1. The UCC: Sales and Secured Transactions
Chapter 13
The UCC: Sales and Secured Transactions

2. Quote of the Day Karl Marx,
“A commodity appears at first sight an extremely obvious, trivial thing. But its analysis brings out that it is a very strange thing, abounding in metaphysical subtleties and theological niceties.”
Karl Marx,
German political philosopher

3. Development of the UCC UCC was created to solve two problems:
Old contract law principles did not reflect modern business practices
Laws had become different from one state to another
Good: Moveable physical object except for money and securities

4. Development of the UCC Scope of Article 2 Mixed contracts
UCC §2-102: Article 2 applies to the sale of goods
Regulates sales
Sales: One party transfers title to the other in exchange for money
Mixed contracts
UCC will govern if the predominant purpose is the sale of goods
Common law will control if the predominant purpose is providing services

5. Development of the UCC
Merchant: Someone who routinely deals in the particular goods involved
UCC holds a merchant to a higher standard of conduct than a non-merchant

6. Contract Formation Formation basics: Section 2-204 Statute of frauds
Rules
Any manner that shows agreement
Moment of making is not critical
One or more terms may be left open
Statute of frauds
Contracts for goods worth $500 or more
Writing sufficient to indicate a contract
Must be signed by the defendant
Enforceable only to the quantity stated

7. Contract Formation Statute of frauds Added terms: Section 2-207 Rules
Exception
Merchant exception
Specialty goods exception
Judicial admission exception
Added terms: Section 2-207
An acceptance that adds or alters terms will often create a contract
Intention

8. Contract Formation Added terms: Section 2-207
Additional terms: Terms that raise issues not covered in the offer
When parties are merchants, additional terms become part of the bargain
Additional terms do not bind the parties when:
Original offer insisted on its own terms
Additional terms materially alter the offer
Offeror promptly objects to the new terms

9. Contract Formation Added terms: Section 2-207 Modification
Different terms: Terms that contradict those in the offer
Cancel each other out
Gap-fillers – Code supplies its own terms when there is no clear oral agreement
Modification
UCC does away with consideration requirement for changes in contracts
Long as both sides agree to the modification

10. Performance and Remedies
Buyer’s remedies
Seller is expected to deliver what the buyer ordered
Buyer has the right to inspect the goods before paying or accepting
Cover
If the seller breaches, the buyer may “cover” by reasonably obtaining substitute goods
Buyer may then obtain the difference between the contract price and the cover price:
Plus incidental and consequential damages, minus expenses saved

11. Performance and Remedies
Buyer’s remedies
Incidental damages cover such costs as:
Advertising for replacements
Sending buyers to obtain new goods
Shipping the replacement goods
Consequential damages are those resulting from the unique circumstances of this injured party

12. Performance and Remedies
Seller’s remedies
Refuse to deliver the goods when buyer breaches before the seller has delivered the goods
The injured seller may resell the goods when buyer unjustly refuses to accept or pay for goods
The seller may recover difference between the resale price and contract price:
Plus incidental damages, minus expenses saved
Seller may simply sue for the contract price if:
Buyer has accepted the goods
Goods are conforming and resale is impossible

13. Warranty Contractual assurance that goods will meet certain standards
Express warranty: One that the seller creates with his words or actions
Disclaimer: Statement that a particular warranty does not apply
Implied warranties: Are created by the Code itself, not by any act or statement of the seller
Implied warranty of merchantability
Merchantable: Goods are fit for the ordinary purposes for which they are used

14. Warranty
Implied warranties - Created by the Code itself, not by any act or statement of the seller
Implied warranty of merchantability
Merchantable: Goods are fit for the ordinary purposes for which they are used
Principles
Unless excluded or modified
Merchantability
Implied
Merchant with respect to goods of that kind

15. Warranty Implied warranties
Implied warranty of fitness for a particular purpose
When the seller:
Knows about a particular purpose for which the buyer wants the goods
Knows that the buyer is relying on the seller’s skill and judgement
Consumer sales
Code provides stronger protection for consumers than for businesses

