Commercial Law Flashcards

Question

Open Price Term (UCC Gap Fillers)

Answer 1

The parties **if they so intend** can conclude a contract for sale even though the price is not settled. In such a case the price is a **reasonable price at the time for delivery** if: * (a) **nothing is said** as to price; * (b) the price is **left to be agreed** by the parties and they **fail to agree**; or * (c) the price is to be fixed in terms of some **agreed market or other standard** as set or recorded by a **third person or agency** and it is not so set or recorded. A price to be fixed by the seller or by the buyer means a price for him to fix in **good faith**. When a price left to be fixed otherwise than by agreement of the parties **fails to be fixed** through fault of one party the other may at his option treat the contract as **cancelled** or **himself fix a reasonable price**. Where, however, the parties **intend not to be bound** unless the price be fixed or agreed and it is not fixed or agreed there is **no contract**.

Answer 2

“Good faith” means **honesty in fact** and the **observance of reasonable commercial standards**. The **subjective** part is “honesty in fact” and the **objective** part is “observance of reasonable commercial standards.” There are three scenarios under a good faith analysis: * (1) The party is a **non-merchant** → Subjective analysis only. * (2) The party is a **merchant** → Subjective and objective analysis. * (3) The party is a **merchant** and there is a **posted/market price** → Objective analysis only.

Answer 3

An agreement for sale which is **otherwise sufficiently definite** to be a contract is **not made invalid** by the fact that it leaves particulars of performance to be specified by one of the parties. Any such specification must be made in **good faith** and within limits set by **commercial reasonableness**.

Answer 4

**Identification** occurs when the buyer receives a **special property** and **insurable interest** in the goods. Identification occurs: * (a) At a time **explicitly agreed** to in the contract; * (b) If the goods **already exist** and are identified, then **when the contract is made**; * (c) If the goods are **future goods** (other than crops and unborn animals), then when goods are **shipped, marked, or designated** by the seller as goods to which contract refers; or * (d) If the goods are **future crops** or **unborn animals**, then when the crops are **planted** or **become growing crops** or when the **young are conceived**; or if for either crops to be harvested or unborn animals to be born within 12 months, then later of the next harvest season or when the crops become growing crops or when the young are conceived, whichever is longer. The product of a **lumbering**, **mining**, or **fishing** operation, though seasonal, is **not** within the concept of “growing.” Identification under a contract for all or part of the output of such an operation can be made **early in the operation**.

Answer 5

Undivided shares in an identified fungible bulk, such as grain in an elevator or oil in a storage tank, can be sold. The mere making of the contract with reference to an undivided share in an identified fungible bulk is enough to effect an identification if there is no explicit agreement otherwise. In other words, identification occurs at the time the contract is made.

Answer 6

If **no destination** is specified, risk passes once **delivered to carrier**. If **destination** is specified, risk passes once **tendered for delivery** at destination to buyer.

Answer 7

The basic idea is that risk passes once the **buyer has the right** to the goods. This is spelled out with some specificity: * (a) On buyer’s receipt of negotiable **document of title** * (b) On bailee’s **acknowledgement of buyer’s right** to goods * (c) On buyer’s receipt of a non-negotiable **document of title** or **other written direction** to deliver. A “**bailee**” means the person who by a warehouse receipt, bill of lading, or other document of title acknowledges **possession of goods** and **contracts to deliver them**.

Answer 8

If seller is a **merchant**, risk passes on **buyer’s receipt** of goods If seller is **not a merchant**, risk passes on **tender of delivery** to buyer.

Answer 9

**Delivery terms** are terms used in the contract that tell us about the price of goods and when the risk of loss shifts from the seller to the buyer. There are a number of delivery terms, but they all correspond to just two types of contracts: * **Shipment contract** → Risk shifts once to **carrier**. * **Destination contract** → Risk shifts once to **buyer**.

Answer 10

The “FOB” term is used when the price for the goods identified includes **delivery at the seller’s expense** only to a **specified point**. FOB always indicates a location. The risk of loss shifts at that location. * **FOB origin address** → This is a **shipment contract** because the risk of loss passes to buyer when goods are placed **in shipper’s hands**. * **FOB destination** → This is a **destination contract** because the risk of loss passes to buyer when **carrier tenders for delivery** to buyer.

Answer 11

**FAS** is used when the goods are to be delivered to a named port. The risk **shifts to buyer** once: * (1) the seller **properly delivers alongside the vessel** identified, * (2) the seller **gives the carrier a receipt for the goods**, and * (3) the seller **receives a bill of lading** from the carrier. The use of FAS can **create** either a **shipment** or **destination** contract: * (a) If the FAS vessel term names the **point of shipment**, a **shipment** contract is created. In that case, risk of loss and title pass when the goods are **tendered alongside the vessel** at the point of shipment. * (b) If the FAS term uses the **point of destination**, a destination contract is formed under which the risk of loss and title will pass **when the goods are delivered alongside the vessel** at the destination.

Answer 12

The term “**CIF**” means that the price includes in a **lump sum** the cost of the goods and the insurance and freight to the named destination. This creates a **shipment contract**. A CIF is a **shipment contract** with risk of loss passing to buyer upon **placing the goods in the hand of the carrier** and: * (1) seller obtains a **negotiable bill of lading** to the named destination; * (2) seller **loads the goods onto the carrier** and **obtains a receipt from carrier** showing freight has been paid for; * (3) seller obtains **policy** or **certificate of insurance**; * (4) seller **prepares an invoice of goods** and any other documents required for shipment; and * (5) seller **forwards and tenders with commercial promptness** all the documents in due form with endorsements necessary to perfect buyer’s rights. “**C&F**” (cost & freight) makes a **shipping contract**. A C&F contract is a shipment contract where risk of loss passes to buyer on shipment.

Answer 13

Unless otherwise agreed, a term for delivery of goods “**ex-ship**” (which means from the carrying vessel) is not restricted to a particular ship and requires delivery from a ship which has reached a place at the named port of destination where goods of the kind are usually discharged. Under such a term, unless otherwise agreed: * (a) the seller must **discharge all liens** arising out of the carriage and **furnish the buyer with a direction** which puts the carrier under a duty to deliver the goods; and * (b) the **risk of loss** does not pass to the buyer until the **goods leave the ship’s tackle** or are **otherwise properly unloaded**.

Answer 14

Under the warranty of title, there is a warranty by the **seller of goods** that: * (1) title is **good**; * (2) the transfer of title is **rightful**; * (3) the goods are **free of a security interest**; and * (4) the goods are **free of any other encumbrance** of which the **buyer** at time of contracting **has no knowledge**. A purchaser cannot gain more title from the seller than the seller had. **Note**: there is no element relating to the **seller’s subjective belief** about title, so the seller cannot argue that they thought they had good title.

Answer 15

Yes and no. It is an implied warranty in that it is **read into every contract** and you have to use **very specific language to disclaim** it. But it won’t be called an “implied” warranty in Article 2. That term only applies to the **warranties of quality** (merchantability and fitness).

Answer 16

A warranty of title will be excluded or modified only by * (a) **specific language** or * (b) by **circumstances which give the buyer reason to know** that the person selling **does not claim title** in himself or that he is purporting to sell only such right or title as he or a third person may have.

Answer 17

“Entrusting” includes **any delivery** and **any acquiescence** in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor’s disposition of the goods have been such as to be larcenous under the criminal law. The basic idea is that I entrust you with my goods if I deliver them to you or acquiesce to you retaining possession.

Answer 18

If B is a merchant of those kinds of goods then B can transfer title to a **buyer in the ordinary course** of business. The basic idea is that we want to protect people who buy, in the ordinary course, out of inventory.

Answer 19

A buyer in the ordinary course of business is a **person** who **buys goods** in **good faith** **without knowledge** that the sale violates the rights of **another person** in the goods, in the **ordinary course** from a person in business of **selling goods of that kind**, but not from a pawnbroker. * The “**ordinary course**” includes the customary practices of the seller’s kind of business or the seller’s own customary practices. A BIOC may buy for **cash**, by exchange of property (**barter**), or on **credit**. A person cannot be a BIOC unless they have **possession** or the **right to possession** against the **seller**.

