Environmental Engineering Chapter 13 Retailer See How Many Television Sets Retailer

16 Unit 2 Contracts and the UCC

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?

Question: If a defendant has breached the implied warranty of merchantability does it mean the

defendant has also been negligent?

Answer: No. As text states on p. 479, there are three theories on which plaintiffs bring claims 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?

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

Question: How will a jury decide what a reasonable consumer would expect to encounter in food?

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.

Secured Transactions

Secured transactions are essential to modern commerce but create pitfalls for the unknowing. A person or

company doing business in ignorance of Article 9 risks losing goods and money.

Article 9: Terms and Scope

Article 9 of the Uniform Commercial Code (UCC) governs secured transactions in personal property.

Article 9 applies to any transaction intended to create a security interest in personal property or fixtures.

Chapter 13: The UCC: Sales and Secured Transactions 17

Article 9 Vocabulary

• Fixtures are goods that have become attached to real estate.

• Security interest means an interest in personal property or fixtures that secures the performance of

some obligation.

• Repossession occurs when the secured party takes back collateral because the debtor has defaulted.

Typically, the secured party will demand that the debtor deliver the collateral; if the debtor fails to do

so, the secured party may find the collateral and take it.

• Perfection is a series of steps the secured party must take to protect its rights in the collateral against

Attachment of a Security Interest

Attachment is a vital step in a secured transaction. This means that the secured party has taken all of the

following steps to create an enforceable security interest:

• The two parties made a security agreement, and either the debtor has authenticated a security

Additional Case: IN RE CFLC, Inc.11

Facts: Expeditors was a freight company that supervised importing and exporting for Everex Systems,

Inc. Expeditors negotiated rates and services for its client, and frequently had possession of Everex’s

goods. During a 17-month period, Expeditors sent over 300 invoices to Everex. Each invoice stated that

11 209 B.R. 508, 1997 Bankr. LEXIS 821 United States Bankruptcy Appellate Panel of the Ninth Circuit, 1997

18 Unit 2 Contracts and the UCC

Issue: Did Expeditors have a security interest in Everex’s goods?

Holding: Judgment for Everex affirmed. Under the common law, silence in the face of an offer is not an

acceptance, unless there is a relationship between the parties or a previous course of dealing pursuant to

which silence would be understood as acceptance. Everex never agreed to the security interest terms.

Repetitive sending of forms that the recipient never acknowledges does not create course of dealing.

Question: What is Expeditors argument that it did have a security interest in the goods?

Answer:

• Expeditors sent the same invoice over 300 times, and each one stated that the customer had to

Question: The court was unpersuaded by Expeditors’ arguments because of one basic issue. What?

Answer: A security interest is created by agreement of the parties. A creditor has no right to impose

Preventive Law Question: Expeditors thought–or dreamed–that it had a security interest, but the

invoices failed to achieve that goal, and the company never obtained its money. How should

Expeditors have protected itself?

Answer: Expeditors essentially tried to slip one by Everex, trying to use the invoice to create a

Perfection

There are several kinds of perfection:

• Perfection by filing

• Perfection by possession

• Perfection of consumer goods

• Perfection of movable collateral and fixtures

In some cases, the secured party will have a choice of which method to use; in other cases, only one

method works.

Chapter 13: The UCC: Sales and Secured Transactions 19

Contents of the Financing Statement

A financing statement is sufficient if it provides the name of the debtor, the name of the secured party,

and an indication of the collateral.

Case: Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc.12

Facts: Corona Fruits & Veggies (Corona) leased farmland to a strawberry farmer named Armando

Munoz Juarez. He signed the lease “Armando Munoz.” Corona advanced him money for payroll and

farm production expenses. Corona filed a financing statement, claiming a security interest in the

strawberry crop, and listed the debtor’s name as “Armando Munoz.” Six months later, Armando Munoz

Juarez contracted with Frozsun Foods, Inc. to sell processed strawberries. Frozsun advanced the farmer

money, and filed a financing statement listing the debtor’s name as “Armando Juarez.”

The next year, the farmer owed Corona $230,000 and Frozsun $19,600. When the farmer was unable

to make payments on Corona’s loan, the company repossessed the farmland and harvested the strawberry

crop. Both Corona and Frozsun claimed the proceeds of the crop. The trial court awarded the money to

Frozsun, finding that Corona had filed its financing statement under the wrong last name, and therefore

had failed to perfect its security interest in the crop. Corona appealed.

Issue: Did Corona correctly file its financing statement?

