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Business Law Chapter 21 Homework Red Elvis Was Malmberg’s Possession Would Hold

Page Count
9 pages
Word Count
4905 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
Chapter 21
Title, Risk, and Insurable Interest
INTRODUCTION
Before the Uniform Commercial Code (UCC), title was a central concept in sales law. The party who had title
bore the risk of a loss of goods (and could thus buy insurance against it). It was often difficult to determine when title
passed from seller to buyer, however, and thus which party had title at the time of a loss. The UCC divorced the
question of title from the question of the rights and obligations of buyers, sellers, and others (subsequent purchasers,
creditors). Title remains relevant under the UCC in some situations, and the UCC has rules for locating title.
In most situations, however, the UCC replaces the concept of title with other concepts: identification, risk of
loss, and insurable interest. Generally, the UCC attempts to place a loss on a party who breaches a contract, the
party who has physical control of the goods, or the party who is most likely to have thought of obtaining insurance. Of
course, the rules do not apply if a different party caused the loss or if the parties allocated the risk in their contract.
The last point is important: parties can agree on who will bear the risk of loss.
CHAPTER OUTLINE
I. Identification
Before an interest in goods can pass from seller to buyer, the goods must exist, and they must be identified to
the contract [UCC 2105(2)]. For passage of title, goods must be identified in a way that will distinguish them
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from all similar goods. Identification gives a buyer the right to obtain insurance on goods and the right to
recover from third parties who damage goods. Sometimes, identification allows the buyer to take goods from
the seller.
A. EXISTING GOODS
If a sale involves specific goods already in existence, identification occurs when the contract is made.
B. FUTURE GOODS
If a sale involves unborn animals to be born within twelve months, identification occurs when the animals
are conceived. If a sale involves crops to be harvested within twelve months, identification occurs when
the crops are planted or begin to grow. Identification of other future goods occurs when they are
shipped, marked, or otherwise designated as the contract goods.
ENHANCING YOUR LECTURE
  CONTRACTS WITH FAIR TRADE PRICING
CAN PROMOTE ENVIRONMENTAL SUSTAINABILITY
 
Most sales contracts have price terms that are mutually agreed to by the buyer and seller. But sales
contracts can do more than that. Thanks to the Fair Trade movement, they can also benefit poor farmers in
developing nations and can promote environmentally sustainable farming practices.
THE FAIR TRADE MOVEMENT
The Fair Trade movement originated during the 1980s. Today, the Fair Trade Labelling Organizations
International determines minimum “fair prices that ensure that small producers can earn a living wage.” It
urges importers to pay these fair prices for the products they obtain.
Under the Fair Trade system, low-income farmers and artisans in developing countries form alliances with
importers and marketers in western Europe and North America. Participants must agree to certain basic
principles:
Producers must receive a stable minimum price for their products.
Producers will not use forced or child labor.
Production methods will be environmentally friendly.
When these standards are met, international certification bodies allow the products to carry a Fair Trade
logo, such as the well-known label borne by some coffee imported into the United States. Retailers are free to
charge any price they wish, but because they necessarily pay more for Fair Trade products, they pass on the
higher costs to their customers:
THE FAIR TRADE SUSTAINABILITY ALLIANCE
The Fair Trade Sustainability Alliance (FairTSA), a nonprofit organization that promotes socially
responsible development in emerging countries, has taken the fair trade concept to another level. FairTSA
attempts to ensure that the community development associated with its work is accountable and sustainable.
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 3
In addition to promoting sustainable development, FairTSA monitors suppliers and certifies those that practice
ethical and accountable supply chain management.
FairTSA will certify a producer of any type of agricultural products. To win certification, a producer must
accept professional standards and be open for audits and inspections:
CRITICAL THINKING
Why might marketing managers of large retail companies, particularly grocery chains, want to
purchase Fair Trade products? Increasingly, the buying public in the US and in Europe is willing to pay
slightly higher prices for fair trade certified coffee, cocoa, chocolate, tea, herbs, fresh fruit, sugar, rice, and
vanilla. Often, showing socially aware customers that a retail outlet is concerned about helping poor people in
other countries and encouraging sustainable growing practices will lead to higher sales?
C. GOODS THAT ARE PART OF A LARGER MASS
Problems may occur when goods exist in a larger mass, in which case identification can often be made
only by separating the goods from the mass. If owners hold fungible goods in common, title and risk can
pass without separation [UCC 2105(4)].
CASE SYNOPSIS
Case 21.1: BMW Group, LLC v. Castle Oil Corp.
