Putting the Framework in Place

We began our journey into the Uniform Commercial Code on March 4, 2015.  The initial goal was to establish a methodology for approaching Uniform Commercial Code transactions.  Part of this process required an understanding of the basic reasons the UCC was drafted, and the policies in the Code which are designed to guide the interpretation and application of the Code. We know that the overriding purpose of the Code was to facilitate commercial transactions, and hence there are core policies in the Code which are designed to achieve that overall purpose.

            The Uniform Commercial Code is not stagnant.  Modernization of commercial transactions is a fundamental purpose and policy of the Uniform Commercial Code. We know that the Code pays great deference to freedom of contract, particularly between merchants. The Code also gives great weight to the customs and practices of any given industry to which the Code applies.  These too are affirmatively stated at the outset in specific language in Section 1-103.  Uniformity of law was a critical goal of the drafting of the UCC and this is recognized as well. The drafters of the Code direct users of the Code to ‘liberally construe and apply the Code to achieve its underlying purposes and policies.’ All of this should be part of the mental framework in place when approaching UCC transactions. 

In drafting contracts involving multistate transactions it was noted that there are differences among the states on a meaningful number of provisions.  The wise draftsperson will always check the law of both states to insure his or her client’s best interests.  Section 1-301 allows the parties to a UCC transaction to choose the law of any state as long as the transaction bears a reasonable relation to the state chosen. In litigation, the uniformity provision has been consistently held to stand for the proposition that cases decided under the UCC in one jurisdiction have relevance in others as well.

            As a draftsperson, the responsibility is to analyze the transaction from start to finish. Activate all Code sections in play. This will provide you with drafting insights which will enable you to draft in the best interests of your client.   As you recall, language is one of several elements to the agreement between the parties.  In fact, there are five elements to the legal definition of ‘agreement’ under the Uniform Commercial Code: language; inferences from other circumstances including course of performance; course of dealing; usage of trade.  Remember, these are illustrative of ‘other circumstances’ not exclusive. The most important in the hierarchy is the written language of the parties.  Under Article 9 you would almost always have a written, executed security agreement due to the nature of Article 9.  Under Article 2 you may simply have a purchase order, an email or just a phone call with some miscellaneous documents and emails.  The latter situation is where you see 2-207 cases.

            One thing to always keep an eye on is the trade involved.  As stated in an earlier post, there are over 83,000 professional and trade associations.  Most of these associations have rules and standards which pertain to their industry.  The meaning given to words in the industry is very important under the Uniform Commercial Code:  The comments to section 2-202 are emphatic on this point:
             
                                     This section definitely rejects: 

                

(b) The premise that the language used has the meaning attributable to such language by rules of construction existing in law rather than the meaning which arises out of the commercial context in which they were used.

Trade usages and any written rules governing a trade should be accessed whenever possible.  It only takes a few minutes and periodicals and articles are extremely helpful. Industry rules supplement and explain the meaning of words used as they relate to their industry.  The differences among the industries are vast. It was noted that the elements of course of performance may not be present, and there may not be a course of dealing, but there will almost always be a trade with attendant customs. 

            So at this point in any preliminary analysis, you almost certainly have language and trade usage, and perhaps conduct which indicates that a contract exists.  Whether or not a contract does in fact exist will be determined by the totality of the agreement; the impact of the Uniform Commercial Code on that agreement; and any applicable supplemental rules of law as stated in the UCC definition of contract in Section 1-201(b)(12).

            For purposes of Sales the starting point is going to be whether or not the agreement is enforceable.  The major hurdle here is the statute of frauds, which requires contracts in the amount of $500 or more to be in writing and signed by the party against whom enforcement is sought.  Contracts exist throughout the Uniform Commercial Code and all have their attendant formalities, legal rights and responsibilities. In each situation, once you get past enforceability issues, the general contract analysis applies with full force to all of these contracts.  

