Sales OutlineWEEK 1 REVIEW Article I is a general article – says UCC applies to all following articles unless it says otherwiseArticle II – UCC applies to all transactions involving goodsArticle II(a) – governs transactions involving the leasing of goods

The official comments are not law but were written by the drafters of the UCC to explain to the courts what was intended.

Scope of Article II in §2-102 – this article applies to transactions involving goods.

Definition of Goods - §2-105 – goods are all things that are movable at the time of identification to the K – including unborn young of animals and growing crops – excludes real property, intangibles such as life insurance and K’s for services

In Hybrid situations where a K involving goods and non goods the court uses 2 tests to decide if K is for goods or services1. Predominant Purpose Test – looks to the predominant purpose of the transaction to determine if the

predominant purpose of the K is for goods or services – you cannot sever the sales portion of the transaction from the goods portion. Either the UCC or the common law applies to the ENTIRE transaction if the predominant purpose of the transaction is for goods - the UCC applies to the entire

transaction If the predominant purpose of the transaction is for sales - the common law applies to the entire

transaction – milos case2. Gravamen Test – looks the portion of the transaction that went wrong and determines if the thing that went wrong involves goods or services – if the service component went wrong, it is a K for service and is governed by common law – if the goods parts went wrong (the thing), it is a K for goods and the UCC applies. – ON THIS TEST YOU CAN SEVER THE GOODS PORTION, FROM THE SERVICE PORTIONON EXAM USE BOTH TESTS

Merchants§2-314 – Definition of MerchantsSome UCC provisions apply to a broad classification of merchants –

§2-213 – Merchants of Goods of a Particular Kind General rule is that farmers are NOT merchantsHowever if farming operation has any degree of sophistication most courts will apply Art II so they are treated as merchants.

Article 2(a) - Leasing Here only need to be able to distinguish a true lease from a disguised sale K which falls under Art II. – How to distinguish a true lease from a disguised sale1. Disguised Sale - If at the end of the lease period, the lessee becomes owner of the property for little

or no consideration, this will be considered a disguised sale and not a lease2. Walkaway Clause - if the K contains a clause that permits the lesee to end the lease at any time,

and return the leased goods (a walkaway provision), this is a true lease.3. Junkpile Test - if there isn’t any economic life left in the goods at the end of the lease, than this is a

disguised sale.

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Sales Outline

WEEK 2

GOES WITH SOF HANDOUT

Statute of Frauds - §2-201(1) – SEE HANDOUT - A K for the sale of good for $500 or more, must be in writing, the writing must contain 3 things:

1. Quantity 2. Indication that a K has been made 3. /s/ by party to be charged

Special Situation for Merchants – §2-202 – If merchant A sends a confirmatory writing to merchant B and merchant B does not object in writing in 10 days – B cannot challenge under SOF

3 times a writing is not required - §2-203 1. partial payment or partial performance by a party up to the amount that was paid or performed 2. when a party admits in a pleading, testimony, or otherwise that a K exists. or3. specially manufactured goods not suited for resale in the ordinary course of business (while

elephant) – goods that have a unique color, size, texture, design, etc.

GOES WITH PAROL EVIDENCE RULE HANDOUT

Parol Evidence Rule – a writing that is intended by the parties to be the final written statement cannot be contradicted by prior to or contemporaneous evidence of any type.

SEE PAROL EVIDENCE RULE HANDOUT

Integrated -

When the writing is integrated or appears to be – several tests to determine of total or partial integrationUCC test - §2-202 – only test in this class for exam - assume partial integration, unless judge determines that the terms sought to be included would have “certainly been included in the writing,” if that is true, the document is deemed to be total integration, if total integration, document cannot be supplements with CATS, nor can it be contradicted.

CATS – consistent additional terms

Even though the court finds that a writing is totally integrated, is intended to be the final expression of the parties, while that writing cannot be contradicted, it can be supplemented, by the course of dealing, performance, usage of trade.

Course of Dealing – parties past conduct over time

Course of Performance – how the parties have conducted themselves under this K

Usage of Trade – customs and practices in that particular industry

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Sales OutlineGeneral Offer and Acceptance Concepts§2-204 - Gap Filler Provisions - An agreement is sufficient to constitute a K for sale may be found even though the precise time of the making of the K is undetermined and the agreement omits certain details – the K will not fail for indefiniteness – this is called the gap filler provisions of the UCC – if it can still be determined that the parties intended to make a K than a K for sale has occurred, and the gap fillers will fill in the missing details.

§2-205 - Firm Offer Rule – an offer by a merchant to buy or sell goods and a /s/ writing which by its terms gives assurances that it will be held open, is not revocable (consideration) during time stated and if no time is stated it remains irrevocable for a reasonable period of time not to exceed 90 days

§2-206 - An order to buy goods, in which the goods are to be shipped, is to be construed as to be inviting acceptance, either by a promise to ship goods or by prompt shipping of the goods. However if a shipment of non conforming goods are sent, that will not constitute an acceptance if the seller seasonably notifies buyer that the goods are only being shipped as an accommodation

WARRANTIES - WEEK 3

Warranty of Title§2-312 – Seller warrants to buyer that title to goods sold shall be a good titleSeller also warrants that he knows of no security interest or other liens that have been placed on the goods.When the seller has created the goods on the specification of the buyer, the buyer is liable, provided that the seller has complied with the buyers specification – common in trademark disputes Is it possible to modify or exclude warranty of title by the use of very specific language EX sheriffs sale for cars – Can exclude warranty altogether or only giving you the title that the sheriff has in the goods, there may or may not be somebody out there with better title to the goods. Not going to spend a lot of time on this in class – all we need to know about title warranties in this classPuffing – exaggerated opinion

GOES WITH §2-207 FLOW CHARTBattle of the Forms §2-207On exam only need to about 2-207 is in the 2-207 handout MEMORIZE HANDOUT FOR EXAM

The addition of an arbitration clause between merchants is a material alternation of the document and therefore it will not become a part of the parties K unless agreed.

