Uniform Commercial Code Litigation

UCC Litigation Blog Nominated for the Top 25 Business Law Blogs of 2011

noreply@blogger.com (Jeffrey A. Robinson) — Tue, 11 Oct 2011 17:56:00 +0000

For the second year in a row, UCC Litigation has been nominated by LexisNexis for its Top 25 Business Law Blogs!

We are pleased that our blog has been noticed by one of the prominent legal publishers in the country.

You can support out blog by commenting on the nomination announcement post at LexisNexis' Corporate & Securities Community.

Each comment is counted as a vote toward the supported blog. To submit a comment, visitors need to log on to their free LexisNexis Communities account. If you haven’t previously registered, you can do so for free by following this link. The comment box is at the very bottom of the blog nomination page. The comment period for nominations ends on October 25, 2011.

LexisNexis will then post the finalists for the Top 25 Business Law Blogs of 2011. Thereafter, a LexisNexis community vote will choose the Top Blog through a Zoomerang survey. The final announcement will be be made in early November.

Breach of Implied Warranty in Sale of Consumer Goods: Don't Forget The Jury Instructions Under Civil Code 1794 and UCC 2-711 through 2-714

noreply@blogger.com (Jeffrey A. Robinson) — Tue, 11 Oct 2011 01:12:00 +0000

Alaimo v. Hallmark-Southwest Corporation (Aug. 31, 2011) 2011 WL 3811941
(Not Officially Published)

Plaintiff lost her home in a wildfire and replaced it with a manufactured home. The home was delivered in two halves. The homeowner had difficulty fitting together the two halves and found various other problems. The jury rejected her claim for breach of express warranty and awarded $55,000 damages for breach of implied warranty.

The court of appeal reversed because the trial court had not not given any jury instructions on how damages for breach of implied warranty should be computed. Neither party asked for any instructions. Construing Agarwal v. Johnson (1979) 25 Cal.3d 932, 951, the court of appeal reversed due to a "complete failure to instruct on material issues and controlling legal principles."

The court noted that the correct measure of damages for breach of an implied warranty in sale of a consumer product is determined by California Civil Code section 1794. Section 1794, subdivisions (b)(1) and (b)(2) incorporate the UCC damages standard. If the buyer rightfully rejected the goods, damages are calculated under sections UCC 2-711, 2-712, and 2-713 (Cal. U. Comm. Code sections 2711, 2712, 2713). If, as in the Alaimo case, the buyer accepted the goods, damages are calculated under UCC 2-714 and 2-715 (Cal. U. Comm. Code sections 2714, 2715).

Judgment was reversed and remanded. The plaintiff lost her status as a prevailing party and an award of attorneys fees that exceeded the implied damages. Don't forget the jury instructions.

When Does Website Content Create an Express Warranty Under the UCC?

noreply@blogger.com (Gregory E. Robinson) — Mon, 12 Sep 2011 19:54:00 +0000

Zwart v. Hewlett-Packard Company (N.D. CA Aug. 23, 2011) 2011 WL 3740805

Can website content create an express warranty for the goods offered? In Zwart v. Hewlett-Packard Co. (N.D. CA Aug. 23, 2011) 2011 WL 3740805 the court said "yes". Plaintiff claimed that the computer he purchased online did not have a wireless card with features described on HP's website. Plaintiff argued that the website's feature descriptions constituted an express warranty, and that HP was liable for a breach of that warranty because the laptop did not conform. The foundation for plaintiff's case was UCC Section 2-313(1)(b), which provides that "any description of goods which is made the basis of the bargain creates an express warranty that the goods shall conform to the description."

HP answered that the website language could not be construed as a representation or warranty. The court indicated that because the language at issue was activated when a customer opened a pop-up box, it was reasonable to conclude that this could be a representation. The court's analysis was cursory. The court did not actually conclude that the language was a representation creating a warranty, merely that the allegation was sufficient to survive an attack on the pleadings. Further, the court noted that California case law supports the proposition that a limited warranty might not bar the right to pursue a claim for an express warranty by description.

Ultimately, the court dismissed the plaintiff's case, because the website language at issue related to custom-order laptops, and the plaintiff had only purchased an off-the-shelf laptop, not a custom laptop.