            At this point, ‘Say Hello to My Little Friend; Section 1-103(b).  This provision stands for the proposition that all laws not specifically displaced by the Uniform Commercial Code shall supplement its provisions.  This section is one of the most powerful in the Uniform Commercial Code and opens up a universe of possibilities, particularly in litigation. Does the result being advocated by the other side violate laws of equity?  Is there an estoppel of some kind that your client can use?  Was there fraud or misrepresentation involved? Is there anything under the general law of contracts that might be useful? What about agency?  The list goes on, but only those with trained eyes and a thorough understanding of the facts will see the possibilities.

            Regardless of what might apply under Section 1-103, ‘every contract or duty within the Uniform Commercial Code imposes an obligation of good faith in its performance or enforcement’  Section 1-304.  In most cases, this means ‘honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade’ Section 1-201(b)(20).  According to the comments, there is no independent cause of action for the failure to act in good faith.  Most courts agree.  However, some courts have determined that the failure to act in good faith as required by Section 1-304 can give rise to punitive damages.   Properly pleading such a cause of action, and getting it past the motion stage, will change the dynamics of almost any litigation.

            With this solid basic background in place, we begin our foray into other articles of the Code. As this is the first time I have employed this type of teaching model [linear explanations], I can’t be certain of the direction other than to say it will start with Article 3.  Most readers are familiar with Articles 2 or 9, and Article 3 fits nicely with both as a payment mechanism and an integral part of most Article 9 transactions.  It is my expectation that I will move around the Code to try to deliver the best overview possible by the end of February 2016. 

            In addition to discussing the Uniform Commercial Code, there will be some discussion of certain brain and learning theories that I have developed over the course of the past 47 plus years which are integral to my teaching of the UCC and learning in general.  The level and volume which is ultimately presented will depend on the response the posts.  

For more information on the author and book, please visit ucc-madeeasy.com. 

Going Forward

As of this point, there have been nineteen posts to the UCC Made Easy blog.  The process has been a great learning experience for me as it has required me to fashion a new way to communicate UCC content.  The problem with the manner in which the material is being delivered is the linear plane on which it must, of necessity, be presented. This is not true of the short story format used in the book which delivers content in a multidimensional manner. By way of illustration, total word count for the nineteen blog posts is about 15,000.  The total word count for the book, counting several long indexes is 135,000.  At the current pace it would take millions of words and decades to deliver the same amount of content.

            Up to this point, a solid basic foundation for approaching all UCC transactions is in place. Following these simple steps consistently will, over time, create literal tracks in your brain that will be activated every time you have a Uniform Commercial Code related problem.  If you have this format in place, you will have a good idea of where to go to find your answer and how to support it.

            The next step in this process will be a review of where we are up to this point in time, and the direction coming.  That is a good process for me and will be a good one for those following along.  That post will be on Thursday.  There will be one upcoming change and that is in frequency of the posts as I must go from two to one post per week.

            The time which will not be utilized for the second post will be utilized to write other things. For example, the problems in the inner cities are something of great concern to me.  I have worked at the front line with many of those currently rising up in the inner cities.  There are solutions to those problems and I feel a responsibility to speak out about them.  When I worked at Los Angeles County Central Juvenile Hall, the kids used to speak about what was coming.  I told them I had been around for the riots in Detroit and in Los Angeles when Rodney King happened.  Their response was…’Rob, no more riots. Next time it will be a revolution’. So, what I see now does not surprise me.  I simply need to do something about it.

            With that stated, I look forward to putting together a comprehensive review on where we are in our Uniform Commercial Code journey for the next post.  The will also serve as a solid foundation for going forward as I envision forays into the various articles of the Code with the constant connection to Article 1.

For more information on the author and book, please visit ucc-madeeasy.com.

Say Hello to My Little Friend

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.

Your Brain: The Best Investment You Can Make

This post will discuss some general thoughts on:

1.    Teaching, Writing, and Posting;

2.    Motivation;

3.    Higher Level Motivation and the Brain;

4.    Why I Encourage Learning the Uniform Commercial Code

         Introduction

I believe that the best investment anyone can make is in her or his brain.  Better brains process information at higher levels. Better brains see more variables which impact decisions. The bottom line is that better brains make better decisions, ultimately raising an individual’s plane of existence.  Those renewable rewards clearly justify a commitment to mental development.  Law school is certainly a great opportunity to make this happen, but there are infinite ways to acquire intellectually challenging material and challenging life situations from which growth can occur. 

