Cerrud Commercial Law Spring2020 Outline

Cerrud_CommercialLaw_Spring2020 Good faith must be present in all UCC transactions. Set of rules under which the sale of goods will be covered. Article 2 - Will you have title once you pay? - Is it merely a lease? If so, apply 2a Is there a transaction? a contract for sale Does the transaction involve goods? Present Good? Future Good? Is the good identifiable? Must be: Present & identifiable Future & identifiable Moveable/severable Is it a hybrid transaction? Cannot be: Money Securities Real Estate All things moveable qualify as a good; must be present; future goods are goods not in existence at the time of the creation of the contract but will be in existence by the completion of the contract. Majority Predominant Factors Test 1) language of contract; 2) nature of business of supplier; 3) reasons for entering contract 4) amount paid for both services and goods. If yes, then Article 2 doesn't apply. Does the transaction involve services? Does a warranty apply to a hybrid transaction? only if hybrid is for sale of goods under the predominant factor test. Minority Gravamen Test Whether the gravamen (essence/most serious part) of action involves goods or services Who is selling the goods? Consumer Until it is cut loose and identified in the contract,good is not moveable. buyer of consumer goods for personal use. Difference between sales and leases: Commercial Lease is a transfer of title where the person transferring title expects a reversionary interest. - When you have this expectation, you must wait for the person to default before you take action. - Did not intend to rid himself of title forever. if you have a reversionary interest if the person does not pay, then you have a secured interest. Magnuson-Moss Act (when product has a warranty and if it is a consumer product) Individual Which law applies? Merchant 1) whoever deals in the kind of goods being sold; 2) hold themselves out as someone who deals in the sale of that good; or 3) person to whom such knowledge/skill may be attributed. Applicable Statute of Frauds for Merchants 2-201 Federal Over State (where directly contradictory) quantity is only requirement Burden of proof on π Offer and Acceptance UCC = State Law - any conduct to valid. - How to prove acceptance: 1) received goods with no complaint about them; or 2) compliance with past conduct and no complaint within a reasonable time. If offer is made by a merchant and he gave you a particular mode of acceptance, substance over form. Can reject goods. - sent something that is almost what you accept but not good enough. - limited amount of time based on case law. If an implied warranty that is not written Firm offer when it comes from a merchant if it has an amount of time. Otherwise it has to be in wrting. § 2-207 Battle of the Forms - can be used as a defense and a weapon - contracts sent between merchants - changes in terms that are not directly contradicting to previous contracts are allowed in unless they are directly flagged. - some of the terms cannot be in small print, they must be conspicuous (when they are material. Cerrud_CommercialLaw_Spring2020 Secured Transactions Look out for: 1. Consignments 2. Leases Exclusions from Article 9 9-109 (c) and (d) CONSIGNMENTS FEDERAL STATUTE UCC does apply to the extent that the federal statute does not answer the problem presented Ship mortgages, aircraft titles, railroad equipment, and some interstate commercial vehicles (such as trucks and buses registered with the Interstate Commerce Commission ICC) are in part governed by federal statutes 9-102(a)(20) SCOPE Secured v. Unsecured what a debtor and creditor must do to make a transaction effective (attachment or creation) a true consignment is neither a sale nor a security device; it is a marketing procedure by which the owner of the goods (consignor) sends (consigns) them to a retailer (consignee) for sale to the public. what a creditor must do to give notice making the transaction effective against other parties, such as other creditors, buyers or a BK trustee (perfection) retailer does not buy the goods; if they cannot sell them they are returned to the owner who wins if other buyers, creditors, or other parties contest rights in the collateral (priority) Look out for Sales on Credit (not true consignments); disguised as consignments to avoid the filing requirements. If retailer must pay for the goods no matter if they sell them, this is not a true consignment. (this is the creation of a security interest) and what creditor may and may not do to repossess the collateral and sell it to get paid (default). UNSECURED: Signature loan - when a debtor is solvent and/or trustworthy so the creditor only demands the debtor's promise to pay Debt can be secured by nominating some of the debtor's current or future property as collateral. SECURED: A lien is an interest in the debtor's property given by the law to protect a creditor. Future Property Nomination (see above) Not generally known by its creditors to be substantially engaged in selling the goods of others test from 9-102(a)(20)(A)(iii) every transfer of any interest in an airplane must be evidenced by an instrument, and every instrument must be recorded with the FAA before the rights of innocent third parties can be affected LANDLORD LIENS AND OTHER STATUTORY LIENS business transaction in which credit extension is protected (secured) by collateral given by debtor to protect the loan 9-109(d)(1) and (2) There are three ways a consignor can protect itself from the claims of the consignee's creditors Ways to try and secure: Perfection: validity of security interest; matter of state law (aka UCC) If debtor defaults, collateral may be seized and sold