As
discussed in the previous post, the characterization of a party as a merchant
or non merchant has great significance under Article 2. This brings us to a point where the cases add
a unique flavor to an otherwise very clear definition. These cases also illustrate the positive results
that creativity can bring to the table.
Very early in these posts, the importance of utilizing the mandates of
Section 1-103 in presenting creative arguments was emphasized. By way of
review, and in the context of the case to be discussed, Section 1-103 directs
the court to ‘liberally construe and apply the code’ and to do so in a manner
which promotes the underlying purposes and policies of the Code:
(a) The Uniform Commercial
Code must be
liberally construed and applied to promote its underlying purposes and
policies, which are: (1) to simplify, clarify, and modernize the law governing
commercial transactions; (2) to permit the continued expansion of commercial
practices through custom, usage, and agreement of the parties; and (3) to make
uniform the law among the various jurisdictions.
As you view these creative
applications of the definition of ‘merchant’, it is useful to see how many of
these purposes and policies support the broad interpretation adopted by the
courts.
The first case for consideration is National Microsales v. Chase Manhattan Bank 761 F. Supp. 304
(S.D.N.Y. 1991) The facts are briefly as follows:
National Microsales Corporation was
engaged in the business of buying and selling computer output microfilming
equipment. Chase Manhattan entered into negotiations with National Microsales Corporation
to sell some of its used Computer Output Microfilming equipment to NMC for
resale. When Chase subsequently sold the equipment to a third party, NMC filed suit
alleging breach of contract.
Chase moved for summary judgment
dismissing NMC's complaint on the basis of the Statute of Frauds, alleging that
the purported contract in question was over $500 and there was no writing as
required by Section 2-201(1).
National Microsales Corporation also
moved for summary judgment claiming the contract in question was covered by the
‘merchant exception’ contained in Section 2-201(2). As you may recall, that section applies only
to transactions ‘between merchants’; hence, for that section to apply, the
court would have to conclude that the bank was a ‘merchant’ under Article 2.
In presenting its case, NMC noted that Chase sold $6.5 million
worth of used COM equipment from 1987-1989, and further that there were
established policies and procedures of Chase which had been adopted for the
purchasing new equipment as well as other ‘fixed surplus assets’.
Chase's response was that it never purchased goods for resale
and that Chase has no specialized knowledge concerning the goods which it buys
for its own use. There was also testimony that Chase had no familiarity with
the market for the equipment which it purchased, and that when it disposed of
surplus goods, it generally sold them to resellers, rather than end users, and
usually sold the equipment for less than fair market value.
The court found that Chase was in fact a ‘merchant for purposes
of the UCC’. As support, the court
quoted the definition of ‘merchant in Section 2-104 and Official Comment 2 to
Section 2-104 which states:
The special
provisions as to merchants appear only in this Article and they are of three
kinds. Sections 2-201(2), 2-205, 2-207 and 2-209 dealing with the statute of
frauds, firm offers, confirmatory memoranda, and modification rest on normal
business practices which are or ought to be typical of and familiar to any
person in business. For purposes of these sections almost every person in
business would, therefore, be deemed to be a "merchant" under the
language "who . . . by his occupation holds himself out as having
knowledge or skill peculiar to the practices . . . involved in the transaction
. . ." since the practices involved in the transaction are non-specialized
business practices such as answering mail.
In applying the
definition of merchant and comment 2 above, the court stated:
This comment implies that Chase's
familiarity with the goods it purchases and sells is sufficient to establish
that it is a merchant for the purposes of § 2-201… For Statute of Frauds
purposes, the scope and extent of Chase's activities qualify it for merchant
status under the UCC. National Microsales at 307
The extent of the Court’s holding on
the merchant matter is unclear. On the
one hand, the court seems to attempt to limit is holding on the merchant
question to the Statute of Frauds provision.
If that were the case however, the Court could have easily so stated
without any discussion of ‘Chase’s familiarity with the goods it purchases and
sells’. The limited reading would be
found in the fact that responding to mail is something everyone in business
should do as clearly stated in the comment.
In mentioning the goods and familiarity of practices with those goods,
the Court can easily be interpreted to be saying more.
There are huge implications from
holding that the bank is a ‘merchant with respect to goods of the kind’ for at
this point, the warranty of merchantability kicks in, as well as a host of
other merchant provisions, some of which have been stated in the last
post. There is a large potential
exposure to the bank if it is classified as a ‘merchant under Article 2’, which
can create great leverage in litigation.
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