978-1305575080 Chapter 23 Solution Manual

Unlock access to all the studying documents.

View Full Document

Chapter 23

TITLE AND RISK OF LOSS

RESTATEMENT

Issues that arise during the performance of a contract for the sale of goods include the liability if the goods are

damaged and the rights of buyers’ and sellers’ creditors to seize the goods. These issues of loss and seizure are

covered by Article 2 rules on passage of title and risk of loss.

A warehouser is a person or entity in the business of storing others’ goods for compensation. The rights and duties of

a warehouser are the same as the rights and duties of a bailee in a mutual benefit bailment. Article 7 of the UCC

governs the rights and duties of warehousers. Warehousers have liens on the goods they store for reasonable

storage charges. The lien may be enforced by sale.

Warehousers issue warehouse receipts which are written acknowledgments of receipt of goods. Warehouse receipts

are memoranda of the contract between the issuer, the warehouser and the depositor. A warehouse receipt is a

document of title and can be bought and sold or used as security for a loan. A warehouse receipt can be negotiable

or non-negotiable. A negotiable warehouse receipt can be negotiated with due negotiation. Due negotiation transfers

both title to the document and the goods. Due negotiation gives the holder of the warehouse receipt rights superior

even to those of the depositor. Defenses to holders of a duly negotiated warehouse receipt are that the goods in the

warehouse are stolen goods. Warranties are made by transferors of warehouse receipts. Field warehousing is the

use of the warehouse system for control of title through the placement of an agent in an area where the warehouser

has the goods. Field warehousing allows the owner of the goods to pledge the goods as security with creditors’

reassurance through the agent’s presence.

Common carriers are public transporters of goods. Consignors or shippers deliver goods to the carrier and

consignees are the parties to whom the goods will be shipped.

Bills of lading are documents of title used to provide rights and control similar to those provided under warehouse

receipts. A bill of lading can be negotiable or non-negotiable. One of the few defenses to a claim under a negotiable

bill of lading is that the underlying goods were stolen. Common carriers are absolutely liable for the goods from start

of shipment until delivery with a few exceptions for losses caused by acts of God, war, public authority, fraud by the

shipper or the natural properties of the goods. Carriers may limit their liability for reasonable amounts. A factor is a

bailee who sells consigned goods. Title remains with the consignor until a sale occurs.

When risk of loss and title pass depends upon the nature of the contract including whether the goods are in existence

and identified at the time of the contract and whether there is a document of title. Damage and destruction of the

goods or breach in performance are also issues that determine passage of title and risk of loss. Special sales

situations, like auctions and self-service stores, also carry special rules for title and risk.

STUDENT LEARNING OUTCOMES

LO.1: Explain when title and risk of loss pass with respect to goods.

LO.2: Determine who bears the risk of loss when goods are damaged or destroyed.

LO.3: Explain why it is important to know when risk of loss and title pass in transactions for the sale of goods.

LO.4: Describe the passage of title and risk in special situations, such as a bailment, sale or return, or a sale on

approval.

LO.5: Classify the various circumstances in which title can be passed to a bona fide purchaser.

INSTRUCTOR’S INSIGHTS

Break the chapter down into five components – related Learning Outcomes are indicated in ( ):

1. What are the potential problems in the delivery of goods?

Explain possible damages to goods

2. How are goods identified under a contract and why is identification important? (LO.2)

3. When does title to goods pass from the seller to the buyer?

Define the terms used in shipping goods

4. Who has the risk of loss when goods are destroyed or lost?

Give the timing rules for passage of risk of loss

5. What special situations exist and what are the rights of the parties?

Explain sales and returns (LO.5)

CHAPTER OUTLINE

I. What Are the Types of Potential Problems in the Delivery of Goods?

A. Damage to goods – total or partial: theft, loss, destruction

II. Determining Rights: How Are Goods Identified Under a Contract and Why Is Identification Important?

A. Existing and identified goods

1. Physically in existence

B. Future and unidentified goods

1. Future: not yet in existence or not yet owned by the seller

C. Fungible good

1. Goods mixed together and indistinguishable – milk, oil, corn

D. Effect of Identification

1. Buyer holds an insurable interest

III. Determining Rights: When Does Title to Goods Pass From the Seller to the Buyer?

A. Goods represented by documents of title

1. Examples are bills of lading and warehouse receipts

B. Passage of title in nonshipment contracts

1. No requirement for seller to deliver unless contract specifies

2. With no delivery specified (and no document of title), the title passes to the buyer at the time the

3. Field warehousing

a. Receipts that owner uses as a pledge for loans

DISCUSSION POINTS: Thinking Things Through

Serving Up Title and Insurance at the Burned Bar

The title to the personal property at the bar passed at the time of the contract. There was no document of title and no

delivery, so Blasini had title, which meant that Cheran did not have the right to pledge that property as security.

