Never Allow a Human to Do a Computer's Job

Over on BNA's Electronic Commerce and Tech Law blog, Thomas O'Toole has posted an interesting and timely discussion of several recent online contracting cases. It's well worth reading.

Awarding attorney’s fees (at least in Texas)

Normally, I tell students that it would be unusual to collect attorney’s fees in an Article 2 sales case (and maybe in contracts cases generally). Well, perhaps I might need to rethink my pitch on this. In the recent case of Medical City Dallas, Ltd. v. Carlisle Corp., the Texas Supreme Court upheld an award of $121,277 in attorney’s fees and $110,449 in damages in a breach of warranty case based on a written contract. The case involved a simple roofing job gone-bad where the roof was warranted for twenty years, but leaked within five years and thereafter with some regularity. The Court concluded (I think correctly) that 2-715 consequential damages generally would not include a buyer’s claim of attorney fees. But, thanks to Texas Civil Practice and Remedies Code section 38.001(8), which allows attorney’s fees in cases based on an oral or written contract, this is not the end of this matter.

The Court acknowledged that breach of warranty and breach of contract are separate causes of action with separate remedies, but that observed that breach of warranty is in essence founded on contract. Therefore, the Court settled the issue in Texas by allowing an award of attorney’s fees to the buyer for the defective roof. Having practiced in Texas, the state’s law is filled with many curiosities. I agree with the Court’s conclusion that breach of warranty is founded on contract. As such, it would be in the letter of the Texas statute allowing attorney’s fees in such cases. Yet, access to attorney’s fees in sales cases is a powerful consumer right. I often tell students that many cases involving defective goods are not litigated because the cost of litigation far exceeds the cost of the defective goods. Even in the Medical City Dallas case, the attorney’s fees exceeded the actual damages. If this bothers you, you are not alone. The risk of misuse here would seem to be high.

So, Why the Disconnect?

To date, five states — Florida, Kentucky, Louisiana, South Dakota, and Vermont — have enacted Revised UCC Article 1 without enacting Revised Article 7, while two states — Maryland and Mississippi — have enacted Revised Article 7 without enacting Revised Article 1. (While Tennessee technically falls into this latter group, I am excluding it because both houses of the Tennessee legislature recently passed a Revised Article 1 bill and I have no reason to believe that Governor Phil Bredesen will not sign it in short order.) Why?

Louisiana's failure to enact Revised Article 7 might be explained by some eccentricity of the Louisiana Civil Code's treatment of documents of title. But, why have Florida, Kentucky, South Dakota, and Vermont revised their versions of Article 1 while retaining (conforming amendments excepted) their pre-2003 versions of Article 7; and, why have Maryland and Mississippi revised their versions of Article 7 while retaining (conforming amendments again excepted) their pre-2001 versions of Article 1?

Inquiring minds want to know.

What About Revised Article 7?

To finishing following up on Robyn Meadows's earlier post, when Governor Edward Rendell signed Pennsylvania HB 1152 into law on April 16, Pennsylvania became the twenty-ninth state to enact Revised UCC Article 7 — joining Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Indiana, Iowa, Kansas, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Virginia, and West Virginia. Nine days later, Governor Phil Bredesen added his signature to Tennessee HB 3950, bringing the number of enacting states to thirty.

Elsewhere, on April 9, the Illinois Senate unanimously passed SB 2080 — which, as has been true in a number of states (including Pennsylvania, but not Tennessee) proposes enacting both Revised Article 1 and Revised Article 7. The bill now awaits a first reading in the Illinois House, which stands in recess until April 29. Massachusetts HB 4302, likewise, combines Revised Articles 1 & 7. As detailed in my white paper on Revised Article 1, HB 4302 has a tortured history and appears to stand little chance of enactment any time soon.

All of the enacted versions of Revised Article 7 are in effect except for Pennsylvania's, which should take effect on or about June 15, and Kansas's and Tennessee's, which will take effect on July 1. If enacted, Illinois SB 2080 will take effect on or after June 1.

Upcoming Conferences of Interest

Three conferences next month may be of interest to some of our faithful readers. I know they all interest me. I also know that, by the time I get home from the first of the three, I will have been out of town four of the last five weekends and would risk serious marital discord by attending either of the latter two. But, don't let that stop you from attending.

First up, chronologically, is "A Debtor World: Interdisciplinary Academic Symposium on Debt," May 2 & 3 at The University of Illinois College of Law, which is co-sponsoring with the American Bankruptcy Institute. The conference's self-stated goal is to "explore debt as neither a problem nor solution but as a phenomenon. Many different academic disciplines can make important contributions to help us understand why consumers and businesses decide to borrow money, what happens to businesses and consumers under a heavy debt load, and what norms and institutions societies need to encourage the efficient use of debt. Much of this knowledge is compartmentalized into intellectual silos that are rarely cross-fertilized. The goal of the conference is to promote the sharing of this knowledge." The line-up of speakers is eclectic and impressive and the conference promises to be time well spent. Conference registration is still open; however, the conference-rate block of hotel rooms may well be gone.

