I. Formation
A. Intro to the Course
1. Background to the UCC
a. In the early-20th C Am law was rule oriented. Legal realism changed that with the belief that diff facts should yield diff results and the movement away from abstract rules. The UCC was the brainchild of Carl Llewelyn, the father of the legal realist movement. The UCC is thus very particular to facts. Title (abstract) was the crux of the law of sales b4 the UCC. Now it’s CoD, CoP and UoT (more fact-oriented).
b. § 1-102—UCC shall be liberally construed.
c. § 1-203—Parties to a K must act in good faith in performance/ enforceM.
2. Functions of Sales Systems
a. Formulation: Sales systems help Bs and Ss create legally enforceable ownership xfers.
b. Terms: Sales systems provide a set of stnd terms unless B and S choose to modify them.
c. Performance: Sales systems provide a set of delivery institutions that facilitate the possessory, legal and symbolic xfer from S to B.
d. Remedies: Sales systems enforce agreeMs to transfer ownership by giving the aggrieved buyer or seller various remedies for breach by the other.
B. The Role and Scope of Codes
1. The UCC is a Gap-Filler!
Express Terms Implied Terms (CoPCoDUoT) UCC CL
a. Express terms trump all.
b. Implied terms trump UCC and CL
i. § 2-208(1)/R1-303(a) = CoP
ii. § 1-205(1) and (3)/R1-303(b) = CoD
iii. § 1-205(2) and (3)/R1-303(c) = UoT
c. The UCC fills gaps since parties to a sales agreeM cannot think of every contingency in advance. Makes transactions quicker when parties are willing to fall back on UCC. Plus it creates uniformity, as opposed to CL which varies by state. The content of UCC is itself mostly UoT.
d. § 1-103: The CL is the second gapfiller; helps define terms UCC leaves undefined like “offer.”
e. Ragus Co. v. City of Chicago (1993)
i. Ragus entered K to supply City w/ a certain number of rodent traps. The city says that it meant pairs of rodent traps and refused delivery of ind traps. Ragus sued for damages. The City showed the UoT was pairs of traps; everyone sold them in pairs. Therefore, City wins SJ. (Note: This case kind of ignores the parol evidence rule, but the modern trend is to admit evidence liberally).
2. UCC applies to transactions in goods (movable at time of identification to K).
a. § 2-102: Art 2 applies to transactions in goods (has nothing to do w/ merchant status).
b. § 2-105/A2-103(1)(k): Goods are “all things (including specially mfg goods) which are movable at the time of identification to the K for sale.” (Also includes crops and unborn animals).
c. Dakota Pork Indus. v. City of Huron (2002)
i. DP gave City water rights in exchange for water supply. Is furnishing water the sale of goods? This ct (unlike some other cts) holds that the sale of water is the sale of goods governed by Art 2 bc it, like electricity, is a thing that is fairly identifiable as movable (by measure w/ flow meter) at the time of identification to the K of sale.
ii. Note: Cts can still apply Art 2 principles and policies even if Article 2 does not technically apply.
d. Problem 1.5: Are these the sale of goods such that Art applies? §§ 2-102, 2-105(1)/A2-103(1)(k).
i. Sale by author of movable paper certificate representing author’s rights to future royalties.
1) Answer: NO—paper is movable but it is not a good. The right/ability to sue/collect royalties is a thing in action, which the UCC specifically states is not goods. Therefore the CL applies.
ii. Sale of natural gas
1) Answer: YES (EXCEPT: If it will damage the realty, Art 2 only applies if the seller removes it. W/ natural gas you have to drill so probably will damage the land and must be removed by S.)
iii. Sale of compact disc to a consumer by a retail music store
1) Answer: YES. Buyer is buying the actual CD, not the IP—might be diff with a download but with a CD the form predominates.
iv. Recording artist’s sale of an original recording on CD to a producer to produce/distribute the CD.
1) Answer: NO. The artist is selling his IP; the IP predominates, not the technical CD form.
v. A publishing company’s contract with an author to write a book
1) Answer: NO- Book does not exist at time of identification to the K. Again this is an IP purchase.
vi. A manufacturer’s K w/ a merchant buyer to specially manufacture and sell a custom-made machine.
1) Answer: YES. 2-105(1) expressly includes SOME specially manufactured goods. Machine v. book. For machine, specs are submitted so the B gets exactly what B wants. With book, even if B doesn’t need to know at time of identification to K exactly what finished product will be.
vii. A sculptor’s K w/ a patron of the arts to create and sell an original sculpture to the patron.
1) Answer: NO—this is a closer question, but still involves creativity so isn’t precisely id’d to the K.
viii. The sale of a raffle ticket for a new car.
1) Answer: NO- A chance to win the car is a thing in action—a right to claim the car IF your ticket gets picked. Any time a piece of paper represents something its almost always not a good.
3. UCC applies to some Mixed Goods-Services Ks
a. Predominant purpose test (maj): Is the predominant purpose of the transaction to sell goods or services? If goods, the UCC applies to the whole transaction. If services, UCC applies to none.
b. Gravamen of the action test (min): Is the source of the complaint w/ the goods or the services portion of the transaction? (H prefers).
c. Cook v. Downing (1994)
i. D is a dentist who also sells dentures. P sued under IWF for ill-fitting dentures. IWF only applies to merchants. Dentists are medical service providers, not merchants under 2-104 and dentures are not goods under 2-105. JudgM for P rev’d.
ii. Dissent: This is a mixed goods-services K. The predominance test applies, there was evidence that the dentures were the predominant part of the trans, and so judgM for P should be aff’d. Maj ignores the fact that nothing excludes dentures/dentists from the code’s definitions of goods/merchants.
d. Problem 1.3: Aunt takes old-fashioned reels of home movies to local camera shop for xfer to VHS tapes. Shop messes up xfer process and ruins reels. Will Art 2’s warranties provide a remedy?
i. Answer: § 2-102: Art 2 only applies to transactions in goods. This is a mixed services-goods K. Art 2 probably will not apply to her claim bc:
1) Under the gravamen test it was the service that resulted in the damage.