16. Secured Transactions Article 9: Terms and scope Article 9 vocabulary
Applies to any transaction intended to create a security interest in personal property or fixtures
Article 9 vocabulary
Fixtures: Goods that have become firmly attached to real estate
Security interest: Interest in personal property or fixtures that secures the performance of an obligation
Secured party: Party who holds the security interest
Collateral: Property subject to the security interest

17. Secured Transactions Article 9 vocabulary
Debtor: Person who has some original ownership in the collateral
Obligor: Person who must repay money
Security agreement: Contract which gives a security interest to the secured party
Default: When the debtor fails to pay
Repossession: When the secured party takes back the collateral because the debtor has defaulted

18. Secured Transactions Article 9 vocabulary
Perfection: Steps the secured party must take to protect rights in the collateral against people other than the debtor
Financing statement: Document filed by secured party to give notice of security interest in the collateral
Record: Information on paper or other medium
Authenticate: To sign a document (includes use of symbols or electronic encryption)

19. Attachment of a Security Interest
Attachment: Three-step process that creates an enforceable security interest
The two parties made a security agreement and either
Debtor has authenticated a security agreement describing collateral
Secured party has possession of the collateral
The secured party gave value in order to get the security agreement
The debtor has rights in the collateral

20. Attachment of a Security Interest
Agreement
Without an agreement, there can be no security interest
Control and possession
Value
For the security interest to attach, secured party must give value
Debtor rights in the collateral
Debtor can grant security interest in goods only if he has some legal right to those goods himself

21. Perfection Kinds of perfection Perfection by filing
Perfection by possession
Perfection of consumer goods
Perfection of moveable collateral and fixtures

22. Perfection by Filing The common way to perfect an interest is by:
Filing a financing statement with one or more state agencies
Financing statement: Gives the names of all parties, describes the collateral, and outlines the security interest
Contents of the financing statement
Sufficient if it provides:
Name of the debtor
Name of the secured party
Indication of the collateral

23. Perfection by Filing Financing statement Place of filing
Secured party must file in the state of the debtor’s location
Goods – Central location will be the Secretary of State’s office
Fixtures – Secured party has choice between
Filing in the same central office
Filing in the local country office
Duration of filing
Effective for five years

24. Perfection by Possession or Control
Advantages
Notice to other parties is very clear
If debtor defaults, secured party has no difficulties repossessing
Impose one important duty
Secured party must use reasonable care in the custody and preservation of collateral in possession or control

25. Perfection of Consumer Goods
UCC gives special treatment to security interests in most consumer goods
Consumer goods – Used primarily for personal, family, or household purposes
Purchase money security interest (PMSI): Interest taken by the person who sells the collateral or advances the money so the debtor can buy it
PMSI in consumer goods perfects automatically, without filing

26. Protection of Buyers Once security interest is perfected:
Remains effective regardless of whether collateral is sold, exchanged, or transferred
Buyers in ordinary course (BIOC): Buys goods in good faith from a seller who routinely deals in such goods
Takes goods free of a security interest created by its seller even though the security interest is perfected

27. Priorities among Creditors
Three principal rules
Party with a perfected security interest takes priority over a party with an unperfected interest
If neither secured party has perfected, the first interest to attach gets priority
Between perfected security interests, the first to file or perfect wins

28. Default and Termination
Default - When debtor fails to make payments due or enters bankruptcy
Taking possession of the collateral
When the debtor defaults, the secured party may take possession of the collateral
Disposition of collateral
Secured party may sell, lease, or otherwise dispose of the collateral in any commercially reasonable manner
Debtor is liable for any deficiency

29. Default and Termination
Happens when the debtor pays the full debt
Termination statement - Document indicating that there is no longer a security interest in the collateral

30. “The Uniform Commercial Code enables merchants to form contracts more quickly and easily. But along with this increased facility goes greater responsibility, since informal discussions may suddenly turn into… a contract.”