1.    Teaching, Writing, and Posting

When I began this blog less than a month ago, it was a positive experience but somewhat detached because there was no audience to whom I could relate and therefore interact. The only responsibility I felt was to put out short pieces of quality information about the Uniform Commercial Code.  At this point however, there are real people involved who have read the blog, and some of whom have made comments in the groups to which the links were posted. That dramatically changes the dynamic for me. 

              The impact of having people read and comment on the posts crystallizes the teaching aspects of this process and everything that goes with that role.  This involves at the very least, two things:  first, demonstrating why the area you are teaching is important and has relevance; second, to motivate students to learn it. 

As to the former, one motivating element has already been stated in an earlier post: there are tremendous job opportunities for someone who has a thorough knowledge of the Uniform Commercial Code.  Additionally, from an entrepreneurial stand point, a knowledgeable Code person could cultivate relationships with many small businesses, particularly start ups.  At last count, there was a reported 29.4 million small businesses in America, many of them functioning without the benefit of legal counsel.  There are no guarantees, but a knowledgeable UCC person could speak at Rotary Clubs and business organizations and with a few powerful pieces of ‘look what could happen to you’ information, that person could start to generate business which would benefit the business and the lawyer.  So, the first piece, on a very practical level, is satisfactorily in place.  Job opportunities and tremendous new client potential establish importance and relevance to someone focusing on a career path.

                             2. Higher Level Motivation

The second piece—higher level motivation—is an integral part of my approach to teaching and life in general.  In addition to the tangible rewards which can be achieved by mastering content, a still higher level motivation will result if higher level rewards are available.  By way of illustration, I am highly motivated in the teaching setting, on a personal level as well as a professional level—because I know that if I put in the right amount of effort, I will emerge from the classroom experience smarter and better than when I went in. This is always true.  I want students to understand that the same is true for them, and hence I want those of you who are sharing your valuable time with me to understand that as well. 

I explain my basic system to the students so that they can understand the process.  I approach the brain as a muscle and create teaching strategies based upon the principles of aerobic, interval and resistance training.  It works quite well. If you would like to see some of the components of that system, they are available at www.pathwaystoexcellence.us.  A ‘mini’ version of that content can be accessed at www.2ptpe.com.

     I want students to understand that if they buy in to the system and content I am presenting, the same level of improvement will happen for them.  Components of that system will be integrated into this blog.

To bring this point home, I do my best to communicate what mastering a large block of the Uniform Commercial Code will do for their overall intellect as well as preparing them for the opportunities noted.  It’s simple: mastery of a block of intense, compact information such as that contained in the UCC, significantly increases the power of your brain.  Think of it as adding a knowledge application to your phone.  All of a sudden it can do things it could not previously do.  That is a wonderful payback for putting in the work. 

                               3. Higher Level Motivation and the Brain

There is another element to this, and that is demonstrating, beyond any doubt, that everyone in the class has the ability to master the topic. In this regard, I am passionate and firm in my belief that everyone with moderate intelligence can elevate his or her mind infinitely and become masters of major content in the process. For example, I am 100% certain that everyone reading this could become an expert in the UCC, or one of a dozen areas with the right effort focused on the right content.  There are certainly enough open circuits in the brain to accommodate anything you might want to learn.

  From a physiological standpoint, we all have same basic brain.  That brain has been estimated to contain 100,000,000,000 neurons. Neurons process and transmit information. Your brain structurally is no different than Einstein’s.  His may have been activated at a higher level, but he had no more circuits available than you or I do. The point of this is that there is infinite room to expand, so the notion that anyone is limited in any mental way from accomplishing complete mastery of the UCC or any subject is false.  The only question is whether or not an individual has the motivation and passion  to make that happen.

                  4. Why I Encourage Learning the Uniform Commercial Code

There are many reasons why I encourage people to learn the Uniform Commercial Code.  The first is quite simple—that is an area I truly enjoy and the area in which I have taught for over twenty years. One of the primary reasons I encourage mastering the subject matter is the relative freedom that accompanies having a valuable level of expertise in an area where there are few experts.

