Ding, Dong, the Which* is Dead

At its annual meeting last week, the American Law Institute approved an amendment, which NCCUSL (a.k.a. the Uniform Law Commission) had previously approved, replacing the oft-jilted text of Revised UCC § 1-301 with language consistent with pre-Revised UCC § 1-105:

§ 1-301. Territorial Applicability; Parties’ Power to Choose Applicable Law.
  (a) Except as otherwise provided in this section, when a transaction bears a reasonable relation to this state and also to another state or nation the parties may agree that the law either of this state or of such other state or nation shall govern their rights and duties.
  (b) In the absence of an agreement effective under subsection (a), and except as provided in subsection (c), [the Uniform Commercial Code] applies to transactions bearing an appropriate relation to this state.
  (c) If one of the following provisions of [the Uniform Commercial Code] specifies the applicable law, that provision governs and a contrary agreement is effective only to the extent permitted by the law so specified:
    (1) Section 2-402;
    (2) Sections 2A-105 and 2A-106;
    (3) Section 4-102;
    (4) Section 4A-507;
    (5) Section 5-116;
    [(6) Section 6-103;]
    (7) Section 8-110;
    (8) Sections 9-301 through 9-307.

In so doing, the bodies responsible for the Uniform Commercial Code followed the lead of thirty-two of the thirty-three states that have enacted Revised Article 1 to date. Only Louisiana — deferring to its Civil Code to ascertain the applicable law where the transaction does not fall within the scope of a more specific choice-of-law provision elsewhere in the UCC — has enacted a version of Revised § 1-301 that differs non-trivially from the new official version.

* - As in, "Which state's law do you want to govern our contract?"

2009 AALS conference on transactional law

Transactional law in Long Beach, California

To: Faculty Members interested in Transactional Law

From: Planning Committee on 2009 AALS Conference on Transactional Law

• Lisa Fairfax, University of Maryland, Chair
• Victor Fleischer, University of Illinois
• Peter Pitegoff, University of Maine
• D. Gordon Smith, Brigham Young University
• Alfred Chueh-Chin Yen, Boston College

Subject: Requests for Proposals on Transactional Law Scholarship and Innovative Methods of Teaching Transactional Law

We are planning the AALS 2009 Mid-year Program on Transactional Law, which will be held on June 10-12, 2009 in Long Beach, California. "Transactional law" refers to the substantive legal rules that influence or constrain planning, negotiating, and document drafting in connection with business transactions, as well as the "law of the deal" (i.e., the negotiated contracts) produced by the parties to those transactions. We are seeking proposals from (1) faculty members interested in presenting on innovative methods of teaching transactional law, and (2) faculty members interested in presenting new scholarship that relates to transactional law.

About the Program

In 1994, the AALS held a Workshop on Transactional Approaches to Law which inspired significant innovation and experimentation in transactional teaching and scholarship. This Program provides a unique opportunity to take stock of developments in this area since that influential workshop. One important goal of the Program is to bring together faculty from different doctrinal areas of law to exchange ideas and information on teaching and scholarly innovations in the area of transactional law. Toward this end, we encourage proposals from faculty members with an interest in transactional law in any discipline including such specialties as bankruptcy, business associations, clinical law, contracts, commercial law, intellectual property, international business, labor and employment law, real estate transactions, securities regulation, and taxation.

Please note that the AALS 2009 Mid-Year Meeting will include three programs: A Program on Business Associations: Taking Stock of the Field, followed by Concurrent Programs on Transactional Law and Work Law. As a result, you may have received, or be receiving, Request for Proposals in connection with these other Programs. We would encourage you to submit proposals to any or all of the programs in which you have an interest in participating. We also encourage submissions from junior faculty.

