Thursday, February 4, 2016

Banks, Merchants & Article 2


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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