Lance Armstrong and Fitness for a Particular Purpose

Each year the authors of the Moot Problem for ICAM cook up perplexing problems On of my favorites this year is the claim by a buyer that goods were not fit for a particular purpose because they were produced by a firm associated with the use of child labor. Thus, the could not be sold for a profit.  As far as we know, no children laid a hand on these particular shirts but buyers are up in arms nonetheless. Of course, there are many reasons an item may not be profitably sold that have little to do with a promise by the seller. So one has to look further than that and think about why they did not sell.

In some sense, does the fitness for a particular purpose warranty even apply to the signalling one does by wearing the item or the sense that one has done the "right thing." You might think about the Lance Armstrong situation. All those Livestrong shirts are the same as they were when you bought them. But, when you bought them you may have wanted to advertise your admiration for Lance. Or you were just happier with them because you like Lance. Are they now unfit for a particular purpose?

Of course, a little quirk is that they were perfectly fit when no one knew of the misdeeds.  Are then unfit now simply because of new information?

Reg. CC in Legal Limbo?

Mark Twain once said, “Be careful when reading health books, you may die of a misprint.” While the risk of death does not seem likely from a commercial law book, lawyers, professors, and students should be wary of the things they read.  A recent change to Regulation CC’s treatment regarding Next-day Availability of Funds as part of the Dodd-Frank Act should have the legal community taking a closer look at their codebooks.

The Expedited Funds Availability Act of 1987 (EFAA), implemented by the Federal Reserve's Regulation CC, sets standards for banks making funds deposited into accounts available for withdrawal, including availability specific schedules.   Section 1086 of the Dodd-Frank Act amends the EFAA (requiring a conforming amendment to Reg. CC) to require depository institutions to make the first $200 of funds deposited by certain checks into an account available for withdrawal on the business day after the banking day that a deposit is received.   See, Regulation CC 229.10(c)(1)(vi) (formerly $100); FDIC version of Reg. CC.

All moves along as expected thus far.  In accordance with amendments, the U.S. Department of the Treasury sent out a bulletin to the Chief Executive Officers and Compliance Officers of all National Banks outlining the major changes. Officiously, the Department of the Treasury stated “National banks should make the appropriate changes to their practices, policies, and disclosures as necessary to comply with the statute by July 21, 2011, even if the changes to Regulation CC have not been adopted by that date.” While it appears that today banks are on notice regarding the Dodd-Frank change to the availability rules, the updated $200 rule remains absent from the Federal Reserve and FDIC current versions of Regulation CC published online.

The potential for confusion does not end there. Some of the latest editions of commercial law textbooks such as 2012 Fifth Edition of Lopucki, Warren, Keating and Mann’s Commercial Transaction: A System Approach have misprints in regard to the rule as well (retaining the $100 rule without comment). Even codebooks that reflect the $200 dollar rule before the regulators have officially put it into regulation are inconsistent. William Warren and Steve Walt’s Commercial Law: Selected Statutes for 2012-13 under section 229.10(c)(1)(vii) reflects the $200 rule with a footnote attribution to Dodd-Frank, but under the printed version of section 229.12(d) retains the reference to the former $100 available under section 229.10(c)(1)(vii).

With the Federal Reserve and FDIC not reflecting the $200 change to section 229.10(c)(1)(vii), as well as conforming amendments in other parts of Reg. CC, it is not surprising that the statutory codebooks and textbooks have had difficulty in conveying the amended rule.  In the meantime, don't believe everything you read.

- JSM and Ramon Alvarez (J.D. 2014) 

The Cost of Default: Bow Wow

Snoop Dog may have his namesake in favor of Snoop Lion, but Bow Wow offers Uniform Commercial Code entertainment for those with a canine preference.  Apparently, a lender had to repossess Bow Wow's Lamborghini.  The original loan was in the amount of $300,165, with about $157,571 owing on the loan at the time of repossession.  The bank managed to sell the car for $161,000, but had $25,000 in costs associated with the repossession and resale of the car.  The bank sued the rapper for a deficiency of $21,371. See, Bank to Bow Wow.

 

UCC Article 9 directs the secured party to apply the proceeds from a disposition of collateral to the expenses of retaking, holding and preparing the collateral for disposition and then toward the obligation secured by the loan.  9-615.  The debtor is liable for any deficiency after application of the proceeds.  So, Bow Wow does in fact appear to owe the Bank the additional chow.  One of my students found this case.  Apparently, like me, he enjoys a little bit of Article 9 in action.

 

- JSM

Does Article 2 Inform CISG Damages?

