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).

An update on the coffee

Maybe it’s our never-ending need for more caffeine (or at least mine) . . . . Despite the complaints about the quality of coffee that spurred the recent Starbuck’s retooling and the “perfect coffee pledge,” Starbucks came in at #7 on Fortune’s list of Best Companies to Work For. Paid sabbaticals, on-site child care and fitness centers and health care caught my eye as some of the “perks” of working at Starbucks. This week, though, Starbucks suffered a setback with a California decision requiring the company to repay more than $100 million in tips back to the baristas due to state law violations from the company’s practice of allowing supervisors to share in employee tips. Kind of puts a damper on the good place to work recognition.

Well, back to the java. Interestingly, Starbucks seems to be sticking to the quality control issue and is adopting new automatic espresso machines designed to leave less error in the puling of the shots and steaming milk. The company is also returning to grinding beans at the stores, rather than using pre-ground bags of coffee. I’m not sure that this all will lead them to increased sales and business success, but it does show company commitment to make the “best” coffee a reality. The problem with the perfect coffee pledge to me, though, still remains. Starbucks has set consumer expectations high, but their ability to convert on their pledge of quality coffee rests with the employees in the stores. That is where the tension between being a great place to work and discontent over the tipping policy may affect whether the baristas ultimately “make it right.”

All of this serves as a reminder that companies which make express warranties regarding the quality of their products may be heavily dependent on their employees to really come through. This would seem to be especially true where the sale involves a mixed goods and services transaction. As to Starbucks, the dependence and ultimate fulfillment of warranty conditions (if the perfect coffee pledge is more than puffery) will require employee dedication to ensure quality coffees. When I went to the Starbucks website, the company’s statement concerning the tipping issue was prominent on the website. That struck me immediately, but upon reflection Starbucks really must tackle this issue that could threaten quality. Although the statement now appears on a less prominent company page, the tipping issue reflects the delicate balance that companies must achieve between satisfaction of warranties of quality and employee relations.

Is the CISG is a self-executing treaty?

On today's ContractsProf Blog, there are interesting comments on whether CISG is a self-executing treaty under the Supreme Court's recent ruling in Medellin v. Texas, with Prof. Michael Van Alstine of Maryland opining that it is and Prof. Michael Zimmer of Seton Hall unpersuaded that a court would necessarily so find. The concern of contracts and commercial law scholars is that if CISG is not held to be a self-executing treaty, state courts may be free to refuse to follow CISG in international sales disputes litigated in state courts.

Got Wheels?

For those who might be lucky enough to be vacationing soon . . . Irma Russell’s recent article Got Wheels?: Article 2A, Standardize Rental Car Terms, Rational Inaction, and Unilateral Private Ordering might be a worthy read. The piece takes a good stab at the issue of adhesion contracts—a popular complaint here recently—in the context of car rentals. Her study compared the terms and conditions of rental agreements and pricing information available to consumers pre-lease, often available to Irma in the oft-seen flimsy paper of the 8-point variety. Not surprisingly, the terms (which heavily favor the rental companies) are offered on a take-it-or-leave-it basis and Irma was met with laughter from one company in response to her request to vary the standard rental terms.

Irma’s observation about lack of consumer preferences on these types of terms strikes at the heart of the debate. It seems like an unfortunate state of affairs that consumers have little bargaining room in these types of transactions. That said, unless severe overreaching occurs, I tend not to question the terms offered and go on my way. In fact, the faster that Hertz gets me in the car and on my way, the happier I tend to be. Consumer inaction strikes again.

What's In a Name?

On March 13, 2008, the Nebraska Legislature passed LB 851 and it is now awaiting the Governor’s signature. If signed, the new law will take effect three months after the legislature adjourns (the legislature is currently slated to adjourn on April 17, 2008) and will have a significant impact for those who conduct UCC searches on individual debtor names in the state.

The bill amends § 9-506(c) so that a financing statement is sufficient for an individual name if a search on just the correct last name of the individual would disclose the record. The effect of this legislation will be to make the first and middle names of individuals irrelevant to the efficacy of a financing statement. That in turn will increase the due diligence burden for searchers. In short, searchers will have to review every financing statement that provides the same last name as the individual name searched. This could be a large task.