Cheran’s lender has no rights in the personal property. Nonpayment is a breach of contract, but title is not affected by

that until there is a judgment and the goods are attached. So, the creditors, the Rajs, did not have title. Insurance

proceeds go to the guy who bought the property and had title. Some provisions in sales contract may entitle Rajs to

the proceeds, but in this case there was no such provision. Point out to the students how confusing it can all look,

even to sophisticated insurers, but the simple concept of when title passes takes care of all the issues.

C. Passage of title in warehouse arrangement

1. Title passes when buyer has documents

D. Passage of title in bailments and other forms of possession

CASE BRIEF: Northern Insurance Company of New York v. 1996 Sea Ray Model 370DA Yacht

453 F. Supp. 2d 905 (D. S.C. 2006)

FACTS: On August 23, 1995, Eric T. Small purchased a thirty-seven foot (37′) SEA RAY 370 Sundancer

Yacht from Gulfwind Marine for $251,000.00. Sea Ray had engraved the vessel’s Hull Identification

Number (“HIN”) into the fiberglass on the vessel’s transom. The vessel’s proper HIN was

SER4860F596 Sea Ray. Northern issued a Master Mariner yacht policy to Small providing

insurance coverage for the Sea Ray yacht for theft or loss for $200,000.00.

On February 27, 2001, Daniel Dey, a Florida resident, stole the Sea Ray yacht while it was moored

at her slip at Gulfwind Marina in Venice, Florida. A police report was filed. After the theft, Northern

paid Small a total loss of $200,000.00 for the vessel.

Subsequently, Dey altered the Sea Ray yacht’s HIN to SERF3571C298 and made other changes to

the vessel to disguise the theft and manufacture date. Dey then advertised the sale of the vessel as

a 1998 Sea Ray on an Internet website. On August 5, 2002, Dey signed a bill of sale conveying the

Sea Ray yacht to Fat Boy, a Delaware Limited Liability Company owned by George Lee, for

$127,500.00. No boat dealer, retailer, distributor or seller was involved in the transaction.

Fat Boy gave a ship mortgage on the Sea Ray yacht to Carolina First. Carolina First filed the

preferred ship mortgage on the Sea Ray yacht.

George Lee and Paul Degenhart, the lawyer for and principal in Fat Boy, became concerned that

the Sea Ray yacht may have been manufactured in 1996, not 1998, as previously indicated by Dey.

Lee and Degenhart confronted Dey about the incorrect model year of the Sea Ray yacht. Dey

admitted that he had altered the vessel’s HIN to disguise the actual manufacture date.

Fat Boy and Lee attempted to trade the Sea Ray yacht to a vessel dealer for another vessel that

Lee wanted to purchase. At that time, it was determined that the vessel had been stolen and Small

was informed. Small contacted Lee and Fat Boy, but Lee did not return the vessel to Small. In

June, 2004, the Sea Ray yacht was seized by the U.S. Marshal Service and Northern filed suit to

get the yacht back. Fat Boy and Carolina First claimed title and interest in the yacht.

ISSUES: Who has title to the yacht? What is the effect of having a thief in the chain of transfer of the goods?

REASONING: A thief cannot pass good title, even when the yacht identification number is changed. The rights of

all the parties, including the lender and the buyer, are all subordinate to the original owner of the

yacht. A party can pass only as good a title as he or she holds. A thief holds no title and cannot

pass good title, even to those who are not aware that the goods are stolen.

DISCUSSION POINTS: Have the students discuss the passage of title on stolen goods using the Northern

Insurance Company of New York v. 1996 Sea Ray Model 370DA Yacht case.

