Commercial Transactions – Prof. Baird – Winter 2007Outline

INTRODUCTION

I. The Domain of Commercial Lawa. Commercial law =/= commerce; commerce has flourished for years w/o laws (merchants rely on reputation and

aren’t interested in the laws that govern)b. Writen Ks initiate the protection of comm’l law: when things go wrong, we look to the K to decide who wins/loses,

allocation of risks/burdens, the parties’ responsibilities (warranties), what happens if intermediaries are insolvent.II. Important Principles:

a. Finality: law often sacrifices some rights for the goal of finality.III. The UCC

a. Includes the concept of the Law Merchant:i. Law Merchant: when merchant bought from seller and seller gave a promise to pay but then didn’t, the

seller could get a writ of debt.1. Writ of debt involved factfinding; wager of law (getting 12 people to say you’re a good person,

then you’re off the hook); other CL factfinding mechanisms: trial by ordeal (hot poker/blister), trial by jury, trial by combat.

2. Rather than relying on the wager of law, parties could use the law merchant (merchant court different from the CL court); these were piepowder courts; juries were composed of merchants from trade fairs (only way to trade was at the fair). These courts enforced implied warranties of merchantability and bills of exchange.

ii. UCC pays attention to the CL of equity and the law merchant (1-103)b. When there is a lot of money on the line (i.e. with wire transfers), things that law professors consider “fair” and

“right” don’t really come into play; there’s more concern about finality. i.e. Art 4A.c. History:

i. Originally, laws that governed transactions varied depending on who the customer was.ii. Nat’l Converence of Comm’ers on Uniform State Law (NCCUSL) got together in the 1990s and wrote a

new Art IX, went to state legislators and all 50 states agreed to make it law.iii. Idea is to engraft practices of merchants onto the UCC.

IV. General Contractual Concernsa. When a K’l price is lower because of what amounts to a partial waiver of rights, a buyer may not attempt to engraft

a seemingly different provision into the Ki. Bartlett & Co v The Merchants Co (5th Cir 1963): Merchants (B) K’d to purchase no. 2 yellow corn from

Bartlett (S); B then sold the corn directly to Walls. The K btwn B and S said that the price was for the corn delivered after inspection (before shipping). Fed’l inspector certified it No. 2 corn; the corn got to Walls’ plant, but it was a lower grade corn; Walls cleaned the corn and sued B for reimbursement; B then sued S, saying that its inspection after delivery showed that it wasn’t no 2 corn. Ct held that, although B had a right to reject if the corn wasn’t as specified by the inspector, it couldn’t challenge the inspector’s designation of the corn as no 2 b/c the clause in the K specified a lower price contingent on B’s waiving the right to inspect on delivery. Ct said that in customary dealings, lower prices are fixed on a condition that there’s no right to reject based on a destination inspection when the grain is inspected at origin. The inspector’s designation will only be thrown out if there was fraud (allowing mere mistake to invalidate inspection would breed litigation).

1. Note: major emphasis on finality (no challenging the inspector’s designation b/c it would lead to litigation) and letting the parties K for what they want. Also remember that corn grading is arbitrary, it’s not like corn naturally comes as no. 2 or 3, etc; seller isn’t warranting that the corn will stay no. 2 grade forever, just that that’s what it is at that particular moment.

V. Documents (see also DOCUMENTARY TRANSACTIONS, infra) and Duties/Terminology.a. Negotiable document of title (this is a negotiable instrument): it’s like a certificate of title, but you can take any

piece of prop’ty and lock up ownership in a piece of paper (ownership of prop’ty depends on ownership of paper)i. Negotiability: whether a document is negotiable or not depends on how it IDs the transferee and how it’s

transferred1. (1) Bearer paper: document made out to bearer may be transferred from one person to another by

delivery of poss’n; delivery transfers rights to goods (title) to the transferee.2. (2) Order paper: made out to a specific person; after initial delivery to person named on document,

it may be negotiated to another person by indorsement (by the named person) and delivery to another person. Rights to good (title) pass w/negotiation to the transferee.

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b. Letter of Credit (l/c): a binding document a buyer can request from his bank to guarantee that the payment for goods will be transferred to the seller. L/c gives the seller reassurance that he’ll get payment for the goods.

i. Payment on l/c: seller presents the bank with the necessary shipping documents confirming delivery of goods w/in a given timeframe.

ii. Risk for buyer: buyer has to ensure that the carrier is giving him what he paid for. In Bartlett, the buyer never saw what he was getting, but he already paid so he had to go to court b/c the transaction said that B would have to pay for the grain w/o seeing it (that’s why B is suing S).

VI. Duties/Terminologya. Merchant buyer who rejects goods must follow reasonable instructions from the seller or make reasonable efforts to

sell them (he is indemnified against expenses). 2-603.b. FOB (Free on Board): means that seller pays for transportation of goods to port of shipment (+ loading costs); buyer

pays freight, insurance, unloading costs and transportation from desitination port to factory. Passing of risk occurs when goods pass the ship’s rail at the port of shipment.

i. This generally means where risk will pass.ii. See also COMMERCIAL CONTRACTING, PT III RISK OF LOSS, infra.

VII. Negligent Misrepresentation and Special Relationshipa. JP Morgan Chase Bank v Winnick (SDNY 2004): Bank extended credit to Global Crossing (GC) pursuant to a credit

agreement which required that GC certify, each time it sought credit, that it had a certain leverage ratio (measure of the company’s financial strength). GC started engaging in swaps of capacity with other similar companies when it became clear that it was in fin’l trouble; Bank claimed that GC deceived it into believing it was fin’lly solvent so it would keep lending money, when it actually wasn’t. Bank claimed negligent misrepresentation. Elements: (1) Material misrepresentation: GC disclosed that it was engaging in swaps, but that didn’t necessarily put P on notice of the underlying fraud. (2) Knowledge of falsity; (3) D has intent to defraud P; (4) reasonable reliance by P; this includes a duty to inquire, but banks shouldn’t have to investigate every certification by GC that it’s being truthful (duty to inquire doesn’t arise on a hint of a possibility of falsehood; this inquiry is fact-based). Claim fails b/c there is no special relationship; to claim negligent misrepresentation, P must allege that the speaker is bound by some relation of duty or care (more than just the existence of the K); here, all that existed was the K, this was an arm’s length transaction; (5) Causation.

TRANSFER OF RIGHTS TO PERSONAL PROPERTY

I. Nemo Dat: The Derivation Principle and Transfer of Goodsa. Possible rules re: transfer of goods:

i. Anglo-american rule (nemo dat, infra)ii. Law merchant rule (Louisiana); buyer can prevail against a thief if he buys in ordinary course

iii. Swiss rule: protects buyers in ordinary course if they can establish GFiv. (doesn’t really exist, but there are hints) pure GF rule of honesty in fact (the good heart and empty head)

b. “Nemo dat, quod non habet” a person cannot transfer that which he does not owni. The purchase of an item from someone who has no ownership right also denies the purchaser of any

ownership title. This applies even if the purchaser doesn’t know that the seller has no right to claim ownership of the object of the transaction.

1. Exceptions: cash/negotiable instruments don’t follow this rule; shelter rule (even if B isn’t a buyer in ordinary course, if she regularly deals with the item in question, she’s protected)

2. Policy: balancing the interests of the original owner vs cutting things off after a period of time (finality).

ii. Bona fide purchaser for value: in nemo dat, a BFPfV who unwittingly purchases/sells stolen goods is liable for the full mkt value of the goods as of the date of conversion (in a conversion COA); since the true owner retains legal title, this is true even when there is a chain of successive BFPfVs.

1. Note: BFPfV can sue the person they bought it from for breach of the implied warranty of title. Remember, too, that there’s always a COA against the thief, but he’s almost always insolvent.

2. Main problem: thieves are usually judgment proof/insolvent. Risk allocation rules deal w/this.iii. Discovery: statute of limitations doesn’t run until owner knows who has poss’n of the goods

1. Autocephalous Greek-Orthodox Church of Cyprus v. Goldberg & Feldman Find Arts, Inc (7th Cir. 1990): Art dealer Goldberg (D) meets a dealer who introduces her to other dealers who have a mosaic from a church in Cyprus (it was stolen, but they tell her the church was in ruins and the mosaic was discovered there. She gets financing, buys the mosaics after cursory research into whether paintings were stolen and some suspicion of the dealers she met with. Church sued her to get back the mosaics. Ct said that D couldn’t claim possessory rights b/c the item was stolen. D claimed that the statute of limitations had run b/c the church knew the mosaic was stolen long before they found her, but the Ct held that the statute of limitations tolls until the rightful owner

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finds out who has poss’n of the item. Rightful owner must still be diligent in finding the person who has the item.

iv. COAs:1. Replevin: Original owner sues in replevin to recover her stolen goods.2. Conversion: Final buyer who is ordered to return the item to the rightful owner has conversion

actions all the way down the chain based on the implied warranty of title (when you sell something, you warrant that it’s yours to sell)

II. Voidable Title and Buyers in Ordinary Course: Consensual Transactions as Exception to Derivation Principlea. Definition of voidable title: when D acquires property (transfer of poss’n is req’d) through deception (i.e. rubber

check, rather than outright theft) he may acquire voidable title and have the power (not the right) to convey good title to a BFPfV. Note: this is just a label to describe the situation where someone has the power but not the right to make someone else the owner of goods; this has nothing to do with metaphysical ownership. 2-403.

i. Typical situation:ii. Policy: it’s one thing to be the owner/have poss’n of the goods, but it’s another to voluntarily enter into a

mkt transaction to sell goods. This puts a person at risk.iii. If a conman (B) buys a painting from an owner (O/S) but pays with a forged check, the owner can bring a

replevin or conversion action. BUT if before the owner discovers that the check is forged, the conman sells the item to a GFPfV, the owner is out of luck.

b. Definitions: (person with voidable title can transfer rights in ownership to a “good faith purchaser for value”); note that “GFPfV” contains no redundancies.

i. Purchaser (1-201(b)(30)): a person who takes by “purchase.” Purchase (1-201(b)(29)) = taking by sale/discount/negotiation/mortgage/pledge/lien/ ... /gift or any other voluntary transaction creating an interest in prop’ty.

ii. For value (1-204): in return for a binding commitment to extend credit, as security for (total/partial satisfaction of preexisting claim; by accepting delivery under preexisting K for purchase, or in return for any consideration sufficient to support a simple K. Gift doesn’t count.

1. i.e. Conman (B) buys painting from owner (O) and pays by forged check; before O realizes it, B sells it to a buyer for the FMV. There has been a transfer of poss’n, there’s a GFPfV, so owner is out of luck. Can still sue the B if he’s solvent.

2. i.e. Conman (B) buys painting from owner (O) and pays by forged check, then sells it to buyer for FMV. Before O discovers the check is forged, buyer gives it to his mother for her bday. Owner’s rights against mother? Owner has no rights against the mother; there was a consensual transaction even though the mother isn’t a BFPfV. Mother is sheltered by the transfer.

iii. Ordinary course of business (1-201(b)(9)): a person who buys for cash or by exchange of other prop’ty or secured or unsecured credit; can’t acquire by transfer in satisfaction of debt.

iv. Entrusting: if owner doesn’t intend to surrender rights (doesn’t intend to sell item) to a dealer, if they entrust the dealer, dealer has the ability to give good title in a transaction in the ordinary course of business.

1. i.e. owner (O) takes painting to dealer for cleaning (dealer also sells); dealer sells paintings to buyer, steals proceeds, goes to Rio. Owner’s rights against buyer? None. Buyer can sue dealer for conversion.

c. GFPfV not protected when there is a problem up the chain.i. Mucha v. King (7th Cir 1986): Painter (Mucha, Sr.) entered into an unusual consignment K w/a dealer that

encouraged the dealer to hold on to the paintings if he believed they would appreciate, and then sell them. After many years, the gallery sold the paintings in a “fire sale” when it was closing. Person who purchased the painting (Hot Tub dealer) then sold it to a dealer (Fly by Nite Gallery), who sold it to King (D). P is Mucha, Jr, and he sues King to regain poss’n of the painting. D loses even though he was a GFPfV because the sale btwn the original gallery and the Hot Tub merchant was not in the ordinary course of business (it was a going-out-of-business sale) and neither was the sale from Hot Tub merchant to Fly by Nite Gallery (b/c Hot Tub merchant doesn’t normally sell paintings).

1. Note: King can sue up the chain under implied warranty of title. It seems strange that these were all voluntary transactions. It’s also strange that a buyer is protected if his dealer is dishonest, but not if his dealer’s dealer’s dealer was dishonest.

DOCUMENTARY TRANSACTIONS

I. Documents of Titlea. There are legal rules that give merchants the ability to embody rights to goods in a piece of paper. Main concern is

allocating fraud by a third party among the original owner and a subsequent BFPfV.i. You can only “lock up” the underlying rights to goods in an NDOT if you’re the actual owner; once you do

this, the paper has “magical qualities.”

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b. Negotiation rule: a buyer gets good title to the negotiable instrument (NI) or document of title (DOT) even if there is a thief in the chain of title, assuming certain requirements are met.

i. This is in contrast with the derivation rule (nemo dat) that applies to goods/prop’ty. Paper is a negotiation regime rather than a derivation regime (goods).

c. Types of DOTs:i. Certificate of title (i.e. cars); ownership in some types of personal prop’ty are always embodied in a

certificate of title; to transfer rights to the prop’ty, one must transfer the certificate of title.ii. Documents of title (i.e. wheat/oil); rights of ownership in some ordinary goods can be embodied

temporarily in a piece of paper. Governed by Art 7 of the UCC.1. Two types:

a. Bill of lading: when a merchant is shipping goods to a distant buyer; embodying the rights to the goods in a piece of paper may make it easier for both parties to ensure that neither has both the goods and the money at the same time (i.e. l/c’s).

i. Carriers at CL were absolutely liable for loss/damage to goods accepted for transport except for acts of God, the public enemy, public authorities, the shipper, or inherent defects in the goods themselves. 7-309(1).

b. Warehouse receipt: when goods are bought and sold w/o being moved, this type of document allows the seller to transfer ownership with the document of title.

i. Warehouse person is liable for damage to goods caused by her failure to exercise such care as a reasonably prudent person would in similar circumstances. 7-204(1).

d. Requirements for a document to be an NDOT:i. (1) Whether the document is treated as adequately evidencing that the person in poss’n is entitled to

receive, hold, and dispose of the document and the goods it covers (This inquiry is w/regard to the course of business/financing)

1. Sale isn’t req’d for a document to be an NDOT (leasing is fine; see Bank of NY v. Amoco, “BNY”)2. Holder (1-201(b)(21)) (A) the person in poss’n of an NI payable to bearer or ID’able person who

holds it; or (B) person in poss’n of a DOT if the goods are deliverable to the bearer or to the order of the person in poss’n.

ii. (2) Purports to cover goods in the bailee’s poss’n which are either ID’d or are fungible portions of an ID’d mass

1. UCC has adopted a flexible approach. See BNY.iii. (3) By its terms, the goods are to be delivered to bearer or to the order of a named person (incl. bailee).

1. “Delivery requirement”: note that actual delivery is not req’d; negotiability is the key question (not deliverability; an item can be delivered w/o being negotiable); see BNY.

a. A document that promises to hold/release goods satisfies the requirement that an NDOT indicates that the goods are “to be delivered”

2. Requires that a person be a holder by due negotiation (7-501)a. Negotiation:

i. Warranties on negotiation: if a person negotiates/delivers a DOT for value, the transferor warrants to its immediate purchaser that the document is genuine, that he doesn’t have any knowledge of any fact that would impair the document’s validity or worth, and that the negotiation/delivery is rightful and fully effective with respect to the title to the document and the goods it represents. 7-507.

ii. “To order”: 7-501(a)(1) if original terms of document are “to the order of [named person]”, the document is negotiated by the named person’s indorsement and delivery. If the named person indorses it in blank or to the bearer, any person may negotiate the document by delivery alone. Delivery to the person named in the document = negotiation.