Request for Proposals on Transactional Law Scholarship

In keeping with the conference theme, the Program will host a series of concurrent works-in-progress sessions designed to give interested faculty members an opportunity to present new scholarship related to transactional law. We are seeking works-in-progress proposals on transactional law scholarship broadly understood. Thus, we are seeking proposals on scholarship that focuses on the legal, financial, and practical implications of business transactions in a variety of different settings. In addition, we welcome proposals on the transactional side of the legal profession and the role of lawyers in consummating such transactions. We do not mean to limit the range of proposals in this area, and would welcome proposals on transactional scholarship of all types.

Request for Proposals on Innovative Methods of Teaching Transactional Law

We are planning a 75 minute plenary session on innovative methods of teaching transactional law, and are seeking proposals for faculty members interested in presenting in the session. Many law professors teach transactional skills in a variety of contexts, from stand-alone "Deals" or Business Planning courses to in-class exercises as part of doctrinal classes. A number of law schools have developed innovative courses or programs in transactional law. We are interested in hearing discussion of the various approaches with an eye towards discovering what works and what doesn't. To anchor the discussion, participants may wish to explore how they use (or choose not to use) case studies as a method for teaching transactional law. We welcome proposals from faculty members who wish to share their insights on using case studies and other innovative techniques and the manner in which those techniques enhance student development of transactional skills. As with the request for works-in-progress, we do not mean to limit the range of proposals in this area.

Submission Guidelines

Interested faculty should submit a 300-500 word written proposal of the proposed work-in-progress or proposed presentation not later than July 15, 2008. Faculty may submit proposals for both the work-in-progress and the presentation. In addition, as noted above, faculty who has submitted proposals in connection with the Business Association's Request for Proposals also may submit to the Program on Transactional Law. Please submit the description by email to transactional@aals.org. The presentations will not be published.

Chosen presenters must register for the Workshop and will be responsible for their own travel and other expenses. Any questions should be directed to Professor Lisa M. Fairfax, University of Maryland School of Law, Lisa M. Fairfax.

Tennessee Enacts Revised UCC Article 1; Illinois SB 2080 Makes Further Progress

On May 15, Tennessee Governor Phil Bredensen signed SB 3993, subsequently designated Chapter 930, making Tennessee the thirty-third state to enact Revised UCC Article 1 since the ALI and NCCUSL promulgated it in 2001.

Prospects look reasonably favorable for Illinois to follow suit in the near future. The Illinois Senate unanimously passed SB 2080 on April 9. On May 20, the Illinois House Judiciary Committee recommended passage and the bill was placed on the House's "short debate" calendar. On May 23, the House extended the final action deadline until May 31.

Revised Article 1 is already in effect in twenty-eight states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Indiana, Iowa, Kentucky, Louisiana, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Rhode Island, Texas, Utah, Virginia, and West Virginia. It will take effect in Pennsylvania on June 15 and in Kansas, South Dakota, Tennessee, and Vermont on July 1.

As I have discussed previously, the two primary bones of contention during the enactment process have been uniform R1-301's choice-of-law rules and uniform R1-201(b)(20)'s "good faith" definition. None of the thirty-three enacting states has adopted uniform R1-301; instead, all have chosen to either leave their pre-revised 1-105 in place or to enact a substitute 1-301 with language consistent with pre-revised 1-105. (Louisiana subsequently amended its substitute 1-301 to diminish the distinction between choice-of-law rules applicable to UCC and non-UCC transactions; but, a fuller exploration of that amendment is another topic for another day.) There had been less uniformity with regard to defining "good faith." Twenty-three states have enacted uniform R1-201(b)(20)'s "honesty in fact and the observance of reasonable commercial standards of fair dealing" definition; while ten states — including Tennessee — have retained pre-revised 1-201(19)'s "honesty in fact in the conduct or transaction concerned" definition, reserving the requirement of commercial reasonableness for merchants under 2-103(1)(b) & 2A-103(3). If enacted as it currently reads, Illinois SB 2080 would make uniform R1-301 0-for-34 and would make Illinois the eleventh enacting state to retain the bifurcated good-faith standard.