No Recovery Under UCC § 1-308 for Voluntary Payment Made By Wire Transfer “Under Protest” As Part of Settlement Agreement

noreply@blogger.com (Jeffrey A. Robinson) — Tue, 07 Sep 2010 21:14:00 +0000

Steinman v. Malamed, (June 28, 2010) 185 Cal.App.4th 1550, 111 Cal. Rptr. 3d 304.
This case suggests that UCC § 1-308 (allowing payment “under protest”) may not be interpreted broadly to allow a party to reserve rights when making a disputed payment.

This blog entry is longer than usual. That's because the court's opinion seems is suspect in analysis and perhaps result.

It is not too often that the court of appeal lets a party who admittedly is not owed $300,000 keep that money just because the rightful owner of money made a mistake paying it--and reverses the trial court to make that happen. What do you think?

In Steinman, the defendant financial advisor lost a bench trial and signed a $6,500,000 settlement agreement after the judge issued a proposed statement of decision concluding the defendant had breached its fiduciary duty. The settlement agreement provided for a reduced settlement amount if paid early. The defendant was anxious to meet the early payment deadline, but a dispute arose as to the how to calculate the payoff amount.

The defendant tried to hedge against losing the early payment discount by paying the greater amount demanded plaintiff “under protest.” The plaintiff stated that it would not accept a payment made “under protest.” The defendant made the payment by wire transfer. The defendant subsequently sought to recover the overpayment.

The trial court found that the defendant was correct and that there was in fact an overpayment and ordered the return of the money. But the appellate court reversed. It did not overturn the finding of an overpayment. Rather, it concluded that because the defendant’s overpayment was voluntary, it could not be recovered. The appellate court found that the defendant had not properly protected itself because the plaintiff had announced it would not accept a payment under protest and the defendant had paid anyway.

UCC § 1-308 (California Commercial Code Section 1308) would, on its face, provide a different result. Section 1-308(a) specifies that if a party performs under an explicit reservation of rights in response to a demand by the other side, then the performing party will not waive its rights. The Steinman court found that the UCC rule did not apply to this situation.

Since the disputed payment was made under a settlement agreement, not a typical commercial transaction, that result might not seem unusual. However, at least one prong of the court’s analysis missed a major point, and other portions of the opinion seemed to be guided by the intended decision rather than the analysis.

The court first stated that the UCC should not apply because payment was by wire transfer not check. (185 Cal. App. 4th at 1561).

• This is a questionable reason to refuse application of UCC § 1-308. California has enacted UCC Article 4A, which is designed to deal with commercial wire transfers. (California Commercial Code §11101 et seq.) UCC § 1-102 (California Commercial Code 1102) states that this division (Division 1, “General Provisions,” which includes § 1-308) applies to a transaction governed by another division, such as Division 11, “Funds Transfers” (UCC Article 4A.) So the method of payment (wire transfer not check) should not disqualify application of the UCC.

The appellant attempted to come under the UCC by arguing that the payment was made under a “negotiable instrument,” (the promissory note being paid as part of the settlement agreement).

• UCC § 3-104 does cover negotiable instruments. Without any description of the factual record, the court of appeal merely noted that the lower court “did not make” a determination that the promissory note was negotiable. The court of appeal did not make an independent analysis of whether the settlement note was a negotiable instrument.

The determinative factor for the court was UCC § 1-103(b) (California Commercial Code Section 1103(b).). Section 1-103(b) provides that common law principles concerning contract, duress, coercion and other matters continue to apply, unless the UCC specifically displaces them.

• The court cited Connecticut Printers, Inc. v. Gus Kroesen, Inc. (1982) 134 Cal. App. 3d 54. Connecticut Printers held that UCC § 1-308 (then known as 1-207) did not displace common law principles which allowed a party to offer an “accord and satisfaction” on a disputed account by tendering a check “in full payment” of the account. This is a different situation than the one facing the Steinman court. The Steinman court did not discuss the factual differing fact patterns. The court of appeal was unwilling to find that the UCC “explicitly displaced” common law principles of “economic duress” and “involuntary payment” in a transaction involving wire payment of an obligation arising under a settlement agreement. (185 Cal. App. 4th at 1562.)

Because the factual circumstances of the dispute were not explicitly within 1-308, the court of appeal chose to rely on common law.

The case, which sits at the intersection of common law and the UCC, could probably spawn some law review articles. In the meantime, for day-to-day lawyers, one must proceed carefully in order to protect a performing party’s rights in an ongoing contract.