1. Note: if it’s made out to a named person, it can never be duly negotiated unless it’s signed by that person.

iii. Bearer form: 7-501(a)(2): if document is in bearer form, it’s negotiated by delivery alone.

b. “Due” negotiation: 7-501(5): document must be negotiated in any manner listed in 7-501 to a holder that purchases it in GF, w/o notice of any defense against or claim to it on the part of any person, and for value, unless it’s established that the negotiation is not in the regular course of business/financing or involves receiving document in settlement or payment of a monetary obligation.

i. Note: this requires ordinary course of business; you can’t become a holder by due negotiation just by being honest.

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ii. Can’t become a holder by due negotiation if you get the DOT in settlement of an antecedent debt even if it’s in the ordinary course of business.

iii. Owner must indorse if made out to order: without indorsement by the owner (if it’s made out to order), there can never be due negotiation. This is a risk you run when you acquire a warehouse receipt; you have to show that you’re the owner of the receipt and you’re out of luck if you have a forged indorsement.

iv. Absent knowledge of breach in the underlying agreement, a holder of an NDOT qualifies as a holder in due course.

c. Person who has acquired an NDOT by due negotiation has certain rights (7-502): title to the document, title to the goods, all rights of agency/estoppel, and direct obligation of the issuer (of the NDOT) to hold/deliver the goods according to the document free of any defense/claim.

e. Stealing a duly negotiated (indorsed by the ID’d person, if made out “to order,” or in bearer form upon receipt) NDOT: puts the thief in the same position as a person who steals cash.

i. If a thief steals the underlying goods, then creates an NDOT, he can’t get title to the goods or pass it to a holder by due negotiation. 7-503.

1. Lineburger Bros v. Hodge (Miss. 1951): Carr went to a warehouse and obtained NDOTs in bearer form (warehouse receipts for bales of cotton) under a false name and then indorsed them. He then transferred them to innocent people in the ordinary course. Those people lost out b/c an NDOT only works if the person with the NDOT (Carr, here) was, in fact, the owner of the goods. The alternative result wouldn’t make sense.

f. Control of the NDOT = control of the goods; a person who doesn’t have the right to the goods (i.e. bailee/shipper) can’t give good title to the goods even on transfer of poss’n.

i. Evergreen Marine Corp v Six Consignments of Frozen Scallops (1st Cir 1993): Japanese company (S) hired Evergreen (shipper) to transport six consignments of frozen scallops to Glouchester (B). S gave Glouchester (B) negotiable documents of title, entitling them to order Evergreen to turn over the scallops. Idea was for the NDOTs to get to Glouchester, then they’d present them to Evergreen. Bank ended up holding the negotiable bill of lading, but Glouchester couldn’t pay (too poor); bank (as agent of seller) said that it would exercise its right to go after Evergreen for the scallops after B fraudulently induced Evergreen to turn them over w/o the bill of lading on arrival. Evergreen sued to try to get the scallops back. Ct said that Evergreen’s reclamation rights (as bailee) were superior to the bank’s security interest. Key here is that, although Evergreen gave poss’n to Glouchester, it didn’t own the scallops, so it had no ability/power to transfer title (like when the coat check man gives your coat to someone else; they don’t own it). This wasn’t entrusting under 2-403 b/c Evergreen wasn’t a merchant regularly dealing w/goods in kind. The person who holds the NDOT has control of the goods.

1. Note: entrusting exception applies only when you entrust goods to someone for purposes of sale. 2-403(2).

g. Holding certificates are analogous to NDOTs even though they’re not the type of transaction anticipated by the drafters of the UCC.

i. Bank of NY v. Amoco Oil Co. (2d Cir 1994): Amoco used platinum to refine gasoline and it leased some from DBL, a company that leased platinum and used its ownership of the platinum as security to get financing. Amoco issued “holding certificates,” which certified that Amoco was holding the platinum and would be released on surrender of the certificate. DBL issued some of the certificates to BNY to get loans, but then it went bankrupt and BNY demanded that Amoco return the platinum. Amoco refused and eventually turned it over, but a lot of money was lost b/c the price of platinum had changed btwn demand and delivery. Ct held that the holding certificate was analogous to an NDOT, and said that Amoco didn’t behave reasonably (7-603) in sorting out the claim to poss’n (so it has to pay difference in value on the platinum).

II. Letters of Credit (l/c): generally governed by the UCP (and UCC A5, which the UCP replaced)a. General:

i. Three-party transaction: customer, bank, beneficiary. Typical situation: K’l relationship btwn customer and beneficiary (normally customer wants to buy goods from far-away beneficiary); beneficiary wants to be paid. Customer has K’l relationship with the bank, the bank has a l/c relationship with the beneficiary.

1. Three relationships:a. Customer – Beneficiary: K’l relationship that forms the underlying trans’n.b. Bank – Customer: K’l relationship; bank agrees to pay for the buyer’s presentment of

documents in exchange for interest.c. Bank – Beneficiary: not a K’l relationship! Duty under the UCP to pay when the draftr is

accompanied by the specified documents; doesn’t matter what happens btwn the customer and the beneficiary.

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ii. Accompanying documents: draft accompanied by documents specified ahead of time triggers obligation to pay. L/c is infinitely flexible b/c there’s no requirement for what the documents must be.

1. Parties can negotiate what the documents will be.2. Lawyer’s job: figure out what documents will be available if and only if the customer’s required

circumstances have been met; when you have the l/c, you know what rights it embodies and you know you’ll be paid.

3. Main issue is how strict compliance must be; parties don’t always have control of the documents, and if you insist on absolutely perfect compliance, there’s no guarantee that a bank won’t find an inconsistency.

a. UCP: strict consistency req’d re: invoice, but only general consistency req’d with respect to other documents. Note: totally strict compliance is the minority rule.

i. Policy: bank shouldn’t be expected to understand merchants’ lexicon. Conflicting policy: it’s hard to get really perfect documents.

b. Rayner: Danish bank had deal with Danish buyer; Hambros (confirming bank) assumes paperwork. Rayner presented a document that said “CRS groundnut kernel” when it was supposed to present “coromandel grounds in a bag” – didn’t matter that the two were synonyms, Ct demanded strict compliance.

4. There can’t be conditions in l/cs, but documentary conditions are ok (must present certain documents). E&H v. Brodway, infra.

iii. Variation: Stand-by l/c: documents that arise only arise when things are bad1. i.e. Baird is building a house for you, you promise to pay when he’s done, but he’s concerned that

you won’t. He insists on an l/c, in which the bank agrees t ohonor his drafts if accompanied by docs such as letter of completion and proof he issued the bill and wasn’t paid.

b. Independence Principle: Bank’s duty to pay is independent of the underlying agreement: their exposure to risk is minimal.

i. Seller’s rights against banks: not a K’l right (seller needn’t look beyond the bank’s letter). ii. Bank must pay on presentment of conforming documents.

1. UCP: Banks must examine documents with reasonable care to determine whether they appear on their face to be in accordance with the terms/conditions of the l/c. If, on receiving the documents, the bank thinks they’re not in accordance w/the l/c, the bank must determine from the documents alone whether to give payment.

a. Bank must look solely to the letter and the documentation the beneficiary presents to determine whether the documentation meets the req’s of the l/c. Hanil.

2. Seller has rights as a beneficiary, but the bank isn’t a guarantor b/c its liability is triggered by documents and it’s generally not allowed to interpose defenses of its customer.

3. If there’s a question about compliance (of documents to demands of l/c), bank may contact its customer (buyer) in asking whether to pay on the l/c

a. Hanil Bank v. PT Bank Negara Indonesia (BNI) (SDNY 2000): BNI (issuing bank) issued Kodeco (buyer) a l/c for the benefit of Sung Jun (bene) but misspelled the name (“Sung Jin”); beneficiary didn’t request amendment; Sung Jun negotiated the l/c to Hanil (he paid for it), BNI refused to honor the l/c, alleging four discrepancies (incl misspelling of name of beneficiary and other very minor discrepancies). Ct declined to order the bank to pay, and said that the bank didn’t breach its duty of GF by consulting its client to ask whether the client would accept the beneficiary, then refusing to honor the l/c on the advice of its client.

4. Bank can’t institute action to determine whether the beneficiary has met requirements of underlying K w/account party

a. First State Bank v. Diamond Plastics Corp (Okla 1995): Issuing bank commenced declaratory judgment action against the beneficiary re: bank’s liability on l/c. Judge applied wrong law, said that the bank has a strict duty to honor a proper demand and has a broad right to reject an improper demand. The burden of making sure the terms of the l/c can be met is placed on the beneficiary b/c the bank may have no knowledge of the docs. Case decided on K law, not UCC law. Wrong!

5. Notice of refusal (UCP 500 Art 14(d)) if bank decides not to pay:a. Voest-Alpine Trading USA Corp v. Bank of China (SD Tx 2000): Ct held that for a bank

to give notice of refusal no later than the close of the 7th banking day after receipt of the documents. Notice must be given to the person/party from whom the bank rev’d the documents. Notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it’s holding the documents or returning them to the presentor. Ct said that notice of refusal here was not adequate b/c the bank’s first notice of refusal (which came w/in 7 days) didn’t explicitly state that it was actually

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rejecting the document or refusing to honor the l/c; second communication included notice of refusal, but wasn’t explicit and came after the 7-day deadline.

c. Compliance:i. Main issue is how strict compliance must be; parties don’t always have control of the documents, and if

you insist on absolutely perfect compliance, there’s no guarantee that a bank won’t find an inconsistency.1. UCP: strict consistency req’d re: invoice, but only general consistency req’d with respect to other

documents.ii. Illustrations (note: the Cts may not be applying different standards; the facts just may be different)

1. Documents must appear on their face strictly to comply:a. Voest-Alpine Trading USA Corp v. Bank of China (SD Tx 2000): P (seller/beneficiary)

entered into a K w/JFTC (buyer) to sell styrene monomer for $1.2 mn. JFTC got a l/c through Bank of China (issuing bank), which provided for payment once the goods were shipped to China. There were a few typos (incl “Trading” and “USA” rev’d in the name, l/c # was wrong, destination spelled wrong, invoice not marked “original,” etc.); JFTC wanted price concession when price dropped at time of shipping, Voest refused and presented documents to the presenting/confirming bank (Tx Commerce Bank) which found the discrepancies but, after asking JFTC, determined that they weren’t significant enough to warrant refusal to pay. Bank of China refused to pay Tx Comm Bank and returned the documents. Ct said (dicta, b/c case was resolved on inadequacy of notice of refusal, see supra) that none of the discrepancies were adequate to allow the bank to refuse to pay on the l/c.

i. Note: Ct addressed three other possible approaches to interpretations banks could employ in examining l/c documents for compliance: (ct rejected all and adopted (d), documents must appear on their face to strictly apply.

1. (a) Strict compliance/mirror image standard2. (b) Some cases claim to follow strict compliance, but support rejection

only when discrepancies would create risks for the issuer if the bank accepted the documents.

3. (c) Analyze documents for risk to the applicant2. Accurate spelling of beneficiary’s name req’d unless it’s an obvious typo (this case could be

consistent w/Voest even though a different standard appears to be applied b/c the misspelling here could be more significant than the swapping of name/geography in that case)

a. Hanil Bank v. PT Bank Negara Indonesia (BNI) (SDNY 2000): BNI (issuing bank) issued Kodeco (buyer) a l/c for the benefit of Sung Jun (bene) but misspelled the name (“Sung Jin”); beneficiary didn’t request amendment; Sung Jun negotiated the l/c to Hanil (he paid for it), BNI refused to honor the l/c, alleging four discrepancies (incl misspelling of name of beneficiary and other very minor discrepancies). Ct declined to order the bank to pay, and held that the refusal to pay was justified by the discrepancy. Ct adopted strict compliance rule, but said that some variations might be so insignificant that they don’t relieve the bank of its obligation to pay (i.e. obvious misspellings, “Smithh”). Example of material discrepancy in spelling of name when it’s not an obvious typo (i.e. in Beyene, person who would give notice of arrival’s name was spelled “Soran” instead of “Sofan”). Ct also said that it doesn’t matter whether the beneficiary makes the error or the bank.

3. Very strict approach re: invoices; they must be specific in listing items sold (in UCP)a. Courtaulds North America, Inc v. North Carolina Nat’l Bank (NCNB) (4th Cir 1975):

Astrada (buyer) had a K w/Courtaulds (seller/bene); NCNB (issuing bank) issued l/c for Courtaulds, which was selling acrylic yarn to Astrada. Invoices were to say that they covered “100% acrylic yarn,” but they said only “imported acrylic yarn.” NCNB contacted Astrada re: waiver of discrepancy, but it couldn’t (although it had in the past) b/c a trustee in bankruptcy had been appointed. Bank informed Courtaulds it wouldn’t accept, Courtaulds sent amended invoices and then sued. Ct held that the documents weren’t in conformity and it didn’t matter that the bank had honored other drafts with similar mistakes. The amended invoice didn’t change the result b/c it was retroactively amended after the l/c expired.

d. Fraud in l/cs:i. Falsified documents are the same as no documents at all, but party claiming that documents have been

altered must present evidence that the misrepresentations are material to the l/c’s requirements. E&H, infraii. Bank must honor demand for payment made by an innocent third party even if the docs it presents are

forged/fraudulent or there’s fraud in the transaction:1. Dynamics Corp v. Citizens & Southern Nat’l Bank (ND Ga 1973): DCA (seller) had K w/India

(buyer), FOB seller’s plant, to provide communications equipment; India was to pay DCA, and if

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DCA didn’t deliver, India was the beneficiary of a stand-by l/c. India paid, but DCA didn’t deliver; said the equipment was at the loading dock. India presented documents, bank said they were forged.

iii. L/cs imply a duty of good faith/fair dealing (this may be wrong): fraud btwn bank and customer1. E&H Partners v. Broadway Nat’l Bank (SDNY 1998): Broadway (issuing bank) issued an l/c for

Astro (a standby l/c, to assure Astro that it would receive payment). Borlas (buyer/seller – middleman) was going to buy from E&H (seller/bene) and then later sell to Astro at a discount. If E&H notified Astro that Borlas was 30 days overdue, it could collect on the l/c if it provided documents (invoices). Astro and Broadway communicated about how to get out of honoring the l/c. Ct held that a bank violates the independence principle when it communicates with the party (customer) to find a way to dishonor the l/c; said that l/cs imply a duty of good faith and fair dealing.

a. Note: the UCC (5-102) definition of GF (= “honestly in fact”) doesn’t include fair dealing

AGENCY AND APPARENT AGENCY

I. Agents and Fiduciary Dutya. Agency in General:

i. Parties who deal at arm’s length generally owe each other a duty to act in GF, but not a fiduciary duty (to look out for others’ interests)

ii. Creating agency relationships: as long as there’s authorization (even if you’re not the one who actually signs your name) there is agency. Agents can engage in actions that count as someone else’s actions.

iii. Scope of the relationship: whatever is provided, but it’s fundamentally different from other K’l relationships.

1. Agents are charged w/fiduciary duties: this means that they must act in the way a reasonable person would act when acting on his own account (must take care of the principal’s affairs the same way a reasonable person would take care of his own affairs.

b. Existence of a fiduciary duty: one cannot conspire to violate fiduciary duty when one owes no such duty.i. Everest Investors 8 v. Whitehall Real Estate (Cal Ct App 2002): Everest was a limited partner in McNeill;

other limited partners sued the gen’l partners for breach of fiduciary duty; in an attempt to settle the lawsuit, Everest alleges that the general partners conspired to sell the partnership for less than it was worth; it sued Whitehall (alleged co-conspirator) for breach of fiduciary duty. Ct held that Whitehall owed no fiduciary duty, so it couldn’t conspire to violate it. The general partnership’s agents/employees aren’t liable for their employers’ breach of fiduciary duty.

c. Whether there is an affirmative duty of disclosure depends on the nature of the relationshipi. Appletree Square I Limited Partnership v. Investmark, Inc. (Minn Ct App 1993): P was formed to

purchase/operate an office building; sellers (Investmark) had an interest in the partnership when the sale occurred. After sale, it was discovered that the building had asbestos; question was whether Investmark owed Appletree a duty to tell it about the asbestos. Ct said that if there was no relationship btwn the parties, Investmark would only have to disclose in GF and Appletree would have a duty to inspect/investigate the building. If there was a fiduciary relationship, there was a duty to disclose (affirmative). Partners have fiduciary relationships and a broad CL duty to disclose all material facts. Although partners have latitude to change the duties they owe to each other, they can’t alter the fiduciary duties (this would change the nature of the relationship).