and proceeds of the sale used to pay the debt. Liens Consensual Lien: debtor voluntarily grants in if taken on debtor's prop = mortgage; one in property or fixtures = security interest. Judicial Lien: arises from judicial proceeding sent out to seize debtor's property. Statutory Lien: imposed by either statute or common law in favor of certain creditors law worthy of protection (i.e. landlords, artisans repairing PP (garage mechanic), innkeepers and attorneys. Mechanics Lien: statutory lien in favor of con workers. It can either comply with a state sign law (which would indicate that the goods were on consignment), it could establish that the consignee was "generally known by his creditors to be substantially engaged in selling the goods of others," or it could comply with Article 9's filing provisions Federal Tax Lien: if you don't pay taxes, fed. will file the fed. tax lien, statutory lien that rea all of taxpayer prop. LEASES WAGES Some states absolutely prohibit the assignment of future wages (such assignments are void); some permit them in limited circumstances if the employer consents; and some states require the consent of both the employer and the spouse NON-FINANCING ASSIGNMENTS The 9-109(d)(4)-(7) exclusions of some transfers of accounts, chattel paper, payment intangibles, and promissory notes are each meant to be an exclusion of all such assignments of a nonfinancing nature 9-109(d)(3) True lease v. Disguised sale: Tax/accounting tests tend to focus on the intention of the parties and two other factors: 1-203 bright lines to help distinguish leases from secured transactions: Cerrud_CommercialLaw_Spring2020 The equity the lessee builds in the leased property; and The value of the property surrendered to the lessor at the end of the term If at the end of the lease period the lessee becomes the owner of the property for little or no consideration, a secured transaction and not a lease has been created If the contract contains a clause that permits the lessee to terminate the lease at any time and return the leased goods, a true lease has resulted. Such a right of termination is not an attribute of a sale of goods The first prong is satisfied if the consideration that the lessee pays to the lessor is an obligation for the term of the lease and is not subject to termination by the lessee The second prong of the test of § 1-203(b) is satisfied if any one of the four "Residual Value Factors" listed in § 1- 203(b)(1) through (4) exists If the lease is for the entire economic life of the leased goods, with or without renewal, a disguised sale has occurred. This is sometimes called the junk pile test because goods that are worthless at the ends of the lease are simply tossed out. Section 1-203(b) of the U.C.C. has two prongs that, if both satisfied, dictate that a transaction creates a security interest per se The court must now consider the economic reality of the transaction to determine whether it is a lease or a secured financing arrangement. If property is leased, the lessee acquires no equity in it. If the lessee defaults, the lessor repossesses the property but is not required to sell it and apply the proceeds to the debt majority of courts and commentators recite that the principal inquiry is whether the lessor retains a meaningful reversionary interest in the goods. If the lessor does not possess a meaningful reversionary interest, the lessor has no interest in the economic value or remaining useful life of the goods, and therefore the lessor transferred title to the goods, in substance if not in form. Cerrud_CommercialLaw_Spring2020 9-505 - fail-safe provision allowing the protective filing without it being in any way an admission that a secured transaction is intended CREATION OF A SECURITY INTEREST COLLATERAL Representations made by a debtor in a purchase-money security agreement regarding the intended use of the collateral will be binding on the debtor and will determine whether the collateral is for business or personal purposes Goods 9-102(a)(44) Consumer goods 9-102(a)(23) Equipment 9-102(a)(33) Farm Products (9-102(a)(34) Inventory 9-102(a)(48) Classified as business or non-business at the creation of the security interest. classification does not change because of a later change in the manner in which collateral is used Equipment is defined not according to its usual meaning but as a catchall category for any goods that do not fit into the other three goods categories When a debtor makes an affirmative representation in loan documents that goods are to be used primarily for personal, family, or household purposes, the creditor is protected, even if the representations are erroneous Are goods that have a relatively long period of use considered equipment? Quasi-Tangible Property (pieces of paper used as collateral) Instruments 9-102(a)(47) Investment Property - stocks and bonds and right to accounts containing same; 9-102(a)(49) Documents - warehouse receipts and bills of landing; 9-102(a)(30) Chattel Paper 9-102(a)(11); and Letter of Credit Rights 9-102(a)(51) Chattel Paper: Defined broadly enough to encompass the sale of most security interests from one secured party to another Intangible Property (property having no significant physical form): Accounts 9-102(a)(2) Commercial Torts Claims 9-102(a)(13) Deposit Accounts 9-102(a)(29) General Intangibles 9-102(a)(42) Health-Care - Insurance Receivables 9-102(a) (46) - these are a subcategory of accounts Payment Intangibles 9-102(a)(61) subcategory of general intangibles General intangibles is the catchall for intangible collateral Yes. Goods that are sold as inventory are not subject to any existing security interests, whereas goods sold as equipment are subject to existing