Description
A sale is the act of selling a product or service in return for money or other compensation.[1] Signalling completion of the prospective stage, it is the beginning of an engagement between customer and vendor or the extension of that engagement.
30 MC x 3 pts = 90 5 short answers x 10 = 50 1 essay = 110 pts 1st thing should be whether the UCC applies 1-102 pg. 6 if any Article of the UCC applies then Article 1 applies. 2-102 pg. 34 Article 2 applies to transactions in goods (broader than just sale of goods) 2-105(1) pg. 38 Definition of goods things in action = right to damage/pursue a suit/insurance claim cmt 1 pg. 39 money can be a good if traded as commodity, is not a good if medium for payment excludes real property, IP, intangibles 2-107(1)minerals or a structure to be severed from the realty: buyer severs = not a good, seller = good 2-107(2) crops, doesn't matter if seller or buyer severs = goods electricity = split in authority whether a good or service K for sale or K for service? Hybrid K ON EXAM analyze with both unless told otherwise Predominant purpose test = look at the transaction as a whole, do not sever, if service predominates UCC does not apply. case by case/facts & circumstances analysis large software program a service or custom mfg good? revised UCC article 2 would make software a good but has been battled by software companies Gravaman test: whether the gravaman of the action involves goods or services. Look at what went wrong, if the gas escaped b/c of a defective fitting then sale of goods. If gas escaped b/c of poor work during install, then the K involved services. swimming pool case: not movable, diving board = moveable The diving board was severed since it was an optional component. 2-205 pg. 45 firm merchant offer: offer by merchant to buy goods 2-104(1) pg. 36 definition of merchant farmer selling produce to a wholesaler? Split of authority. More sophisticated = merchant 2-314 pg. 56 implied warranty of merchantability IF seller is a merchant with respect to goods of that kind [Prof S: narrower than just a merchant] owner of a sawmill was not a merchant so the saw he sold that injured other guy wasn't covered by this implied warranty. 2-315 pg. 68 implied warranty of fitness for a particular purpose applies to any seller not just merchants in sawmill case brought his son and had made up his mind prior therefore didn't apply How to tell a lease from a disguised sale? 3 rules to tell if Article 2A applies based loosely on 1201(35) pg. 12 defining security interest and 1-203 pg. 18. 1) If at the end of the lease period the lessee becomes the owner of the property for little or no consideration, a secured transaction has been created NO LEASE
2) If K contains a clause permitting the lessee to terminate at any time and return the leased goods “walk away test” a LEASE has resulted. 3) If the lease is for the entire economic life of the leased goods, with of without renewal, a disguised sale has occurred NO LEASE 2-201 pg. 41 STATUTE OF FRAUDS (SofF) MYLEGS • Only worry about goods > $500 for SofF for this class. • 2-201 just overcomes SofF defese, does NOT prove existence of K or its terms. • Doesn't matter if term is missing or incorrectly stated • 2-201(2) Between merchants confirmatory memoranda 2-201(2) received within a reasonable time. Purpose is to prevent A from playing off the price offered by B and C against each other by using SofF to bind them (since they signed) and not him. This rule protects B and C from A by binding A when a confirmatory memorandum is sent and A doesn't reject it in writing within 10 days. reasonable time = facts and circumstances Example case course of dealing 5 weeks had been reasonable before, but once corn price started rising rapidly making it possibly unreasonable (left to jury to determine) Requires 1. qty 2. sufficient indication that a K has been made 3. signed by party against whom enforcement is sought 1-201(37) pg. 13 signed 3 Exceptions 2-201(3) 1) Specially mfg goods not suitable in the ordinary course of business for resale 2) Admission in pleading/testimony by party against whom enforcement is sought 3) Payment made or received and accepted (partial payment OR partial performance) Example partial payment on a non-divisible lot = sufficient to overcome SofF for whole lot missing terms = gap fillers 2-305(1) pg. 55 gap filler for price quantity = some courts will infer a qty of 1 if it is missing, however MAJ require it. “Tank” marked on the memo line satisfied qty for one of our problems. EXAM for purposes of our class you will always need a qty. 2-306 pg. 56 deals with qty for a requirements K (all buyer requires) 1-103(b) pg. 6 other legal and equitable concepts supplement UCC Defense: parol evidence not admissible if there is an integrated writing. Can overcome with 2-202 however even if evidence is admitted, that doesn't prove the terms of the agreement.
2-202 pg. 43 PAROL EVIDENCE RULE [UCC assumes partial integration] no contradiction by prior or contemporaneous agreement, however, can be explained/supplemented by: • 1-303 pg. 25 (many typos say 1-205) course of performance, course of dealing, usage of trade • 2-208 pg. 48 course of performance • consistent additional terms can be added Remember: if total integration then NO consistent additional terms = complete and exclusive statement. Test: Would the parties certainly have included the term in the agreement? merger clause = again, no consistent additional terms, course of p, d, and u of t still allowed in to supplement. If you want to negate c of p, d, and u of t you must “carefully” do so. GENERAL RULES OF OFFER AND ACCEPTANCE 2-204 pg. 44 Formation in General intent to form K, does not fail for indefiniteness if some terms missing 2-205 pg. 45 Firm Offers 2-206 pg. 46 Offer and Acceptance and cmt 4 pg. 47 • shipped non-conforming and notified buyer that non-conforming offered as accommodation to the buyer = no acceptance = no K = no breach • shipped non-conforming but didn't notify = acceptance AND breach 2-207 pg. 47 BATTLE OF THE FORMS The party opposing inclusion of the term has the burden. ProCD 7th circuit said 2 forms required for 2-207 to apply. Klocek v. Gateway, Inc. This court said one form is good enough to apply 2-207 even though it is routinely referred to as the battle of the forms provision. Deals with any acceptance or written confirmation. Klocek (computer purchaser) was the offeror who had to expressly accept the “counter-offer” in Gateway's form. “unless” in 2-207(1) DOES NOT deal with confirmatory memo. Oral agreement + return confirmatory doc with proviso = 2-207(2) it's too late to change the K. There's an agreement in place. 1) did the returned doc change a dickered term? price or qty for our purposes but anything negotiated] N->goto #2 Y->goto 2-207(3) b/c we have a counter-offer. #2) does it trigger proviso language? aka returned doc is expressly conditioned on assent N->K is formed go to 2-207(2) Y->were the new terms assented to? Y->K formed with those terms N->goto 2-207(3) b/c we have a counter-offer
2-207(2) were docs between merchants? N->additional terms are just proposals for addition to K unless offeror expressly agrees Y->Additional/different terms are part of the K unless (2)(a) or (b) or (c) in which case K is formed but additional/different terms are NOT part of the K materially alter = cmt 4 pg 48 surprise or hardship, not materially alter = cmt 5 pg. 48 MAJ say arbitration clause is a material alteration however could reach different result if it is normal for that industry to use such clauses. Court in Bayway Refining Co. v. Oxygenated Marketing and Trading AG (CofA 2nd Circuit) said surprise must be both objective and subjective. Did they know? Should they have known? Common practice in the petroleum industry meant that OMT was out of luck re: tax clause. Did not have “proven hardship” either. Hardship = a term that creates an open ended or prolonged liability = material alteration. knockout rule: conflicting terms are both out and gap filler will apply. You don't have to be in 2-207(3) for gap filler to apply. 2-207(3) does conduct indicate a K? Y->K exists terms include all writing agree on + gap fillers N->no K just a counter-offer GAP FILLERS If parties intended a K even w/o some terms, gap fillers will apply. SEE 2-311 FIRST FOR ANALYSIS. 2-311(1) pg. 62 Parties can leave certain details to be filled in by either of them without risk K will be found invalid for indefiniteness. GF + commerically reasonable standards apply per cmt 1 pg. 62 2-305 pg. 55 price = reasonable price at time of delivery Landrum v. Davenport If both parties agree on a price, but do not put it in their written K they still have a K. If the parties fail to agree on a price at all, can there still be a contract? Yes, when it is reasonably certain they wanted to be bound. 2-306(1) pg. 56 Output, Requirements K [allows you to determine qty] Can't demand more, can't build more capacity and say that's your output. Not illusory b/c of GF req. 2-307 pg. 57 & 1st para cmt 3 pg. 58 Delivery in Single Lot or Several Lots [if single lot not feasible] 2-308(a) pg. 58 place of delivery = seller's place of business or residence 2-309 pg. 59 time = reasonable time, also see 1-205 pg. 21 2-310 pg. 60 & cmt 1 pg. 61 Payment Due at time/place of delivery 2-314 pg. 66 warranty of merchantability 2-315 pg. 68 warranty of fitness for a particular purpose
WARRANTY – contractual obligation by the seller to remedy possible defects in the K. UCC divides into warranties of title and warranties of quality. 2-312 pg. 63 Warranty of Title and against IP infringement seller warrants title conveyed is good unless specific language tells buyer he is selling only interest he has. Seller who is a merchant delivers goods free of any IP claims by 3rd parties. [If the buyer gives specs to the seller for a specially mfg good, then the buyer warrants to the seller that there is no IP problem] Warranties of Quality • 2-313 pg. 54 Express covers affirmation, description, sample/model. Seller must do some affirmative act to create it. Must relate to goods and be part of basis of bargain. basis of the bargain: some courts require reliance cmt 3 pg. 65 contra book says any substance so it played some part in buyer's decision to buy = natural tendancy to induce purchase. Prof Scott: MAJ most courts would say if it was said afterward it wouldn't be part of the basis of the bargain. MIN follow cmt 7 pg. 66 says that the precise time when words of description or affirmation are made or samples are shown is NOT material. Language after closing is a modification under 2-209(1) pg. 49 Example Never saw the ad until a year after his purchase = Winston Indus Inc. v. Stuyvesant Ins. Co. which held that a buyer was protected by mfgs warranty on mobile home even though he never received a copy through no fault of his own. It still inured to his benefit. Seller would argue, of course, that this couldn't have been the basis of the bargain MAJ rule. Note If the promise is contained in a writing then it is a question of law whether 2-313 applies. If oral, then it is a question of fact. Accidentally made express warranty you can still be held to it per cmt 3 pg. 65 no need for specific intent to make a warranty. Example Mint condition, any paste, dries immediately, goes up easily = express Non-examples “Automobile was in A-1 mechanical condition and that it would take plaintiff any place that she wished to go” Prof Scott says most courts would say this was just puffing. “great car and you're going to love it” are puffery • 2-314 pg. 66 Implied Warranty of Merchantability [merchant + goods of the kind BOTH required] The serving for value of food or drink Shaffer v. Victoria Station, Inc. Shaffer ordered a glass of wine that broke and injured his hand permanently. Court said that the drink that was sold included the wine and the container both of which must be fit for the ordinary purpose for which it was used. Immaterial whether the title to the glass [jug case] passed to the P. [mineral water case].
Cases cut both ways on implied warranty of merchantability for tobacco products. cmt 3 pg. 67 isolated sale of used goods is not a merchant and no warranty of merchantability would apply. However, GF requires that he disclose known material but hidden defects. fitness for the ordinary purpose foreseeable misuse/foreseeable collision – courts lean toward applying this warranty for lack of safety measures to prevent injury or exacerbating injuries. Example paint gives horrible odor even after it dries is unfit Non-example Daniell v. Ford Motor Co. The implied warranty wasn't implicated b/c the use of the trunk for suicide was not an ordinary purpose for which such goods are used. 2 approaches to harmful substances in food such as stones in cherry pies, pits in olives, fish bones: 1) Deny liability if object is a natural substance and permit recovery for foreign objects. Example Webster v. Blue Ship Team Room, Inc. P sued for breach of implied warranty of merchantability. P bought fish chowder at a quaint Boston restaurant. She was a native New Englander and had been to the restaurant b4. After 3 or 4 spoonfuls she got a fish bone lodged in her throat and ended up needed two surgeries. I: was the fish bone a foreign substance? From time immemorial recipes for fish chowder don't mention removal of fish bones at all. Court says diners should be prepared to cope with the hazards of fish bones in light of the hallowed traditions of the state. The presence of the bone was not a foreign substance and did not impair fitness or merchantability. 2) Permit recovery for natural substance if biter's reasonable expectation is that the natural substance would have been removed. Facts and circumstances matter. Hypo Same facts as above except it was the customer's first visit to New England. A: Customer wouldn't have the same reasonable expectation Hypo Can of clam chowder with national distribution. Expect better protection from manufactured foods. Virtually every substance causes such reaction in someone. GR if a product is reasonably fit for use by a normal person, there is no breach of implied warranty when an allergic consumer suffers injury. • 2-315 pg. 68 Implied Warranty of Fitness for a particular purpose Cmt 5 pg. 69 If the buyer insists on a particular brand he is not relying on the
seller's skill and judgment and so no warranty results. The fact that there was a trade name/brand on the article is one of the facts to be considered on the question of whether the buyer actually relied on the seller. Example went to paint store, wanted to match with prior paint can from same store, paint he was given did not match therefore warranty breached. If store said “we can match anything” that would be an express warranty under 2-313. Non-example Daniell v. Ford Motor Co No evidence she or her husband gave any particular thought to the trunk mechanism 2-316 pg. 69 DISCLAIMING EXPRESS WARRANTIES Drafters of UCC made 2-316(1) in such a way as to make disclaimer of an express warranty virtually impossible. The proper way to avoid liability for an express warranty is not to make it in the first place. Bell sports, Inc. v. Yarusso Brian Yarusso (22yo) motorcycle rider landed on his head crushing his C5 vertebrae. Sued for breach of express warranties (based on text in the manual: primary function of the helmet was to absorb the force of a blow to the head”) Bell argued that they had disclaimed their express warranty but the court held that UCC 2-316(1) didn't let them off the hook. Hypo Seller trying to disclaim express warranty made by salesperson when terms of the K included a merger clause. • Merger clause + parol evidence rule 2-202 pg. 43 means the seller is protected by some courts. • Other courts will say document wasn't intended to be the final expression of the parties. • Other courts ignore parol evidence rule or use equity 1-103 pg. 6 to get around it. • cmt 4 to 2-313 pg. 65 covers express warranty situation can't just disclaim express warranties using a plain old disclaimer clause b/c GF and pseudo obligation. • official comment 2 to 2-316 pg. 70 says parol evidence rule + “lack of authority” clauses can protect seller against salesperson making an express warranty. DISCLAIMING OTHER WARRANTIES 2-316(2) conspicuous to exclude warranty of merchantability or fitness 1-201(10) pg. 10 Conspicuous and cmt 10 pg. 14 Objective standard • If purchaser has actual knowledge of the disclaimer it overrides the question of conspicuousness since the buyer is already protected from surprise. Cate v. Dover Corp. Dissent said UCC didn't mention actual knowledge so why use it. Dover Corp had buried their disclaimer in a section entitled WARRANTY. Doesn't matter if disclaimer of express warranty is conspicuous. It's all but impossible to disclaim an express warranty. It is not an effective argument to say that usage of trade (1-303(c)) is that disclaimers are buried in fine print b/c just because usage of trade is violating the UCC doesn't mean that it should control. The law trumps usage of trade.
2-315(3)(b) pg. 70 and cmt 8 pg. 70 Buyer in a hurry doesn't examine the car, the buyer who unreasonably refused if injured may be found to be injured by his own action rather than proximately by breach of warranty. 2-316(3)(c) pg. 70 Hey buddy, want to buy a watch? = purchased “as is” If disclaimed after bargain is struck the disclaimer is ineffective. Owners manual in glove box not read until months after purchase and contains disclaimer of warranties. • Most courts would say if it was said afterward it wouldn't be part of the basis of the bargain so owner won't be held to the disclaimer. Prof. Scott disclaimer is not effective in this case. Bowdoin v. Showell Growers Disclaimer given 2 weeks after sale in manual during time of delivery. The fact that the disclaimer was conspicuous didn't matter. Had it been given before the sale, the implied warranties of merchantability and fitness would have been disclaimed. Also didn't matter that Showell Growers is a sophisticated commercial enterprise. UCC is silent as to sophistication. Warranty disclaimed inside the box Rinaldi v. Iomega Corp. Issue in this case was that disclaimer was not considered conspicuous 2-316(2). Relied on ProCD case where additional terms in the shrinkwrap license were allowed b/c buyer still had a chance to make a final decision after a detailed review, i.e. could reject under 2-606(b) pg. 112. Q: If the court had done a 2-207 analysis, would it have reached the same result? LIMITATIONS ON THE WARRANTY (parties are free to K around them) • 2-316(4) pg. 70 Remedies for breach of warranty can be limited • 2-719 pg. 143 Contractual Modification or Limitation of Remedy To return, replacement, repair Can make remedy optional or expressly make it a sole remedy cmt 2 pg. 144 remedies are presumed cumulative unless made exclusive. Remedy must not fail of its essential purpose • cmt 1 pg. 144 could be unconscionable and striken • 2-302 pg. 53 Unconscionable K or clause if K or clause is unconscionable it can be removed/limited to remove the unconscionable result Examples Wilson Trading Corp. v. David Ferguson, Ltd. Unmarketable sweaters b/c dyed yarn 'shaded' when washed. Yarn supplier tried to limit warranty to time before knitting and processing. Court said this remedy failed of its essential purpose by depriving the buyer of a remedy in this circumstance. Prof S: There must be some quantum of remedy in a sales K in
case of breach, otherwise it is unconscionable. Based on cmt 1 pg. 144 to 2-719. Consequentials can be limited if not unconscionable and defines what is prima facia unconscionable (personal injury + consumer good) 2-718 pg. 142 Liquidated damages ok Conflict between 2-719(2) and 2-719(3) Pierce v. Catalina Blisters appeared below the waterline of the sailboat. K tried to limited damages to repair/cost of repair and NO consequentials. UCC allows consequentials to be limited in in 2-719(1)(a) and 2-719(3). Typically a limited repair/replacement remedy fails of its essential purpose where 1) seller is unsuccessful in repairing or replacing the defective part regardless of good or bad faith OR 2) there is unreasonable delay in repairing or replacing defective components. • MIN When a limited remedy fails of its essential purpose 2-719(2) nullifies the warranty limitation restoring buyers right to any remedy under the act. • MAJ view 2-719(2) and (3) are independent. Even if it fails of essential purpose, consequentials can still be limited so long as not unconscionable. In determining if exclusion is unconscionable court looks at: consumer involved; disparity in bargaining power, pre-printed form versus freely negotiated. Also look at whether in hindsight the damage came within the realm of expectable losses. 2-715 pg. 140 Buyer's Incidental and Consequential Damages DEFENSES TO A WARRANTY ACTION: Buyer must give seller NOTICE of breach 2-607(3)(a) pg. 113 and cmt 4 pg. 114 describes this notice. “reasonable time” facts and circumstances test Fitl v. Strek Micky Mantle card purchased for $17k+, told “mint condition” card had actually been altered: trimmed, re-glued and repainted. Buyer discovered this 2 years later when he had is appraised. This was held to be a reasonable time. The purposes of 2-2607(3)(a): provide seller opportunity to correct defect; prepare for negotiation/litigation; allow seller to investigate claims b4 evidence lost/memories stale. In this case seller had no way to correct the defect and conflict between seller and his supplier was a separate matter. Most courts hold that filing suit is insufficient notice to the seller. cmt 5 pg. 114 TBP may not need to give notice to seller of injury as quickly. Courts vary. DEFENSES IN WARRANTY: PRIVITY • vertical privity: up the supply chain [Not our focus] How far up the chain can the buyer sue? • horizontal privity: to whom retail seller is liable other than current purchaser Normally privity is required for a warranty action. However, there is an exception:
2-318 pg. 72 and cmt 2 pg. 73 Third Party Beneficiaries of Warranties: 3 alternatives A: family/household member/guest of buyer: MAJ of states recognize this exception to privity natural person + injured in person (pain and suffering, medical expenses) not mere economic damage (lost wages no) B: wider C: entity + economic harm allowed KNOW THE 3 ALTERNATIVES, the facts provided may demonstrate which state the facts fall into Why do privity issues bring up the concept of third party beneficiaries? Example case: The employee's safety while using the bandsaw was either explicitly or implicitly part of the basis of the bargain when the employer purchased the goods. DEFENSE TO WARRANTY ACTION: STRICT PRODUCTS LIABILITY Purpose of strict products liability is to permit an injured consumer to recover against the mfg as longer as the consumer can prove that the mfg put a defective product into the stream of commerce. There is no need to prove negligence or privity. Non-example Solely dealing with injury by product to the product = no strict products liability. Look to warranty law for a remedy. WARRANTIES AND ARTICLE 2A Warranty rules for lease of goods are almost carbon copies of article 2 rules. One major exception: “finance lease” where there is a lessee, lessor and supplier. If lessor makes no express warranties to the lessee, the lessee must go directly to supplier for warranty issues. • lessee wants to use the leased equipment • lessor actually purchased the equipment and then leases it to the lessee. Typically bank/finance company. • supplier: provided equipment 2A-103(g) pg. 157 Finance Lease [for our class requirements to create this are:] • The lessor must not be in the business of selling goods and must have acquired the goods in connection with the lease. • The lessee must have knowledge of what the warranties are by seeing the K between supplier and lessor or approving it 2A-212 pg. 172 Implied Warranty of Merchantibility “except in a finance lease” 2A-213 pg. 173 Implied Warranty of Fitness for a Particular purpose “except in a finance lease” 2A-210 pg. 171 lessor can create an express warranty even in a finance lease. Solution: keep your mouth shut. “Hell or high water clause” that meant that the lessor had to make payments whether or not the equipment was working. INSTALLMENT SALES
2-612 pg. 120 Installment K and Breach substantially impairs, defect to one installment versus whole K Cherwell-Ralli v. Rytman Grain A seller in an installment K can terminate a contract without first invoking 2-609. A party is entitled to adequate assurances when he has reasonable grounds for insecurity. A buyer cannot suspend performance [payment] if he has already received the agreed goods, in whole or in part? MISC 2-609 pg. 116 Assurance of Performance [may demand not must demand] A party that is in breech cannot demand adequate assurances to stall for time. 2-301 pg. 52 General Obligations seller's obligation is to transfer and deliver and buyer's is to pay in accordance with the K. THE PERFECT TENDER RULE 2-601 pg. 107 ON EXAM: a b and c as the text is written is one of his pet peeves. Don't screw it up. de minimis non curat lex (the law does not notice small defects) cmt 2 to 2-106 pg. 40 depends on the defect, seller's right to cure, usage of trade, course of dealing and course of performance. commercial unit: you cannot break a unit into pieces, separating tail from horse 2-106(2) pg. 39 Conforming 2-508 pg. 98 Seller's Right to Cure [not the same q: as whether cure was acceptable] Seller has to have reasonable grounds to believe tender would be acceptable. Sometimes if prior course of dealing involving rigorous inspection or inclusion of a “no replacement” clause in the K the seller is held to rigid compliance. Whether cure was acceptable Hypo new car, engine blows up, engine from another care. Shaken faith doctrine: The attempted cure can be ineffective. Basically taking judicial notice of the thing all modern day consumers know: that things that do not work well at the start are not likely to work well in the future unless the original defect is minor. Wilson v. Scampoli 1st application perfect tender rule. Cases don't provide that buyer must accept patchwork goods or substantially repaired articles but minor repairs are frequently able to cure imperfect tender. The seller can cure under 2-508(2) if he can do so without subjecting the buyer to any great inconvenience, risk, or loss. Removal of the TV chassis to determine the cause of the color malfunction and make repairs was no great inconvenience to the buyer. Note: in a breach of warranty case the buyer must give the seller the opportunity to cure too and in certain circumstance repairs/adjustments are ok.