UCC § 3-104 Definition of “Negotiable Instrument” Helps Bank Defeats Widow’s Stale Claim

noreply@blogger.com (Jeffrey A. Robinson) — Wed, 01 Sep 2010 18:37:00 +0000

Gabriel v. Wells Fargo Bank, N. A., (August 30, 2010) 2010 WL 3388062 (Not Officially Published)

This case illustrates how the UCC often appears in a supporting role, cited by the courts to bolster a conclusion.

A widow sued a bank (Wells Fargo) as the beneficiary of a bank certificate of deposit originally worth nearly $1 million. The certificate of deposit was opened by her husband in 1988. The husband placed a receipt for the certificate of deposit in a safety deposit box. He died a few years later without telling her about the certificate of deposit. The widow did not learn of the certificate of deposit for another 16 years (after the contents had been sent to the state as unclaimed property). The safety deposit box contained a receipt for the certificate of deposit—which the state controller sent to the widow.

In defense of the widow’s claim, the bank pointed out that the funds on deposit were subject to withdrawal; that most of its records had been destroyed; and that such records as it could locate implied that that no funds were left in the account at the time it was closed. The widow countered with California Evidence Code Section 635, which states that an obligation possessed by a creditor (in this case, the widow) is presumed not to have been paid. This is where the UCC comes in. Rightly or wrongly, the court interpreted Section 635 as dealing primarily with negotiable instruments. The court looked to UCC § 3-104 (California Commercial Code 3104) for the definition of a negotiable instrument. Under 3-104(d) an instrument is not negotiable if it “contains a conspicuous statement” to that effect. Unfortunately for the widow, the receipt for the certificate of deposit stated that it was “not transferrable or negotiable.” Thus, the Court did not apply the Evidence Code Section 635 in favor of the widow.

The Court cited other reasons why the widow could not prevail, primarily because she could not prove that any money her husband had not withdrawn the money prior to his death. Since the funds could be withdrawn, the existence of a receipt originally depositing the funds did not imply that the funds remained on deposit. This appears to be the dispositive reason why the court of appeals denied the widow’s claim.

For the litigator, the case illustrates how the UCC is often a persuasive source of authority. For the transactional lawyer, the case is another sad tale of how better estate planning (and estate administration) could have eliminated the need for the lawsuit and resolved the issue while records were intact.

Victim or Deadbeat: UCC Article 9 and California Real Estate Broker’s License Requirements

noreply@blogger.com (Jeffrey A. Robinson) — Wed, 16 Jun 2010 17:37:00 +0000

Greenlake Capital, LLC v. Bingo Investments, LLC (June 14, 2010)
2010 WL 2351460

This case illustrates the broad reach of the California Real Estate Broker's License law, the risks of noncompliance, and the potential impact of UCC Article 9 (lending secured by personal property).

Greenlake Capital originated and helped negotiate a $150 million mezzanine loan for Bingo Investments, charging a $3 million fee. Bingo reneged on the fee, asserting that Greenlake forfeited its fee by failing to hold a California real estate broker's license. (Ca. Bus. & Prof. Code Sections 10131, 10136.) The trial court granted summary judgment: Bingo was a victim of unlicensed activity, and therefore not required to pay the fee.

The court of appeal reversed for a full trial. Perhaps Greenlake's lending activity was not within the definition of real estate loan brokerage. If so, Bingo would be treated as a deadbeat, not a victim, and would be obligated to pay the fee.

The court cited recent cases holding that if some of the services fell outside the definition of real estate loan brokerage, part of the fee may be recoverable based on a theory of severability (services not requiring a license being severed from those that do). If the "central purpose" of the contract was not tainted with illegality, it may be possible to recover a part of the fee for those acts "for which no license was required." This was important, because "at the start of the relationship, neither party "intended the financing to take a form that would necessarily" violate the licensing requirement.

More importantly, the services may fall outside the scope of the licensing requirement altogether. A mezzanine loan is typically secured by equity in another entity--personal property-- rather than a mortgage. When the borrower had "no direct equity position" in the underlying real property, the licensing requirements may not be triggered. Thus, UCC Article 9 may apply, not local mortgage laws. On remand, the trial court will be required to sort it out, based on "a complete factual investigation" into the "nature of the obligations created by the" parties' credit and security agreements, and the "policies and equities" inherent in the licensing statutes. The case is not a quick fix for legal and financial professionals because the court did not offer any litmus test or even a checklist of factors.

