Creditor’s Rights
Article 9 of the Uniform Commercial Code controls the rights of secured parties. We look closely at it in
Chapter 23. Briefly stated, UCC §9-320 generally permits a buyer in the ordinary course of business to
take goods free and clear of a security interest.
Consignment
If you assigned the consignment question at the start of this chapter, this is a good time to discuss it.
Question: The letter’s author uses the common term “consigned” in describing this transaction. Under the
Code, was this consignment a “sale on approval” or a “sale or return”?
Question: Explain why this was a sale or return.
Answer: In a sale or return, the consignee takes goods intending to resell them, but has the right to return
Question: In a sale or return, are the goods generally subject to the consignee’s creditors?
Question: In this case the Code permits a creditor (the bank) to take goods (the Buggatis) that never
belonged to the consignee (the dealer). What sense does that make?
Risk of Loss
UCC §2-509(4) states that the parties may allocate the risk of loss any way they wish. When neither party
has breached the contract, the risk of loss generally passes from seller to buyer when the seller has
transported the goods as far as he is obligated to. When a party has breached, the risk of loss generally lies
with that party.
Risk Allocation
If you assigned students to draft a risk allocation contract, this would be a useful place to discuss their
efforts. The risk clauses can be effective even if only one sentence long.
The common law answered this problem by looking at which party had title to the goods at the time of
loss. But the Uniform Commercial Code again rejects the old is abstract concept, striving once more for a
practical solution. The UCC permits the parties to agree on who bears the risk of loss. UCC §2-509(4)
states that the parties may allocate the risk of loss any way they wish.
Shipping Terms
The parties can allocate the risk of loss by using common shipping terms that the code defines. FOB
place of shipment means that the seller is at risk until goods are in carrier’s hands. FOB place of
destination means that the seller is at risk until goods are at the destination.
When the Parties Fail To Allocate the Risk
When neither party has breached the contract, the risk of loss generally passes from seller to buyer when
the seller has transported the goods as far as he is obligated to. When a party has breached, the risk of loss
generally lies with that party.
When Neither Party Breaches
In a shipment contract, the risk passes to the buyer when the seller delivers the goods to the carrier.
In a destination contract, the seller is responsible for delivering the goods to the buyer, and risk passes
to the buyer when the goods reach the destination.
If the contract requires a bailee to hold the goods for the buyer, the risk passes when the buyer obtains
documents entitling her to possession, or when the bailee acknowledges her right to the goods.
When One Party Breaches
When the buyer rejects nonconforming goods, the risk of loss remains with the seller until he cures
the defect or the buyer decides to accept the goods.
When a buyer accepts goods but then rightfully revokes acceptance, the risk remains with the seller to
the extent the buyer’s insurance will not cover the loss.
When a buyer breaches the contract before taking possession, it assumes the risk of loss to the extent
the seller’s insurance is deficient.
Case: Harmon v. Dunn1
Facts: Bess Harmon owned a two-year-old Tennessee Walking Horse named Phantom Recall. Harmon,
who lived in Tennessee, boarded her horse with Steve Dunn. Dunn cared for Phantom Recall and showed
him at equestrian events. Harmon instructed Dunn to sell the horse for $25,000, and Dunn arranged for
his friend Scarbrough to buy the colt. On June 30, Dunn delivered Scarbrough’s $25,000 check to
Harmon, who handed over the horse’s certificate of registration and a “transfer of ownership” document.
That night at a horse show, Dunn told Scarbrough he had delivered the check and had the ownership
papers in his car. Dunn did not actually give the documents to his friend. Scarbrough knew that Phantom
Recall was at Dunn’s stable, where Scarbrough had boarded other horses. Sadly, the colt developed colitis
and died suddenly, on July 4. Scarbrough stopped payment on his check, and Harmon sued for her money.
The trial court found for Harmon and Scarbrough appealed.
Issue: Which party bore the risk of Phantom Recall’s death?
Holding: Judgment for Harmon affirmed. Scarbrough suffers the loss. Dunn was a bailee. In a bailment
case, under UCC §2-509(2) (a) and (b), the risk of loss passes to the buyer “on his receipt of a negotiable
document of title covering the goods; or on acknowledgment by the bailee of the buyer’s right to
possession of the goods.” The ownership documents were in the hands of Dunn, the bailee, and the buyer
had access to them no later than July 1.