2-711(3) pg. 136 On rightful rejection OR justifiable revocation of acceptance a buyer has a security interest in goods in his possession [Prof S: This gives the buyer leverage to make sure he gets the purchase price back] REJECTION AND ACCEPTANCE AND REVOCATION OF ACCEPTANCE When seller makes perfect tender buyer must either reject 2-602 or accept 2-606 or 2-607. 2-602 pg 108 BUYER'S REJECTION [hold goods for seller at seller's expense] Official comment 2 pg. 109 normal duties of the buyer upon rejection include duty to hold the goods with reasonable care. ? 2-603 pg. 109 ask seller what to do with them, sell if no instructions and perishable or declining in value. –> 2-604 pg. 110 store, reship, resell 2-605 pg. 111 Buyer must Particularize Defects when notifying seller upon rejection buyer must state particular defect which is ascertainable by reasonable inspection otherwise he cannot rely on the unstated defect to justify rejection or to establish breach where seller could have cured. • cmt 2 pg. 111 states that where tender is one which could have been cured by the seller a buyer who merely rejects the delivery without stating his objections is probably acting in bad faith and seeking to get out of a deal which has become unprofitable. Example Plateq Corp. v. Machlett Labs Specially made lead covered steel tank. Deficiencies discovered by buyer but never took delivery, instead sent notice of cancellation w/o stating particular grounds for the cancellation. 2-606 pg. 111 what constitutes ACCEPTANCE [includes failure to make a rejection] 2-607 pg. 113. Effect of Acceptance • Buyer must pay • Precludes rejection unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured • Burden is on the buyer to establish any breach 2-608 pg. 114. REVOCATION OF ACCEPTANCE • Substantially impairs its value to him [subjective] [not same as 612 installment K substantially impairs] Waddell v. L.V. R.V., Inc. Waddells 7 months of 3 years it was broken down, overheated engine. They wanted to tour country and live RV lifestyle. RV club prez. Two part test: value of conforming goods to the buyer [subjective] AND whether the nonconformity in fact substantially impairs the value of the goods to the buyer, having in mind his particular needs [objective] Cumulative effect of defects piling up = substantial impairment. Related concept: Lemon laws Reasonable time after the buyer discovers or should have discovered Waddell: time spent by seller curing defect doesn't matter re: reasonable time
•
•
It is not effective until the buyer notifies the seller of it.
2-513 pg. 104 Buyer's Right to Inspection of Goods. The buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. 1-202 pg. 17 Notifies/Notice book may be wrong could be 1-201(26) 1-205 pg 21 Reasonable Time Example Ramirez v. Autosport R's wanted to take new camper on summer vacation. Delays and problems with repairs. Dealer sold their trade in to an innocent third party. Issue: whether buyer may reject tender of goods with minor defects and whether a seller may cure. Held Ramirez's had properly rejected delivery NJ SC said they didn't cure the defects within a reasonable time so Autosport did not effect a cure. P's also wanted restitution. A buyer who rightfully rejects goods may recover as much of the purchase price as has been paid. The Code does not define “pay” and doesn't require the payment to be made in cash. • Perfect tender's harshness mitigated by right to cure within a further reasonable time and this varies depending on circumstances including change of position by the buyer and amount of inconvenience to the buyer 2-508 cmt 3 pg. 99. • Should the seller fail to cure, whether substantial or not, the buyer has the right to cancel or seek damages. • Assuming that the seller doesn't cure the code allows remedies for consumers to be liberally construed and the buyer ought to be able to exercise all of this remedies. • D's grounds for cure did not fit within 2-508 b/c time for performance had past and no reasonable grounds to believe it would be acceptable. ON EXAM BE SURE YOU FIT IN ONE OF THE TWO PRONGS OF 2-508 FOR SELLER TO HAVE A RIGHT TO CURE. Is the seller entitled to a setoff for the amount of benefits the purchaser received? GR: buyer's post-revocation use entitles seller to set off. Whether it destroys the revocation will depend on facts and circumstances. In exceptional circumstances subsequent use (after revocation) is acceptable. Examples combine with high replacement cost, mobile home, car w/no other means of transport. Related concepts: remedies that fail of their essential purpose ( 2-719 pg. 143) and shaken faith doctrine. Buyer gets defective good, retailer goes bankrupt, buyer wants to revoke against mfg. This is not allowed under the UCC. RISK OF LOSS 2-401(1) pg 85 and cmt 1 pg. 86 UCC states that risk of loss has nothing to do with technical
title cmt 5 to 2-503 pg. 93 presumption shipment K unless “a term requiring the seller to pay the freight or cost of transportation to the buyer is equivalent to an agreement by the seller to deliver to the buyer or at an agreed destination.” • shipment K – parties agree that the buyer has the risk of loss once goods are delivered by the seller to the carrier. UCC PRESUMES THIS if the K is silent on risk of loss. • destination K – seller bears the risk until delivery by carrier to the buyer. 2-503 pg. 99 Seller's Tender of Delivery • Hold conforming goods for buyer and • Give buyer notification reasonably necessary to enable him to take delivery • reasonable hour • kept available for period reasonably necessary to enable buyer to take possession 2-509 pg. 99 Risk of Loss + No Breach section 4 says subject to provisions of K and 2510 [breach] and 2-503 [tender of delivery] pg. 91 and 2-504 pg. 94 [seller's shipment] (3) pg. 100 If the seller is a merchant the risk of loss passes to the buyer on the buyer's actual receipt of the goods. (3) Where the seller is not a merchant the risk of loss passes to the buyer when the seller tenders delivery. (1) If K requires a carrier (a) if does not require delivery at a particular destination risk passes to the buyer when goods are delivered to the carrier [SHIPMENT K] (b) if does require particular destination risk passes to the buyer when tendered at that destination [DESTINATION K] (2) issue is whether seller can be a bailee. GR: not a bailee unless a separate portion of the agreement dealing with the bailment. 2-509 subject to 2-510 Jakowski v. Carole Chevrolet, Inc. P/buyer entered K to buy a 1980 Camaro. Buyer wanted it undercoated and wanted the finish to have a polymer coating. Car was delivered w/o coatings. Next day seller contacted the buyer admitted mistake and asked for the buyer to return the car for coating. Buyer did that. Then the car was stolen from the seller's premises. Seller argues buyer has risk of loss under 2509. However, 2-509's general provisions are subject to specific provisions of 2-510 which deals with the effect of breach. 2-510(1) says that were the tender or delivery of goods fails to conform to the K as to give a right of rejection the risk of loss remains on the seller until cure or acceptance. 2-510 pg. 101 Risk of Loss + Breach • Seller flunks perfect tender rule (2-601 pg. 107) risk remains on seller until cure (2508 pg. 98) or acceptance (2-606 pg. 111) • Buyer rightfully revokes (2-608 pg. 114) and loss, portion not covered by buyer's insurance is the seller's responsibility. • Buyer repudiates (2-610 pg. 118) or otherwise in breach before risk passed to him, loss, and seller's insurance doesn't cover it, buyer is on the hook for the remainder. 2-709 pg. 135 Action for the price: risk of loss shifts back to the seller when buyer fails to pay
within a commercially reasonable time. Cannot sit on the goods indefinitely, must assume K is breached and act to protect yourself if you are a seller. 2-319 through 2-322 define these: CIF (cost, insurance, freight) 2-320 pg. 74 always shipment K C&F (cost and freight) 2-320 pg. 74 always shipment K – buyer often has blanket insurance K. FOB (free on board) 2-319(1)(a) pg. 73 – can indicate either a destination K or shipment K. The named place is where the risk of loss passes. If the named place is the seller's warehouse the it calls for a shipment K. If the destination is the buyer's store a destination K arises and the seller bears the risk. Example FOB Pittsburgh where Pittsburgh is the buyer's place = destination K. FAS (free along-side) 2-319(2) pg. 73 [typically a shipment K] Ex-ship (off the ship) 2-322 pg. 79 cmt 2 to 2-509 pg 100 a K must be entered into between the seller and the carrier. If the seller buys the goods afloat and later diverts the shipment to the buyer, he must identify the goods to the K before the risk of loss can pass. cmt 2 to 2-501 pg. 90 It is possible for the identification to be tentative or contingent. The general policy is to resolve all doubts in favor of identification. 2-504 pg. 94 if seller must deliver to buyer but buyer doesn't specify location seller must make reasonable K with carrier (should seller insure goods? Depends on facts and circumstances) Example Cook Specialty Co. v. Schrlock P bought a machine from D/MSI. The terms were FOB MSI's warehouse [seller's place of business therefore shipment K] Hydraulic press brake machine fell off the carrier's truck in transit. The court said that seller/D/MSI bore the expense and risk of putting the machine into the carrier's possession for delivery under UCC 2-319. After the carrier took possession the risk of loss shifted to the buyer/P. What does "duly delivered to the carrier" mean? Per 2509 they aren't duly delivered unless a K is entered between the seller and the carrier that satisfies provisions of 2-504. cmt 2 to 2-509 says that the seller has to put the goods in the possession of such a carrier and make such a K for their transportation a may be reasonable having regard to the nature of the goods. The P argues that the K MSI made for delivered wasn't reasonable b/c it failed to ensure that the carrier had sufficient insurance coverage to compensate the P for loss in transit. Since it was unreasonable, P argues the brake wasn't duly delivered according to 2-509 therefore risk of loss never passed to the P. Reasonable in the circumstances means things like refrigeration of perishable goods, watering of livestock, protection against cold, etc according to 2-504 cmt 3. The seller is not obliged to investigate the amount and terms of the insurance held by the carrier. The court found as a matter of law that MSI's conduct was not unreasonable under 2-504. 2-504(c) pg 94 requires prompt notification of the buyer Rheinberg-Kellerei GmbH v. Vineyard Wine Co. The trial court concluded that the P's failure to notify the D of the shipment until after the sailing of the SS Munchen and the loss was not prompt notice within the meaning of 2-504 so the risk of loss didn't pass to the D upon the delivery of the wine to the carrier pursuant to 2-509(1)(a). Held the trial court was correct. The requirement of prompt notification by the seller as used in 2-504(c) must be construed as taking
into consideration the need of a buyer to be informed of the shipment in sufficient time for the buyer to take action to protect himself from risk of damage to or loss of the goods while in transit. What constitutes prompt notice will vary based on facts and circumstances. Because the buyer/D was never notified directly or by forwarding of shipping docs within the time in which its interest could have been protected by insurance or otherwise, D was entitled to reject the shipment pursuant to the term of 2-504(c). COMMERCIAL IMPRACTICABILITY = UCC's VERSION OF IMPOSSIBILITY 2-613 pg. 121. Casualty to Identified Goods [broken sundial hypo] IF the contract requires for its performance goods identified when the contract is made, AND the goods suffer casualty without fault of either party BEFORE the risk of loss passes to the buyer THEN • (a) if the loss is total the contract is avoided; and • (b) if the loss is partial..buyer may..at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration. Prof S: impossibility of performance: not applicable if assumed loss or loss was foreseeable to be avoided or accepted with due allowance for K price 2-615 pg. 123 Excuse by Failure of Presupposed Condition cmt 1, 4 and 5 to 2-615 pg. 124 SELLER IS EXCUSED for impracticability in certain circumstances. • NOT increased cost alone UNLESS the rise in cost is due to some unforeseen contingency BEYOND a rise or a collapse in the market LA Power & Light Co. v. Allegheny Ludlum Industries, Inc Allegheny faced an increase in cost of performance of only 38% over the original K price. This wasn't enough. 31.6% increase in a cape of good hope/suez canal case wasn't enough Iowa case 52.2% increase wasn't enough and court noted that cost increases of 50-58 percent hadn't been enough in other cases. • A severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like. • Where the particular source of supply is exclusive and fails though casualty..However the seller must employ all measures to assure himself that his source will not fail. • In AZ must prove that the supervening frustrating event was not reasonably foreseeable. AZ rejects the application of the commercial frustration doctrine when a party assumes the risk of the frustrating event [promoting a dead horse]. Arabian Score v. Lasma Arabian Ltd. REMEDIES, IN GENERAL 1-305(a) pg. 27 Remedies to be liberally construed, also cmt 4 2-703 [seller's remedies] pg. 128, cmt 3 2-711[buyer's remedies] pg. 137 Guiding principle UCC is to put the injured party in as good a position as the party would have been but for the breach. 1-103 pg. 6 other principles of law and equity supplement
2-719 pg. 143 Limitation of remedy can be put in the K 2-718 pg. 142 Liquidated damages are ok so long as not a penalty SELLER'S REMEDIES when the buyer is in breach (2-703 to 2-710, 2-718) • 2-703 cmt 1 pg. 128 UCC rejects election of remedies • if BUYER ACCEPTS (2-606 pg. 111) then we are talking about Action for price (2-709 pg. 135) 2-703 allows seller to withhold delivery, stop bailee from delivering, complete mfg or scrap/salvage under 2-704, resell +damages,damages,action on price reclamation - one party insolvent while in possession of goods identified to the K you can bring an action to forgo damages and get the goods 2-702 pg. 127 Seller's Remedies on Discovery of Buyer's Insolvency [often litigated] 2-710 pg. 136 Seller's Incidental Damages 2-704(2) and cmt 1 and 2 pg. 129 Unfinished goods: complete it or scrap it. Burden is on the buyer to show commercially unreasonable nature of the seller's action. Seller under 2-704 can complete manufacture and if he can't complete resale then he can go after buyer for action on the price under 2-709(1)(b). Generally, 3 options on Buyer's breach/repudiation 2-706 pg. 131 Seller's Damages IF RESALE • GF + commercially reasonable manner cmt 2 pg 132 If seller fails to act properly, seller is deprived of measure of damages under 2-706 and is relegated to 2-708 pg. 134. • seller's damages = Resale price – K price + incidentals – expenses saved • private sale reasonable notification to buyer • public sale reasonable notice (unless perishable or rapidly declining value) Hypo: finance company repos car and doesn't give notice of sale becomes the stuckee • seller may buy • seller not accountable to the buyer for profit • purchaser who buys in GF takes free of rights of original buyer 2-708(1) pg. 134 Seller's Damages if NO RESALE seller's damages = market price at time/place for tender – unpaid K price + incidental damages – expenses saved. 2-723 = market price 2-708(2) pg. 134 Seller's Damages LOST VOLUME SALE [has an inventory of the goods] seller's damages = profit (including reasonable overhead) + incidental damages + costs reasonably incurred – payments received • lost volume sale: could have had 2 sales, but instead only got 1. A buggy whip salesman, though, wouldn't qualify no matter how large his inventory b/c hardly
•
•
•
anyone is buying. This is a facts and circumstances evaluation. Drafters made an error in 2-708(2) so courts ignore “proceeds from the resale”
BUYER'S REMEDIES when seller is in breach (2-711 to 2-717) • 2-718 pg. 142 Buyer's Restitution [NOT ON EXAM] Buyer breaches AND seller withholds delivery and buyer paid, buyer can get his money back [restitution] minus liquidated damages OR (20% K price OR $500 whichever is smaller). Buyer's money also minus setoff for seller's other damages and benefits/profits buyer was going to get under the K. • reclamation - one party insolvent while in possession of goods identified to the K you can bring an action to forgo damages and get the goods. 2-502 pg. 90 Buyer's Right to Goods on Seller's Insolvency 2 options depending on if there was an acceptance of the goods or not. 2-714 BUYER HAS ACCEPTED, buyer gets diff between goods promised - goods received 2-715 pg. 140 buyer has accepted he also gets incidental and consequential damages as defined here 2(b) does NOT require foreseeability, only proximately • Rejection of doctrine of certainty (mathematical precision) in calculation of consequential damages • More and more courts are willing to give damages on lost opportunity argument • Most jurisdictions would not allow attny fees as consequentials 2-711 pg. 136 BUYER HAS NOT ACCEPTED seller fails to deliver or repudiates or buyer rightful rejects/revokes acceptance 2-712 pg. 137 buyer has not accepted, buyer covers. cmt 2 pg. 138 test for cover is whether buyer's actions were reasonable + GF Hypo it was ok to buy the bigger mobile home as cover. Some courts would say that the $2k difference won't be compensated. Hughes Communications Galaxy, Inc. v. US Applying UCC by analogy to a services situation. This case stands for proposition that you don't have to cover with exactly the same substitute [case was about Satellite launch services] 2-713 pg. 138 buyer has not accepted, buyer chooses not to cover calculation of damages for non-delivery or repudiation by seller. 2-723 = market price 2-716 pg. 141 buyer hasn't accepted: SP when goods are unique or other proper circumstances (Prof S: could be anything) ANTICIPATORY REPUDIATION (2-610 pg. 118) UCC doesn't define but it must be a definite refusal to perform cmt 1 to 2-610 pg. 119 anticipatory repudiation (aside from defective delivery under and installment K) is an overt communication of intention or an action which demonstrates a clear determination not to continue with performance.