The complicated financing arrangements have generated arguments on both sides as to whether the real estate loan brokerage licensing laws should apply. For businesses raising money, it is better to be safe than sorry. Holding the right license will transform the nonpaying client from a potential victim into a deadbeat. This will make it much easier to enforce the fee. Careful examination of the licensing arena is advisable.

Thirty Day Countdown to Disaster: Customer Consequences Under UCC 4-406(d)(2)

noreply@blogger.com (Jeffrey A. Robinson) — Mon, 03 May 2010 18:42:00 +0000

Litke v. City National Corp., (April 29, 2010) 201 WL 1712702 (not published)

Giving teeth to what must effectively be the shortest statute of limitations in the world (30 days) for commonly encountered situations, the California Court of Appeal denied relief to an 82 year-old bank account holder defrauded by his long-time bookkeeper.

In Litke v. City National Corp. (April 29, 2010) 201 WL 1712702 (not published), an 82 year-old bank customer held accounts for more than 15 years. He protected himself by requiring two signatures on checks not signed by him or his relative. The account holder received canceled checks and statements monthly. Unfortunately, he did not discover the fraud until the bank contacted him about a suspiciously large check (just under $10,000) flagged by the bank’s automatic fraud detection filters. The account holder’s subsequent review disclosed that over the course of more than six years, his bookkeeper embezzled nearly $380,000 by forging 180 checks.

The account holder sued the bank but was turned away cold. Under California’s version of UCC 4-406(d)(2) (California Commercial Code Section 4406(d)(2)) a bank account holder who receives regular monthly statements must discover and report the first fraudulent or forged check within 30 days; otherwise the account holder is barred from suing the bank to recover for subsequent forgeries by the same wrongdoer paid by the bank in good faith, unless the bank was negligent. In addition, there is a statutory one-year period for reporting each forgery, dating from when the applicable bank statement or canceled check is presented. Since the forgeries were all the work of a single wrongdoer, and the account holder could not prove that the bank was negligent, the account holder was barred from any recovery.

The account holder unsuccessfully argued various theories, such as estoppel, the bank’s failure to manually review each signature, alleged discrepancies between the signature cards and the account disclosures. The court sided with the bank based on the UCC’s policy that “there is little excuse for a customer not detecting an alteration of his own check or a forgery of his own signature.”

The court of appeal did not explain why it declined to publish the decision, but we may assume the court thought the situation common enough, and the law so well settled, that the opinion did not break new ground. It’s a cautionary reminder about how vulnerable businesses are to fraud. Failing to discover a forged or altered check returned with a monthly bank statement is a 30 day countdown to disaster.

UCC § 2-313: Reliance Not Necessary For Breach of Express Warranty

noreply@blogger.com (Jeffrey A. Robinson) — Tue, 06 Apr 2010 23:47:00 +0000

Weinstat v. Dentsply International, Inc.,
(Jan. 7, 2010) 180 Cal. App. 4th 1213, 103 Cal. Rptr. 614

Product Directions in Package Allow Breach of Warranty Claim; Unlike Fraud Claims, “Reliance” Is Not a Necessary Element

Can the buyer sue for breach of warranty based on an inaccurate statement in the product directions? Yes, according to the California Court of Appeal (1st District, Division 4) in Weinstat v. Dentsply International, Inc., (Jan. 7, 2010) 180 Cal. App. 4th 1213, 103 Cal. Rptr. 614. Actual “reliance” on such a statement by reading before purchasing is not necessary.

A group of dentists who purchased the “Cavitron” dental cleaning device sued the manufacturer (Dentsply International) for breach of warranty. The dentists complained that Cavitron product directions allegedly said the device could be used for oral surgery but dental health regulations allegedly precluded this application. The lower court denied a class action certification, reasoning in part that a plaintiff could not demonstrate “reliance” on the challenged warranty, since the warranty was included in the product directions, not the sales contract documents. The court of appeal reversed. The court of appeal interpreted UCC § 2-313 (California Commercial Code § 2313) to authorize a claim for breach of express warranty under these circumstances.

A fraud claim requires proof of reliance as an element. Not so for a breach of warranty claim under the UCC. The court found that the product directions, delivered with the product, could form a “basis of the bargain” under UCC § 2-313. The “bargain” extends beyond the “legal formation of the contract.” It includes affirmations contained in product manuals or other materials that are given to the buyer at the time of delivery.