Loaded Questions

On April 2, the Institute for Legal Reform released the results of a consumer survey that indicated consumers oppose legislation regulating the use of binding arbitration in consumer disputes (the proposed Arbitration Fairness Act). The telephone poll found that 71 percent of likely voters oppose efforts by Congress to ban arbitration agreements from consumer contracts. 82 percent actually prefer arbitration to litigation as a means to settle a serious dispute with a company. The American Association for Justice says its survey shows the opposite. 81 percent of Americans express disapproval of mandatory binding arbitration. 64 percent of voters favor the legislation, 26 percent oppose it. How can this be?

Here's one of the statements made as part of the American Association for Justice poll:

"As you may know, consumers are sometimes required to sign a contract with a company when they buy certain services or products such as automobiles, cell phones, or nursing home care. Today, these contracts often include a binding arbitration provision, which says that the consumer agrees to have any dispute with the company decided by an independent arbitrator in binding arbitration, rather than by a judge or jury in a civil legal proceeding. Do you approve or disapprove of these binding arbitration provisions in consumer contracts?"

Now here's one from the Institute for Legal Reform poll:

"Now suppose for a moment you had to sign a contract with a company when you purchased their goods or services. If you could choose the method by which any serious dispute would be settled between you and the company, which would you choose? Arbitration, which does not require going to court ...or... Litigation, which does require a lawsuit and going to court. "

Hat tip to Consumer Law and Policy Blog.

Neither statement provides an intelligent person with the information necessary to answer the question. If I ever get a call from a poll taker, I'd want to know what my "right to go to court" costs me in terms of the price I pay for consumer goods and services. I'd ask about the odds for consumers in arbitration vs. judicial resolution of their disputes. I'd want to know what was in it for me — apart from empty rhetoric about my right to "go to court" or vague inferences about the relative "fairness" of arbitration vs. adjudication. And, in the extremely unlikely event that I did not hang up on the poll taker within seconds after he mispronounces my name, I'd resent being used as a tool for others whose stake in the controversy dwarfs that of the average consumer.

Good results for Visa

Despite troubles in the economy and the financial sector generally shares of Visa are up forty-six percent (46%) since going public just two months ago. Quarterly profits for Visa came in at $314 million, or 52 cents a share. Not bad results. The position of Visa and Mastercard is different from Discover and American Express in that the two former companies do not lend money to consumers. Visa and Mastercard only process charges made by companies that use their systems. Since they don’t lend, Visa and Mastercard don’t assume the risk of consumer default during harsh economic times. Instead, that risk is taken by the banks that issue the cards. It would seem that these companies should experience business success so long as people continue to use their credit and debit cards with the Visa and Mastercard label.

For my part, I often find little cash in my wallet. No worries. I know that I will be using the ‘ole debit card to pay for gas, groceries and the like. About half of Visa’s profits come from debit card purchases (a quarter for Mastercard). As payments become increasingly dependent on electronic systems, Mastercard and Visa should continue to do well. Of course, there is that nagging issue of the staggering consumer debt that could dull the continued success of the system operators. The primary issue that comes to my mind, though, is that of the per transactions fees Visa and Mastercard set for merchants and banks that use their systems. Will Visa and Mastercard begin to turn profits that resemble the big oil companies? Should the government regulate the fees set by the system operators?

Although more than twenty countries, including the EU and Australia, have taken up the interchange fee issue in terms of anti-competitive behavior, the issue is not resolved here in the United States. About $30 billion of interchange revenue is at stake according to a recent report by the Kansas City branch of the Federal Reserve Bank. The many lawsuits over the fees have been consolidated before the U.S. District Court of the Eastern District of New York for trial later this year. Moreover, the “Credit Card Fair Fee Act of 2008” is currently pending in Congress. This seems to set up the classic conflict between market forces and regulation. With a recent National Retail Federation report that the interchange fees cost families about $400 per year, I find myself surprisingly drawn to the idea of regulation. Hidden fees always get my ire going. Just something else for me to think over as I pull out my debit card to fill up the gas tank again.