•
• •
Await performance for a commercially reasonable time. Wouldn't be bad faith to wait in a market where prices were moving to seller's advantage on buyer's breach or vice versa. Resort to any remedy (Buyer's or Seller's remedies in general) despite having said would await Suspend performance or identify: finish or salvage.
The equivocating party can be forced into performance or repudiation by using 2-609 pg. 116. 2-611 pg. 119 Retraction of Anticipatory Repudiation. 2-723 pg. 145 Proof of market price [PROBLEM drafters were thinking of a buyer who learns of repudiation AFTER the date set for original performance, not b4 the due date. The drafters got sloppy] STATUTE OF LIMITATIONS 4 years per 2-725 pg. 146. Parties can agree to as little as 1 year for breach of K but may not extend it beyond 4. Also reducing SofL may need to be conspicuous to be enforced. In most jurisdictions SofL is an affirmative defense that is waived if not pleaded and proved. 4 years for breach of warranty unless express/explicity guarantee of future performance. Courts are split on whether statute is tolled during the time good is being repaired. Example: 3 months in a repair shop. Hypo lifetime guarantee. Under 2-725(2) this warranty extended the time so it covered the future performance of the goods. He can sue b/c he just discovered the breach. Philosophical question about what a 'lifetime' should be for goods. Hypo “Many tires are still on the road after 5 years” This is not definite enough of a statement of future performance. Example Poli v. DaimlerChrysler Corp 7 year 70k powertrain warranty. Timing belt replaced or repaired numerous times between 1993 and 1998 when P sued for breach of warranty. P argued that b/c the D had explicitly extended the warranty to future performance of the goods, the cause of action accrues when the breach is or should have been discovered. The P argued that this was in 1998 when the D failed to repair the timing belt. Court held that P was correct, that the claim for breach of this warranty did not accrue at time of delivery of the car but rather when the D allegedly breach its duty to repair the defect. If court gave D what they wanted the warranty beyond 4 years was meaningless. ARTICLE 3: NEGOTIABLE INSTRUMENTS Two categories of negotiable instruments A promise to pay money is a note and an order to pay money is a draft. cmt 1 to 3-104 pg. 239 Negotiable instruments – transfer through many hands before being presented for payment.
UCC 3-102(a) excludes stocks, bonds and wire transfers from coverage of UCC article 3. 3-102(b) pg. 234 in case of conflicts between article 3 and 4, article 4 governs. 3-104(e) pg. 239 instrument as NOTE = PROMISE v. draft (=order) Note is a 2 party instrument 3-103(a)(5) pg. 236 Maker = person in a note who undertakes to pay Payee person to whom the note is made payable, person entitled to payment Example 3-104(f) pg. 239 CD = deposit and promise to repay = note 3-104(f) pg. 239 check = DRAFT= ORDER payable on demand & drawn on bank OR cashier's check OR teller's check. Draft = 3 party instrument. • 3-103(3) pg. 236 Drawer = person who signs and orders payment • 3-103(2) pg. 236 Drawee = person ordered to pay = bank • Payee Examples Money order can be a check. cashier's check: draft where drawer and drawee are same bank. teller's check: draft drawn by a bank on another bank or payable through a bank. 3-409(d) pg. 300 certified check = accepted by the bank on which it is drawn. 3-103(a)(11) pg. 237 Remitter: person who purchases an instrument from issuer and payee is somebody other than the purchaser. NEGOTIABILITY = requirement for Article 3 to apply N1+N2 = Holder N1 = negotiability = form the doc must be in N2 = negotiation = transfer If the paper is not negotiable then any transfer is nothing more than the assignment of K rights and latter holders (assignees) take subject to all defenses arising from the underlying transaction. Holder + (Value, GF, w/o knowledge of defects) = Holder in Due Course (HDC) HDC avoids most defenses. One exception to HDC status is if the note was for money won during gambling. Note: having the “rights of a HDC” not the same as being an HDC Negotiable refers to the form of the document and the definition is in UCC 3-104(a). Every element must be met. SUPER 7 REQUIREMENTS • #1 writing A negotiable instrument MUST be in WRITING but no requirement that it be on paper. Banks must sometimes cope with instruments written on odd surfaces. The IRS is sometimes the payee of a negotiable shirt. • #2 signed Promise 3-103(9) pg. 236 written undertaking to pay money signed Order 3-103(6) pg. 236 a written instruction to pay money signed 1-201(37) pg 13 "Signed" includes using any symbol executed or adopted with present
intention to adopt or accept a writing. cmt 39 to 1-201(37) pg. 17 A complete signature is not necessary. A symbol can be used. 3-401(b) A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing. § 3-104. (a) (1), (2),(3) pg. 239 NEGOTIABLE INSTRUMENT. • #3 unconditional promise or order [only refers to express conditions not being there] 3-106 pg. 242, cmt 1 pg. 243 Negotiable instrument holder should not have to examine another doc to determine payment rights. • No express conditions = destroys it's ok for the note to be subject to an implied condition (that the theater won't burn down) but an express condition destroys negotiability. Exception: “void after 90 days” pre-code cases uphold as being negotiable and UCC allows this without destroying negotiability. • • • • governed by another writing = destroys rights and obligations for the order/promise in another instrument = destroys refers to another writing = ok ok to refer to anther writing for statement of rights for collateral, prepayment, acceleration Hypo “This note is secured by a security interest in collateral described in a security agreement between the payee and maker of this note.” The security interest is a separate interest. This does not destroy negotiability. limited to a particular fund/source = ok countersignature required = ok fail to countersign = still can become a holder statute states holder/transferee subject to claims/defenses issuer could assert against payee = ok but no HDC
• • • •
Triffin v. Dillabough Triffin buys checks at a discount from Chuckies Check Cashing. Chuckies had cashed stolen AMEX traveller's checks. The checks had a legend stating “DO NOT CASH FOR STRANGERS. THIS MONEY ORDER WILL NOT BE PAID IF IT HAS BEEN ALTERED OR STOLEN OR IF AN ENDORESEMENT IS MISSING OR FORGED.” Triffin wanted to force AMEX to pay the checks. AMEX said that the language on the check made it a conditional promise to pay. Court said no, it's just a warning to the party cashing the money order to protect himself against fraud. Triffin won. • #4 fixed amount of money • If you can't look at the instrument and readily calculate the amount that the maker or drawer promised to pay it is not negotiable. The fact that the holder of
• •
the note has to consult sources outside of the instrument to calculate the interest doesn't destroy negotiability. Per 3-112(b) pg. 248 INTEREST Must be payable in money. 1-201(24) pg 12 money = official currency of a govt.
#5 courier without luggage [refers to no other promises, conditions, undertakings] express conditions not under this element • Maker agrees signing this note also indicates acceptance of the K of sale for which it was given = destroys • Maker agrees tha if the holder deems himself insecure, he may inform the maker who will then supply additional collateral = ok • Maker agrees to let the holder select an attny for the maker and the attny can confess J against the maker = ok • By cashing this check the payee agrees [agreement = promise] = destroys • Maker grants payee a security instrument = ok Woodworth v. Richmond Indiana Venture Dec 1987 P executed a promissory note payable to The Richmond Indiana Venture LP for $655k. Note was negotiated to D Signet Bank. P defaulted on the note in July 1989. P filed this action on Nov 1989. The promissory note contained a term that if the maker of the note failed to pay on time then the Partnership had the option to kick the maker out and the maker would forfeit his partnership interest in addition to other remedies in the Partnership agreement. The court said that this was more than recitation of security or an agreement to protect collateral. This was forfeiture w/o resort to judicial process so the negotiability of the note was destroyed. Since it was not negotiable, D Signet Bank couldn't claim HDC status and was subject to ordinary K defenses. P Woodward's motion for partial summary J granted, in other words, Signet was not an HDC and therefore subject to defenses Woodward had against the Venture. Court stated that it was persuasive that the forfeiture was at the option of the partnership and not the holder and partnership could exercise this even before the holder declared a default. Where doubt exists THE PRESUMPTION IS AGAINST negotiability.
•
#6 payable on demand or at a definite time Holder must be able to tell when it comes due or it is non-negotiable. 3-108 pg. 244 defines payable on demand or at a definite time • MUST meet the requirements of 3-108 • acceleration ok since holder gets paid sooner • extension clauses ok if to a further definite time “tomorrow” standing alone is not a definite time, same problem with “on my next birthday” not enough standing alone. 3-113 pg. 249 • can be ante or post dated. • An undated instrument that specifies no time of payment is treated as payable on demand.
•
#7 payable to bearer or order
Prof Scott: if a check under 3-104(c) pg. 239 doesn't have to use special bearer order language. Drafters of UCC didn't want folks inadvertently destroying negotiability of checks. If a note the language must be correct 3-109 pg. 245 payable to bearer if: “payable to bearer” or “payable to the order of bearer” or doesn't state payee or “payable to cash” or “to the order of cash” • With special indorsement can turn it into payable to order • bearer paper = payable to the holder 3-104(a)(1) Examples cash, bearer bonds “Payable to John Smith or bearer” = bearer paper payable to order = payable to identified person or to order. 3-115 Incomplete Document Example “pay to the order of <blank>” cmt 2 pg. 250 is bearer paper while blank, after it is filled in it is order paper 3-110(c) A person to whom an instrument is payable may be identified in any way, including name, identifying number, office, or account number. Example Pay to the order of the President of the United States” = ok NEGOTIATION = transfer Everything between issuance and presentment is a transfer. If transfer makes the person a holder, it's called negotiation. STAGE 1: ISSUANCE: 3-105 pg. 242 STAGE 3: PRESENTMENT: 3-501 pg. 316 (also requires indorsement to make it bearer paper 3-501(b)(2)(iii)) the bank being presented with the instrument is NOT a holder STAGE 2: TRANSFER: 3-203 pg. 255 Physical transfer of the instrument vests in the transferee whatever rights the transferor had in the instrument If the physical transfer is done in a way to make the transferee a HOLDER, then the transfer is called a NEGOTIATION. 1-201(21) Holder pg. 11 person in possession of a negotiable instrument that is payable either to bearer OR to an identified person that is the person in possession. 4-105(1) "Bank" means a person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or trust company. (2) "Depositary bank" means the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter; [presented for immediate payment = presentment]
(3) "Payor bank" means a bank that is the drawee of a draft; (4) "Intermediary bank" means a bank to which an item is transferred in course of collection except the depositary or payor bank; 4-205(1) pg. 347 How a Depository Bank becomes a HDC Requirements 3-201(b) pg. 254 • if bearer paper just needs delivery to transferee who qualifies as a holder. Even a thief who has bearer paper qualifies as a holder. • if order paper indorsement by indorser + delivery to transferee who qualifies as a holder. An INDORSEMENT (3-204 pg. 257) is a signature placed on an instrument (most commonly on the back) by the payee or any later transferees. BLANK INDORSEMENT (3-205 pg. 259) – when the payee simply signs the back of the instrument. Legal effect? It converts the paper into bearer paper. SPECIAL INDORSEMENT (3-205 pg. 259) – to preserve the “order” character, the original payee may specify a new payee by writing “Pay (name).” The new payee becomes a holder as soon as the instrument is delivered. (Do not need “pay to order of” here) Negotiability is not affected by the language written on the instrument during the course of negotiation 3-203 a person who possess an instrument that hasn't been signed has right to get the indorsement but for now she is not even a holder 3-110(d) pg. 247 and cmt 4 pg. 248 Who Signs When more than one Payee • x and y = both must sign • x or y = either can sign • no connecting words/ambiguous = either can sign, UCC favors negotiability Paycheck made out to the wrong person “Bob Baker” instead of “Bob Barker” 3-204(d) and cmt 3 pg. 258 A separate paper used for indorsements is called an allonge • 3-204(a) says that it must be affixed to the instrument. • A 1975 CO case says that stapling Is the modern equivalent of gluing or pasting.
• •
Adams case held that the bank purchaser of notes was not HDC due to separation of allonges sheets paper clip = questionable, folding in = not good enough
Forgery of the Payee’s Name 3-403 pg. 290 unauth'd signature • If an instrument is payable to the ORDER of a named payee, only that payee can become a HOLDER. • That person does not become a holder until the PAYEE gets possession of the instrument. • Thereafter, no one can qualify as a HOLDER until the payee indorses the instrument. • Without the payee’s indorsement, no later transferees will have taken by a valid NEGOTIATION, which remains the payee’s property. 3-306 pg. Claims to an Instrument. A person taking an instrument, other than HDC, is subject to a claim of a property in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. • An unauthorized signature (forgery or signature by nonagent), is NOT effective to negotiate the instrument. Remember under 2-205 a forged signature on a specially endorsed instrument is not a signature by the person it is payable to so this wouldn't be a valid negotiation. Also, unauth'd signature 3-403 Hypo: a blank check (no payee, signed, thief puts his name in and endorses it) = valid negotiation, garden variety theft of bearer paper. Following a forgery of the payee’s name, no later transferee (no matter how innocent) can qualify as a holder.
•
If your name is on it, you are liable on it 3-415(a) pg. 305 ...if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed HOLDER IN DUE COURSE (HDC) 3-302(a)pg. 263 HDC if: (1) no evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; AND • (2) the HOLDER took the instrument • (i) for value, 3-303 pg. 267 Value and Consideration to the extent the promise has been performed. To the extent not performed issuer has a defense. Instrument must be issued for C. Hypo: promise is totally executory (attny retainer), not an HDC and check can be
recovered using 3-306. If attny starts work on the case, he is now giving value and [for our class purposes] he is an HDC and check isn't reclaimable. The gift of an instrument will NEVER created HDC status in the donee though the donee may get similar rights under the shelter rule 3-203(b) pg. 255 Guy signs $23k note to car dealership. Finance company buys the note for $200 less than face amount. Finance company is a HDC for $23K. The finance company took the risk of non-payment and paid their money now to the car company. Both of those things are valuable consideration. PROBLEM 104 Guy defrauds lady. Lady stops payment. The guy tries to cash the check at his bank for payment. The bank's major problem in this situation is proving that it paid value for the check. If it is out of pocket then the UCC allows the guy's bank to be an HDC b/c it paid value. Article 4, section 4-211 pg. 352 provides that for purposes of determining its HDC status a bank gives value whenever it has a security interest in the instrument. Situations like this are spelled out in 4210(a) and (b) FIFO rule pg. 351. Prof Scott: if they just put money in the account until it clears that is just provisional credit and the bank would NOT be a HDC. But if the bank shelled out cash then they are HDC. FIFO rule 4-210: first in, first out. Bank customer presumed to withdraw his own money first. Examples Fraudster already has $500 in his account, deposits $1k, withdraws $500. Is the bank a HDC for any amount? No. If he withdraws $750 bank is HDC for $250. Falls Church Bank v. Wesley Heights Realty, Inc. Whether a depositary bank can achieve HDC status. Bank's customer deposited $1400 check. Withdrew $140. Drawer stopped payment on the $1400 check. Bank's customer skipped out of town owing the bank $140. Can bank assert HDC against people who stopped the check? UCC expressly provides that a bank acquires a security interest in items deposited and for purposes of HDC the depositary bank gives value to the extent that it acquires a security interest in the item in question 4-210. A bank may be a HDC while acting as a collecting agent for its customer. As HDC the $140 claim against the drawer cannot be defeated except by those real defenses set out in UCC 3-305(2) none of which are asserted. • (ii) in good faith, GF = 1-201(20), 3-103(4) “honesty in fact” AND “the observance of reasonable commercial standards” Analysis of notice is often linked to GF b/c if you have notice of defects you can't take in GF. commercially reasonable standards Any Kind Checks Cashed, Inc. v. Talcott Issue: Is a check cashing store a HDC when it paid out $10k to a
fraudster who bilked an elderly man? Held: Not an HDC b/c their procedures re: the chx didn't comport with reasonable commercial standards of fair dealing. Facts: Fraudsters sold $75k of bogus “investments” to a 93 yo MA resident. Guarino told the old man he needed to send a $10k check so Rivera, his partner in crime, could travel to obtain a return on the $75k. The old guy called Rivera directly who said he only needed $5700. The old guy stopped payment on the check. Guarino still presented it for payment at the check cashing store. B/c of the fedex envelope the check came in and since the old guy didn't pick up the phone, the check cashing company took their $500 fee and gave Guarino $9500. Rivera called the old guy again, got him to send the $5700 then they presented that for payment. Again Guarino showed a fedex envelop and told Any Kind he was a “broker.” Having no written procedures, the company employee contacted the other supervisor who had paid out the $10k who said, let's wait until we get the geezer on the phone. G. reversed the phone digits, they got in contact with the old man, didn't mention the $10k and he confirmed he'd sent the $5700. They cashed the second check. GF requirement was analyzed using standard of honesty in fact and the observance of reasonable commercial standards of fair dealing. Here the pure heart/empty head formula doesn't work anymore even though it would under the pre-1992 subjective standard. For further guidance court looked to analysis done by SC of ME. The factfinder has to first look at whether the conduct of the holder comported with industry/commercial standards and 2nd whether those standards were reasonable standards intended to result in fair dealng. Facts and circumstances. No evidence at trail court concerning check cashing industry's commercial standards. Court says that even if their conduct matched the industry's gold standard they were still not reasonably related to achieving fair dealing in the transaction. Further looked at the statute regulating check cashing business in FL. Also commented on check cashing industry's niche market in cashing small checks not these kinds of large checks. The $10k amount was a red flag. Also Guarino didn't have a history of cashing checks of this size at the check cashing store and also had to pay a % fee far in excess of what he would have paid at a traditional bank. General Investment Corp v. Angelini Trial court held that P was an HDC of note signed by D's Angelini and was immune from defenses they wanted to assert, the Angelinis ended up with a J against them for approximately $5,300 plus interest. Ds appeal. Ds entered a K with Lustro Aluminum Products for repairs to their home. Siding, sills, trim, storm doors, paint and job cleanup. Installment payment plan. They signed a note. Note wasn't dated and date of commencement of payment was not set forth. Also, payments were not to begin until the D's were happy according to the sales rep. P General Investment Corp is a home improvement K financier dealing with hundreds of contractors. About 10% of its volume came from Lustro. They supposedly purchased the note for value from Lustro on the day of alleged execution in Dec 1966. It was endorsed without recourse but
there was a warranty that it had installed all articles and materials and completed all the work. P required both the note and underlying K before it paid for the note. Therefore, General Investment had to know that only after completion the payments would commence 60 days later. If General had inquired or required a “certificate of completion” under NJ law, then it would have known there was a problem with the work. Lustro never did the work. Lustro became insolvent and went out of business. D's returned the payment book to the P and let them knew about the problems. P argued it was already a HDC and immune from the defense of failure of consideration. Ordinarily where the note appears to be negotiable in form and regular on its face the holder is under no duty to inquire as to possible defense. Once it appears that a defense exists against the payee the person claiming the rights of a holder in due course has the burden of establishing that he is in all respects such a holder. Here, with consumer home repair transactions, failure to inquire reveals a deliberate desire to evade knowledge b/c of a belief or fear that investigation would disclose a defense arising from the transaction. Their lack of GF led to their lack of notice. Therefore not an HDC and General is subject to defenses homeowner could assert against the note. J reversed. • (iii) without notice of defects Normally the payee is so involved in the underlying transaction that he/she cannot be an HDC b/c of knowledge of problems with the transaction. PROBLEM 106 Corp treasurer used a corporate check to pay his AMEX bill. The corp check requisition was for shipping expenses. He did this every month for 2 years. Corp finally figured it out and sued AMEX in quasi K for the cash. Amex said it was an HDC. This is correct. AMEX had no notice of breach of fiduciary duty under 3-307(b)(4) pg. 274. Also the instrument was not so irregular so as to call into question its authenticity under 3-302(a)(1). Another example, put wrong year on check just after the New Year. No problem. Not so irregular as to call it into question. Do it in July, that's a problem. 3-304(b) and (c) unless accelerated, instrument not overdue if default in payment of interest (not principal). A check payable on demand is overdue 90 days after its date. The holder of such a check cannot be a HDC. So check lost behind a desk for months and indorsed over to the local grocery store means that the grocer is just a holder and subject to defenses drawer wants to assert against the original payee (dentist who did shoddy work and indorsed over the check) PROBLEM 111 3-203(c) and official comment 3 and case #4 in official comment 4 Note not properly indorsed. Unfortunately, company holding the note had notice of a defect b4 the indorsement was made therefore would not qualify as an HDC.