For example, a UCC search of the individual last name “Johnson” on the Nebraska Secretary of State’s web site produces 2671 unique active records. For a searcher interested in the property of any one of them, each of those filings would have to be reviewed. This would seem to significantly add to the cost associated with using the filing system, something that would seem undesirable in this time of tight credit.

The problems associated with filing and searching against individual debtors has frequently been the subject of long trains of postings on the UCC listserv. Texas has already enacted a non-uniform rule to deal with the preceived problem and now Nebraska is poised to adopt a different approach. The ALI and NCCUSL are in the process of establishing an Article 9 Review Committee to discuss issues that have arisen and formulate proposals (but not to do actual drafting). I hope the remaining 48 states refrain from adopting any more non-uniform approaches -- especially not Nebraska's approach -- to this issue until that Committee has the opportunity to address the matter.

Update on Dragnet Clauses

Courts are continuing to split on the efficacy of dragnet clauses in consumer transactions. Some courts give effect to such clauses, see In re Shemwell, 378 B.R. 166 (Bankr. W.D. Ky. 2007) (dragnet clause in open-ended line of credit granted to consumer is enforceable, and thus collateral secures all obligations of the consumer to the creditor); In re Nagata, 2006 WL 2131318 (Bankr. D. Haw. 2006) (credit card agreement, which provided for debt to be secured by all collateral provided for other loans made to the debtors, was secured by cars which debtor later refinanced, even though debtors had paid off the car loans); In re Franklin, 343 B.R. 815 (Bankr. N.D.W. Va. 2006) (enforcing a future advances clause in a consumer loan transaction without discussing the purpose of the future advance or how related it may be to the original loans). However, about an equal number do not. See Wooding v. Cinfed Employees Credit Union, 872 N.E.2d 959 (Ohio Ct. App. 2007) (although auto loan agreement provided that car would secure all obligations the borrower owed to the lender, nothing specifically indicated that the car would secure the borrower’s credit card account obligations and thus there was "no meeting of the minds with respect to the cross-collateralization of the automobile"); In re Yelverton, 2007 WL 841393 (Bankr. M.D. Ala. 2007) (neither first loan agreement, which included a clause indicating that collateral securing other loans also secures this one, nor second loan agreement, which included a clause purporting to make the collateral secure all other debts of the borrowers, was adequate to make the collateral granted in the second agreement secure the debt created in the first).

The most recent decision on this point is In re Keeton, 2008 WL 686938 (Bankr. M.D. Ala. 2008) (dragnet clause in security agreement with joint debtors did not clearly encompass obligations later incurred by only one of them, and thus the collateral did not secure those individual obligations). Decisions such as this are lamentable. They are a judicial invention that implicitly treats secured transactions as if they were governed by the common law, rather than a fairly detailed legislative code. Beyond that, they are expressly rejected in the comment to revised Article 9. See 9-204 comment 5 . More important, the requirement that the advances be of a similar kind is inconsistent with its own underlying rationale. In an effort to ensure that the debtor has truly consented to secured treatment of the future advance, courts refuse to enforce the parties’ agreement as written – which is the best evidence of their intent. Moreover, in the process, they relegate the unquestioned intent of the secured party to an irrelevancy. Most significantly, there is really no way to draft around the rule to ensure that all future advances will be covered, even if that is the true intent of both parties and even though the rule is ostensibly designed to give effect to their (or at least the debtor’s) intent.