That stated, it certainly does not need to be the UCC for that to happen.  It could be the Tax Code, issues relating to cyber currency, intergalactic torts, or any area generally not understood by the majority, and who further, typically want nothing to do with the area.  That is where you can find a spot with the autonomy to have a much better existence.  This is important to me because autonomy through knowledge increases the likelihood of preserving positive core values intact. I think it is a good thing when positive core values stay intact, and therefore, I encourage this level of mastery. I have shared this sentiment at the beginning of every law school class I have ever taught. 

Another reason I encourage learning the Uniform Commercial Code is the fact that it is a pervasive force throughout the United States and we interact with it all day every day. There are literally billions of commercial transactions occurring in the United States every working day, hundreds of thousands, perhaps millions at this instant.  It is very nice to have a solid basic understanding of how the entities involved in these transactions are impacted by the law governing them, and what one’s rights are as a consumer.

 I hope this post has been of some value.  The next post will return to The Uniform Commercial Code.  Periodically, I will integrate some of the brain muscle strategies with explanations in the posts.         

Uniformity of Law: Does It Exist?

One of the most critical policies of the Uniform Commercial Code is uniformity of law. Indeed, the lack of uniformity of law among the various jurisdictions was a prime mover in the overall undertaking to draft The Uniform Commercial Code.  This is codified in section 1-102(a)(3), which directs the courts once again, to ‘liberally construe and apply’ the Code ‘to make uniform the law among the various jurisdictions’.

In approaching the policy of uniformity, several realities must be taken into account.  First, the Official Text of the Uniform Commercial Code must go through the legislative process of each state prior to its enactment.  In the legislative process, states often amend the official text of the Code so that it lines up with the law of the particular state.  In that situation, the text enacted in the state would not be identical to the Official Text.  In some cases, the changes are minor and relatively insignificant; in others the changes might be dramatic.  Anyone involved in multistate transactions should check the law of the other state to be certain that it is consistent with the expectations of the parties.  This is particularly important in the drafting stage.

Second, the Official Text of the UCC provides options for states to choose in several very important provisions.  The differences among the alternatives can be dramatic.  Section 2-318, which deals with Third Party Beneficiaries of Warranties Express or Implied, clearly illustrates this point.  The Official Text to Section 2-318 provides three alternatives for the states to choose from:

                                                ALTERNATIVE A

A seller’s warranty whether express or implied extends to any natural person who is in the family or household of his buyer or who is a guest in his home if it is reasonable to expect that such person may use, consume or be affected by the goods and who is injured in person by breach of the warranty.  A seller may not exclude or limit operation of this section. [Emphasis Added]

ALTERNATIVE B

A seller’s warranty whether express or implied extends to any natural person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty.  A seller may not exclude or limit operation of this section.  [Emphasis Added]

ALTERNATIVE C

A seller’s warranty whether express or implied extends to any person who may reasonably be expected to use, consume or be affected by the goods and who is injured in person by breach of the warranty.  A seller may not exclude or limit operation of this section with respect to injury of the person of an individual to whom the warranty extends. [Emphasis Added]

A casual examination of the alternatives presented in Section 2-318 reveals significant differences among them.

            Alternative A is the most restrictive of the three options presented, and is the option selected in the majority of the states.  In that scenario, the warranty extends only to ‘any natural person who is in the family or household of his buyer or who is a guest in his home’….  Alternative B is more expansive since it eliminates the ‘family, guest of household’ criteria. Finally, Alternative C extends the warranty to ‘any person’, eliminating the ‘natural person’ requirement, and does not limit damages to personal injury.