BMW Group, LLC ordered No. 4 fuel oil from Castle Oil Corp. BMW paid the retail price for No. 4 fuel oil,
but Castle’s delivered product did not conform to the orderit appeared to have been mixed with waste oil.
Meanwhile, Mid Island L.P. and Carnegie Park Associates, L.P. ordered No. 4 and No. 6 fuel oil from Hess
Corp. but also received a blend containing waste oil. BMW and the other buyers filed a suit in a New York
state court against Castle and Hess, alleging that the defendants had delivered goods of lesser value that did
not meet the standards governing the parties’ contracts. The court dismissed the complaint on the ground that
the plaintiffs did not allege an injury caused by the use of the blended oil. The plaintiffs appealed.
A state intermediate appellate court reversed the lower court’s dismissal of the plaintiffs’ complaint. “If the
goods that are delivered do not conform to the goods contemplated by the sale contract, the purchaser has a
cause of action under the Uniform Commercial Code.” The appellate court concluded that in their complaint
“plaintiffs successfully alleged that the delivered goods were nonconforming.”
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Notes and Questions
State and federal law allows and encourages the use of certain forms of used oil for fuel in high-
temperature industrial settings and other situations. Should the court in the BMW case have
considered these policies in its opinion? No, the court in the BMW case did not need to take into account
in its opinion state and federal law or policy that allows or encourages the use of certain forms of used oil for
fuel in high-temperature industrial settings and other circumstances.
The issue at center of the case at bar was whether the plaintiffs successfully alleged that the goods the
defendants delivered under their contracts were nonconforming, resulting in a cognizable injury. The plaintiffs
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complained that the defendants delivered goods of lesser value that did not meet the governing standards
and charged breach of warranty and breach of contract. The court dismissed this complaint on the ground
that it did not allege any injury.
An appellate court reversed the dismissal, concluding that the plaintiffs’ complaint “successfully alleged
that the delivered goods were nonconforming. * * * If the goods that are delivered do not conform to the
goods contemplated by the sale contract, the purchaser has a cause of action under the Uniform Commercial
Code.” The goods ordered were specific grades of heating oil. According to the plaintiffs, the defendants
The defendants did not inform the plaintiffs that the delivered oil was a blend. How does this
affect the ethics of the defendants’ conduct in this case? In certain circumstances, the blending of fuel
oils for the purposes of heating systems is not illegal, and may in fact be encouraged by state or federal
policy. But in other situationssuch as those presented by the plaintiffs in the BMW caseadulterating pure
II. When Title Passes
If the parties do not expressly agree to when and under what conditions title passes, it passes at the time and
place at which the seller delivers the goods [UCC 2401(2)], according to the delivery terms.
A. SHIPMENT AND DESTINATION CONTRACTS
Under a shipment contract, title passes at the time and place of shipment. Under a destination contract,
title passes when goods are tendered at the destination.
B. DELIVERY WITHOUT MOVEMENT OF THE GOODS
1. When a Title Document Is Required
2. When a Title Document Is Not Required
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 5
C. SALES OR LEASES BY NONOWNERS
1. Void Title
If a seller or lessor is a thief, his or her title is void, the buyer or lessee acquires no title, and the
owner can reclaim the goods.
2. Voidable Title
If a seller or lessor obtained goods by fraud; with a check that is later dishonored; on credit, when
the seller or lessor was insolvent; or from a minor, the seller or lessor has voidable title.
a. Good Faith Purchasers
A seller with voidable title can transfer good title to a good faith purchaser for valueand the
b. Voidable Title and Leases
A seller with voidable title can transfer good title to a good faith lessee for value. The owner
3. The Entrustment Rule
Entrusting goods to a merchant who deals in goods of the kind gives the merchant power to
transfer all rights to a buyer or sublessee in the ordinary course of business [UCC 2403(2), 2A
305(2)].
CASE SYNOPSIS
Case 21.2: Lindholm v. Brant
In 1987, Kerstin Lindholm of Greenwich, Connecticut, bought a silkscreen by Andy Warhol titled Red Elvis
from Anders Malmberg, a Swedish art dealer, for $300,000. In 1998, Lindholm loaned Red Elvis to the
Guggenheim Museum in New York City for an exhibition to tour Europe. Peter Brant, one of the museum’s
trustees, believed that Lindholm was the owner. Stellan Holm, a Swedish art dealer, told him, however, that
Malmberg had bought it and would sell it for $2.9 million. Malmberg refused to provide a copy of an invoice
between Lindholm and himself on the ground that such documents normally and customarily are not
disclosed in art deals. A search of reliable databases and other sources revealed no problems with the title.