Spring Submissions of Commercial Law Scholarship

It’s the season for spring law review submissions. The season, and my own submission of “Impracticability Under the U.C.C. for Wartime Contracts” via ExpressO yesterday, had me recalling Larry Garvin’s “The Strange Death of Academic Commercial Law.” Larry argues that there has been a decline in the area of commercial law in terms of faculty numbers, courses taught and scholarship produced. Larry observes that “[m]any issues of the Current Index of Legal Periodicals have nothing in commercial law, or nothing other than perhaps a student note or a survey of state law.” Larry (I think correctly) argues that the status of commercial law is tied to the quantity and quality of scholarship produced. For the three year period ending 2005, Larry’s study found just 219 articles on commercial law (criminal law in the same period had 1415 articles). And, this number itself may be inflated due to inclusion of non-academic articles. So, he portrays a dim look at the quantity of scholarship we in commercial law are producing. Not to say we aren’t writing at all. Perhaps we are writing about other issues? Even if the number of faculty in commercial law has declined, perhaps those in commercial law might assume some responsibility here to make sure that they are teaching and publishing in the area. A constitutional law faculty member once told me not to write in the area because there was nothing to say. To this, I disagree. The area is active and the diversity of posts just on this blog suggests that the topics worthy of discussion are many

But . . . placement matters too. Not only does Larry’s essay tell a grim tale of the number of articles as a whole, but the study found no articles in the top ten journals for 2004-05 and only 2 in the same period for the top sixteen journals. I find myself asking whether there is a corollary between the secondary position of commercial law in the curriculum of some law schools and the lesser placement of scholarly commercial law articles. Jim's post about teaching commercial law is ultimately related to issues of scholarship as well. Students who don’t have an opportunity to take, learn and appreciate commercial law are the same ones who make publication decisions for the reviews. If some view the study as one that is only encouraged because it is necessary, the same would appear true of scholarship. It seems to be a problem that will perpetuate itself without law review editors being bold enough to publish work that falls outside some of the typical parameters (high citation counts and former placements). And, again, if there aren’t plenty of submissions of commercial law papers to the law reviews, it becomes an anomaly for the editors to see such things.

Agree or not with Larry’s findings. The status of commercial law does depend on what we do and how engaged we are with our field. I, like many others, will wait out the next few weeks to see what becomes of my manuscript. Wherever it ends up, I will continue to write in the area. There is always hope that the more pieces the law review editors see on their desk with “U.C.C.” lurking somewhere in the title, abstract or first page, the more likely that the status of the scholarship will gain a greater sense of appreciation. It will be worth seeing how the March submission cycle treats commercial law authors. Best to all in this season.

Perspectives on the Uniform Commercial Code

Recently, the Harvard Law Review's publications section reviewed Doug Litowitz' new student reader on commercial law, Perspectives on the Uniform Commercial Code, which is now in a second edition. According to the review, Litowitz' book contains “discussions relating the UCC’s drafting and enactment history; debates over the methodology, interpretation, and wisdom of the UCC’s nationalization of commercial law; insightful commentary about the contested nature of commercial property and the politics and adequacy of the UCC’s amendment procedure; and excerpts from cutting-edge UCC scholarship.”

In an email to me, Doug mentioned: "The purpose of the book was to change the way that commercial law is taught. In addition to the standard casebook and statutory supplement, I wanted to provide students with readings on the history, interpretation, and politics of the UCC." Now that’s a lot in one book.

Given Jim's post about teaching commercial law and Marie's on Teaching Commercial Law II , the broad based approach that Doug is trying to achieve has some attactiveness. Not only do students need critical statute reading and interpretative skills, but also an understanding of the methodology behind the sections, including the drafting history. I agree to a limited extent with Joe S. that the U.C.C. may have a different drafting practice than, for instance, an environmental statute. Yet, I find that students have difficulty with statutes of any kind and that the U.C.C. with its comments and history makes it a particularly good vehicle for students embarking on the study of critical statutory skills. The U.C.C. also has many sublties that make it interesting for those of us who study it long term. Perhaps my bias as a commercial law professor finds me agreeing with Marie Reilly that the study is not at all like broccoli (though I must admit that I have an affinity for that too). To me, I think the study is more like the flavor of a glass of Châteauneuf du Pape. The importance of the blend of skills that the study offers is a good part of what makes the practice of law intriguing. I certainly offer my best to Doug for his new edition.