On May 22 & 23, the University of Houston Law Center's Center for Consumer Law, under the direction of our friend Richard Alderman, presents "Teaching Consumer Law: The Who, What, Where, Why, When and How." The conference faculty includes academics, advocates, and practitioners from the U.S. and several foreign countries and the program appears designed to appeal to attendees with varying degrees of experience and expertise in consumer law and in related areas of substantive law that have substantial consumer dimensions to them (e.g., bankruptcy, sales, payments). In addition to the inherent pleasure of spending two glorious May days in my hometown, conference attendees will be feted to Texas-style Bar-B-Q (known elsewhere as barbecue) and, for a nominal charge, a Houston Astros home game at lovely Minute Maid Park (formerly known as Enron Field and the Ballpark at Union Station). Conference and hotel registration are still open, as of this posting.

Rounding out the month, on May 30 & 31, Emory University School of Law's Center for Transactional Law and Practice hosts "Teaching Drafting and Transactional Skills: The Basics and Beyond." With panels geared toward both neophytes teaching courses that are ripe for infusing drafting and other transactional skills and those already teaching drafting and other transactional skills in their courses who are looking for fresh ideas, "[t]his conference offers those who teach drafting and transactional skills the knowledge and tools they need to comprehensively train students who are studying these areas of law" and "those at the forefront of developing these new courses a forum in which to exchange ideas about teaching, and promoting the teaching of, transactional law and skills." Among an excellent group of speakers is our friend and colleague Scott Burnham, whose book, Drafting and Analyzing Contracts (LexisNexis 3d ed. 2003), is a must-read and who is a most excellent house- and office-guest. Conference registration is open, as of this posting. Attendees are responsible for their own accommodations. For those who want to compare Texas-style Bar-B-Q to Carolina-style barbecue, at the far end of the Emory campus is a wonderful place called Dusty's. It's worth a visit if for no other reason than to buy some sauce to take back home with you.

The (Next to) Last Shall be (Among the) First

For several years now, those of us who teach UCC Articles 3 and 4 have had to caution our students that New York (the financial and commercial capital of the Western hemisphere) and South Carolina (home to many fine golf courses) had not adopted the 1990 revisions of Article 3 and 4, on which most payments teaching materials focus much of their attention. More recently, we have had to decide how much emphasis to give the 2002 amendments to Article 3 and 4 -- which, until April 15, only five states (Arkansas, Kentucky, Minnesota, Nevada, and Texas) had enacted.

But, wait! In the spirit of Matthew 20:16 (it seems only fair, being Sunday morning and all), South Carolina has vaulted from the rear of the peloton to the lead group. By affixing his signature to SB 936 on April 15, Governor Mark Sanford made law a sweeping revision of South Carolina's Articles 3 and 4 that has the effect of enacting the 1990 revisions as amended by the 2002 amendments.

Meanwhile, New York SB 2410 proposes comparably sweeping changes to New York's versions of Article 3 and 4. However, SB 4120 does not appear to be making any progress since first being referred to the Senate Judiciary Committee in March 2007 (not a typo).

Vermont and Pennsylvania Enact Revised Article 1; Tennessee and Illinois Progress Toward Enactment

Governor Jim Douglas signed Vermont HB 563 into law on April 10. Governor Ed Rendell did likewise to Pennsylvania HB 1152 on April 16. Pennsylvania HB 1152, by its terms, takes effect on or about June 15, 2008. Vermont HB 563, along with Kansas SB 183 (enacted last year) and South Dakota SB 93 (enacted earlier this year), will take effect on July 1, 2008.

Vermont HB 563 and Pennsylvania HB 1152 both eschew uniform R1-301 (making it 0-for-32 for those scoring at home) and adopt the uniform R1-201(b)(20) good faith definition (that tally now stands at 23-to-9 in favor of the new unitary standard).

Elsewhere:

The Tennessee Senate and House have approved slightly different versions of Tennessee SB 3993. The Tennessee Senate is scheduled to vote next Monday (April 21) whether to accept the House's amended version.

The Illinois Senate has unanimously approved Illinois SB 2080, which now awaits a first reading in the Illinois House.

Massachusetts HB 4302 continues to idle.

The bills pending in Tennessee, Illinois, and Massachusetts all reject uniform R1-301. The Massachusetts bill adopts the uniform R1-201(b)(20) good faith definition, while the bills pending in Tennessee and Illinois retain the bifurcated good faith standard currently in effect by replacing the language of uniform R1-201(b)(20) with "honesty in fact in the conduct or transaction concerned."