Question: Enough trivia. What is a bailment?
Question: Who was the bailor and who was the bailee?
Question: Why does the Code treat bailments as slightly different from other sales involving risk?
Question: How does the Code allocate risk in a bailment case?
1 1997 Tenn. App. LEXIS 217 Tennessee Court of Appeals, 1997.
Answer: Under UCC §2-509(2), if the contract requires a bailee to hold the goods for the buyer, the
Question: But Scarbrough never received all of the ownership documents, and Dunn never explicitly
said, “You are the owner.” Why should Harmon win?
Answer: Common sense prevails. Dunn and Scarbrough were friends, and Dunn said that he had the
Question: Scarbrough spent $25,000 on a horse he owned for three days. That doesn’t seem fair.
Answer: It is a question of allocating risk. The court is saying it would make even less sense for
CODE PROVISIONS DISCUSSED IN THIS CASE
Issue Relevant Code Section
1. Did the parties create a bailment?In a bailment, one person legally holds goods for
the benefit of another.
2. Which party bore the risk of the horse’s death?UCC §2-509(2): If the contract requires a bailee to
hold the goods for the buyer, the risk passes when
the buyer obtains documents entitling her to
possession, or when the bailee acknowledges her
right to the goods.
Additional Case: Beal v. Grin 2
John Beal ran a cleaning business. He purchased a window-blind cleaning machine from Daniel Griffin
for $18,000. Griffin told Beal that the best way to ship the machine was by “electronic” means, in other
words, with the special care given to sensitive electronic equipment. They agreed that Griffin would
package the machine for safe shipment, arrange for “electronic” shipping, and insure the shipment. Beal
would pay for it.
Griffin did not in fact use electronic shipping, nor did he purchase insurance. When the machine
arrived, it was inoperable. Beal immediately telephoned Griffin, who urged Beal to accept the machine,
with the understanding that Griffin would obtain money to have it repaired. On those conditions, Beal
accepted the machine. He waited a year for Griffin to arrange repairs, but the machine was never fixed.
During that year, he had the machine inspected and it appeared not to be the model he had ordered. Beal
rejected the machine and sued Griffin.
Question: What is the result if the parties did not allocate the risk of loss in their contract?
Answer:
2 123 Idaho 445, 849 P.2d 118, 1993 Idaho App. LEXIS 37 (Idaho Ct. App. 1993
When the buyer accepts but then revokes, risk remains with the seller to the extent that the buyer’s
insurance is deficient. Here, Beal had no insurance, because Griffin promised to obtain it. Griffin suffers
the risk of the entire loss.
Warranties
A warranty is a promise that goods will meet certain standards.
Express Warranties
An express warranty is one that the seller creates with his words or actions. The UCC establishes that the
seller may create an express warranty in three ways: (1) with an affirmation of fact or a promise; (2) with
a description of the goods; or (3) with a sample or model. In addition, the buyer must demonstrate that
what the seller said or did was part of the basis of the bargain.
A%rmation of Fact
A statement is more likely to be an affirmation of fact if:
• It is specific and can be proven true or false.
• It is written.
• Defects are not obvious.
• Seller has greater expertise.
Basis of the Bargain
The buyer must also demonstrate that the two parties included the statements or acts in their bargain.
Some courts have interpreted this to mean that the buyer must have relied on the seller’s statements.
If students completed the warranty research and drafting exercise they should explain their findings at this
juncture.
Additional Case: Rite Aid Corp v. Levy-Gray.3
Facts: Ellen Levy-Gray was diagnosed with Lyme disease and prescribed doxycycline. Her doctor told
Ms. Levy-Gray to stop breast feeding her son while she is taking the medication. Ms. Levy-Gray filled
her prescription at a Rite Aid pharmacy. With the medication was a pamphlet called “Rite Advice.” The
cover page stated “Inside is everything you need to now about your prescription. It covers everything in
writing from dosage to side effects.” The pamphlet stated the following:
IMPORTANT NOTE: THE FOLLOWING INFORMATION IS INTENDED TO SUPPLEMENT,
NOT SUBSTITUTE FOR, THE EXPERTISE AND JUDGMENT OF YOUR PHYSICIAN,
PHARMACIST OR OTHER HEATHCARE PROFESSIONAL.
