The Comprehensive Approach: An Application

This post will be used to demonstrate the impact of the Comprehensive Approach to UCC problems.  The Comprehensive Approach was discussed in detail in an earlier post, but the essence of the concept is that multiple Articles of the UCC apply to all transactions under the Code; multiple sections apply within each Article; and the best Code analysis is one that takes these realities into account.  Once you have a solid working knowledge of the Code—which you will if you do the work—this analysis will take 10-15 minutes.  It will take me several hours because I must write it out.

In an earlier post we discussed the critical importance of the knowing the facts cold when dealing with Uniform Commercial Code transactions. This is equally important in drafting and litigation.  Once the facts are thoroughly digested and I suggest placed in diagram form, the process of activation of Articles and sections moves quickly.  At that point, with the facts firmly embedded in your brain, you go to front index of each of the Articles activated.  With a working knowledge of the Code in place, as you skim down the index the facts of your case, code sections will be activated where appropriate.  The interaction is automatic, and at the end of the process you may have 45-50 sections.
Obviously, certain sections are more important than others.  Nevertheless the process provides the participant with the ‘UCC story’.  Gaps will appear which require further information, and the key sections will have become clear.  Those sections are dissected word for word, always with the understanding that there are underlying Code policies which impact everything and are part of every analysis. 

The following hypothetical will be used to illustrate the concept. The list of sections activated is not exhaustive, but illustrative.

1. Lender [secured party] agrees to loan borrower [debtor] $4,000,000 provided that debtor is secures an accommodation maker—satisfactory to lender—to sign on the note; further, that debtor agrees to give secured party a security interest in debtor’s inventory;

2. Debtor is able to get his credit worthy brother in law to sign as an accommodation maker and gives secured party a security interest in his inventory which is comprised of high quality paintings, some of which are extremely old and delicate;

3. Secured party is an art dealer and has debtor’s inventory being exhibited at the secured party’s main gallery;

4. Debtor’s artsy lifestyle is far more extravagant than his income and after paying back a little over a million dollars, debtor defaults;

5. Secured party sells the collateral for $2,000,000 leaving a balance owing of a little over $1,000,000.

6.  Accommodation maker is sued for the balance owed and he objects noting that proper climate control was not maintained for the paintings and this resulted in an ‘impairment of the value of collateral’ for which accommodation maker should be discharged;

7. Accommodation maker further alleges that secured party did not act in a commercially reasonable manner in his disposition of collateral.


            The analysis for this problem, under a Comprehensive Approach, starts with identifying the Articles activated by the facts.  From the facts stated, we know that Article 3 applies because the note is a negotiable instrument; we know that Article 9 applies because we have a security interest in personal property; and we know that Article 1 applies because Article 1 applies to all transactions under the Uniform Commercial Code:
This article applies to a transaction to the extent that it is governed by another article of the Uniform Commercial Code.  Section 1-102
           
            With some basic facts in place, it is time to go to the indexes of the articles identified to see which sections are activated by the facts known to you.  This will give you a basic structure from which to determine what follow up questions to ask your client, and where to start looking in the substantive text of the Code. Under Article 1, the following sections are activated.  Most of the Article 1 provisions and Article 3 provisions have been discussed in earlier posts.


1.    Section1-102—applicability of Article 1.  Although you know this, it is very possible that the attorney on the other side as well as the court, will not.  By simply citing this section, you are demonstrating to both that you know a key piece of information they do not. 

2.    Section 1-103(a)—purposes and policies of the Code which will ultimately be used to support whatever argument you make;

3.    Section 1-103(b) which incorporates all areas and rules of law not displaced by substantive provisions of the Code;

4.    Section 1-201—general definitions;

5.    Section 1-201(b)(12)—what was the parties contract?

6.    Section 1-201(b)(3)—what was the parties’ agreement?

7.    Section 1-303(a)—was there a course of performance between the parties?

8.    Section 1-303(b)—was there a course of dealing between the parties?

9.    Section 1-303(c)—what industry is involved—art or commercial lending or both?

10. Section 1-304—was the obligation of good faith satisfied?

11. Section 1-309—was there an acceleration clause in the note that was activated, and if so, was acceleration done in good faith?