too “closely connected” = the seller-transferor is too closely connected for the buyer-transferee of the paper for the buyer to be allowed the HDC status. Jones v. Approved Bancredit Corp Close relationship between the homebuilder and the finance company...same officers/directors. This led the court to conclude they did not buy without notice/had GF. Courts recognize problem with the financing of installment sales for consumer goods and household improvements. Court must balance desire for unrestricted negotiability against the remedy of consumers who want to withhold payment. The more the holder knows about the underlying transaction which is the source of the paper, the more he controls or participates in it, the less he fits the role of a good faith purchaser for value and the less justification for according him the protected status of HDC. Another exception thanks to the shelter rule Triffin v. Somerset Valley Bank Triffin had notice the checks he bought had already been dishonored. So Triffin couldn't qualify as a HDC. However, b/c of the shelter rule, Triffin acquired the “rights of a HDC.” What does 3-308(a) pg. 276 and cmt 1 provide? Signatures are presumed to be valid. If party wishes to contest this, must plead it as a specific denial to put the opposing party on notice. Party trying to prove the signatures invalid has the burden of proving sufficient support for it. Why does the shelter rule make sense here? Because the holder could just pass the instrument back up the chain until it reached an HDC who would then sue the instrument's creator and prevail. No real difference aside from reinforcing the concept of negotiability. SHELTER RULE: 3-203(b) pg. 255 transferee stands in the transferor's shoes Exception: fraud/illegality on the part of the transferee. Also can't wash the instrument clean by transferring to another party then buying it back to acquire HDC status. cmt 2 pg. 256 Example Gift of a note? If donor was a HDC the shelter rule would provide the donee with the “rights of a holder in due course.” Shelter rule can apply multiple times down the line of transferees. Reacquisition of the instrument: 3-207 when a previous holder reacquires the instrument, he has the power to strike the intervening indorsements. REAL DEFENSES 3-305 pg. 269. Real defenses (1) defeat HDC. Personal defenses (2) do not. Claims of recoupment in (3) can be asserted against the transferee of the instrument to reduce the amount owing on the instrument. • infancy defeats HDC 3-202 (a) Negotiation is effective even if obtained (i) from an infant, a corporation exceeding its powers, or a person without capacity, (ii) by fraud, duress, or mistake, or (iii) in breach of duty or as part of an illegal transaction. (b) To the extent permitted by other law, negotiation may be rescinded or may be subject to other remedies, but those remedies may not be asserted against a
subsequent holder in due course or a person paying the instrument in good faith and without knowledge of facts that are a basis for rescission or other remedy. • • • duress lack of legal capacity illegality Prof S: Don't use 3-305(a)(1)(ii) illegality of the transaction....don't use this for forgery situations. It generally applies to usury and gambling situations.
Sea Air Support Inc. v. Herrman Ralph H. wrote a check for $10k payable to Ornsby House in exchange for gaing chips but Hermann had insufficient funds. The debt assigned to Sea Air Support. They couldn't collect & filed suit. Trail court dismissed based on NV cases refusing to enforce gambling debts. NV follows CL of gambling. All notes drawn for the purpose of reimbursing or repaying any money knowingly lent or advanced for gaming are utterly void and unenforceable. Sea Air can't claim HDC status and had at least constructive notice since original check made out to a casino. Following this case NV legislature amended its gambling laws. Kedzie & 103rd Currency Excahnge, Inc. v. Hodge Service provider was required to be, but was not a licensed plumber. Flood control system not installed. Stop payment on the check. Nevertheless Fentress presented the check at the 103rd and obtained payment but when presented to Citicorp for payment it was refused. Currency Exchange alleged it was a HDC and sued Beulah Hodge, the drawer of the check. Hodge moved to dismissed under 3-305 alleging that the transaction was illegal b/c Fentress was not a licensed plumber as required under IL plumbing license law. Trial court dismissed Currency Exchange's action against Hodge. On appeal issue is whether noncompliance by Fentress with licensing law gives rise to illegality of transaction. Historically, illegality arises only when there is a legislative declaration affecting both the underlying K and instrument exchanged upon it. Also, gaming nature/gambling. Usury has not been held to give rise to illegality as a defense against a holder in due course. Transaction made in violation of an injunction, still note was upheld. Rationale: everyone has notice of legislative actions, HDC is an innocent third party w/o knowledge of circumstances of K upon which instrument was initial exchanged. HDC intended to facilitate commercial transactions. If illegality were used the way the D says, then it would be a personal defense. Not enough that the initial obligation to pay arising from a void K or transaction is void. DISSENT: said that it's clear that an illegal transaction is enough to defeat HDC under 3-305. IL Plumbing Law event provides for criminal penalties b/c public safety is at issue.
•
Fraud in the factum = real defense type of fraud where misrepresentation causes one to enter a transaction without accurately realizing the risks, duties, or obligations incurred. Didn't mean to enter the agreement. Sign this, blind guy, it's a petition. Really, it's a deed. That's fraud in the factum. Non-examples FDIC v. Culver D was to run the daily farm operations of a business and Kailliel was to run the financial aspects. D signed blank preprinted promissory note to payee Rexfor State Bank, note provided that principal and interest were to be paid to the payee at its offices. D assumed $30k would be written in, thought it was a receipt not a promissory note making him liable. Though Kailliel was obligated. Terms written in were for $50k and $50k entered into account controlled by Kalliel who in turn paid D $30k.. Rexford Bank became insolvent and the FDIC took over as receiver. In its corporate capacity the FDIC purchased assets including the note from the receiver. D made no payments. Fraud in the factum asserted by the D. 3-305(2)(c) in Kansas: misrepresentation as has induced the party to sign the instrument with no knowledge nor reasonable opportunity to obtain knowledge of its character or essential terms. Fraud in the
factum: a party is betrayed into signing a bill or note by assurance that it is an instrument of a different kind. However, court here says that if he can read he must read. This isn't the same as forgery, if the terms are on the note you must read or else when you sign the person who presented the instrument to you becomes kind of like your agent and his knowledge will be attributed to you. Thus D is wrong to say that it was misrepresented as a receipt. D also contends he had no opportunity to learn of the note's essential terms. Quotations about incomplete instruments and material alterations are governed by 3-115 and 3-407. HDC is auth'd to enforce not as it was completed and not as D would have auth'd it to be completed. One who signs an instrument b4 all essential terms have been completed creates a blank check that may be enforced by a subsequent HDC according to terms completed by an intervening holder. D's only legal recourse is against the intervening holder who actually completed the note w/o D's auth. Fraud in the inducement = personal defense Occurs when A enters into an agreement, knowing that it is supposed to be a contract and (at least having a rough idea) what the agreement is about, but the reason A signed/made the agreement was because of some false information that B gave to A. Buy this house. Ok. Leaky roof misrepresented as having been fixed. Fraud in the inducement. Another example: I've got a bridge in Brooklyn I'd like to sell you. The fraud is that the seller claims he has title and can convey. • 3-601 Discharge in bankruptcy is always a real defense regardless of what the subsequent holder knows or doesn't know at the time of the acquisition of the instrument. Any other discharge is NOT effective against the HDC unless that holder at the time of acquisition knew of the discharge in which case it is a real defense against the HDC. Recoupment (see cmt 3 to 3-305 for other examples) is the ability to subtract from the amount due any damages owed to the creditor. Example I owe you $500 on a note and you breach the K causing me $200 in damages. I can subtract that $200 from the note as recoupment. Hypo Dog bite that has nothing to do with the K that gave rise to the obligation = not the same transaction. That's a setoff, not recoupment.
•
•
I already paid defense 3-601 discharge 3-602 payment Malvio (purchased new car) signed note for $18k Valentine (auto seller) discounted note for $16.8k to Orsino Orsino told M that payments assigned to them M sent them a check for full amount Orsino wouldn't return the note Orsino assigned to Olivia and they contacted M. M doesn't want to pay again. Transferee (Olivia) stands in Orsino's shoes. Orsino is no longer entitled to HDC status.
Malvio's regular K remedies: unjust enrichment against Orsino. • Forgery Defense Issue is it a real or personal defense? It's complicated. 3-401(a) a person is not liable on an instrument unless the person signed he instrument and in 3-403(a) Unauthorized signature. (a) an unauthorized signature is ineffective except as the signature of the unauthorized signer[forger] in favor of a person who in good faith pays the instrument or takes it for value. Translation: If the forger signed it, even with somebody elses' name, the forger is stuck as against the person who paid value for the instrument. forgery – distinguish between trying to sign a name that looks like somebody else's signature. That's forgery. If you sign somebody else's name in your own hand, it isn't. PERSONAL DEFENSES • The purpose of a countersignature on the traveler's check is for identification purposes (see 3-106 official comment 2 pg. 244 ) this is a personal defense and cannot be used against a HDC. 3-106(c) If a promise or order requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the promise or order, the condition does not make the promise or order conditional for the purposes of Section 3-104(a). If the person whose specimen signature appears on an instrument fails to countersign the instrument, the failure to countersign is a defense to the obligation of the issuer, but the failure does not prevent a transferee of the instrument from becoming a holder of the instrument. Failure of consideration is a personal defense. Hypo Piano falls apart. You got firewood. Too bad, you will be liable on the note to an HDC. THE NATURE OF THE LIABILITY Suit on underlying obligation may not always be brought. 3-310 pg. 278 If an instrument received on obligation, the obligation is suspended to the extent of the $$ until instrument is paid or dishonored. 3-412 obligation of the issuer of a note. This is what you sue on if instrument is dishonored. 3-413 is the similar obligation for the drawer. 3-402 pg. 288 Principal (even an undisclosed one if agent was auth'd) can be bound on an instrument by the signature of his agent. Agent will also be liable on the note unless he unambiguously indicates that he is an agent. “John Doe, Agent” Prof Scott says agent wouldn't be bound though comment says different “John Smith” [personally liable] “Money Corporation, John Smith.” [could go either way] “Money Corporation, John Smith, President.” [not personally liable for the Corp] DRAWEE/DRAWER OBLIGATION Ward v. Federal Kemper Ins. Co
•
• •
Characterized drawer as creditor and drawee as the debtor. The drawer/check writer does not “own” the funds it has on deposit with the drawee/bank. The drawer/check writer's balance on the drawee/bank's books represents a debt owed the drawer/check writer by the drawee/bank. The funds are “owned” by the drawee/bank. In other words, the money in the checking account isn't yours, simply represents debt the bank “owes” you. Drawee is primarily liable for paying the check. Only upon drawee failing to pay is the drawer liable (they are secondarily liable on the instrument). 3-414 pg. 303 Until dishonor drawer is not liable 3-414 pg. 303
3-408 pg. 300 Drawee is not liable on a draft until he accepts it. 3-409 acceptance means he SIGNED it 3-401 signed means mechanical stamp, trade name, etc. Example Bank can refuse to sign off on the check. That would make the drawer secondarily liable. DISHONORED [when the drawee bank fails/refuses to pay a note or check] 3-502 pg. 317 MAKER OBLIGATION The maker of a promissory note is absolutely liable on the instrument [unlike a draft]. If there are comakers they are jointly and severally liable. 3-412 pg. 302 obligation of the issuer = maker of promissory note or bank that issues a cashier's check, we focus on the maker. PRESENTMENT 3-501 pg. 316 • The person making presentment must give reasonable identification [not defined in the UCC] Messing v. bank of America, N.A. found that bank's thumbprint requirement was reasonable. Remember, even though Messing presented the check and the bank refused to cash it, the check was NOT dishonored. • Without dishonoring the instrument, the party to whom presentment is made may (i) return the instrument for lack of a necessary indorsement, or (ii) refuse payment or acceptance for failure of the presentment to comply with the terms of the instrument, an agreement of the parties, or other applicable law or rule. 3-503 NOTICE OF DISHONOR pg. 319 commercially reasonable means, identify, time provisions 3-504 pg. 320 EXCUSED PRESENTMENT AND NOTICE OF DISHONOR in certain circumstances presentment, dishonor, notice of dishonor might be waived by parties, K'd around. Example “All parties to this note hereby waive all rights to presentment, notice of dishonor, and protest.” Even if buried in the fine print, this works. INDORSER OBLIGATION (secondary liability) 3-415 pg. 305 Indorser is not liable until presentment, dishonor and notice of dishonor. The person primarily liable (drawer, maker) did not pay the obligation on the instrument. • The indorser can protect himself by stating indorsement is made “without recourse” or otherwise disclaims liability. Indorser is only indorsing for negotiation purposes.
• •
• •
There is no strict liability. The indorser can raise any defense that he has. However, as we've seen if the defenses are asserted against an HDC, only real defenses can win. Where there is joint and several liability the right of contribution is available. Indorsers only have this where they are joint indorsers or there is more than one anomalous indorsement per cmt 2 to 3-116 pg. 250-251. You indorse, you are on the hook for the full amount (terms at time of indorsement) 3-119 pg. 253 “vouching in” other parties into the action is the smart thing to do. 3-205 (d) "Anomalous indorsement" means an indorsement made by a person who is not the holder of the instrument. An anomalous indorsement does not affect the manner in which the instrument may be negotiated.
SURETY (a fool with a pen) 3-419(e) pg. 312 Accommodation Party (Surety) is entitled to reimbursement from the accommodated party (the debtor) if the surety had to pay the debt. The debtor is not entitled to recourse or contribution from the surety. Surety situation involves 3 Ks.
K1 = underlying contract between debtor and creditor K2 = surety promises the creditor he will pay if the principal (debtor) doesn't. K3 = if the surety has to pay the creditor, then the principal (debtor) will pay the accomodation party (surety) back. This is an implied K to reimburse. Sureties have rights • Exoneration – surety tells the principal to perform • Subrogation - if surety must pay creditor, he is subrogated (steps into shoes of the creditor)
• •
and takes on rights of creditor (liens against collateral, etc) Contribution – right to get money from the principal Strictissimi juris - CL rule if debtor-creditor make a new agreement, the surety that signed the first agreement is no longer bound unless surety consents to be bound again or creditor informs principal that the suretyship is being preserved.
3-603. TENDER OF PAYMENT pg. 322 Tender of payment = discharge, even if refused Obligor = original debtor “Security follows the debt” under 3-605(e-g) if creditor impairs collateral then the surety can be discharged up to the value of the collateral. Burden of proving impairment is on the surety. 3-605(e) = indorser or accommodation party (aka surety) 3-605(f) = anybody jointly/severally liable 3-605(g) e or f point to what impairment is here Example George and Martha are co-makers on a $10k note. Both are jointly and severally liable w/right of contribution, each individual responsible for $5k. 3-605(f) applies. Even if the surety is discharged b/c collateral is impaired, he must give notice to prevent being put back on the hook. 3-302(b) pg. 263 discharge is effective against a person who became a HDC with notice of the discharge 3-601(b) Discharge of the obligation of a party is not effective against a person acquiring the rights of a HDC w/o notice of discharge. BANKS AND THEIR CUSTOMERS 4-102 pg. 331. Article 4 controls Article 3 drawee bank = payor bank depository bank (first bank item is transferred to for collection could be payor bank where drawer and holder do banking at the same bank) Any bank except the payor bank is a collecting bank. open a checking account creates 2 relationships • debtor (creditor)/ creditor(depositor) • agent(bank)/principal(depositor) 4-103 pg. 332. • Variation by agreement; • Cannot disclaim lack of GF or failure to use ordinary care • Failure to use ordinary care • Standards for measuring ordinary care may be varied if not unreasonable • Measure of damages PROPERLY PAYABLE RULE (4-401(a) pg. 364) A bank may pay out of the customers money only if it follows instructions exactly. Charge only if properly payable. 4-401(a) tells us
4-401 pg. 364 • Properly payable from that account even though the charge creates an overdraft. • Properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank. • A customer is not liable for the amount of an overdraft if the customer neither signed the item nor benefited from the proceeds of the item. Example electronic check (routing and transit number given and bank pays) Was this signed? solution 1: bank and customer have agreement covering these solution 2: equitable principles The NOR operation is a logical operation on two logical values, typically the values of two propositions, that produces a value of true if and only if both operands are false. Here, customer received the benefit. Sent email to Professor Scott. • A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though payment was made before the date of the check, unless the customer has given notice to the bank of the postdating. Cmt 3 says must give bank time to act on the postdating b/c automated check collection system cannot accommodate postdated checks. If the bank charges account of a customer b4 date stated in notice of postdating the bank is liable for damages cmt 1 forged drawer signature or forged indorsement is NOT properly payable. Customer does not have to make a “stop payment” since the item is not properly payable. Examples Non-customer presents check over the counter to bank on which it is drawn. Bank refuses to cash. This was properly payable b/c customer/drawee authorized it. Therefore the check was wrongfully dishonored. If customer and bank had an agreement that non-customers couldn't cash checks over the counter then it would not have been wrongfully dishonored. 4-403 pg. 367 STOP PAYMENT CUSTOMER RIGHT • describe with reasonable certainty • give bank reasonable opportunity to act • if oral, must confirm in writing after 14 days or it lapses • 6 month limit unless preserved for additional 6 month periods in writing 4-404 pg. 368 6 MONTHS A bank is under no obligation to a customer having a checking account to pay a check, EXCEPT a certified check, which is presented more than six months after its date, but it may charge its customer's account for a payment made thereafter in good faith. 4-402 pg. 477 WRONGFUL DISHONOR • Payor bank wrongfully dishonors if it was properly payable [Prof: Scott this rule includes mistakes] • Payor bank liable to customer for consequential damages proximately caused [a question of
• •
•
fact]. Damages limited to actual damages proved.
4-405 pg. 368 DEATH OR INCOMPETENCE OF A CUSTOMER. • Bank's authority not effected by incompetence of a customer existing at the time instrument issued or its collection is undertaken if the bank does not know of incompetence. • Neither death nor incompetence of a customer revokes the authority until the bank knows AND has reasonable opportunity to act on it. • Even with knowledge, a bank may for 10 days after the date of death pay or certify checks drawn on or before that date unless ordered to stop payment by a person claiming an interest in the account. Even if crazy Nellie neighbor claims an interest in the account, the bank will stop paying out of the account. Low threshhold. 3-420 CONVERSION LIABILITY (a) incorps CL for conversion of negotiable instruments Conversion = misappropriation of another's property. Only person whose property rights are affected may sue. Out the outset, the payee/bearer. After that holder gets property rights while he/she has the instrument. If check is forged, the payee can sue the drawee bank or anyone taking the check after the forgery in conversion. If J for payee against the drawee, the drawee will sue the check's presenter for breach of presentment warranty. WARRANTIES Article 3 and 4 warranties are virtually identical. Article 3 warranties control BEFORE check is taken for deposit 3-417 (presentment), 3-416 (transfer) Article 4 warranties control AFTER check is taken for deposit. 4-208 pg. 349 PRESENTMENT WARRANTIES. Drawee bank can recover from warrantor damages Warrantor is the person presenting for payment or previous transferor • warrantor was entitled to enforce • draft wasn't altered • no knowledge of signature of drawer was unauthorized. 4-207 pg. 349. TRANSFER WARRANTIES A customer or collecting bank [any bank other than the drawee bank] that transfers an item...warrants to the transferee and to any subsequent collecting bank that: (1) the warrantor is a person entitled to enforce the item; (2) all signatures on the item are authentic and authorized; (3) the item has not been altered; (4) the item is not subject to a defense or claim in recoupment AND (5) the warrantor has no knowledge of any insolvency proceeding 4-111. STATUTE OF LIMITATIONS Action must be commenced within three years after the [cause of action] accrues. 3-118 STATUTE OF LIMITATIONS. 6 years, 10 years. Look at the statute.
doc_748910911.pdf
A sale is the act of selling a product or service in return for money or other compensation.[1] Signalling completion of the prospective stage, it is the beginning of an engagement between customer and vendor or the extension of that engagement.