The court recognized that its decision departed from a Maine case, Cuthbertson v. Clark Equipment Co., (1982) 448 A. 2d 315, 321. The California court bolstered its analysis of UCC 2-313 by stating that federal regulations required accurate medical product directions. Therefore, such product directions could form part of the “basis of the bargain” (UCC § 1-201(b)(3)) through the UCC provisions on “usage of trade.” UCC § 1-303(c); California Commercial Code § 1303(c). The element of “good faith” inherent in UCC sales supported this conclusion. UCC §§ 1-304; 1-201(b)(20); Cal. Comm. Code §§ 1304, 1201(b)(20) A “buyer would reasonably expect any statement or description of the product appearing in a user manual or similar publication to be true, regardless of when the manual was read or received.” 180 Cal. App. 4th at 1231, 103 Cal. Rptr. 614.

Battle of the Tow Trucks: Secured Creditor vs. Consignor Under UCC § 9-102

noreply@blogger.com (Jeffrey A. Robinson) — Tue, 27 Oct 2009 00:15:00 +0000

Fariba v. Dealer Services Corp., 178 Cal. App. 4th 156, 2009 Westlaw 3191538 (Oct. 7, 2009).

A used car dealership sold cars it obtained on consignment from a wholesale automobile purchaser. The dealership was financed by a secured creditor. When the car dealership went under, the secured creditor and the consignor both sent tow trucks to repossess the remaining vehicles. There was a battle of the tow trucks. When the last car was towed off the lot, the consignor had recovered 31 of 45 vehicles, the secured creditor had 14.The consignor sued for the value of the 14 vehicles taken by the secured creditor. The consignor won.

The secured creditor argued that it had a lien in the consignor’s cars under Section 9310(a), since it had filed a UCC-1 financing statement but the consignor had not.

However, under Section 9102(a)(20)(A)(iii), the secured creditor’s lien does not reach a consignor’s goods when the consignee “is generally known to be substantially engaged in selling the goods of others.” The court held that when a secured creditor has actual knowledge that the goods belong to the consignor, the creditor cannot claim the protection otherwise available under Section 9310(a). The consignor should have filed its own UCC-1 financing statement; this would also have protected it.

The case is one of first impression in California, although it cites supporting authorities from other jurisdictions.

Double-Crossed Diamond Dealers Dinged By UCC 2-403

noreply@blogger.com (Jeffrey A. Robinson) — Thu, 09 Jul 2009 17:23:00 +0000

Ishaia Trading Corp. v. Anter, 2009 WL 1913184 (July 6, 2009) (Not Officially Reported)

This case disproves the familiar slogan “diamonds are forever.”

A diamond dealer was swindled out of several gems, including a 23 carat, pear-shaped, flawless diamond. The transaction involved a complicated series of consignments between international characters with such exotic sounding names as “Chayto,” “Shamash,” “Achmed,” and an alleged “Mrs. Mobutu,” (yes, that Mobutu—the infamous African dictator). When the diamond-dust settled, the owner and consigner had worthless checks and no diamonds.

The owner/consigner sued the persons who ended up with the gems and lost. They were done in by UCC 2-403 (California’s version is at Ca. Comm. Code 2403.) Good title will pass if a bona fide purchaser acquires title from a defrauder, but not a thief. As the court put it, “an involuntary transfer [theft] results in void title, while a voluntary transfer, even if fraudulent results in voidable title.” (2009 WL 1913184, at *9.) Section 2-403(1) states, in part: “A person with voidable title has power to transfer a good title to a good faith purchaser for value.” Since the defendant was a good faith purchaser for value, it could keep the diamonds.

The case also pivoted on the application of California vs. Spanish law and contains a good discussion of choice-of-law issues. The opinion should be officially published--not only because of the key law it reinforces, but also because it opens such an interesting window into the world of diamond trading.

Perhaps the defrauded diamond owners can recover some value by selling the movie rights.

The Consumer’s Life Preserver: Implied Warranties Under California’s Song-Beverly Consumer Protection Legislation Compared To The UCC

noreply@blogger.com (Jeffrey A. Robinson) — Tue, 23 Jun 2009 21:02:00 +0000

Mexia v. Rinker Boat Co., (2009) WL 1651442, ___Cal. Rptr. 3d ___ 2009 .

