All posts in category Article 9 – Secured Transactions

UCC Supplemental General Principles of Law: Potential Impact Can Be Huge

bookcover-for-facebook1.jpgAs 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.

http://www.ucc-madeeasy.com

Contact Rob at rob@ucc-madeeasy.com

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by learntheucc on March 16, 2013  •  Permalink
Posted in Article 1 - General Provisions, Article 9 - Secured Transactions, Learn the UCC
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Posted by learntheucc on March 16, 2013

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Uniformity of Law: Cases From Other Jurisdictions Can Make YOUR Case

Make YOUR Case
Although it is clear from the name itself—i.e.—the Uniform Commercial Code, the drafters of the Code explicitly stated the policy of uniformity in Section 1-103(a)(3):

(a)  [The Uniform Commercial Code] must be liberally construed and applied to promote its underlying purposes and policies, which are:

(1)  to simplify, clarify and modernize the law governing commercial transactions;

(2)  to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and

(3)  to make uniform the law among the various jurisdictions.

Traditionally, courts are reluctant and often unwilling to consider the case law from other jurisdictions.  However, in furtherance of the uniformity of law policy of the Uniform Commercial Code, courts regularly look to the law of other jurisdictions in determining disputes before the court.  Attorneys who understand and actively employ this policy, have an arsenal of cases from all jurisdictions which can be used to support a theory or argument presented to the court.  This is obviously a great advantage over the attorney who is singularly focused on the law of his or her jurisdiction.

In the case of In re Hispanic American Television Co., Inc. 113 B.R. 453 (Bkrtcy.) N.D. Ill. 1990) 11 UCC Rep Serv 2d),  the legal issue before the court was the question of whether or not the contract between Motorweek Productions and Hispanic American Television Co., designated as a lease, was in fact a lease or a security agreement.  If the contract was in fact a true lease, Motorweek, as lessor, would be entitled to repossess the equipment as provided for in the lease.  If on the other hand, the contract was deemed to be a security agreement, the equipment would become property of the Debtor’s estate.  Under the purported lease, Hispanic American Television Co. was required to make monthly payments of $55,624.97 over a five year term.  At the time of default, Hispanic American Television Co. owed Motorweek $525,000.

The controlling law at the time of the case was Section 1-201(37), which contained the definition of “Security interest” and addressed the specific question of whether or not a lease is in fact a lease or a lease intended as security.  The latter question is now specifically addressed in Section 1-203, and the definition of “Security interest” is now contained in Section 1-201(35).

The case is particularly interesting for two reasons.  First, although the Court made a determination that the parties to the contract did in fact intend the contract to be a true lease; the Court nevertheless found that the contract between the parties was in fact a security agreement. Of course, the law determines the answer to the legal question of whether a transaction is a true lease or a security agreement, but the determination that the parties did in fact intend a lease is significant.  The characterization of the transaction however, must also be viewed outside the context of the parties to the agreement.  In addition to the controlling law, the agreement must be viewed in the context of the interests of other creditors of the Debtor who have a very high stake in the determination of the nature of the agreement.  As noted earlier, if the contract is a true lease, Motorweek can retake its equipment; if not, the equipment becomes part of the Debtor’s estate and hence available to other creditors.

The second reason that the case was particularly interesting is that the contract contained a choice of law provision which stated that the law of New York was to govern the transaction.  This certainly would include the case law of New York. Notwithstanding this provision however, the court stated:

Section 1-201(37) of the U.C.C. is identical in New York and Illinois.  The case law from both states is relevant on the issue of distinguishing a “true lease” from a security agreement.  In Re Hispanic Television Co., Inc. at 456

The court went on to state:

Further, given the uniformity purpose of the UCC, decisions from other states which have adopted its standard provisions are also relevant.  Id at 456-457

There are many cases which support these statements from In Re Hispanic Television Co., Inc..  They present a great arsenal for the attorney who utilizes their potential impact on his or her case.

Robert LeVine, Professor, Author the book The Uniform Commercial Code Made Easy

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by learntheucc on February 18, 2013  •  Permalink
Posted in Article 2 - Sales transactions, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on February 18, 2013

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The Uniform Commercial Code: The Comprehensive Approach

 As noted in Blog #9 (The Second Element of Contract: Application of the Uniform Commercial Code to the Agreement), once the parties ‘agreement’ has been delineated, the next element of the definition of ‘contract’ comes into play: application of the Uniform Commercial Code to the agreement which has been created.  Once an agreement for sale has been determined to be enforceable under Section 2-201, the next step involves the application of the Uniform Commercial Code to the totality of that agreement.