Malmberg “sold” the work to Brant in April 2000. Lindholm filed a suit in a Connecticut state court against
Brant, alleging conversion. The court issued a judgment in Brant’s favor. Lindholm appealed.
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Notes and Questions
If the arrangement between Lindholm and Malmberg had been a consignmentthat is, if Lindholm
had authorized Malmberg to sell Red Elvis rather than having authorized him only to arrange for its
loanhow would the legal relations among these parties have been different? The UCC views a
consignment as a sale or return subject to UCC 2326. In that circumstance, if the consignee (Malmberg)
sells the goods (Red Elvis), the consignee must pay the consignor (the ownerLindholm, here) for them.
ADDITIONAL CASES ADDRESSING THIS ISSUE
Passage of Title
Cases involving the passage of title in a sales contract include the following.
Usinor Industeel v. Leeco Steel Products, Inc., 209 F.Supp.2d 880 (N.D.Ill. 2002) (title passed to the
buyer at the time and place at which the seller physically delivered the goodssteel—despite the seller’s
reservation, in their contract, of a security interest in the goods).
Arcadia Financial, Ltd. v. Southwest-Tex Leasing Co., 78 S.W.3d 619 (Tex.App.Austin 2002) (title to
motor vehicles did not pass to the buyer on the physical delivery of the goods because the parties had agreed
that transfer of title was contingent on the seller’s receipt of payment).
III. Risk of Loss
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 7
By agreement, parties can generally control when risk of loss passes from seller to buyer.
A. DELIVERY WITH MOVEMENT OF THE GOODSCARRIER CASES
1. Shipment Contracts
Under a shipment contract, risk passes when goods are delivered to a carrier [UCC 2509(1)(a),
2A219(2)(a)]. Generally, all contracts are assumed to be shipment contracts if nothing to the
contrary is stated in the contract.
2. Destination Contracts
Under a destination contract, risk passes when goods are tendered to a buyer or lessee at the
specified destination [UCC 2509(1)(b), 2A219(2)(b)].
CASE SYNOPSIS
Case 21.3: Person v. Bowman
Tammy Herring and Stacy Bowman signed a document titled “Bill of Sale—Purchase Agreement” that
required Herring to pay $2,200 for a horse named Toby. Until the price was paid in full, the document required
Herring to board Toby at Bowman’s Summit Stables in Puyallup, Wisconsin. Bowman would provide Toby’s
registration papers to Herring only when she paid in full. Before the price was paid, Tammy’s minor daughter,
Alex, was driving a buggy drawn by Toby when the horse reared and threw its passenger Diana Person from
the buggy. To recover for her injuries, Person filed a suit in a Wisconsin state court against Bowman, claiming
that Bowman owned the horse. The court ruled that Herring owned the horse. Person appealed.
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Notes and Questions
What did the contract between Herring and the Bowmans require Herring to do? What is the
significance of these provisions? The contract required Herring to keep the horse at the Bowmansstable,
make timely payments, and not remove the horse without permission, and it gave the Bowmans the right to
terminate the contract if Herring defaulted on the payments.
These stipulations give the Bowmans recourse to recover the horse in the event of Herring’s default on
the payments. In other words, these provisions act as the seller's security interest, protecting the seller until it
no longer has a risk of loss. Although Herring would not own Toby free and clear until she made her final
payment, these provisions make it clear that Herring owned Toby. Thus, for purposes of the passage of risk,
Herring owned the horse.
On the issue of liability, in whose favor did the court rule? Why? On the issue of liability, the court
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 9
The contract required Herring to keep the horse at Bowman’s stable, make timely payments, and not
remove the horse without permission, and it gave Bowman the seller the right to terminate the contract if
Herring defaulted on the payments. These provisions gave the seller recourse to recover the horse should
there be a default, indicating that Herring would not own Toby free and clear or have the right to remove him
from the stable until she made her final payment. But for purposes of the passage of risk, Herring owned the
horse.
What theory of contract interpretation supported the court’s reasoning? The theory of contract
Risk of loss does not necessarily pass with title. If the parties to a contract do not specify when
the risk of loss passes, and the goods are to be delivered without their movement by the seller, when
does the risk pass? If the seller holds the goods and is a merchant, the risk of loss passes to the buyer
when the buyer takes physical possession of the goods. If the seller holds the goods and is not a merchant,
Which of these situations existed in this case? Arguably, Stacy Bowman was a merchant, and the
court ruled that Tammy Herring was a buyer (not a lessee). In that case, the risk of loss passed to Herring
when she took physical possession of Toby. If Bowman did not qualify as a merchant, then Herring took the
risk on Bowman’s tender of the horse.