HOW TO TAKE THIS MEDICATION: Take each does with a full glass of water (4 oz. or 120 ml) or
more. Take with food or milk if stomach upset occurs unless your doctor directs you otherwise.
The medication upset Ms. Levy-Gray’s stomach, so she began taking it with a glass of milk. She also
was consuming eight glasses of milk a day, grilled cheese sandwiches, and ice cream in order to maintain
her breast milk so that she could resume nursing after her treatment. Her disease did not improve and her
brother, a doctor in another specialty, advised her to stop using dairy products. Ms. Levy-Gray did so and
her symptoms briefly improved, but ultimately she was diagnosed with post-Lyme syndrome, a chronic
autoimmune response.
3 391 Md. 698, 894 A.2d 563, Court of Appeals of Maryland, 2006.
Ms. Levy-Gray sued Rite Aid for breach of express warranty, claiming the instructions to take the
medication with milk rendered the drug ineffective and caused her chronic condition. Her expert witness
testified that taking dairy products with this drug prevented the drug from being absorbed into the body.
Rite Aid’s expert testified that any loss of absorption was minimal and had no effect on her treatment.
Rite Aid also claimed that the pamphlet could not have been part of the basis of the bargain because
Levy-Gray did not see it until after she purchased the medication.
The jury found for Levy-Gray and awarded $250,000 in damages. Rite Aid appealed.
Issue: Did Rite Aid breach an express warranty?
Holding: Yes, judgment for Levy-Gray affirmed.
Rite Aid argued that the pamphlet was not part of the basis of the bargain because Ms. Levy-Gray did
not see it, nor was she aware of it until after she bought the medication. The court disagreed.
According to the court, the exact time when words of description or affirmation are made is not
relevant. The only question is whether it is fair to believe the language was part of the contract. The
important aspect is the relationship between the affirmation by the seller and the sale of goods. It is
common knowledge that sellers give written warranties after the sale has been made, and some courts
recognize that late statements found in these writings are part of the basis of the bargain.
Rite Aid also relied on the “learned intermediary” theory, to support its argument that the patient
relies on the advice of her doctor, not the pharmacist, therefore whatever Rite Aid said could not have
been part of the basis of the bargain. However, the court held that a jury could have inferred that the
language on the pamphlet encouraged Ms. Levy-Gray to rely on the information contained therein.
Thus the statement “take with food or milk if upset stomach occurs” had the effect of warranting that
for as long as Ms. Levy-Gray was taking the medication, milk would not adversely affect her.
Question: What did Rite Aid expressly warrant to Ms. Levy-Gray?
Question: How is that an express warranty that dairy products would not adversely affect Ms.
Levy-Gray’s treatment?
Question: But, Ms. Levy-Gray not only took the drug with milk, she was consuming a large amount
of dairy. Does that make a difference?
Answer: Not according to the court. According to the court, because Rite Aid claimed you could
Question: What is the “learned intermediary” doctrine?
Answer: The “learned intermediary” doctrine is a theory that explains the relationship between drug
Question: Why does Rite Aid raise this theory?
Answer: To try to persuade the court that Ms. Levy-Gray relied on the advice of her doctor when
Question: What did the court think about that argument?
Answer: The court did not think it was persuasive. According to the court, the language on the Rite
Implied Warranties
Implied warranties are those created by the Uniform Commercial Code itself, not by any act or statement
of the seller.
Implied Warranty of Merchantability
“Merchantability” means that goods are fit for their normal purposes.
Case: Goodman v. Wenco Foods, Inc.4
Facts: Fred Goodman bit into a Wendy’s hamburger and was injured by a triangular piece of cow bone,
about one-sixteenth to one-quarter inch thick and one-half inch long. The restaurant purchased all of its
meat from Greensboro Meat Supply Company (GMSC). Wendy’s specifications required its meat to be
chopped and “free from bone or cartilage in excess of 1/8 inch in any dimension.” GMSC beef was
inspected continuously by state regulators and was certified by the United States Department of
Agriculture. The U.S. Department of Agriculture (USDA) considered any bone fragment less than
three-quarters of an inch long to be “insignificant.”
