What are the Goods?

As of this writing, most of Articles 1 and 3 have been completed, and while there are other sections which could be discussed in Article 3, I am confident that anyone who understands the posts to date will be able to analyze those sections.  Going forward, I will be combining posts from Articles 2, 7, and 9.  Article 2 deals with sales of goods; Article 7 deals with movement and storage of goods via documents of title; and Article 9 deals with secured financing, and while there are many types of non goods collateral, Article 9 has many provisions which deal with the secured financing of goods at the wholesale and retail level. 

At the outset, it must be noted that although Article 2 deals with sales, the scope of Article 2 applies to ‘transactions in goods’:

Unless the context otherwise requires, this Article applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.

                                      

                                                                                    Section 2-102

Most of the time, the applicability of Article 2 will be very straightforward—the transaction involved will be a typical sale of goods and Article 2 will apply.  In some situations however, the transaction involved will be a combination of a sale and a service requiring further analysis to determine whether or not a particular combined transaction is within the scope of Article 2.

            Before addressing the scope issue as it relates to mixed transactions, a more basic question must be addressed; namely, what are ‘goods’, the essential ingredient of Article 2. Goods are defined under Section 1-205 as follows:

(1)  "Goods" means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action. "Goods" also includes the unborn young of animals and growing crops and other identified things attached to realty as described in the section on goods to be severed from realty (Section 2-107).

Goods, therefore, are tangible personal property which are ‘movable’ at the time of identification to the contract for sale.  Note that when money is used as a payment mechanism, it is excluded from the definition of goods.  If however, money is being sold as a commodity, it will come within the definition of goods.  This point is specifically addressed in comment 1 to Section 2-105 which states as follows:

Goods is intended to cover the sale of money when money is being treated as a commodity but not to include it when money is the medium of payment.

In order for an interest in goods to pass, the goods must be ‘existing and identified’:

Goods must be both existing and identified before any interest in them can pass. Goods which are not both existing and identified are "future" goods. A purported present sale of future goods or of any interest therein operates as a contract to sell.                     Section 2-105(2)

Several exceptions/qualifications to this general rule are contained in Section 2-107 which is cross referenced in Section 2-105(1).  Section 2-107(1) states as follows:

A contract for the sale of minerals or the like (including oil and gas) or a structure or its materials to be removed from realty is a contract for the sale of goods within this Article if they are to be severed by the seller but until severance a purported present sale thereof which is not effective as a transfer of an interest in land is effective only as a contract to sell.

There are three situations contemplated by Section 2-107(1):

1.    Sale of minerals ‘or the like’, specifically including oil and gas;

2.    Sale of a structure to be moved from realty;

3.    Sale of the materials of a structure to be removed from realty.

In order for a sale of the foregoing to be within Article 2, severance of those items must be undertaken by the seller.  Further, until severance, there can be no present sale of those items unless there is an accompanying transfer of the real estate interest.  Absent such a real estate transfer, any contract for the sale of the items listed will be treated’ only as a contract to sell’.

            The foregoing is consistent with basic real estate law. Oil, gas and mineral rights generally are treated as part of the real estate on which they are located.  Hence, absent a sale of the land, there is no sale of these goods.  This is also consistent with Article 9 which characterizes oil, gas and mineral rights as ‘as extracted collateral’, which is defined under Section 9-102(a)(6) as follows:

                         "As-extracted collateral" means:

(A) oil, gas, or other minerals that are subject to a security interest that:

(i) is created by a debtor having an interest in the minerals before extraction; and

(ii) attaches to the minerals as extracted; or

(B) ….

While the oil, minerals and gas are in the ground, they are treated as real estate.  Upon extraction they become goods, and hence within the scope of a secured transaction under Article 9.

            The scenario contemplated by Section 2-107(1) is to be distinguished from the situation where the goods involved are attached to realty but are capable of removal without ‘material harm’ to the realty:       

A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto but not described in subsection (1) or of timber to be cut is a contract for the sale of goods within this Article whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.

 In the situation contemplated by Section 2-107(2), severance can be made by either party, and the parties can conduct a present sale of those goods before severance by identification of the goods involved.