30 MC x 3 pts = 90 5 short answers x 10 = 50 1 essay = 110 pts 1st thing should be whether the UCC applies 1-102 pg. 6 if any Article of the UCC applies then Article 1 applies. 2-102 pg. 34 Article 2 applies to transactions in goods (broader than just sale of goods) 2-105(1) pg. 38 Definition of goods things in action = right to damage/pursue a suit/insurance claim cmt 1 pg. 39 money can be a good if traded as commodity, is not a good if medium for payment excludes real property, IP, intangibles 2-107(1)minerals or a structure to be severed from the realty: buyer severs = not a good, seller = good 2-107(2) crops, doesn't matter if seller or buyer severs = goods electricity = split in authority whether a good or service K for sale or K for service? Hybrid K ON EXAM analyze with both unless told otherwise Predominant purpose test = look at the transaction as a whole, do not sever, if service predominates UCC does not apply. case by case/facts & circumstances analysis large software program a service or custom mfg good? revised UCC article 2 would make software a good but has been battled by software companies Gravaman test: whether the gravaman of the action involves goods or services. Look at what went wrong, if the gas escaped b/c of a defective fitting then sale of goods. If gas escaped b/c of poor work during install, then the K involved services. swimming pool case: not movable, diving board = moveable The diving board was severed since it was an optional component. 2-205 pg. 45 firm merchant offer: offer by merchant to buy goods 2-104(1) pg. 36 definition of merchant farmer selling produce to a wholesaler? Split of authority. More sophisticated = merchant 2-314 pg. 56 implied warranty of merchantability IF seller is a merchant with respect to goods of that kind [Prof S: narrower than just a merchant] owner of a sawmill was not a merchant so the saw he sold that injured other guy wasn't covered by this implied warranty. 2-315 pg. 68 implied warranty of fitness for a particular purpose applies to any seller not just merchants in sawmill case brought his son and had made up his mind prior therefore didn't apply How to tell a lease from a disguised sale? 3 rules to tell if Article 2A applies based loosely on 1201(35) pg. 12 defining security interest and 1-203 pg. 18. 1) If at the end of the lease period the lessee becomes the owner of the property for little or no consideration, a secured transaction has been created NO LEASE
2) If K contains a clause permitting the lessee to terminate at any time and return the leased goods “walk away test” a LEASE has resulted. 3) If the lease is for the entire economic life of the leased goods, with of without renewal, a disguised sale has occurred NO LEASE 2-201 pg. 41 STATUTE OF FRAUDS (SofF) MYLEGS • Only worry about goods > $500 for SofF for this class. • 2-201 just overcomes SofF defese, does NOT prove existence of K or its terms. • Doesn't matter if term is missing or incorrectly stated • 2-201(2) Between merchants confirmatory memoranda 2-201(2) received within a reasonable time. Purpose is to prevent A from playing off the price offered by B and C against each other by using SofF to bind them (since they signed) and not him. This rule protects B and C from A by binding A when a confirmatory memorandum is sent and A doesn't reject it in writing within 10 days. reasonable time = facts and circumstances Example case course of dealing 5 weeks had been reasonable before, but once corn price started rising rapidly making it possibly unreasonable (left to jury to determine) Requires 1. qty 2. sufficient indication that a K has been made 3. signed by party against whom enforcement is sought 1-201(37) pg. 13 signed 3 Exceptions 2-201(3) 1) Specially mfg goods not suitable in the ordinary course of business for resale 2) Admission in pleading/testimony by party against whom enforcement is sought 3) Payment made or received and accepted (partial payment OR partial performance) Example partial payment on a non-divisible lot = sufficient to overcome SofF for whole lot missing terms = gap fillers 2-305(1) pg. 55 gap filler for price quantity = some courts will infer a qty of 1 if it is missing, however MAJ require it. “Tank” marked on the memo line satisfied qty for one of our problems. EXAM for purposes of our class you will always need a qty. 2-306 pg. 56 deals with qty for a requirements K (all buyer requires) 1-103(b) pg. 6 other legal and equitable concepts supplement UCC Defense: parol evidence not admissible if there is an integrated writing. Can overcome with 2-202 however even if evidence is admitted, that doesn't prove the terms of the agreement.
2-202 pg. 43 PAROL EVIDENCE RULE [UCC assumes partial integration] no contradiction by prior or contemporaneous agreement, however, can be explained/supplemented by: • 1-303 pg. 25 (many typos say 1-205) course of performance, course of dealing, usage of trade • 2-208 pg. 48 course of performance • consistent additional terms can be added Remember: if total integration then NO consistent additional terms = complete and exclusive statement. Test: Would the parties certainly have included the term in the agreement? merger clause = again, no consistent additional terms, course of p, d, and u of t still allowed in to supplement. If you want to negate c of p, d, and u of t you must “carefully” do so. GENERAL RULES OF OFFER AND ACCEPTANCE 2-204 pg. 44 Formation in General intent to form K, does not fail for indefiniteness if some terms missing 2-205 pg. 45 Firm Offers 2-206 pg. 46 Offer and Acceptance and cmt 4 pg. 47 • shipped non-conforming and notified buyer that non-conforming offered as accommodation to the buyer = no acceptance = no K = no breach • shipped non-conforming but didn't notify = acceptance AND breach 2-207 pg. 47 BATTLE OF THE FORMS The party opposing inclusion of the term has the burden. ProCD 7th circuit said 2 forms required for 2-207 to apply. Klocek v. Gateway, Inc. This court said one form is good enough to apply 2-207 even though it is routinely referred to as the battle of the forms provision. Deals with any acceptance or written confirmation. Klocek (computer purchaser) was the offeror who had to expressly accept the “counter-offer” in Gateway's form. “unless” in 2-207(1) DOES NOT deal with confirmatory memo. Oral agreement + return confirmatory doc with proviso = 2-207(2) it's too late to change the K. There's an agreement in place. 1) did the returned doc change a dickered term? price or qty for our purposes but anything negotiated] N->goto #2 Y->goto 2-207(3) b/c we have a counter-offer. #2) does it trigger proviso language? aka returned doc is expressly conditioned on assent N->K is formed go to 2-207(2) Y->were the new terms assented to? Y->K formed with those terms N->goto 2-207(3) b/c we have a counter-offer
2-207(2) were docs between merchants? N->additional terms are just proposals for addition to K unless offeror expressly agrees Y->Additional/different terms are part of the K unless (2)(a) or (b) or (c) in which case K is formed but additional/different terms are NOT part of the K materially alter = cmt 4 pg 48 surprise or hardship, not materially alter = cmt 5 pg. 48 MAJ say arbitration clause is a material alteration however could reach different result if it is normal for that industry to use such clauses. Court in Bayway Refining Co. v. Oxygenated Marketing and Trading AG (CofA 2nd Circuit) said surprise must be both objective and subjective. Did they know? Should they have known? Common practice in the petroleum industry meant that OMT was out of luck re: tax clause. Did not have “proven hardship” either. Hardship = a term that creates an open ended or prolonged liability = material alteration. knockout rule: conflicting terms are both out and gap filler will apply. You don't have to be in 2-207(3) for gap filler to apply. 2-207(3) does conduct indicate a K? Y->K exists terms include all writing agree on + gap fillers N->no K just a counter-offer GAP FILLERS If parties intended a K even w/o some terms, gap fillers will apply. SEE 2-311 FIRST FOR ANALYSIS. 2-311(1) pg. 62 Parties can leave certain details to be filled in by either of them without risk K will be found invalid for indefiniteness. GF + commerically reasonable standards apply per cmt 1 pg. 62 2-305 pg. 55 price = reasonable price at time of delivery Landrum v. Davenport If both parties agree on a price, but do not put it in their written K they still have a K. If the parties fail to agree on a price at all, can there still be a contract? Yes, when it is reasonably certain they wanted to be bound. 2-306(1) pg. 56 Output, Requirements K [allows you to determine qty] Can't demand more, can't build more capacity and say that's your output. Not illusory b/c of GF req. 2-307 pg. 57 & 1st para cmt 3 pg. 58 Delivery in Single Lot or Several Lots [if single lot not feasible] 2-308(a) pg. 58 place of delivery = seller's place of business or residence 2-309 pg. 59 time = reasonable time, also see 1-205 pg. 21 2-310 pg. 60 & cmt 1 pg. 61 Payment Due at time/place of delivery 2-314 pg. 66 warranty of merchantability 2-315 pg. 68 warranty of fitness for a particular purpose
WARRANTY – contractual obligation by the seller to remedy possible defects in the K. UCC divides into warranties of title and warranties of quality. 2-312 pg. 63 Warranty of Title and against IP infringement seller warrants title conveyed is good unless specific language tells buyer he is selling only interest he has. Seller who is a merchant delivers goods free of any IP claims by 3rd parties. [If the buyer gives specs to the seller for a specially mfg good, then the buyer warrants to the seller that there is no IP problem] Warranties of Quality • 2-313 pg. 54 Express covers affirmation, description, sample/model. Seller must do some affirmative act to create it. Must relate to goods and be part of basis of bargain. basis of the bargain: some courts require reliance cmt 3 pg. 65 contra book says any substance so it played some part in buyer's decision to buy = natural tendancy to induce purchase. Prof Scott: MAJ most courts would say if it was said afterward it wouldn't be part of the basis of the bargain. MIN follow cmt 7 pg. 66 says that the precise time when words of description or affirmation are made or samples are shown is NOT material. Language after closing is a modification under 2-209(1) pg. 49 Example Never saw the ad until a year after his purchase = Winston Indus Inc. v. Stuyvesant Ins. Co. which held that a buyer was protected by mfgs warranty on mobile home even though he never received a copy through no fault of his own. It still inured to his benefit. Seller would argue, of course, that this couldn't have been the basis of the bargain MAJ rule. Note If the promise is contained in a writing then it is a question of law whether 2-313 applies. If oral, then it is a question of fact. Accidentally made express warranty you can still be held to it per cmt 3 pg. 65 no need for specific intent to make a warranty. Example Mint condition, any paste, dries immediately, goes up easily = express Non-examples “Automobile was in A-1 mechanical condition and that it would take plaintiff any place that she wished to go” Prof Scott says most courts would say this was just puffing. “great car and you're going to love it” are puffery • 2-314 pg. 66 Implied Warranty of Merchantability [merchant + goods of the kind BOTH required] The serving for value of food or drink Shaffer v. Victoria Station, Inc. Shaffer ordered a glass of wine that broke and injured his hand permanently. Court said that the drink that was sold included the wine and the container both of which must be fit for the ordinary purpose for which it was used. Immaterial whether the title to the glass [jug case] passed to the P. [mineral water case].
Cases cut both ways on implied warranty of merchantability for tobacco products. cmt 3 pg. 67 isolated sale of used goods is not a merchant and no warranty of merchantability would apply. However, GF requires that he disclose known material but hidden defects. fitness for the ordinary purpose foreseeable misuse/foreseeable collision – courts lean toward applying this warranty for lack of safety measures to prevent injury or exacerbating injuries. Example paint gives horrible odor even after it dries is unfit Non-example Daniell v. Ford Motor Co. The implied warranty wasn't implicated b/c the use of the trunk for suicide was not an ordinary purpose for which such goods are used. 2 approaches to harmful substances in food such as stones in cherry pies, pits in olives, fish bones: 1) Deny liability if object is a natural substance and permit recovery for foreign objects. Example Webster v. Blue Ship Team Room, Inc. P sued for breach of implied warranty of merchantability. P bought fish chowder at a quaint Boston restaurant. She was a native New Englander and had been to the restaurant b4. After 3 or 4 spoonfuls she got a fish bone lodged in her throat and ended up needed two surgeries. I: was the fish bone a foreign substance? From time immemorial recipes for fish chowder don't mention removal of fish bones at all. Court says diners should be prepared to cope with the hazards of fish bones in light of the hallowed traditions of the state. The presence of the bone was not a foreign substance and did not impair fitness or merchantability. 2) Permit recovery for natural substance if biter's reasonable expectation is that the natural substance would have been removed. Facts and circumstances matter. Hypo Same facts as above except it was the customer's first visit to New England. A: Customer wouldn't have the same reasonable expectation Hypo Can of clam chowder with national distribution. Expect better protection from manufactured foods. Virtually every substance causes such reaction in someone. GR if a product is reasonably fit for use by a normal person, there is no breach of implied warranty when an allergic consumer suffers injury. • 2-315 pg. 68 Implied Warranty of Fitness for a particular purpose Cmt 5 pg. 69 If the buyer insists on a particular brand he is not relying on the
seller's skill and judgment and so no warranty results. The fact that there was a trade name/brand on the article is one of the facts to be considered on the question of whether the buyer actually relied on the seller. Example went to paint store, wanted to match with prior paint can from same store, paint he was given did not match therefore warranty breached. If store said “we can match anything” that would be an express warranty under 2-313. Non-example Daniell v. Ford Motor Co No evidence she or her husband gave any particular thought to the trunk mechanism 2-316 pg. 69 DISCLAIMING EXPRESS WARRANTIES Drafters of UCC made 2-316(1) in such a way as to make disclaimer of an express warranty virtually impossible. The proper way to avoid liability for an express warranty is not to make it in the first place. Bell sports, Inc. v. Yarusso Brian Yarusso (22yo) motorcycle rider landed on his head crushing his C5 vertebrae. Sued for breach of express warranties (based on text in the manual: primary function of the helmet was to absorb the force of a blow to the head”) Bell argued that they had disclaimed their express warranty but the court held that UCC 2-316(1) didn't let them off the hook. Hypo Seller trying to disclaim express warranty made by salesperson when terms of the K included a merger clause. • Merger clause + parol evidence rule 2-202 pg. 43 means the seller is protected by some courts. • Other courts will say document wasn't intended to be the final expression of the parties. • Other courts ignore parol evidence rule or use equity 1-103 pg. 6 to get around it. • cmt 4 to 2-313 pg. 65 covers express warranty situation can't just disclaim express warranties using a plain old disclaimer clause b/c GF and pseudo obligation. • official comment 2 to 2-316 pg. 70 says parol evidence rule + “lack of authority” clauses can protect seller against salesperson making an express warranty. DISCLAIMING OTHER WARRANTIES 2-316(2) conspicuous to exclude warranty of merchantability or fitness 1-201(10) pg. 10 Conspicuous and cmt 10 pg. 14 Objective standard • If purchaser has actual knowledge of the disclaimer it overrides the question of conspicuousness since the buyer is already protected from surprise. Cate v. Dover Corp. Dissent said UCC didn't mention actual knowledge so why use it. Dover Corp had buried their disclaimer in a section entitled WARRANTY. Doesn't matter if disclaimer of express warranty is conspicuous. It's all but impossible to disclaim an express warranty. It is not an effective argument to say that usage of trade (1-303(c)) is that disclaimers are buried in fine print b/c just because usage of trade is violating the UCC doesn't mean that it should control. The law trumps usage of trade.
2-315(3)(b) pg. 70 and cmt 8 pg. 70 Buyer in a hurry doesn't examine the car, the buyer who unreasonably refused if injured may be found to be injured by his own action rather than proximately by breach of warranty. 2-316(3)(c) pg. 70 Hey buddy, want to buy a watch? = purchased “as is” If disclaimed after bargain is struck the disclaimer is ineffective. Owners manual in glove box not read until months after purchase and contains disclaimer of warranties. • Most courts would say if it was said afterward it wouldn't be part of the basis of the bargain so owner won't be held to the disclaimer. Prof. Scott disclaimer is not effective in this case. Bowdoin v. Showell Growers Disclaimer given 2 weeks after sale in manual during time of delivery. The fact that the disclaimer was conspicuous didn't matter. Had it been given before the sale, the implied warranties of merchantability and fitness would have been disclaimed. Also didn't matter that Showell Growers is a sophisticated commercial enterprise. UCC is silent as to sophistication. Warranty disclaimed inside the box Rinaldi v. Iomega Corp. Issue in this case was that disclaimer was not considered conspicuous 2-316(2). Relied on ProCD case where additional terms in the shrinkwrap license were allowed b/c buyer still had a chance to make a final decision after a detailed review, i.e. could reject under 2-606(b) pg. 112. Q: If the court had done a 2-207 analysis, would it have reached the same result? LIMITATIONS ON THE WARRANTY (parties are free to K around them) • 2-316(4) pg. 70 Remedies for breach of warranty can be limited • 2-719 pg. 143 Contractual Modification or Limitation of Remedy To return, replacement, repair Can make remedy optional or expressly make it a sole remedy cmt 2 pg. 144 remedies are presumed cumulative unless made exclusive. Remedy must not fail of its essential purpose • cmt 1 pg. 144 could be unconscionable and striken • 2-302 pg. 53 Unconscionable K or clause if K or clause is unconscionable it can be removed/limited to remove the unconscionable result Examples Wilson Trading Corp. v. David Ferguson, Ltd. Unmarketable sweaters b/c dyed yarn 'shaded' when washed. Yarn supplier tried to limit warranty to time before knitting and processing. Court said this remedy failed of its essential purpose by depriving the buyer of a remedy in this circumstance. Prof S: There must be some quantum of remedy in a sales K in
case of breach, otherwise it is unconscionable. Based on cmt 1 pg. 144 to 2-719. Consequentials can be limited if not unconscionable and defines what is prima facia unconscionable (personal injury + consumer good) 2-718 pg. 142 Liquidated damages ok Conflict between 2-719(2) and 2-719(3) Pierce v. Catalina Blisters appeared below the waterline of the sailboat. K tried to limited damages to repair/cost of repair and NO consequentials. UCC allows consequentials to be limited in in 2-719(1)(a) and 2-719(3). Typically a limited repair/replacement remedy fails of its essential purpose where 1) seller is unsuccessful in repairing or replacing the defective part regardless of good or bad faith OR 2) there is unreasonable delay in repairing or replacing defective components. • MIN When a limited remedy fails of its essential purpose 2-719(2) nullifies the warranty limitation restoring buyers right to any remedy under the act. • MAJ view 2-719(2) and (3) are independent. Even if it fails of essential purpose, consequentials can still be limited so long as not unconscionable. In determining if exclusion is unconscionable court looks at: consumer involved; disparity in bargaining power, pre-printed form versus freely negotiated. Also look at whether in hindsight the damage came within the realm of expectable losses. 2-715 pg. 140 Buyer's Incidental and Consequential Damages DEFENSES TO A WARRANTY ACTION: Buyer must give seller NOTICE of breach 2-607(3)(a) pg. 113 and cmt 4 pg. 114 describes this notice. “reasonable time” facts and circumstances test Fitl v. Strek Micky Mantle card purchased for $17k+, told “mint condition” card had actually been altered: trimmed, re-glued and repainted. Buyer discovered this 2 years later when he had is appraised. This was held to be a reasonable time. The purposes of 2-2607(3)(a): provide seller opportunity to correct defect; prepare for negotiation/litigation; allow seller to investigate claims b4 evidence lost/memories stale. In this case seller had no way to correct the defect and conflict between seller and his supplier was a separate matter. Most courts hold that filing suit is insufficient notice to the seller. cmt 5 pg. 114 TBP may not need to give notice to seller of injury as quickly. Courts vary. DEFENSES IN WARRANTY: PRIVITY • vertical privity: up the supply chain [Not our focus] How far up the chain can the buyer sue? • horizontal privity: to whom retail seller is liable other than current purchaser Normally privity is required for a warranty action. However, there is an exception:
2-318 pg. 72 and cmt 2 pg. 73 Third Party Beneficiaries of Warranties: 3 alternatives A: family/household member/guest of buyer: MAJ of states recognize this exception to privity natural person + injured in person (pain and suffering, medical expenses) not mere economic damage (lost wages no) B: wider C: entity + economic harm allowed KNOW THE 3 ALTERNATIVES, the facts provided may demonstrate which state the facts fall into Why do privity issues bring up the concept of third party beneficiaries? Example case: The employee's safety while using the bandsaw was either explicitly or implicitly part of the basis of the bargain when the employer purchased the goods. DEFENSE TO WARRANTY ACTION: STRICT PRODUCTS LIABILITY Purpose of strict products liability is to permit an injured consumer to recover against the mfg as longer as the consumer can prove that the mfg put a defective product into the stream of commerce. There is no need to prove negligence or privity. Non-example Solely dealing with injury by product to the product = no strict products liability. Look to warranty law for a remedy. WARRANTIES AND ARTICLE 2A Warranty rules for lease of goods are almost carbon copies of article 2 rules. One major exception: “finance lease” where there is a lessee, lessor and supplier. If lessor makes no express warranties to the lessee, the lessee must go directly to supplier for warranty issues. • lessee wants to use the leased equipment • lessor actually purchased the equipment and then leases it to the lessee. Typically bank/finance company. • supplier: provided equipment 2A-103(g) pg. 157 Finance Lease [for our class requirements to create this are:] • The lessor must not be in the business of selling goods and must have acquired the goods in connection with the lease. • The lessee must have knowledge of what the warranties are by seeing the K between supplier and lessor or approving it 2A-212 pg. 172 Implied Warranty of Merchantibility “except in a finance lease” 2A-213 pg. 173 Implied Warranty of Fitness for a Particular purpose “except in a finance lease” 2A-210 pg. 171 lessor can create an express warranty even in a finance lease. Solution: keep your mouth shut. “Hell or high water clause” that meant that the lessor had to make payments whether or not the equipment was working. INSTALLMENT SALES
2-612 pg. 120 Installment K and Breach substantially impairs, defect to one installment versus whole K Cherwell-Ralli v. Rytman Grain A seller in an installment K can terminate a contract without first invoking 2-609. A party is entitled to adequate assurances when he has reasonable grounds for insecurity. A buyer cannot suspend performance [payment] if he has already received the agreed goods, in whole or in part? MISC 2-609 pg. 116 Assurance of Performance [may demand not must demand] A party that is in breech cannot demand adequate assurances to stall for time. 2-301 pg. 52 General Obligations seller's obligation is to transfer and deliver and buyer's is to pay in accordance with the K. THE PERFECT TENDER RULE 2-601 pg. 107 ON EXAM: a b and c as the text is written is one of his pet peeves. Don't screw it up. de minimis non curat lex (the law does not notice small defects) cmt 2 to 2-106 pg. 40 depends on the defect, seller's right to cure, usage of trade, course of dealing and course of performance. commercial unit: you cannot break a unit into pieces, separating tail from horse 2-106(2) pg. 39 Conforming 2-508 pg. 98 Seller's Right to Cure [not the same q: as whether cure was acceptable] Seller has to have reasonable grounds to believe tender would be acceptable. Sometimes if prior course of dealing involving rigorous inspection or inclusion of a “no replacement” clause in the K the seller is held to rigid compliance. Whether cure was acceptable Hypo new car, engine blows up, engine from another care. Shaken faith doctrine: The attempted cure can be ineffective. Basically taking judicial notice of the thing all modern day consumers know: that things that do not work well at the start are not likely to work well in the future unless the original defect is minor. Wilson v. Scampoli 1st application perfect tender rule. Cases don't provide that buyer must accept patchwork goods or substantially repaired articles but minor repairs are frequently able to cure imperfect tender. The seller can cure under 2-508(2) if he can do so without subjecting the buyer to any great inconvenience, risk, or loss. Removal of the TV chassis to determine the cause of the color malfunction and make repairs was no great inconvenience to the buyer. Note: in a breach of warranty case the buyer must give the seller the opportunity to cure too and in certain circumstance repairs/adjustments are ok.