Holding: No, judgment for Frozsun Foods is affirmed. When a creditor files a UCC-1 financing

statement, the debtor’s true last name is critical because the financing statements are indexed

alphabetically by last name. A subsequent creditor who loans money to a debtor with the same last name

is put on notice that its lien is secondary.

According to the court, there was substantial evidence that the farmer’s true last name was “Juarez”,

Corona knew the farmer’s legal name was “Armando Juarez” or “Armando Munoz Juarez” and could

have protected itself by using both names on their financing statements.

Question: If Corona knew Armando Munoz Juarez’ last name was Juarez, why didn’t they use that

in their UCC-1 filing?

12 143 Cal. App. 4th 319. 48 Cal. Rptr. 3d 868, California Court of Appeals, 2006.

20 Unit 2 Contracts and the UCC

Additional Case: IN RE Thriftway Auto Supply, Inc.13

Facts: Star Automotive was a wholesaler of automotive parts. Thriftway Auto Supply was an auto parts

store that did business under the name Thriftway Auto Stores. Star sold auto parts, on credit, to Thriftway

and took a security interest in all of Thriftway’s inventory, accounts, furniture, and equipment. Star filed

a financing statement with the Oklahoma County Clerk, identifying the debtor as Thriftway Auto Stores.

Issue: Was Star’s filing adequate?

Holding: Judgment for Star affirmed. Excerpts from the court’s opinion:

[Former §9-402, revised §9-506 states that a] financing statement substantially complying with the

requirements of this section is effective even though it contains minor errors which are not seriously

misleading. The issue before us is whether Star’s identification of the debtor in its financing statement as

“Thriftway Auto Stores,” when the debtor’s legal corporate name is “Thriftway Auto Supply, Inc.,” is a

minor error that is not seriously misleading.

The Oklahoma courts have established that the purpose of the filing system is to provide notice to

creditors that a security interest exists in the debtor’s property. A financing statement must contain

sufficient information necessary to put any searcher on inquiry. Tied into that inquiry is a determination

of whether the prior security interest would have been discovered by a reasonably prudent subsequent

creditor.

We hold that Star’s identification of the debtor in its financing statement as “Thriftway Auto

Stores,” as opposed to “Thriftway Auto Supply, Inc.,” is a minor error that is not seriously misleading.

Our holding is based on the substantial similarity of the debtor’s legal name and the variation used by

Star. We do not presume to give any opinion as to whether any variation of the debtor’s legal name that is

any less similar than that used by Star would be a minor error and not seriously misleading.

Part and parcel of the determination of whether an error is minor and not seriously misleading is

that a subsequent creditor to whom the filing system is designed to give notice must be a reasonably

prudent creditor. We agree with the finding by both the district and bankruptcy courts that the bank did

not act as a reasonably prudent creditor in conducting such a narrow and limited search.

In this particular case, the name used by Star was substantially similar to the debtor’s true legal name in

that it contained the two most unique and descriptive words in the debtor’s true legal name, “Thriftway”

and “Auto.” A reasonably prudent creditor conducting a reasonably diligent search would have

formulated a search aimed at revealing filings under substantially similar names.

Article 9 – 2010 Amendments. In 2010, the authors of the UCC – The National Conference of

Commissioners on Uniform State Laws – created a set of Amendments to Article 9. At the time of this

13 1994 U.S.App. LEXIS 31831, 25 UCC Rep.Serv.2d 982 Court of Appeals for the Tenth Circuit, 1994

Chapter 13: The UCC: Sales and Secured Transactions 21

Perfection of Consumer Goods

The UCC gives special treatment to security interests in most consumer goods.

Protection of Buyers

Buyers in Ordinary Course of Business

You Be The Judge: Conseco Finance Servicing Corp. v Lee14

Facts: Lila Williams purchased a new Roadtrek 200 motor home from New World R.V. Inc. She paid

about $14,000 down and financed $63,000, giving a security interest to New World. The RV company

You Be the Judge: Were the Lees BIOCs?

Holding: Judgment for Conseco. The court devoted only a few sentences to this issue. Section 9-320

enables a BIOC to take free and clear of a security interest created by the seller. Unfortunately, Lila

Williams, not the seller, created this security interest. Section 9-320 does not help the Lees, and

Conseco’s security interest is valid and enforceable.]

Question: The Lees’ argument is far more persuasive. Common sense tells me they should win and

I thought the UCC tried to create reasonable, sensible results. Why Conseco win?

law—U CC §9-320—is squarely behind Conseco in this case?

Question: What does §9-320 provide?

Answer: A buyer in ordinary course of business takes the goods free of a security interest created by

Question: Did New World still hold Williams’ debt when the Lees purchased the RV?

Answer: No. New World assigned the security interest to Conseco.