security interests Because the buying secured party takes possession of the paper, that is usually sufficient to satisfy the Article 9 rules on attachment and perfection. Collateral is classified based on the principal use of the goods To determine whether goods are inventory or equipment, we look at their primary use. Goods are equipment if they are fixed assets or have a relatively long period of use. Goods are inventory, even if they are not for sale, if they are used up or consumed in a short period of time to produce an end product For example, milk in the hands of a farmer would be a farm product, whereas milk in a grocery store would be inventory. The same milk in a grocery store customer's hands would be a consumer good. Cerrud_CommercialLaw_Spring2020 Pledge: debtor (pledgor) gives physical possession of the collateral to the creditor (called the pledgee) until the debt is paid. TECHNICAL VALIDITY OF THE FORMS Possession perfects the creditors interest in the collateral. The security agreement is the contract between the debtor and the creditor by which the debtor grants to the creditor (the secured party) a security interest in the collateral Creation of the security interest typically involves two documents: the security agreement and the financing statement Where the collateral is in the possession of the secured party (a pledge), no written security agreement is required by law SECURITY AGREEMENT FINANCING STATEMENT The financing statement is the notice that is filed in the place specified in 9-501 (and indexed under the debtor's name) in order to give later creditors an awareness that the collateral is encumbered. If collateral not in secured party's possession or control, the 9-203 security agreement must (1) be authenticated by the debtor (authenticate is defined in 9-102(a) (7)) and (2) describe the collateral (plus the land if timber is involved) Where the property is to leave the creditor's control, 9-203 becomes relevant and creates technical problems Document filed in the appropriate public office by the creditor (secured party) to perfect the creditor's rights in the collateral against later parties. 9-502(a) It need be signed by no one (though the debtor must have authorized it, which follows automatically from the signing of the security agreement 2 drawbacks: 1) only tangible objects can be pledged; 2) some types of collateral debtor needs to keep possession (i.e. machines for manufacturing) Purpose of the security agreement is to create property rights between the debtor and the creditor, and the purpose of financing statement is to create property rights in the creditor against most of the rest of the world 9-509 must identify the parties and indicated what collateral is to be covered. Need not be in any particular form or contain any particular words; needn't call itself a security agreement Should identify the parties, describe the collateral, contain a grant by the debtor to the creditor of a security interest in the collateral, and specify the contractual understandings of the parties - in particular naming what events will constitute default to permit the creditor to realize on the security interest by repossessing the collateral If realty interests are involved (timber, fixtures, minerals to be extracted from the ground), 9-502 adds another requirement - that it describe the realty and the record owner of the realty (if he or she is not the obligor) and indicate that it be filed in the real property records (so that filing officers see that it gets to the right place). 9-516 If filing office does take the financing statement not containing these things, the financing statement is effective nonetheless. Does not typically contain many details of the underlying transaction Security agreements and financing statements serve different purposes, but they have several problems in common Who the debtor is What a sufficient description of the collateral is, etc Function to give notice to later creditors as to what property of the debtor is encumbered by prior liens Two options for resolving issues with debtor's name: 9-503 Only if Rule alternative A The description of collateral in a financing statement is sufficient if it notifies subsequent creditors that a lien may exist and that further inquiry is needed to learn the full state of affairs 9-503 Safe Harbor Rule - alternative B A security agreement must contain a reasonable identification of the property covered, and blanket agreements, covering all the debtor's assets, are generally not sufficient. The identity of the collateral must be objectively determinable, and a description by category, or type of collateral, is permitted. 9-506 9-506 (a) adds that a financing statement that is in error but not seriously misleading is nonetheless effective UCC § 9-504 specifically allows a financing statement that "covers all assets of all personal property. 9-506(c) search engine test: A financing statement that has an incorrect identification of a debtor is "seriously misleading" if the statement would not be found by a search of the records of the filing office under the debtor's correct name using the filing office's standard search logic. 9-108 official comment 2 - test adopted by the courts "whether the description does the job assigned to it, i.e., make possible the identification of the thing described." Such things as the amount of the loan, the time periods of repayment, etc., are not required to be described Or, because later creditors will be doing the records searching, would a reasonable person be put on inquiry as to the identity of the collateral? The description need only inform, it need not educate.

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