2-711(3) pg. 136 On rightful rejection OR justifiable revocation of acceptance a buyer has a security interest in goods in his possession [Prof S: This gives the buyer leverage to make sure he gets the purchase price back] REJECTION AND ACCEPTANCE AND REVOCATION OF ACCEPTANCE When seller makes perfect tender buyer must either reject 2-602 or accept 2-606 or 2-607. 2-602 pg 108 BUYER'S REJECTION [hold goods for seller at seller's expense] Official comment 2 pg. 109 normal duties of the buyer upon rejection include duty to hold the goods with reasonable care. ? 2-603 pg. 109 ask seller what to do with them, sell if no instructions and perishable or declining in value. –> 2-604 pg. 110 store, reship, resell 2-605 pg. 111 Buyer must Particularize Defects when notifying seller upon rejection buyer must state particular defect which is ascertainable by reasonable inspection otherwise he cannot rely on the unstated defect to justify rejection or to establish breach where seller could have cured. • cmt 2 pg. 111 states that where tender is one which could have been cured by the seller a buyer who merely rejects the delivery without stating his objections is probably acting in bad faith and seeking to get out of a deal which has become unprofitable. Example Plateq Corp. v. Machlett Labs Specially made lead covered steel tank. Deficiencies discovered by buyer but never took delivery, instead sent notice of cancellation w/o stating particular grounds for the cancellation. 2-606 pg. 111 what constitutes ACCEPTANCE [includes failure to make a rejection] 2-607 pg. 113. Effect of Acceptance • Buyer must pay • Precludes rejection unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured • Burden is on the buyer to establish any breach 2-608 pg. 114. REVOCATION OF ACCEPTANCE • Substantially impairs its value to him [subjective] [not same as 612 installment K substantially impairs] Waddell v. L.V. R.V., Inc. Waddells 7 months of 3 years it was broken down, overheated engine. They wanted to tour country and live RV lifestyle. RV club prez. Two part test: value of conforming goods to the buyer [subjective] AND whether the nonconformity in fact substantially impairs the value of the goods to the buyer, having in mind his particular needs [objective] Cumulative effect of defects piling up = substantial impairment. Related concept: Lemon laws Reasonable time after the buyer discovers or should have discovered Waddell: time spent by seller curing defect doesn't matter re: reasonable time
•
•
It is not effective until the buyer notifies the seller of it.
2-513 pg. 104 Buyer's Right to Inspection of Goods. The buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. 1-202 pg. 17 Notifies/Notice book may be wrong could be 1-201(26) 1-205 pg 21 Reasonable Time Example Ramirez v. Autosport R's wanted to take new camper on summer vacation. Delays and problems with repairs. Dealer sold their trade in to an innocent third party. Issue: whether buyer may reject tender of goods with minor defects and whether a seller may cure. Held Ramirez's had properly rejected delivery NJ SC said they didn't cure the defects within a reasonable time so Autosport did not effect a cure. P's also wanted restitution. A buyer who rightfully rejects goods may recover as much of the purchase price as has been paid. The Code does not define “pay” and doesn't require the payment to be made in cash. • Perfect tender's harshness mitigated by right to cure within a further reasonable time and this varies depending on circumstances including change of position by the buyer and amount of inconvenience to the buyer 2-508 cmt 3 pg. 99. • Should the seller fail to cure, whether substantial or not, the buyer has the right to cancel or seek damages. • Assuming that the seller doesn't cure the code allows remedies for consumers to be liberally construed and the buyer ought to be able to exercise all of this remedies. • D's grounds for cure did not fit within 2-508 b/c time for performance had past and no reasonable grounds to believe it would be acceptable. ON EXAM BE SURE YOU FIT IN ONE OF THE TWO PRONGS OF 2-508 FOR SELLER TO HAVE A RIGHT TO CURE. Is the seller entitled to a setoff for the amount of benefits the purchaser received? GR: buyer's post-revocation use entitles seller to set off. Whether it destroys the revocation will depend on facts and circumstances. In exceptional circumstances subsequent use (after revocation) is acceptable. Examples combine with high replacement cost, mobile home, car w/no other means of transport. Related concepts: remedies that fail of their essential purpose ( 2-719 pg. 143) and shaken faith doctrine. Buyer gets defective good, retailer goes bankrupt, buyer wants to revoke against mfg. This is not allowed under the UCC. RISK OF LOSS 2-401(1) pg 85 and cmt 1 pg. 86 UCC states that risk of loss has nothing to do with technical
title cmt 5 to 2-503 pg. 93 presumption shipment K unless “a term requiring the seller to pay the freight or cost of transportation to the buyer is equivalent to an agreement by the seller to deliver to the buyer or at an agreed destination.” • shipment K – parties agree that the buyer has the risk of loss once goods are delivered by the seller to the carrier. UCC PRESUMES THIS if the K is silent on risk of loss. • destination K – seller bears the risk until delivery by carrier to the buyer. 2-503 pg. 99 Seller's Tender of Delivery • Hold conforming goods for buyer and • Give buyer notification reasonably necessary to enable him to take delivery • reasonable hour • kept available for period reasonably necessary to enable buyer to take possession 2-509 pg. 99 Risk of Loss + No Breach section 4 says subject to provisions of K and 2510 [breach] and 2-503 [tender of delivery] pg. 91 and 2-504 pg. 94 [seller's shipment] (3) pg. 100 If the seller is a merchant the risk of loss passes to the buyer on the buyer's actual receipt of the goods. (3) Where the seller is not a merchant the risk of loss passes to the buyer when the seller tenders delivery. (1) If K requires a carrier (a) if does not require delivery at a particular destination risk passes to the buyer when goods are delivered to the carrier [SHIPMENT K] (b) if does require particular destination risk passes to the buyer when tendered at that destination [DESTINATION K] (2) issue is whether seller can be a bailee. GR: not a bailee unless a separate portion of the agreement dealing with the bailment. 2-509 subject to 2-510 Jakowski v. Carole Chevrolet, Inc. P/buyer entered K to buy a 1980 Camaro. Buyer wanted it undercoated and wanted the finish to have a polymer coating. Car was delivered w/o coatings. Next day seller contacted the buyer admitted mistake and asked for the buyer to return the car for coating. Buyer did that. Then the car was stolen from the seller's premises. Seller argues buyer has risk of loss under 2509. However, 2-509's general provisions are subject to specific provisions of 2-510 which deals with the effect of breach. 2-510(1) says that were the tender or delivery of goods fails to conform to the K as to give a right of rejection the risk of loss remains on the seller until cure or acceptance. 2-510 pg. 101 Risk of Loss + Breach • Seller flunks perfect tender rule (2-601 pg. 107) risk remains on seller until cure (2508 pg. 98) or acceptance (2-606 pg. 111) • Buyer rightfully revokes (2-608 pg. 114) and loss, portion not covered by buyer's insurance is the seller's responsibility. • Buyer repudiates (2-610 pg. 118) or otherwise in breach before risk passed to him, loss, and seller's insurance doesn't cover it, buyer is on the hook for the remainder. 2-709 pg. 135 Action for the price: risk of loss shifts back to the seller when buyer fails to pay
within a commercially reasonable time. Cannot sit on the goods indefinitely, must assume K is breached and act to protect yourself if you are a seller. 2-319 through 2-322 define these: CIF (cost, insurance, freight) 2-320 pg. 74 always shipment K C&F (cost and freight) 2-320 pg. 74 always shipment K – buyer often has blanket insurance K. FOB (free on board) 2-319(1)(a) pg. 73 – can indicate either a destination K or shipment K. The named place is where the risk of loss passes. If the named place is the seller's warehouse the it calls for a shipment K. If the destination is the buyer's store a destination K arises and the seller bears the risk. Example FOB Pittsburgh where Pittsburgh is the buyer's place = destination K. FAS (free along-side) 2-319(2) pg. 73 [typically a shipment K] Ex-ship (off the ship) 2-322 pg. 79 cmt 2 to 2-509 pg 100 a K must be entered into between the seller and the carrier. If the seller buys the goods afloat and later diverts the shipment to the buyer, he must identify the goods to the K before the risk of loss can pass. cmt 2 to 2-501 pg. 90 It is possible for the identification to be tentative or contingent. The general policy is to resolve all doubts in favor of identification. 2-504 pg. 94 if seller must deliver to buyer but buyer doesn't specify location seller must make reasonable K with carrier (should seller insure goods? Depends on facts and circumstances) Example Cook Specialty Co. v. Schrlock P bought a machine from D/MSI. The terms were FOB MSI's warehouse [seller's place of business therefore shipment K] Hydraulic press brake machine fell off the carrier's truck in transit. The court said that seller/D/MSI bore the expense and risk of putting the machine into the carrier's possession for delivery under UCC 2-319. After the carrier took possession the risk of loss shifted to the buyer/P. What does "duly delivered to the carrier" mean? Per 2509 they aren't duly delivered unless a K is entered between the seller and the carrier that satisfies provisions of 2-504. cmt 2 to 2-509 says that the seller has to put the goods in the possession of such a carrier and make such a K for their transportation a may be reasonable having regard to the nature of the goods. The P argues that the K MSI made for delivered wasn't reasonable b/c it failed to ensure that the carrier had sufficient insurance coverage to compensate the P for loss in transit. Since it was unreasonable, P argues the brake wasn't duly delivered according to 2-509 therefore risk of loss never passed to the P. Reasonable in the circumstances means things like refrigeration of perishable goods, watering of livestock, protection against cold, etc according to 2-504 cmt 3. The seller is not obliged to investigate the amount and terms of the insurance held by the carrier. The court found as a matter of law that MSI's conduct was not unreasonable under 2-504. 2-504(c) pg 94 requires prompt notification of the buyer Rheinberg-Kellerei GmbH v. Vineyard Wine Co. The trial court concluded that the P's failure to notify the D of the shipment until after the sailing of the SS Munchen and the loss was not prompt notice within the meaning of 2-504 so the risk of loss didn't pass to the D upon the delivery of the wine to the carrier pursuant to 2-509(1)(a). Held the trial court was correct. The requirement of prompt notification by the seller as used in 2-504(c) must be construed as taking
into consideration the need of a buyer to be informed of the shipment in sufficient time for the buyer to take action to protect himself from risk of damage to or loss of the goods while in transit. What constitutes prompt notice will vary based on facts and circumstances. Because the buyer/D was never notified directly or by forwarding of shipping docs within the time in which its interest could have been protected by insurance or otherwise, D was entitled to reject the shipment pursuant to the term of 2-504(c). COMMERCIAL IMPRACTICABILITY = UCC's VERSION OF IMPOSSIBILITY 2-613 pg. 121. Casualty to Identified Goods [broken sundial hypo] IF the contract requires for its performance goods identified when the contract is made, AND the goods suffer casualty without fault of either party BEFORE the risk of loss passes to the buyer THEN • (a) if the loss is total the contract is avoided; and • (b) if the loss is partial..buyer may..at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration. Prof S: impossibility of performance: not applicable if assumed loss or loss was foreseeable to be avoided or accepted with due allowance for K price 2-615 pg. 123 Excuse by Failure of Presupposed Condition cmt 1, 4 and 5 to 2-615 pg. 124 SELLER IS EXCUSED for impracticability in certain circumstances. • NOT increased cost alone UNLESS the rise in cost is due to some unforeseen contingency BEYOND a rise or a collapse in the market LA Power & Light Co. v. Allegheny Ludlum Industries, Inc Allegheny faced an increase in cost of performance of only 38% over the original K price. This wasn't enough. 31.6% increase in a cape of good hope/suez canal case wasn't enough Iowa case 52.2% increase wasn't enough and court noted that cost increases of 50-58 percent hadn't been enough in other cases. • A severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like. • Where the particular source of supply is exclusive and fails though casualty..However the seller must employ all measures to assure himself that his source will not fail. • In AZ must prove that the supervening frustrating event was not reasonably foreseeable. AZ rejects the application of the commercial frustration doctrine when a party assumes the risk of the frustrating event [promoting a dead horse]. Arabian Score v. Lasma Arabian Ltd. REMEDIES, IN GENERAL 1-305(a) pg. 27 Remedies to be liberally construed, also cmt 4 2-703 [seller's remedies] pg. 128, cmt 3 2-711[buyer's remedies] pg. 137 Guiding principle UCC is to put the injured party in as good a position as the party would have been but for the breach. 1-103 pg. 6 other principles of law and equity supplement
2-719 pg. 143 Limitation of remedy can be put in the K 2-718 pg. 142 Liquidated damages are ok so long as not a penalty SELLER'S REMEDIES when the buyer is in breach (2-703 to 2-710, 2-718) • 2-703 cmt 1 pg. 128 UCC rejects election of remedies • if BUYER ACCEPTS (2-606 pg. 111) then we are talking about Action for price (2-709 pg. 135) 2-703 allows seller to withhold delivery, stop bailee from delivering, complete mfg or scrap/salvage under 2-704, resell +damages,damages,action on price reclamation - one party insolvent while in possession of goods identified to the K you can bring an action to forgo damages and get the goods 2-702 pg. 127 Seller's Remedies on Discovery of Buyer's Insolvency [often litigated] 2-710 pg. 136 Seller's Incidental Damages 2-704(2) and cmt 1 and 2 pg. 129 Unfinished goods: complete it or scrap it. Burden is on the buyer to show commercially unreasonable nature of the seller's action. Seller under 2-704 can complete manufacture and if he can't complete resale then he can go after buyer for action on the price under 2-709(1)(b). Generally, 3 options on Buyer's breach/repudiation 2-706 pg. 131 Seller's Damages IF RESALE • GF + commercially reasonable manner cmt 2 pg 132 If seller fails to act properly, seller is deprived of measure of damages under 2-706 and is relegated to 2-708 pg. 134. • seller's damages = Resale price – K price + incidentals – expenses saved • private sale reasonable notification to buyer • public sale reasonable notice (unless perishable or rapidly declining value) Hypo: finance company repos car and doesn't give notice of sale becomes the stuckee • seller may buy • seller not accountable to the buyer for profit • purchaser who buys in GF takes free of rights of original buyer 2-708(1) pg. 134 Seller's Damages if NO RESALE seller's damages = market price at time/place for tender – unpaid K price + incidental damages – expenses saved. 2-723 = market price 2-708(2) pg. 134 Seller's Damages LOST VOLUME SALE [has an inventory of the goods] seller's damages = profit (including reasonable overhead) + incidental damages + costs reasonably incurred – payments received • lost volume sale: could have had 2 sales, but instead only got 1. A buggy whip salesman, though, wouldn't qualify no matter how large his inventory b/c hardly
•
•
•
anyone is buying. This is a facts and circumstances evaluation. Drafters made an error in 2-708(2) so courts ignore “proceeds from the resale”
BUYER'S REMEDIES when seller is in breach (2-711 to 2-717) • 2-718 pg. 142 Buyer's Restitution [NOT ON EXAM] Buyer breaches AND seller withholds delivery and buyer paid, buyer can get his money back [restitution] minus liquidated damages OR (20% K price OR $500 whichever is smaller). Buyer's money also minus setoff for seller's other damages and benefits/profits buyer was going to get under the K. • reclamation - one party insolvent while in possession of goods identified to the K you can bring an action to forgo damages and get the goods. 2-502 pg. 90 Buyer's Right to Goods on Seller's Insolvency 2 options depending on if there was an acceptance of the goods or not. 2-714 BUYER HAS ACCEPTED, buyer gets diff between goods promised - goods received 2-715 pg. 140 buyer has accepted he also gets incidental and consequential damages as defined here 2(b) does NOT require foreseeability, only proximately • Rejection of doctrine of certainty (mathematical precision) in calculation of consequential damages • More and more courts are willing to give damages on lost opportunity argument • Most jurisdictions would not allow attny fees as consequentials 2-711 pg. 136 BUYER HAS NOT ACCEPTED seller fails to deliver or repudiates or buyer rightful rejects/revokes acceptance 2-712 pg. 137 buyer has not accepted, buyer covers. cmt 2 pg. 138 test for cover is whether buyer's actions were reasonable + GF Hypo it was ok to buy the bigger mobile home as cover. Some courts would say that the $2k difference won't be compensated. Hughes Communications Galaxy, Inc. v. US Applying UCC by analogy to a services situation. This case stands for proposition that you don't have to cover with exactly the same substitute [case was about Satellite launch services] 2-713 pg. 138 buyer has not accepted, buyer chooses not to cover calculation of damages for non-delivery or repudiation by seller. 2-723 = market price 2-716 pg. 141 buyer hasn't accepted: SP when goods are unique or other proper circumstances (Prof S: could be anything) ANTICIPATORY REPUDIATION (2-610 pg. 118) UCC doesn't define but it must be a definite refusal to perform cmt 1 to 2-610 pg. 119 anticipatory repudiation (aside from defective delivery under and installment K) is an overt communication of intention or an action which demonstrates a clear determination not to continue with performance.
