978-1285427003 Chapter 20 Lecture Note Part 1

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Suggested Additional Assignments

Drafting Exercise: Consignment

Students are the authors of a syndicated newspaper advice column. They must answer the following letter,

which is based on many such instances:

Dear Legal Advisor:

I collect rare cars. I needed to raise money for some new purchases, so I consigned two beautiful

Bugattis to Celebrity Rare Autos, a car dealer in Beverly Hills, California. My 1928 Bugatti is worth

about $150,000, and my 1930 Bugatti is worth nearly $200,000. I assumed the dealer would sell

them, keep his percentage, and pay me. Instead, Todoeselmio Bank took my cars! It turns out that

Celebrity owed Todoeselmio a ton of money. Todoeselmio refuses to return my autos, saying it plans

to sell them to pay off Celebrity’s debts. Obviously that is not fair. I don’t owe the bank any money!

What are my rights? What should I do? Signed, Bereft 90210.

Drafting Exercise: Risk Allocation

Students should draft a contract for the sale of goods that uses common shipping terms, such as “FOB,” to

allocate risk, insurance, and shipping costs.

Research: Title and On-line Auction sites

Students should look at on-line auction sites such as eBay and try to determine how ownership of the

goods listed for sale are treated by the site. Students may want to look at the User Agreements for the

service.

Chapter Overview

Chapter Theme

The Code has reduced the importance of abstract terms, such as “title,” and replaced them with practical

rules designed to enable businesspeople to anticipate risk and protect against it.

Legal Interest

An interest is a legal right in something. More than one party can have an interest in particular goods.

Often the parties will claim ownership, each arguing that his interest is stronger than the other’s. But in

cases where the goods are damaged or destroyed, each party argues that the other one owns the goods.

identification, Title, and Insurable Interest

Students who performed the Title and On-Line Auction Site research could discuss their findings here.

Existence and identification

Title in goods can pass from one person to another only if the goods exist and have been identified to the

contract.

Passing of Title

Once goods exist and are identified to the contract, ownership can pass from one person to another. Title

may pass in any manner on which the parties agree (UCC §2-401). If the parties do not agree on passing

title, §2-401 decides.

Additional Case: Circuit City Stores, Inc. v. Commissioner of Revenue1

Facts: Circuit City, which sold electronic goods, permitted customers to pay for goods at one store but

pick them up at another. Because Massachusetts imposed a five percent sales tax on all goods sold in the

state, but neighboring New Hampshire had no sales tax, many Massachusetts customers chose to save the

five per cent by collecting their goods at a New Hampshire store.

For these “alternative location” sales, the customer receipt indicated where the item had been bought and

where it would be picked up. The receipt also said “reserved,” meaning simply that in the collection store,

one less item was available to other customers. Until the merchandise was picked up, the customer could

demand a refund or request to collect the item in the store where she had paid for it.

The Massachusetts Commissioner of Revenue demanded sales tax on the “alternative location” sales,

claiming that it was a sale in Massachusetts because that is where title passed. Circuit City claimed that it

owed no sales tax, because (1) the goods were not identified to the contract until a customer picked them

up in New Hampshire, and (2) title passed in New Hampshire.

Issue: Where were the goods identified to the contract? Where did title to the goods pass?

Holding: Judgment for the Commissioner of Revenue. The court disagreed with Circuit City that its

failure to book, credit, or consider the sale to have occurred until the product is physically released to the

customer in New Hampshire makes it an order for merchandise, not a concluded sale. For purposes of the

UCC, Circuit City placed the goods within the actual or constructive possession of customers when it

entered the sale as an alternative location sale in its system and merchandise was reserved for the

customer at the designated location. The court also concluded that the reserve notation marked on the

customer sales receipt for the purchased merchandise sufficiently reflected its status of being set aside, or

identified, to that particular transaction.

Question: What sections of Article 2 govern this case?

Answer:

UCC §2-501(1): The parties may agree in their contract how and when they will identify the goods;

Question: Why is the Massachusetts Commissioner of Revenue interested in these sales?

Answer: Massachusetts has a 5.00% sales tax on goods. New Hampshire, immediately to the north,

has no sales tax. Circuit City did not collect the Massachusetts sales tax from those Massachusetts

Question: Where would these customers pay for the goods?