            The differences among these three alternatives are huge.  Imagine a wholesale buyer of goods in an Alternative C state such as Minnesota purchasing goods for resale in Minnesota from a seller in an Alternative A state such as Florida.  The expectation of the Minnesota purchaser is that he, and his buyers, will have the protection of the expansive warranty which exists in Minnesota under Alternative C. While it is not certain which law will apply—Minnesota or Florida [either one could depending on other facts and relative conflicts of law provisions], the Minnesota purchaser takes a major risk in going forward in the event the goods prove to be defective and there is injury as a result. If alternative A applies, and injury occurs to someone who is not ‘in the family or household of his buyer or who is a guest in his home, the Minnesota buyers would not have the benefit of a third party beneficiary under Section 2-318, and the wholesale purchaser will face major exposure.

            Attorneys involved in multi state transactions should always review the law of the other jurisdiction or jurisdictions involved.  In a situation like the one posed above, the Minnesota buyer can request, or insist, depending upon bargaining power, that the law of Minnesota will govern the transaction.  This choice of law will be protected under Section 1-301, which will be discussed in greater detail in a later blog.

The Comprehensive Approach: Intra Article

An example of the impact of the intra Article comprehensive approach can be seen with a simple hypothetical.  Buyer of goods purchases 80 commercial washing machines from seller.  Shortly after installation, buyer experiences difficulty with the machines and it turns out that they are all defective due problems with the motors.  The machines work intermittently. Seller and buyer are unable to resolve the dispute, and ultimately, buyer sues for breach of the warranty of merchantability under Section 2-314.   

Buyer’s attorney does not use the comprehensive approach, and feels that he has this case locked under what he perceives to be the dispositive section and language of the case:

(1) Unless excluded or modified (Section 2-313), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind….

(2) Goods to be merchantable must be at least such as

(a) pass without objection in the trade under the contract description; and
…
(c) are fit for the ordinary purposes for which such goods are used

 

Seller was a merchant dealing in goods of the kind; client was a buyer in the ordinary course; the goods were defective. The washing machines did not work. Clear violations of the merchantability warranties of Section 2-314(2)(a)(c).  Buyer thinks ‘case over’. 

Seller’s attorney on the other hand, follows the comprehensive approach and sees the applicability of other sections under Article 2 which might shed light.*   For example, was there any disclaimer of warranties?  As you will see, disclaimers of warranties can be disclaimed by trade usage, course of performance and course of dealing.  They need not be in writing.  Are there documents, trade information, or conversations between the parties which can help seller? Section 2-202 creates channels for the introduction of certain types of evidence if done in a manner consistent with the section.  

If buyer claims rejection, was timely notice given by the buyer under Section 2-602; if timely, did it satisfy the particularity requirement of Section 2-605.  If the rejection is not effective, then the product has been accepted per Section 2-606(1)(b).  If goods are accepted, and defects claimed, there are notice requirements for the buyer once again per Section 2-607.The failure to give proper and timely notice can result in a dismissal of the case.  There is great leverage in these sections.  If the goods were shipped, were they damaged in transit? What were the shipping terms? If it was an F.O.B. shipment contract, and proper shipping and notice were done, the risk of loss would pass to the buyer at the time of shipment?  Is there an exclusive remedy under Section 2-719?

At this point, the plaintiff buyer is no longer controlling the playing field.  His or her goal is to keep the case within Section 2-314.  You are now in control of where the case goes, because you have created a new playing field. The other side must now respond to your points of law, and each time a challenging response is required, you are moving toward a successful resolution of the case.  This is all done in good faith, and with the skill of someone who understands the meaning of the text of the Code and how to apply it consistent with your professional responsibility to represent your client at the highest possible level.

The foregoing illustration occurs in the litigation context.  The facts have already been fixed and the damage done.  In the drafting context however, you are predicting what might go wrong and to eliminate as much risk as possible.  You are looking for anything in applicable Code sections which impacts your client’s position.  I think drafting is the most intellectually challenging component of law, for you are attempting to imagine the totality of what will and might happen in a dynamic commercial setting, and how to establish protection for your client.  Unquestionably, for this endeavor you need to look at the whole Code.

* As you will see, Article 1 can have an enormous impact on any contract under the Code.  For now, I am using Article 2 to illustrate the potential impact of the comprehensive approach within a substantive Article.  Also, the sections being cited in connection with the example are illustrative.  There are many other sections activated by the facts.