What makes a material alteration?2 prong test1. undue hardship – prolonged and open ended liability – bayway refining case2. surprise – a subjective view of what the party actually knew and an objective view of what the party should have reasonably known BOP for material alteration lies with the party opposing the terms

§2-207 comment 4 – adding language that somehow disclaims standard warranties also materially alters the K.

Klocek v Gateway case – know for exam - There is nothing in §2-207 that requires 2 conflicting forms in order for 2-207 to apply – can have a form and a verbal or oral alteration alteration for addition to trigger 2-207

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Quality Warranties1. Express warranty2. Implied warranty

1. Express Warranty - §2-313 – to create an express warranty, the seller must do something affirmative – such as make an affirmative statement or provide a description or model or sample of the goodsThe representation that is relied on by the buyer must also go to the basis of the bargain- somehow the representation induced the buyer to make this purchase – even if not the only reason buyer purchased itDon’t need formal language – “I warrant” or “we guarantee” Mere puffing does not rise to level of express warranty

2. Implied Warranty – 2 kinds A. Merchantability - §2-314 B. Fitness for a Particular Purpose - §2-315

A. Implied Warranty of Merchantability – §2-314- unless excluded or modified, a warranty is implied for a K for the sale of goods, that the goods shall be merchantable provided that the seller is a merchant for goods of that particular kind – to be merchantable the goods must be fit for the ordinary purposes for which those goods are used

B. Implied Warranty of Fitness for a Particular Purpose – §2-315 - the seller (merchant or non merchant seller) at the time of K has reason to know of any particular purpose for which the goods are required and the buyer is relying on the sellers skill or judgment in selecting those goods, there is an implied warranty that the goods be fit for that particular purpose

Implied Warranties in Food – 2 tests - harmful substances in food1. Foreign Object/ Natural Object Test – if the substance found in food is a natural substance – no

liability, if a foreign object – liability - (glass)2. Reasonable Expectation Test – even if the substance found is a natural substance, if there is a

reasonable expectation on the part of the buyer that the substance would be removed, than there is liability – pit in an olive

How to disclaim warranties - §2-3161. Express – it is virtually impossible to disclaim this – once the seller makes an express warranty, the

law does not want the seller to be able to take it away – the best way to disclaim this is not to make one in the first place because the law does not want you to be able to get out of it.

2. Implied – 2 ways to disclaim - NEED TO KNOW BOTH OF THESE FOR EXAM A. Implied Warranty of Merchantability – §2-316(2-3)-To disclaim an implied warranty of

merchantability, the disclaiming language MUST mention the word “merchantability,” the disclaimer does NOT have to be in writing, but if it is in writing than MUST be conspicuous

B. Implied Warranty of Fitness for a Particular Purpose – §2-316(2-3) -To disclaim an implied warranty of fitness for a particular purpose the disclaimer must be in writing, and the disclaimer must be conspicuous, however it does NOT have to mention the word “merchantability”

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Sales OutlineWEEK 4Conspicuous - Easy to notice; obvious; attracting attention by being unusual or remarkable; noticeable

Unless the circumstances indicate otherwise, all implied warranties are disclaimed or excluded by expressions such as: “as is” or “with all faults,” etc.Provided that otherwise the disclaiming language is conspicuous

When the buyer before entering into the K, has examined the goods or a model, or has refused the opportunity to examine the goods or a model, there is no implied warranty, for defects that would have been discoverable by buyer examining the goods. The Key is that the seller DEMAND that the buyer examine the goods, not sufficient if seller just makes them available.

An implied warranty can be excluded or modified by course of dealing, course of performance or usage of trade

Limitations on the Warranty§2-719 - sometimes a seller is willing to give buyer a warranty but wishes to somehow limit the scope of liability that breach of the warranty would create, for example, limiting damages to return of the goods or repayment of the purchase price - this is permissible under the certain circumstances that follow:1. Limitation on consequential damages for injuries to the person IS unconscionable2. Limitation on consequential damages for property losses it is NOT on its face unconscionable

Where the remedy fails its essential purpose will be strickened from the K, A remedy fails its essential purpose when it operates to deprive either party of the “substantial value

of the bargain.” - §2-719 (comment 1) when a remedy fails its essential purpose, the aggrieved party is entitled to any remedy available in

the code. - §2-719(2)

§2-719 does not define the term “unconscionable” – however some courts are more likely to find a warranty is unconscionable, or the limitation of a warranty is unconscionable, when:Factors to consider if the terms of a K are unconscionable1. Consumer buyer rather than a commercial buyer (because of the disparity in bargaining power)2. The disclaiming language is on a preprinted form 3. The buyer did not have the ability/opportunity to negotiate 4. The seller has acted in bad faith (Pierce v. Catalina Yachts)

Defenses the Seller Can Raise in Warranty Actions 1. FAILURE TO GIVE NOTICE – §2-607(3) – the buyer must within a in a reasonable time, after he

discovers, or should have discovered the breach, must notify the seller of the breach, the notice need not detail every objection that the buyer has to the product, it only has to put the seller on notice that the transaction is troublesome.

2. LACK OF PRIVITY – 2 kinds of privityWEEK 5

1. Vertical Privity – how far back up the distribution chain a buyer can go for relief. Can the buyer sue the manufacturer or just the retail seller? – addresses the question: who can be sued? EX: A man buys a power saw from the local hardware store and is injured – can the buyer sue the manufacturer?

2. Horizontal Privity – who the retail seller is liable to other than the immediate purchaser – the retail seller – addresses the question: who can sue?EX: woman is injured by a lawnmower that her husband purchased from hardware store – can she sue the retailer?