Question: How did Circuit City argue that it owed no sales tax on these transactions?

Answer: It characterized them as orders for merchandise, claiming that the goods were not identified

Question: Did the court agree that they were orders for merchandise?

Answer: No. The court ruled they were concluded sales based on evidence that:

The customer sales receipt contained a description of the items purchased and the time

1 439 Mass. 629, 790 N.E.2d 636 Supreme Judicial Court of Massachusetts, 2003.

Question: Did Circuit City make other arguments to support its position?

Answer: It argued that “identification to the contract” cannot be made in alternative location sales

Question: How did this argument fare?

Answer: Poorly. The court ruled that the sales receipt’s notation that the items were “reserved” was

CODE PROVISIONS DISCUSSED IN THIS CASE

Issue Relevant Code Section

1. In which state were goods identified to the contracts?UCC §2-501(1): The parties may agree in their contract

how and. when they will identify the goods; otherwise,

they are identified as specified in §2-501 (a), (b) or (c).

2. In which state did title pass?UCC §2-402: Title may pass in any manner on which the

parties agree; otherwise, it passes as specified in §2-401.

Insurable Interest

A buyer obtains an insurable interest when the goods are identified to the contract (UCC §2-501).

The seller retains an insurable interest in goods as long as she has either title to the goods or a

security interest in them (UCC §2-501).

Case: Valley Forge Insurance Co. v. Great American Insurance Co.2

Facts: On a Friday afternoon, Karl and Linda Kennedy went to John Nolan Ford to buy a new Ford

Mustang. The parties signed all necessary documents, including a New Vehicle Buyer’s Order, an

Agreement to Provide Insurance, and credit applications. The Kennedys made a down payment, but could

not arrange financing before the dealership closed. John Nolan Ford determined that the Kennedys were

creditworthy and allowed them to take the car home for the weekend. That evening, Karl Kennedy

permitted his brother-in-law, Cella, to take the car for a drive, along with a passenger named Campbell.

Cella wrecked the car, injuring his passenger. Campbell sued, and the question was which insurance

company was liable for all of the harm: John Nolan Ford’s insurer (Milwaukee Mutual), Cella’s insurer

(Valley Forge), or Kennedy’s insurer (Great American). The trial court ruled that title had never passed to

Kennedy and found Milwaukee Mutual liable. The company appealed.

Issue: Had title passed to Kennedy at the time of the accident?

Holding: Judgment affirmed. Excerpts from the court’s opinion: Title had never passed and the dealer’s

insurer was liable. Under the “Agreement” provision, the contract states that “it is expressly agreed that

the purchaser acquires no right, title or interest in or to the property which he agrees to purchase

hereunder until such property is delivered to him and either the full purchase price is paid in cash or a

satisfactory deferred payment agreement is executed by the parties hereto [.]”

We hold that because the parties had otherwise agreed that interest in the car, including insurable interest,

would not pass until the financing was complete, John Nolan Ford still had the risk of loss and the

insurable interest when the accident occurred.

2 1995 Ohio. Ap. LEXIS 3939 Ohio Court of Appeals, 1995.

Question: What sections of Article 2 govern this case?

Answer:

UCC §2-401: Title to goods may pass in any manner on which the parties agree.

Question: There are several questions in this case. Which issue is the most important?

Question: Who is actually litigating this case?

Question: Ignore the law for a moment and make a common sense argument that the dealer’s insurer

ought to win.

Answer: Nobody gets a car for free. The parties had agreed on a price, and everyone knew that the

Kennedys were going to obtain financing and drive away as the owners and insurers of the car. They

Question: Now make a common sense argument that the dealer’s insurer ought to lose.

Answer: The Kennedys had not paid for this car. Does the dealership usually give away its vehicles?

Financing is not a detail, like a safety inspection sticker. Until the financing is arranged, no dealership

Question: According to the court, who does have an insurable interest in the car?

Question: Why does the court reach that conclusion?

Answer: The contract states that the buyer obtains no title or interest in the car until the vehicle has

Question: However, the contract also states that the buyer agrees to insure the car. Doesn’t that mean

that the Kennedys were obligated to do that, and that their insurer should be liable?