The Risk of Buying a Boat Off-Season

In the recent case of First Nat. Bank of Litchfield v. Miller, the Connecticut Supreme Court considered whether the Millers accepted a Donzi Z20 boat they purchased for purposes of 2-606. The Millers paid a deposit and executed a purchase agreement on April 30 when the weather was still far too cold for boating in New England and they could not take the boat out into the water. The agreement provided that title and ownership would not transfer until the full purchase price was paid and that delivery would not occur until May 20. The May 12 retail installment contract, though, recited that the seller had delivered the boat to the Millers who had accepted the boat (even though no delivery had in fact occurred), but this representation was in provisions agreed to by the seller and financing company. The seller did not have the boat ready for delivery until May 27 and even then during a test-ride with the Millers there were some mechanical problems. When the Millers sent the seller a letter rejecting the boat and refusing to pay the lender, the lender brought suit.

Reversing the appellate court, the Connecticut Supreme Court found that the Miller’s accepted the boat for two reasons: (1) that the purchase agreement and retail installment forms signed by the Millers stated that they had inspected the boat and were satisfied with it, constituting acceptance under 2-606(1)(a); and (2) that the act of signing an application for a temporary registration for the boat constituted an act inconsistent with the seller’s ownership under 2-606(1)(c). The Court observed that the circumstances of the transaction were key to the issue of acceptance:

The Millers did not purchase any vehicle. They purchased a boat during spring in New England. The trial court particularly found that it is not uncommon for buyers to purchase a boat during the off season, deferring delivery until later. Presumably, buyers who wish to take a boat for a test ride prior to accepting delivery will wait until the weather permits that form of inspection before signing contracts in which they represent that they have inspected the boat and found it satisfactory, and before having the boat customized to suit their needs. Buyers who do not wait until warmer weather permits a test ride essentially have weighed the advantages of a more thorough inspection versus the instant satisfaction of purchasing the boat immediately, and relying on a less reliable means of inspection, and opted for the latter.

The Court’s conclusions on the workings of 2–606(1)(a) seem to be against precedent and detrimental to the rights of consumers making purchases on forms prepared by sellers. Before reading this case, I would have told my students that it is a generally accepted principle that seller forms reciting that goods are “accepted” are not effective under 2-606 unless there was a sufficient opportunity for a buyer to perform more than a cursory inspection of the goods. Regarding the buyer’s right to inspection of goods, comment 8 to 2-513 provides that inspection is not regarded as a condition to the passing of title. Comment 9 further explains that inspection is the buyer’s “check-up” to see if the goods are conforming and should not be confused with an “examination” of goods at the time of contracting.

The Miller’s examination of the boat in April would seem to be the type of “examination” at the time of contracting that the code contemplates, rather than an inspection. Moreover, a boat that can only be inspected during the winter while out of the water would not seem to amount to more than a cursory inspection. As such, the Millers would have at least until the test ride with the seller on May 27 to accept or reject the boat (and perhaps longer). It seems a curious proposition to deem acceptance at the date of purchase (or payment) when the parties clearly contemplated a test drive later when the weather warmed up in Connecticut. Similarly, it would not seem that merely signing an application for temporary registration presented by the seller would constitute acceptance either. Car dealerships also have consumers sign temporary registrations, but I would not think that this would be acceptance under 2-606 either.

So, the aspect of this case that remains for me here is the Court’s observation that a boat purchased during winter in New England somehow is special. I have doubts about this reasoning. Nevertheless, buyer’s would be wise to exercise caution when purchasing boats during wintertime in Connecticut. I wonder if this decision will put a damper on off-season boat sales?

Classification of "Financial Services"

The term "financial services" refers to an assortment of institutions that provide the means for people to save for the future, hedge against risks, acquire capital for consumption and organize capital for investment. Actors who undertake this intermediation function facilitate social gains from trade.

The The Department of the Treasury Blueprint of A Modernized Financial Regulatory Structure (March 2008) makes a provocative observation about the "financial services" sector and the term itself. Our current regulatory structure organizes financial services institutions into legally distinct categories, (e.g., commercial banks, other insured depository institutions, insurers, companies engaged in securities and futures transactions, finance companies, and specialized governmental companies such as Freddie Mac and Fannie Mae). These categories in part reflect distinctions in the way these actors function as capital intermediaries. In ways we hardly notice, however, the legal categories both reflect and entrench distinctions that regulation, not function, makes important.

For example, we perceive a legal difference between a commercial bank and an "other depositary institution" because the law that regulates commercial banks is different than that which regulates other depositary institutions. To accommodate the regulatory difference, we invent and deploy different words to describe the differently regulated actors. The most famous example of this may be the "non-bank bank" a term coined in the 1980's for a financial institution that did not meet the regulatory definition of a "commercial bank" and thus avoided the prohibition against interstate banking for commercial banks. The words we use to describe and importantly to think about "financial services" institutions make non-functional distinctions important.