UCC ONLY DEALS WITH HORIZIONTAL PRIVITY SO NEED TO FOCUS ON HORIZONTAL

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Sales Outline

§2-318 –only addresses horizontal – no code § for vertical privityLists 3 Horizontal Privity alternatives for statesA. – a sellers warranty extends express and implied warranties to any natural person who is in the

family or household of the buyer or is a guest in the home and receives personal injuries, but only of if its reasonable to expect that person would use, consume, or be effected by the goods, and who is injured in person by the breach of warranty –

MUST BE A PART OF THE HOUSEHOLD OR A GUEST OF THE HOUSEHOLD LIMITED TO NATURAL PERSONS – CORPORATIONS NOT COVERED HERE LIMITED TO PERSONAL INJURY – PROPERY LOSS NOT COVERED

Most states have adopted this section. – MI is an A state

B. - a sellers express or implied warranty extends to any natural person who may reasonably be expected to use, consume or be affected by the goods, and is injured in person by the breach of warranty – Similar to A. except under B there is no requirement that the injured person be a member of

buyer’s family, household or guest in the buyers household.

C. – a sellers express or implied warranty extends to ANY person (not necessarily a natural person) who may be reasonably expected to use, consume, or be effected by the goods and is injured by the breach of warranty Under C there is no requirement that that the injured party be a member of sellers household or

family or a guest of the home of the buyer Damages are NOT limited to personal injury- can get property loss here if in a alternative C state Not limited to natural persons – corps can sue here as well

this is all we need to know about §2-318

Warranties Under Article 2AArticle 2A relates to finance leases

3 PartiesLessor – usually a bank or finance company – only extends credit to lesseeLessee – usually a businessSupplier – the party who manufactures or supplies the equipment

What happens to warranties relating to leases? RULE – Lessor does not make any warranty to Lessee. The Lessee with warranty problems looks directly to Supplier NOT the Lessor

Key Features of Finance Leases - 2A-103(1)(g) The Lessor must NOT be in the business of buying and selling goods AND must have

acquired the goods in connection with the lease

The Lessee must have knowledge of what the warranties are, either by receiving a copy of the K between the supplier and the Lessor, or by otherwise approving it.

“Come Hell or High Water Clause” - As soon as the Lessee receives the leased goods, the Lessee must pay the Lessor regardless of whether or not the goods work - §2A-407

Filling in the Gaps6

Sales OutlineAt common law, if the parties omitted a major term of the K, the courts will usually find no enforceable agreement exists. NOT the case under UCC, the UCC plugs in gap fillers to fill in missing details to make K enforceable.

For this class only need to know these 7 - §2-305 – Reasonable Price at the Time of Delivery - parties can conclude a K, even though the price

is not settled – the price will be a “reasonable price at the time of delivery”

§2-306 – The Requirement/Output K – such actual requirement or output that may occur in good faith - an obligation is imposed on the seller to produce the # of “widgets” required in good faith and an obligation is imposed on the buyer to purchase the amount of widgets the seller produces in good faith.

§2-307 – Single Delivery - unless otherwise agreed to, all goods under a K, must be tendered in a single delivery before payment is due.

§2-308 - Place for Delivery @ Sellers Business - unless otherwise agreed, the place for delivery of goods is the sellers place of business, if the seller does not have a place of business, the place of delivery is the sellers home – basically buyer must pick up goods.

§2-309 – time for delivery, if not specified, is a “reasonable period of time”

§2-310 – payment for goods is due at the time and place the buyer is to receive the goods

§2-311 – an agreement for sale which is otherwise sufficiently definite to be a K, is not made invalid because it leaves particular terms of performance to be specified by one of the parties.

WEEK 6Perfect Tender RulePerfect Tender Rule – §2-601 – the goods must conform to the K in every respect, if they not, they buyer may:

1. Accept the whole, 2. Reject the whole, 3. Accept any commercial unit and reject the rest

3 Exceptions to Perfect Tender Rule1. seller has right to cure non conformity if time of performance has not passed - if buyer rejects and

seller reasonably believes that buyer will accept the non conforming goods, the seller gets an additional reasonable extension of time to cure. - §2-508

2. the parties can agree not to follow the perfect tender rule – the parties can agree that the goods do not have to be perfect

EX: banana bread example – running a bakery, want brown bananas, but if deliver brown bananas to Kroger, not good3. Installment K’s – 2 ways for buyer to reject partial shipments A. In an installment K, the buyer can reject any particular shipment where the nonconformity

“substantially impairs the value” of that shipment or installment only B. where the nonconformity cannot be cured or the seller refuses to give adequate assurances of the

cure Buyer Rejection of the Entire K - Buyer can only reject the entire K ONLY where the non conformity of

a particular installment, substantially impairs the value of the whole K. - §2-612

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Sales OutlineShaken Faith Doctrine – part of Perfect Tender RuleIf a reasonable person in the buyers positions would not have accepted the sellers remedy for cure because the buyers faith in the product has been so shaken, the seller may be denied the right to cure in this circumstance. - Wilson v. Scampoli case

The sellers right to cure normally includes the right to make minor repairs and adjustments; in those situations where the seller can do so without subjecting the buyer to unreasonable inconvenience, risk, or loss.

Upon the rightful rejection of goods, the buyer has the right to hold onto the goods as a type of security interest. §2-711(3)

Rejection of Goods – §2-6021. Buyer can reject goods for any nonconformity, but the rejection must occur in a “reasonable time”

after delivery. 2. The buyer must “timely notify” the sellers of rejection. 3. The buyer must not take any action inconsistent with the seller’s ownership of the goods.

Once the buyer has rejected the goods, the buyer must also take “reasonable care of the goods” at the sellers expense – EX: UPS delivery lobster

The rejection of goods not in writing is deemed to have been waived.