Question: What does that mean?

Answer: Typically, it means that Conseco purchased Williams’ loan from New World at a discount

Question: So although New World was an original party to Williams’ security interest, §9-320 does

not apply because New World did not create the interest.

Question: Does that leave the Lees without any legal remedy?

14 2004 WL 1243417 Court of Appeals of Texas, 2004

22 Unit 2 Contracts and the UCC

Buyers of Chattel Paper, Instruments, and Documents

Tele-Maker Hypothetical Case — The text offers a hypothetical case concerning Tele-Maker, which

sells 500 televisions to Retailer, keeping a security interest in the sets and proceeds. Customers sign

chattel paper when they purchase on credit. The chattel paper is proceeds, so Tele-Maker’s security

interest extends to the paper. Retailer sells the chattel paper to Financer. Retailer then defaults on its

obligation to Tele-Maker.

Tele-Maker cannot repossess the televisions, because each customer was a BIOC. Tele-Maker is also

barred from seizing the chattel paper, because the buyer of chattel paper (Financer) takes it free of a

perfected security interest.

Question: What could Tele-Maker have done to prevent this disaster?

Answer: Take possession! The surest way to perfect a security interest in something as easily

Priorities among Creditors

Priority involving a PMSI

Question: First, some basics about priorities among creditors. On January 5, Andrew took a security

interest in Danielle’s entire inventory but did not perfect. On February 5, Peggy took a security

interest in the same inventory and perfected the same day. On March 5, Danielle defaults on all

obligations. Whose claim to the inventory has priority?

Question: Between two perfected security interests, which has priority?

Question: Article 9 creates an exception for PMSIs. What is that exception?

Comment: Why does Article 9 permit a PMSI holder to take priority over the holder of an

earlier-perfected security interest? Part of the reason is historical: under pre-Code law, many states

granted special priority to PMSI holders. The other reason is that this exception, while giving additional

rights to certain creditors (holders of PMSIs), actually benefits the debtor. This rule enables a debtor,

who already owes money to one creditor, to obtain additional merchandise from other creditors, perhaps

boosting business.

Suppose a retailer borrows money from a bank for use in remodeling its store. The bank takes a

Question: What are the requirements for a PMSI to take priority over an earlier-perfected interest?

Chapter 13: The UCC: Sales and Secured Transactions 23

Inventory: A PMSI in inventory takes priority over a conflicting perfected security interest if it meets

two conditions:

• Before filing its PMSI, the secured party must check for earlier security interests and notify

Additional Case: In ReRoser15

Facts: Robert Roser obtained a loan from Sovereign Bank which he promptly used to buy a car.

Nineteen days later, Sovereign filed a lien with the state of Colorado. The bank expected that, with a

perfected interest, it would have priority over everyone else. Unknown to Sovereign Bank, Roser had

declared bankruptcy only 12 days after he purchased the car. Later, the bankruptcy trustee argued that

he had priority over Sovereign because the bankruptcy filing happened before Sovereign perfected its

security interest. When the court found for the trustee, Sovereign Bank appealed.

Issue: Did Sovereign Bank, a PMSI holder, obtain priority over the bankruptcy trustee?

Excerpts from Judge Hartz’s Decision: The Bankruptcy Code gives the bankruptcy trustee the

The Bank presents a straightforward argument why its lien would have priority under

Colorado law over a lien of a judgment creditor who obtained judgment at the time Roser filed for

bankruptcy. Under the UCC:

If a person [1] files a financing statement [2] with respect to a purchase-money security

Default and Termination

Generally, a debtor defaults when he fails to make payments due or enters bankruptcy proceedings.

When the debtor defaults, the secured party may take possession of the collateral and may sell, lease or

otherwise dispose of the collateral in any commercially reasonable manner.

When a debtor does not default, but rather fully repays the debt, the secured party must complete a

termination statement, indicating it no longer claims a security interest in the collateral.

15 613 F.3d 1240; 2010 U.S. App. LEXIS 14817, United States Court of Appeals for the Tenth Circuit,2010

24 Unit 2 Contracts and the UCC

Ethics

If students were assigned the ethical question concerning foreclosing on the farmer, this is a good

opportunity to discuss it. This problem is a classic one from the annals of American farming (and

farming around the world). It arises every day, and not just in connection with farming. It is a common

dilemma for any lender: allow a non-performing (i.e. non-paying debtor) to hold and use loan collateral

in business to attempt to raise enough revenue to make loan payments, and perhaps lend additional

Multiple Choice Questions

1. Which one of the following transactions is not governed by Article 2 of the UCC?

(a) Purchasing an automobile for $35,000

(b) Leasing an automobile worth $35,000

(c) Purchasing a stereo worth $501

(d) Purchasing a stereo worth $499

2. Under the UCC Statute of Frauds, a contract must be signed by the ________________ to count as

being “in writing”. Also, the _____________ of the goods must be written.