The Blueprint proposes a new regulatory regime for intermediaries in which non-functional regulatory distinctions give way to functional ones. It opens a discussion on the possibility and realization of optimal regulation free of the restraint the current regulatory classification system imposes.

The proposal is both thrilling and terrifying. Mastery of the elaborate financial services classification system, like its biological counterpart, is not cheaply acquired or easily relinquished. For those players who have invested in manipulating the present regime to their advantage, the prospect of change threatens their return. The Blueprint invites financial services lawyers (and others who might be) to abandon the old vocabulary and embrace and create a new legal field that as yet has no name.

Revised Articles 1 & 7 in Pennsylvania

The bill to adopt revised Articles 1 and 7 that had been stalled in the Pennsylvania Senate was unanimously passed by the Senate on April 8 and now heads to Gov. Ed Rendell's desk for signature. I'm sure this Blog's own Keith Rowley will give us a complete update when the bill is finally signed into law. Pennsylvania joins the majority of states that have enacted Revised Article 1 in adopting the uniform definition of good faith for all articles except Article 5, honesty in fact and the observance of reasonable commercial standards of fair dealing.

Testing Secured Transactions

When I went to Vanderbilt law school some years ago, I had Professor Margaret Howard for Secured Transactions. Professor Howard gave us a multiple choice final examination that I recall had elements of short answer format as well. When I’ve taught Secured Transactions in the past, I’ve nearly always given the traditional long format essay exam. But, I’ve not taught Secured Transactions in a few years, so I am revisiting this as I am thinking about this Spring’s rapidly approaching exam. I am leaning toward using a short answer examination for Secured Transactions.

Of course, what do lawyers really need to know about U.C.C. Article 9? Not that they haven’t been taught a great deal in class, but testing forces professors and students alike to give thought to focusing on key issues. It would seem at the least that students must understand the basics of classifying collateral, creating a security interest, perfecting the security interest and sorting out priorities. But then, there are plenty of other good things to learn as well. Should students really know how the “rebuttable presumption” test works for non-complying sales? What should they know about the treatment of inventory that is leased to a lessee where the lessor’s lender has a security interest in the collateral?

Lynn Daggett’s recent article All of the Above: Computerized Exam Scoring of Mulitple Choice Items Helps To: (A) Show How Exam Items Worked Technically, (B) Maximize Exam Fairness, (C) Justly Assign Letter Grades, and (D) Provide Feedback on Student Learning in the recent volume of the Journal of Legal Education makes the pitch for multiple choice generally, but not in the context of commercial law. The most persuasive argument is the ability to have data showing areas where students either mastered the material (or didn’t). Kenney Hegland’s 2006 article On Essay Exams also in the Journal of Legal Education takes the opposite stance. Hegland makes a pretty good case that exams not only evaluate, but also teach. This, of course, is better done with essay format.

The merits of both Daggett’s and Hegland’s arguments are easy to see, but are there reasons to prefer one over the other for commercial law? With the breadth of code provisions, it is tempting to use multiple choice questions in commercial law. In fact, I have used a partial multiple choice format when teaching Sales. But even in this class, I share Hegland’s desire to teach and a general commitment to having students carefully work analysis. The breadth of issues with Secured Transactions would make it easy to weave a single long fact pattern of a transaction in its entirety from the creation of the security interest to default and repossession by a lender. There would certainly be plenty for all students to write about in such a case. But, I find myself drawn to a format that might use the same transaction in a format that breaks it down to shorter 20-30 minute segments. This approach, I believe, would require students that might otherwise skip over difficult code issues to have to take them up because they are set out as separate grading items. There is also a greater potential for using variations on the fact patterns with this format, which is especially helpful for drawing out code nuances. Like Daggett, I like knowing which areas of Article 9 the students had more difficulty with on the examination. But, I am not quite willing to commit to giving the students a pass on explaining their analysis.

For any of you also mulling this over, several other articles that you might want to look at (though not specifically about commercial law) are:

Steven Friedland, A Critical Inquiry into the Traditional Uses of Law School Evaluation, 23 Pace L. Rev. 147, 174-79 (2002);

Linda R. Crane, Grading Law School Examinations: Making a Case for Objective Exams to Cure What Ails “Objectified” Exams, 34 New. Eng. L. Rev. 785 (2000);

Marcella David, A Funny Thing Happened on the Way to the Multiple-Choice Exam: Or, The Schoolroom Lessons from Bush v. Gore, 51 J. Legal Educ. 1 (2001);

Steve Sheppard, An Informal History of How Law Schools Evaluate Students, With a Predictable Emphasis on Law School Final Exams, 65 UMKC L.Rev. 657, 665-88 (1997).