3 ways a buyer has accepted the goods - §2-606Acceptance occurs when:1. After a reasonable opportunity to inspect the goods, the buyer indiciates to the seller that the goods

are acceptable EX: buyer inspects goods and admits they are nonconforming but decides to accept anyway.2. Buyer fails to reject the goods after inspection. – stays silent EX: Buyer just stays silent3. Buyer takes any action inconsistent with the sellers ownership of the goods. EX: if a car, driving the car;

Buyers Right to Inspect Goods - §2-513Buyer has a right to inspect the goods, before payment is due, at any reasonable place and time BEFORE acceptance.

ONLY 3 times a Buyer can Revoke Acceptance - §2-608 – IF ACCEPTANCE VALIDLY REVOKED, IS THE SAME AS IF BUYER REJECTED GOODS IN THE FIRST PLACE1. The buyer may revoke his acceptance of a lot or commercial unit only where nonconformity substantially impairs its value to that buyer – (subjective)2. The buyer must show his revocation was based on the “reasonable assumption” that the defect would be cured or there was difficulty in discovering the defect in the non conforming good.3. Revocation of acceptance must occur in a “reasonable period of time” after the buyer discovers or should have discovered the substantial impairment.

Substantial Impairment – for purpose of revocation of acceptance is a “subjective” determination - Did THIS buyer believe that the defect has substantially impaired the value of the goods to him?

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Sales OutlineThere is a higher standard of revocation of acceptance is imposed on the buyer as opposed to an outright rejection of the goods in the first instance.

The purpose of requiring a higher standard for revocation of acceptance is prevent the buyer from revoking for trivial defects and to prevent the buyer from allowing the goods to depreciate then returning them. Ramirez v. Autosport

Know the difference between “revocation of acceptance” and “outright rejection.”

WEEK 7Risk of Loss: No Breach by Either PartyRisk of Loss: Breach by Either Buyer or SellerHANDOUT COVERS EVERYTHING NEED TO KNOW ABOUT RISK OF LOSS FOR EXAM

Impossibility of Performance - §2-613 When K requires for its performance that the goods be identified and the goods are destroyed, due to no fault of either party, and this occurs BEFORE Risk of Loss has passes to buyer, If the loss is total, the K is avoided If the loss is partial, the buyer can treat the K as voided, or the buyer can accept the K with due allowances in K price to the seller. Saw this in PROBLEMS 65 & 66

Undue Frustration/Commercial Frustration/ Impossibility of Performance – not applicable if Risk of Loss (ROL) is foreseeable or if the party who is obligated to perform, has assumed the risk–Arabian case

As a general rule, courts are reluctant to accept rising prices as the excuse for Avoiding the K -§2-6153 conditions must occur before performance can be excused because of rising prices1. Contingency must occur2. Performance must be made impracticable3. Non performance for the contingency must be a basic assumption of which the K was made Louisiana Power case - §2-615?

WEEK 8REMEDIESSellers RemediesThe guiding principal for all K remedies is §1-106 §1-106 says: The goal of all K remedies is to put the injured party in as good a position as he would have been in, had the other party totally performed.

The remedies that are available to a Seller for K breach, depend on whether or not the Buyer has made a technical acceptance of the K as defined in §2-606

Sellers Remedies Where the Buyer Has Already Accepted the Goods1. The seller? can bring an action for K Price under §2-709. If acceptance had occurred, the seller may sue for the K price, together with any incidental damages. Think of §2-709 as being a type of Specific Performance Clause for sellers that order the buyer to make payment. 3 Circumstances When a K for Price Action is Appropriate -§2-709 - (Buyer has already accepted goods)

1. When the buyer has made a technical acceptance 2. The risk of loss has passed to the buyer and the goods were destroyed 3. Where the buyer will not accept the goods and there is no market to resell the goods

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Sales OutlineSellers Remedies Where the Buyer Has Not Accepted the Goods – 3 kinds1. Seller Resells the Goods - §2-706 - Seller can resell the goods and recover the difference between K

price and resale price together with incidental damages as long as resale is made in good faith and is commercially reasonable. The resale can be private or public. If it is a private than reasonable notice must be given to the buyer. If it is a public resale there are a number of other requirements: advertising, timing, method of sale, etc.

2. A. Refuse to Resell and Sue Buyer for Damages - §2-708(1) and (2) - If the seller chooses not to resell the goods, the seller can sue for the difference between the K price and market price along with incidental damages under (1).

B. Lost Volume Seller - If the seller is a Lost Volume Seller, a seller who has a virtually unlimited inventory of the good, then the seller can sue under (2) which says the seller is entitled to receive lost profits including “reasonable overhead” that the seller would have made under the K, together with incidental damages.

The seller has the choice of which remedy to pursue.

3. Unfinished Goods: Sell for Scrap Value or Finish and Sell Finished Product - The seller’s right to identify the goods or to salvage unfinished goods. Where the goods to the K have not already been identified at the time the breach occurs, upon learning of the breach, the seller can identify the goods to the K that are in his possession, and then proceed to any of its other K remedies. Also, under this provision, where the goods are unfinished at the time of the breach, the seller can with his reasonable commercial judgment, can complete the manufacture of the goods and resell the goods for scrap value or proceed in any other reasonable manner.

Buyers RemediesThe buyer’s remedies depend on whether or not the buyer has made a technical acceptance of the goods.

Buyers Remedies When the Buyer HAS Accepted the GoodsSue for damages under §2-714 - The buyer may get the difference between what the buyer was promised and what the buyer got. The buyer can also get incidental and consequential damages here.

Incidental damages – type of damages that the buyer incurs in trying to figure out if there has been a breach or trying to avoid the breach. EX: costs of inspecting the goods, storage costs, cost of transportation, etc.Consequential Damages – damages buyer incurred because of breach, that buyer would not have incurred if there was no breach EX: buyer misses an opportunity to resale the goods, goods are delivered to the buyer and explode (propane tank)

3 Buyers Remedies when the Buyer has NOT ACCPETED the Goods1. Specific Performance - Buyer can get specific performance under §2-716 when the goods are

unique or “other proper circumstances.” UCC does not define “other proper circumstances, can argue anything.