It's Important to Know [to] Whom to [En]Trust

Trusting, or more precisely entrusting to, the wrong person can be a multi-million dollar mistake. A Swedish art collector learned this hard lesson from Article 2, in particular, UCC section 2-403(2). Kerstin Lindholm owned the Red Elvis (the Warhol work of art not Dean Reed, the American Soviet superstar dubbed by the press as “the Red Elvis”). Lindholm had used a reputable Swedish art dealer in various transactions, including organizing the loan of the Red Elvis to the Guggenheim Museum in New York. The dealer represented to an experienced American art collector, and member of the Guggenheim board, that he owned the Red Elvis, having purchased it from Lindholm and arranged to sell it to the collector with delivery from a bonded Danish warehouse. The dealer represented to Lindholm that the Red Elvis was going from the Guggenheim to a Danish museum exhibit. Lindholm authorized the Guggenheim to release the Red Elvis to the dealer’s custody, and that’s where her problem arose. When the painting was released to the dealer, he diverted it to the Danish warehouse and consummated the sale to the collector. Lindholm first learned of the sale when she herself sought to sell the Red Elvis for $4.6 million. She then sued to recover the work from the collector.

By giving the dealer control over the Red Elvis, Lindholm had entrusted the work to the dealer sufficient to implicate UCC section 2-403. Through the entrustment, the dealer acquired the power to transfer Lindholm’s ownership to a buyer in the ordinary course of business. The question the court confronted in Lindholm v. Brant, 925 A.2d 1048 (Conn. 2007) was whether the experienced art collector was a buyer in the ordinary course of business. Prior to the sale, the collector’s attorney did a search of the international database on lost and stolen works of art and found no claims against the Red Elvis, but opined to the collector that this provided only “minimal assurances” of good title. The collector, concerned about potential claims against the work from Lindholm’s former husband, requested documentary evidence of the dealer’s ownership. The dealer refused on the basis that providing such evidence was not customary in the art trade. Despite the dealer’s refusal, the collector proceeded with the sale. Finding that the collector had acted consistent with the practices in the art trade, even if those practices seemed unreasonable to the court, the court found the collector was a buyer in the ordinary course of business and therefore, the owner of the Red Elvis.

South Dakota Makes 30

By affixing his signature to SB 93 on March 13, 2008, Governor Mike Rounds made South Dakota the thirtieth state to enact Revised Article 1. South Dakota's enactment, along with Kansas's (enacted last year), will take effect on July 1, 2008.

SB 93, like the versions of Revised Article 1 enacted in Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Virginia, and West Virginia, rejects uniform R1-301. (To date, only the U.S. Virgin Islands has adopted uniform R1-301.)

SB 93, like the versions of Revised Article 1 enacted in Arkansas, California, Colorado, Connecticut, Delaware, Florida, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Texas, and West Virginia, adopts uniform R1-201(b)(20)'s definition of "good faith." By contrast, Alabama, Arizona, Hawaii, Idaho, Indiana, Nebraska, Rhode Island, Utah, and Virginia retained the pre-R1 “honesty in fact in the conduct or transaction concerned” definition in Article 1 and left 2-103(1)(b) & 2A-103(3) unchanged.

The bills currently pending in Massachusetts, Pennsylvania, Tennessee, and Vermont (see my February 28 post) do not appear to be making much progress.

Relational Contracts and Modifications

So many businesses pursue long-term relationships for supply of products. A relational contract is generally thought of as an agreement of an ongoing nature between two or more parties that the parties modify to address changing business needs. U.C.C. section 2-209(2) expressly recognizes the enforceability of a contractual clause prohibiting subsequent oral modification. Recognizing the need for flexibility in commercial transactions that underlies the policy of the U.C.C., section 2-209(4) acknowledges that the parties may waive such a clause. Businesses often use the no-modification clauses as a matter of stock-terms and conditions. Yet, business practice may suggest that the parties actually desire more flexibility in their day-to-day dealings. The question becomes how much flexibility in defining the scope of the relationship do parties to formal agreements really desire in fact, especially in the face of a no-modification contract clause?