1. Note: Laidlaw Case (end of War of 1812, trade embargo (goods really cheap), D went to the dock, bought a bunch of stuff, did he have to tell people the embargo was about to be lifted and that’s why he was buying? Ct said no, but he still couldn’t lie about it. In an arm’s length transaction, the general rule is that there’s no aff duty to disclose.

d. Fiduciary duties owed to creditors and shareholders by corp’nsi. Solvent corp’ns owe fiduciary duties to shareholders.

1. Corp’ns can limit personal duties owed to shareholders, but not as to creditors (b/c creditors don’t pick officers/directors).

ii. Insolvent corp’ns owe fiduciary duties to creditors (shareholders have no claim anyway and would act out of self-interest alone).

iii. Companies on the brink of insolvency do not owe fiduciary duties to creditors (or shareholders?); they owe a duty to the corp’te enterprise.

1. Credit Lyonnais Bank Nederland v. Pathe Communications Corp (Del Chanc 1991): Post-buyout, company was on the brink of insolvency; to get it out, principal shareholder gave control to the lender who financed the buyout; shareholder demanded that the mfrs sell assets, when they refused

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the shareholder sued for breach of the fiduciary duty of loyalty owed to him. Ct said that the mgrs didn’t owe a fiduciary duty to the shareholder.

2. Steinberg v. Kendig (Bankruptcy Ct, N.D. Ill 1998): Ds were officers/directors of a retailer; they refreshed due dates of receivables to make it look like they were solvent, creditors continued to lend money and supply inventory but they went bankrupt. Company filed for bankruptcy, trustee claimed that the officers/directors were liable for the creditors’ loss. Ct disagreed. On the brink of insolvency, creditors have a right to expect that the directors won’t divert, dissipate, or unduly risk assets necessary to satisfy their claims.

II. Apparent Agency and Inherent Agency Powersa. In general:

i. Apparent agency: estoppel principal. R.2d of Agency definition: apparent authority is the power to affect the legal relations of another person by transactions with third persons (estoppel), professedly as agent for the other, arising from and in accordance with the other’s manifestations to third persons.

1. Creating apparent agency: It arises from written/spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on her behalf by the person purporting to act.

2. Reasonable reliance: party claiming apparent agency must undergo due diligence to ascertain whether the person in question had apparent authority. This existed in Tex Bank of Garland, infra, b/c the bank checked to see if Thomas was, in fact, the CEO.

b. Power of Attorney: i. Villanueva v. Brown (3d Cir 1997): Rubenstein was Ostroff’s (principal) accountant; he made up a

fraudulent power of atty after he got her to invest in a fake hotel/investment; he signed her name to it and had a friend notarize it. Law firm (holding the money for the investment) wrote checks out of the account (her money); she sued when she discovered. Ct held that the firm owed her no fiduciary duty and didn’t have to call and check up on the validity of the power of attorney. Whether the firm’s reliance on the documents was justified is a question of fact; the firm was entitled to conclude that she had given authority to draw on her account.

1. Note: this is probably an apparent agency case (not inherent agency); Ostroff created agency power in her atty (most likely) when she deposited the money in the firm’s account.

c. Apparent agency and inherent agency w/position of authorityi. FDIC (CBP) v. Tex Bank of Garland (Tx App 1989): Thomas (CEO/Chairman of the Bd of CBP bank)

signed a l/c naming TBG as a third-party beneficiary. Customer defaulted, beneficiary demanded payment, and CBP said it wouldn’t honor it b/c Thomas didn’t have actual authority to sign it. Apparent and inherent authority were coextensive here; by naming Thomas CEO (a position that, to outsiders, looks obviously qualified to sign an l/c), they were estopped from claiming that he didn’t have authority to sign the l/c. Similarly (inherent agency), by naming him the CEO, the bank necessarily gave him the power to do the kinds of things that CEOs have the power to do (implicit idea; if you can’t trust your CEO to do things CEOs normally do, he shouldn’t be in that position.

d. Attorneys’ Inherent/Apparent Authority: attorneys have a lot of inherent agency/apparent authority, but some things are for the client alone (i.e. settlement) – note: Ct didn’t explicitly hold this but remanded w/these suggestions.

i. Makins v. DC (DC Cir 2002): Makins was P in a suit against DC, her atty represented her and went to the settlement meeting; he was on the phone with her throughout the negotiations and finally accepted a settlement that she later claimed didn’t bind her (she said she didn’t agree). Ct remanded the case for determination under applicable (state) law. Inherent agency; just b/c she authorized him to engage in settlement negotiations doesn’t mean he had authority to settle.

1. Dissent: apparent authority can arise from any conduct of principal; affirmative representations of agency authority aren’t req’d; this would limit the scope/usefulness of apparent authority. Would adopt reasoning that hiring an atty and holding him out as counsel representing you in a matter clothes the atty with apparent authority to settle claims.

PAYMENT MECHANISMS AND RISK ALLOCATION

I. Negotiable Instruments (NI) and the Holder-in-Due-Course Concept (HIDC)a. Negotiation principle (as opposed to derivation)

i. Focus on the ordinary course of business (OCB) – if a person acquires a NI (here, promissory note) in the ordinary course of business, he will have good title to the instrument even if there’s a thief in the chain. Miller v. Race.

ii. Goal: to make NIs as much like cash as possible.1. HIDC concept used to be mainly about making NIs as much like cash as possible, but now it’s

about allocating risks (expressed through the HIDC concept).

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b. Negotiable Instruments (3-104)i. An unconditional promise or order to pay a sum certain (w/ or w/o interest), either “to order” or to bearer, if

it’s payable to bearer or order when issued, if it’s payable on demand at a definite time, and it doesn’t state that any condition precedent is req’d for the person to get payment of the money.

1. Negotiability must be visible on the face of the instrument2. Even if a note lacks a prerequisite of negotiability when signed, it can subsequently become

negotiable.3. A note containing an otherwise uncond’l promise isn’t made cond’l merely b/c it refers to (or

states that it arises from) a separate agreement or transaction (3-104(a)(3)) (See AITF, infra)ii. Enforcing NIs:

1. Indorsements and forgeries of NIs: see FORGED CHECKS AND FORGED INDORSEMENTS, PT II, INFRA.

2. Liability, Signatures, presentment, warranties: see FORGED CHECKS AND FORGED INDORSEMENTS, PT II, INFRA.

3. Exceptions (why a party may not be able to recover on an NI) (from AITF)a. “Dealt with” exception: an HIDC takes an NI free from all defenses of any party to the

instrument with whom the holder has not dealt (3-305(2)); this is meant to be construed narrowly, and usually applies to deny HIDC immunity to a holder payee who was a party to the underlying transaction with the maker of the NI.

b. “Close connectedness” exception: a transferee who has an unusually close relationship with the transferor may not take an instrument from the transferor as an HIDC (usually applies only in cases where the seller and financial entity are intertwined or have an ongoing relationship.

iii. Negotiation: A transfer of poss’n, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder. (3-201(a)).

1. Transfer (3-203(a)) requires (1) delivery (voluntary transfer of poss’n), and (2) the transferor’s intent to give the transferee the right to enforce the instrument.

c. Holder in Due Course: (3-302(a)(2))i. The most exalted person in all of Anglo-American law; he can assert ownership of an NI even though

there’s a thief in the chain of title.1. Potential problems with HIDCs:

a. Can’t be a HIDC if you took the instrument by legal process, bankruptcy, creditors’ sale, etc., by purchase as part of a bulk trans’n not in the OCB of the transferor, etc. (3-302(c))

b. Being an HIDC doesn’t guarantee payment; three risks even if you are an HIDC:i. (1) “Real defense” from 3-305(a)(1), incl infancy, duress, illegality. Not

common in real life, more academic.ii. (2) Danger that the signer is judgment proof, from 3-305(a)(2).

iii. (3) Would-be HIDC discovers that he’s not even a holder (i.e. forged indorsement), from 3-305(a)(3).

ii. Must be a holder of an instrument:1. Holder = the person in poss’n if the instrument is payable to bearer or, in the case of an instrument

payable to an ID’d person, if the ID’d person is in poss’n. 1-201(20).a. Dual requirement: (1) one must be in poss’n and (2) instrument essentially must run to

the person. This determination depends on whether it’s to bearer (whoever bears it / has poss’n) or to order (named person)

b. Has the ultimate burden of proving the other elements (essentially, that he is an HIDC). Initial burden is slight; party must only disclaim knowledge (AITF, infra).

iii. Holder took the instrument: (from 3-302(a)(2)(i)-(vi))1. For value (3-303)

a. Value includes taking an instrument in satisfaction of an antecedent claim of any person (whether or not that claim was due). See Swift v. Tysen.

2. In good faith3. W/o notice that it was overdue/had been dishonored or that there was an unsecured default re:

payment of another instrument issued as part of the same series4. W/o notice that it had an unauthorized sig or was altered5. W/o notice of any claim to the instrument (3-306)6. W/o notice that any party had a defense/claim (3-305(a))

a. AITF v. Laminaciones de Lesaca (2d Cir 1994): Laminaciones (buyer) agreed to purchase machinery from Delta (seller); Delta asked AITF (financier P) for financing; buyer issued Delta 10 promissory notes w/blank dates to be filled in when Delta presented shipping documents. Delta presented documents before it shipped the

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machinery, Laminaciones cancelled the K with Delta and then refused to pay AITF on the promissory notes (which are NIs). Ct held that, since AITF took the notes in GF w/o notice of underlying defenses (proven by affidavits submitted by VPs

d. Rights of a HIDC: A holder in due course takes an NI free of all defenses (even those against his transferor).i. Swift v Tysen (SCOTUS 1842): Schemers made up an investment scheme, but became insolvent; had to pay

back a bank teller (Swift) for a note he’d personally paid out for them, to do so, they signed over a NI they’d gotten from Tysen (note: this is cancellation of antecedent debt). Ct said that cancellation of antecedent debt counts as value re: holder in due course, so Swift is entitled to be paid on the note. This case is good law under old Art 3; ct uses honesty in fact w/o inquiring into comm’l norms of the underlying transaction.

1. Llewelyn disagreed with this ruling and said that, because the transaction wasn’t in the OCB, Swift shouldn’t be an HIDC. He said that payment on account of antecedent debt made just before a party vanishes isn’t in the OCB.

2. Recent decisions have sided with Llewelyn; now, standards of GF look more toward course of trade/dealing.

II. Forged Checks and Forged Indorsementsa. Negotiable Instruments in Practice

i. Terminology:1. “Drawer” = the person who writes or owns the check/NI2. “Drawee” = the person who presents the check/NI for payment (usually to a bank)

ii. Enforcement of NIs1. Person entitled to enforce an NI presents it to the bank (= demand/presentment) for payment. 3-

501.a. Who is entitled to enforce? The holder. (3-301)

i. The holder is the person in poss’n of an NI made out to bearer (1-201). 1. This includes finders and thieves of instruments in bearer form.

ii. If the NI is made out to an identifiable person, they are the holder (entitled to enforce) as the “identified person in poss’n” of the NI (3-110).

b. The bank doesn’t have to enforce the NI:i. An instrument is dishonored (under 3-502) when a bank refuses to pay the

person who presents the NI and is entitled to enforce it.ii. Liability is important if a bank dishonors an NI; if this happens, the person who

signed the NI (“the drawer”) must pay on it. 3-401.iii. Only the person who signs an NI is liable on it. (SIGNATURE PROV”N)

2. Special Indorsement (3-205): holder (either ID’d person in poss’n if made out to order or the holder if made out to bearer) can negotiate the instrument to someone else via a special indorsement. The holder signs their name and indorses the check to someone else, that person then becomes the holder and only they may negotiate/enforce the instrument. They can also indorse in blank, which makes the NI in bearer form.

iii. Warranties and Promises are made when checks are indorsed (transfer) and when the person at the end of the line presents the NI to the bank for payment (presentment).

1. General information: a. The two categories of warranties are distinguished by the parties to whom they run (not

the parties that give them). i. Transfer warranties run only to transferees (they always run to a transferor’s

immediate transferee, and often extent further to subsequent transferees).1. Transfer warranties do not run to persons who pay or to payor banks.

Paying entities receive a less-extensive array of presentment warranty protection.

2. Transfer warranties always run to immediate transferees, and they run to subsequent transferees if the transfer is by indorsement (here, warranty runs with the instrument).

ii. Presentment warranties run to a person who in GF accepts/pays on the instrument.

1. Presentment and payment don’t result in transfer; transfer warranties don’t run to the paying party.

2. Transfer warranties:a. Given by a person who transfers an instrument for consideration. Also made (under Art

4) by a customer/collecting bank that transfers an item and receives a settlement or other consideration (i.e. the CE, infra)

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i. Transfer: occurs when an instrument is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery a right to enforce the instrument (3-203(a)).

1. A transfer w/o indorsement precludes creation of K liability, but doesn’t escape transfer warranties; a person who makes an anomalous transfer doesn’t give the warranties b/c they’re not transferring the instrument.

ii. Only those who give consideration for the transfer of the instrument give transfer warranties.

b. Statutory text: (3-416 and 4-207): a person who transfers an instrument warrants (to the transferee, and if transfer is by indorsement, to any/all subsequent transferees) that:

i. (a)(1) the warrantor is entitled to enforce the instrument; ii. (a)(2) all signatures on the instrument are authentic and authorized;

1. This distinguishes transfer warranties from presentment warranties; this makes transfer warranties stronger than presentment warranties.

2. Covers the authenticity of signatures in any capacity (incl drawers, makers, acceptors, and even indorsers whose signatures aren’t necessary for negotiation of instrument).

3. This protects the transferee’s reliance on the appearance that prior parties incurred liability on the instrument.

iii. (a)(3) the instrument hasn’t been alterediv. (a)(4) the instrument isn’t subj to a defense or claim in recoupment of any party

that can be asserted against the warrantorv. (a)(5) the warrantor has no knowledge of insolvency proceeding commenced

w/respect to the maker/acceptor, or (w/unaccepted draft) the drawer;3. Presentment warranties

a. Given by the person obtaining payment/acceptance and a previous transferor of the draft, at the time of transfer. A person receiving payment gets only the presentment warranties.

i. The warranties run only to the drawee making payment or accepting an unaccepted draft in GF; until the draft is paid/accepted, the presentment warranties don’t run to anyone.

b. Statutory text: (3-417 and 4-208) (note: basically a warranty that there are no missing or unauthorized indorsements): a person who presents an unaccepted draft and the drawee pays/accepts the draft, the person getting payment at the time of presentment and all previous transferors of the draft, warrant that:

i. (a)(1) the warrantor is entitled to enforce the instrument; ii. (a)(2) the warrantor has no knowledge that the signature of the purported

drawer of the draft is unauthorized;1. This distinguishes transfer warranties from presentment warranties

a. Reason for this distinction: a drawee can verify the drawer’s signature with a signature card (that the bank holds); but the drawee has no similar method to verify indorsement signatures.

2. This is not an absolute guarantee of the authenticity of any signature. iii. (a)(3) the instrument hasn’t been alterediv. (a)(4) the instrument isn’t subj to a defense or claim in recoupment of any party

that can be asserted against the warrantorv. (a)(5) the warrantor has no knowledge of insolvency proceeding commenced

w/respect to the maker/acceptor, or (w/unaccepted draft) the drawer;4. Causes of action under transfer/presentment warranties:

a. Conversion action (3-420(a)): against anyone who exercises active ownership of the NI (i.e. bank when it pays out on the NI); conversion actions can work all the way up the chain.

i. Conversion actions arise not only with payment, but with transfer, too.b. Breach of warranty:

i. Banks can sue each other under presentment warranties for the warranty (on presentment) that each bank was entitled to enforce the draft.

