The UCC: Sales and Secured Transactions

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Chapter 13

• The UCC Sales and Secured Transactions

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Quote of the Day

• 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

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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

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Development of the UCC

• Scope of Article 2
• 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

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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

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Contract Formation

• Formation basics Section 2-204
• Rules
• Any manner that shows agreement
• Moment of making is not critical
• One or more terms may be left open
• Statute of frauds
• Rules
• 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

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Contract Formation

• Statute of frauds
• 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

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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

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Contract Formation

• Added terms Section 2-207
• 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

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Performance and Remedies

• Buyers 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

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Performance and Remedies

• Buyers 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

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Performance and Remedies

• Sellers 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

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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

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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

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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 sellers
  skill and judgement
• Consumer sales
• Code provides stronger protection for consumers
  than for businesses

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Secured Transactions

• Article 9 Terms and scope
• 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

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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

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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)

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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

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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

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Perfection

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

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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

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Perfection by Filing

• Financing statement
• Place of filing
• Secured party must file in the state of the
  debtors location
• Goods Central location will be the Secretary of
  States 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

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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

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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

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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

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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

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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

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Default and Termination

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

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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.