2. Cover – §2-712 – allows the buyer to purchase substitute goods and sue seller for diff between the K price and cover price. – If the buyer chooses to cover, the buyer must:1. Act in good faith 2. Without unreasonable delay 3. Must make a reasonable purchase of the substitute goods

3. Buyers Damages - §2-713 - If the buyer chooses not to cover, the buyer can recover the difference between the K price and the market price. Together with incidental and consequential damages. – Can only get this if buyer chooses NOT to cover. - §2-713 (comment 5)

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Sales Outline

Anticipatory Repudiation (AR) – a positive expression, either by words or conduct, of one parties intent not to perform when performance is due. The measure of damages in AR is the difference between the K price and the price of the goods at the end of a “reasonable period of time to cover.” - §2-713

Statute of Limitations (SOL) - §2-725 – an action for breach of K must be brought within 4 years after the cause of action accrues. By agreement the parties may reduce the SOL down to 1 year, but cannot extend it beyond 4 years.

A cause of action accrues when the breach occurs. A breach of warranty accrues upon the tender of delivery EXCEPT where the warranty explicitly extends to future performance, in which case the cause of action is said to accrue when the breach is discovered or should have been discovered.

Wk 9 Review Begin 2nd Review HereNEGOTIABLE INSTRUMENTS2 Types of Negotiable InstrumentsNote – a promissory undertaking involving 2 parties in which 1 party called the maker –agrees to pay a sum of money to another party the payee – a note is always a 2 party instrument – Draft (common check)- is a 3 party instrument – is written by 1 party called the drawor – to another party called the drawee (usually a bank) – that directs the drawee to pay money to a third party (payee) – a draft is nothing more than a common check – 3 primary types of drafts1. Cashiers Check – a check drawn by the bank again the seller2. Tellers Check – a check that is drawn by one bank on another bank that is payable to the other bank3. Certified Check – starts off as a plain old personal check that is drawn on the bank, then the bank that it is drawn on, stamps their name on it, when they stamp their name on it, it certifies the check, certifies that the funds are there

Negotiability as a conceptFor Art III to apply, the instrument must be negotiable. Defined in §3-104If the instrument is negotiable a couple of things happen1. it triggers the application of ART III and all of the other possibilities stated in ART III such as Holders in Due Course. A holder in Due Course – a super Plaintiff –

If the instrument is NOT negotiable, than it is nothing more than an ordinary K that is being passed around from individual to individual subject to all of the defenses that are raised in a K action – under the rules of K lawIf it is not negotiable, it is subject to the avoidance doctrine.

What are the 7 Requirements for Negotiability? - §3-104 – if don’t meet these requirements it is not a “negotiable instrument.” It might be an instrument, but it is not negotiable. Taylor reads §3-104(a)(1-3)7 Super Requirements for a document to be negotiable§3-104(a)(1-3) boils down to this:

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Sales OutlineThere are 7 requirements for negotiability. 1. Instrument must be in writing to be negotiable 2. Instrument must be /s/3. Instrument must contain an unconditional promise or order to pay4. Instrument must be for a fixed amount of $5. Instrument must be a courier without luggage6. Instrument must be payable on demand or at a definite time7. Instrument must be payable to bearer or to order

Wk 10 There are 7 requirements for negotiability. 1. Instrument must be in writing to be negotiable -§3-104 comment 1 – a promise is a written

undertaking to pay money signed by the person undertaking to pay. An order is a written instruction to pay money signed by the person giving the instruction. Thus, the term “negotiable instrument” is limited to a signed writing that orders or promises payment of money.

You cannot have an ORAL negotiable instrument.

2. Instrument must be /s/- §1-201(39) -"Signed" includes using any symbol executed or adopted with by a person with present intention to authenticate a writing. §1-401(b) - A signature may be made (i) manually or by means of a device or machine, and (ii) by the use of any name, including a trade or assumed name, or by a word, mark, or symbol executed or adopted by a person with present intention to authenticate a writing.

3. Instrument must contain an unconditional promise or order to pay- §3-106 - the instrument must be a clean document that is not cluttered up by conditions or promises. You cannot have an express conditions to payment. Its ok for the instrument to discuss the underlying transaction itself so long as it does not incorporate by reference the terms of the underlying transaction into the instrument. It is also permissible for an instrument to reference another writing for a statement of rights with respect to: Payment of collateral, Prepayment of an obligation; or an acceleration clause

4. Instrument must be for a fixed amount of $- We have to be able to calculate the amount of money that is required to be paid. - the instrument must be payable in money - What is money? §1-201(24) Any currency that is blessed by any government on the planet as the official currency is money. - Variable interest rates are permitted so long as they can be calculated.

5. Instrument must be a courier without luggage- §3-104 - The writing must not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money3 exceptions (when a writing can contain other instructions other than the payment of money)- §3-104(a)(3)1. it can contain promises to give or to protect collateral2. it can contain a confession of judgment clause (where a person avoids trial by allowing an attorney to enter

a verdict against him)3. When the obligor who is promising to pay waives the protection of any law

6. Instrument must be payable on demand or at a definite time- §3-108 – An instrument is payable on demand if it says that it is payable on demand, or if it says its payable at sight, or otherwise indicates that it is payable at the will of the holder, or if it does not state any time of payment. The holder of an instrument must be able to tell when it comes due, or the instrument is non-negotiable; however, there is no requirement that the instrument be dated.  An undated instrument that specifies no time of payment is treated as an instrument payable on demand by the holder.