1. Remember, only the holder can enforce a draft, and to be a holder, all indorsements must be proper/authentic. This does not matter if the NI is in bearer form.

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2. This warranty is the NI analog of the CL notion of an implied warranty of title in personal property.

b. Forgery: i. General situation/Parties: Thief (T) steals checks from Owner (O), then forges (either the indorsement or

the whole check), then presents it to the local bank (LB), which pays him out. The LB then presents the check to the payor bank (PB), which reimburses it. This is final payment (consequences if entire check is forged).

ii. Discerning between different types of forgery1. Note: banks don’t keep old paper checks; it’s hard to determine the extent of forgery.

a. Wachovia Bank v. Foster Bancshares, Inc (7th Cir 2006): Check has its “PTOO” line forged/changed; but the checks are photographically identical; it was unclear whether the entire check had been forged (forged check) or whether it was just altered (forged indorsement). By the time the problem is discovered, the check has been destroyed and there had been final payment. Liability rules differ: with a forged indorsement/altered instrument, the party closest to the wrongdoer takes the fall. Ct said that they would assume it was an altered/forged indorsement (rather than an entirely forged check), thus the party closest to the forger took the fall (here, the LB); Posner says that we shouldn’t assume a new type of fraud has been perpetrated when it is impossible to tell what happened.

iii. Forged Indosements (on a legitimately written check): 1. Forged indorsement, no negligence (general rule): liability rests on the thief (if he’s available/not

insolvent), otherwise on the first solvent party to deal with the indorsement.a. Note: if a payee isn’t negligent, he is never bound by a signature that’s not his except in

the situation of negligence (he’s estopped from claiming that the signature isn’t his) and under 3-405, where he has done enough to make the signature count (similar to inherent agency).

b. Once there is a break in the chain of indorsements, the instrument is no longer payable to the person in poss’n of the instrument.

c. 3-403: an unauthorized signature is not effective except if the thief transfers the NI for value (HIDC or GFPfV); that signature binds only the thief, not the person who signed the check.

2. Forged indorsement + negligence (of owner of check/NI, “payee”): the payee is estopped from claiming that the indorsement is unauthorized (no conversion action)

3. Trusted but dishonest person NOT an agent + forged indorsement + no negligence: when a payee trusts someone, he is bound by her actions even w/o negligence and even if she isn’t authorized to indorse checks.

a. Signature of trusted person is not the signature of the payee b/c she wasn’t authorized.b. Allocation of risk: as btwn innocent payee and an innocent bank, the payee (who hired

the bookkeeper) should take the fall. c. 3-403: an unauthorized signature is not effective except if the thief transfers the NI for

value (HIDC or GFPfV); that signature binds only the thief, not the person who signed the check.

4. Trusted but dishonest agent (3-404):a. Trusted (but dishonest) agent + check to cash OR “imagination”: Payee is left holding the

bag; situation is the same whether the agent writes the check out to herself, cash, or uses imagination.

b. Agent with imagination + negligent local bank: rule of comparative negligence in 3-404(a); the payee has an independent negligence action against the bank if the bank failed to exercise care in taking the instrument, which substantially contributed to the loss.

i. Scope of contributory negligence: the payee has a suit against the person failing to exercise ordinary care to the extent that the failure contributed to the loss.

iv. Forged Checks: remember, they’re not like prop’ty, we have a strong final payment rule. This is the situation where a check is stolen (or created, i.e. on a computer).

1. General rule: in the absence of final payment, liability cones to rest on the first solvent party to deal with the forged instrument. When there is final payment, liability comes to rest on the payor bank.

2. Ordinary forged check, no negligence by owner (O), no final payment by bank: If a thief (T) steals a checkbook or makes facsimile checks, writes them out to cash, then transfers them for value to a local bank (LB), the LB is a holder.

a. The forged signature on the check (T signing O’s name) counts as T’s signature.

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i. GFPfV down the line: can sue up the line for transfer warranties; the person who took the check from the forger (T) can sue the forger b/c he is bound by the instrument (and liable on it, since he signed it). (3-401).

b. If the O finds out that the check was stolen/forged, he can tell his bank (payor bank, PB) that it was stolen and they can refuse to pay on the instrument. If LB has honored the check (after T’s presentment), they are stuck unless they can find the T; LB can’t go after O b/c it’s not his signature on the instrument.

3. Ordinary forged check, but O was negligent: estoppel applies as against O; he’s estopped from claiming it wasn’t his name.

a. Note: here, negligence is a question of fact, not a legal question.4. Ordinary forged check + final payment: bank that made final payment takes the fall if it doesn’t

“bounce” the check w/in the specific amount of time given.a. When T takes the check to the LB, they honor it, and then present it to the PB, then the

PB pays on it, the PB takes the fall. i. LB’s presentment warranty: doesn’t include a warranty that the signatures are

good, just that the LB has no knowledge that the signature/indorsement is unauthorized. This is distinguishable from a situation of forged indorsement, where the payor bank can sue upstream for breach of presentment warranty. PB can’t do that here. (?)

5. Ordinary forged check + T cashes check at currency exchange (CE), which presents to the LB, which presents to the PB, but the PB refuses to pay (no final payment).

a. CE is left holding the bag b/c there was no final payment; the CE made a transfer warranty when it transferred the check to the LB (under 3-416) that all signatures were genuine; CE broke that warranty when it transferred to the LB. When the LB transferred to the PB, it didn’t break the warranty (b/c transfer warranty, 3-417, guarantees only that the warrantor has no knowledge that the signature is unauthorized.

b. + CE is negligent and enters final payment:i. Payor bank doesn’t have an action against the CE and is stuck (final payment

rule); remedies for making payment wrongly can’t be asserted against a person who took in GF for value and, in GF, relies on payment/acceptance. 3-418.

ii. Independent, standalone comparative negligence action (3-404(d)); payor bank can go after the CE/transferor, not for breach of presentment warranties, but independently if the CE is negligent.

6. Forged check + imaginative T: (note: treat forged check + forged indorsement as just a forged check)

a. This situation is treated the same way as when a person forges a check to themselves and receives cash. (Final payment rule).

III. Wire Transfersa. General rule: at payment, the payor bank takes the fall. Emphatic embracement of the rule of finality.b. Fraud:

i. When a wire transfer is fraudulently induced by a thief, the institution that honored the forged order (and, in so doing, dealt directly with the forger) is liable for the amount of the wire transfer.

1. Bradford Trust Co v. Texas American Bank (5th Cir 1986): Con artists arranged to buy coins for $800K; they wrote a forged letter to Bradford, which held Rochefort’s account, and asked for the liquidation of $800K. Bradford paid it; Rochefort notified them, they reimbursed him and demanded reimbursement from the con artists’ bank and the coin dealer. Ct held that Bradford took the fall b/c it dealt directly with the thief (and made payment); idea is that it was in the best position to stop the forgery. Ct refused to apply comparative negligence (in favor of the rule of finality). Troubling b/c the Ct didn’t use any particular prov’n of the UCC.

c. Discharge for Value Doctrine: a creditor who has received from a third person any benefit in discharge of debt/lien is under no duty to make restitution (even if it was a mistake) as long as the transferee made no misrepresentation and had no notice of the transferor’s mistake. This is a defense to cases seeking recovery of funds mistakenly wired.

i. Credit Lyonnais v. Koval (Miss 1999): Koval had a bank account in Luxemburg, but the bank was liquidated; the bank protection system could pay only $14,450 (Koval had much more than this in his account), notified him of this, but then the bank (Credit Lyonnais) made the payment twice. When CL discovered its mistake, it demanded repayment, Koval refused, and it sued him. Ct held that Koval could keep the erroneous wire transfer under the discharge for value doctrine (4A-205); holding that the two prerequisites were met: (1) D (beneficiary receiving the funds) was entitled to receive money in payment of a debt, and it’s not necessary that the payor be the debtor; and (2) the beneficiary (D) had no knowledge that the funds were erroneously wired.

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1. Dissent disagreed on both of the two preconditions, saying that D was entitled only to $14K, not $28K; and that D knew/should have known that the second transfer was a mistake; he was supposed to get only one transfer and he got two, so he had no right to keep the money.

d. Ct will not engage in an open-ended inquiry into whether a recipient of funds (fraudulently obtained) knew of the nature of the funds.

i. Regions Bank v. Provident Bank, Inc. (11th Cir 2006): Regions and Provident were warehouse lenders (lend money to independent mortgage lenders who fund loans to home buyers, then sell the mortgage at a premium to a third party and pay back the warehouse lender); Provident was lending to Morningstar (which was engaging in fraud); Morningstar borrowed from Regions to pay Provident and Regions demanded repayment. Ct wouldn’t go into an open-ended inquiry into whether Provident was responsible for knowing what was going on at Morningstar, so Provident got to keep the money (analogy to money: as long as Provident was acting in GF, it got the “title” to the money.

COMMERCIAL CONTRACTING

I. The Duty to Inspecta. General rule: caveat emptor – if you buy the goods w/o inspecting, you get them “as is,” w/o warranty.

i. Note: buyer must reject w/in the statute of limitations.b. Nonconforming Samples and Implied Warranties: current rule @ 2-313.

i. Parkinson v. Lee (KB 1802): P (buyer) wanted to buy hops from D (seller, but not grower); pursuant to the agreement, D delivered five samples and promised that the goods delivered would be of like quantity to the samples. When the goods were delivered, they weren’t usable and not of like quality (even though the samples were satisfactory). Ct said that the buyer could not recover (under assumpsit/fraud) b/c there was no express warranty. It’s possible that samples could be fine and the hops could not (w/o fraud).

1. Giving samples = express warranty (statute)ii. There is no implied warranty (of quality?) just because a buyer pays a price that would be the FMV for a

good-quality item. Stuart v. Wilkins. iii. Gardiner v. Grey (Nisi Prius 1815): P buyer bought 12 bags of waste silk from D after seeing a sample that

was satisfactory; Ct said that inconsistency btwn goods and sample by itself doesn’t necessarily give the buyer any rights unless there’s an express warranty that the goods will correspond with the sample.

c. Buyer’s right to reject goods:i. When the buyer accepts the goods:

1. Acceptance: 2-607(1) occurs when the buyera. (a) After a reasonable opp’ty to inspect the goods, signifies to the seller that they’re

conforming or that he’ll take/retain them in spite of their nonconformity; b. (b) Fails to make effective rejection; but this doesn’t occur until the buyer has had a

reasonable opp’ty to inspect; or i. Question in Miron, infra, was what constituted a “reasonable time.” This was a

race horse, they’re extremely delicate and prone to rapid changes in condition. When the buyer didn’t inspect the horse at the place of sale or at his barn later that same day, he passed up a “reasonable opp’ty” to inspect the horse.

c. (c) Does any act inconsistent w/seller’s owernship; but if this is wrongful as against seller, it’s an acceptance only if ratified by him.

2. Acceptance doesn’t end the buyer’s right to assert that the goods are defective, but it changes the buyer’s burden of proof.

a. Miron v. Yonkers Raceway, Inc (2d Cir 1968): Raceway/purchaser bought a horse at auction; after they took it home they realized that it had a broken leg. They sued the P (horse seller). The terms/conditions were that all risk/responsibility for the horse would pass to the buyer at the fall of the auctioneer’s hammer (K gave 24 hours to return the horse if it was “defective”). Conflicting evidence over whether the leg was broken when the horse was sold; but the Ct said that the buyer had the burden of proof b/c he had accepted the horse (to demonstrate that the horse was unfit at the time of purchase). Since he couldn’t prove that, he couldn’t recover.

i. Note: auctioneers have a “puffing privilege” – they’re not liable under warranty for everything they say.

ii. When a buyer rejects: 1. If a buyer rejects w/in a reasonable period of time, the burden of demonstrating that the goods

were suitable (and thus that rejection was improper) is on the seller.2. Buyer must put seller on notice of revocation, 2-608(2).

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a. Continued use of item doesn’t make rejection improper; this is important for mitigation. Code doesn’t require a rejecting buyer to immediately stop using the product. Potts, infra.

3. Exercise of ownership after rejection: 2-602(a). iii. When a buyer discovers that goods are defective or have a higher-than-ordinary likelihood of being

defective, liability can shift to the buyer based on the doctrine of incurred risk.1. General Foods v. Valley Lea Dairies (7th Cir 1985): P buyer bought dry milk from D sellers, who

were req’d to certify that the milk was produced under sanitary conditions (P reserved the right to do its own tests). It found salmonella in one of the 9 lots it had purchased, then tested the rest at a higher confidence level, used it to make chocolate, which was shipped to distributors/stores before it was discovered that the rest of it had salmonella, too. P sued Ds claiming breach of express/implied warranties; Ct held that P had incurred the risk of loss by using the suspect shipment rather than rejecting it, saying that the incurred risk doctrine is triggered when a risk is known (doesn’t matter what likelihood there is of the risk being realized).

a. Dissent (Easterbrook) would have req’d specific knowledge of particularized risk rather than general knowledge of potential risk like majority req’d.

II. Warranties: Express and Implieda. Conflict btwn/among Warranties 2-317b. (1) Implied Warranty of Title 2-312: re: personal prop’ty

i. Function: seller implicitly warrants that what he sells is his to sell. This is for situations in which the seller believes he owns the goods but doesn’t.

ii. Purpose: to establish liability upstream to the person who deals with the bad guy.iii. Significance: important in nemo dat and understanding how NIs work, but it’s not often litigated. Most

often invoked b/c of issues of infringement (when you use a machine in business, there’s an implied warranty that you’re using it w/o violating someone else’s IP rights).

c. (2) Express Warranty 2-313:i. Express warranty is created when words are a description or affirmation of fact or promise about the

product that became part of the basis of the bargain. 1. Note: actual reliance not required; just show that the express warranty was part of the bargain.

ii. Can never be disclaimed. LS Heath & Son v. ATT Information Systems, Inc (7th Cir 1993).iii. Express warranty can be created by descriptions of products in catalogs:

1. Interco v. Randustrial (Mo App 1976): P buyer sued D seller alleging breach of warranty after P purchased flooring from the seller; in D’s catalog, it said the material would withstand “substantial flex” without cracking, but in the second floor P used it in, it cracked. Ct held that the buyer didn’t establish breach of an express warranty (re: statements in the catalog) b/c the term wasn’t expressly definable, and said that it was reasonable for the jury to find that the flexing at the buyer’s location was more than substantial.

iv. Interpretation of condition in express warranty: 1. CPC Int’l, Inc. v. Techni-Chem, Inc. (ND Ill 1987): P buyer entered into a K with D seller to

purchase equipment for refining fructose; sales agreement included a repair warranty that said that after a certain amount of repairs, D would charge); agreement also contained a guarantee that the machine would produce a min amount of 55% fructose per day. Machine didn’t work, D workers worked on the machine for longer than anticipated, P sued for breach of express warranty. Ct held that seller wasn’t entitled to summary judgment on the production guarantee b/c it wasn’t clear whether indication that machine would produce certain amount that referred to specific chemicals the user would have to use in the machine was a condition precedent or not.

a. Note: Ct looked to the fact that D continued to make repairs beyond the time specified in the K as evidence of breach, but it’s unfair that they penalize the seller for being diligent and trying to make the machine work.

v. Fraud in express warranties: if the Ct finds that an express warranty has been breached, there may also have been fraud if a D promised to do something it never had the capability to do.

1. LS Heath & Son v. ATT Information Systems, Inc. (7th Cir 1993): Buyer was a chocolate mfr that wanted to upgrade its computer systems; ATT submitted a bid, saying that it could provide a fully integrated voice/data system (later came to light that it didn’t have the capability to do this); when the system didn’t work up to expectations, buyer said it was going to revoke acceptance and sue. ATT filed countersuit for purchase price. Ct held that there was an express warranty, and that SJ on the buyer’s CL fraud claim was inappropriate b/c it if was found that the seller breached the express warranty, there could be fraud as well. Buyer would have to show false representations, D’s knowledge of the fact that the statements were false; that the statements were made to induce reliance; that P’s reasonably relied, etc.

d. (3) Implied Warranty of Merchantability 2-314: (IWM)

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i. Function: merchant selling goods in the mktplace warrants that his goods pass some certain minimum standard.