Answer 20

A **merchant buyer** has a **heightened duty of inquiry** when a **reasonable merchant** would have **doubts or questions** about the **seller’s authority** to sell. This is to be assessed using all of the facts and circumstances surrounding the sale.

Answer 21

There are three ways a seller can make an **express warranty**: * (a) The seller can make an **affirmation of fact or a promise** to buyer relating to the goods. * (b) The seller can provide the buyer with a **description of the goods**. * (c) The seller can show the buyer a **sample or model**. The seller’s outward manifestations must become **part of the basis for the bargain**. Proof of the **buyer’s reliance** is not necessary to prove the existence of an express warranty. **Specific intention** by the seller to make a warranty is not necessary.

Answer 22

No. It is not necessary to the creation of an **express warranty** that the seller use formal words such as “**warrant**” or “**guarantee**” or that the seller have a specific intention to make a warranty, but an affirmation **merely of the value of the goods** or a statement purporting to be merely the **seller’s opinion** or commendation of the goods does **not** create a warranty.

Answer 23

Yes. The precise time when words of description or affirmation are made or samples are shown is **not material**. The sole question is whether the language or samples or models are **fairly to be regarded as part of the contract**. If language is used after the closing of the deal (as when the buyer when taking delivery asks and receives an additional assurance), the warranty becomes a **modification**, and need **not be supported by consideration** if it is otherwise **reasonable and in order**.

Answer 24

A warranty that the **goods shall be merchantable** is **implied** in a contract for their sale if the **seller is a merchant** with respect to **goods of that kind**. The serving for value of **food or drink** to be consumed either on the premises or elsewhere is a **sale**. Goods to be **merchantable** must be at least such as: * (1) **pass without objection** in the trade under the contract description; * (2) in the case of **fungible goods**, are of **fair average quality** within the description; * (3) are **fit for the ordinary purposes** for which such goods are used; * (4) **run**, within the variations permitted by the agreement, of **even kind, quality and quantity** within each unit and among all units involved; * (5) are **adequately contained, packaged, and labeled** as the agreement may require; and * (6) **conform to the promises or affirmations of fact** made on the container or label if any.

Answer 25

“**Fungible goods**” means: * (a) goods of which **any unit**, by nature or usage of trade, is the **equivalent of any other like unit**; or * (b) goods that **by agreement** are **treated as equivalent**.

Answer 26

The **implied warranty of merchantability** with regard to **food** is not violated if the food contains a **natural substance** which a **reasonable person** would anticipate could be in the food. Under the **reasonable expectations** test, the preferred test, the issue is whether **the consumer reasonably should have expected** to find the injury-causing substance in the food.

Answer 27

Where the **seller** at the **time of contracting** has **reason to know** any **particular purpose** for which the **goods are required** and that the **buyer is relying** on the seller’s skill to select or furnish suitable goods, there is an **implied warranty** that the goods shall be **fit for such purpose**.

Answer 28

Not for the **warranty of merchantability**. A specific designation of goods by the buyer does not exclude the seller’s obligation that they be **fit for the general purposes** appropriate to such goods. However, a buyer’s insistence on a particular brand of good will not create a **warranty of fitness for a particular purpose** because he is **not relying on the seller’s skill and judgement**.

Answer 29

If **words or conduct** seem to **limit or negate** an express warranty, then those words/conduct must be **construed**, wherever reasonable, **as consistent** with the words/conduct creating the warranty. If this is **not possible**, then **to the extent** such construction is unreasonable, the **limitation or negation is inoperative**.

Answer 30

(1) The language **must mention** “**merchantability**” and (2) **If in writing**, the disclaimer/modification must be **conspicuous**.

Answer 31

The disclaimer or modification must be **in a writing** and must be **conspicuous**. But, language to exclude **all** implied warranties of fitness is **sufficient** if it states: “There are no warranties which extend beyond the description on the face hereof.”

Answer 32

A term or clause is conspicuous when it is so written that a **reasonable person** against whom it is to operate **ought to have noticed it**. A printed heading in capitals is conspicuous. Language in a body of a form is conspicuous if it is **larger or of other contrasting type of color**. But in a telegram, any stated term is conspicuous. The test is whether attention can reasonably be expected to be called to it.

Answer 33

**All implied warranties** are excluded by expressions like “**as is**,” “**with all faults**,” or other language which in **common understanding** calls the buyer’s attention to the **exclusion of warranties** and makes plain that there is no implied warranty. The **warranty of title** cannot be disclaimed with this language because these rules apply only to “**implied**” warranties and, for purposes of the UCC, the warranty of title is **not** an “implied” warranty. It can only be excluded by **specific language or circumstances** that give the buyer reason to know the person selling does not claim title or is only selling what title the seller has.

Answer 34

No. When the **buyer before entering into the contract** has **examined the goods** or the sample or model as fully as he desired **or has refused** to examine the goods, there is **no implied warranty** with regard to defects which an examination ought in the circumstances to have revealed to him.

Answer 35

The buyer’s duty to accept the goods and pay for them is conditioned on **tender of delivery**.

Answer 36

**Tender of delivery** requires that the seller **put and hold conforming goods** at the buyer’s disposition and give the buyer **any notification reasonably necessary** to enable him to take delivery. **Note**: tender must be at a reasonable hour, and the goods must be kept available for the period reasonably necessary to enable the buyer to take possession.

Answer 37

(a) Put the goods in the **possession of such a carrier** and make such a **contract for their transportation** as may be reasonable having regard to the nature of the goods and other circumstances of the case; and (b) Obtain and **promptly deliver or tender** in due form **any document necessary** to enable the buyer to **obtain possession of the goods** or otherwise required by the agreement or by usage of trade; and (c) **Promptly notify** the buyer of the shipment.

Answer 38

Goods or conduct including any part of a performance are “conforming” or conform to the contract when they are **in accordance with the obligations under the contract**.

Answer 39

Substantial performance occurs when: * (a) there are **minor defects or omissions** (that can be remedied), * (b) the party has performed in **all material and substantive particulars**, or * (c) the contractual deviations or deficiencies **do not severely impair the purpose** of the contract requirements. Yes, the law as to performance in installment contracts is substantial performance.

Answer 40

An “installment contract” is one which requires or authorizes the delivery of goods in **separate lots to be separately accepted**, even though the contract contains a clause “each delivery is a separate contract” or its equivalent. The buyer in an installment contract may **reject any installment** whose nonconformity **substantially impairs the value** of that installment. In general, if the non-conformity **can be cured** and the seller gives **adequate assurance** of the seller’s **intent to cure**, buyer must accept that installment. * However, if the nonconformity of an installment substantially impairs the value of the **whole contract**, then there is a **breach of the whole**.

Answer 41

If the **goods or the tender of delivery** fail in any respect to conform to the contract, the buyer may: * (1) reject the whole; * (2) accept the whole; or * (3) accept **any commercial unit** or units and **reject the rest**. A “**commercial unit**” is a **unit of goods** that by **commercial usage** is a **single whole** for purposes of **sale**, the division of which **materially impairs its character or value** on the market or in use. * It may be a **single article** (as a machine) or a **set of articles** (as a suite of furniture or an assortment of sizes) or a **quantity** (as a bale, gross, or carload) or any other unit treated in use or in the relevant market as a single whole.

Answer 42

The duty of **good faith** is read into every contract subject to Article 2. As a result, a party must act **honestly in rejecting delivery** due to failure to perfectly conform to the contract. This provides a limit on the party’s ability to refuse tender of performance.

Answer 43

A seller cures when the seller **corrects a defect** in the delivery. * Where any **tender or delivery** by the seller is rejected because non-conforming and the **time for performance has not yet expired**, the seller may **seasonably notify** the buyer of his intention to cure and may then within the contract time make a conforming delivery. * Where the buyer **rejects a non-conforming tender** which the seller had **reasonable grounds to believe would be acceptable** may if he **seasonably notifies the buyer** have a further **reasonable time to substitute** a conforming tender. Generally, the seller should be able to cure the defect provided he can do so without subjecting the buyer to any great inconvenience, risk, or loss.