•
• •
Await performance for a commercially reasonable time. Wouldn't be bad faith to wait in a market where prices were moving to seller's advantage on buyer's breach or vice versa. Resort to any remedy (Buyer's or Seller's remedies in general) despite having said would await Suspend performance or identify: finish or salvage.
The equivocating party can be forced into performance or repudiation by using 2-609 pg. 116. 2-611 pg. 119 Retraction of Anticipatory Repudiation. 2-723 pg. 145 Proof of market price [PROBLEM drafters were thinking of a buyer who learns of repudiation AFTER the date set for original performance, not b4 the due date. The drafters got sloppy] STATUTE OF LIMITATIONS 4 years per 2-725 pg. 146. Parties can agree to as little as 1 year for breach of K but may not extend it beyond 4. Also reducing SofL may need to be conspicuous to be enforced. In most jurisdictions SofL is an affirmative defense that is waived if not pleaded and proved. 4 years for breach of warranty unless express/explicity guarantee of future performance. Courts are split on whether statute is tolled during the time good is being repaired. Example: 3 months in a repair shop. Hypo lifetime guarantee. Under 2-725(2) this warranty extended the time so it covered the future performance of the goods. He can sue b/c he just discovered the breach. Philosophical question about what a 'lifetime' should be for goods. Hypo “Many tires are still on the road after 5 years” This is not definite enough of a statement of future performance. Example Poli v. DaimlerChrysler Corp 7 year 70k powertrain warranty. Timing belt replaced or repaired numerous times between 1993 and 1998 when P sued for breach of warranty. P argued that b/c the D had explicitly extended the warranty to future performance of the goods, the cause of action accrues when the breach is or should have been discovered. The P argued that this was in 1998 when the D failed to repair the timing belt. Court held that P was correct, that the claim for breach of this warranty did not accrue at time of delivery of the car but rather when the D allegedly breach its duty to repair the defect. If court gave D what they wanted the warranty beyond 4 years was meaningless. ARTICLE 3: NEGOTIABLE INSTRUMENTS Two categories of negotiable instruments A promise to pay money is a note and an order to pay money is a draft. cmt 1 to 3-104 pg. 239 Negotiable instruments – transfer through many hands before being presented for payment.
UCC 3-102(a) excludes stocks, bonds and wire transfers from coverage of UCC article 3. 3-102(b) pg. 234 in case of conflicts between article 3 and 4, article 4 governs. 3-104(e) pg. 239 instrument as NOTE = PROMISE v. draft (=order) Note is a 2 party instrument 3-103(a)(5) pg. 236 Maker = person in a note who undertakes to pay Payee person to whom the note is made payable, person entitled to payment Example 3-104(f) pg. 239 CD = deposit and promise to repay = note 3-104(f) pg. 239 check = DRAFT= ORDER payable on demand & drawn on bank OR cashier's check OR teller's check. Draft = 3 party instrument. • 3-103(3) pg. 236 Drawer = person who signs and orders payment • 3-103(2) pg. 236 Drawee = person ordered to pay = bank • Payee Examples Money order can be a check. cashier's check: draft where drawer and drawee are same bank. teller's check: draft drawn by a bank on another bank or payable through a bank. 3-409(d) pg. 300 certified check = accepted by the bank on which it is drawn. 3-103(a)(11) pg. 237 Remitter: person who purchases an instrument from issuer and payee is somebody other than the purchaser. NEGOTIABILITY = requirement for Article 3 to apply N1+N2 = Holder N1 = negotiability = form the doc must be in N2 = negotiation = transfer If the paper is not negotiable then any transfer is nothing more than the assignment of K rights and latter holders (assignees) take subject to all defenses arising from the underlying transaction. Holder + (Value, GF, w/o knowledge of defects) = Holder in Due Course (HDC) HDC avoids most defenses. One exception to HDC status is if the note was for money won during gambling. Note: having the “rights of a HDC” not the same as being an HDC Negotiable refers to the form of the document and the definition is in UCC 3-104(a). Every element must be met. SUPER 7 REQUIREMENTS • #1 writing A negotiable instrument MUST be in WRITING but no requirement that it be on paper. Banks must sometimes cope with instruments written on odd surfaces. The IRS is sometimes the payee of a negotiable shirt. • #2 signed Promise 3-103(9) pg. 236 written undertaking to pay money signed Order 3-103(6) pg. 236 a written instruction to pay money signed 1-201(37) pg 13 "Signed" includes using any symbol executed or adopted with present
intention to adopt or accept a writing. cmt 39 to 1-201(37) pg. 17 A complete signature is not necessary. A symbol can be used. 3-401(b) A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing. § 3-104. (a) (1), (2),(3) pg. 239 NEGOTIABLE INSTRUMENT. • #3 unconditional promise or order [only refers to express conditions not being there] 3-106 pg. 242, cmt 1 pg. 243 Negotiable instrument holder should not have to examine another doc to determine payment rights. • No express conditions = destroys it's ok for the note to be subject to an implied condition (that the theater won't burn down) but an express condition destroys negotiability. Exception: “void after 90 days” pre-code cases uphold as being negotiable and UCC allows this without destroying negotiability. • • • • governed by another writing = destroys rights and obligations for the order/promise in another instrument = destroys refers to another writing = ok ok to refer to anther writing for statement of rights for collateral, prepayment, acceleration Hypo “This note is secured by a security interest in collateral described in a security agreement between the payee and maker of this note.” The security interest is a separate interest. This does not destroy negotiability. limited to a particular fund/source = ok countersignature required = ok fail to countersign = still can become a holder statute states holder/transferee subject to claims/defenses issuer could assert against payee = ok but no HDC
• • • •
Triffin v. Dillabough Triffin buys checks at a discount from Chuckies Check Cashing. Chuckies had cashed stolen AMEX traveller's checks. The checks had a legend stating “DO NOT CASH FOR STRANGERS. THIS MONEY ORDER WILL NOT BE PAID IF IT HAS BEEN ALTERED OR STOLEN OR IF AN ENDORESEMENT IS MISSING OR FORGED.” Triffin wanted to force AMEX to pay the checks. AMEX said that the language on the check made it a conditional promise to pay. Court said no, it's just a warning to the party cashing the money order to protect himself against fraud. Triffin won. • #4 fixed amount of money • If you can't look at the instrument and readily calculate the amount that the maker or drawer promised to pay it is not negotiable. The fact that the holder of
• •
the note has to consult sources outside of the instrument to calculate the interest doesn't destroy negotiability. Per 3-112(b) pg. 248 INTEREST Must be payable in money. 1-201(24) pg 12 money = official currency of a govt.
#5 courier without luggage [refers to no other promises, conditions, undertakings] express conditions not under this element • Maker agrees signing this note also indicates acceptance of the K of sale for which it was given = destroys • Maker agrees tha if the holder deems himself insecure, he may inform the maker who will then supply additional collateral = ok • Maker agrees to let the holder select an attny for the maker and the attny can confess J against the maker = ok • By cashing this check the payee agrees [agreement = promise] = destroys • Maker grants payee a security instrument = ok Woodworth v. Richmond Indiana Venture Dec 1987 P executed a promissory note payable to The Richmond Indiana Venture LP for $655k. Note was negotiated to D Signet Bank. P defaulted on the note in July 1989. P filed this action on Nov 1989. The promissory note contained a term that if the maker of the note failed to pay on time then the Partnership had the option to kick the maker out and the maker would forfeit his partnership interest in addition to other remedies in the Partnership agreement. The court said that this was more than recitation of security or an agreement to protect collateral. This was forfeiture w/o resort to judicial process so the negotiability of the note was destroyed. Since it was not negotiable, D Signet Bank couldn't claim HDC status and was subject to ordinary K defenses. P Woodward's motion for partial summary J granted, in other words, Signet was not an HDC and therefore subject to defenses Woodward had against the Venture. Court stated that it was persuasive that the forfeiture was at the option of the partnership and not the holder and partnership could exercise this even before the holder declared a default. Where doubt exists THE PRESUMPTION IS AGAINST negotiability.
•
#6 payable on demand or at a definite time Holder must be able to tell when it comes due or it is non-negotiable. 3-108 pg. 244 defines payable on demand or at a definite time • MUST meet the requirements of 3-108 • acceleration ok since holder gets paid sooner • extension clauses ok if to a further definite time “tomorrow” standing alone is not a definite time, same problem with “on my next birthday” not enough standing alone. 3-113 pg. 249 • can be ante or post dated. • An undated instrument that specifies no time of payment is treated as payable on demand.
•
#7 payable to bearer or order
Prof Scott: if a check under 3-104(c) pg. 239 doesn't have to use special bearer order language. Drafters of UCC didn't want folks inadvertently destroying negotiability of checks. If a note the language must be correct 3-109 pg. 245 payable to bearer if: “payable to bearer” or “payable to the order of bearer” or doesn't state payee or “payable to cash” or “to the order of cash” • With special indorsement can turn it into payable to order • bearer paper = payable to the holder 3-104(a)(1) Examples cash, bearer bonds “Payable to John Smith or bearer” = bearer paper payable to order = payable to identified person or to order. 3-115 Incomplete Document Example “pay to the order of <blank>” cmt 2 pg. 250 is bearer paper while blank, after it is filled in it is order paper 3-110(c) A person to whom an instrument is payable may be identified in any way, including name, identifying number, office, or account number. Example Pay to the order of the President of the United States” = ok NEGOTIATION = transfer Everything between issuance and presentment is a transfer. If transfer makes the person a holder, it's called negotiation. STAGE 1: ISSUANCE: 3-105 pg. 242 STAGE 3: PRESENTMENT: 3-501 pg. 316 (also requires indorsement to make it bearer paper 3-501(b)(2)(iii)) the bank being presented with the instrument is NOT a holder STAGE 2: TRANSFER: 3-203 pg. 255 Physical transfer of the instrument vests in the transferee whatever rights the transferor had in the instrument If the physical transfer is done in a way to make the transferee a HOLDER, then the transfer is called a NEGOTIATION. 1-201(21) Holder pg. 11 person in possession of a negotiable instrument that is payable either to bearer OR to an identified person that is the person in possession. 4-105(1) "Bank" means a person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or trust company. (2) "Depositary bank" means the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter; [presented for immediate payment = presentment]
(3) "Payor bank" means a bank that is the drawee of a draft; (4) "Intermediary bank" means a bank to which an item is transferred in course of collection except the depositary or payor bank; 4-205(1) pg. 347 How a Depository Bank becomes a HDC Requirements 3-201(b) pg. 254 • if bearer paper just needs delivery to transferee who qualifies as a holder. Even a thief who has bearer paper qualifies as a holder. • if order paper indorsement by indorser + delivery to transferee who qualifies as a holder. An INDORSEMENT (3-204 pg. 257) is a signature placed on an instrument (most commonly on the back) by the payee or any later transferees. BLANK INDORSEMENT (3-205 pg. 259) – when the payee simply signs the back of the instrument. Legal effect? It converts the paper into bearer paper. SPECIAL INDORSEMENT (3-205 pg. 259) – to preserve the “order” character, the original payee may specify a new payee by writing “Pay (name).” The new payee becomes a holder as soon as the instrument is delivered. (Do not need “pay to order of” here) Negotiability is not affected by the language written on the instrument during the course of negotiation 3-203 a person who possess an instrument that hasn't been signed has right to get the indorsement but for now she is not even a holder 3-110(d) pg. 247 and cmt 4 pg. 248 Who Signs When more than one Payee • x and y = both must sign • x or y = either can sign • no connecting words/ambiguous = either can sign, UCC favors negotiability Paycheck made out to the wrong person “Bob Baker” instead of “Bob Barker” 3-204(d) and cmt 3 pg. 258 A separate paper used for indorsements is called an allonge • 3-204(a) says that it must be affixed to the instrument. • A 1975 CO case says that stapling Is the modern equivalent of gluing or pasting.
• •
Adams case held that the bank purchaser of notes was not HDC due to separation of allonges sheets paper clip = questionable, folding in = not good enough
Forgery of the Payee’s Name 3-403 pg. 290 unauth'd signature • If an instrument is payable to the ORDER of a named payee, only that payee can become a HOLDER. • That person does not become a holder until the PAYEE gets possession of the instrument. • Thereafter, no one can qualify as a HOLDER until the payee indorses the instrument. • Without the payee’s indorsement, no later transferees will have taken by a valid NEGOTIATION, which remains the payee’s property. 3-306 pg. Claims to an Instrument. A person taking an instrument, other than HDC, is subject to a claim of a property in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. • An unauthorized signature (forgery or signature by nonagent), is NOT effective to negotiate the instrument. Remember under 2-205 a forged signature on a specially endorsed instrument is not a signature by the person it is payable to so this wouldn't be a valid negotiation. Also, unauth'd signature 3-403 Hypo: a blank check (no payee, signed, thief puts his name in and endorses it) = valid negotiation, garden variety theft of bearer paper. Following a forgery of the payee’s name, no later transferee (no matter how innocent) can qualify as a holder.
•
If your name is on it, you are liable on it 3-415(a) pg. 305 ...if an instrument is dishonored, an indorser is obliged to pay the amount due on the instrument (i) according to the terms of the instrument at the time it was indorsed HOLDER IN DUE COURSE (HDC) 3-302(a)pg. 263 HDC if: (1) no evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; AND • (2) the HOLDER took the instrument • (i) for value, 3-303 pg. 267 Value and Consideration to the extent the promise has been performed. To the extent not performed issuer has a defense. Instrument must be issued for C. Hypo: promise is totally executory (attny retainer), not an HDC and check can be
recovered using 3-306. If attny starts work on the case, he is now giving value and [for our class purposes] he is an HDC and check isn't reclaimable. The gift of an instrument will NEVER created HDC status in the donee though the donee may get similar rights under the shelter rule 3-203(b) pg. 255 Guy signs $23k note to car dealership. Finance company buys the note for $200 less than face amount. Finance company is a HDC for $23K. The finance company took the risk of non-payment and paid their money now to the car company. Both of those things are valuable consideration. PROBLEM 104 Guy defrauds lady. Lady stops payment. The guy tries to cash the check at his bank for payment. The bank's major problem in this situation is proving that it paid value for the check. If it is out of pocket then the UCC allows the guy's bank to be an HDC b/c it paid value. Article 4, section 4-211 pg. 352 provides that for purposes of determining its HDC status a bank gives value whenever it has a security interest in the instrument. Situations like this are spelled out in 4210(a) and (b) FIFO rule pg. 351. Prof Scott: if they just put money in the account until it clears that is just provisional credit and the bank would NOT be a HDC. But if the bank shelled out cash then they are HDC. FIFO rule 4-210: first in, first out. Bank customer presumed to withdraw his own money first. Examples Fraudster already has $500 in his account, deposits $1k, withdraws $500. Is the bank a HDC for any amount? No. If he withdraws $750 bank is HDC for $250. Falls Church Bank v. Wesley Heights Realty, Inc. Whether a depositary bank can achieve HDC status. Bank's customer deposited $1400 check. Withdrew $140. Drawer stopped payment on the $1400 check. Bank's customer skipped out of town owing the bank $140. Can bank assert HDC against people who stopped the check? UCC expressly provides that a bank acquires a security interest in items deposited and for purposes of HDC the depositary bank gives value to the extent that it acquires a security interest in the item in question 4-210. A bank may be a HDC while acting as a collecting agent for its customer. As HDC the $140 claim against the drawer cannot be defeated except by those real defenses set out in UCC 3-305(2) none of which are asserted. • (ii) in good faith, GF = 1-201(20), 3-103(4) “honesty in fact” AND “the observance of reasonable commercial standards” Analysis of notice is often linked to GF b/c if you have notice of defects you can't take in GF. commercially reasonable standards Any Kind Checks Cashed, Inc. v. Talcott Issue: Is a check cashing store a HDC when it paid out $10k to a
fraudster who bilked an elderly man? Held: Not an HDC b/c their procedures re: the chx didn't comport with reasonable commercial standards of fair dealing. Facts: Fraudsters sold $75k of bogus “investments” to a 93 yo MA resident. Guarino told the old man he needed to send a $10k check so Rivera, his partner in crime, could travel to obtain a return on the $75k. The old guy called Rivera directly who said he only needed $5700. The old guy stopped payment on the check. Guarino still presented it for payment at the check cashing store. B/c of the fedex envelope the check came in and since the old guy didn't pick up the phone, the check cashing company took their $500 fee and gave Guarino $9500. Rivera called the old guy again, got him to send the $5700 then they presented that for payment. Again Guarino showed a fedex envelop and told Any Kind he was a “broker.” Having no written procedures, the company employee contacted the other supervisor who had paid out the $10k who said, let's wait until we get the geezer on the phone. G. reversed the phone digits, they got in contact with the old man, didn't mention the $10k and he confirmed he'd sent the $5700. They cashed the second check. GF requirement was analyzed using standard of honesty in fact and the observance of reasonable commercial standards of fair dealing. Here the pure heart/empty head formula doesn't work anymore even though it would under the pre-1992 subjective standard. For further guidance court looked to analysis done by SC of ME. The factfinder has to first look at whether the conduct of the holder comported with industry/commercial standards and 2nd whether those standards were reasonable standards intended to result in fair dealng. Facts and circumstances. No evidence at trail court concerning check cashing industry's commercial standards. Court says that even if their conduct matched the industry's gold standard they were still not reasonably related to achieving fair dealing in the transaction. Further looked at the statute regulating check cashing business in FL. Also commented on check cashing industry's niche market in cashing small checks not these kinds of large checks. The $10k amount was a red flag. Also Guarino didn't have a history of cashing checks of this size at the check cashing store and also had to pay a % fee far in excess of what he would have paid at a traditional bank. General Investment Corp v. Angelini Trial court held that P was an HDC of note signed by D's Angelini and was immune from defenses they wanted to assert, the Angelinis ended up with a J against them for approximately $5,300 plus interest. Ds appeal. Ds entered a K with Lustro Aluminum Products for repairs to their home. Siding, sills, trim, storm doors, paint and job cleanup. Installment payment plan. They signed a note. Note wasn't dated and date of commencement of payment was not set forth. Also, payments were not to begin until the D's were happy according to the sales rep. P General Investment Corp is a home improvement K financier dealing with hundreds of contractors. About 10% of its volume came from Lustro. They supposedly purchased the note for value from Lustro on the day of alleged execution in Dec 1966. It was endorsed without recourse but
there was a warranty that it had installed all articles and materials and completed all the work. P required both the note and underlying K before it paid for the note. Therefore, General Investment had to know that only after completion the payments would commence 60 days later. If General had inquired or required a “certificate of completion” under NJ law, then it would have known there was a problem with the work. Lustro never did the work. Lustro became insolvent and went out of business. D's returned the payment book to the P and let them knew about the problems. P argued it was already a HDC and immune from the defense of failure of consideration. Ordinarily where the note appears to be negotiable in form and regular on its face the holder is under no duty to inquire as to possible defense. Once it appears that a defense exists against the payee the person claiming the rights of a holder in due course has the burden of establishing that he is in all respects such a holder. Here, with consumer home repair transactions, failure to inquire reveals a deliberate desire to evade knowledge b/c of a belief or fear that investigation would disclose a defense arising from the transaction. Their lack of GF led to their lack of notice. Therefore not an HDC and General is subject to defenses homeowner could assert against the note. J reversed. • (iii) without notice of defects Normally the payee is so involved in the underlying transaction that he/she cannot be an HDC b/c of knowledge of problems with the transaction. PROBLEM 106 Corp treasurer used a corporate check to pay his AMEX bill. The corp check requisition was for shipping expenses. He did this every month for 2 years. Corp finally figured it out and sued AMEX in quasi K for the cash. Amex said it was an HDC. This is correct. AMEX had no notice of breach of fiduciary duty under 3-307(b)(4) pg. 274. Also the instrument was not so irregular so as to call into question its authenticity under 3-302(a)(1). Another example, put wrong year on check just after the New Year. No problem. Not so irregular as to call it into question. Do it in July, that's a problem. 3-304(b) and (c) unless accelerated, instrument not overdue if default in payment of interest (not principal). A check payable on demand is overdue 90 days after its date. The holder of such a check cannot be a HDC. So check lost behind a desk for months and indorsed over to the local grocery store means that the grocer is just a holder and subject to defenses drawer wants to assert against the original payee (dentist who did shoddy work and indorsed over the check) PROBLEM 111 3-203(c) and official comment 3 and case #4 in official comment 4 Note not properly indorsed. Unfortunately, company holding the note had notice of a defect b4 the indorsement was made therefore would not qualify as an HDC.
too “closely connected” = the seller-transferor is too closely connected for the buyer-transferee of the paper for the buyer to be allowed the HDC status. Jones v. Approved Bancredit Corp Close relationship between the homebuilder and the finance company...same officers/directors. This led the court to conclude they did not buy without notice/had GF. Courts recognize problem with the financing of installment sales for consumer goods and household improvements. Court must balance desire for unrestricted negotiability against the remedy of consumers who want to withhold payment. The more the holder knows about the underlying transaction which is the source of the paper, the more he controls or participates in it, the less he fits the role of a good faith purchaser for value and the less justification for according him the protected status of HDC. Another exception thanks to the shelter rule Triffin v. Somerset Valley Bank Triffin had notice the checks he bought had already been dishonored. So Triffin couldn't qualify as a HDC. However, b/c of the shelter rule, Triffin acquired the “rights of a HDC.” What does 3-308(a) pg. 276 and cmt 1 provide? Signatures are presumed to be valid. If party wishes to contest this, must plead it as a specific denial to put the opposing party on notice. Party trying to prove the signatures invalid has the burden of proving sufficient support for it. Why does the shelter rule make sense here? Because the holder could just pass the instrument back up the chain until it reached an HDC who would then sue the instrument's creator and prevail. No real difference aside from reinforcing the concept of negotiability. SHELTER RULE: 3-203(b) pg. 255 transferee stands in the transferor's shoes Exception: fraud/illegality on the part of the transferee. Also can't wash the instrument clean by transferring to another party then buying it back to acquire HDC status. cmt 2 pg. 256 Example Gift of a note? If donor was a HDC the shelter rule would provide the donee with the “rights of a holder in due course.” Shelter rule can apply multiple times down the line of transferees. Reacquisition of the instrument: 3-207 when a previous holder reacquires the instrument, he has the power to strike the intervening indorsements. REAL DEFENSES 3-305 pg. 269. Real defenses (1) defeat HDC. Personal defenses (2) do not. Claims of recoupment in (3) can be asserted against the transferee of the instrument to reduce the amount owing on the instrument. • infancy defeats HDC 3-202 (a) Negotiation is effective even if obtained (i) from an infant, a corporation exceeding its powers, or a person without capacity, (ii) by fraud, duress, or mistake, or (iii) in breach of duty or as part of an illegal transaction. (b) To the extent permitted by other law, negotiation may be rescinded or may be subject to other remedies, but those remedies may not be asserted against a
subsequent holder in due course or a person paying the instrument in good faith and without knowledge of facts that are a basis for rescission or other remedy. • • • duress lack of legal capacity illegality Prof S: Don't use 3-305(a)(1)(ii) illegality of the transaction....don't use this for forgery situations. It generally applies to usury and gambling situations.