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Sales Outline Predating and postdating of checks is permitted without destroying the payment on demand or at a

definite time requirement.2 areas that are frequently litigated concerning this requirement1. Acceleration Clauses : Speed up the time of payment. Does not hurt the holder, the holder gets paid

sooner. Therefore, acceleration clauses are always acceptable without destroying the negotiability of the instrument.

2. Extension Clauses : Delay or postpone the time of payment. Are okay so long as the extension is to a further definite time. - Can’t say: Payable Jan 31st, unless my crops fail then whenever I get around to it. Not definite.

7. Instrument must be payable to bearer or to order- §3-104 - A negotiable instrument means that the instrument is payable to bearer or to order.

Bearer paper is payable to whom holds it Order paper is payable to person named, or to whomever that person further designates Checks no longer required to have bearer, or order language. §3-104(c) Notes must still be written “pay to bearer” or “to order” language

An instrument (promise or order) is made payable to bearer if it: §3-109(a)1. says that it is payable to bearer or to the order of bearer or otherwise indicates that the person in

possession of the promise or order is entitled to payment;2. If the instrument does not state a payee; 3. States that it is payable to cash or to the order of cash or otherwise indicates that it is not payable to

an identified person

A promise or order that is NOT payable to bearer IS payable to order if: §3-109(b) it is payable to the order of an identified person, Or it is payable to an identified person.

An instrument (promise or order) payable to bearer may become payable to an identified person if it is specially indorsed. An instrument payable to an identified person may become payable to bearer if it is indorsed in blank. -§3-109(c)

One more thing that the case covered and that we looked at. This assumes also that the instrument is not your regular appearing on the case. Remember that these 7 requirements that we looked at, that these are the gist of §3-104. Keep in mind that also in 3-104 is the requirement that the instrument is not so irregular looking on its face as to put a person on notice that it may be fraudulent.

Transfers and Negotiations 3 stages of an Negotiable Instrument Stage 1- Issuance Stage 2- Transfers -Every legally significant movement of the paper between issuance and presentment

Physical transfer of the instrument vests in the transferee whatever right the transferor had in the instrument

If the physical transfer is done in a way to make the transferee a holder, then the transfer is called a negotiation

Stage 3- Presentiment

Stage 2 Transfers CONT--How do you negotiate the paper?

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Sales OutlineIn order for there to be a negotiation, you first have to be a holder as defined by §3-2011. What does it take to be a holder of Order paper?

A. The instrument has to be indorsed by the proper person identified (who thereby becomes the endorser), and

B. The instrument must be delivered to the transferee (who thereupon qualifies as a holder)C. Note: an endorsement is a /s/ placed on an instrument by the payee or any later transferees

2. What does it take to negotiate Bearer paper?A. Bearer paper needs no endorsementB. Must be in possession of the transferee (who thereupon qualifies as a holder)

Special and Blank endorsements Order Paper : When a payee wants to transfer order paper to another person, the drawee bank

will require the payee’s endorsement. §3-501(b)(2)(iii) 2 types of endorsements:

1. Blank endorsement - when the payee simply /s/ the back of the instrument. Legal effect: It converts the paper into bearer paper.

2. Special endorsement - This occurs when the payee specifies a new payee by writing “pay to the order of (name)” on the back of the instrument: the new payee becomes a holder as soon as the instrument is delivered. (do not need “pay to the order of” here) The legal effect of this is to preserve the “order” character of the instrument. The new payee becomes a holder as soon as the instrument is delivered to him.

Specially endorsed instruments can only be endorsed by the person identified

Miscellaneous Endorsement IssuesWhat if a check is made payable to two different individuals connected with the word AND or OR?1. If an instrument is payable to 2 or more people (“X AND Y”), NOT (“X OR Y”) it is payable to all of

them and may be negotiated, discharged or enforced only if all /s/ MUST be on it. - §3-110(d)2. If an instrument is payable to two or more persons with “OR” in it, (“X OR Y”), it is payable to any of

them and may be negotiated, discharged, or enforced by any of them individually or all of them in possession of the instrument. Only 1 /s/ is required to negotiate this. -§3-110(d)

3. If an instrument payable to two or more persons and separated by a COMMA (“X, Y”) Only 1 /s/ is required - §3-110(d)

4. If the name on the instrument is misspelled. The payee can endorse the instrument with the name that is on the instrument or his in his correct name, or in both names. -§3-204(d) If you want to use an allonge, it has to be affixed to the instrument in order for a valid endorsement to occur. – stapled -§3-204(d)

Forgery of the Payee’s Name1. Order paper – a forgery of a payee’s name means that proper negotiation has NOT occurred. No

one can subsequently become a holder of that instrument no matter how innocent.2. Bearer paper – forgery here does not effect holder status

Forgery of the Payees NameConcerning Order Paper – anytime you have a forgery of the Payees name, it means that no proper negotiation has occurred. No one who accepts the paper thereafter can become a holder no matter how innocent.

Week 11

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Sales OutlineRequirements for becoming a Holder in Due Course §3-3021. Holder2. Value3. Good Faith and Without Notice

1. HOLDER - §3-201What is a holder? Only a holder can become a holder in due course – someone who takes the instrument through a series of valid negotiations. Bearer Paper – to become a holder, all that is necessary is for the person to be in possession of the instrument Order Paper - only the person identified can become a holder. Provided that the person is also in possession of the instrument.The courts have held that the drawee bank is generally NOT considered to be a holder in due course because the drawee bank is not taking the instrument through a series of valid negotiations but rather is taking the instrument for presentment.