Answer 44

(1) Acceptance of goods occurs when the buyer * (a) after a **reasonable opportunity to inspect** the goods signifies to the seller that the **goods are conforming** or that he will take or retain them **in spite of their non-conformity**; or * (b) fails to make an **effective rejection**, but such acceptance does not occur until the buyer has had a **reasonable opportunity to inspect them**; or * (c) does **any act inconsistent with the seller’s ownership**; but if such act is **wrongful as against the seller** it is an acceptance **only if ratified** by him. (2) Acceptance of a **part of any commercial unit** is acceptance of that **entire unit**.

Answer 45

Rejection is generally regarded as the buyer’s **refusal to keep delivered goods**. A rejection is **not** effective merely because there has not been an express acceptance. Rejection of goods must be **within a reasonable time** after their **delivery or tender**. It is ineffective unless the buyer **seasonably notifies** the seller. * After rejection, any **exercise of ownership** by the buyer with respect to any commercial unit is **wrongful as against the seller**; and * If the buyer has before rejection taken physical possession of goods in which he or she does not have a security interest, the buyer is under a duty to **hold them with reasonable care** at the seller’s disposition for a time sufficient to permit the seller to remove them; but * The buyer has **no further obligations** with regard to goods rightfully rejected.

Answer 46

The buyer may **revoke her or his acceptance** of a lot or commercial unit whose **nonconformity substantially impairs its value** to her or him if she or he has accepted it: * (a) on the **reasonable assumption** that its **nonconformity would be cured** and it has **not** been seasonably cured; or * (b) **without discovery of such nonconformity** if her or his acceptance was **reasonably induced either by the difficulty of discovery** before acceptance or by the **seller’s assurances**. Revocation of acceptance must occur within a **reasonable time after the buyer discovers** or should have discovered the ground for it and before **any substantial change in condition of the goods** which is not caused by their own defects. It is not effective until the **buyer notifies the seller** of it. A buyer who so revokes has the **same rights and duties** with regard to the goods involved as if she or he had **rejected them**.

Answer 47

(1) The buyer must **pay at the contract rate** for any goods accepted. (2) Acceptance of goods by the buyer **precludes rejection** of the goods accepted and **if made with knowledge of a non-conformity cannot be revoked** because of it unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured.

Answer 48

Where a **tender or delivery** of goods **fails to conform to the perfect tender rule** as to give a **right of rejection**, the risk of their loss remains on the **seller until cure or acceptance**. * **Note**: the seller by his individual action **cannot shift the risk of loss** to the buyer unless his action conforms with **all the conditions resting on him** under the contract.

Answer 49

The seller. Where the buyer **rightfully revokes acceptance** he may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as having **rested on the seller from the beginning**.

Answer 50

Where the buyer of conforming goods **repudiates or is otherwise in breach before risk of their loss has passed to him**, the seller may, to the extent of any deficiency in his effective insurance coverage, treat the risk of loss as resting on the **buyer** for a **commercially reasonable time**.

Answer 51

Section 1-205 provides the definitions of these terms: * (a) Whether a time for taking an action is **reasonable** depends on the **nature, purpose, and circumstances** of the action. * (b) An action is taken **seasonably** if it is taken at or **within the time agreed** or, if no time is agreed, at or within a **reasonable time**.

Answer 52

Yes, the seller may **refuse delivery** if they discover that the buyer is **insolvent**, unless the buyer is **paying cash** for the items to be delivered. A party is **insolvent** when they are **unable to pay their debts as they mature** (become due).

Answer 53

Seller may **reclaim** the goods upon **demand made within ten days** after the receipt, but if **misrepresentation of solvency** has been made to the seller **in writing within three months before delivery**, the ten day limitation does not apply.

Answer 54

“**Liquidated damages**” are a sum of money **specified in a contract** that states the total amount of compensation a non-breaching party should receive if the other party breaches the contract. The amount of liquidated damages must be set at an amount that is **reasonable in the circumstances**. A term fixing unreasonably large liquidated damages is **void** as a penalty.

Answer 55

**Expectation damages** = **loss in value** + **other loss** – **cost avoided** – **loss avoided** * **Loss in value** is the difference between value of the performance that should have been received and value of what was received. * Other loss includes both **incidental** and **consequential** damages: * **Incidental** → Includes additional costs incurred after the breach in a **reasonable attempt to avoid loss.** * **Consequential** → Losses beyond general damages that the plaintiff would not have incurred **but for the breach**. * **Cost avoided** is the amount saved by nonbreaching party because of not having to make expenditures that would have been incurred. * **Loss avoided** is the amount saved by nonbreaching party by avoiding some loss.

Answer 56

Where the **buyer wrongfully** (a) **rejects**, (b) **revokes** acceptance of goods, (c) **fails to make a payment** due on or before delivery, or (d) **repudiates** with respect to a part or the whole, the aggrieved **seller** may: * (a) **withhold delivery** of such goods; * (b) **stop delivery** by any bailee as hereafter provided; or * (c) **cancel**.

Answer 57

When the buyer fails to pay the price as it becomes due the seller may recover, together with any **incidental damages**, the price: * (1) of goods **accepted** or of **conforming goods lost or damaged** within a commercially reasonable time **after risk of their loss has passed** to the buyer; and * (2) of **goods identified to the contract** if the seller is **unable after reasonable effort to resell them at a reasonable price** or the circumstances reasonably indicate that **such effort will be unavailing**.

Answer 58

The seller may resell the **goods concerned** or the **undelivered balance** thereof. Where the resale is made **in good faith** and in **a commercially reasonable manner** the seller may recover the **difference between the resale price and the contract price** together with any **incidental damages**, but less **expenses saved** in consequence of the buyer’s breach. * (a) Where the resale is at **private sale** the seller must give the buyer **reasonable notification** of his intention to resell. * (b) Where the resale is at **public sale**: * (1) only **identified goods** can be sold except where there is a recognized market for a public sale of futures in goods of the kind; * (2) it must be made at a **usual place or market** for public sale if one is reasonably available and except in the case of goods which are perishable or threaten to decline in value speedily, the seller must give the buyer **reasonable notice** of the time and place of the resale; * (3) if the goods are **not to be within the view** of those attending the sale, the notification of sale **must state the place where the goods are located** and provide for their **reasonable inspection** by prospective bidders; and * (4) the **seller may buy**.

Answer 59

**Incidental damages** to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in **stopping delivery**, in the **transportation, care, and custody of goods** after the buyer’s breach, in connection **with return or resale** of the goods or **otherwise resulting** from the breach.

Answer 60

The measure of damages for non-acceptance or repudiation by the buyer is the **difference between the market price** at the time and place for tender **and the unpaid contract price** together with any **incidental damages**, but less **expenses saved** in consequence of the buyer’s breach.

Answer 61

The basic idea is that if the seller had capacity to produce more of the product, could have sold unit(s) **in addition to those relating to broken contract**, and the additional sale would have been **profitable**, then **market price damages** will not put them in the same position as a sale would have. A lost volume seller may recover the **profit** (including reasonable overhead) which the seller **would have made from full performance** by the buyer, together with any **incidental damages**, **due allowance for costs** reasonably incurred, and **due credit for payments or proceeds** of resale.

Answer 62

The basic remedy where the buyer **retains the goods** and **notifies the seller** of any breach is that the damages may be assessed in **whatever manner is reasonable**. But most of the time, the damages will be measured as **value as promised** minus **value as received** plus **incidental** and **consequential** damages. Notice this is the basic expectations damages formula. **Value** is calculated at the **time and place of acceptance**.

Answer 63

(1) Warranty of **title**, (2) **Express** warranty, (3) Implied warranty of **merchantability**, and (4) Implied warranty of **fitness for a particular purpose**.

Answer 64

**Incidental damages** are normally incurred when a buyer (or seller) repudiates the contract or wrongfully rejects the goods, causing the other to incur such expenses as **transporting, storing, or reselling the goods**. **Consequential damages** do not arise within the scope of the immediate buyer/seller transaction, but rather stem from losses **incurred by the nonbreaching party in its dealings**, often with third parties, which were a **proximate result of the breach**, and which were **reasonably foreseeable by the breaching party** at the time of contracting.

