As stated in an earlier Blog, it is my belief that Article 1 is the most important Article under the Uniform Commercial Code. One of the many reasons I believe this to be the case is found in the text of Section 1-103(b). That section states as follows:
Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to the capacity to contract, principal and agent, estoppels, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating and invalidating cause shall supplement its provisions.
The potential impact of Section 1-103(b) is enormous. The essence of the section is that unless the Uniform Commercial Code specifically displaces a substantive principle of law, including, but not limited to those listed, those principles of law survive the enactment of the UCC and ‘supplement’ its provisions.
In Re Invenux, Inc. 298 B.R. 442 (Bkrtcy. D. Colo. 2003), 51 UCC Rep Serv 2d, clearly illustrates the impact of Section 1-103. The case was before the court on defendant/trustee’s motion to dismiss and plaintiff’s cross motion for summary judgment.
In its Motion for summary judgment plaintiff was seeking a reformation of the Security Agreement between itself and Debtor. The court noted that:
Although the UCC-1 financing statement which Plaintiff filed to perfect its security interest is worded broadly enough to embrace an interest in the Stock [the collateral], it does not appear as part of the collateral in the security agreement. In Re Invenux, Inc. at 445-446
In order for a security interest to be enforceable, Section 9-203(b)(3)(A) requires that a description of the collateral be contained in the security agreement. Section 9-203 provides in relevant part as follows:
(a) A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.
(b) Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if:
(1) value has been given;
(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and
(3) One of the following conditions has been met:
(A) the debtor has authenticated a security agreement that provides a description of the collateral….
(B) – (D) …
It is clear from the language of Section 9-203(b)(3)(A) [the other sections do not apply in the case] that in order for the security interest to be enforceable, the debtor must have authenticated a security agreement and such agreement must provide a description of the collateral.
The trustee took the position that since there was no description as required by Section 9-203, the security agreement was invalid. The court framed the issue as follows:
The issue for this Court is whether Colo. Rev. Stat. Section 4—9—203 displaces Colorado’s common law such that the right of reformation due to mutual mistake—a common law right available to contracting parties generally—is not available to parties intending to create a security agreement under Article 9 of the U.C.C. id at 446
In finding for the Plaintiff on this point of law, the court said:
There is no question that Section 4—9—203 is in the nature of a statute of frauds because it requires a security agreement to be in writing. Colo.Rev.Stat. Section 4—9—203 Commernt 3. But the fact that an agreement must be in writing to satisfy a statute of frauds is not inconsistent with reformation of that written agreement if, by reason of mutual mistake, the true agreement of the parties is not expressed in the writing. id at 447
The court found that the security agreement was reformed per the common law of reformation and mutual mistake which existed in Colorado, and therefore, the fact that there was no written description of collateral as provided for in Section 9-203 did not render the security agreement unenforceable.
In Re Invenux powerfully illustrates the potential impact of Section 1-103 in its application of the general contract principles noted. When one factors in the multitude of general contract principles which apply and supplement the UCC one can clearly begin to see the magnitude of Section 1-103 on the many contracts which exist under the UCC. When one superimposes the many bodies of law which similarly apply, the power and pervasive applicability of Section 1-03 becomes very clear.
Robert M. LeVine, J.D., Adjunct Professor and UCC mentor. Visit our website for more information.
Contact Rob at rob@ucc-madeeasy.com
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