The tension between relational contracting and firm contract terms came up recently In Italverde Trading, Inc. v. Four Bills of Lading Numbered LRNNN 120950, LRNNN 122950, LRNN 123580, and MLSNV 254064, 485 F. Supp. 2d 187 (E.D.N.Y. 2007). After a freight forwarder seized a shipment of pasta in payment of a debt, the pasta manufacturer, Delverde SpA (“Delverde”), sought to establish that title to the pasta passed to the buyer, Italverde Trading, Inc. (“Italverde”), upon delivery to the shipper. The parties to the pasta sales agreement had a no modifications clause in their sales contract. The contract between Delverde and Italverde provided that Italverde would not gain title to the pasta until Italverde received the pasta in the United States, but Italverde argued that the parties waived this provision. First, the Delverde shipping invoices used the delivery term “CIF.” Ultimately, the court found this evidence inconclusive since the effect of the CIF term would depend on whether the parties understood the term as being used under the INCOTERMS, which does not govern title, or the U.C.C. section 2-320, which would. Second, the Italverde CEO testified that he understood that Italverde had title to the pasta when it was positioned on the ship. The court concluded that the inclusion of the CIF term on invoices, the lack of objection by Italverde and the testimony of the Italverde CEO were insufficient to establish as a matter of law that the parties had waived the no oral modifications provisions regarding title to the pasta. At trial, Italverde and Delverde would have the burden of proof to show the parties waived the transfer of title provision from the contract.

Perhaps this argument was created just to avoid the loss of the pasta to freight forwarder. But, on the other hand, title and risk of loss issues are often important to parties involved in shipping. If Deverde and Italverde did in fact change the contract’s title provisions through practice developed over time, as we might expect in a relational contract, then denial of the change undermines the intention of the parties. The common inclusion of non-modifications clauses as boilerplate in contracts may turn out to be a pitfall to parties to longer term contracts who often leave some of their contract terms behind as their business develops.

Teaching Commercial Law Part II

Jim's post about teaching commercial law is both gratifying and provocative. "Law schools should actively encourage all students, and not just those who contemplate a future in business law, to complete at least one course in commercial law." He offers three reasons why a commercial law course is essential to a well-balanced law school meal: 1) commercial law is statutory and close statute reading is a useful legal skill; 2) clients pay for commercial law expertise ; and 3) commercial law courses offer students a good opportunity to learn how to integrate "legal doctrine with real world problem solving techniques."

As a threshold matter, consider what is and what is not commercial law. The commercial law curriculum consists of the big three: Sales, Secured Transactions and Payment Systems. Sales covers the law that governs supply chain transactions (goods sales and leases, domestic and international). Secured Transactions opens the door of the mind to debt relationships. It explores where capital comes from, where it goes, and how borrowers and lenders solve recurring problems of agency and control. Payment Systems covers an array of items that facilitate transactions including bank-customer relations, risks associated with debt relationships with strangers, and alternate credit enhancement techniques. These three courses are the mirepoix and Contracts is the broth that supplies the flavor base to every mutually beneficial exchange.

I agree that in a perfect world, a first rate legal education would include at least one of the big three. But, Jim's points require clarification. Yes, commercial law courses are statutory. They feature articles of the UCC and, these days, a host of other statutes, state, federal and international. But commercial law courses are not just statutory. It is wrong to imagine a section by section slog through the Articles for the sole purpose of mastering the statute (no doubt, the legal analog to the Bataan death march). The UCC coexists with common law of commercial law: "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, or other validating or invalidating cause." UCC 1-103. White & Summers note that this scope section, 1-103, "is probably the most important single provision in the Code." The meaning and function of the Articles of the UCC are deeply embedded in the larger and highly dynamic legal environment in which commerce occurs. Commercial law is about how law supports and regulates business. It does not begin and end within the covers of a statutory supplement or a Nutshell. It is alive and well and everywhere.