2. VALUE -§3-303Def: The person in addition to being a holder, must pay value for the instrument. The term value is broadly defined. Basically any kind of K1 type consideration constitutes value. 1 Exception – an unperformed promise, is not current value until the promise is at least until performance is begun.A depository bank has a security interest proceeds that have been deposited in the bank to the extent that the bank has given credit for the item that has been withdrawn therefore depository bank has given value. When credit is given by the depository bank and the customer later withdraws funds under FIFO Rule, customer is presumed to have withdrawn his own funds first. -§4-210

FIFO – first in first out

3. GOOD FAITH AND WITHOUT NOTICE -§1-201(20) & §3-103(4)The instrument must be accepted in good faith and without notice of any defects. Good faith and notice are lumped together by the courts because you cant take an instrument in good faith if you have notice of the defects. Good Faith is defined as Honest in Fact, and the observance of reasonable commercial standards of fair dealing. The holder of a note is not under a duty to investigate possible defensesBut the closer the holder of the note it is to the underlying transaction, the lesser the need to give that person holder in Due Course status. Furthermore, on that same point, the holder may not intentionally close his eyes to defenses or defects in the instrument. (General Investments v. Angeleni)

Knowledge by the holder of a default, of an overdue interest payment would not disqualify a holder from becoming a Holder in Due Course BUT knowledge of an overdue BALANCE (principle) will disqualify a holder from becoming a Holder in Due Course. - §3-304Checks are presumptively overdue 90 days after they are dated. This automatically puts the person on notice of the defect. -§3-304(a)(2)

The Shelter Rule - §3-203The transferee gets whatever right the transferor had in the instrument. If the transferor was a HIDC, the transferee gets the rights of a HIDC. Even though the transferee does not qualify as a Holder in Due Course on his own. If the transferee engages in fraud or illegality, he cannot inherit the rights of a holder in due course. If the transferee is only aware of fraud or illegality that will not effect his ability to obtain the rights of a HIDC as long as he did not participate in the wrongdoing.

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1. Real and personal defenses2. Forgery3. The underlying obligation4. The makers obligation5. the drawers liability6. The drawee’s obligation7. signature by agents

Week 12 reviewREAL AND PERSONAL DEFENSES§3-305 divides defenses into 2 categories 1. Real Defenses –effective against a HIDC2. Personal Defenses – NOT effective against a HIDC

Real Defenses Only one effective against against a holder in due course§3-305 (a)(1) - an obligor (the person who is being sued by the HIDC), can raise ONLY the following real defenses against a HIDC: 6 Real Defenses1. Infancy2. Duress3. Lack of Legal Capacity4. Illegality5. Fraud in the Factum - the person must show that he had neither knowledge or a reasonable opportunity to learn of the essential terms of the instruments6. Insolvency (bankruptcy)

These are considered to be real defenses against a holder in due course to the extent that the instrument would be deemed void under the Laws of that state.

If the instrument is only deemed to be VOIDABLE under the laws of that particular state, than these will be deemed to be personal defenses

Personal Defenses - §3-305 (a)(2-3)All other defense including claims in recoupment are ineffective against a holder in due course3 Personal Defenses1. Failure of Consideration – the goods didn’t work.2. Fraud in the Inducement 3. Negligence

Forgery – §3-401 A person is not liable on an instrument unless that person has /s/ the instrumentIf a persons /s/ is not authorized it is ineffective against that person, because he is not a party to that transaction. - §3-403When an identified persons /s/ is required for negotiation (order paper), no one who takes the instrument thereafter can qualify as a HIDC, no matter how innocent. The forgery of order paper (where /s/ of the payee is required) is a REAL Defense, against a HIDC. While the holder of bearer paper is deemed to only be a PERSONAL Defense.

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Sales OutlineA Special Rule Applies to Forgery of Travelers Checks – §3-106(c) comment 2 – if the purpose of the /s/ on the travelers check is for ID ONLY, forgery of the /s/ is a Personal Defense that is ineffective against a Holder in Due Course. – ON EXAM ALWAYS ASSUME /S/ IS FOR ID ONLY

The Underlying Obligation - §3-310(b)Codifies the common law doctrine of Merger – if a note or uncertified check is taken for an obligation, the obligation is suspended until the check or note has been dishonored or paid. What this means is that, until this occurs, the holder of the note or check may NOT sue on the underlying obligation. Cashiers Checks - §3-310(a)- payment by a cashiers check discharges the underlying obligation immediately, just as if the person had paid in cash.

THE NATURE OF LIABILITYThe Makers Obligation – §3-412The maker has primary liability on a note, which means that the payee looks first to the maker of the note for payment on the note. If there is more than 1 maker than both co-makers have joint and several liability with the right of contribution against each other.

The Drawors Obligation - §3-414This applies to checks - Unlike the maker of the note, the drawor has only secondary liability on the check. The Drawors obligation only arises after presentment, dishonor, and notice of dishonor of the check.

Presentment - def in §3-501 – there is a demand for payment made by the person who is entitled to enforce the instrument.

Dishonor – def in §3-502(b) – a check is dishonored when the drawee bank either fails or refuses to pay the instrument

The drawee bank has a right under §3-501(b) to require “reasonable ID” from the payee and unless reasonable ID is presented, presentment is not proper. In that case there has been no dishonoring of the check. Messing v. Bank of America.

Notice of the dishonor must be given to the drawor or makor in a timely manner and such notice must be communicated by any reasonable means. §3-503

A person can waive the right to receive notice of presentment, honor and dishonor. §3-504

Drawees Obligations - §3-409The drawee bank is not liable on a check until the drawee bank accepts the check.Acceptance means a /s/ agreement by the bank indicating that they are accepting the check and will pay it. - Normally the bank stamps the check.

Signature by Agents - §3-402A agency can avoid personal liability on an instrument ONLY if the agent indicates unambiguously that the agent is signing in a representative capacity.

