The UCC: Sales and Secured Transactions Chapter 13 The UCC: Sales and Secured Transactions

Quote of the Day Karl Marx, “A commodity appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing, abounding in metaphysical subtleties and theological niceties.” Karl Marx, German political philosopher

Development of the UCC UCC was created to solve two problems: Old contract law principles did not reflect modern business practices Laws had become different from one state to another Good: Moveable physical object except for money and securities

Development of the UCC Scope of Article 2 Mixed contracts UCC §2-102: Article 2 applies to the sale of goods Regulates sales Sales: One party transfers title to the other in exchange for money Mixed contracts UCC will govern if the predominant purpose is the sale of goods Common law will control if the predominant purpose is providing services

Development of the UCC Merchant: Someone who routinely deals in the particular goods involved UCC holds a merchant to a higher standard of conduct than a non-merchant

Contract Formation Formation basics: Section 2-204 Statute of frauds Rules Any manner that shows agreement Moment of making is not critical One or more terms may be left open Statute of frauds Contracts for goods worth $500 or more Writing sufficient to indicate a contract Must be signed by the defendant Enforceable only to the quantity stated

Contract Formation Statute of frauds Added terms: Section 2-207 Rules Exception Merchant exception Specialty goods exception Judicial admission exception Added terms: Section 2-207 An acceptance that adds or alters terms will often create a contract Intention

Contract Formation Added terms: Section 2-207 Additional terms: Terms that raise issues not covered in the offer When parties are merchants, additional terms become part of the bargain Additional terms do not bind the parties when: Original offer insisted on its own terms Additional terms materially alter the offer Offeror promptly objects to the new terms

Contract Formation Added terms: Section 2-207 Modification Different terms: Terms that contradict those in the offer Cancel each other out Gap-fillers – Code supplies its own terms when there is no clear oral agreement Modification UCC does away with consideration requirement for changes in contracts Long as both sides agree to the modification

Performance and Remedies Buyer’s remedies Seller is expected to deliver what the buyer ordered Buyer has the right to inspect the goods before paying or accepting Cover If the seller breaches, the buyer may “cover” by reasonably obtaining substitute goods Buyer may then obtain the difference between the contract price and the cover price: Plus incidental and consequential damages, minus expenses saved

Performance and Remedies Buyer’s remedies Incidental damages cover such costs as: Advertising for replacements Sending buyers to obtain new goods Shipping the replacement goods Consequential damages are those resulting from the unique circumstances of this injured party

Performance and Remedies Seller’s remedies Refuse to deliver the goods when buyer breaches before the seller has delivered the goods The injured seller may resell the goods when buyer unjustly refuses to accept or pay for goods The seller may recover difference between the resale price and contract price: Plus incidental damages, minus expenses saved Seller may simply sue for the contract price if: Buyer has accepted the goods Goods are conforming and resale is impossible

Warranty Contractual assurance that goods will meet certain standards Express warranty: One that the seller creates with his words or actions Disclaimer: Statement that a particular warranty does not apply Implied warranties: Are created by the Code itself, not by any act or statement of the seller Implied warranty of merchantability Merchantable: Goods are fit for the ordinary purposes for which they are used

Warranty Implied warranties - Created by the Code itself, not by any act or statement of the seller Implied warranty of merchantability Merchantable: Goods are fit for the ordinary purposes for which they are used Principles Unless excluded or modified Merchantability Implied Merchant with respect to goods of that kind

Warranty Implied warranties Implied warranty of fitness for a particular purpose When the seller: Knows about a particular purpose for which the buyer wants the goods Knows that the buyer is relying on the seller’s skill and judgement Consumer sales Code provides stronger protection for consumers than for businesses

Secured Transactions Article 9: Terms and scope Article 9 vocabulary Applies to any transaction intended to create a security interest in personal property or fixtures Article 9 vocabulary Fixtures: Goods that have become firmly attached to real estate Security interest: Interest in personal property or fixtures that secures the performance of an obligation Secured party: Party who holds the security interest Collateral: Property subject to the security interest

Secured Transactions Article 9 vocabulary Debtor: Person who has some original ownership in the collateral Obligor: Person who must repay money Security agreement: Contract which gives a security interest to the secured party Default: When the debtor fails to pay Repossession: When the secured party takes back the collateral because the debtor has defaulted

Secured Transactions Article 9 vocabulary Perfection: Steps the secured party must take to protect rights in the collateral against people other than the debtor Financing statement: Document filed by secured party to give notice of security interest in the collateral Record: Information on paper or other medium Authenticate: To sign a document (includes use of symbols or electronic encryption)

Attachment of a Security Interest Attachment: Three-step process that creates an enforceable security interest The two parties made a security agreement and either Debtor has authenticated a security agreement describing collateral Secured party has possession of the collateral The secured party gave value in order to get the security agreement The debtor has rights in the collateral

Attachment of a Security Interest Agreement Without an agreement, there can be no security interest Control and possession Value For the security interest to attach, secured party must give value Debtor rights in the collateral Debtor can grant security interest in goods only if he has some legal right to those goods himself

Perfection Kinds of perfection Perfection by filing Perfection by possession Perfection of consumer goods Perfection of moveable collateral and fixtures

Perfection by Filing The common way to perfect an interest is by: Filing a financing statement with one or more state agencies Financing statement: Gives the names of all parties, describes the collateral, and outlines the security interest Contents of the financing statement Sufficient if it provides: Name of the debtor Name of the secured party Indication of the collateral

Perfection by Filing Financing statement Place of filing Secured party must file in the state of the debtor’s location Goods – Central location will be the Secretary of State’s office Fixtures – Secured party has choice between Filing in the same central office Filing in the local country office Duration of filing Effective for five years

Perfection by Possession or Control Advantages Notice to other parties is very clear If debtor defaults, secured party has no difficulties repossessing Impose one important duty Secured party must use reasonable care in the custody and preservation of collateral in possession or control

Perfection of Consumer Goods UCC gives special treatment to security interests in most consumer goods Consumer goods – Used primarily for personal, family, or household purposes Purchase money security interest (PMSI): Interest taken by the person who sells the collateral or advances the money so the debtor can buy it PMSI in consumer goods perfects automatically, without filing

Protection of Buyers Once security interest is perfected: Remains effective regardless of whether collateral is sold, exchanged, or transferred Buyers in ordinary course (BIOC): Buys goods in good faith from a seller who routinely deals in such goods Takes goods free of a security interest created by its seller even though the security interest is perfected

Priorities among Creditors Three principal rules Party with a perfected security interest takes priority over a party with an unperfected interest If neither secured party has perfected, the first interest to attach gets priority Between perfected security interests, the first to file or perfect wins

Default and Termination Default - When debtor fails to make payments due or enters bankruptcy Taking possession of the collateral When the debtor defaults, the secured party may take possession of the collateral Disposition of collateral Secured party may sell, lease, or otherwise dispose of the collateral in any commercially reasonable manner Debtor is liable for any deficiency

Default and Termination Happens when the debtor pays the full debt Termination statement - Document indicating that there is no longer a security interest in the collateral

“The Uniform Commercial Code enables merchants to form contracts more quickly and easily. But along with this increased facility goes greater responsibility, since informal discussions may suddenly turn into… a contract.”