Yes, statutory skills are good to have. Sadly, though, this truth is typically distorted in the presentation. "Commercial law courses are good for you," says the colleague down the hall who teaches Constitutional Law. The subtext in such a remark is unmistakable. Commercial law is a big green vegetable. Like high fiber food, commercial law courses and the statutory interpretation skills they deliver are "good for you" but pointless and mind numbing in the consumption. (Some colleagues actually assume an "I smell broccoli cooking" look whenever advising a student about a commercial law course.) The rejoinder to those who see the role of commercial law in the law school curriculum as a kind of lead bat in the on deck circle appears in justifications 2 and 3. In good times and especially in bad, law firms and clients pay for substantive expertise in commercial law. Moreover, commercial law courses are most definitely a legal "skills" experience. They present complex questions and require sophisticated answers. A well-trained lawyer can listen to a problem, translate it into the specialized language of commercial law, locate the governing principle, identify negotiating space, and offer reasoned advice to the client. It's probably true that few students remember distinct statutory language after the exam. Instead they carry away legal instinct, the urge to "look it up," and the courage and patience to do so.

Bankruptcy and Gift Cards

This AP article dated March 3, 2008, ”Bankruptcy Makes Gift Cards Worthless,” is one of several that I have seen along similar lines recently and serves as a good reminder that, notwithstanding a variety of attempts to protect consumers who use gift cards (including limits or outright bans on expiration dates, which about 70% of states now have in some form), consumers can still be vulnerable to total loss in the event of the issuer’s bankruptcy. The article also highlights some fairly ingenious efforts on the part of competitors to take advantage of the situation (and attract new customers) by honoring those otherwise worthless gift cards, at least in part.

Teaching (commercial) law

Shortly after I started MoneyLaw, I wrote a post called Beyond ratings: Actually doing our jobs. Commercial law figured prominently in that post, and I thought I'd revisit the topic on the occasion of this weblog's founding.

A year and a half ago, The Conglomerate rightfully devoted careful attention to Larry Gavin's recent SSRN post, The Strange Death of Academic Commercial Law. Christine Hurt and Vic Fleischer each posted thoughtful proposals for reconfiguring the law school curriculum to bring this venerable and valuable subject back to legal academia.

After reviewing what I wrote in response to these proposals, I will add a few thoughts about commercial law and its centrality to legal education.

Read the rest of this post . . . .In August 2006, I wrote this in response to The Strange Death of Academic Commercial Law and The Conglomerate's discussion of that paper:

There is something to be said for reconfiguring the law school curriculum, especially in a third year that is as widely wasted as it is dreaded, according to the functional needs of new lawyers rather than the intellectual predilections of sinecured professors or, even worse, those professors' personal convenience.

Short of a comprehensive restructuring of the upper-level law school curriculum — which after all is the sort of proposal that sinks tenure petitions, ends deanships, and generally withers otherwise promising academic careers — perhaps we can consider a more modest intermediate step. Every law school student should complete a six-credit, two-semester "capstone" sequence as part of her or his third-year experience. Relying strictly on my personal arsenal of curricular weapons, I could conceivably offer full-year sequences in economic regulation (from antitrust to full-blown, command-and-control regulation of entry and rates), agricultural law and agribusiness law, the law of disasters, or natural resource and public lands management, among other possibilities. These are not offerings that lend themselves to a single 2-, 3-, or 4-credit course. In the tradition of, say, sports and entertainment law, they undertake to explain an entire way of doing business and to integrate such bodies of law as may be pertinent — all from a prospective client's perspective rather than the professor's idiosyncratic view of the field. Team teaching, skills training, and clinical experience can all be incorporated into this capstone sequence.

I still embrace the notion of building the entire third-year law school curriculum around capstone courses and practice-oriented exercises such as clinics, moot courts, and externships. I am now less sanguine, however, at the prospect that the legal academy as a whole would ever embrace something this radical. Even in August 2006, I feared that "an academy that is paralyzed by fear of The Ratings will be loath to try something different, no matter how sensible or how useful the alternative might be." Mark Osler has since identified serious and systemic institutional barriers to curricular innovation. Only partly in jest, I've suggested that those barriers dictate a single approach to faculty appointments: Hire no one.