Week 13 Review

Endorsers Obligation

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Sales OutlineOnce payee /s/ the back of an instrument, the payee automatically incurs the obligation of the endorser under §3-204. Anybody else who /s/ the instrument for the purposes of negotiating it also incurs the obligation of an endorser

The Obligations of an Endorser - §3-415 Endorsers promise to pay the instrument to the person entitled to enforce the instrument The endorsers obligations are secondary Before obligation arises, must first be presentment, dishonor, and notice of dishonor. An Endorser may disclaim liability by writing on the back of a check “without recourse.” - §3-415(b) An endorser who is sued on the instrument may bring in his co-endorsers by “vouching them in” so

to speak -§3-119(there is a certain notice requirement that the endorser must have to “vouch in” his co-conspirators)SuretyshipWhether it’s intended or not, when look at the endorsers obligations discussed in §3-415An endorser becomes an surety of all parties that /s/ the instrument prior to himIn Art III a surety is called an accommodation partyIn Art III Principle is called the debtor or the accommodated partyIn Art III Creditor is called the person entitled to enforce the instrumentIn any surety situation always 3 K’s involved:K1 – principle (debtor) and creditorK2 – surety and creditor K3 – surety and principle (debtor)

In addition to the right to seek reimbursement, a surety who is forced to pay has several other legal remedies available to him against the principle.1. Exoneration – compels principle to perform at maturity2. Subrogation – once a surety pays off a creditor he steps into the shoes of the creditor, and when he

does, he takes on whatever legal rights the creditor had against the principle. (EX: leins on the property, collateral the creditor has paid)

3. Contribution – this occurs when the surety seeks partial reimbursement from his co-surety’s. 4. Strictissimi Juris – if a creditor releases the debtor (principle) from liability or gives Principle an extension of time to pay, the surety is also discharged unless:

1. Surety Consents2. Creditor informs the principle of the preservation of surety’s rights against the Principle 3. The Surety who dislikes the modified agreement then has the right to ignore it and exercise his

usual rights to seek: exoneration, subrogation, etc.

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Under §3-605(e), if a creditor requires a borrower to give collateral, and the collateral is impaired in any way by the creditor, than the obligations of any endorser or surety will be discharged A couple of Different ways in which a creditor can impair collateral. - §3-605(g)This includes the right to record collateral, the right to perfect collateral, improperly releasing the collateral to the principle, failure to preserve the value of collateral, etc.

BANKS AND THEIR CUSTOMERSProperly Payable Rule - §4-401 When a bank can tap into a customers account to pay an item§4-401(a) an item is properly payable when it is authorized by the customer and is in accordance with

any agreement between the customer and bank.Generally if a bank violates the properly payable rule, it must put the $ back into customers account.

§4-401(c) - A bank may pay a postdated check unless the customer has given special notice to the bank not to pay the check – if that has happened (if this occurs the bank has NOT violated the properly payable rule Unless the customer has given special notice to lookout for a particular postdated check).

Forgery of the Drawors Name under Properly Payable Rule - Forgery keeps the check from becoming properly payable. If the drawors name is forged and the bank pays the item, the bank has violated the properly payable rule

Checks that are more than 6 months old are considered to be stale under §4-404. Therefore those checks are not properly payable

A bank may pay a check, an item, even if it creates an overdraft in customers account without violating the Properly Payable Rule - §4-401(a)

Wrongful Dishonor – §4-402Whenever a bank makes an improper payment on a customers account, causing other checks to be dishonored, the customer may recover from the bank “all actual damages,” including any consequential damages - §4-402(b)

SuretyAccommodated

Party

K3 K2

K13

Principle (debtor)Accommodated

party

Creditor (holder)Person entitled to enforce instrument

Surety

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Death or Incompetency of the Customer - §4-405 The common law rule that death or incompetency of a Principle automatically revokes the authority

of an agent to act, does NOT apply to banks and their customers

Under §4-405 neither death nor incapacity of the customer revokes the banks authority to act or to pay an item until such time the bank knows of the death or incapacity and has had a reasonable opportunity to act on it.

Even with knowledge of a death or incompetency, a bank may for 10 days thereafter, pay checks unless ordered to stop payment by a person claiming an interest in the account. The idea behind this provision is to stop putting routine checks through probate unnecessarily.

Enforcement of Instruments The primary definition of a person entitled to enforce the instrument is that of a Holder, but the law has expanded that concept to provide holder status to other persons who do NOT technically qualify as holders. Including these individuals: 1. Non holders who are in possession of the instrument, who have the rights of the holder.

EX: The Drawor forgets to endorse a check made payable to the Payee – that person has the rights of a holder and the law considers that person to be a holder

2. Depository Bank where the instrument has been deposited in the bank unendorsed - §4-205 The law says there that the bank for those purposes is considered to be a holder even though the person who deposited the check in the bank has forgotten to endorse it.

3. §3-309 – this extends holder to someone who is entitled to enforce the instrument when the instrument has been lost or stolen.

EX: It can be established that this person is entitled to enforce the instrument but the dog ate the check.

Presentment Warranties – §4-208(a)Once the Drawee bank pays a draft, the person obtaining payment at any previous transferor of the bank warrants to the Drawee bank:1. That the warrantor was the person who is entitled to enforce the draft AND 2. Draft hasn’t been altered AND 3. The warrantor has no knowledge that the signature of the Drawor is unauthorized

Transfer Warranties - §4-207(a)A customer or collecting bank also gives warranty assurances to transferees and any collecting bank, including the following warranties1. That the warrantor is the person entitled to enforce the item2. All /s/ on the item are authentic 3. The item has not been altered4. The item is not subject to a defense or claim in recoupment5. The warrantor is not aware of any insolvency proceedings commenced concerning the maker or

drawor of the instrument

Conversion Liability -§3-420 The law that is applicable to the conversion of personal property also applies to negotiable instruments. For us that means that an instrument is converted if it is taken by transfer from a person not entitled to enforce the instrument. - §3-420(a)

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Sales OutlineThe issuer of a check is not entitled to sue the Drawee Bank for conversion. Rather the issuer may recover from the bank under the properly payable rule - §3-420(a)(i)

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