A June 15, 2009 decision by the California Court of Appeal threw a life preserver to a boat owner and all purchasers of consumer products. One Jess Mexia bought a boat from Rinker Boat Co. The boat came with an express limited warranty. Mexia claimed that the boat could not be repaired due to corrosion in the engine. Mexia sued Rinker Boat Co., not under the UCC, but rather the Song-Beverly Act, which covers consumer goods in California. The trial court ruled in favor of Rinker Boat Co., but the Court of Appeal reversed. The Court discussed the greater protections available to the consumer under the Song-Beverly Act, as compared to the UCC.

Implied warranty of merchantability. Under the UCC, the purchaser must typically show a breach at the time of sale or delivery. Under the Song-Beverly Act, this implied warranty generally lasts as long as the express warranty or one year and the breach may arise after the sale.
Statute of Limitations. Claims under the Song-Beverly Act are governed by the same limitations period as UCC 2-725, generally four years after the cause of action has accrued. The accrual period is often upon the date of delivery.
Rejection of Nonconforming Goods. This is required, within a reasonable time, by UCC 2-602, 2-607. This deadline for rejection is not required by the Song-Beverly Act.
Consumer’s Rights Under the Song-Beverly Act Will Prevail Over Contrary Provisions In UCC. The rights of buyers of consumer goods under Song-Beverly Act prevail over contrary provisions of the UCC.

Prior Assignment of Contract Rights vs. -- Later Filed Financing Statement: Battle for Priority under U.C.C. Section 9-109

noreply@blogger.com (Gregory E. Robinson) — Fri, 27 Mar 2009 23:47:00 +0000

Kennedy v. Healthstone Staffing, LLC, 2009 WL 281777 (Cal.App. 1 Dist.) Feb. 6, 2009
(Not Officially Published -- See Cal. Rules of Court, Rules 8.1105, 8.1110, 8.1115)

Accounts receivable are valuable assets, and commonly used as collateral to secure loans. Lenders commonly structure credit facilities to allow for advances up to a specified percentage of accounts receivable.

This case pitted a lender secured by "all assets" against the prior assignee of the debtor's contract. The debtor had a purportedly valuable contract to furnish foreign nurses to hospitals. Previous to the arrival of the secured lender, the debtor had borrowed money from a third party and gave the prior lender an assignment of the contract. The subsequent secured lender challenged the first lender's priority in the contract, by claiming that it had lost priority due to a failure to file a financing statement, as required by U.C.C. Section 9-109(a)(which subjects the sale of accounts payment intangibles and promissory notes to the Uniform Commercial Code) and Section 9-310(a)(which generally requires filing to obtain perfection).

The original lender argued that it was protected by two separate exceptions to the filing requirements. The first, § 9-109(d)(7), excludes from Article 9 the assignment of a single account in full or partial satisfaction of a pre-existing indebtedness. The second exemption provides that a security interest is perfected when there is an assignment of accounts or payment intangibles which individually or in the aggregate does not transfer a "significant part" of these outstanding accounts receivable. §9-309(2).

In this case, there was testimony that the original lender took an outright, absolute, assignment of a contract as payment for a prior loan, in part so that it would not need to actually file a UCC financing statement to protect its position. The appellate court found this persuasive.

It dismissed the second lender's contention that because the assigned contract covered multiple nurses, that it was an assignment of multiple accounts receivable, and thus not elibible for the no-filing exception.

How is the second lender to protect itself from this situation, since a review of the public financing statements would not disclose any third party interest in the contract? Presumably this would not be an issue if the borrower's financial statements had been prepared properly. If there were an absolute assignment of a contract in payment of a debt, the borrower's financial statements should exclude both the prior debt, and the contract at issue, and the lender would not rely on it for collateral. Reliance on audited financial statements might help protect the lender, but this is not practicable in many situations.

If any prior lenders are listed in the borrower's financial statement, the second lender could check to verify the position and claims of the prior lender. If contracts of significant value are listed as part of the borrower's assets, the second lender could also take possession of the original contract, and obtain a certification from the contract payor that it had not received any notice of assignment, that it would not make any contract payments to any third parties without the lender's consent, and that on receipt of written notification from the lender it would make payments on the contract to the lender. Although taking possession of the original of a standard contract would not replace filing a financing statement in the manner allowed for negotiable instruments or chattel paper (see §9-313(a), taking possession of the original could be helpful evidence to establish that it had not in fact had been sold outright, and at a minimum would help to flush out any problems of this nature.