1. History: has been part of the law merchant since the 12th century; originally applied only to mfrs of goods/sellers of foodstuffs, but has since been extended and applies to all sellers.

ii. Disclaimer: IWM can be disclaimed if it is conspicuous in the document and the word “merchantability” is used. LS Heath & Son v. ATT Information Systems, Inc (7th Cir 1993).

e. (4) Implied Warranty of Fitness for a Particular Purpose 2-315: (IWFPP)i. Function: applies when a buyer relies on a seller’s expertise to find a product for a particular purpose; this

requires an affirmative undertaking by the seller that the goods are suitable for that particular purpose.ii. Particular use =/= ordinary use; particular use is a specific use by the buyer peculiar to the nature of his

business. (See Pott, infra, in which parties argued extensively about whether use was specific or general)1. Ingram River Equipment, Inc. v. Pott Industries (8th Cir 1987): P (barge operator) K’d with D

(builder of boats/barges) to purchase four barges; it specified that they should have steam-coil systems for heating cargo to make it easier to unload; P left most of the planning to D, but after delivery, leaks developed in the system and P had to have them repaired/replaced. P sued for breach of IWFPP; parties argued over intended use of barge, Ct said that use doesn’t have to be entirely unique; buyer’s use must be sufficiently different from customary use of the goods; deference to T.Ct.’s ruling that use was particular.

a. Look to the buyer’s purpose for purchasing the item; seller must be aware of it.b. This is what distinguishes IWFPP from IWM.

III. Risk of Lossa. History/Policy: at CL, risk changed when title passed (title passing =/= delivery); Llewelyn thought that risk of loss

ought to be borne by the seller in absence of indication to the contrary until he transfers poss’n of the goods; this is based on a clearly determinable event (so that merchants know where they stand), this is also the time when the seller’s expertise in taking care of the goods stops being superior to buyers.

i. Incentives and risk go together.b. When neither buyer nor seller contemplated risk of loss, look to 2-509.

i. Default prov’n: 2-509(4) “subject to agreement of the parties”1. Easy to change risk of loss, i.e. with an FOB prov’n. “FOB [place/event]” means that risk of loss

passes at or on the happening of [place/event]. a. i.e. FOB buyer’s barge; risk of loss passes when the goods are in the barges; seller is

responsible for turning them over to the carrier and for getting them into the barge.ii. Generic UCC rule: risk of loss passes on transfer of poss’n: 2-509(3)

1. In the absence of anything to the contrary, it’s a shipment K and risk of loss passes when the goods are delivered to the carrier. See Commonwealth Petroleum Co v. Petrosol Intern’l, Inc. (6th Cir 1990) (holding that there was sufficient evidence to determine that the K was an inventory transfer, no transfer of poss’n/not a shipment K).

iii. No transfer of possession: what happens when the goods aren’t going to be moved: 2-509(2).1. Risk transfers to the buyer:

a. (a) on his receipt of poss’n/control of a NDOT covering the goods; or b. (b) on acknowledgment by the bailee of the buyer’s right to poss’n of the goods; orc. (c) after receipt of poss’n/control of a NNDOT or other direction to deliver.

2. Determination of whether a K is an “inventory transfer” (no transfer of poss’n) or for delivery (default; includes transfer of poss’n) significant for risk of loss.

a. Commonwealth Petroleum Co v. Petrosol Intern’l, Inc. (6th Cir 1990): Petrosol and Commonwealth are middlemen, Comm has its own storage facility. Petrosol bought gas from Cal Gas and stored it at Lake Underground; then Commonwealth bought that gas from Petrosol, but the gas stayed in the same storage facility. There was some confusion on the K (said “shipped via: inventory transfer” but no box was checked next to “to be delivered in”). Wall collapsed and the gas was lost. If it was an inventory transfer, the risk is on Commonwealth (buyer), but if it was for delivery, risk was still on the seller (Petrosol). Ct held that it was an inventory transfer, so Commonwealth took the fall.

i. Note: metaphysical question in the case is whether, when the gas is being stored at the facility, it’s Commonwealth’s gas being stored or Petrosol’s gas that it’s holding for when Commonwealth wants to use it? Ct decided on the former.

iv. Risk of loss with breach/nonconforming goods (2-510)1. With breach (nonconformity so as to give buyer right of rejection), risk of loss remains on the

seller unless the buyer accepts or the seller “cures”. Thus, risk turns on acceptance rather than transfer of poss’n.

a. i.e. owner sells horse o buyer, warranting that it doesn’t have windgalls. Buyer picks up horse and takes it back to farm where it dies the next day in a fluke thunderstorm;

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autopsy reveals that the horse had windgalls. Does the buyer have recourse against the owner? Goods were nonconforming; breach exists if the goods so fail to conform to the K as to give a right of rejection. Risk of loss on seller unless buyer had accepted.

i. Note: determining what is “acceptance” often requires heroic factfinding.b. i.e. Seller promises ton of no. 2 grade corn to buyer, but puts no. 3 grade corn in the

hands of the carrier (worth less/bushel than no. 2 grade); on the way there, truc is engulfed by a tidal wave (but buyer has already paid). Same result; risk of loss is on seller until cure by seller/acceptance by buyer.

2. Damages determined by 2-711.v. Risk of loss with installment Ks: 2-612.

1. Rejection of nonconforming shipment in installment K:a. Buyer cannot reject a shipment of an installment K if the nonconformity can be cured, 2-

612(2). Buyer must accept if the seller gives adequate assurance of cure. This is a drawback from the perfect tender rule.

i. i.e. seller promises 10 tons of no. 2 grade corn to buyer for $5/bushel in 10 monthly shipments of 1 ton each (shipment K under 2-509(1)). Third shipment, seller puts no. 3 grade corn in hands of carrier; it’s worth less than no. 2 grade, but no. 3 and no. 1 grade can be mixed together to produce no. 2. Seller offers to cure by offering a discount or sending no. 1 grade in the next shipment. Buyer cannot reject shipment b/c the nonconformity can be cured. Discount/partial refund may constitute cure, but Baird doesn’t care.

b. Buyer can reject a shipment of an installment K if it substantially impairs the value of the installment; this is breach of the whole installment K. 2-612(3).

2. Buyer who has already paid for a nonconforming shipment in an installment K (that can be cured and doesn’t substantially impair the value of the installment) cannot demand a refund.

a. Note: 2-709 gives the seller a right to bring an action for the price, but it doesn’t mention nonconforming goods that give rise to rejection (says only “conforming goods”); this is probably an error; it should say “seller can bring action for the price of conforming goods or of nonconforming goods that did not give rise to a right of rejection.”

b. i.e. seller promises 10 tons of no. 2 grade corn in 10 monthly shipments of 1 ton each (shipment K under 2-509(1)). For third shipment, seller puts no. 3 grade corn in the hands of the carrier (worth less but can be combined with no. 1 grade to make no. 2 grade); buyer is a regular buyer of no. 3 and 2 grades. Seller offers to cure by offering a discount or sending no. 1 grade in the fourth shipment. Nonconformity doesn’t substantially impair the value. Truck carrying the shipment is engulfed by a freak tidal wave in Indiana; if buyer already paid

c. Anecdote: Douglas’s mom’s dead horse. Mom wants to start a nonprofit that teaches developmentally disabled children to ride horses; she buys a horse from another such company and expects to board it at the stable for a time. She entered into the K.

i. For purposes of implied warranties, make sure to check whether the seller is a merchant (2-104(1)); this requires that they deal in goods of that kind or otherwise hold themselves out to have skill peculiar to that trade.

1. Art 2 is the only article with special provisions for merchants. Meaning of merchants in 2-509 different (more relaxed standard) than in Art 2). Here, it just means someone selling goods. In warranty prov’ns (i.e. IWM), “merchant” means a person with expertise in the particular item.

2. When seller is a nonmerchant, tender of delivery is sufficient to transfer risk of loss. 2-503.ii. Ambiguity in possession: D’s mom had an agent (Bonnie) who also worked for the home from which D’s

mom bought the horse.IV. Noncontractual Obligations

a. Preliminary Agreements:i. Three types of preliminary agreements

1. (1) Mere proposal: preliminary writing not intended to be binding on the parties at all. Result: neither party has any obligation.

2. (2) Binding preliminary commitment: created when parties agree on certain major terms but leave others open to negotiation; parties accept a mutual commitment to negotiate together in GF in an effort to reach a final agreement. Result: binding to a degree; parties commit to the obligation to negotiate open issues in GF in an attempt to reach objective w/in the agreed framework. If a final K isn’t agreed upon, parties may abandon the trans’n.

3. (3) Fully binding preliminary agreement: created when parties agree on all the points that require negotiation, incl’ing to be bound, but agree to memorialize their agreement in a more formal

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document. Result: fully binding (preliminary only in form); binds both parties to the ultimate K’l objective.

a. Adjustrite Systems, Inc. v. GAB Business Svcs, Inc (2d Cir 1998): Ps had a computer software program that depended on a database subj to a renewable licensing agreement; another company sought to buy them, but was concerned about the licensing of the program. When it asked the database company if it could have a more lengthy agreement to use the database, it refused, and the company sought to pull out of the proposed merger. Parties had already started negotiating, had a two-page proposal that called for other documents (sales agreement, employment Ks, letter of intent) which were never written. Ct said that it wasn’t a fully binding preliminary agreement.

i. Note: this appears to eliminate promissory estoppel (reasonable reliance on the merger) since the Ct looked only to the proposal as the entire agreement (no parol evidence).

b. Four factors to consider (from Adjustrite): (1) whether there has been an express reservation of the right not to be bound in absence of a writing (language of the agreement – most important); (2) whether there has been partial performance of the K; (3) whether all of the terms of the alleged K have been agreed upon; and (4) whether the agreement is the type of K that’s usually committed to writing.

ii. Policy objectives involved in selecting which type of agreement: Cts are wary of trapping parties in surprise K’l obligations they didn’t intend (intent of parties is key); Cts must enforce agreements intended to be binding.

b. Consultant’s Privilege:i. The defense of consultant’s privilege applies only when a consultant (1) gives advice w/in the scope of his

engagement; and (2) gives honest advice (not for his own benefit).1. JD Edwards & Co v. Podany (7th Cir 1999): Seller/BP entered into a K with buyer to purchase a

computer system; selected that particular system over another, similar one b/c it had a special component the other lacked. Seller was engaged in reorganization and hired a consulting company to do a “sniff test” (limited review) of the project involving the computer system. He gave advice with the goal of being hired to implement the other (inferior) computer system; he did so and it failed miserably. He tried to assert the consultant’s privilege (defense to the tort of deliberately inducing breach; theory on which the seller company sued). Ct said that the consultant wasn’t entitled to the privilege b/c, although he gave advice w/in the scope (or at least mostly so, if he saw something wrong slightly outside of the scope of his engagement, we want him not to be discouraged re: speaking up), he didn’t give honest advice b/c it was in his own self-interest. Ct wouldn’t overturn a jury verdict to that effect – the jury didn’t believe the consultant.

CORPORATE CONTROL TRANSACTIONS

I. Best Efforts Clause:a. With royalty provision post-merger for sale of a brand: party must promote the brand the way a reasonable person

would promote it if it were their own producti. Bloor v. Falstaff Brewery Co (2d Cir 1979): P brewery produced cheap beer; change in ownership, new

brewery (that sold nicer beer) took over; there was a royalty prov’n whereby the new company had to pay a certain amount on sale of the cheap beer, it included a best efforts clause (if breach, liquidated damages prov’n). Sales of the cheap beer plummeted after another takeover, and old brewery sued. Question was over the proper application of the best efforts clause; some of the decline was likely due to a takeover of bigger, nat’l breweries in the mkt (other, similar cheap beers from local breweries saw declines in sales), but there were some questionable business decisions by the new owner. Ct found that the best efforts clause was breached (on a showing that the new company didn’t care about the volume of the sale of the cheap beer and let sales plummet) and calculated damages based on the sales of other similar cheap beers from local breweries in the area. Liquidated damages clause didn’t apply.

b. A corp’n may not take voluntary action to get out of a noncompete clause (or similar K’l obligation): even w/o explicit language binding assignees of an asset (buyers of a subsidiary) not to compete, a party K’ing not to compete can breach the covenant/agreement by disabling itself from complying w/the NC obligation by selling the asset (thereby enabling the competition).

i. Goodman Mfring Co v. Raytheon Co (SDNY 1999): Raytheon and Goodman entered into a merger agreement; Goodman would buy nearly all of Raytheon except its comm’l laundry segment, which Raytheon spun off into a subsidiary (RCL). There was a noncompete (NC) that said that Raytheon wouldn’t permit any of its affiliates to compete in home laundry in the US; Raytheon sold RCL (probably to get out of the NC) to Bain (Alliance), which intended to compete with Goodman. Suit. Question was

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whether sale of RCL constituted noncompliance with the K; Ct allowed this COA to go forward (survived D’s motion to dismiss), since there were no express provisions that said that RCL couldn’t sell itself or that, if it did sell, the new company would be bound by the NC. Ct held that there were allegations that could support the inference that Raytheon sold RCL to get out of the NC.

1. Note: in Citibank, the agreement had a “successor clause” that bound successors to the NC after sale. This is smart. Think about how to draft these agreements.

c. Adverse change in condition of a company during merger:i. Goodman Mfring Co v. Raytheon Co (SDNY 1999): Before merger, Goodman alleged that Raytheon said

that the new Horizon washer would soon be ready for mass production; it took a long time to get ready, Goodman said that this was breach of K as a material adverse change in business condition (involving future business prospects). Ct doesn’t allow the COA to go forward, b/c there were no express or implied warranties re: the readiness of future products (or Horizon washer specifically).

ii. When merger fails b/c of material adverse change in company to be acquired (and the purchasing company breaches), the liquidated damages clause controls damages award.

1. Consolidated Edison, Inc. v. Northeast Utilities (2d Cir 2005): Corp’n was being sold for a certain price, the deal fell through b/c of adverse change in condition of company to be acquired. Ct held that the liquidated damages clause would control and refused to award to shareholders the entire amount of the merger agreement ($1.2 bn). Shareholders also didn’t have the right to sue as third party beneficiaries b/c, in order for them to have that right, it has to be clearly/explicitly stated in the K (it was, but they would only have a right after the merger; since that didn’t happen, they had no right.)

a. Note: prevention doctrine: parties can’t avoid performance of a K’l duty by preventing the occurrence of a condition precedent. If the purchasing company had wrongfully prevented a merger that, on completion, would have yielded the premium, the failure of the merger would be no excuse for nonpayment of the premium.

iii. Court orders SP of a merger (highly unusual)1. IBP, Inc. v. Tyson Foods, Inc (Del Ch 2001): Tyson was anxious to buy IBP (in bidding war with

another company); IBP had trouble, but Tyson continued to pursue it until it won the bid, then got buyer’s remorse (had its own fin’l troubles), and cancelled the merger. IBP sued seeking SP, and the court ordered it. Said that IBP didn’t suffer a material adverse change sufficient to allow Tyson to cancel the merger b/c, although there was a short-term blip, this purchase was a long-term K and companies go up and down at times (esp with livestock). Ct ordered SP, saying that Tyson had the power to hire/fire whomever it wanted, so it felt the companies would be able to work together.

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Commercial Transactions – Prof. Baird – Winter 2007UCC Provisions

INTRODUCTION

§ 1-103. Construction of [Uniform Commercial Code] to Promote its Purposes and Policies: Applicability of Supplemental Principles of Law.

(a) [The Uniform Commercial Code] must be liberally construed and applied to promote its underlying purposes and policies, which are: (1) to simplify, clarify, and modernize the law governing commercial transactions; (2) to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and (3) to make uniform the law among the various jurisdictions.

(b) Unless displaced by the particular provisions of [the Uniform Commercial Code], the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions.

§ 2-603. Merchant Buyer's Duties as to Rightfully Rejected Goods.