Phishing in International Waters: The New Phace of Organized Crime

The U.S. Justice Department and Romanian authorities announced two federal indictments (C.D. Cal. and D. Conn.) against 38 people who allegedly participated in two international phishing operations with ties to organized crime. The charges include conspiracy to violate the Racketeer Influenced and Corrupt Organizations (RICO) Act, and a host of hacker crimes such as conspiracy in connection with account access devices (credit or debit cards), unauthorized access to a protected computer, bank fraud and aggravated identity theft. U.S. Attorney for C.D. Cal., Thomas O'Brien said experts estimate losses at more than $3 million.

Romanian based "suppliers" phished for and obtained credit and debit card account data and personal information from cardholders by baiting more than 1.3 million e-mails. The "suppliers" sent the data to U.S. based "cashiers" who did the tech work, encoding the account data onto magnetic strips on access devices (including hotel key cards that work nicely for this purpose). "Runners" tested the cards and used the ones that worked to draw cash. U.S. participants took a cut and transferred the balance to the Romanian suppliers.

International organized crime is deep into the world payment system and just about everything else. Last month, U.S. Attorney General Michal Mukasey announced the Justice Department's Law Enforcement Strategy to Combat International Organized Crime . He said that mafia-style organized crime as Attorney General Robert Kennedy saw it in 1961 is a thing of the past. Organized crime is international, but that's not all. "They are more sophisticated, they are richer, they have greater influence over government and political institutions worldwide, and they are savvier about using the latest technology, first to perpetrate and then to cover up their crimes. . . . They touch all sectors of our economy, dealing in everything from cigarettes to oil; clothing to pharmaceuticals. These criminals invest some of the millions they make from illegal activities in the same publicly traded companies as we hold in our pension plans and 401(k)s. They exploit the internet and peddle their scams on eBay, and they're responsible for a significant chunk of the spam email we get."

Leave the gun. Take the cannoli. (Clemenza to Rocco)

Testing Secured Transactions Part II

My exams are all taken and graded now, so I wanted to report back my observations from my earlier post on Testing Secured Transactions. I ended up using a three hour examination with 30 true/false questions and five short answer essays. I actually offered up six short answer essays with the students getting to pick five to answer. The true false questions included all the basics of creating and perfecting security interests and priority. Topics on the short answer essays included: double debtors; new debtors; powers of the bankruptcy trustee; PMSI’s and general collateral descriptions in preexisting financing statements; and priority, proceeds, accounts and chattel paper. I must have had old-time television on my mind, as many of the hypos involved Gilligan's Island, Green Acres and Spiderman. Oh, and a little bit of politics thrown in too. After all, it was the "season" in Pennsylvania as I was drafting this exam.

The exam certainly was hard and rigorous from a time perspective. That said, I am a big believer in law school examinations serving the dual purpose of testing and teaching. I would certainly use this format of examination again. The true false gave me coverage of differing fact patterns, as did the short answer. The students had many situations to contend with, but also had to draft some short essays (typically about a page each) and cite to the appropriate code provisions. As for student performance, with a few exceptions, the students tended to do about the same on each part of the examination. The students who did well on the true/false mostly did about the same on the short answer essay.

Overall, I was also pleased with the quality of the answers given by the students. The rules of double debtors and new debtors probably gave the students the most trouble, but this did not surprise me. I find that the rules of 9-325 and 9-326 are hard for students to grasp (even with the examples in the code). But I did give the students a hint in the review session that these rules might appear on the examination. The next time I teach Secured Transactions, I will be mindful of my approach on these issues to see if there are better ways to make this easier for the students. With this exception, though, I am confident that the students do understand the basics of Article 9.

Most of my students this year will be taking the bar examination in Pennsylvania where Article 9 is no longer on the bar exam. But as these issues come up routinely in practice, the examinations give me confidence that they will be able to solve these issues when they arise. I would use this format of examination again, though it was a close call to pair multiple-choice with a long format traditional essay. I hope that you all had a good semester and have your grading done (or at least almost).

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).

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.