercise ordinary care
2. Failure substantially contributed to the loss
IF SHOWN, Bank is liable under principles of COMPARATIVE FAULT
ARTICLES 3/4 > CHECK FRAUD > Forged Drawer’s SIGNATURE
Repeater Rule (4-406 Exclusion)
Customer’s Counter Defense to Repeater Rule
Customer fails to notify payor bank of FORGERY/ALTERATION within 30 days after receiving bank statement disclosing it, customer is precluded from asserting it by same wrongdoer on SUBSEQUENT CHECKS
COUNTER DEFENSE: failure to exercise ordinary care (substantially contributed); Lack of Good Faith
ARTICLES 3/4 > CHECK FRAUD > Forged Drawer’s SIGNATURE
Absolute Bar Rule
If customer fails to report unauthorized signature/alteration within ONE YEAR after receiving statement disclosing it, customer is precluded from asserting forgery/alteration against the bank, EVEN IF the bank failed to exercise ordinary care
((Cut Down Terms: bank can “cut down” time from one year by putting terms in the deposit agreements)
ARTICLES 3/4 > CHECK FRAUD > Conversion
Who may maintain conversion action
Against whom
Rule
BROUGHT BY: Payee* (NOT drawer)
BROUGHT AGAINST: payor bank and depositary bank
Rule: payee from whom a check is STOLEN and paid upon a forgery of his indorsement can maintain a conversion action against the payor bank and the depositary bank
ARTICLES 3/4 > CHECK FRAUD > Indorsement
Padded Payroll Defense
Counter Defense
Employee responsible to supply information determining names and addresses of payees on checks to be issued by her employer
- provides names of entities not entitled to payment
- after the employer signs checks payable to these entities, employee steals the checks, and
- employee forges indorsement of entity identified as the payee, and cashes the check and deposits into her personal account
RESULT: Employer bears loss. INDORSEMENT IS EFFECTIVE
COUNTER DEFENSE: if depository bank failed to exercise ordinary care, and it substantially contributed to the loss, then COMPARATIVE FAULT
ARTICLE 2 > Perfect Tender Rule
South Carolina Nuances WRT rejection of goods
Rejection of goods must be in writing
Revocation of Acceptance probably must be in writing
Buyer gets a security interest in the rejected goods to secure refund of any purchase price paid and incidental damages (buyer loses SI if he surrenders possession)
ARTICLE 2 > Perfect Tender Rule
Buyer’s duties with respect to rejected goods
Buyer can’t use the goods–could constitute acceptance
Buyer must exercise reasonable care
If seller has no place of business/agent in buyer’s location:
- buyer must follow seller’s instruction as to the disposition of goods
- If goods are perishable, buyer must sell the goods, even w/o seller’s instruction
ARTICLE 2 > Perfect Tender Rule > Buyer Rejects/Revokes Acceptance > MArket BAsed Measure of Damages
Formula
When is it allowed
Time and Place Mkt Price is determined
FORMULA: Market price at time of breach minus contract price
WHEN IS IT ALLOWED:
- buyer did not cover
- buyer purchased substitute goods, but the purchase is not effective as cover; or
- Buyer ELECTS to claim damages based upon market price (exception: windfall to buyer wrt market price decrease)
TIME/PLACE MKT PRICE IS DETERMINED:
Place: at buyer’s location if rejected/revoked after arrival
time: at time of breach
ARTICLE 2 > Perfect Tender Rule > Buyer Rejects/Revokes Acceptance
Availability of Incidental Damages
Availability of Consequential Damages
Availability of Punitive Damages
INCIDENTAL: included in price of effecting cover
CONSEQUENTIAL:
must be foreseeable
must try to mitigate
PUNITIVE
Fraud in the PERFORMANCE of the contract will allow for punitive damages (not in K’s creation)
ARTICLE 2 > Limiting Buyer’s Remedies
Enforceability of Limited Remedy Terms
ENFORCEABILITY OF LIMITED REMEDY TERMS:
must EXPRESSLY AGREE ((or trade usage shows)) that the limited remedy is the buyer’s EXCLUSIVE remedy (or else buyer can assert statutory remedies)
FAILURE OF ESSENTIAL PURPOSE: if seller is unable to cure defect within a reasonable time, limited remedy fails its essential purpose–buyer can assert statutory remedies
ARTICLE 2 > Limiting Buyer’s Remedies > Exclusion of Consequential Damages
Enforceability
Enforceable unless exclusion is UNCONSCIONABLE (personal injury resulting from consumer goods is prima facie unconscionable)
ARTICLE 2 > MULTIPLE PARTY PROBLEMS
Privity Defense in SC
Virtually abolished: Breach of Warranty extends to any NATURAL person who may be EXPECTED to be affected by the goods and whose person or property is damaged by a breach of warranty.