Answer 65

If the seller has breached and the buyer does not receive the goods, the buyer may, without **unreasonable delay** and acting in **good faith**, reasonably purchase **substitute goods**. **Damages** = **Cost of cover** minus **contract price** plus **incidental** and **consequential** damages minus **expenses saved** due to the breach.

Answer 66

The measure of damages for non-delivery or repudiation by the seller is the **difference between the market price** at the time when the buyer learned of the breach and the **contract price** together with any **incidental** and **consequential** damages, but less **expenses saved** in consequence of the seller's breach. **Market price** is to be determined **as of the place for tender** or, in cases of rejection after arrival or revocation of acceptance, as of the place of arrival.

Answer 67

**Specific performance** may be decreed where the **goods are unique** or in other proper circumstances. The buyer has a right of **replevin** for **goods identified to the contract** if after reasonable effort he is **unable to effect cover** for such goods or the circumstances reasonably indicate that such effort will be **unavailing**.

Answer 68

It is a provision in the UCC that gives us a way to decide what a term means if that term is “missing” from the agreement. Even though one or more terms are left open a contract for sale **does not fail for indefiniteness** if (1) the parties have **intended to make a contract** and (2) there is a **reasonably certain basis for giving an appropriate remedy**.

Answer 69

Except as otherwise provided, Article 9 applies to: * (1) a transaction, regardless of its form, that creates a **security interest** in personal property or fixtures **by contract**; * (2) an agricultural lien; * (3) a sale of accounts, chattel paper, payment intangibles, or promissory notes; * (4) a consignment.

Answer 70

A security interest is an interest in **personal property** or **fixtures** which secures payment or performance of an obligation. In general, **personal property** is anything that is not real property. More precisely there are two types of personal property: * **Tangible personal property**: things you can touch directly like animals, merchandise, jewelry, etc. * **Intangible personal property**: things you cannot touch directly like the rights (embodied) in stocks, trust fund accounts, etc. “**Fixtures**” means goods that have become so related to particular real property that an interest in them arises under real property law.

Answer 71

“Collateral” means the property subject to a **security interest** or **agricultural lien**. The term includes: * (1) proceeds to which a security interest attaches; * (2) accounts, chattel paper, payment intangibles, and promissory notes that have been sold; and * (3) goods that are the subject of a consignment.

Answer 72

“Debtor” means: * (a) a person having an interest, other than a security interest or other lien, in the collateral, whether or not the person is an obligor; * (b) a seller of accounts, chattel paper, payment intangibles, or promissory notes; or * (c) a consignee. Put simply, the debtor is the person who has the **basic title** to the **collateral** subject to the security interest.

Answer 73

“Obligor” means a person that, with respect to an obligation secured by a security interest in or an agricultural lien on the collateral: * (a) owes payment or other performance of the obligation, * (b) has provided property other than the collateral to secure payment or other performance of the obligation, or * (c) is otherwise accountable in whole or in part for payment or other performance of the obligation. The term does not include issuers or nominated persons under a letter of credit. Put simply, the obligor is the person (usually the debtor) who has to **pay or perform an obligation** arising out of the credit relationship.

Answer 74

“Secured party” means: * (a) a person in whose favor a security interest is created or provided for under a security agreement, whether or not any obligation to be secured is outstanding; * (b) a person that holds an agricultural lien; * (c) a consignor; or * (d) a person to which accounts, chattel paper, payment intangibles, or promissory notes have been sold. Put simply, the secured party is the person who has a **security interest in the collateral**. (Also called the **creditor**.)

Answer 75

An artisan’s lien is a kind of **mechanic’s lien**. A mechanic’s lien is a legal claim against some property arising out of work the person performed on that property for which the person has not been reimbursed (in full). No, Article 9 does not apply to a lien, **other than an agricultural lien**, given by statute or other rule of law for services and materials.

Answer 76

An “**agricultural lien**” means an interest in **farm products**: * (1) which **secures payment or performance** of an obligation for: * (a) goods or services furnished in connection with a **debtor’s farming operation**; or * (b) rent on real property leased by a debtor in connection with its **farming operation**; * (2) which is **created by statute** in favor of a person that: * (a) in the ordinary course of its business furnished goods or services to a debtor in connection with a debtor's farming operation; or * (b) leased real property to a debtor in connection with the debtor's farming operation; and * (3) whose effectiveness does not depend on the person's possession of the personal property.

Answer 77

“Consignment” means a transaction, regardless of its form, in which a person **delivers goods to a merchant for the purpose of sale** and: * (1) the merchant: * (i) deals in goods of that kind under a name other than the name of the person making delivery; * (ii) is not an auctioneer; and * (iii) is **not generally known by its creditors** to be substantially engaged in selling the goods of others; * (2) with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery; * (3) the goods are not consumer goods immediately before delivery; and * (4) the transaction does not create a security interest that secures an obligation.

Answer 78

“**Consignee**” means a merchant to which goods are delivered in a consignment. “**Consignor**” means a person that delivers goods to a consignee in a consignment.

Answer 79

“Lease” means a **transfer of the right to possession and use of goods for a term in return for consideration**, but a sale, including a sale on approval or a sale or return, or retention or creation of a security interest is not a lease. * “**Lessee**” means a person who acquires the right to possession and use of goods under a lease. Unless the context clearly indicates otherwise, the term includes a sublessee. * “**Lessor**” means a person who transfers the right to possession and use of goods under a lease.

Answer 80

A transaction in the form of a lease creates a security interest if the **consideration** that the lessee is to pay the lessor for the right to possession and use of the goods **is an obligation for the term of the lease** and **is not subject to termination by the lessee**, and: * (a) the **original term** of the lease is equal to or greater than the remaining **economic life** of the goods; * (b) the lessee is bound to **renew** the lease for the **remaining economic life** of the goods or is bound to become the owner of the goods; * (c) the lessee has an **option to renew** the lease for the **remaining economic life** of the goods for **no additional consideration** **or for nominal additional consideration** upon compliance with the lease agreement; or * (d) the lessee has an **option to become the owner** of the goods for **no additional consideration or for nominal additional consideration** upon compliance with the lease agreement.

Answer 81

Additional consideration **is nominal if** it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration **is not nominal** if: * (a) when the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or * (b) when the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.

Answer 82

Article 9 not apply to the extent that: * (1) a statute, regulation, or treaty of the United States preempts this article; * (2) another statute of this State expressly governs the creation, perfection, priority, or enforcement of a security interest created by this State or a governmental unit of this State; * (3) a statute of another State, a foreign country, or a governmental unit of another State or a foreign country, other than a statute generally applicable to security interests, expressly governs creation, perfection, priority, or enforcement of a security interest created by the State, country, or governmental unit; or * (4) the rights of a transferee beneficiary or nominated person under a letter of credit are independent and superior under Section 5-114.

Answer 83

Article 9 does not apply to: * (1) a landlord’s lien, other than an agricultural lien; * (2) a lien, other than an agricultural lien, given by statute or other rule of law for services or materials; * (3) an assignment of a claim for wages, salary, or other compensation of an employee [**Garnishments**]; and * (4) a sale of accounts [business’s accounts receivable], chattel paper, payment intangibles, or promissory notes as part of a sale of the business out of which they arose.

Answer 84

A landlord’s lien is a state statute (or common law right in some states) that gives the landlord the right to seize the tenant’s property if the tenant does not pay on time.

Answer 85

“Chattel paper” means a record or records that evidence both a monetary obligation and a security interest in specific goods. Think promissory note + security agreement.

Answer 86

“Health-care-insurance receivable” means an interest in or claim under a policy of insurance which is a right to payment of a monetary obligation for health-care goods or services provided or to be provided. Yes, because Article 9 does not apply to a transfer of an interest in or an assignment of a claim under a policy of insurance, **other than** an assignment by or to a health-care provider of a health-care-insurance receivable and any subsequent assignment of the right to payment.

Answer 87

A right to recoupment arises when the defendant raises their own claim against the plaintiff **arising from the same transaction**. A setoff occurs when the two parties have obligations running to each other **from different transactions** and one party wants to cancel (part/all) of the obligation owed provided the other party does the same. Neither are subject to Article 9’s reporting requirements.