It is clear that Article 2 will apply since we are hypothesizing a sales agreement.  Article 1 will also apply since that Article applies to all transactions under the Uniform Commercial Code.  In addition, several other Articles will be activated by the typical commercial sales transaction.  First, there will generally be some shipment of goods from the seller to the buyer which will activate Article 7, documents of title.  For the shipping portion of the transaction, the primary document will be a ‘bill of lading’ as defined in Section 1-201(b)(6); if goods are stored either before or after shipment, a warehouse receipt will likely be issued which is defined in Section 1-201(b)(42).  The rights, duties and liability regarding these documents is covered under Article 7.  Once again, it is worth noting that the actual definition of the documents themselves is found in Article 1.

There will also be a payment mechanism of some type: a check or promissory note which activate Article 3; a wire transfer which activates Article 4A; or a letter of credit which activates Article 5.  If a documentary draft is involved, Section 4-104(a)(6), Article 4 will be activated.  Finally, if the transaction is financed, Article 9 will be activated as well.

The comprehensive approach to Uniform Commercial related problems, incorporates the reality that many sections of the UCC are activated in most commercial transactions.  While Article 2 may supply the key sections involved in a given Sales transaction, there are many sections in the other Articles which can create leverage and opportunities for someone drafting documents or someone involved in litigation. I have always been of the opinion that the comprehensive approach to Uniform Commercial Code matters is the best way to visualize and deal with UCC matters.

It is important to understand the reality of the comprehensive approach before undertaking the application of the substantive provisions of the UCC to the parties agreement.  The next Blog will begin the application of Article 1 to Sales transactions, in the litigation and drafting contexts.

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by learntheucc on December 4, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Article 3 - Negotiable Instruments, Article 4 - Bank Deposits, Article 5 - Letters of Credit, Article 7 - Documents of Title, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on December 4, 2011

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The Second Element of Contract: Application of the Uniform Commercial Code to the Agreement

At this point in our mission to “Learn the UCC”, we have discussed the first element in determining what a contract is under the Uniform Commercial Code: namely, the ‘agreement’ of the parties as determined by the application of the criteria stated in Section 1-203(b)(3).  As discussed in Blogs 4 – “What IS a Contract”  & 5 – “Course of Performance: Impact on Contract”, there are two more elements which must be addressed before one can determine what the contract is in reality, or if in fact there is a ‘legal obligation between the parties’.  These elements include the application of relevant UCC provisions to the agreement between the parties, and the application of supplemental general principles of law which are also applicable to the agreement.  It is only upon the application of these criteria to the parties’ agreement, that the ‘legal obligation’ among the parties can be determined.

The laws which apply to a sales contract under the Uniform Commercial Code are those laws contained in Article 2, Sales, and the laws contained in Article 1, General Provisions.  It is extremely important to remember at all times that Article 1 applies to the whole Uniform Commercial Code per section 1-102; hence, regardless of the substantive article which applies to a given transaction, it will always be supplemented by the provisions of Article 1.  This is often overlooked, and in such a situation, a huge body of law, with enormous implications is not activated.

As we have already seen, the definition of ‘contract’ is found in Article 1 as are the terms comprising the definition of agreement.  Further, the application of these concepts as envisioned by Sections 1-201(b)(3) and 1-303, can have an enormous impact on the ultimate meaning of the parties agreement, and hence, their contract. Article 1 will be discussed in detail in upcoming Blogs.

Once the parties ‘agreement’ is determined, I believe that most logical next step is to determine whether or not the ‘agreement’ is enforceable under the Statute of Frauds.  While the totality of Article 1 applies to the ‘agreement’, it is irrelevant if the agreement itself has no legal import due to the Statute of Frauds.  The basic rule of Section 2-201(1), and the reply doctrine of Section 2-201(2), were discussed in Blog # 3 – “Monopoly and the UCC”.  If there is a written contract signed by the party against whom enforcement is sought, or the requisite confirmatory memoranda under Section 2-201(2), the contract is enforceable.  If however, neither of these criteria is met, there are still three possible exceptions to the writing requirement of Section 2-201(1).