(1) Subject to any security interest in the buyer (subsection (3) of Section 2-711), when the seller has no agent or place of business at the market of rejection a merchant buyer is under a duty after rejection of goods in his possession or control to follow any reasonable instructions received from the seller with respect to the goods and in the absence of such instructions to make reasonable efforts to sell them for the seller's account if they are perishable or threaten to decline in value speedily.  Instructions are not reasonable if on demand indemnity for expenses is not forthcoming.

(2) When the buyer sells goods under subsection (1), he is entitled to reimbursement from the seller or out of the proceeds for reasonable expenses of caring for and selling them, and if the expenses include no selling commission then to such commission as is usual in the trade or if there is none to a reasonable sum not exceeding ten per cent on the gross proceeds.

(3) In complying with this section the buyer is held only to good faith and good faith conduct hereunder is neither acceptance nor conversion nor the basis of an action for damages.

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TRANSFER OF RIGHTS TO PERSONAL PROPERTY

§ 1-201. General Definitions.

...

(b) Subject to definitions contained in other articles of [the Uniform Commercial Code] that apply to particular articles or parts thereof:

...

(9) "Buyer in ordinary course of business" means a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices. A person that sells oil, gas, or other minerals at the wellhead or minehead is a person in the business of selling goods of that kind. A buyer in ordinary course of business may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under a preexisting contract for sale. Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 may be a buyer in ordinary course of business. "Buyer in ordinary course of business" does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt.

...

(29) "Purchase" means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property.

(30) "Purchaser" means a person that takes by purchase.

§ 1-204. Value.

Except as otherwise provided in Articles 3, 4, [and] 5, [and 6], a person gives value for rights if the person acquires them: (1) in return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection; (2) as security for, or in total or partial satisfaction of, a preexisting claim; (3) by accepting delivery under a preexisting contract for purchase; or (4) in return for any consideration sufficient to support a simple contract.

§ 2-403. Power to Transfer; Good Faith Purchase of Goods; "Entrusting".

(1) A purchaser of goods acquires all title which his transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though

(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.

(2) Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business.

(3) "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.

[Note: If a state adopts the repealer of Article 6-Bulk Transfers (Alternative A), subsec. (4) should read as follows:] 22

(4) The rights of other purchasers of goods and of lien creditors are governed by the Articles on Secured Transactions (Article 9) and Documents of Title (Article 7).

[Note: If a state adopts Revised Article 6-Bulk Sales (Alternative B), subsec. (4) should read as follows:]

(4) The rights of other purchasers of goods and of lien creditors are governed by the Articles on Secured Transactions (Article 9), Bulk Sales (Article 6) and Documents of Title (Article 7).

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DOCUMENTARY TRANSACTIONS

A. DOCUMENTS OF TITLE

§ 1-201. General Definitions.

...

(b) Subject to definitions contained in other articles of [the Uniform Commercial Code] that apply to particular articles or parts thereof:

...

(21) "Holder" means: (A) the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession; or (B) the person in possession of a document of title if the goods are deliverable either to bearer or to the order of the person in possession.

§ 7-104. Negotiable and Nonnegotiable Document of Title.

(a) A document of title is negotiable if by its terms the goods are to be delivered to bearer or to the order of a named person.

(b) A document of title other than one described in subsection (a) is nonnegotiable. A bill of lading that states that the goods are consigned to a named person is not made negotiable by a provision that the goods are to be delivered only against an order in a record signed by the same or another named person.

(c) A document of title is nonnegotiable if, at the time it is issued, the document has a conspicuous legend, however expressed, that it is nonnegotiable.

§ 7-204. Duty of Care;  Contractual Limitation of Warehouse's Liability.

(a) A warehouse is liable for damages for loss of or injury to the goods caused by its failure to exercise care with regard to the goods that a reasonably careful person would exercise under similar circumstances. However, unless otherwise agreed, the warehouse is not liable for damages that could not have been avoided by the exercise of that care.

(b) Damages may be limited by a term in the warehouse receipt or storage agreement limiting the amount of liability in case of loss or damage beyond which the warehouse is not liable. Such a limitation is not effective with respect to the warehouse's liability for conversion to its own use. The warehouse's liability, on request of the bailor in a record at the time of signing such storage agreement or within a reasonable time after receipt of the warehouse receipt, may be increased on part or all of the goods covered by the storage agreement or the warehouse receipt. In this event, increased rates may be charged based on an increased valuation of the goods.

(c) Reasonable provisions as to the time and manner of presenting claims and commencing actions based on the bailment may be included in the warehouse receipt or storage agreement.

(d) This section does not impair or repeal [Insert reference to any statute that imposes a higher responsibility upon the warehouse or invalidates contractual limitations that would be permissible under this Article.]

§ 7-309. Duty of Care;  Contractual Limitation of Carrier's Liability.

(a) A carrier that issues a bill of lading, whether negotiable or nonnegotiable, shall exercise the degree of care in relation to the goods which a reasonably careful person would exercise under similar circumstances. This subsection does not affect any statute, regulation, or rule of law that imposes liability upon a common carrier for damages not caused by its negligence.

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(b) Damages may be limited by a term in the bill of lading or in a transportation agreement that the carrier's liability may not exceed a value stated in the bill or transportation agreement if the carrier's rates are dependent upon value and the consignor is afforded an opportunity to declare a higher value and the consignor is advised of the opportunity. However, such a limitation is not effective with respect to the carrier's liability for conversion to its own use.

(c) Reasonable provisions as to the time and manner of presenting claims and commencing actions based on the shipment may be included in a bill of lading or a transportation agreement.

§ 7-401. Irregularities in Issue of Receipt or Bill or Conduct of Issuer.

The obligations imposed by this article on an issuer apply to a document of title even if:

(1) the document does not comply with the requirements of this article or of any other statute, rule, or regulation regarding its issue, form, or content;

(2) the issuer violated laws regulating the conduct of its business;

(3) the goods covered by the document were owned by the bailee when the document was issued; or

(4) the person issuing the document is not a warehouse but the document purports to be a warehouse receipt.

§ 7-403. Obligation of Warehouse or Carrier to Deliver;  Excuse.

(a) A bailee shall deliver the goods to a person entitled under a document of title if the person complies with subsections (b) and (c), unless and to the extent that the bailee establishes any of the following:

(1) delivery of the goods to a person whose receipt was rightful as against the claimant;

(2) damage to or delay, loss, or destruction of the goods for which the bailee is not liable;

(3) previous sale or other disposition of the goods in lawful enforcement of a lien or on a warehouse's lawful termination of storage;

(4) the exercise by a seller of its right to stop delivery pursuant to Section 2-705 or by a lessor of its right to stop delivery pursuant to Section 2A-526;

(5) a diversion, reconsignment, or other disposition pursuant to Section 7-303;

(6) release, satisfaction, or any other fact affording a personal defense against the claimant; or

(7) any other lawful excuse.

(b) A person claiming goods covered by a document of title shall satisfy the bailee's lien if the bailee so requests or the bailee is prohibited by law from delivering the goods until the charges are paid.

(c) Unless a person claiming the goods is one against which the document of title does not confer a right under Section 7-503(a):

(1) the person claiming under a document shall surrender possession or control of any outstanding negotiable document covering the goods for cancellation or indication of partial deliveries; and

(2) the bailee shall cancel the document or conspicuously indicate in the document the partial delivery or be liable to any person to which the document is duly negotiated.

§ 7-501. Form of Negotiation and Requirements of Due Negotiation.

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(a) The following rules apply to a negotiable tangible document of title:

(1) If the document's original terms run to the order of a named person, the document is negotiated by the named person's indorsement and delivery. After the named person's indorsement in blank or to bearer, any person may negotiate the document by delivery alone.

(2) If the document's original terms run to bearer, it is negotiated by delivery alone.

(3) If the document's original terms run to the order of a named person and it is delivered to the named person, the effect is the same as if the document had been negotiated.

(4) Negotiation of the document after it has been indorsed to a named person requires indorsement by the named person as well as delivery.

(5) A document is duly negotiated if it is negotiated in the manner stated in this subsection to a holder that purchases it in good faith, without notice of any defense against or claim to it on the part of any person, and for value, unless it is established that the negotiation is not in the regular course of business or financing or involves receiving the document in settlement or payment of a monetary obligation.

(b) The following rules apply to a negotiable electronic document of title:

(1) If the document's original terms run to the order of a named person or to bearer, the document is negotiated by delivery of the document to another person. Indorsement by the named person is not required to negotiate the document.

(2) If the document's original terms run to the order of a named person and the named person has control of the document, the effect is the same as if the document had been negotiated.

(3) A document is duly negotiated if it is negotiated in the manner stated in this subsection to a holder that purchases it in good faith, without notice of any defense against or claim to it on the part of any person, and for value, unless it is established that the negotiation is not in the regular course of business or financing or involves taking delivery of the document in settlement or payment of a monetary obligation.

(c) Indorsement of a nonnegotiable document of title neither makes it negotiable nor adds to the transferee's rights.

(d) The naming in a negotiable bill of lading of a person to be notified of the arrival of the goods does not limit the negotiability of the bill or constitute notice to a purchaser of the bill of any interest of that person in the goods.

§ 7-502. Rights Acquired by Due Negotiation.

(a) Subject to Sections 7-205 and 7-503, a holder to which a negotiable document of title has been duly negotiated acquires thereby:

(1) title to the document;

(2) title to the goods;

(3) all rights accruing under the law of agency or estoppel, including rights to goods delivered to the bailee after the document was issued; and

(4) the direct obligation of the issuer to hold or deliver the goods according to the terms of the document free of any defense or claim by the issuer except those arising under the terms of the document or under this article. In the case of a delivery order, the bailee's obligation accrues only upon the bailee's acceptance of the delivery order and the obligation acquired by the holder is that the issuer and any indorser will procure the acceptance of the bailee.

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(b) Subject to Section 7-503, title and rights acquired by due negotiation are not defeated by any stoppage of the goods represented by the document of title or by surrender of the goods by the bailee and are not impaired even if:

(1) the due negotiation or any prior due negotiation constituted a breach of duty;

(2) any person has been deprived of possession of a negotiable tangible document or control of a negotiable electronic document by misrepresentation, fraud, accident, mistake, duress, loss, theft, or conversion; or

(3) a previous sale or other transfer of the goods or document has been made to a third person.

§ 7-503. Document of Title to Goods Defeated in Certain Cases.

(a) A document of title confers no right in goods against a person that before issuance of the document had a legal interest or a perfected security interest in the goods and that did not:

(1) deliver or entrust the goods or any document covering the goods to the bailor or the bailor's nominee with actual or apparent authority to ship, store, or sell; with power to obtain delivery under Section 7-403; or with power of disposition under Section 2-403, 2A-304(2), 2A-305(2), or 9-320 or other statute or rule of law; or

(2) acquiesce in the procurement by the bailor or its nominee of any document.

(b) Title to goods based upon an unaccepted delivery order is subject to the rights of any person to which a negotiable warehouse receipt or bill of lading covering the goods has been duly negotiated. That title may be defeated under Section 7-504 to the same extent as the rights of the issuer or a transferee from the issuer.

(c) Title to goods based upon a bill of lading issued to a freight forwarder is subject to the rights of any person to which a bill issued by the freight forwarder is duly negotiated. However, delivery by the carrier in accordance with Part 4 pursuant to its own bill of lading discharges the carrier's obligation to deliver.

§ 7-507. Warranties on Negotiation or Transfer of Document of Title.

If a person negotiates or delivers a document of title for value, otherwise than as a mere intermediary under Section 7-508, unless otherwise agreed, the transferor warrants to its immediate purchaser only in addition to any warranty made in selling or leasing the goods that:

(1) the document is genuine;

(2) the transferor does not have knowledge of any fact that would impair the document's validity or worth; and

(3) the negotiation or delivery is rightful and fully effective with respect to the title to the document and the goods it represents.

§ 7-603. Conflicting Claims;  Interpleader.

If more than one person claims title to or possession of the goods, the bailee is excused from delivery until the bailee has a reasonable time to ascertain the validity of the adverse claims or to commence an action for interpleader. The bailee may assert an interpleader either in defending an action for nondelivery of the goods or by original action.

B. LETTERS OF CREDIT

UCP PROVISIONS!

§ 5-102. Definitions.

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(a) In this article:

(1)  "Adviser" means a person who, at the request of the issuer, a confirmer, or another adviser, notifies or requests another adviser to notify the beneficiary that a letter of credit has been issued, confirmed, or amended.

(2)  "Applicant" means a person at whose request or for whose account a letter of credit is issued.  The term includes a person who requests an issuer to issue a letter of credit on behalf of another if the person making the request undertakes an obligation to reimburse the issuer.

(3)  "Beneficiary" means a person who under the terms of a letter of credit is entitled to have its complying presentation honored.  The term includes a person to whom drawing rights have been transferred under a transferable letter of credit.

(4)  "Confirmer" means a nominated person who undertakes, at the request or with the consent of the issuer, to honor a presentation under a letter of credit issued by another.

(5)  "Dishonor" of a letter of credit means failure timely to honor or to take an interim action, such as acceptance of a draft, that may be required by the letter of credit.

(6)  "Document" means a draft or other demand, document of title, investment security, certificate, invoice, or other record, statement, or representation of fact, law, right, or opinion (i) which is presented in a written or other medium permitted by the letter of credit or, unless prohibited by the letter of credit, by the standard practice referred to in Section 5-108(e) and (ii) which is capable of being examined for compliance with the terms and conditions of the letter of credit.  A document may not be oral.

(7)  "Good faith" means honesty in fact in the conduct or transaction concerned.

(8)  "Honor" of a letter of credit means performance of the issuer's undertaking in the letter of credit to pay or deliver an item of value.  Unless the letter of credit otherwise provides, "honor" occurs (i) upon payment,(ii) if the letter of credit provides for acceptance, upon acceptance of a draft and, at maturity, its payment, or(iii) if the letter of credit provides for incurring a deferred obligation, upon incurring the obligation and, at maturity, its performance.

(9)  "Issuer" means a bank or other person that issues a letter of credit, but does not include an individual who makes an engagement for personal, family, or household purposes.

(10)  "Letter of credit" means a definite undertaking that satisfies the requirements of Section 5-104 by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.

(11)  "Nominated person" means a person whom the issuer (i) designates or authorizes to pay, accept, negotiate, or otherwise give value under a letter of credit and (ii) undertakes by agreement or custom and practice to reimburse.

(12)  "Presentation" means delivery of a document to an issuer or nominated person for honor or giving of value under a letter of credit.

(13)  "Presenter" means a person making a presentation as or on behalf of a beneficiary or nominated person.

(14)  "Record" means information that is inscribed on a tangible medium, or that is stored in an electronic or other medium and is retrievable in perceivable form.

(15)  "Successor of a beneficiary" means a person who succeeds to substantially all of the rights of a beneficiary by operation of law, including a corporation with or into which the beneficiary has been merged or consolidated, an administrator, executor, personal representative, trustee in bankruptcy, debtor in possession, liquidator, and receiver.

(b)  Definitions in other Articles applying to this article and the sections in which they appear are:

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"Accept" or "Acceptance"       Section 3-409      

"Value"       Sections 3-303, 4-211

(c)  Article 1 contains certain additional general definitions and principles of construction and interpretation applicable throughout this article.

§ 5-108. Issuer's Rights and Obligations

(a)  Except as otherwise provided in Section 5-109, an issuer shall honor a presentation that, as determined by the standard practice referred to in subsection (e), appears on its face strictly to comply with the terms and conditions of the letter of credit.  Except as otherwise provided in Section 5-113 and unless otherwise agreed with the applicant, an issuer shall dishonor a presentation that does not appear so to comply.

(b)  An issuer has a reasonable time after presentation, but not beyond the end of the seventh business day of the issuer after the day of its receipt of documents:

(1) to honor,

(2) if the letter of credit provides for honor to be completed more than seven business days after presentation, to accept a draft or incur a deferred obligation, or

(3) to give notice to the presenter of discrepancies in the presentation.

(c)  Except as otherwise provided in subsection (d), an issuer is precluded from asserting as a basis for dishonor any discrepancy if timely notice is not given, or any discrepancy not stated in the notice if timely notice is given.