(a) plaintiff; price

(b) plaintiff; quantity

(c) defendant; price

(d) defendant; quantity

3. Assume that a contract is modified. New consideration must be present for the modification to be

binding if the deal is governed by:

(a) The common law

(b) The UCC

(c) Both A and B

(d) Neither A nor B

Chapter 13: The UCC: Sales and Secured Transactions 25

4. CPA QUESTION Under the UCC Secured Transactions Article, which of the following actions will

best perfect a security interest in a negotiable instrument against any other party?

(a) Filing a security agreement

(b) Taking possession of the instrument

(c) Perfecting by attachment

(d) Obtaining a duly executed financing statement

5. CPA QUESTION Under the UCC Secured Transactions Article, perfection of a security interest by a

creditor provides added protection against other parties in the event the debtor does not pay its debts.

Which of the following parties is not affected by perfection of a security interest?

(a) Other prospective creditors of the debtor

(b) The trustee in a bankruptcy case

(c) A buyer in ordinary course of business

(d) A subsequent personal injury judgment creditor

6. When Michelle buys a laptop, she pays an extra fee so that the computer arrives at her door with the

latest version of Microsoft Word pre-installed. Under Article 9, the word processing program is

considered:

(a) “goods”

(b) “services”

(c) “software”

(d) none of the above

7. Alpha perfects its security interest by properly filing a financing statement on January 1, 2010. Alpha

files a continuation statement on September 1, 2014. It files another continuation statement on

September 1, 2018. When will Alpha’s financing statement expire?

(a) January 1, 2015

(b) September 1, 2019

(c) September 1, 2023

(d) Never

Essay Questions

1. Hasbro used to manufacture a toy called “Wonder World Aquarium.” The toy included a powder

that, when mixed with water, formed a gel that filled a plastic aquarium. Children could then place

plastic fish in the aquarium and create underwater scenes. Cloud Corporation supplied the powder to

Hasbro. The toy sold poorly, and Hasbro’s need for the powder diminished,

26 Unit 2 Contracts and the UCC

The two companies discussed changing the powder’s formula. Cloud believed the conversation

amounted to an indication that Hasbro would continue to buy powder, so it produced large quantities.

Although it did not receive an order from Hasbro, Cloud sent an order acknowledgement for 9.5

million packets to Hasbro. Hasbro made no objection to it.

Did the order acknowledgement create an enforceable agreement? What specific facts determine

your answer?

Answer: Because both Cloud and Hasbro are merchants, a confirmatory memo sent and not objected

2. Nina owns a used car lot. She signs and sends a fax to Seth, a used car wholesaler who has a huge lot

of cars in the same city. The fax says, “Confirming our agrmt—I pick any 15 cars fr yr lot—30%

below blue book.” Seth reads the fax, laughs, and throws it away. Two weeks later, Nina arrives and

demands to purchase 15 of Seth’s cars. Is he obligated to sell?

Answer: Probably. Under UCC §2-201(2), a signed memo between merchants that would be binding

3. Eugene Ables ran an excavation company. He borrowed $500,000 from the Highland Park State

Bank. Ables signed a note promising to repay the money and an agreement giving Highland a security

interest in all of his equipment, including after-acquired equipment. Several years later, Ables agreed

with Patricia Myers to purchase a Bantam Backhoe from her for $16,000, which he would repay at

the rate of $100 per month, while he used the machine. Ables later defaulted on his note to Highland,

and the bank attempted to take the backhoe. Myers and Ables contended that the bank had no right to

take the backhoe. Was the backhoe covered by Highland’s security interest? Did Ables have

sufficient rights in the backhoe for the bank’s security interest to attach?

Answer: Yes to both questions. The bank had a valid security interest in all of Able’s equipment,

4. The Copper King Inn, Inc. had money problems. It borrowed $62,500 from two of its officers,

Noonan and Patterson, but that did not suffice to keep the inn going. So Noonan, on behalf of Copper

King, arranged for the inn to borrow $100,000 from Northwest Capital, an investment company that

worked closely with Noonan in other ventures. Copper King signed an agreement giving Patterson,

Noonan, and Northwest a security interest in the inn’s furniture and equipment. But the financing

statement that the parties filed made no mention of Northwest. Copper King went bankrupt.

Northwest attempted to seize assets, but other creditors objected. Is Northwest entitled to Copper

King’s furniture and equipment?