When it comes to teaching remedies, it is easy to collapse doctrines onto one another that appear consistent in underlying theory.  When it comes to the CISG (Convention on the International Sale of Goods) this conflation would be erroneous.  A large number of American courts have held that where Article 2 and the CISG are similar in theory or language, that resort to Article 2 cases and provisions is an appropriate method for interpreting the CISG.  This approach, though, would not be consistent with the Article 7 of the CISG's mandate theat “[i]n the interpretation of this Convention, regard is to be had to its international character and to the need to promote uniformity in its application and the observance of good faith in international trade."  The unifority would not seem to be enhanced by American courts referring to Article 2, even though they are more familiar with its provisions.  Quite simply, there is no expectation that courts of other countries would defer to Article 2 in any manner. 

Rather, the better reasoned approach should be to consider interpretive sources that evidence this international perspective, which might be used individually or collectively toward deducing the meaning behind various CISG provisions. For instance, courts could accept that a specific source of general principles of contracts routinely informs CISG cases worldwide, such as those of the Unidriot Principles of International Contracts.  Alternatively, the CISG Advisory Council Opinions could fulfill a stronger informative role regarding interpretation of provisions in the manner like the comments to the UCC do such that courts and commercial parties would regularly follow its interpretations in practice.  Yet another alternative available in the fulfillment of the CISG’s mandate is consultation with decisions rendered by tribunals applying the CISG where such are available.  Where such decisions are unavailable, insufficient, incomplete or unhelpful, though, UCC Article 2 might form part of the evidence of applicable private international law, as well as usages, customs and practices, but would not itself be the primary legal authority. The writings of scholars collecting opinions, examining theory and practice and providing careful analysis would also surely constitute sources expected for consultation in these cases just as in domestic ones.

This is not meant to state that Article 2 would never be part of the consideration of interpretation in CISG cases, but only that courts have overstated its usefullness.  There is only a limited role for Article 2 in such cases where it forms part of a larger indication of international perspective or a portion of an applicable usage.  This would be true even where the language in the CISG seems to track that of Article 2 or be otherwise similar in theory.  An example of this would be CISG Article 74’s general directive regarding remedies provides that: "Damages for breach of contract by one party consist of a sum equal to the loss, including loss of profit, suffered by the other party as a consequence of the breach. Such damages may not exceed the loss which the party in breach foresaw or ought to have foreseen at the time of the conclusion of the contract, in the light of the facts and matters of which he then knew or ought to have known, as a possible consequence of the breach of contract."   While American courts have ample experience with remedy considerations involing loss profits and foreseeabilty (Hadley v. Baxendale), it would be in error to solely rely on our perspective for these doctrines that are entrenched in our own legal history and perspective.  The better view is that our perspective simply is part of a larger understanding of these doctrines where it is consistent with the international perspective.

If the CISG is to have any force as a body, we cannot consider it merely an extension of Article 2.  For more on this, see: Does Article 2 Inform CISG Damages?

- JSM

Why would you ever assign a book that costs students money if it is available for free? (Again)

Over the summer, I posted about the high cost of law school textbooks for students (Why Would You Assign).  My current book for Contracts was being updated and the new edition would cost my students $180+. With the cost of law school somewhere near $150,000 (See For Law Schools, a Price to Play the A.B.A.'s Way, New York Times) I find it difficult to add to that cost any more than necessary. That means, choosing free books for students where they are available. CALI's ELangdell program does just this by paying professors who write textbooks a stipend and then giving the books to students in Word, Mobi, PDF and Epub formats for free. So, why is the message not getting through.

I receive the messages posted to the Contracts list-serve daily and this topic came up again. Professor Jeff Harrison (U Florida) initiated a lively discussion with the following post: 

Is the market for casebooks working? I like the George/Korobkin casebook which was just published. I thought I would use it until I saw the price --$186. I really cannot see asking my 100+ students to pay this. Even if they get $40 for selling their used copies, it's too much given what is otherwise available. Put differently, how is it possible that any contracts casebook would have enough market power to profitably sell at this price? One explanation is similar to that with physicians. The people who demand the books are not the same as those paying for them. So the professor assigns a book and is sheltered from the impact. Related to this is the possibility that professors are too lazy to change books. So, suppose you have been using Farnsworth for 20 years and when a new edition comes out you assign it because you want to minimize preparation time. The economics of casebook publishing puzzles me. First, the breakeven point must be tiny. Second, the pricing seems based on a belief that there is some market power when there should not be.