2) Under the predominance test she is probably paying more for the service than the tapes.
e. Problem 1.4: Specialty Optometrists make and fit contact lenses for the problem wearer. Should they make customers sign disclaimer of UCC warranties?
i. Answer: § 2-102 again. H doesn’t know the answer bc its difficult to pull apart the goods from the services. If we go by Cook v. Downing then its not a transaction in goods, but “medical services.” But under normal UCC definitions, maybe? Primarily buying the specialty contact lenses—so goods seem predominant. Plus the contacts and not the fitting will likely cause any damage.
4. Merchants
a. § 2-104(1): a merchant is “a person who deals in the goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employM of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.
b. Three Types of Merchants under UCC (§ 2-104 Cmt. 2):
i. For § 2-201(2) (SoF), 2-205 (firm offers), 2-207 (confirmatory memoranda) and 2-209 (modification), almost every person in biz qualifies as a merchant by “hold[ing] himself out as having knowledge or skill peculiar to the practices … involved in the transaction …” This is bc the practices involved, e.g., answering mail, are typical biz practices for all bizs. Still must be in mercantile capacity.
ii. § 2-314 (IWM), §2-402(2) and § 2-403(2) (entrustment) only apply to merchants who deal in goods of the kind (requiring professional status as to the particular kind of goods.)
iii. § 2-103(1)(b) (good faith = reas comm stnds), §2-327(1)(c), § 2-603, § 2-605, § 2-509 (RoL) and § 2-609 apply to persons who are merchants under either of the above definitions: practices or goods so like i. every person in biz will qualify.
c. Problem 1.6: Drunk lawyer friend agrees to sell you her car for $8,000 at reunion. You were told to bring the check to her house at end of month for pickup. Sent letter to confirm agreeM but she didn’t respond and refused to sell bc worth 15,000. Can you enforce oral K under §§ UCC 2-201(1) & (2), 2-104(1) & (3), and OC 2 to 2-104.
i. Answer: Under OC 2, for SoF issues, any person in business qualifies as a merchant, so long as they are acting in their mercantile capacity…not to a lawyer buying fishing tackle. For 2-201(2) to apply, the sale must be between merchants. Deborah might be acting w/in her mercantile capacity due to her expertise of Rolls Royces. But B (me) probably is not—like buying fishing tackle. So probably not merchants, K exceeds $500 and there’s valid writing so Deborah can assert the SoF.
ii. H: This is the type of ? you don’t want to give a definite answer to. Don’t assume anything!
5. Scope of Article 2A for Leases
a. 49 states plus DC have adopted Amended 2A and one state adopted current 2A.
b. Art. 2A functions like Art. 2, allowing parties to make their lease Ks as they wish w/ 2A gap-fillers.
6. True Lease v. Disguised Sale (very difficult)
a. Bright Line Test in 1-201(37): In re Bailey (2005)
i. B leased two tractors from Lafayette with down payments and monthly payMs of 800/mo. B filed for bankruptcy. B had PO for 10% of the FMV of the unit at the end of the lease (although its not in the writing, which states this is a true lease). B could terminate, but would still be liable for payments until new lessee was found.
ii. Lafayette’s profit was derived from the down payment and the buyout and the mthly payMs were exactly the amt Layfayette owed his supplier each month. B paid license fees, insurance/repair and even pd personal property taxes on the tractors thinking it was a purchase.
iii. The total principle payMs totaled 20,800 over the 36 mth lease. Units would be worth 14,000 to 15,000 at end of lease term, leaving B able to buy for just $1,400-$1,500 w/ 10% PO.
iv. Ramifications: If this is a security interest Lafayette waits in line with everyone else. If a true lease, Lafayette gets back.
v. HELD: This is a disguised sale so B must wait in line with all of the other collectors.
vi. § 1-201(37) Bright Line Test:
1) TERMINABLE? Does the debtor have a right to terminate the purported lease prior to expiration of its term? (If you still have to make payMs, its not a true right to terminate).
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No right to terminate here bc would still have to make payments.
2) STATUTORY CONDITIONS? If not terminable, are any of the four statutory conditions satisfied?
3) If terminable or none of the statutory conditions are satisfied, then the court must further examine the specific facts of the case to determine whether the economics of the transaction still suggest a security interest.
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Here the fourth condition applies: the lessee has an option to purchase for nominal addl consideration upon compliance with the lease agreeM.
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Nominal consideration means that given the facts and circs, there is no reas alternative but to exercise the PO. IOW, it would be completely unreasonable not to exercise the PO. “Economic life test”—the nominal PO shows that there is very little economic life left in the good for the lessor and hence no meaningful reversionary interest.
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This is the case here. After paying 20,000 already and only having to pay 1400-1500 more for something worth 14,000-15,000 any reas person would exercise the PO. If the debtor fails to exercise the option, he will lose approximately 12,000 in equipment value (FMV – purchase price), which is much less than what he will lose if the option is not exercised. Therefore, the addl consideration is nominal bc it is less than the Debtor’s reas predictable cost of performing under the lease but not exercising the option.
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There is also evidence of a net lease (has to pay ins and taxes) and a payout lease (sellers profit is from payout and downpayment—mthly payments go directly to seller’s creditor). These circs along with the debtor bearing RoL, the existence of a down payM, and the existence of a third-party supplier are all factors weighing in favor of a disguised sale.
b. If no bright line test, move on to on of the following fact-based tests per 1-201(37):