ARTICLE 2 > MULTIPLE PARTY PROBLEMS
Dealer Adoption
Dealer can be liable for MFR’s warranty if the dealer uses the warranty in persuading the buyer to buy the goods
ARTICLE 2 > STATUTE OF LIMITATIONS
Statute of Limitations in South Carolina for Breach of Warranty
Reducing the SOL by contract
6 years from when buyer discovers OR should have discovered the breach.
This period CANNOT be reduced by contract
ARTICLE 2 > FORMATION ISSUES > FIRM OFFERS
Rule regarding if the assurance/promise is on the OFFEREE’S form
the term must be separately signed by the offeror
ARTICLE 2 > FORMATION ISSUES > Battle of the Forms
Applicability
Applies only to cases in which a contract is formed through the exchange of STANDARD FORMS containing inconsistent BOILER PLATE PROVISIONS
ARTICLE 2 > FORMATION ISSUES > Statute of Frauds > Specially Manufactured Goods
- Goods SPECIALLY MANUFACTURED for the buyer
- goods NOT SUITABLE for sale to others in the ordinary course of the seller’s business
- seller has SUBSTANTIALLY BEGUN to manufacture or has made commitments to procure the goods
- actions undertaken to begin manufacture/procure REASONABLY INDICATE goods are for buyer
- Such actions began BEFORE SELLER RECEIVED NOTICE of buyer’s revocation
ARTICLE 2 > FORMATION ISSUES > Statute of Frauds >
Estoppel in SC
- competent proof of the existence of the oral contract
- party invoking the doctrine has suffered a definite, substantial, detrimental change of position in reliance on the contract
- No remedy except enforcement of the bargain is adequate to restore his former position; and
- must show he lost more than his expected benefit under the contract
ARTICLE 2 > FORMATION ISSUES > Open Price Terms
First Scenario: Parties agree to reach price later
Second Scenario: Buyers allows Seller to pick price term
FIRST SCENARIO: Did parties intend to be bound. Yes: court will determine price. No: no contract.
SECOND SCENARIO: Seller must act in good faith when picking price ((honestly and in observance of reasonable commercial standards))
ARTICLE 2 > RISK OF LOSS >
What is the effect of C.I.F. or C&F
Like a shipment contract
ARTICLE 2 > RISK OF LOSS
Risk of Loss: contracts for the sale of goods in the possession of the bailee
- buyer receives possession of a negotiable warehouse receipt;
- buyer receives the possession of a writing directing the bailee to deliver the goods to the buyer (including non-negotiable warehouse receipt); or
- Bailee acknowledges buyer’s right to possession of the goods
ARTICLE 2 > RISK OF LOSS
What is the effect of nonconforming goods (breach) on the risk of loss?