Two of these exceptions are quite easy.  Under Section 2-201(3)(b), the contract 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”  Obviously, in such a situation, the contract has been admitted, and hence should be enforced.  Another situation which is very straightforward is the exception to the basic Statute of Frauds rule “with respect to goods for which payment has been made and accepted or which have been received and accepted”.  Payment for goods or acceptance of goods is an unmistakable statement that the contract exists.

The final exception is stated under Section 2-201(3)(a) which states as follows:

A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable

(a) if the goods are to be specially manufactured for the buyer and are not suitable to sell 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.

There are thus four questions which must be answered in order to determine if Section 2-201(3)(a) applies in a given case:

(a)    Are the goods to be specifically manufactured for the alleged buyer?

(b)    Are the goods in question suitable for sale to others in the ordinary course of the seller’s business?

(c)   Did the seller make the “substantial beginning” of the manufacture of the goods in question or “commitments for their [its] procurement”?

(d)   Was the foregoing done before notice of repudiation was received, and under circumstances which reasonably indicate that the goods are for the buyer?

In order for the contract to be enforceable under the Statute of Frauds per Section 2-201(3)(a), the questions must be answered as follows:

(a)   yes; (b) no; (c) yes; (d) yes.

The policy behind Section 2-201(3)(a) is predicated upon the commercial reality that a seller is unlikely to undertake the manufacture of a product which cannot be sold in the seller’s ordinary course of business for no reason.  Such a move, involving time and expense is unlikely to be undertaken if there wasn’t a basis, provided by the buyer, for the seller’s going forward.  It should be noted however, that even if the criteria of Section 2-201(3)(a) are satisfied, the seller will still have to prove his or her case, for the satisfaction of those criteria merely eliminates the barrier of the Statute of Frauds.  It does not result in a conclusive presumption that the seller is entitled to judgment.

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by learntheucc on November 20, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Article 3 - Negotiable Instruments, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on November 20, 2011

https://learntheucc.wordpress.com/2011/11/20/the-second-element-of-contract-application-of-the-uniform-commercial-code-to-the-agreement/

Monopoly and the UCC

Monopoly and the UCC

There are millions of businesses and hundreds of millions Americans who are impacted by the Uniform Commercial Code every day.  Some of these entities interact with the UCC hundreds or thousands of times per day.  Regardless of the volume of transactions, if you are in business, you need to know the meaning and operations of the Uniform Commercial Code.

I have often analogized various aspects of life to a board game.  When playing a board game, it is very helpful, if not essential, to understand the rules of the game.  Moreover, the better one understands the rules of the game, the greater the likelihood of winning.  Take Monopoly for example.  People who understand the rules: which properties pay the most in rent; how to get a monopoly, and then how to build houses and hotels, are ready to play the game and ready to win.

If you compare the foregoing individual to someone who has no clue what the rules of Monopoly are, it is quickly apparent the latter has virtually no chance of winning.  The reason is simple: he doesn’t’ know what to do.  He knows to select a piece for the game, and how to roll the dice, but has no understanding of how to succeed.  He may be able to move around the board for a long time.  But eventually, he will lose.

The same is true in business.  You need to know the rules.  You need to understand the legal structure of the world you have entered, and particularly how to avoid a mistake that can cost you everything.  Like the uninformed Monopoly player, without sufficient understanding of the rules of the game, you may be able to move around the board, but the risks you take every day by being uninformed can cost you everything.

Nowhere is this more evident than in the Reply Doctrine of the Statute of Frauds contained in  Section 2-201(2).  The basic Statute of Frauds rule contained in Section 2-201(1) requires sales contracts with a value of $500 or more “must be signed by the party against whom enforcement is sought…”.  Assume for example, that Seller agrees to sell Buyer 1000 tables worth $500.00 per table.  That is a great deal for buyer and he is excited about the deal.  A week later, Seller meets Buyer #2 who offers seller $750.00 per table. Seller accepts and sells the tables to Buyer #2.  If Buyer #! Brings a cause of action against Seller and there is no written contract, Seller will prevail.