Well said.  A number of responses ensued ranging from students will buy the new hardcover book no matter what the cost even if given the choice of something less costly (indicating that this might not be ripe for concern) to arguments in favor of jettisoning the traditional books in favor of other alternatives without delay. To me, this seems to be a question of leadership. As professors, we should care about the cost of legal education. If there is not sufficient incentive to add to the cost of the students (much of which is financed through student loans), we should decline to do so in favor of viable alternatives. There is no good reason that I can see to lead students down the path of higher costs even if they would willingly pay when most of the cost is incurred by the student as debt that will take them years to pay off. Again, can we justify asking law students to pay for something that is not necessary?

- JSM

Applying Economic Loss Doctrine to Article 2 Transactions: A Doctrine at a Loss . . .

I just finished an essay on the economic loss doctrine (available on SSRN at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2160298). I had a chance to talk to one of the law review editors that had been working on the piece and a discussion ensued.  Surely, he understood that the modern application of the judicially-created economic loss doctrine redirects some purchasers of defective goods away from an action in tort for negligence orstrict liability against a product manufacturer. What is less widely understood is how this is actually done in by courts. Moreover, whether courts provide a defensible rationale is yet another problem.

Quite simply, modern application of the economic loss doctrine has proven esoteric at times, as fittingly illustrated by the case of In re Chinese Manufactured Drywall Products Liability Litigation (the “Chinese Drywall Litigation”), 680 F. Supp. 2d 780 (E.D. La. 2010), which involved installation of defective Chinese drywall in certain homes built after Hurricanes Katrina and Rita. In a seeminglystrange argument, the defendants argued that only some of the purchasers of the drywall should be able to make tort claims that arose from the same defective drywall. The odd part about the argument was that it was based on the manner of purchase made, with an attempt to categorize purchasers (an by extension, application of the economic loss doctrine to preclude tort claims) as: 1) those who purchased the Chinese drywall directly from the manufacturer and then installed it in their homes; and (2) those who purchased a home, which had been built (or rebuilt) with Chinese drywall.

While the court did not invest in this type of distinction, the decision surely left open the demarcation between the inner-workings of Article 2 remedies and tort doctrine.  Essentially, how do we define the product purchased by buyers when it might be installed in a larger unit, like a home. My Essay concludes that modern application of the economic loss doctrine serves the desired purpose to preserve the boundary between tort and contract, but surely there must be a less obscure approach that lends greater surety to parties and which does not require judicial intervention in most cases. Evaluating both the product attributes and the gravamen of the claim yields a basic tool that is more principled in application than an approach dependent on only one portion of the analysis, as has been done on an ad hoc basis by some courts. This would seem to involve an examination of the rationale for limiting Article 2 claimants to statutory remedies and being satisfied that, in true bargain cases, this is sufficient. While it appears that the Chinese Drywall court came to an acceptable resolution in the case, the failure of the court to embrace a meaningful methodology continues to leave litigants with less certainty as to the nature of permissible claims.  Closer examination of the deal in fact made by the parties would seem to permit resolution in these types of cases.

- JSM

This Year's Vis Problem: &%#$^* Yet Again

Jim Chen has invited me to post a note from time to time on the International Commercial Arbitration Moot. This is my tenth year of coaching, along with Tom Hurst and now George Dawson, the Florida team  What follows are my initial impressions of this year's problem. Please feel free to disagree, clarify, whatever. I do not regard myself as a CISG scholar and, as you know, the problems are always composed of mind-numbing combinations of dates, amounts, exhibits, statements, and issues.

 Following the normal formula there are procedural issues and substantive ones. This year the procedural issues seem a bit less significant than in the past but no less sticky. One deals with the use of a statement by an unavailable party. Another has to do with the consequences of a possible Article 96 reservation and its application to a modification.

For Vis veterans the principle substantive issue will be familiar. Remember the wine problem  from a few years ago?  The wine may or may not have been  laced with anti freeze or something related to antifreeze. Or maybe antifreeze was only in the trucks transporting the wine. In that case, problems came up when the possibility was publicized and the buyer decided it was not what was promised.

Now we have an ethically minded buyer who purchases polo shirts for resale but discovers they may or may not have been produced with child labor. This leads to a claim that the shirts are unfit and that a fundamental breach has occurred. Like the wine problem from a few years ago, there is actually nothing physically "wrong" with the shirts except that now, with the bad publicity, they cannot be sold as profitably and without  damage to the reputation of the retailer and its parent company.

It's all rather nasty and definitely fun. The problems reveal themselves over the months before the competition.  Each day the students and the teachers seem to find a new twist or theory. It's additive.