Answer 88

No. For example, a landlord’s lien can arise either through statute (**non-consensual**) or through agreement (**consensual**). If it is by agreement, it is a consensual lien to which Article 9 applies.

Answer 89

A judgment is a court’s final determination of the rights and obligations of the parties in a case. A settlement occurs where the parties negotiate an end to the judicial action and where there is no judgment of the court as to the matter. Article 9 does not apply to “an assignment of a right represented by a judgment, **other than** a judgment taken on a **right to payment that was collateral**.”

Answer 90

(1) Tangible property (goods) (2) Quasi-tangible property (3) Intangible property

Answer 91

Payment intangible: a general intangible under which the account debtor’s principal obligation is a **monetary obligation**. * They include “**no note**” loan agreements where the payment obligation is in the loan agreement and there is **no promissory note** evidencing a promise to pay. * They also include **participation interests** in loans. When a bank makes a loan (and gives money to the debtor) it has a right to a stream of income (the monthly payments). But the bank is not in the business of collecting streams of income. It wants to give more loans. So it will often sell “participations” in the loan (usually big commercial loans) to other banks. These participating banks only have a right to collect money from the Lending bank, not the borrower.

Answer 92

An account is a **right to payment of a monetary obligation**, whether or not earned by performance: * (1) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of, * (2) for services rendered or to be rendered, * (3) for a policy of insurance issued or to be issued, * (4) for a secondary obligation incurred or to be incurred (this is when someone undertakes a **suretyship obligation**) * (5) for energy provided or to be provided, (Think JEA selling electricity to Manufacturing Co. on credit. Then JEA sells that accounts receivable to another company. This is called “factoring.”) * (6) for the use or hire of a vessel under a charter or other contract, * (7) arising out of the use of a **credit or charge card** or information contained on or for use with the card, * (8) as winnings in a lottery or other game of chance.

Answer 93

A chose in action is a **personal right to demand money or property by an action**. (Also called a thing in action.) It includes: contracts, covenants, and promises which confer on one party a right to recover a personal chattel or a sum of money from another by action. Examples: * Money due under a contract * Damages arising from a breach of a contract, * A check, * An interest in a pension and profit-sharing plan, * The right to receive payment under an insurance contract and the proceeds from such policy.

Answer 94

The **principal use**. Factors determining principle use include: * (1) whether the goods are for immediate or ultimate sale, and * (2) whether the goods have a relatively long or short period of use in the business. Goods are **equipment** if they are used in business and they are fixed assets or have a **relatively long period of use**. Goods are **inventory** when they are used up or consumed in a **short period of time** in the production of some end product. Goods can be inventory even if not held for sale.

Answer 95

The **security agreement** is the contract between the debtor and creditor. The **financing statement** is the notice (to the world) that creditor claims a security interest in the collateral.

Answer 96

Information that is inscribed on a **tangible medium** or which is stored in an **electronic or other medium** and is retrievable in **perceivable form**.

Answer 97

In order for a security interest to be **enforceable** against the debtor with respect to the collateral (called “**attachment**”): * (1) **Value** must have been given for the security interest; * (2) The **debtor** must either: * (a) have **rights** in the collateral, or * (b) have the **power to transfer rights** in the collateral to a secured party; and * (3) One of the following must be met: * (a) **debtor** has **authenticated** a security agreement, * (b) collateral is in **possession** of secured party, * (c) if collateral is certificated security, it has been delivered to the secured party, or * (d) **Secured party** has **control** (deposit accounts, electronic chattel paper, investment property, letters-of-credit rights).

Answer 98

A financing statement is sufficient only if it: * (1) provides the name of the **debtor**; * (2) provides the name of the **secured party** or a **representative** of the secured party; and * (3) **indicates the collateral** covered by the financing statement.

Answer 99

If the debtor is a **registered organization** or the collateral is held in a trust that is a **registered organization**, only if the financing statement provides the **name** that is stated to be the **registered organization’s name** on the **public organic record** most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization that purports to state, amend, or restate the registered organization’s name. * “**Registered organizations**” are organizations that have to file to do business. E.g., corporations, Limited Liability Partnerships, Limited Liability Companies. * “**Public organic record**” means a record that is available to the public for inspection and is a record consisting of the record initially filed with or issued by a State or the United States to form or organize an organization and any record filed with or issued by the State or the United States which amends or restates the initial record.

Answer 100

If the collateral is being administered by the **personal representative of a decedent**, only if the financing statement provides, **as the name of the debtor**, the **name of the decedent** and, in a separate part of the financing statement, indicates that the collateral is **being administered by a personal representative**.

Answer 101

If the **debtor is an individual** to whom this state has issued a **driver license** that has not expired or to whom the agency of this state that issues driver licenses has issued, in lieu of a driver license, a personal identification card that has not expired, only if the financing statement provides the name of the individual that is **indicated on the driver license** or personal identification card. * If the debtor is an individual to whom this does not apply, only if the financing statement provides the **individual name** of the debtor or the **surname and first personal name** of the debtor.

Answer 102

A financing statement **substantially complying** with the requirements is effective, even if it has **minor errors or omissions**, unless the errors or omissions make the financing statement **seriously misleading**. A financing statement that fails sufficiently to provide the **name of the debtor** in accordance is seriously misleading. If a search of the records of the filing office under the debtor’s correct name, **using the filing office’s standard search logic**, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor, the name provided does **not** make the financing statement seriously misleading.

Answer 103

The **individual name**. A financing statement that provides the name of the debtor is not rendered ineffective by the absence of a trade name or other name of the debtor. However, a financing statement that provides **only the debtor’s trade name** does **not** sufficiently provide the name of the debtor. In the case of a **registered partnership**, the **partnership name** is the correct name to use.

Answer 104

No, if a name change occurs after the filing of a financing statement that makes the filed-under-name seriously misleading, it has no effect on the effectiveness of the original financing statement.

Answer 105

Except as otherwise provided, a description of personal or real property is sufficient, whether or not it is specific, if it **reasonably identifies** what is described. A description of collateral reasonably identifies the collateral if it identifies the collateral by: * (a) specific listing; * (b) category; * (c) a type of collateral defined in the UCC; * (d) quantity; * (e) computational or allocational formula or procedure; or * (f) any other method, if the identity of the collateral is objectively determinable. However, a description of collateral as “**all the debtor’s assets**” or “**all the debtor’s personal property**” or using words of similar import **does not reasonably identify** the collateral.

Answer 106

A **financing statement** sufficiently indicates the collateral that it covers if the financing statement provides: * (a) a **description** of the collateral as required for the security agreement; or * (b) an indication that the financing statement **covers all assets** or **all personal property**. **Custom** and **usage of trade** may also be used to determine whether a financing statement sufficiently identifies the collateral. At a minimum, the financing statement must put creditors on notice that they should inquire of the potential debtor as to whether property is subject to another security interest, also known as **inquiry notice**.

Answer 107

It is a **floating lien**. When a business secures debt using inventory, the business wants to be able to sell some of that inventory and will want to replace what it sells. This could be a problem if the lien the creditor had on the inventory was on the precise items in the inventory at that moment in time the money was loaned, the business wouldn’t be able to sell because selling would diminish the creditor’s protection. So what happens in a floating lien is that the lien covers whatever is in inventory from the moment of creation of the lien and then shifts to whatever is in inventory as the inventory changes over time.

Answer 108

No. In terms of notice, there is no harm in the financing statement including more collateral than the security agreement because the security agreement controls. It puts creditors on **inquiry notice**. They can inquire as to whether the collateral is/is not covered and in so doing avoid harm.

Answer 109

**Attachment** is the process where the security interest in favor of a creditor becomes **effective against the debtor**. **Perfection** is the process by which a security interest in favor of a creditor becomes **effective against the world**.

Answer 110

All three must be true before the security interest **attaches** to the collateral: * (1) the **creditor** must give **value**, * (2) the **debtor** must **have some rights** in the collateral, and * (3) a **security agreement** is **authenticated** by the **debtor**, or the **creditor** must **have possession or control** of the collateral (pursuant to an oral agreement with the debtor). “**Value**” means consideration for a simple contract.