Answer: No. Although the contract requires the Kennedys to buy insurance, the agreement is not

CODE PROVISIONS DISCUSSED IN THIS CASE

Issue Relevant Code Section

1. Which party had title to the car?UCC §2-401: Title to goods may pass in any

manner on which the parties agree.

2. Did the seller have an insurable interest in

interest in the car?

UCC §2-501: The seller retains an insurable in the

goods as long as it holds title to or a security

interest in them.

Imperfect Title

Bona Fide Purchaser

A person with voidable title has power to transfer valid title for value to a good faith purchaser,

generally called a bona fide purchaser or BFP. A person can prove that he is a BFP by showing (1)

that he gave value for the goods, and (2) that he acted in good-faith.

Case: Bakalar v. Vavra 3

Facts: Franz Grunbaum was a Jewish man who lived in Vienna before World War II. In 1938, the Nazis

imprisoned him in the Dachau concentration camp, where he died three years later. The Nazis also

confiscated his property, which included a valuable drawing.

This drawing changed hands several times until it was eventually sold to David Bakalar in 1963. Years

later, Franz Grumbaum’s heirs, Milos Vavra and Leon Fischer, argued that they were the true owners of

the picture. At this point, it was worth an estimated $675,000. The trial court disagreed, and found that

Bakalar was the drawing’s owner. Vavra and Fischer appealed.

Issue: Did Bakalar own the painting?

Excerpts from Judge Korman’s Decision: [I]n New York, a thief cannot pass good title. This

means that, under New York law, absent other considerations an artwork stolen during World War

II still belongs to the original owner, even if there have been subsequent buyers and even if each of

those buyers was completely unaware that she was buying stolen goods. The manner in which the

rule is applied reflects an overarching concern that New York not become a marketplace for stolen

goods. New York case law has long protected the right of the owner whose property has been

stolen to recover that property, even if it is in the possession of a good faith purchaser for value.

Until demand is made the statute of limitations does not begin to run.

Consequently, if the drawing was stolen or otherwise unlawfully taken from Grunbaum, that

circumstance would affect the validity of Bakalar’s title. Indeed, if Vavra and Fischer have made a

showing that they have a claim to the drawing, New York law places the burden on Bakalar, the

current possessor, to prove that the drawing was not stolen.

Accordingly, we vacate the judgment of the district court and remand the case.

Question: How could Bakalar possibly prove that the drawing was not stolen?

Answer: This was a significant burden, but Bakalar’s lawyers convinced the U.S. District Court for

Question: So, the drawing never stolen?

Answer: Grunbaum’s heirs argued that if Lukacs did possess the drawing, then she had stolen it from

the Grunbaum estate. In response to this claim, Bakalar’s lawyers successfully argued under a

3 619 F.3d 136, Second Circuit Court of Appeals, 2010.

Question: Did the court agree with Bakalar?

Answer: Yes. The U.S. Court of Appeals for the Second Circuit affirmed the Southern District

Additional Case: People v. Simmons4

Facts: With a fraudulent check Scott Simmons purchased a 15-carat, heart-shaped diamond ring for

$70,000 from Archer Estate Jewelers. Simmons took the diamond, and the accompanying gemological

certificate, to a jewelry store/pawnshop operated by Glenn Verdult. Verdult bought the ring from

Simmons, paying with a $40,000 cashier’s check. Simmons was arrested for passing a bad check, and the

police seized the diamond.

The trial court awarded the ring to Archer and Verdult appealed.

Issue: Who was entitled to the diamond ring?

Holding: Judgment for Archer reversed and case remanded for trial on whether Verdult was a good-faith

purchaser. Excerpts from the court’s opinion:

A thief possesses only void title and can transfer only that which he has. Any subsequent purchaser

has no valid interest in the stolen property.

Not so where the thief acquires the property by a transaction of purchase. Only voluntary transactions

can constitute transactions of purchase. Case law from other states reasons that a thief who

wrongfully takes the goods against the will of the owner is not a purchaser. On the other hand, a

swindler who fraudulently induces the victim to deliver the goods voluntarily is a purchaser under the

Code. Thus, if the original seller voluntarily assents to the transaction and delivers the property, then

the thief obtains voidable title. A person with voidable title may transfer good title in an ordinary

transaction for value to a good-faith purchaser.

Here, Archer voluntarily delivered the diamond to Simmons. The original transfer was a transaction

of purchase. Simmons acquired voidable title through this transaction.