(The shirts in the pic are Fred Perry.  As far as I know the are manufactured by non child labor and by vegetarians who recycle.)

2012-2013. ICAM, Vis Problem is up

Get ready for polo shirts!

Why would you ever assign a book that cost students money if it is available for free?

eLangdell is offering free Bankruptcy and Securities Law statutory supplement e-books for law school courses; call for textbook proposals

Just finishing up today at the CALI Conference in lovely San Diego at the Thomas Jefferson School of Law.  The new building is super nice if you've not seen it!

The cost of books for our law students is immense.   In case you have not already heard about this from other sources:

CALI publishes free, open books for legal education in electronic and print formats through eLangdell® Press http://elangdell.cali.org/ These e-books are viewable on computers, iPad, iPhone, Nook, and Kindle, or a student can order at cost a hard copy printed and mailed from Lulu.

CALI has partnered with Cornell’s LII to produce free, open statutory e-book supplements for Bankruptcy and Securities law courses:

Securities Law: Selected Statutes and Regulations

s

U.S. Bankruptcy Code and Federal Rules of Bankruptcy Procedure
      

eLangdell is also publishing open access textbooks distributed under a Creative Commons license, although there are none yet in the Commercial Law field (yet, of course). There are statutory supplements for subjects (evidence, civil procedure, bankruptcy, etc).  If you are looking for a Contracts text for Fall, J.H. Verkerke, University of Virginia, has a new eLangdell book out for Fall 2012 adoption.  If you would like to preview it, contact me at jmartin@stu.edu or Deb Quentel of CALI at dquentel@cali.org.

In case you are interested in writing a text for Commercial Law or another subject . . . There is a call for proposals (deadlines October 1, 2012 and April 1, 2013) for textbooks or individual chapters here: http://elangdell.cali.org/content/write-elangdell-casebook-or-chapter

- jsm

When loan recourse affects mortgage defaults

Sure, home prices pretty much everywhere have dropped from 35% to 55% or more since the housing bubble burst.  (See, Morgan Brennan, Home Prices Are Stabilizing, Signifying A Housing Market Bottom).   Some reports suggest that home prices may be stabilizing and may even start to recover. Id.   That is supposedly there is a bottom to the real estate market.  “Different markets will bottom and recover at different paces depending on a variety of factors this year, including the availability of local jobs and how fast foreclosures can be processed and reabsorbed into local markets.”  Id.  The ten hardest hit states are (as of March 2012):

1.        Nevada (worst)

2.        Florida

3.        New Jersey

4.        California

5.        Louisiana

6.        Illinois

7.        Rhode Island

8.        Mississippi

9.        Arizona

10.    Georgia

See Lending Tree Announces (in case you're wondering, North Dakota has the best housing market).

See, Andrea Ghent, Recourse and Residential Mortgage Default: Evidence from US States.  You might think that this would result in lower interest rates in recourse states as the risk to lenders would seem lower, but the study concluded this was not the case. 

What about those worst hit real estate market states?  Do limits on lender recourse prime a market for greater risk-taking by home buyers?  Perhaps not.  A good study on the comparison of state laws on recourse by lenders was done by James Orlando, OLR Research Report: Comparison of State Laws on Mortgage Deficiencies and Redemption Periods (Revised 12/9/11).   My quick read suggests that the top ten states hardest hit have mixed regulations when it comes to recourse or non-recourse mortgages.  So, perhaps a hard hit real estate market is just that.  The non-recourse will surely help borrowers who need to default (somewhat of a mini-bailout of sorts).  Perhaps the strategic defaulters get a bit of a headwind in these states.  There doesn't seem to be enough data to suggest, though, that the availability of a non-recourse loan was a substantial factor in the decline of the markets in the hardest hit states. 

My suspicion is that most home loan defaulters don't have the assets available to lenders who would pursue a deficiency judgment even if they could under state law.  If defaults are higher in non-recourse states, though, it would seem that either: (i) those in difficulty find it easier to let go where there is no recourse; or (ii) those who can pay act more opportunistically in a way that increases the number of defaults.  Even without recourse, the homeowner who opportunistically walks away from the mortgage does not get a complete free pass due to the impact on their credit report.  And, as Brent White (University of Arizona) has argued, the shame and guilt of walking away is often enough to deter many homeowners.  See, Underwater and Not Walking Away.  So, perhaps the local law doesn't have much impact after all.   