Article 3

1.    Section 3-104—was the writing negotiable in form?  This determines the applicability of Article 3 to the transaction;

2.    Section 3-103(a)(11)—definition of principal obligor;

3.    Section 3-103(a)(17)---definition of secondary obligor;

4.    Section 3-116—dealing with joint and several liability on an instrument;

5.    Section 3-301—person entitled to enforce;

6.    Section 3-305—defenses and claims in recoupment;

7.    Section 3-401—signature—was there a ‘present intent to authenticate?

8.    Section 3-412—obligation of issuer of a note;

9.    Section 3-501(a)—presentment;

10. Section 3-502—dishonor;

11. Section 3-503—notice of dishonor;

12. Section 3-601—discharge and effect of discharge;

13. Section 3-605—discharge of secondary obligors;

Article 9

            Section 3-605 (c) activates Article 9 by referencing ‘impairment to collateral’.  To the extent the collateral is goods in which a security interest is claimed, Article 9 will be activated. The UCC Made Easy blog has not yet discussed Article 9 so that selecting the activated sections will not make much sense unless an individual has an independent understanding of Article 9.  However, for purposes of demonstrating the impact of the Comprehensive Approach, some of the key sections to Article 9 will be listed.  It is interesting to note at the outset, that there is no ‘scope’ section to Article 9 as in other articles.  However, as stated earlier, Article 9 applies to transactions which create a security interest or agricultural lien in goods.


1.    Section 9-102(a)(7)—definition of authenticate;

2.    Section 9-102(a)(28)—definition of debtor;

3.    Section 9-102(a)(12);--definition of collateral;

4.    Section 9-102(a)(28)—definition of debtor;

5.    Section 9-102(a)(47)—definition of instrument;

6.    Section 9-102(a)(59);--definition of obligor;

7.    Section 9-102(a)(65)—definition of promissory note;

8.    Section 9-102(a)(71)—definition of secondary obligor;

9.    Section 9-102(a)(72)—definition of secured party;

10. Section 9-102(a)(73)—definition of security agreement;

11. Section 9-102(a)(77)—definition of supporting obligation;

12. Section 9-201—general effectiveness of the security agreement;

13. Section 9-203—attachment and enforceability of security interest;

14. Section 9-301—law governing perfection and priority of security interests;

15. Section 9-308—when security interest or agricultural lien is perfected;

16. Section 9-313—when possession by secured party perfects without filing;

17. Section 9-319—rights and title of consignee with respect to creditors and purchasers;

18. Section 9-320—buyers of goods;

19. Section 9-625 Remedies for Secured Part’s for Failure to Comply With Article;

Once the foregoing analysis is complete—and I emphasize this will go quickly once you have the Code and facts I place-- the basic analysis that I suggest for all UCC related transactions is as follows:

 What was the parties’ contract?  That takes us to Section 1-201(b)(12):

”Contract", as distinguished from "agreement", means the total legal obligation that results from the parties' agreement as determined by the Uniform Commercial Code as supplemented by any other applicable laws.

The definition of contract refers us to the definition of agreement:

(3) "Agreement", as distinguished from "contract", means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in Section 1-303.
This provides us with the elements of agreement, the legal impact of which is the contract:
 
 

1.    Language;

2.    Course of performance;

3.    Course of dealing;

4.    Usage of trade;

5.    Inference from other circumstances.

Language encompasses anything spoken or written.  When the client walks in the door, you will hear his or her statement of the facts—but of course—there will be another side to the story from the other party.  Understanding this, and the reality that it is rare to get the full picture from a client—at least at the beginning—this will form the basis of further inquiry.
Among the preliminary questions:

1.    What was the content of any discussions between SP & D;

2.    What written documents exist which reference, in any way, the transaction under dispute; this 
includes letters, emails, memos—anything in written form which may shed light on the transaction;

3.    Have SP & D dealt with one and other in the past?

4.    If so, how many times?

5.    What were the specifics of the transaction?

6.    Was there anything in the past transactions which might shed light on the current dispute?

7.    What is the trade involved in the transaction?—is it art or is it finance?

The contract/agreement analysis is going to be important in every transaction.  For example, assume that secured party and debtor had dealt before, and that in past dealings debtor had shared responsibility for insuring proper conditions for the paintings.  Further assume that in past dealings, secured party had always given debtor as many extensions as he needed to make the payments, and that in fact, debtor had always made them.   Or, assume that secured party had a demand note and called it due because he had an argument with debtor and ‘wanted to get even’.  The list of possibilities is endless, but the main point is clear:  The wider and more focused the inquiry, the more powerful the weapons to go forward.

The power of going into court or drafting documents in exponentially stronger for the individual who has a comprehensive grasp of the case. The ability to shape litigation and create a climate for a favorable settlement corresponds directly to the power brought to the table.  Imagine the disparity between an attorney with a one or two section arsenal versus someone who has a command of the whole UCC.  Once again, I emphasize that the Uniform Commercial Code offers a very fertile arena for lawyers to create a unique space which benefits the clients and their practice.