Answer: No. Northwest’s name was omitted from the financing statement. Minor omissions are

Chapter 13: The UCC: Sales and Secured Transactions 27

5. The state of Kentucky filed a tax lien against Panbowl Energy, claiming unpaid taxes. Six months

later, Panbowl bought a powerful drill from Whayne Supply, making a down payment of $11,500 and

signing a security agreement for the remaining debt of $220,000. Whayne perfected the next day.

Panbowl defaulted. Whayne sold the drill for $58,000, leaving a deficiency of just over $100,000.

The state filed suit, seeking the $58,000 proceeds. The trial court gave summary judgment to the state

and Whayne appealed. Who gets the $58,000?

Answer: It went to Whayne’s world. Taking the money from the taxpayer’s creditor Whayne rather

Discussion Questions

Apply the following facts to the next two questions.

The publication of the original UCC in 1952 sparked an expansion of the statute of frauds in the

United States to cover sales of goods of $500 or more. At about the same time (in 1954), the British

Parliament repealed its longstanding statute of frauds as applied to sales of goods. Some have argued

that we should scrap UCC 2-201 on the grounds that it encourages misdealing as much as it prevents

fraud. Consider the following two hypotheticals:

(In the U.S.) Johnny is looking at a used Chevy Tahoe. He knows that the $7000 price is a good one,

but he wants to go online and see if he can find an even better deal. In the twenty minutes he has

been with the car’s current owner, the owner has received three phone calls about the car. Johnny

wants to make sure that no one else buys the car while he is thinking the deal over, so he makes a

verbal agreement to buy the car and shakes the seller’s hand. He knows that, because of the statute of

frauds, and the fact that that nothing is in writing, he does not yet have any enforceable obligation to

buy the car.

(In the U.K.) Nigel sells used Peugeots in Liverpool. When he senses interest from customers, he

aggressively badgers them until they verbally commit to buy. If the customers later get cold feet and

try to back out of the deal, he holds them to the verbal contracts. Because there is no longer a UCC-

style statute of frauds in Britain, the buyers are stuck.

1. Rate the degree to which you believe Johnny and Nigel acted wrongfully. Did one behave more

wrongfully than the other? If so, which one, and why?

2. Do you think that the UCC statute of frauds as it currently exists is more likely to prevent fraud, or is

28 Unit 2 Contracts and the UCC

it more likely to encourage misunderstandings and deception? Why?

Overall, is it sensible to require that purchases of big-ticket items be in writing before they are final?

3. ETHICS The Dannemans bought a Kodak copier worth over $40,000. Kodak arranged financing by

GECC and assigned its rights to that company. Although the Dannemans thought they had purchased

the copier on credit, the papers described the deal as a lease. The Dannemans had constant problems

with the machine and stopped making payments. GECC repossessed the machine and, without

notifying the Dannemans, sold it back to Kodak for $12,500, leaving a deficiency of $39,927. GECC

sued the Dannemans for that amount. The Dannemans argued that the deal was not a lease but a sale

on credit. Why does it matter whether the parties had a sale or a lease? Is GECC entitled to its

money? Finally, comment on the ethics. Why did the Dannemans not understand the papers they had

signed? Who is responsible for that? Are you satisfied with the ethical conduct of the Dannemans?

Kodak? GECC?

Answer: If the transaction is actually a sale with a security interest, Article 9 governs–and that is

4. After reading this chapter, will your behavior as a consumer change? Are there any types of

transactions that you might be more inclined to avoid? After reading this chapter, will your future

behavior as a businessperson change? What specific steps will you be most careful to take to protect

your interests?

5. A perfected security interest is far from perfect. We examined several exceptions to normal

perfection rules involving BIOCs, consumer goods, and so on. Are the exceptions reasonable?

Should the UCC change to give the holder of a perfected interest absolute rights against absolutely

everyone else?

Bonus Exam Strategy:

Question: Dana Owens hired Jeff Smith to decorate her apartment. Jeff Smith’s business is furniture

Chapter 13: The UCC: Sales and Secured Transactions 29

Strategy: There is a lot going on in the question. First, identify an agreement: Dana hired Jeff and

the two exchanged e-mails about the details. Jeff provided his services, which is consideration. So

far so good. Is this a contract for the sale of goods (the chair) or services (the decorating)? If the

predominant purpose of the contract is the sale of goods, then the UCC applies. If the predominant

purpose is the services, common law applies. Under common law, any written agreement needs to be

explicit, containing all of the essential terms and conditions of the agreement.

Result: Using the predominant purpose test, the agreement between Dana and Jeff is for services,