This is an extract of our Cerrud Commercial Law Spring2020 document, which we sell as part of our Commercial Law Outlines collection written by the top tier of Barry University School Of Law students.
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Good faith must be present in all
Set of rules under which the sale of goods will be covered.
- 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?
Is the good identiﬁable?
Present & identiﬁable
Future & identiﬁable
Is it a hybrid transaction?
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.
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.
Whether the gravamen
(essence/most serious part) of action involves goods or services
Who is selling the goods?
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:
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.
(when product has a warranty and if it is a consumer product)
Which law applies?
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
(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
- some of the terms cannot be in small print,
they must be conspicuous (when they are material. Cerrud_CommercialLaw_Spring2020
Look out for:
(c) and (d)
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
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
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
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.
A lien is an interest in the debtor's property given by the law to protect a creditor.
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
business transaction in which credit extension is protected (secured) by collateral given by debtor to protect the loan
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
If debtor defaults,
collateral may be seized and sold and proceeds of the sale used to pay the debt.
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
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
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
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:
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
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
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
Consumer goods 9-102(a)(23)
Farm Products (9-102(a)(34)
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?
(pieces of paper used as collateral)
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);
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):
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.
VALIDITY OF THE
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
Where the collateral is in the possession of the secured party (a pledge), no written security agreement is required by law
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
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 (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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