Answer 111

No, all a debtor has to have are **rights in the collateral**. A security interest is attached to the collateral only to the **extent of the debtor’s rights** in the collateral.

Answer 112

No, mere possession is not sufficient.

Answer 113

* (1) Filing (the presumed/default manner for many types of collateral), * (2) Possession/Pledge, * (3) Control, and * (4) Automatically (perfection occurs at the moment of attachment).

Answer 114

Once the security interest attaches, the interest will **at the same time** be perfected: A security interest is perfected when it attaches if the applicable requirements are satisfied **before the security interest attaches**.

Answer 115

An agricultural lien is effective when the agricultural lien **becomes enforceable** by the agricultural lien holder **against the debtor**. When that will occur is governed by the **statute** creating the agricultural lien.

Answer 116

No. When a creditor has **possession** of the collateral, it is sufficient to **perfect the creditor’s interest** in the collateral: The filing of a financing statement is **not necessary** to perfect a security interest in collateral in the secured party's possession

Answer 117

No, for **attachment** to occur: * (1) Creditor has **possession** of the collateral, * (2) **Debtor has an interest** in the collateral, and * (3) Creditor has given **value** for the security interest.

Answer 118

Perfection by **pledge** can only happen if the collateral **can be possessed by the creditor** (and therefore be perfected by possession): * Goods * Negotiable instruments * Certificated securities * Money * Tangible chattel paper The following types of collateral **cannot be physically possessed** so perfection **cannot** occur through possession: * Accounts; * Commercial tort claims; * Deposit accounts (but can “control” deposit accounts); * Certain investment property; * Letter-of-credit rights or L/C’s; or * Oil, gas minerals before extraction.

Answer 119

If perfection of a security interest depends upon possession of the collateral by a secured party, perfection occurs **no earlier than** the time the secured party **takes possession** and continues only while the secured party **retains possession**.

Answer 120

It is a strong protection of the creditor’s interest. But, the creditor in possession has a **duty to care for the collateral** which means the creditor may incur costs. And if the property is very large, you may need to store it in a warehouse, and then you’ll want something like a negotiable warehouse receipt to entitle you to possess. For the **debtor** it can be not good because using the collateral for economic gain generally requires possession.

Answer 121

A secured party shall use **reasonable care in the custody and preservation** of collateral in the secured party’s possession. In the case of **chattel paper** or an **instrument**, reasonable care includes taking necessary steps to **preserve rights against prior parties** unless otherwise agreed. The rule of reasonable care is **confined to the physical care of the chattel**, whether an object such as a horse or piece of jewelry, or a negotiable instrument or document of title.

Answer 122

The **secured party** may use or operate the collateral: * (a) for the purpose of **preserving the collateral** or its value; * (b) as permitted by an **order of a court** having competent jurisdiction; or * (c) except in the case of consumer goods, in the manner and to the extent **agreed by the debtor**.

Answer 123

Perfection through **possession by a third party** occurs when the person in possession **authenticates a record** **acknowledging** that it holds possession of the collateral **for the secured party's benefit**.

Answer 124

In order to facilitate a person **taking title to goods without moving them**, merchants developed paper that represented the goods and **gave holder title** to the goods. “**Document of title**” includes bill of lading, dock warrant, dock receipt, warehouse receipt or order for the delivery of goods, and also any other document which * (1) in the **regular course of business** or financing * (2) is treated as **adequately evidencing** that the person in possession of it is **entitled to receive, hold, and dispose** of the document and the goods it covers.

Answer 125

In determining whether a particular person has **possession**, the principles of **agency** apply. The **debtor cannot qualify as an agent** for the secured party for purposes of the secured party’s taking possession. And, under appropriate circumstances, a court may determine that a person in possession is **so closely connected to or controlled by the debtor** that the debtor has **retained effective possession**, even though the person may have agreed to take possession on behalf of the secured party. If so, the person's taking possession would not constitute the secured party's taking possession and would **not be sufficient for perfection**.

Answer 126

A security interest in **certificated securities**, negotiable documents, or instruments is perfected **without filing or the taking of possession** for a period of **20 days from the time it attaches** to the extent that it **arises for new value** given under an authenticated security agreement. After the 20-day period has expired, if filing is required but did not occur, the interest will no longer be perfected.

Answer 127

It means that no action is needed other than having the security interest **attach** for the security interest to be perfected. The following security interests are **perfected when they attach**: * (1) A **purchase-money security interest in consumer goods**, except as otherwise provided; * (2) An **assignment of accounts or payment intangibles** which **does not** by itself or in conjunction with other assignments to the same assignee **transfer a significant part** of the assignor’s outstanding accounts or payment intangibles; * (3) A **sale** of a **payment intangible**; * (4) A **sale** of a **promissory note**; * (5) A security interest created by the assignment of a **health-care-insurance receivable** to the provider of the health-care goods or services; * (6) A security interest created by an assignment of a **beneficial interest in a decedent’s estate**. * (7) A sale by an individual of an account that is a **right to payment of winnings in a lottery or other game of chance**.

Answer 128

A purchase money security interest is granted to **sellers** or **lenders** who **extend credit to the debtor** so the debtor may purchase the collateral. The credit **must** be used to fund the purchase.

Answer 129

A security interest **does not attach** under a term constituting an **after-acquired property** clause to consumer goods unless the **debtor acquires rights** in them **within 10 days** after the secured party **gives value**.

Answer 130

Purchase-money obligation means an obligation of an **obligor** incurred as all or part of the price of the collateral or for **value given** to enable the debtor to acquire rights in or the use of the collateral **if the value is in fact so used**.

Answer 131

In a transaction **other than a consumer-goods transaction**, if the extent to which a security interest is a purchase-money security interest depends on the **application of a payment to a particular obligation**, the payment must be applied: * (a) in accordance with any reasonable method of application to **which the parties agree**; * (b) in the absence of the parties' agreement to a reasonable method, in accordance with **any intention of the obligor manifested** at or before the time of payment; or * (c) in the absence of an agreement to a reasonable method and a timely manifestation of the obligor's intention, in the following order: * (1) to **obligations that are not secured**; and * (2) if more than one obligation is secured, to obligations **secured by purchase-money security interests** in the order in which those obligations were incurred.

Answer 132

The limitation of the rules to transactions other than consumer-goods transactions is intended to **leave to the court** the determination of the proper rules in consumer-goods transactions. The court **may not infer** from that limitation the **nature of the proper rule** in consumer-goods transactions and may continue to apply **established approaches**.

Answer 133

Except as otherwise provided, a financing statement **must be filed** to perfect all security interests. The filing of a financing statement is **not necessary** to perfect a security interest: * (1) Interests that **flow out of the collateral** (if you perfect the SI in the collateral, you perfect in these other rights); * (2) PMSI, assignment of accounts/payment tangibles, sale of payment tangible, sale of promissory note, assignment of a health-care-insurance receivables to the provider of health-care goods/services; * (3) Cars, boats, etc. things that have a title that, **by statute**, notes the SI; * (4) Security interest in goods in **possession of a bailee** are perfected by issuance of a **negotiable document of title in name of secured party**; * (5) In **certificated securities**, documents, goods, or instruments which is **perfected without filing, control, or possession**; * (6) In collateral in the secured party's possession (**pledge**); * (7) In deposit accounts, electronic chattel paper, electronic documents, investment property, or letter-of-credit rights which is **perfected by control**; * (8) Perfected **proceeds**.

Answer 134

The office in which to file a **financing statement** to perfect a **security interest** or **agricultural lien** is: * (1) The office of the **clerk of the circuit court**, if: * (a) The collateral is **as-extracted collateral** or **timber to be cut**; or * (b) The collateral is **goods** that are or are to become **fixtures** and the financing statement is **filed as a fixture filing**. * (2) The **Florida Secured Transaction Registry** in all other cases, including cases in which the collateral is **goods that are or are to become fixtures** and the financing statement is **not filed as a fixture filing**.

Answer 135

Except as otherwise provided, a filed financing statement is effective for a period of **five years** after the date of filing. After the five year period, the financing statement **lapses** until a **continuation** is filed. When a financing statement lapses, the security interest is **unperfected** unless perfected by some other method.