Section 2-201(2) can change that result in a very dramatic way.  Assume Seller and Buyer are discussing a sale of the tables for $500.00 per table, and the parties agree to the sale of the 1000 tables at that price.  Three days later, on October 1, 2011 Buyer writes Seller and states the following:  “Pursuant to our phone conversation on September 28, 2011, I hereby agree to buy 1000 tables from you for $350.00 per table.”   Seller reads the letter, tears it up and throws it away.  He doesn’t’ want to waste any more time dealing with this Buyer..

What Seller should have done is immediately write Buyer back and state that “there was no deal at $350.00 per table.  The deal was for $500.00.”  Seller’s failure to reply to Buyer’s “confirmation of the contract” within ten days, results in a waiver of the Statute of Frauds rule of 2-201(1).  Translation: Buyer can sue Seller for Seller’s alleged breach of contract to sell the tables at $350.00 per chair.  While Buyer would still have to prove his case, Seller would not be able to use the basic Statute of Frauds rule as a defense, and would face the costs of litigation, as well as the risk of losing.

Obviously, it is far better to answer  your mail in a timely manner in a situation such as this, and eliminate the possibility of the result faced by not taking timely and appropriate action.  This is an example of a single instance where not knowing the appropriate provisions of the UCC can result in a potential disaster. Conversely, understanding the law, and proceeding accordingly, will result in ultimate protection for your business.

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by learntheucc on October 9, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Article 3 - Negotiable Instruments, Article 4 - Bank Deposits, Article 5 - Letters of Credit, Article 7 - Documents of Title, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on October 9, 2011

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The Uniform Commercial Code – Business owners you need to know this code

The Uniform Commercial Code creates the legal foundation and structure of American business transactions.  Everyone engaging in commercial transactions in the United States, on any level, is directly impacted by the Code.  The Uniform Commercial Code was written by some of the best legal minds in the history of the United States legal system.  Their expertise, and the resulting statutory scheme, was greatly enhanced by direct input from leaders in the business and banking communites, thereby insuring that this law would reflect the reality of the business world.

The Uniform Commercial Code governs virtually every phase of a commercial transaction in goods, at the wholesale or retail level: the Code governs all sales and leases of tangible personal property; negotiable instruments such as checks, promissory notes, and bank drafts; the relationship between a bank and its customer; electronic funds transfers; letters of credit; movement of goods in commerce; the sale of commodity paper; and secured financing of goods.

In addition to the 29.4 million small businesses in America whose daily activities are governed and regulated by the UCC, every purchasing consumer in America consistently interacts with the Uniform Commercial Code.

Anyone engaged in business in the United States needs a solid working knowledge of the Uniform Commercial Code.  Such a base of information will increase efficiency, minimize exposure, and generally create a smoother business operation.  This flows from the fact that the UCC incorporates many standard methods of doing business within its text, and creates vehicles whereby new methods can be integrated within the statutory framework of the Code.

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by learntheucc on September 26, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Article 3 - Negotiable Instruments, Article 4 - Bank Deposits, Article 5 - Letters of Credit, Article 7 - Documents of Title, Article 9 - Secured Transactions, Learn the UCC
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Posted by learntheucc on September 26, 2011

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Uniform Commercial Code Article 9: Secured Transactions

Article 9 Transactions (Excerpts from The Uniform Commercial Code Made Easy www.ucc-madeeasy.com)

“What is a ‘security interest’?” asked Stephen.

“Remember,” responded Alan, “when we were at the bank and Fred Luvick told you that the bank would need security of some sort before it would fund the loan?”

Stephen nodded.

“Well,” continued Alan, “the legal vehicle by which it will get the security in the property listed in paragraphs 1, 2, 3 and 4 is called a ‘security interest’. It is defined in the Uniform Commercial Code in part as: “…an interest in personal property…which secures payment…of an obligation.’ 

“What is the obligation being referred to?” Stephen interrupted.

“Your obligation to repay the bank per the payment schedule you ultimately agree upon,” responded Alan.

“What interest in the property will the bank have?” Stephen asked.

“Its interest will be comprised of certain legal rights it will have in the listed property,” responded Alan, “which it can exercise in the event you fail to perform your obligations to it under the terms of the Security Agreement or Loan Agreement.”

(more…)

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by learntheucc on September 24, 2011  •  Permalink
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Posted by learntheucc on September 24, 2011

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