B. DELIVERY WITHOUT MOVEMENT OF THE GOODS
1. Goods Held by the Seller
a. Merchants
If a seller is a merchant, risk passes only on a buyer’s taking possession of the goods. If a
b. Leases
The same rules apply to lessors (or suppliers under finance leases) and lessees [UCC 2A
219(c)].
2. Goods Held by a Bailee
a. Negotiability of Title Document
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A document of title can be negotiablein which case its recipient obtains it free of any claims
of the party that issued it. If the document is nonnegotiable, its recipient obtains only those
rights that its transferee had, subject to prior claims.
b. When Risk of Loss Passes
If a bailee holds goods for a seller and the goods are to be delivered without being moved, risk
passes when
The buyer receives a negotiable document of title for the goods.
The bailee acknowledges the buyer’s right to possess the goods.
The buyer receives a nonnegotiable document of title and has had a reasonable time to
present the document to the bailee and demand the goods [UCC 2509(2), 2503(4)(b)].
If a bailee holds goods for a lessor and the goods are to be delivered without being moved,
risk passes when the bailee acknowledges the lesse’s right to possess the goods [UCC 2A
219(2)(b)].
ADDITIONAL BACKGROUND
Delivery
When a seller, a buyer, and the goods that serve as the subject of their contract are located in the same
city, delivery does not present many problems. The buyer will pick up the goods, or the seller will deliver
them.
In many transactions, however, the seller, the buyer, and the goods are located in different cities.
Distance can complicate an otherwise simple transaction. The parties may agree in their contract as to which
party will make delivery arrangements and who will pay the costs. This can be stated in delivery terms in the
parties’ contract. If the parties do not expressly agree as to delivery obligations, the UCC will control. (Under
the UCC, usage of trade, course of dealing, or course of performance may be applicable. Otherwise, specific
UCC provisions concerning delivery will apply [UCC 2307, 2308, 2309, 2504].)
Most sellers are not in the delivery business. Generally, a seller uses independent, common carriers
(trucking companies, shipping companies, railroads, airlines) to deliver goods. When a carrier receives goods
from a seller, the carrier issues a bill of lading to the seller. On the bill, the seller is usually identified as the
shipper (or consignor) and the buyer is named as the consignee. A bill of lading serves as the seller’s receipt
and as the contract between the seller and the carrier for transportation of the goods.
There are two forms of bills of ladingnegotiable bills and nonnegotiable bills. Negotiable bills (or order
bills) are easily recognizable. On a negotiable bill, goods are consigned to the order of a party (usually the
buyer). Typically, a negotiable bill specifies that “[s]urrender of this original order bill of lading properly
indorsed is required prior to delivery of the property.” A negotiable bill is normally printed on yellow paper. If
CHAPTER 21: TITLE, RISK, AND INSURABLE INTEREST 11
Most deliveries are made under nonnegotiable bills of lading. A nonnegotiable bill (or straight bill) is also
easily recognizable. Normally, somewhere on the nonnegotiable bill is printed the words “straight bill of
lading.” On a nonnegotiable bill, goods are simply consigned to a party (rather than consigned to the order of
a party). A nonnegotiable bill is usually printed on white paper. If goods are delivered under a nonnegotiable
C. CONDITIONAL SALES
1. Sale on Approval
Under a sale on approval, until the buyer accepts, the seller retains title and risk of loss (from
2. Sale or Return
Under a sale or return, when the buyer receives possession of the goods, title and risk pass, and
they remain with the buyer until he or she returns the goods. If the buyer does not return the goods
within a specified time (because they are sold or lost), the sale is finalized.
ADDITIONAL BACKGROUND
Sale on Approval and Sale or Return Contract Forms
A sale on approval is not a sale until the buyer accepts (approves) the offer. A sale or return is a sale
that can be rescinded by the buyer without liability. The following are forms that a seller might use in one or
the other transaction.
SALE ON APPROVAL
Date:_______________
To:______________________
Buyer
_____________________
Address
To whom it may concern:
The seller acknowledges that the goods delivered as per the attached invoice or order no. ___ are sold on a sale on approval
basis. If the buyer is not satisfied with the goods after inspection, the buyer has the right to return the goods in merchantable condition at
the seller’s expense within ___ days of receipt for full credit (or full refund if prepaid). Goods not returned within that time will be deemed
accepted, with no further right to return. Until the goods are accepted, the seller retains title to the goods.
On acceptance, the balance of the purchase price is to be paid according to the terms specified on the attached invoice.
Thank you for your business. We hope the goods prove satisfactory and meet with your approval.

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