2. Authorization – lien holders can sell property when debtors default

3. Voidable title

a. Minor has title and transfers; transferee transfers to bfp

DISCUSSION POINTS: Ethics & the Law

The $7 Renoir at the Flea Market

Cover ethical issues of government taking of property and the implications of title for later holders of the property.

Here is the outcome of the case in a nutshell:

“The common law provides that possession of property constitutes prima facie evidence of ownership until a

better title is proven.” That presumption, undoubtedly, favors Fuqua on the facts presented here. She claims

to have purchased the painting in good faith at a flea market in West Virginia, and she possessed the

painting until the FBI seized it. See Adams, 672 S.E. 2d at 867. The burden thus lies with BMA, as the

claimant out of possession, to rebut Fuqua’s presumptive proof of ownership by “produc[ing] evidence of

superior title.” BMA does so by way of a detinue action, alleging that the painting was stolen from its

collection in November 1951.

The only conclusion to be drawn from the evidence presented by BMA is that it was in lawful possession of

the painting until the painting was stolen from its collection in November 1951. To this end, BMA appended a

number of affidavits and supporting exhibits to its memorandum. Internal records, discussed above, indicate

that BMA received the painting as a loan from Saidie May, cataloged the painting, and put it on exhibit

before reporting it stolen. See BMA’s Mem., Ex. 1. Of particular significance is the police report, which

demonstrates that BMA reported the painting as stolen to the City of Baltimore Police Department on

November 17, 1951. See id. at Ex. 2. The theft is further corroborated by BMA’s records, including

handwritten and typed notations on the catalog card reflecting the painting’s status as stolen, id. at Ex. 1–C;

minutes from a board meeting stating that BMA made an insurance claim as a result of the theft, id. at Ex.

1–G; and BMA’s financial ledger confirming that it received a $2,500 payment from its insurer, id. at Ex. 1–H.

Together these records offer overwhelming evidence in support of BMA’s claim that the painting was stolen.

Given this quantum of evidence, there can be no doubt that BMA has proved all it must under Virginia law,

and that Fuqua cannot have good title as the possessor of a stolen work of art.

This conclusion is consistent with Brown University v. Tharpe, No. 4:10cv167, 2013 WL 2446527 (E.D. Va.

June 5, 2013), a detinue action involving a stolen Tiffany presentation sword to which both parties have cited

in their papers. In that case, Brown University brought an action against Tharpe seeking to recover the

sword, id. at *1, which had gone missing from Brown’s collection sometime between 1975 and 1977, a fact

that was documented in a memo to the Provost but, unlike the instant case, had not been reported to the

police or the insurance company out of concern for the institution’s reputation, id. at *7. The sword

reappeared thirty years later when Tharpe purchased it in good faith from a collector. Id. Despite evidentiary

shortcomings not present here, the court found in favor of Brown on the basis of a typewritten card

identifying the sword as part of Brown’s holdings and the testimony of an employee who had observed the

sword in Brown’s collection, both of which established prior possession. Id. at *6. The court then inferred that

the sword had been stolen based on evidence that its display case remained in the same place after its

disappearance and that several other items in the vicinity were also missing, even though Brown had a

policy prohibiting removal for any purpose other than repair and restoration. To the extent Tharpe is

instructive at all, it merely bolsters BMA’s position that the evidence before the Court is more than adequate

to make out a detinue claim.

The interesting ethical issue involves Fuqua trying to claim title – the court referred to her arguments as ridiculous

because the answer was so clear under UCC passage of title concepts.

4. Bailments

a. Sale by bailee/entrustee to bfp turns possession into title

E. Shipment contracts – the shipping terms (See Figure 23-1 in text)

1. FOB (Free on Board) place of shipment – seller must get the goods to a carrier for shipment, e.g., “FOB

2. FOB place of destination – seller must get the goods to the buyer, e.g., “FOB New York” means that the

a. Seller cannot hand over obligation to carrier

3. FAS – Free Along Side, FOB for boat transportation

4. CF

a. Cost and freight

5. CIF

a. Cost, insurance and freight

6. COD

a. Cash on delivery

F. Shipping contracts and passage of title (See Figure 23-2 in text)

1. FOB place of shipment – title passes when the seller delivers the goods to the carrier

IV. Determining Rights: Who Has the Risk of Loss When Goods Are Destroyed or Lost?

A. Nonshipment contracts (See Figure 23-3 in text)

1. In the absence of an agreement, there is no delivery requirement under Article 2

DISCUSSION POINTS: E-Commerce & Cyberlaw

Supply Chain and Risk Management

Discuss how shipping is less risky because of the availability of tracking; direct orders; automatic shipment.