Answer 136

It must be filed **no more than six months** before the expiration of the five-year period. If the continuation is filed, the security interest is **perfected for five more years** starting as of **the day the financing statement would have been ineffective**.

Answer 137

Generally, a secured party is **not obligated** to terminate a financing statement. However, if there is **no outstanding obligation of the debtor** and no commitment on the part of the secured party to make **further advances**, or if the debtor did not authorize the filing of the initial financing statement, the secured party must, **on demand of the debtor**, **within 20 days**, file a **termination statement** or provide one to the debtor. In the case of consumer goods, the secured party must file the termination statement **within one month** after there is **no obligation or commitment**, or if the debtor **demands** it, **within 20** days of the demand. **Note**: If no termination statement is filed, a filing remains **effective for the whole five years**, even if the original obligation for which it was filed has been satisfied.

Answer 138

A secured party of record with respect to a financing statement is a person whose name is provided as the name of the secured party or a representative of the secured party in an initial financing statement that has been filed.

Answer 139

Yes. Except as otherwise provided, when a transaction bears a **reasonable relation to this state** and also to **another state or nation** the **parties may agree** that the law either of this state or of such other state or nation shall govern their rights and duties. A transaction bears a **reasonable relation** to the state if a significant enough portion of the transaction occurred therein.

Answer 140

In the absence of an agreement, the Code applies to transactions bearing an **appropriate relation** to this state. Where a transaction has **significant contacts** with a state **which has enacted the Act** and also with other jurisdictions, the question what relation is “**appropriate**” is left to judicial decision. If the transaction occurs in a state which has **not adopted the UCC**, it is **not** one that can bear an appropriate relation to the transaction.

Answer 141

The law of the state of the **debtor’s location**: Except as otherwise provided, while a debtor is located in a jurisdiction, the **local law of that jurisdiction** governs **perfection**, **the effect** of perfection or nonperfection, and the **priority** of a security interest in collateral.

Answer 142

We use the law of the **jurisdiction in which the collateral is located**: While collateral is located in a jurisdiction, the **local law of that jurisdiction** governs **perfection**, **the effect** of perfection or nonperfection, and the **priority** of a possessory security interest in that collateral.

Answer 143

While **negotiable documents**, goods, instruments, money, or tangible chattel paper is located in a jurisdiction, the **local law of that jurisdiction governs**: * (1) perfection of a security interest in the **goods by filing a fixture filing**; * (2) perfection of a security interest in **timber to be cut**; and * (3) **the effect** of perfection or nonperfection and the **priority** of a nonpossessory security interest in the collateral.

Answer 144

The **local law of the jurisdiction** in which the wellhead or minehead is located governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in as-extracted collateral.

Answer 145

The individual’s **principal residence**. If the organization has only one **place of business**, then that place. If it has more than one, its **chief executive office**.

Answer 146

Filing should occur in the **District of Columbia**. It is also a good idea to file in the **state where the property is located** as well.

Answer 147

The **local law of the jurisdiction** under whose certificate of title the goods are covered governs **perfection**, **the effect** of perfection or nonperfection, and the **priority** of a security interest in goods covered by a certificate of title from the time the goods become covered by the certificate of title until the goods cease to be covered by the certificate of title.

Answer 148

Voidable title occurs where there is a voluntary transfer of title where the rightful owner has assented to the transfer but there is **some defect or problem** that would allow the **original owner** to reclaim title. A person with voidable title **can pass good title** to a **good faith purchaser** for **value**, where a person whose title is void (e.g., someone whose car has been stolen) cannot. Some examples which create voidable title: * (a) the transferor was **deceived as to the identity of the purchaser**, or * (b) the delivery was in exchange for a **check which is later dishonored**, or * (c) it was agreed that the transaction was to be a “**cash sale**”, or * (d) the delivery was procured through **fraud punishable as larcenous** under the criminal law.

Answer 149

If the certificate of title issued in the new state **does not note the secured party’s interest** in the vehicle, the following parties have **priority** over the secured party: * (1) A **buyer of the vehicle** who is **not in the business of selling vehicles** who purchases for **value** and receives delivery of the vehicle **without knowledge** of the security interest; and * (2) A **secured party** who **perfects a security interest** in the vehicle **without knowledge** of the other security interest **after the clean certificate of title** is issued in the new state.

Answer 150

“Lien creditor” means: * (a) a creditor that has **acquired a lien on the property** involved **by attachment**, levy, or the like; * (b) an **assignee for benefit** of creditors from the time of assignment; * (c) a **trustee in bankruptcy** from the date of the filing of the petition; or * (d) a receiver in equity from the time of appointment.

Answer 151

(a) **Seller directly finances** the sale taking a security interest in the goods. (b) **Lender finances** the sale taking a security interest in the goods–to the extent the money loaned is used to buy the goods.

Answer 152

A purchase-money security interest in **consumer goods** is perfected when it **attaches**. Note that this does **not** apply to **equipment**, which is goods other than inventory, farm products, or consumer goods.

Answer 153

Yes, there is a 20 day grace period. If a person files a **financing statement** with respect to a **purchase-money security** interest before or within **20 days** after the **debtor receives delivery** of the collateral, the security interest takes **priority** over the rights of a buyer, lessee, or lien creditor which arise **between the time** the security interest attaches and the time of filing.

Answer 154

Deposit account means a demand, time, savings, passbook, or similar account **maintained with a bank**. The term does **not** include investment property or accounts evidenced by an instrument.

Answer 155

A **secured party** has **control** of a **deposit account** if: * (a) The secured party **is the bank with which the deposit account is maintained** (even if debtor has right to direct disposition of funds from account), * (b) The debtor, secured party, and bank have **agreed**, in an **authenticated record**, that the **bank will comply with instructions** originated by the secured party directing disposition of the funds without further consent of the debtor, or * (c) The **secured party becomes the bank’s customer** with respect to the deposit account. (The account gets put into the secured party’s name).

Answer 156

No. A security interest in a **deposit account** may only be perfected by **control**.

Answer 157

* A **buyer in ordinary course of business**, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer's seller, even if the security interest is **perfected** and the **buyer knows** of its existence. * A **buyer**, other than a secured party, of **tangible chattel paper, tangible documents, goods, instruments, or a certificated security** takes free of a security interest or agricultural lien if the buyer **gives value** and **receives delivery** of the collateral **without knowledge** of the security interest or agricultural lien and **before it is perfected**.

Answer 158

In this section, “**possessory lien**” means an interest, **other than a security interest** or an agricultural lien: * (1) which **secures payment** or **performance** of an obligation **for services or materials furnished** with respect to goods by a person **in the ordinary course** of the person's business; * (2) which is created **by statute or rule of law** in favor of the person; and * (3) whose **effectiveness depends on the person's possession** of the goods.

Answer 159

All **liens on real or personal property** provided by **statute** are enforceable by persons in privity with the owners, except when otherwise provided, as follows: * (1) By **retention of possession of the property** on which the lien has attached for a period of **not exceeding 3 months** by the person entitled to the lien, if the person was **in possession at the time the lien attached**. * (2) By **action**.

Answer 160

A **possessory lien** on goods has priority over a security interest in the goods **unless** the lien is created by a statute that **expressly provides otherwise**. Normally a possessory lien has priority, but that priority requires the lienor furnish the services in the ordinary course of business. This is read to include a **duty of good faith**. If that duty is violated, the lienor will not retain priority over a perfected security interest.

Answer 161

“Fixtures” means goods that have become **so related to particular real property** that an **interest in them arises** under real property law. However, a security interest does not exist in fixtures that are **ordinary building materials** incorporated into an **improvement on land**.

Answer 162

Three part test: * (1) whether the item has been **annexed to the realty**; * (2) whether the item is **appropriately applied to the use or purpose** of that part of the realty to which it is connected; and * (3) whether the party making the annexation **intended the item to be a permanent accession**. The **intention of the party** making the annexation is the primary criterion; **method of annexation** and the **character of the article annexed** are factors to determine intent.