- JSM   

The Easy Road for Article 9 in Florida

Summer is upon us, a good reminder that the effective date of Revised Article 9 is coming in just a year (the "Revision"). Of course, one of the main issues within Article 9, which gave rise to the Revision, was the lack of specificity in the way in which a secured party should provide the name of an individual debtor on a financing statement. To resolve this problem, a joint review committee was appointed by the American Legal Institute (ALI) and the Uniform Law Commission (ULC). The joint review committee produced two alternatives from which states would be free to choose. Alternative “A” sets up a hierarchy for individual names which requires a creditor to use the name on the most recent driver’s license, if the debtor has one. While Alternative “B” allows the creditor more flexibility in listing the individual debtor’s name, allowing the creditor to identify the debtor on the financing statement by the individual name, the surname and personal name, or the name on the debtor’s most recent driver’s license. See, What's in a Name. 

As I am getting ready to teach a Commercial Law Survey course, I know that the students will ask about the Revision and its progress here in Florida. Perhaps indicative of the easy road the Revision will have, the status of Article 9 in Florida has already been decided. Florida has enacted the 2010 amendments to UCC Article 9 through House Bill 483 (HB 483). The law provides Alternative “A” for individual debtor names in Section 9-503(a)(4) and takes effect on July 1, 2013, right on schedule. The bill was presented to the Governor on March 23, 2012 and was subsequently signed into law on April 6, 2012. The only small departure from the official text of the Article 9 amendments is a non-uniform version of Section 9-521. Under HB 483, the Florida version of Section 9-521 directs the secretary of state to develop or approve forms.

While Florida is neither the first, nor the last state to consider the Revision, its pathway with little resistance is a good sign for its fate going forward. Let's just hope that the Revision proves successful in its treatment of outstanding issues like debtor names that have provided much litigation.

-JSM

CALI Annual Conference: Some Assembly Required

Paul Caron recently posted over at TaxProf Blog about the annual CALI Conference upcoming at Thomas Jefferson School of Law June 21-23.   There are plenty of sessions for faculty from building online courses to contract drafting.  Also, there will be an update on the ELangdell project.  CALI is hosting free open source books targeted to the law school audience, including texts for the U.S. Bankruptcy Code and Rules and Securities Law Statutes.  Not likely to have the Uniform Commercial Code published for free, but here's to hoping. Also, for those teaching Contracts next year and not yet committed to a text, Professor Verkerke's Collaborative Teaching Materials For Contracts will be available soon.  And, yes, for free.  I've already reviewed this text, and it is sure to draw an audience.

- JSM

Seventh International Contracts Conference Kicks Off at Thomas Jefferson in San Diego

The conference starts on Friday, March 2d. There is a great lineup of speakers and stimulating
topics.

Of especial note, our esteemed colleague Professor Melvin Eisenburg will be the recipient of the 7th ICC Life Achievement Award. Professor Omri Ben Shahar will also receive an award for the best contracts paper published in 2011.

With the weatherman promising nice weather (sunny with highs of 63 and 68 on Friday and Saturday) and great food in store, it doesn't get much better than this. If an interlude in the sun with great food for scholars and practitioners of contracts law to mingle while doing what they love most: taking about contracts sounds good to you, well, its not too late to register - go to http://www.tjsl.edu/conferences/international-conference-on-contracts.

Sorry to say that I cannot attend this year, but sounds like fun!

- JSM

Can I pay a "reasonable price" please?

Sure, Article 2 applies to sales of goods. Sure, it provides a flexible approach to commercial transactions by facilitating deals where the parties have failed to provide all terms. Sure, open prices are filled with a "reasonable price." U.C.C. 2-305. I tell my students the virtues of the reasonable price as a saver of deals where the parties just never get around to deciding. After all, who could complain about paying a reasonable price and what seller would complain about receiving one?

So, here's a toast to the reasonable price. The price of the Friday night libation has surely gotten out of hand. Apparently, a Boston lawyer complained at a Cheesecake Factory about the price of a Margarita, which was not disclosed and the waitress could not provide the actual price. (See ABA Journal). This, of course, comes on the heels of the shocked restaurant patron who received a bill for a $275 spaghetti dinner in New York. (See, New York Times).

The sobering reality is that the Cheesecake Factory will now post prices in advance. A wonderful development for those who don't like to be shocked by the bill at the end of the evening. Otherwise, the reasonable price would seem to be all that is due.


- JSM

Thomas Jefferson to Host International Conference on Contracts

Happy to report that Thomas Jefferson School of Law in sunny San Diego will be hosting the International Conference on Contracts this year on March 2-3. This is always a good conference4 with a variety of topics and presenters on both scholarly and teaching projects. For more information, click here.

- JSM