B. Shipment contracts

1. FOB place of shipment – risk of loss passes to buyer when the seller gets goods to the carrier

CASE BRIEF: Total Quality Logistics, LLC v. Frye Trucking, LLC

997 F. Supp. 2d 384 (E.D.N.C. 2014)

FACTS: Total Quality Logistics, LLC (plaintiff/TQL) hired Frye Trucking, LLC (defendant/Frye) to transport

fruit to TQL’s customer’s facility in Georgia. Frye’s driver picked up the fruit in New Jersey and

Pennsylvania and transported the fruit to Georgia over a period of three days. The driver received

bills of lading for the fruit when he picked them up and, after delivery, he received the three bills of

lading after they were stamped as approved by the customer. Each bill of lading has a stamp and

notation from the customer that shows all cases were received, no cases were damaged, no cases

were rejected, and lists the pulp temperature of the fruit upon arrival. After the driver had left the

customer’s premises, the customer noticed that the fruit was not in good condition and requested

an inspection by the USDA. The USDA prepared three reports on March 2, 2012, the delivery date,

which stated that the fruit was spoiled and evidenced decay and other issues. TQL then

unsuccessfully tried to salvage the shipment of fruit, but it was determined that the fruit was in too

poor of a condition to salvage. TQL filed a claim with Frye on March 13, 2012. Frye’s insurance

company denied an insurance claim filed for the lost fruit product because it believed that the fruit

was delivered to Frye in damaged condition. TQL filed suit and both parties moved for summary

judgment.

ISSUE: Who is liable for the non-salvageable fruit?

REASONING: The records showed that the temp was too high during transit with the result being that the fruit was

damaged in transit. The buyer need not pay and the seller would be able to recover from the

carrier’s insurer because the carrier was negligent in shipping with the high temps.

Even though the documents were signed and no damage was noted, the thorough inspection had

not been done and once that was done, there was evidence of damage and the shipping records

revealed that the temperature was not where it needed to be to preserve the fruit.

The plaintiff was awarded $11,925.00 plus prejudgment interest and the costs of this action against

defendant Frye Trucking.

C. Effect of damage or destruction

1. Damage to identified goods before risk of loss passes

a. Partial or complete loss

2. Damage to identified goods after risk of loss passes

CASE BRIEF: King Jewelry, Inc. v. Federal Express Corporation

166 F.Supp.2d 1280 (C.D. Cal. 2001)

FACTS: Yehouda Hanasab, president and sole shareholder of King Jewelry, Inc., bought a pair of marble

and brass statues with candelabra from Elegant Reflections, a purveyor of jewelry and object d’art

located in Florida, for $37,500.00. Elegant Reflections was to ship the goods to King under FOB

place of shipment terms. Elegant Reflections hired Raymond Reppert, a “professional packager

and crater” with 12 years experience, to package, crate and ship the statues and candelabra to

King. Reppert packaged and crated the statues with directional markings and signs stating

“Fragile-Handle with Care.”

Reppert paid FedEx $684.50 (transportation charge in the amount of $485.04, declared value

charge in the amount of $185.00, and fuel surcharge in the amount of $14.55) to ship the

candelabras. However, both candelabra were broken in transit, something King discovered when

they arrived in King’s California offices. FedEx’s airbill limits damages to $500. King sought

recovery from Elegant and/or FedEx and Reppert.

ISSUES: On a FOB place of shipment contract, what happens when the goods are damaged? Can the

shipper limit its payment for goods damaged during transit?

HOLDING AND

REASONING: The standard airbill holding FedEx harmless for any damage to artwork were sufficiently plain and

conspicuous to give reasonable notice of their meaning and, thus, effectively limited carrier’s

liability for damage to sculptures; conspicuous notice limiting coverage for artwork appeared on

DISCUSSION POINTS: Have the students discuss what happens when good are damaged in a FOB place of

shipment contract using the King Jewelry, Inc. v. Federal Express Corporation case.