Answer 163

“Transmitting utility” means a person primarily engaged in the business of: * (a) operating a **railroad**, subway, street railway, or trolley bus; * (b) transmitting **communications electrically**, electromagnetically, or by light; * (c) transmitting goods by **pipeline or sewer**; or * (d) transmitting or producing and **transmitting electricity, steam, gas, or water**. As to most collateral, perfection by filing is governed by the law of the jurisdiction in which the **debtor is located**. However, the law of the jurisdiction in which goods that are or become **fixtures are located** governs perfection by filing a **fixture filing**. As a consequence, filing in the filing office of **more than one State may be necessary** to perfect a security interest in fixtures collateral of a transmitting utility by filing a fixture filing.

Answer 164

“Accession” means goods that are **physically united** with other goods in such a manner that the **identity of the original goods is not lost**. If a security interest is perfected when the collateral becomes an accession, the security interest **remains perfected** in the collateral. However, a security interest in an accession is **subordinate to a security interest in the whole** which is perfected by compliance with the requirements of a certificate-of-title statute.

Answer 165

Commingled goods means goods that are **physically united** with other goods in such a manner that their **identity is lost** in a product or mass. For example, flour that becomes bread is commingled. Once the original collateral becomes commingled goods, the original collateral **cannot be identified**. Therefore, the security interest in the original collateral is **lost**. However, after the original collateral is commingled with the other goods, the **secured party’s interest** in the original collateral is **transferred to the mass**. If a security interest in collateral is perfected **before the collateral becomes commingled** goods, **the security interest that attaches to the product or mass is perfected**. If **more than one security interest** is perfected in this way, the security interests **rank equally in proportion to the value of the collateral** at the time it became commingled goods.

Answer 166

**Proceeds** are what you get from collateral, more specifically: * (a) Anything you get if you **sell**, lease, license, exchange or dispose of collateral is proceeds. * (b) Any **economic benefit you receive from possession** of the collateral: * (1) If you **rent** the collateral, the **rent** is proceeds. * (2) If you have a **promissory note** as collateral, **monthly payments** on the note are proceeds. * (3) If you have a **security** (e.g., stocks), any **cash dividends/distributions** are proceeds. * (c) If rights arise from **ownership of the collateral** (you have a copyright as collateral), then what you get as a result of those rights (**royalties**) are proceeds. * (d) **Claims** for breach of warranty, casualty, infringement of use, impairment to rights in, etc. are proceeds. * (e) **Insurance payables**.

Answer 167

No. The general rule is that a **security interest survives disposition** of the collateral. In these cases, the secured party may **repossess** the collateral from the transferee or, if appropriate maintain an action for **conversion**. The secured party can claim both any **proceeds** and the **original collateral**, but can only get one or the other. Additionally, a security interest in collateral will also attach to any **identifiable proceeds** from the collateral. Identifiable proceeds of collateral are proceeds that can be identified as **having come from the collateral**.

Answer 168

Proceeds that are commingled with other property are **identifiable proceeds** if the proceeds are **not goods**, to the extent that the **secured party identifies the proceeds** by a method of **tracing**, including application of equitable principles, that is permitted under law with respect to commingled property of the type involved. There are at least 5 tracing principles employed: * The **lowest intermediate balance rule** (LIBR), from trust accounting, * The **pro rata distribution hybrid** of the lowest intermediate balance rule, used in more complicated commingling cases, where multiple trust funds are mingled, * The **first-in-first-out** (FIFO) and the similar **last-in-first-out** (LIFO) rules from trust accounting, * The **community-out first rule**, from community property rule, and * The **rule of approximate correctness** from both trust and property law.

Answer 169

A perfected security interest in proceeds **becomes unperfected** on the **21st day after the security interest attaches** to the proceeds **unless**: * (a) the following conditions are satisfied (same office rule): * (1) a filed **financing statement covers the original** collateral; * (2) the proceeds are collateral in which a security interest may be perfected by filing in the office **in which the financing statement has been filed**; and * (3) the proceeds are **not acquired with cash proceeds**. * (b) the proceeds are **identifiable cash proceeds**; or * (c) the security interest in the proceeds is perfected by filing a financing statement containing a description **broad enough to cover the proceeds**.

Answer 170

If a secured party has possession of collateral, **reasonable expenses**, including the cost of insurance and payment of taxes or other charges, **incurred in the custody**, preservation, use, or operation of the collateral are **chargeable to the debtor** and are **secured by the collateral**.

Answer 171

If a secured party has possession of collateral, the risk of accidental loss or damage is **on the debtor** to the extent of a **deficiency in any effective insurance coverage**.

Answer 172

No. The security agreement will likely have a **choice of law provision** making the state’s version of Article 9 governing law. Article 9 mandates that the debtor has the **right to redeem** the collateral. So if the creditor sells it **without authorization in the contract**, they have violated Article 9 and **breached** the contract.

Answer 173

While Article 9 tell us what a secured party can do once the obligor has defaulted, it does not define “default.” Given that, the following are usually considered default: * Failure to perform the promised obligation; * Making of false or misleading statements in connection with making the agreement; * The collateral being lost, stolen, damaged, or destroyed; * The failure of the debtor to keep the collateral insured or in good repair/health (if an animal); * A grant by the debtor of a security interest in the same collateral to any other party; * Any levy upon or seizure of the collateral through judicial process; * Failure of the debtor to notify the secured party changes to debtor’s name, address, organizational structure, or change to the location of the collateral; * Death, dissolution, termination of existence, insolvency, or business failure of the debtor.

Answer 174

Yes. A term providing that one party or that party's successor in interest may **accelerate** payment or performance or require collateral or additional collateral “at will” or when the party “**deems itself insecure**,” or words of similar import, means that the party has power to do so only if that party in **good faith** believes that the prospect of payment or performance is impaired. The **burden** of establishing lack of good faith is on the **party against which the power has been exercised**.

Answer 175

**After default**, a secured party has the rights provided by agreement of the parties. In addition, a secured party: * (1) may **reduce a claim to judgment**, **foreclose**, or otherwise **enforce** the claim, security interest, or agricultural lien by **any available judicial procedure**; and * (2) if the collateral is **documents**, may proceed **either** as to the **documents** or as to **the goods they cover**.

Answer 176

If a secured party has reduced its claim to **judgment**, the **lien of any levy** that may be made upon the collateral by virtue of an execution based upon the judgment **relates back** to the earliest of: * (a) the **date of perfection** of the security interest or agricultural lien in the collateral; * (b) the **date of filing** a financing statement covering the collateral; or * (c) any **date specified in a statute** under which the agricultural lien was created.

Answer 177

After **default**, a secured party: * (1) may **take possession** of the collateral; and * (2) without removal, may **render equipment unusable** and **dispose of collateral on a debtor's premises**. A secured party may proceed: * (a) pursuant to **judicial process**; or * (b) without judicial process, if it proceeds **without breach of the peace**. If so agreed, and in any event after default, a secured party **may require the debtor to assemble the collateral** and make it available to the secured party at a place to be designated by the secured party which is **reasonably convenient** to both parties.

Answer 178

A **repossessing creditor** commits a breach of the peace when its speech or conduct is such as to **violate the public order**, **disturb the public tranquility**, or has the potential of **provoking violence** or when its conduct incites or is **likely to incite immediate public turbulence** or leads to or is likely to lead to an **immediate loss of public order and tranquility**. Breach of the peace **does not require violence**, physical confrontation, or threat. It may occur where a creditor repossesses over the **unequivocal oral protest** of the defaulting debtor even though no actual violence occurs. When the creditor repossesses by self-help because of the intervention of a police officer, it is a breach of the peace.

Answer 179

* the type of collateral involved; * the condition of the collateral; * the number of bids solicited; * the time and place of sale; * the purchase price received or the terms of the sale; * any special circumstances involved.

Answer 180

Although the UCC permits resale of the collateral **in its present condition**, the courts have nonetheless required reasonable, easily-taken action to fix up the collateral prior to sale. Official Comment 4 states that a secured party may not dispose of collateral in its then condition when, taking into account the costs and probable benefits of preparation or processing and the fact that the secured party would be advancing the costs at its risk, it would be **commercially unreasonable** to dispose of the collateral in that condition.

Commercial Law Flashcards

(211 cards)