(d)  Failure to give the notice specified in subsection (b) or to mention fraud, forgery, or expiration in the notice does not preclude the issuer from asserting as a basis for dishonor fraud or forgery as described in Section 5-109(a) or expiration of the letter of credit before presentation.

(e)  An issuer shall observe standard practice of financial institutions that regularly issue letters of credit.  Determination of the issuer's observance of the standard practice is a matter of interpretation for the court.  The court shall offer the parties a reasonable opportunity to present evidence of the standard practice.

(f)  An issuer is not responsible for:

(1) the performance or nonperformance of the underlying contract, arrangement, or transaction,

(2) an act or omission of others, or 

(3) observance or knowledge of the usage of a particular trade other than the standard practice referred to in subsection (e).

(g)  If an undertaking constituting a letter of credit under Section 5-102(a)(10) contains nondocumentary conditions, an issuer shall disregard the nondocumentary conditions and treat them as if they were not stated.

(h)  An issuer that has dishonored a presentation shall return the documents or hold them at the disposal of, and send advice to that effect to, the presenter.

(i)  An issuer that has honored a presentation as permitted or required by this article:

(1) is entitled to be reimbursed by the applicant in immediately available funds not later than the date of its payment of funds;

(2) takes the documents free of claims of the beneficiary or presenter;

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(3) is precluded from asserting a right of recourse on a draft under Sections 3-414 and 3-415;

(4) except as otherwise provided in Sections 5-110 and 5-117, is precluded from restitution of money paid or other value given by mistake to the extent the mistake concerns discrepancies in the documents or tender which are apparent on the face of the presentation; and

(5) is discharged to the extent of its performance under the letter of credit unless the issuer honored a presentation in which a required signature of a beneficiary was forged.

§ 5-109. Fraud and Forgery.

(a)  If a presentation is made that appears on its face strictly to comply with the terms and conditions of the letter of credit, but a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant:

(1) the issuer shall honor the presentation, if honor is demanded by (i) a nominated person who has given value in good faith and without notice of forgery or material fraud, (ii) a confirmer who has honored its confirmation in good faith, (iii) a holder in due course of a draft drawn under the letter of credit which was taken after acceptance by the issuer or nominated person, or (iv) an assignee of the issuer's or nominated person's deferred obligation that was taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person; and

(2) the issuer, acting in good faith, may honor or dishonor the presentation in any other case.

(b)  If an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation or grant similar relief against the issuer or other persons only if the court finds that:

(1) the relief is not prohibited under the law applicable to an accepted draft or deferred obligation incurred by the issuer;

(2) a beneficiary, issuer, or nominated person who may be adversely affected is adequately protected against loss that it may suffer because the relief is granted;

(3) all of the conditions to entitle a person to the relief under the law of this State have been met; and

(4) on the basis of the information submitted to the court, the applicant is more likely than not to succeed under its claim of forgery or material fraud and the person demanding honor does not qualify for protection under subsection (a)(1).

§ 5-111. Remedies.

(a)  If an issuer wrongfully dishonors or repudiates its obligation to pay money under a letter of credit before presentation, the beneficiary, successor, or nominated person presenting on its own behalf may recover from the issuer the amount that is the subject of the dishonor or repudiation.  If the issuer's obligation under the letter of credit is not for the payment of money, the claimant may obtain specific performance or, at the claimant's election, recover an amount equal to the value of performance from the issuer.  In either case, the claimant may also recover incidental but not consequential damages.  The claimant is not obligated to take action to avoid damages that might be due from the issuer under this subsection.  If, although not obligated to do so, the claimant avoids damages, the claimant's recovery from the issuer must be reduced by the amount of damages avoided.  The issuer has the burden of proving the amount of damages avoided.  In the case of repudiation the claimant need not present any document.

(b)  If an issuer wrongfully dishonors a draft or demand presented under a letter of credit or honors a draft or demand in breach of its obligation to the applicant, the applicant may recover damages resulting from the breach, including incidental but not consequential damages, less any amount saved as a result of the breach.

(c)  If an adviser or nominated person other than a confirmer breaches an obligation under this article or an issuer breaches an obligation not covered in subsection (a) or (b), a person to whom the obligation is owed may recover damages resulting from the breach, including incidental but not consequential damages, less

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any amount saved as a result of the breach.  To the extent of the confirmation, a confirmer has the liability of an issuer specified in this subsection and subsections (a) and (b).

(d)  An issuer, nominated person, or adviser who is found liable under subsection (a), (b), or (c) shall pay interest on the amount owed thereunder from the date of wrongful dishonor or other appropriate date.

(e)  Reasonable attorney's fees and other expenses of litigation must be awarded to the prevailing party in an action in which a remedy is sought under this article.

(f)  Damages that would otherwise be payable by a party for breach of an obligation under this article may be liquidated by agreement or undertaking, but only in an amount or by a formula that is reasonable in light of the harm anticipated.

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AGENCY AND APPARENT AGENCY

No UCC provisions.

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PAYMENT MECHANISMS AND RISK ALLOCATION

I. NEGOTIABLE INSTRUMENTS AND THE HOLDER-IN-DUE-COURSE CONCEPT

§ 3-104.  NEGOTIABLE INSTRUMENT.

(a)  Except as provided in subsections (c) and (d), "negotiable instrument" means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:

(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;

(2) is payable on demand or at a definite time; and

(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.

§ 3-109.  PAYABLE TO BEARER OR TO ORDER.

(a)  A promise or order is payable to bearer if it:

(1) states that it is payable to bearer or to the order of bearer or otherwise indicates that the person in possession of the promise or order is entitled to payment;

(2) does not state a payee; or

(3) states that it is payable to or to the order of cash or otherwise indicates that it is not payable to an identified person.

(b)  A promise or order that is not payable to bearer is payable to order if it is payable (i) to the order of an identified person or (ii) to an identified person or order.  A promise or order that is payable to order is payable to the identified person.

(c)  An instrument payable to bearer may become payable to an identified person if it is specially indorsed pursuant to Section 3-205(a).  An instrument payable to an identified person may become payable to bearer if it is indorsed in blank pursuant to Section 3-205(b).

§ 3-110.  IDENTIFICATION OF PERSON TO WHOM INSTRUMENT IS PAYABLE.

(a)  The person to whom an instrument is initially payable is determined by the intent of the person, whether or not authorized, signing as, or in the name or behalf of, the issuer of the instrument.  The instrument is payable to the person intended by the signer even if that person is identified in the instrument by a name or other identification that is not that of the intended person.  If more than one person signs in the name or behalf of the issuer of an instrument and all the signers do not intend the same person as payee, the instrument is payable to any person intended by one or more of the signers.

(b)  If the signature of the issuer of an instrument is made by automated means, such as a check-writing machine, the payee of the instrument is determined by the intent of the person who supplied the name or identification of the payee, whether or not authorized to do so.

(c)  A person to whom an instrument is payable may be identified in any way, including by name, identifying number, office, or account number.  For the purpose of determining the holder of an instrument, the following rules apply:

(1)  If an instrument is payable to an account and the account is identified only by number, the instrument is payable to the person to whom the account is payable.  If an instrument is payable to an account identified by number and by the name of a person, the instrument is payable to the named person, whether or not that person is the owner of the account identified by number.

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(2)  If an instrument is payable to:

(i) a trust, an estate, or a person described as trustee or representative of a trust or estate, the instrument is payable to the trustee, the representative, or a successor of either, whether or not the beneficiary or estate is also named;

(ii) a person described as agent or similar representative of a named or identified person, the instrument is payable to the represented person, the representative, or a successor of the representative;

(iii) a fund or organization that is not a legal entity, the instrument is payable to a representative of the members of the fund or organization; or

(iv) an office or to a person described as holding an office, the instrument is payable to the named person, the incumbent of the office, or a successor to the incumbent.

(d)  If an instrument is payable to two or more persons alternatively, it is payable to any of them and may be negotiated, discharged, or enforced by any or all of them in possession of the instrument.  If an instrument is payable to two or more persons not alternatively, it is payable to all of them and may be negotiated, discharged, or enforced only by all of them.  If an instrument payable to two or more persons is ambiguous as to whether it is payable to the persons alternatively, the instrument is payable to the persons alternatively.

§ 3-204.  INDORSEMENT.

(a)  "Indorsement" means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring indorser's liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an indorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than indorsement.  For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.

§ 3-205.  SPECIAL INDORSEMENT; BLANK INDORSEMENT; ANOMALOUS INDORSEMENT.

(a)  If an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a "special indorsement."  When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person.  The principles stated in Section 3-110 apply to special indorsements.

(b)  If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a "blank indorsement."  When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.

§ 3-302.  HOLDER IN DUE COURSE.

(a)  Subject to subsection (c) and Section 3-106(d), "holder in due course" means the holder of an instrument if:

(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and

(2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 3-306, and (vi) without notice that any party has a defense or claim in recoupment described in Section 3-305(a).

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(b)  Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (a), but discharge is effective against a person who became a holder in due course with notice of the discharge.  Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment, or claim to the instrument.

(c)  Except to the extent a transferor or predecessor in interest has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken (i) by legal process or by purchase in an execution, bankruptcy, or creditor's sale or similar proceeding, (ii) by purchase as part of a bulk transaction not in ordinary course of business of the transferor, or (iii) as the successor in interest to an estate or other organization.

(d)  If, under Section 3-303(a)(1), the promise of performance that is the consideration for an instrument has been partially performed, the holder may assert rights as a holder in due course of the instrument only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance.

(e)  If (i) the person entitled to enforce an instrument has only a security interest in the instrument and (ii) the person obliged to pay the instrument has a defense, claim in recoupment, or claim to the instrument that may be asserted against the person who granted the security interest, the person entitled to enforce the instrument may assert rights as a holder in due course only to an amount payable under the instrument which, at the time of enforcement of the instrument, does not exceed the amount of the unpaid obligation secured.

(f)  To be effective, notice must be received at a time and in a manner that gives a reasonable opportunity to act on it.

(g)  This section is subject to any law limiting status as a holder in due course in particular classes of transactions.

§ 3-303.  VALUE AND CONSIDERATION.

(a)  An instrument is issued or transferred for value if:

(1) the instrument is issued or transferred for a promise of performance, to the extent the promise has been performed;

(2) the transferee acquires a security interest or other lien in the instrument other than a lien obtained by judicial proceeding;

(3) the instrument is issued or transferred as payment of, or as security for, an antecedent claim against any person, whether or not the claim is due;

§ 3-305.  DEFENSES AND CLAIMS IN RECOUPMENT.

(a)  Except as otherwise provided in this section, the right to enforce the obligation of a party to pay an instrument is subject to the following:

(1) a defense of the obligor based on (i) infancy of the obligor to the extent it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor, (iii) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or (iv) discharge of the obligor in insolvency proceedings;

(2) a defense of the obligor stated in another section of this Article or a defense of the obligor that would be available if the person entitled to enforce the instrument were enforcing a right to payment under a simple contract; and

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(3) a claim in recoupment of the obligor against the original payee of the instrument if the claim arose from the transaction that gave rise to the instrument; but the claim of the obligor may be asserted against a transferee of the instrument only to reduce the amount owing on the instrument at the time the action is brought.

§ 3-401.  SIGNATURE.

(a)  A person is not liable on an instrument unless (i) the person signed the instrument, or (ii) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person under Section 3-402.

(b)  A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing.

§ 3-402.  SIGNATURE BY REPRESENTATIVE.

(a)  If a person acting, or purporting to act, as a representative signs an instrument by signing either the name of the represented person or the name of the signer, the represented person is bound by the signature to the same extent the represented person would be bound if the signature were on a simple contract.  If the represented person is bound, the signature of the representative is the "authorized signature of the represented person" and the represented person is liable on the instrument, whether or not identified in the instrument.

(b)  If a representative signs the name of the representative to an instrument and the signature is an authorized signature of the represented person, the following rules apply:

(1)  If the form of the signature shows unambiguously that the signature is made on behalf of the represented person who is identified in the instrument, the representative is not liable on the instrument.

(2)  Subject to subsection (c), if (i) the form of the signature does not show unambiguously that the signature is made in a representative capacity or (ii) the represented person is not identified in the instrument, the representative is liable on the instrument to a holder in due course that took the instrument without notice that the representative was not intended to be liable on the instrument.  With respect to any other person, the representative is liable on the instrument unless the representative proves that the original parties did not intend the representative to be liable on the instrument.

(c)  If a representative signs the name of the representative as drawer of a check without indication of the representative status and the check is payable from an account of the represented person who is identified on the check, the signer is not liable on the check if the signature is an authorized signature of the represented person.

§ 3-405.  EMPLOYER'S RESPONSIBILITY FOR FRAUDULENT INDORSEMENT BY EMPLOYEE.

(a)  In this section:

(1)  "Employee" includes an independent contractor and employee of an independent contractor retained by the employer.

(2)  "Fraudulent indorsement" means (i) in the case of an instrument payable to the employer, a forged indorsement purporting to be that of the employer, or (ii) in the case of an instrument with respect to which the employer is the issuer, a forged indorsement purporting to be that of the person identified as payee.

(3)  "Responsibility" with respect to instruments means authority (i) to sign or indorse instruments on behalf of the employer, (ii) to process instruments received by the employer for bookkeeping purposes, for deposit to an account, or for other disposition, (iii) to prepare or process instruments for issue in the name of the employer, (iv) to supply information determining the names or addresses of payees of instruments to be issued in the name of the employer, (v) to control the disposition of instruments to be issued in the name of the employer, or (vi) to act otherwise with respect to instruments in a responsible

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capacity. "Responsibility" does not include authority that merely allows an employee to have access to instruments or blank or incomplete instrument forms that are being stored or transported or are part of incoming or outgoing mail, or similar access.

(b)  For the purpose of determining the rights and liabilities of a person who, in good faith, pays an instrument or takes it for value or for collection, if an employer entrusted an employee with responsibility with respect to the instrument and the employee or a person acting in concert with the employee makes a fraudulent indorsement of the instrument, the indorsement is effective as the indorsement of the person to whom the instrument is payable if it is made in the name of that person.  If the person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from the fraud, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.

(c)  Under subsection (b), an indorsement is made in the name of the person to whom an instrument is payable if (i) it is made in a name substantially similar to the name of that person or (ii) the instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to the name of that person.

§ 3-406.  NEGLIGENCE CONTRIBUTING TO FORGED SIGNATURE OR ALTERATION OF INSTRUMENT.

(a)  A person whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature on an instrument is precluded from asserting the alteration or the forgery against a person who, in good faith, pays the instrument or takes it for value or for collection.

(b)  Under subsection (a), if the person asserting the preclusion fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss, the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss.

(c)  Under subsection (a), the burden of proving failure to exercise ordinary care is on the person asserting the preclusion.  Under subsection (b), the burden of proving failure to exercise ordinary care is on the person precluded.

§ 3-416.  TRANSFER WARRANTIES. (§ 4-207 is substantively identical)

(a)  A person who transfers an instrument for consideration warrants to the transferee and, if the transfer is by indorsement, to any subsequent transferee that:

(1) the warrantor is a person entitled to enforce the instrument;

(2) all signatures on the instrument are authentic and authorized;

(3) the instrument has not been altered;

(4) the instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor; and

(5) the warrantor has no knowledge of any insolvency proceeding commenced with respect to the maker or acceptor or, in the case of an unaccepted draft, the drawer; and

(6) with respect to a remotely-created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.

§ 3-417.  PRESENTMENT WARRANTIES. (§ 4-208 is substantively identical)

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(a)  If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i) the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of transfer, warrant to the drawee making payment or accepting the draft in good faith that:

(1) the warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft;

(2) the draft has not been altered;

(3) the warrantor has no knowledge that the signature of the drawer of the draft is unauthorized;

(4) with respect to any remotely-created consumer item, that the person on whose account the item is drawn authorized the issuance of the item in the amount for which the item is drawn.

§ 3-420.  CONVERSION OF INSTRUMENT.