V. Determining Rights in Special Situations: What Special Situations Exist and What are the Rights of the Parties?

A. Returnable goods transactions

Mention that a buyer’s creditors will be able to seize the goods if it is a sale or return; whereas, a seller’s

creditors will be able to seize the goods if it is a sale on approval and there has been no approval. Ask the

students how a seller can protect himself or herself from the buyer’s creditors seizing the goods in a sale or

B. Sale on approval

1. Risk and title pass with approval

2. What constitutes approval

a. Express words

C. Sale or return – title and risk with the buyer until return

D. Sale on consignment

E. Self-service stores

F. Auction sales

ANSWERS TO QUESTIONS AND CASE PROBLEMS

1. Title; risk of loss. If the seller is a nonmerchant, the risk of loss passes to the buyer on tender of delivery. Tender

of delivery requires that the seller “put and hold conforming goods at the buyers’ disposition….” At the time of

The UCC deviated significantly from the earlier common law discounting the role of title in determining risk of

loss. See UCC § 2-401. While many traditionalists bemoaned the loss, the realities of commerce affected the

Where a party has breached, UCC § 2-209 does not apply, its sibling § 2-210 applies instead. Under § 2-210,

2. Void; voidable title. Although the Mendenhalls might have been bona fide purchasers, Clark did not have

voidable title. He was a thief, and a thief can never pass good title to stolen property. Even in the case of

3. Sale on approval; sale or return. The court held that “pay on scan” meant that CVS would pay only if the cookies

sold. The arrangement was, therefore, a type of sale or return that meant that CVS could send the cookies back.

4. Risk of loss. The court held that delivery had not yet occurred because delivery included installment. Sunkissed

5. Rick of loss. Ownership of the wafers had passed from Omneon to PPI when the shipment left Omneon’s dock.

The direct shipment to City University does not interfere with the passage of risk of loss to the buyer, which was

6. Ability of vendor with voidable title to transfer valid title. While B had only a voidable title because of the fraud in

using a bad check, B had the power under the UCC to pass a good title to a good faith buyer for value. Such a

buyer may buy either directly from the holder of the voidable title or at an auction at which the holder of the

7. Distinction between sale on approval and sale or return. The transaction was a sale on approval. Because the

goods could be returned by the buyer, the transaction was either a sale on approval or a sale or return. Because

8. Passage of title. No. The mechanic may know the auto industry, but the auto mechanic is not a merchant for

9. Passage of title; theft. The pawnbroker passes only the title that he has. If there is a theft involved, title cannot

10. Risk of loss. In this case, risk of loss remains with the merchant seller until the buyer obtains the goods. Conway

11. Risk of loss. Future Tech, not Tae II Media, has title to the computer equipment in the containers. The goods in

question were sold on the terms F.O.B. Pusan, Korea and “net 90 days.” In other words, “delivery” to Future

Tech occurred not in Miami, but in Pusan, where title and the risk of loss passed to Future Tech. Thus, although

12. Passage of title. The risk of loss never passed to Bakker Brothers because Graff did not ship goods in

compliance with the terms of the contract. The seed did not meet the germination rate, and Bakker Brothers did

13. Effect of sale on title. The buyer had no title to the timber. A purchaser receives only the title that the seller had.

14. Transfer of risk loss in a shipment contract. The buyer will bear the loss. Because the contract required shipment

to the buyer, and no agreement was made as to who would bear the loss, the loss is the buyer’s when the goods

are delivered to the carrier. [Eberhard Manufacturing Co. v. Brown, 232 N.W. 2d 378 (Mich. App.)]

15. Passage of title. Develop a chart for when a seller’s creditors can repossess goods in transit to a buyer.

Buyer fails to provide assurance Buyer insolvent Buyer breach

Seller can decide not to ship Seller can decide not to ship Seller can decide not to ship

Seller can stop truckload,

Seller can stop any size shipment Seller can stop truckload,

LAWFLIX

RV (2006) (PG)

Robin Williams leases an RV and drives his family from California to Colorado. Along the way, the RV ends up

management system for classroom use.