Title Risk and Insurable Interest Chapter 20

Sale v. Lease Does title pass under a typical lease contract? Legal title vs. equitable title. –What is the difference?

Identification Before title can pass, there must be identification of the goods for which title is to pass. –Must be in existence –Must be identified in contract Parties can specify when identification will occur. If not then –Goods in existence – identification occurs at time contract is made –Future goods – 1) livestock when born & 2) crops when planted or begin to grow. Other future goods are identified when seller designates by marking, shipping or other means

Identification Goods which are part of a larger mass are identified when marked, shipped or identified by seller in another way –Exception for fungible goods. No need for actual separation Buyer replaces seller as coowner Example: I buy X4’s from Menards

Title For goods in existence and identified, unless agreed upon otherwise, title passes when seller physically delivers Exceptions! –If a shipment contract, title passes at time of tender to carrier. Example: UPS takes the package from the hardware store. Most contracts assumed to be shipment contracts unless specified otherwise. –Destination Contract: titles passes when goods tendered at predetermined destination.

Title Delivery without movement of goods –Depends upon whether seller must deliver documents such as a bill of lading What is a bill of lading? –Receipt –If bill of lading is delivered, then title passes with the delivery of bill of lading –If no bill of lading, then title passes when contract is formed IF the goods have been identified. If not identified and no bill of lading, then title passes when identified.

Imperfect Title Buyer purchases at least what a seller has in regards to imperfect title. Lessee –Does a lessee obtain title? –Acquires right to possess and use the rights seller has to goods. Subject to limitations under the contract.

Imperfect Title Thief has no legal title and cannot transfer title –Void title if you bought from a thief. –What is the policy behind this rule? Voidable title: if goods were purchased by seller – –Through fraud –With a dishonored check –Or if seller was insolvent at time he purchased –Major exception is when a good faith purchaser gives value.

Good Faith Purchaser Must give value i.e. legally sufficient consideration Good faith purchaser must have clean hands and no knowledge of defect in title. Good faith purchaser can normally keep the goods. –How does real owner get justice? If no value is given or not a good faith purchaser, then real owner can recover. Same rules apply to leases, however, under a lease the real owner can demand to receive the rents

Entrustment Rule Beware!!! –Entrusting goods to a merchant who deals in such goods allows the merchant to pass title to a buyer in the ordinary course of business. –Goods must be entrusted Left with merchant for later delivery or pickup Purchaser must buy in good faith and without any knowledge of the imperfect title. Pawnbrokers are an exception. –I leave my car at Dewey Ford for repairs and they sell it to Ronald. Who gets title to the car? –What if Josh steals my car and leaves it at Dewey Ford, and Dewey Ford sells it while Josh is at work? Did I entrust the car to anyone?

Risk of Loss Contract generally determines when risk of loss shifts When agreement does not specify: –See 20-1 in the case of a common carrier FOB, destination or shipping point. –Shifts when tendered to carrier FAS – Free along side –Shifts when tendered to buyer at destination CIF or CF Delivery & Ex-ship See page 387

Delivery Without Movement Risk of loss shifts –Bailment arises when goods do not move and title is not delivered. Bailee is one who holds the goods. If seller holds goods & –Buyer is a merchant, then risk of loss shifts to buyer at tender of goods –Buyer is non-merchant, then risk of loss tendered at actual delivery of goods to buyer

Goods Held by a Bailee When bailee holds and delivery does not require movement risk of loss passes when: –1) the buyer receives a negotiable document of title for the goods –2) the bailee acknowledges the buyers rights to the goods –2) the buyer receives a non-negotiable document of title and has reasonable time to present the document. If bailee refuses to deliver risk of loss does not shift

Conditional Sales Some goods are taken buyer subject to buyer’s approval or buyer’s ability to resell A sale or return contract is one which allows the buyer to return unsold goods with a reasonable time frame. –Risk of loss shifts to buyer when buyer receives goods and resides with buyer until goods are returned –Subject to creditors claims while in possession of buyer –Consignments involve entrusting of goods without upfront payment.

Conditional Sales Sale on approval –Buyer takes goods as bailment. –If buyer does not approve, buyer can return goods. –Risk of loss does not shift until sale is finalized. Finalized when –Express notice of acceptance given. –Trial period ends and buyer has not returned the goods. –If delivered and buyer is going to try and resell, then it’s a sale or return and not a sale on approval.

When Sale or Lease is Breached If the buyer has right to reject, –Risk of loss does not pass until defect is cured Until buyer waives right to reject –If buyer later discovers defect and revokes acceptance, then risk of loss shifts back to original seller Key is determining whether originally accepted If buyer breaches –Then risk of loss immediately shifts to buyer if 1) goods have been identified, 2) buyer has risk of loss for a commercially reasonable amount of time after breach and 3) buyer or lessor is liable only to the extent insurance is inadequate.

Insurable Interest Buyer obtains insurable interest when goods are identified Seller retains insurable interest until title passes –Seller can retain insurable interest after title passes if the seller has a security interest