Sea Air Support Inc. v. Herrman Ralph H. wrote a check for $10k payable to Ornsby House in exchange for gaing chips but Hermann had insufficient funds. The debt assigned to Sea Air Support. They couldn't collect & filed suit. Trail court dismissed based on NV cases refusing to enforce gambling debts. NV follows CL of gambling. All notes drawn for the purpose of reimbursing or repaying any money knowingly lent or advanced for gaming are utterly void and unenforceable. Sea Air can't claim HDC status and had at least constructive notice since original check made out to a casino. Following this case NV legislature amended its gambling laws. Kedzie & 103rd Currency Excahnge, Inc. v. Hodge Service provider was required to be, but was not a licensed plumber. Flood control system not installed. Stop payment on the check. Nevertheless Fentress presented the check at the 103rd and obtained payment but when presented to Citicorp for payment it was refused. Currency Exchange alleged it was a HDC and sued Beulah Hodge, the drawer of the check. Hodge moved to dismissed under 3-305 alleging that the transaction was illegal b/c Fentress was not a licensed plumber as required under IL plumbing license law. Trial court dismissed Currency Exchange's action against Hodge. On appeal issue is whether noncompliance by Fentress with licensing law gives rise to illegality of transaction. Historically, illegality arises only when there is a legislative declaration affecting both the underlying K and instrument exchanged upon it. Also, gaming nature/gambling. Usury has not been held to give rise to illegality as a defense against a holder in due course. Transaction made in violation of an injunction, still note was upheld. Rationale: everyone has notice of legislative actions, HDC is an innocent third party w/o knowledge of circumstances of K upon which instrument was initial exchanged. HDC intended to facilitate commercial transactions. If illegality were used the way the D says, then it would be a personal defense. Not enough that the initial obligation to pay arising from a void K or transaction is void. DISSENT: said that it's clear that an illegal transaction is enough to defeat HDC under 3-305. IL Plumbing Law event provides for criminal penalties b/c public safety is at issue.
•
Fraud in the factum = real defense type of fraud where misrepresentation causes one to enter a transaction without accurately realizing the risks, duties, or obligations incurred. Didn't mean to enter the agreement. Sign this, blind guy, it's a petition. Really, it's a deed. That's fraud in the factum. Non-examples FDIC v. Culver D was to run the daily farm operations of a business and Kailliel was to run the financial aspects. D signed blank preprinted promissory note to payee Rexfor State Bank, note provided that principal and interest were to be paid to the payee at its offices. D assumed $30k would be written in, thought it was a receipt not a promissory note making him liable. Though Kailliel was obligated. Terms written in were for $50k and $50k entered into account controlled by Kalliel who in turn paid D $30k.. Rexford Bank became insolvent and the FDIC took over as receiver. In its corporate capacity the FDIC purchased assets including the note from the receiver. D made no payments. Fraud in the factum asserted by the D. 3-305(2)(c) in Kansas: misrepresentation as has induced the party to sign the instrument with no knowledge nor reasonable opportunity to obtain knowledge of its character or essential terms. Fraud in the
factum: a party is betrayed into signing a bill or note by assurance that it is an instrument of a different kind. However, court here says that if he can read he must read. This isn't the same as forgery, if the terms are on the note you must read or else when you sign the person who presented the instrument to you becomes kind of like your agent and his knowledge will be attributed to you. Thus D is wrong to say that it was misrepresented as a receipt. D also contends he had no opportunity to learn of the note's essential terms. Quotations about incomplete instruments and material alterations are governed by 3-115 and 3-407. HDC is auth'd to enforce not as it was completed and not as D would have auth'd it to be completed. One who signs an instrument b4 all essential terms have been completed creates a blank check that may be enforced by a subsequent HDC according to terms completed by an intervening holder. D's only legal recourse is against the intervening holder who actually completed the note w/o D's auth. Fraud in the inducement = personal defense Occurs when A enters into an agreement, knowing that it is supposed to be a contract and (at least having a rough idea) what the agreement is about, but the reason A signed/made the agreement was because of some false information that B gave to A. Buy this house. Ok. Leaky roof misrepresented as having been fixed. Fraud in the inducement. Another example: I've got a bridge in Brooklyn I'd like to sell you. The fraud is that the seller claims he has title and can convey. • 3-601 Discharge in bankruptcy is always a real defense regardless of what the subsequent holder knows or doesn't know at the time of the acquisition of the instrument. Any other discharge is NOT effective against the HDC unless that holder at the time of acquisition knew of the discharge in which case it is a real defense against the HDC. Recoupment (see cmt 3 to 3-305 for other examples) is the ability to subtract from the amount due any damages owed to the creditor. Example I owe you $500 on a note and you breach the K causing me $200 in damages. I can subtract that $200 from the note as recoupment. Hypo Dog bite that has nothing to do with the K that gave rise to the obligation = not the same transaction. That's a setoff, not recoupment.
•
•
I already paid defense 3-601 discharge 3-602 payment Malvio (purchased new car) signed note for $18k Valentine (auto seller) discounted note for $16.8k to Orsino Orsino told M that payments assigned to them M sent them a check for full amount Orsino wouldn't return the note Orsino assigned to Olivia and they contacted M. M doesn't want to pay again. Transferee (Olivia) stands in Orsino's shoes. Orsino is no longer entitled to HDC status.
Malvio's regular K remedies: unjust enrichment against Orsino. • Forgery Defense Issue is it a real or personal defense? It's complicated. 3-401(a) a person is not liable on an instrument unless the person signed he instrument and in 3-403(a) Unauthorized signature. (a) an unauthorized signature is ineffective except as the signature of the unauthorized signer[forger] in favor of a person who in good faith pays the instrument or takes it for value. Translation: If the forger signed it, even with somebody elses' name, the forger is stuck as against the person who paid value for the instrument. forgery – distinguish between trying to sign a name that looks like somebody else's signature. That's forgery. If you sign somebody else's name in your own hand, it isn't. PERSONAL DEFENSES • The purpose of a countersignature on the traveler's check is for identification purposes (see 3-106 official comment 2 pg. 244 ) this is a personal defense and cannot be used against a HDC. 3-106(c) If a promise or order requires, as a condition to payment, a countersignature by a person whose specimen signature appears on the promise or order, the condition does not make the promise or order conditional for the purposes of Section 3-104(a). If the person whose specimen signature appears on an instrument fails to countersign the instrument, the failure to countersign is a defense to the obligation of the issuer, but the failure does not prevent a transferee of the instrument from becoming a holder of the instrument. Failure of consideration is a personal defense. Hypo Piano falls apart. You got firewood. Too bad, you will be liable on the note to an HDC. THE NATURE OF THE LIABILITY Suit on underlying obligation may not always be brought. 3-310 pg. 278 If an instrument received on obligation, the obligation is suspended to the extent of the $$ until instrument is paid or dishonored. 3-412 obligation of the issuer of a note. This is what you sue on if instrument is dishonored. 3-413 is the similar obligation for the drawer. 3-402 pg. 288 Principal (even an undisclosed one if agent was auth'd) can be bound on an instrument by the signature of his agent. Agent will also be liable on the note unless he unambiguously indicates that he is an agent. “John Doe, Agent” Prof Scott says agent wouldn't be bound though comment says different “John Smith” [personally liable] “Money Corporation, John Smith.” [could go either way] “Money Corporation, John Smith, President.” [not personally liable for the Corp] DRAWEE/DRAWER OBLIGATION Ward v. Federal Kemper Ins. Co
•
• •
Characterized drawer as creditor and drawee as the debtor. The drawer/check writer does not “own” the funds it has on deposit with the drawee/bank. The drawer/check writer's balance on the drawee/bank's books represents a debt owed the drawer/check writer by the drawee/bank. The funds are “owned” by the drawee/bank. In other words, the money in the checking account isn't yours, simply represents debt the bank “owes” you. Drawee is primarily liable for paying the check. Only upon drawee failing to pay is the drawer liable (they are secondarily liable on the instrument). 3-414 pg. 303 Until dishonor drawer is not liable 3-414 pg. 303
3-408 pg. 300 Drawee is not liable on a draft until he accepts it. 3-409 acceptance means he SIGNED it 3-401 signed means mechanical stamp, trade name, etc. Example Bank can refuse to sign off on the check. That would make the drawer secondarily liable. DISHONORED [when the drawee bank fails/refuses to pay a note or check] 3-502 pg. 317 MAKER OBLIGATION The maker of a promissory note is absolutely liable on the instrument [unlike a draft]. If there are comakers they are jointly and severally liable. 3-412 pg. 302 obligation of the issuer = maker of promissory note or bank that issues a cashier's check, we focus on the maker. PRESENTMENT 3-501 pg. 316 • The person making presentment must give reasonable identification [not defined in the UCC] Messing v. bank of America, N.A. found that bank's thumbprint requirement was reasonable. Remember, even though Messing presented the check and the bank refused to cash it, the check was NOT dishonored. • Without dishonoring the instrument, the party to whom presentment is made may (i) return the instrument for lack of a necessary indorsement, or (ii) refuse payment or acceptance for failure of the presentment to comply with the terms of the instrument, an agreement of the parties, or other applicable law or rule. 3-503 NOTICE OF DISHONOR pg. 319 commercially reasonable means, identify, time provisions 3-504 pg. 320 EXCUSED PRESENTMENT AND NOTICE OF DISHONOR in certain circumstances presentment, dishonor, notice of dishonor might be waived by parties, K'd around. Example “All parties to this note hereby waive all rights to presentment, notice of dishonor, and protest.” Even if buried in the fine print, this works. INDORSER OBLIGATION (secondary liability) 3-415 pg. 305 Indorser is not liable until presentment, dishonor and notice of dishonor. The person primarily liable (drawer, maker) did not pay the obligation on the instrument. • The indorser can protect himself by stating indorsement is made “without recourse” or otherwise disclaims liability. Indorser is only indorsing for negotiation purposes.
• •
• •
There is no strict liability. The indorser can raise any defense that he has. However, as we've seen if the defenses are asserted against an HDC, only real defenses can win. Where there is joint and several liability the right of contribution is available. Indorsers only have this where they are joint indorsers or there is more than one anomalous indorsement per cmt 2 to 3-116 pg. 250-251. You indorse, you are on the hook for the full amount (terms at time of indorsement) 3-119 pg. 253 “vouching in” other parties into the action is the smart thing to do. 3-205 (d) "Anomalous indorsement" means an indorsement made by a person who is not the holder of the instrument. An anomalous indorsement does not affect the manner in which the instrument may be negotiated.
SURETY (a fool with a pen) 3-419(e) pg. 312 Accommodation Party (Surety) is entitled to reimbursement from the accommodated party (the debtor) if the surety had to pay the debt. The debtor is not entitled to recourse or contribution from the surety. Surety situation involves 3 Ks.
K1 = underlying contract between debtor and creditor K2 = surety promises the creditor he will pay if the principal (debtor) doesn't. K3 = if the surety has to pay the creditor, then the principal (debtor) will pay the accomodation party (surety) back. This is an implied K to reimburse. Sureties have rights • Exoneration – surety tells the principal to perform • Subrogation - if surety must pay creditor, he is subrogated (steps into shoes of the creditor)
• •
and takes on rights of creditor (liens against collateral, etc) Contribution – right to get money from the principal Strictissimi juris - CL rule if debtor-creditor make a new agreement, the surety that signed the first agreement is no longer bound unless surety consents to be bound again or creditor informs principal that the suretyship is being preserved.
3-603. TENDER OF PAYMENT pg. 322 Tender of payment = discharge, even if refused Obligor = original debtor “Security follows the debt” under 3-605(e-g) if creditor impairs collateral then the surety can be discharged up to the value of the collateral. Burden of proving impairment is on the surety. 3-605(e) = indorser or accommodation party (aka surety) 3-605(f) = anybody jointly/severally liable 3-605(g) e or f point to what impairment is here Example George and Martha are co-makers on a $10k note. Both are jointly and severally liable w/right of contribution, each individual responsible for $5k. 3-605(f) applies. Even if the surety is discharged b/c collateral is impaired, he must give notice to prevent being put back on the hook. 3-302(b) pg. 263 discharge is effective against a person who became a HDC with notice of the discharge 3-601(b) Discharge of the obligation of a party is not effective against a person acquiring the rights of a HDC w/o notice of discharge. BANKS AND THEIR CUSTOMERS 4-102 pg. 331. Article 4 controls Article 3 drawee bank = payor bank depository bank (first bank item is transferred to for collection could be payor bank where drawer and holder do banking at the same bank) Any bank except the payor bank is a collecting bank. open a checking account creates 2 relationships • debtor (creditor)/ creditor(depositor) • agent(bank)/principal(depositor) 4-103 pg. 332. • Variation by agreement; • Cannot disclaim lack of GF or failure to use ordinary care • Failure to use ordinary care • Standards for measuring ordinary care may be varied if not unreasonable • Measure of damages PROPERLY PAYABLE RULE (4-401(a) pg. 364) A bank may pay out of the customers money only if it follows instructions exactly. Charge only if properly payable. 4-401(a) tells us
4-401 pg. 364 • Properly payable from that account even though the charge creates an overdraft. • Properly payable if it is authorized by the customer and is in accordance with any agreement between the customer and bank. • A customer is not liable for the amount of an overdraft if the customer neither signed the item nor benefited from the proceeds of the item. Example electronic check (routing and transit number given and bank pays) Was this signed? solution 1: bank and customer have agreement covering these solution 2: equitable principles The NOR operation is a logical operation on two logical values, typically the values of two propositions, that produces a value of true if and only if both operands are false. Here, customer received the benefit. Sent email to Professor Scott. • A bank may charge against the account of a customer a check that is otherwise properly payable from the account, even though payment was made before the date of the check, unless the customer has given notice to the bank of the postdating. Cmt 3 says must give bank time to act on the postdating b/c automated check collection system cannot accommodate postdated checks. If the bank charges account of a customer b4 date stated in notice of postdating the bank is liable for damages cmt 1 forged drawer signature or forged indorsement is NOT properly payable. Customer does not have to make a “stop payment” since the item is not properly payable. Examples Non-customer presents check over the counter to bank on which it is drawn. Bank refuses to cash. This was properly payable b/c customer/drawee authorized it. Therefore the check was wrongfully dishonored. If customer and bank had an agreement that non-customers couldn't cash checks over the counter then it would not have been wrongfully dishonored. 4-403 pg. 367 STOP PAYMENT CUSTOMER RIGHT • describe with reasonable certainty • give bank reasonable opportunity to act • if oral, must confirm in writing after 14 days or it lapses • 6 month limit unless preserved for additional 6 month periods in writing 4-404 pg. 368 6 MONTHS A bank is under no obligation to a customer having a checking account to pay a check, EXCEPT a certified check, which is presented more than six months after its date, but it may charge its customer's account for a payment made thereafter in good faith. 4-402 pg. 477 WRONGFUL DISHONOR • Payor bank wrongfully dishonors if it was properly payable [Prof: Scott this rule includes mistakes] • Payor bank liable to customer for consequential damages proximately caused [a question of
• •
•
fact]. Damages limited to actual damages proved.
4-405 pg. 368 DEATH OR INCOMPETENCE OF A CUSTOMER. • Bank's authority not effected by incompetence of a customer existing at the time instrument issued or its collection is undertaken if the bank does not know of incompetence. • Neither death nor incompetence of a customer revokes the authority until the bank knows AND has reasonable opportunity to act on it. • Even with knowledge, a bank may for 10 days after the date of death pay or certify checks drawn on or before that date unless ordered to stop payment by a person claiming an interest in the account. Even if crazy Nellie neighbor claims an interest in the account, the bank will stop paying out of the account. Low threshhold. 3-420 CONVERSION LIABILITY (a) incorps CL for conversion of negotiable instruments Conversion = misappropriation of another's property. Only person whose property rights are affected may sue. Out the outset, the payee/bearer. After that holder gets property rights while he/she has the instrument. If check is forged, the payee can sue the drawee bank or anyone taking the check after the forgery in conversion. If J for payee against the drawee, the drawee will sue the check's presenter for breach of presentment warranty. WARRANTIES Article 3 and 4 warranties are virtually identical. Article 3 warranties control BEFORE check is taken for deposit 3-417 (presentment), 3-416 (transfer) Article 4 warranties control AFTER check is taken for deposit. 4-208 pg. 349 PRESENTMENT WARRANTIES. Drawee bank can recover from warrantor damages Warrantor is the person presenting for payment or previous transferor • warrantor was entitled to enforce • draft wasn't altered • no knowledge of signature of drawer was unauthorized. 4-207 pg. 349. TRANSFER WARRANTIES A customer or collecting bank [any bank other than the drawee bank] that transfers an item...warrants to the transferee and to any subsequent collecting bank that: (1) the warrantor is a person entitled to enforce the item; (2) all signatures on the item are authentic and authorized; (3) the item has not been altered; (4) the item is not subject to a defense or claim in recoupment AND (5) the warrantor has no knowledge of any insolvency proceeding 4-111. STATUTE OF LIMITATIONS Action must be commenced within three years after the [cause of action] accrues. 3-118 STATUTE OF LIMITATIONS. 6 years, 10 years. Look at the statute.
doc_748910911.pdf