As a compromise, therefore, I modestly propose this intermediate step: Law schools should actively encourage all students, and not just those who contemplate a future in business law, to complete at least one course in commercial law. Better yet, all students — especially those who expect to work in areas they may not characterize as commercial or economic — should complete a core business law curriculum, including commercial law, the law of business associations, and basic income taxation. This may be an obvious point to the contributors to this blog, but a shocking number of students (and even professors) indicate a contrary belief through their curricular choices. Marie Reilly has already extolled the utility law teacher. I now praise the utility law course.

The virtues of teaching commercial law are many, but the principal ones merit quick mention here:

• Commercial law, throughout its manifestations, is primarily a product of statutory law. In an academy where few schools undertake to teach legislation and statutory interpretation and few students encounter the chief tool of contemporary lawmakers and courts, courses in commercial law (and, for that matter, in tax) may represent most students' only systematic introduction to statutes and codes.


• Commercial law covers the sort of substantive legal knowledge for which clients are most likely to be willing to pay. We must never forget that the vast majority of law students are not going to school for fun or mere intellectual stimulation. Every law students should take at least one upper-level course that will enable them, quite simply, to get a job.


• Commercial law outperforms most other law school offerings in its integration of legal doctrine with real-world problem-solving techniques. That potential, at any rate, means a great deal in the hands of a skillful teacher of commercial law.

For these reasons and more, I have expressed my belief that a start-up law school should hire a Reilly-style utility law teacher as the first member of its new faculty. I would hire a broad-gauged business law generalist ahead of, say, an intellectual property or environmental law specialist, and far, far ahead of an interdisciplinary scholar whose devotion to teaching law students might stem entirely from the relative heft of a law teaching salary vis-à-vis paychecks offered elsewhere on a university campus. Commercial law may lack the glamor attributed to other fields in today's legal academy, but it is the bedrock of a legal education that works for its students — both in the sense of serving those students prudently, and in the sense of committing law schools to devoting labor, time, and resources toward those students and their future.

i'm lovin' it!

Yes, I have to admit that I am a mom that allows her children to eat McDonald’s. Not daily, or even weekly, but, yes, from time to time we visit the “golden arches.” My almost three year old just loves the French fries and chicken McNuggets. I feel comfortable taking the position that the occasional French fry does not make me a bad parent or remiss in the nutritional needs of my children. That being said, I would not feed my children (or recommend that others) eat fast food on a frequent basis. This is a safe enough ground so far, I would think. Yet, I am not persuaded that fast food is “unmerchantable” under 2-314.

Although I would expect many to side with me on this one, several recent cases argued just that. This makes me wonder if I am missing something with the warranty of merchantability. In Hoyte v. Yum! Brands, Inc., 489 F. Supp 2d 24 (D.D.C. 2007), a physician argued that KFC food, particularly the French fries and chicken, breached the warranty of merchantability due to the trans-fats. The court granted the defendant’s motion for summary judgment because the physician could not allege an injury, but noted that “it might be appropriate for this court to find, as a matter of law, that the consumption of fat-including trans fat – is indeed within the reasonable expectations of the consumer of fried chicken and French fries prepared in fast food kitchens . . . .” Similarly, the court in In re McDonald's French Fries Litig., 503 F. Supp 2d 953 (N.D. Ill. 2007) dismissed claims of breach of the warranty of fitness for particular purpose in a case involving customers with special dietary issues and sensitivities to milk querying what the “non-ordinary use of a French fry or hash brown is.” Rounding out a trio of these cases was Gonzalez v. Pepsico, Inc., 489 F. Supp 2d 1233 (D. Kan. 2007), where the claims for breach of implied warranty of merchantability survived because the plaintiffs alleged the beverages contained benzene. The court compared the ordinary purpose under 2-314 with the tort principle of defect.

All and all, these cases seem correct. I don’t believe that I can state a claim against McDonald’s for selling me “unmerchantable” French fries. Like the physician, it would be a hard case in my situation to show that my child was injured from the occasional fry (unless there is some long term ill-effect that I do not know of now). The ordinary purpose is satisfied when my toddler squeals with joy when mom relents and pulls through the drive-thru for that occasional order of a Happy Meal. Happiness for mom and the little guy. Merchantable? I think so.