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Section 1-103(b)

There are certain sections of the Uniform Commercial Code that have enormous impact on the totality of the Code.  None is more powerful than Section 1-103(b).  This often overlooked statutory provision essentially opens up the whole world of American Jurisprudence to a lawyer who understands the meaning of that section and how to utilize it.  Section 1-103 reads as follows:

Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions.

The net effect of Section 1-103 is to incorporate all ‘principles of law and equity’ which exist, ‘unless displaced by the particular provisions of the Uniform Commercial Code’.  So, if the Code doesn’t knock it out via a ‘particular provision’ the whole body of law involved will ‘supplement [the Uniform Commercial Code] provisions’.  It doesn’t get more powerful than that.

            A simple review of the supplemental principals of law stated illustrates the massive content available to attorneys who are involved in UCC transactions.  The general law of contracts, agency, estoppel, misrepresentation and fraud often are intertwined in commercial transactions.  Understanding the applicability of any of these supplemental principles, and how to creatively utilize them gives an enormous advantage to someone so armed. 

            This is dramatically illustrated in the case of In Re Invenux, Inc. 298 B.R. 442 (Bkrtcy. D. Colo. 2003), 51 UCC Rep Serv 2d,.  The case was before the court on defendant/trustee’s motion to dismiss and plaintiff’s cross motion for summary judgment. In its motion for summary judgment plaintiff was seeking a reformation of the security agreement between itself and debtor.  The court noted that:

Although the UCC-1 financing statement which Plaintiff filed to perfect its security interest is worded broadly enough to embrace an interest in the Stock [the collateral], it does not appear as part of the collateral in the security agreement.  In Re Invenux, Inc. at 445-446

In order for a security interest to be enforceable, Section 9-203(b)(3)(A) requires that a description of the collateral be contained in the security agreement. Section 9-203 provides in relevant part as follows:

(a)   A security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment.

(b)   Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if:

(1)   value has been given;

(2)   the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and

(3)   One of the following conditions has been met:

(A)  the debtor has authenticated a security agreement that provides a description of the collateral….

(B)      ….

(C) …..

(D) …..

[Emphasis added]

It is clear from the language of Section 9-203(b)(3)(A) [the other sections do not apply in the case] that in order for the security interest to be enforceable, the debtor must have authenticated a security agreement and such agreement must provide a description of the collateral. 

            The trustee took the position that since there was no description as required by Section 9-203, the security agreement was invalid.  The court framed the issue as follows:

The issue for this Court is whether Colo. Rev. Stat. Section 4—9—203 displaces Colorado’s common law such that the right of reformation due to mutual mistake—a common law right available to contracting parties generally—is not available to parties intending to create a security agreement under Article 9 of the U.C.C. id at 446

In finding for the plaintiff on this point of law, the court said:

There is no question that Section 4—9—203 is in the nature of a statute of frauds because it requires a security agreement to be in writing. Colo.Rev.Stat. Section 4—9—203 Comment 3.  But the fact that an agreement must be in writing to satisfy a statute of frauds is not inconsistent with reformation of that written agreement if, by reason of mutual mistake, the true agreement of the parties is not expressed in the writing. Id at 447

The court found that the security agreement was reformed per the common law of reformation and mutual mistake which existed in Colorado, and therefore, the fact that there was no written description of collateral as provided for in Section 9-203 did not render the security agreement unenforceable.

In Re Invenux powerfully illustrates the potential impact of Section 1-103 in its application of the general contract principles noted.  When one factors in the multitude of general contract principles which apply and supplement the UCC one can clearly begin to see the magnitude of Section 1-103(b) on the many contracts which exist under the UCC.  When one superimposes the many bodies of law which similarly apply, the power and pervasive applicability of Section 1-03(b) becomes very clear.  Section 1-103 should be part of any systematic analysis of Uniform Commercial Code cases.