A good-faith purchaser is a person who, among other things, takes delivery of the goods pursuant to a

preexisting contract for purchase and is honest in fact in the transaction. Whether a person qualifies as

a good-faith purchaser is determined by applying the reasonable person standard. For instance, if the

goods are offered at an unusually low price, a reasonable person would suspect that the goods are

stolen and, thus, be put on notice that he may be entering an illegitimate transaction. Usually, whether

a person qualifies as a good-faith purchaser involves a credibility determination to be made by the

trier of fact.

Verdult stated that Simmons entered his pawnshop with the 15.05-carat, heart-shaped diamond,

produced a gemological certificate for it, and that Verdult purchased it with a $40,000 cashier’s check.

Under these circumstances the trial court could not determine whether Verdult was a good-faith

purchaser. Simmons had voidable title and Verdult may have had good title. Therefore remand is

necessary to give the court an opportunity to decide whether Verdult was a good-faith purchaser,

thereby entitling him to ownership of the diamond.

Question: What is a bona fide purchaser?

Question: What is voidable title?

Question: What is an example of voidable title?

Question: Simmons purchased the diamond ring with a bad check. How can he have any title to it?

4 2003 WL 21350737 California Court of Appeals, 2003.

Question: What is a transaction of purchase?

Question: Can you put all of this together with these facts?

Answer: Certainly. Archer’s employee freely gave title to the diamond ring to Simmons in exchange

Question: Where does Verdult come in?

Question: How does the court determine whether one qualifies as a good-faith purchaser?

Answer: The court applies a reasonable person standard: would a reasonable person in the

Question: Did Verdult purchase the ring in good-faith?

Question: So who is entitled to the ring?

Answer: We don’t know, yet. The court remanded the case for the trial court to hear evidence to

Additional Case: Kotis v. Nowlin’s Jewelry 5

Facts: Steve Sitton forged a check belonging to his brother, went to Nowlin’s Jewelry, and misrepresented

that he had his brother’s authorization to make a purchase. He bought a gold ladies’ Rolex watch with a

diamond bezel for $9,438.50. The next day, Sitton called Eddie Kotis, the owner of a used car dealership,

and asked if he would be interested in buying the watch. Kotis had bought several used cars from Sitton

over the years and had never had problems with him. Kotis expressed interest, so Sitton showed him the

watch. Sitton explained that several months earlier he had sold his house and used the proceeds to buy the

watch for his girlfriend. Kotis had a good general knowledge of the value of Rolex watches. He realized

this one was in excellent condition. Kotis bought the watch for $3,550.

At some point on that same day, Kotis telephoned the jewelry store and spoke with Cherie Nowlin. He

described the watch, and asked if the store had sold such an item within the past few months. Kotis at first

refused to identify himself. Ms. Nowlin said that Sitton had bought the watch the day before. She did not

have the payment information available and said she would call him back. When Nowlin called Kotis, she

told him that payment had been by a check that had not yet cleared. Kotis told Nowlin that he did not

have the watch and that he did not want it. Kotis refused to tell Nowlin how much Sitton was asking for

the watch.

The bank dishonored the check, the state prosecuted Sitton for forgery and theft, and Nowlin sued to

recover the watch.

Issue: Was Kotis a bona fide purchaser entitled to retain the watch?

Holding: No.

Question: What title did Sitton obtain when he purchased the watch?

5 844 S.W.2d 920, 1992 Tex. App. LEXIS 3226 (Tex. Ct. App. 1992).

Question: Kotis paid $3,550 for the watch; he clearly gave value. What evidence supports Kotis’s

argument that he acted in good-faith?

Answer:

Kotis had purchased cars from Sitton and had never had any problems. He had no reason

to suspect that Sitton would lie.

Question: What evidence supports Nowlin’s argument that Kotis did not act in good-faith?

He was evidently suspicious, because he telephoned the jewelers.

He told Nowlin that he had not yet bought the watch. If that was true, then Nowlin’s

information should have made him very suspicious of the deal, and he acted in bad faith when he

later bought the watch. If that was false, then he was lying to Nowlin, which is an odd thing to do

when you are trying to learn about a watch and have done nothing wrong.