If seller tenders NCGs so that the buyer has a right of rejection, the risk of loss REMAINS UPON SELLER until cure or acceptance
ARTICLE 2 > RISK OF LOSS >
Effect of Buyer Rightfully Revoking Acceptance on the Risk of Loss
Buyer’s rightful revocation of acceptance may, to the extent of any deficiency in its effective insurance, treat the risk of loss as resting on the seller.
i.e., seller is responsible for anything insurance doesn’t cover (seller is also responsible for deductible)
ARTICLE 2 > RISK OF LOSS >
Effect of Buyer Repudiating after goods have been identified, but before risk of loss has passed to the buyer
Seller may, to the extent of a deficiency in his effective insurance coverage, treat the risk of loss as resting on the buyer for a COMMERCIALLY REASONABLE TIME after the buyer has repudiated
i.e., buyer is responsible for anything insurance doesn’t cover (buyer is also responsible for deductible)
ARTICLE 2 > ADEQUATE ASSURANCE/REPUDIATION/RETRACTION
What are Seller’s rights if buyer is insolvent?
- can refuse to deliver except for cash
- require all unpaid obligations to be paid in cash
- can stop goods in transit
- if B received goods while insolvent, seller can demand reclamation if made within 10 days
ARTICLE 2 > ADEQUATE ASSURANCE/REPUDIATION/RETRACTION
Rules for Retracting repudiation
- before repudiating party’s next performance is due, and
before aggrieved party
- accepts repudiation (cancels K)
- changes position in reliance of repudiation
ARTICLE 2 > Seller’s Remedies
Seller’s remedy if seller has not completed performance when buyer repudiates
seller may withhold delivery (and stop delivery by any bailee)
ARTICLE 2 > Seller’s Remedies
Seller’s remedy if buyer pays for the goods by a check that is dishonored for insufficient funds
Seller has a right to reclaim the goods from the buyer.
Buyer has “voidable title” to the goods”: buyer can transfer good title to a good faith purchaser for value (including an Article 9 secured party). Such GFP takes free of seller’s right of reclamation
ARTICLE 2 > Seller’s Remedies
Can seller get consequential damages
No
ARTICLE 9 > Attachment issues > With Valid Security Agreement, how do you treat these issues?
- Proceeds
- After-Acquired Property
- Future Advances
- Proceeds: Security Agreement attaches to any identifiable proceeds (remember lowest intermediate balance rule)
- After-Acquired Property: Automatic for inventory and accounts. Must be explicit in SA for other types of collateral
- Future Advances: Must be explicit in the security agreement
[[SCOPE of Article 9 + this = analysis up until perfection]]
ARTICLES 3/4 > Who has primary liability to pay instruments?
Makers of notes
Issuers of cashier’s checks: drawer/drawee are same entity
Acceptors of drafts: Drawee (bank) signs draft and incurs primary liability
ARTICLES 3/4 > Who has secondary liability to pay instruments?
DRAWER: conditioned on presentment and dishonor of instrument
-can disclaim obligation by signing “without recourse”–but NOT for checks
INDORSER: conditioned on dishonor of instrument
ACCOMMODATION PARTIES:
ARTICLES 3/4 > HOLDER IN DUE COURSE
From what does a HDC take free of?
Personal Defenses of the obligor
Claims in recoupment of the obligor
Possessory Claims (including claims of ownership)
NOT Real Defenses
ARTICLES 3/4 > Checks “not properly payable”
What are the defects?
What is the remedy if the drawee pays these checks?
Bank’s Defenses?
DEFECTS
unauthorized signature
alteration
unauthorized indorsement
REMEDY:
if bank pays, must recredit drawer’s account
BANKS DEFENSES
3-306 preclusion: drawer’s failure to exercise ordinary care which substantially contributed to the making of the forged signature
4-406 (repeater rule): drawer doesn’t notify bank of forgery/alteration within reasonable time (not exceeding 30 days) after receiving bank statement
Absolute Bar Rule: Drawer doesn’t report unauthorized drawer’s signature/alteration within one year after receiving statement of account
-see other flash card for more information on these rules
ARTICLES 3/4 > Restitution claim for bank that makes an improper payment to a person (under mistaken belief drawer’s signature was authorized)
Can make a restitution claim to recover amount of the check from the person who received the payment
CANNOT if person took in good faith and either
for value
changed position in reliance