(a)  The law applicable to conversion of personal property applies to instruments.  An instrument is also converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment.  An action for conversion of an instrument may not be brought by (i) the issuer or acceptor of the instrument or (ii) a payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee.

(b)  In an action under subsection (a), the measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiff's interest in the instrument.

(c)  A representative, other than a depositary bank, who has in good faith dealt with an instrument or its proceeds on behalf of one who was not the person entitled to enforce the instrument is not liable in conversion to that person beyond the amount of any proceeds that it has not paid out.

§ 3-501.  PRESENTMENT.

(a)  "Presentment" means a demand made by or on behalf of a person entitled to enforce an instrument (i) to pay the instrument made to the drawee or a party obliged to pay the instrument or, in the case of a note or accepted draft payable at a bank, to the bank, or (ii) to accept a draft made to the drawee.

(b)  The following rules are subject to Article 4, agreement of the parties, and clearing-house rules and the like:

(1)  Presentment may be made at the place of payment of the instrument and must be made at the place of payment if the instrument is payable at a bank in the United States; may be made by any commercially reasonable means, including an oral, written, or electronic communication; is effective when the demand for payment or acceptance is received by the person to whom presentment is made; and is effective if made to any one of two or more makers, acceptors, drawees, or other payors.

(2)  Upon demand of the person to whom presentment is made, the person making presentment must (i) exhibit the instrument, (ii) give reasonable identification and, if presentment is made on behalf of another person, reasonable evidence of authority to do so, and (iii) sign a receipt on the instrument for any payment made or surrender the instrument if full payment is made.

(3)  Without dishonoring the instrument, the party to whom presentment is made may (i) return the instrument for lack of a necessary indorsement, or (ii) refuse payment or acceptance for failure of the presentment to comply with the terms of the instrument, an agreement of the parties, or other applicable law or rule.

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(4)  The party to whom presentment is made may treat presentment as occurring on the next business day after the day of presentment if the party to whom presentment is made has established a cut-off hour not earlier than 2 p.m. for the receipt and processing of instruments presented for payment or acceptance and presentment is made after the cut-off hour.

I. FORGED CHECKS AND FORGED INDORSEMENTS

§ 3-401.  SIGNATURE.

(a)  A person is not liable on an instrument unless (i) the person signed the instrument, or (ii) the person is represented by an agent or representative who signed the instrument and the signature is binding on the represented person under Section 3-402.

(b)  A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing.

§ 3-403.  UNAUTHORIZED SIGNATURE.

(a)  Unless otherwise provided in this Article or Article 4, an unauthorized signature is ineffective except as the signature of the unauthorized signer in favor of a person who in good faith pays the instrument or takes it for value.  An unauthorized signature may be ratified for all purposes of this Article.

§ 3-404.  IMPOSTORS; FICTITIOUS PAYEES.

(a)  If an impostor, by use of the mails or otherwise, induces the issuer of an instrument to issue the instrument to the impostor, or to a person acting in concert with the impostor, by impersonating the payee of the instrument or a person authorized to act for the payee, an indorsement of the instrument by any person in the name of the payee is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

(b)  If (i) a person whose intent determines to whom an instrument is payable (Section 3-110(a) or (b)) does not intend the person identified as payee to have any interest in the instrument, or (ii) the person identified as payee of an instrument is a fictitious person, the following rules apply until the instrument is negotiated by special indorsement:

(1)  Any person in possession of the instrument is its holder.

(2)  An indorsement by any person in the name of the payee stated in the instrument is effective as the indorsement of the payee in favor of a person who, in good faith, pays the instrument or takes it for value or for collection.

(c)  Under subsection (a) or (b), an indorsement is made in the name of a payee if (i) it is made in a name substantially similar to that of the payee or (ii) the instrument, whether or not indorsed, is deposited in a depositary bank to an account in a name substantially similar to that of the payee.

(d)  With respect to an instrument to which subsection (a) or (b) applies, if a person paying the instrument or taking it for value or for collection fails to exercise ordinary care in paying or taking the instrument and that failure substantially contributes to loss resulting from payment of the instrument, the person bearing the loss may recover from the person failing to exercise ordinary care to the extent the failure to exercise ordinary care contributed to the loss.

§ 3-418.  PAYMENT OR ACCEPTANCE BY MISTAKE.

(a)  Except as provided in subsection (c), if the drawee of a draft pays or accepts the draft and the drawee acted on the mistaken belief that (i) payment of the draft had not been stopped pursuant to Section 4-403 or (ii) the signature of the drawer of the draft was authorized, the drawee may recover the amount of the draft from the person to whom or for whose benefit payment was made or, in the case of acceptance, may revoke the acceptance.  Rights of the drawee under this subsection are not affected by failure of the drawee to exercise ordinary care in paying or accepting the draft.

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(b)  Except as provided in subsection (c), if an instrument has been paid or accepted by mistake and the case is not covered by subsection (a), the person paying or accepting may, to the extent permitted by the law governing mistake and restitution, (i) recover the payment from the person to whom or for whose benefit payment was made or (ii) in the case of acceptance, may revoke the acceptance.

(c)  The remedies provided by subsection (a) or (b) may not be asserted against a person who took the instrument in good faith and for value or who in good faith changed position in reliance on the payment or acceptance.  This subsection does not limit remedies provided by Section 3-417 or 4-407.

(d)  Notwithstanding Section 4-215, if an instrument is paid or accepted by mistake and the payor or acceptor recovers payment or revokes acceptance under subsection (a) or (b), the instrument is deemed not to have been paid or accepted and is treated as dishonored, and the person from whom payment is recovered has rights as a person entitled to enforce the dishonored instrument.

III. ELECTRONIC WIRE TRANSFERS

ADD 4A-205

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COMMERCIAL CONTRACTING

I. THE DUTY TO INSPECT

GET 2-314 AND 2-316

2-608(2).2-602(a).

§ 2-607. Effect of Acceptance;  Notice of Breach;  Burden of Establishing Breach After Acceptance;  Notice of Claim or Litigation to Person Answerable Over.

(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 but acceptance does not of itself impair any other remedy provided by this Article for non-conformity.

(3) Where a tender has been accepted

(a) the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy;  and

(b) if the claim is one for infringement or the like (subsection (3) of Section 2-312) and the buyer is sued as a result of such a breach he must so notify the seller within a reasonable time after he receives notice of the litigation or be barred from any remedy over for liability established by the litigation.

(4) The burden is on the buyer to establish any breach with respect to the goods accepted.

(5) Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over

(a) he may give his seller written notice of the litigation.  If the notice states that the seller may come in and defend and that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact common to the two litigations, then unless the seller after seasonable receipt of the notice does come in and defend he is so bound.

(b) if the claim is one for infringement or the like (subsection (3) of Section 2-312) the original seller may demand in writing that his buyer turn over to him control of the litigation including settlement or else be barred from any remedy over and if he also agrees to bear all expense and to satisfy any adverse judgment, then unless the buyer after seasonable receipt of the demand does turn over control the buyer is so barred.

(6) The provisions of subsections (3), (4) and (5) apply to any obligation of a buyer to hold the seller harmless against infringement or the like (subsection (3) of Section 2-312).

§ 2-715. Buyer's Incidental and Consequential Damages.

(1) Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.

(2) Consequential damages resulting from the seller's breach include

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(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise;  and

(b) injury to person or property proximately resulting from any breach of warranty.

II. WARRANTIES EXPRESS AND IMPLIED

§ 2-312

§ 2-313. Express Warranties by Affirmation, Promise, Description, Sample.

(1) In this section, "immediate buyer" means a buyer that enters into a contract with the seller.

(2) Express warranties by the seller to the immediate buyer are created as follows:

(a) Any affirmation of fact or promise made by the seller which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.

(b) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(c) Any sample or model that is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(3) 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.

(4) Any remedial promise made by the seller to the immediate buyer creates an obligation that the promise will be performed upon the happening of the specified event.

§ 2-314. Implied Warranty:  Merchantability;  Usage of Trade.

(1) Unless excluded or modified (Section 2-316), 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.  Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.

(2) Goods to be merchantable must be at least such as:

(a) pass without objection in the trade under the contract description; 

(b) in the case of fungible goods, are of fair average quality within the description; 

(c) are fit for the ordinary purposes for which goods of that description are used; 

(d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; 

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(e) are adequately contained, packaged, and labeled as the agreement may require;  and

(f) conform to the promise or affirmations of fact made on the container or label if any.

(3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of dealing or usage of trade.

§ 2-315. Implied Warranty:  Fitness for Particular Purpose.

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 or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

§ 2-316

§ 2-317. Cumulation and Conflict of Warranties Express or Implied.

Warranties whether express or implied shall be construed as consistent with each other and as cumulative, but if such construction is unreasonable the intention of the parties shall determine which warranty is dominant.  In ascertaining that intention the following rules apply:

(a) Exact or technical specifications displace an inconsistent sample or model or general language of description.

(b) A sample from an existing bulk displaces inconsistent general language of description.

(c) Express warranties displace inconsistent implied warranties other than an implied warranty of fitness for a particular purpose.

III. RISK OF LOSS

§ 2-104. Definitions:  "Merchant";  "Between Merchants";  "Financing Agency".

(1) "Merchant" means a person that deals in goods of the kind or otherwise holds itself out by occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction or to which the knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that holds itself out by occupation as having the knowledge or skill.

§ 2-503

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§ 2-509. Risk of Loss in the Absence of Breach.

(1) Where the contract requires or authorizes the seller to ship the goods by carrier

(a) if it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation (Section 2-505);  but

(b) if it does require him to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery.

(2) Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer

(a) on his receipt of possession or control of a negotiable document of title covering the goods;  or

(b) on acknowledgment by the bailee of the buyer's right to possession of the goods;  or

(c) after his receipt of posession or control of a non-negotiable document of title or other direction to deliver in a record, as provided in subsection (4)(b) of Section 2-503.

(3) In any case not within subsection (1) or (2), the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant;  otherwise the risk passes to the buyer on tender of delivery.

(4) The provisions of this section are subject to contrary agreement of the parties and to the provisions of this Article on sale on approval (Section 2-327) and on effect of breach on risk of loss (Section 2-510).

§ 2-510. Effect of Breach on Risk of Loss.

(1) Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance.

(2) 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.

(3) Where the buyer as to conforming goods already identified to the contract for sale 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.

§ 2-606. What Constitutes Acceptance of Goods.

(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 (subsection (1) of Section 2-602), 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.

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§ 2-612. "Installment contract";  Breach.

(1) 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.

(2) The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents;  but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment.

(3) Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole.  But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.

§ 2-709. Action for the Price.

(1) When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental damages under the next section, the price

(a) 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

(b) 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.

(2) Where the seller sues for the price he must hold for the buyer any goods which have been identified to the contract and are still in his control except that if resale becomes possible he may resell them at any time prior to the collection of the judgment.  The net proceeds of any such resale must be credited to the buyer and payment of the judgment entitles him to any goods not resold.

(3) After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment due or has repudiated (Section 2-610), a seller that is held not entitled to the price under this section shall nevertheless be awarded damages for non-acceptance under the preceding section.

§ 2-711. Buyer's Remedies in General;  Buyer's Security Interest in Rejected Goods.

(1) A breach of contract by the seller includes the seller's wrongful failure to deliver or to perform a contractual obligation, making of a nonconforming tender of delivery or performance, and repudiation.

(2) If the seller is in breach of contract under subsection (1), the buyer, to the extent provided for by this Act or other law, may:

(a) in the case of rightful cancellation, rightful rejection, or justifiable revocation of acceptance, recover so much of the price as has been paid;

(b) deduct damages from any part of the price still due under Section 2-717;

(c) cancel;

(d) cover and have damages under Section 2-712 as to all goods affected whether or not they have been identified to the contract;

(e) recover damages for nondelivery or repudiation under Section 2-713;

(f) recover damages for breach with regard to accepted goods or breach with regard to a remedial promise under Section 2-714;

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(g) recover identified goods under Section 2-502;

(h) obtain specific performance or obtain the goods by replevin or similar remedy under Section 2-716;

(i) recover liquidated damages under Section 2-718;

(j) in other cases, recover damages in any manner that is reasonable under the circumstances.

(3) On rightful rejection or justifiable revocation of acceptance a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care and custody and may hold such goods and resell them in like manner as an aggrieved seller (Section 2-706).

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Commercial Transactions – Prof. Baird – Winter 2007Issue-Spotting Checklist

Important Principles:- Rule of finality (i.e. forged checks)- Certainty in comm’l Ks and btwn parties- Enforcing what parties want, otherwise using reasonable

default rules (UCC)- Speedy disposition of cases- Derivation vs. negotiation rules

Always Ask:- What are the parties’ rights? (K or default rules)

o Preliminary agreement? p 18- Who is left holding the bag? What COAs does that person

have? E.g., conversion, replevin, breach of warranty

Transfer of Property:1. Trsfr by someone who may not have perfect title?

a. Voidable title (if original owner had somehow agreed to part with goods); p. 3, incl. entrusting

i. GFPfV can get good title when the person from whom they purchased had voidable title.

ii. Entrusting exception: must be sold in the OCB for buyer to get good title. Mucha.

b. Was the item stolen? (p. 2)i. Nemo dat ; see discovery

ii. Was it sold to a GFPV? He still has no rights as against original owner.

iii. COA under IWT (p. 16)2. Was there a document of title involved?

a. E.g. certificate of title, bill of lading, warehouse receipt (see liability for each, p. 4)

b. Negotiation rule: buyer gets good title even if there’s a thief in the chain of title

c. NDOT: see requirements, p. 4 – control of document = control of goods

i. Evidences that person in poss’n is entitled to document/goods it covers

ii. Purports to cover goods either ID’d or fungible portions of an ID’d mass

iii. Goods are to be delivered (to bearer/to order)

iv. Holder by due negotiation has special rights

3. Were there warranties involved?a. Implied warranty of title (always w/stolen items)b. Express warranty (fact/promise; part of bargain)c. Implied warranty of merchantabilityd. Implied warranty of fitness for particular purpose

4. Buyer’s duty to inspecta. Acceptance p. 15b. Rejection p. 15

5. Did something happen to the item? Who had risk of loss?a. Transfer of poss’n? p 17b. Inventory transfer?c. Breach/nonconforming goods/installment K?

Letters of Credit:- Customer, bank, beneficiary (see relationships btwn each,

p. 5)- Carefully scrutinize the documents and terms- Compliance, p. 7- Bank’s independence (must pay on presentment of

conforming documents, etc.)

- Fraud: bank must still honor demand if there’s fraud in the trxn.

Potential Agency Issues:- Were there employees/employers; parties dealing at arm’s

length; partners (fid duties)- Corp’n involved? Insolvency? p. 8- Apparent agency: manifestations by principal of agency

authority that would lead to reasonable reliance by third parties?

- Inherent agency: putting someone in a position and showing the outside world that they have power to do things that people in that position do.

Was there a document re: payment of money?- Negotiable instrument :

o Uncond’l promiseo Pay sum certain (to order/to bearer)o Payable on demand at definite timeo No condition precedent

- Negotiationo Xfer of poss’n (voluntary/invol’y) by a person

other than the issuer to a person ho becomes the holder.

- HIDC : can assert ownership of NI even if there’s a thief in the chain of title (reqs on p. 10)

o Holder (person in poss’n if payable to bearer or ID’d person in poss’n)

Indorsements must be auth.o Took instrument for value, in GF, w/o notice (p

10)- Was there an indorsement?

o Signature binds signero Forged indorsement? p. 11o Trusted persono Agento Negligence

- Was the instrument transferred?o Xfer warranties if xferred for considerationo COA for breach of warranty/conversion

- Was the instrument presented for payment?o Presentment warranties (less than xfer)o COA for breach of warranty/conversion

- Was there a forged check?o Final payment ruleo Signature binds thief

Wire transfer? p. 14. Final payment, discharge for value rule.

Was there a corp’n/partnership involved?- Agency issues- Fid duties (esp in insolvency)- Merger?

o Best efforts clause p. 19o No voluntary action to get out of Ko Adverse change in cond’n of companyo SP of merger?

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