Goodman sued, claiming a breach of the implied warranty of merchantability. The trial court
dismissed the claim, ruling that the bone was natural to the food and that the hamburger was therefore fit
for its ordinary purpose. The appeals court reversed this, holding that a hamburger could be unfit even if
the bone occurred naturally. Wendy’s appealed to the state’s highest court.
Issue: Was the hamburger unfit for its ordinary purpose because it contained a harmful but natural bone?
Holding: Affirmed appeals court judgment reinstating Goodman’s merchantability claim. An injured
consumer of food may recover from the seller even though the substance that caused injury was “natural”
to the food, provided that the consumer would not reasonably anticipate the substance or process that
caused the injury. A triangular, one-half inch, inflexible bone shaving may be natural to beef, but whether
it is so natural to hamburger as to put a consumer on guard is a question for the jury.
Question: Does the ruling mean that Wendy’s has breached its implied warranty of merchantability?
Answer: No. The trial court had dismissed the merchantability claim, preventing Goodman from
Question: If a defendant has breached the implied warranty of merchantability does it mean the
defendant has also been negligent?
Answer: No. There are three theories on which plaintiffs bring claims of product liability: breach of
Question: How could Wendy’s be in breach of its implied warranty when the meat it purchased was
inspected continuously by state regulators and certified by the USDA?
Answer: Remember that merchantability means the goods are fit for their normal purposes. The
Question: Bone is not a foreign substance in meat; it is not something that was accidentally added
during processing. How can it be in breach of the implied warranty of merchantability to serve a food
in its natural state?
Answer: Other things occur naturally in meat, too: cartilage, hair, horns, intestines. That does not
mean a person biting into a hamburger won’t be surprised to discover them. The court says that the
Question: How will a jury decide what a reasonable consumer would expect to encounter in food?
4 333 N.C. 1, 423 S.E.2d 444, 1992 N.C. LEXIS 671 Supreme Court of North Carolina, 1992.
Question: This ruling creates a serious difficulty for Wendy’s and its lawyer, in terms of arguing to
the jury. What is that difficulty?
Update
When the remanded case went to trial, Goodman stated (out of court) that he had originally offered to
settle for $2,000, the cost of his dental bills, and that he still was not trying to capitalize on his situation.
The lawyer for Wendy’s argued that there was no neutral eyewitness who could testify that there ever had
been bone in the hamburger. Goodman claims that he gave the bone to the store’s manager. Unfortunately,
that manager had left Wendy’s and Goodman’s lawyer was unable to locate him. Research located no
report of a jury verdict or appeal, indicating that the parties probably settled.
Implied Warranty of Fitness for a Particular Purpose
Where the seller at the time of contracting knows about a particular purpose for which the buyer wants the
goods, and knows that the buyer is relying on the seller’s skill or judgment, there is (unless excluded or
modified) an implied warranty that the goods shall be fit for that purpose.
Two Last Warranties: Title and Infringement
Example: A Pair of Stolen Trucks
Pedro owns High Heat, a plumbing and heating company. He buys two new trucks, one red and one blue,
for his work crews to use. Each is worth $25,000. Three days later, Roger steals both of the trucks. Roger
sells the red truck to Mia and the blue truck to Jodie. Each buyer, believing that Roger is the real owner,
receives forged ownership documents. Jodie, in turn, sells the blue truck to Brianna. Pedro discovers the
two trucks and files suit against Mia and Brianna, demanding return of the vehicles. Both of the
defendants argue convincingly that they acted in good faith and should not suffer the loss.
Question: What is the outcome?
Question: Why is Pedro entitled to both trucks?
Answer: A thief obtains no title (see Chapter 20, Ownership and Risk). Roger, the thief, had no title to
Question: Does either Mia or Brianna have any remedy?
Question: Assume that Roger has absconded and cannot be sued. Does either Mia or Brianna have any
other remedy?
Question: What is Brianna’s remedy?
Question: What is the warranty of title?
Answer: The seller of goods (implicitly) warrants that
Question: Jodie never said anything to Brianna about a warranty of title. Does the warranty exist?
Question: How will Brianna use UCC §2-312?
Question: Suppose Jodie had doubts about Roger’s honesty and did not want to provide a warranty of
title to Brianna. Was there anything she could have done?
Question: Why didn’t Jodie exclude the warranty of title, just to be on the safe side?