Entrustment

According to UCC §2-403(2), any entrusting to a merchant who deals in goods of that kind gives him

power to transfer all rights of the entruster to a “buyer in the ordinary course of business” (BIOC).

Entrusting means delivering goods to a merchant or permitting the merchant to retain them.

Additional Case: Lindholm v. Brant.6

Facts: Kerstin and Magnus Lindholm were art collectors. For over 30 years, Anders Malmberg, an art

dealer, sold paintings for the couple and bought some for them, including an Andy Warhol picture called

“Red Elvis.” In 1989, Malmberg arranged for Kerstin Lindholm to loan Red Elvis to the Museum of

Modern Art in New York as part of a Warhol exhibit. The exhibit also included paintings owned by Peter

Brant, another collector, who saw Red Elvis at the show. Brant was interested in Red Elvis and learned

that Kerstin Lindholm was the owner, represented by Malmberg.

Ten years later, another dealer, Stella Holm, told Brant that Malmberg owned Red Elvis and might

sell it. Actually, Lindholm still owned the painting.

Brant orally agreed to pay Malmberg $2.9 million for Red Elvis, and he made a $900,000 deposit.

Brant then learned that the Lindholms were getting a divorce, and he became worried that Magnus

Lindholm may make a claim to the painting. Brant hired a lawyer to investigate the painting. The lawyer

found no liens or art loss claims, but told Brant that that did not prove that Malmberg owned the painting.

Brant asked Malmberg for documentation proving Kerstin had sold him the picture, but Malmberg

refused citing customary confidentiality. Eventually, Brant paid the remaining $2 million and received the

picture. Meanwhile, Kerstin thought she still owned the picture, and arranged to sell it to a Japanese buyer

for $4.6 million, only to learn that Brant now claimed ownership.

Kerstin Lindholm sued, and the trial court found that Brant was a BIOC, entitled to keep the painting.

Kerstin appealed.

Issue: Was Brant a BIOC?

Holding: Yes, judgment for Brant affirmed. According to the court, the defendant presented expert

testimony that in the majority of art transactions where the buyer has no reason to doubt the seller’s

ability to convey good title, the transactions are completed “on a handshake and an exchange of an

invoice.” It is not customary for buyers and sellers to get a signed invoice from the original seller to the

dealer prior to a transaction.

6 283 Conn. 65, 925 A.2d 1048, Supreme Court of Connecticut, 2007.

The court concluded that the sale from Malmberg to Brant was not ordinary or customary. Brant was

concerned that Magnus Lindholm may make a claim for the painting during his divorce, so Brant took the

extraordinary step of hiring a lawyer to conduct an investigation and to negotiate a formal contract for the

sale of Red Elvis. Moreover, during the investigation, the lawyer conducted a lien search and an Art Loss

Registry Search, and neither search revealed any claims to the painting. Such searches are not conducted

during the normal course of an art transaction, and gave Brant some reasonable assurance that there were

no competing claims to the painting.

Both Malmberg and Lindholm had reputations as being honest, reliable, and trustworthy art dealers,

therefore Brant had little reason to doubt Malmberg’s claim that he was the owner, or Lindholm’s claim

that Malmberg had bought the painting from the original owner because she needed the money due to her

divorce.

Brant’s concerns were further allayed when Malmberg delivered Red Elvis to the agreed upon

location in Denmark. The painting was on loan to the Guggenheim at the time of the sale, and it is

Guggenheim policy not to release a painting on loan unless it is to the true owner, or someone authorized

by the true owner to take possession.

Question: What section of Article 2 governs this dispute?

Answer: UCC §2-403(2), under which anyone entrusting to a merchant who deals in goods of that

Question: Who is the entruster in this case?

Question: What is a BIOC?

Question: What evidence did the court have to determine that Brant was a BIOC?

Answer: The court looked at the extra, and unusual, steps Brant took to make sure there were no

competing claims to Red Elvis, such as attempting to get a written contract for sale from Malmberg

Question: It seems unfair that UCC §2-403(2) permits an unscrupulous merchant to sell entrusted

goods and deprive an entruster of ownership. What is the rationale for this section?

Answer: Cases such as these involve two innocent parties: the entruster, and the good faith purchaser

of entrusted goods. A good faith purchaser does not walk into a retail outlet and ask if the seller has