Conspicuous Disclosure Under UCC 1-201(10)

noreply@blogger.com (Jeffrey A. Robinson) — Thu, 26 Mar 2009 15:47:00 +0000

Broberg v. Guardian Life Ins. Co. of America (March 2, 2009) 90 Cal. Rptr. 225, 2009 Daily Journal D.A.R. 2983

Broberg is an insurance case. The insured claimed fraud and misrepresentation in connection with the sale of the policy. The insurer said it had disclosed the operative risk on the last page of a sales chart. Under California case law (Haynes v. Farmers Ins. Exchange (2004) 32 Cal. 4th 1198, 1204), the disclaimer had to be "conspicuous, plain and clear" to be effective. p. 233. The disclaimer was contained in the body of a 39-line single-spaced end note, all capitalized, with the same font, color, border, style and spacing. There was nothing about the particular disclaimer language to draw one's attention to it (at least above other lines). The majority concluded that this could not qualify as conspicuous, guided by the California's version of UCC Section 1-210(10). The capitalization of the disclosure language did not persuade the majority, apparently because all 39 lines were capitalized, and therefore insufficient attention was directed to these particular disclaimers.
Since the case doesn't involve sale of goods--and insurance contracts are often more strictly construed--it is not clear how much reliance will be placed on this decision in UCC cases.

The "Cardinal" Rule: No "More Than Four" Year Statute of Limitations Period Under UCC 2-725 Without Specific Time Reference

noreply@blogger.com (Jeffrey A. Robinson) — Mon, 26 Jan 2009 17:44:00 +0000

Cardinal Health 301, Inc. v. Tyco Electronics Corp., (2008) 169 Cal. Ap. 4th 116, 87 Cal. Rptr. 3d 5.

Cardinal Health manufactured medicine-dispensing cabinets for use in hospitals. When these suffered repeated malfunctions, Cardinal sued the suppliers of the defective component.

First Key Issue: Statute of Limitations Under UCC 2-725-- Four Years or More?
Applying California's version of UCC 2-725, the court ruled that the statute of limitations for breach of warranty causes of action is four years from the date of tender. Cardinal argued for more than four years, based UCC 2-725(2), which allows for a greater warranty period if the "warranty explicitly extends to future performance"--in which case the accrual date is triggered when the breach is, or should have been, discovered. Cardinal's warranty stated that the defective part would function for "50,000 cycles." This wasn't good enough to extend the limitations period beyond four years. The "more than four" warranty extension only applies if the warranty "refers to a specific time period."

Second Key Issue: No Privity Required For Implied Warranty Claim When There Are Direct Dealings
Cardinal claimed that the successor in interest to the manufacturer of the defective component was also liable for breach of implied warranty. The successor asserted the defense of "lack of privity" because it had no contract with Cardinal. Under express warranty claims no privity is required. However, under California law, vertical privity is required for a breach of implied warranty claim--unless an exception applies. Applying the rule of US Roofing, Inc. v. Credit Alliance Corp., (1991) 228 Cal. App. 3d 1431, 279 Cal. Rptr. 533, the Court held that no contract privity was required when there are "direct dealings." Since the successor adopted the same designs, used the same manufacturing tools, and continued to manufacture the parts in the same manner as the initial supplier, and the parties understood that "things would be business as usual," the court found sufficient evidence of direct dealings to establish liability for breach of implied warranty.

The opinion covers a number of other important areas. Bottom line for us:
(1) No "more than four" years for breach of express warranty without a specific reference to time.
(2) There may be liability for breach of implied warranty, without express contract privity, when there are "direct dealings" between buyer and seller.

Excluding Lost Profits and Consequential Damages Under UCC 2-719: Too Much of a Good Thing?

noreply@blogger.com (Jeffrey A. Robinson) — Fri, 12 Dec 2008 22:48:00 +0000

Whittlestone, Inc. v. Handi-Craft Company 2008 WL 4963053 (USDC, N. D. Ca. Nov. 19, 2008)

Buyers and sellers often limit the damages recoverable for breach contract in sale of goods cases. Under UCC 2-709(3) such limitations are enforceable, with exceptions for unconscionability. If the exclusionary language is too broadly written, it could be interpreted to preclude direct liability on the contract, not merely consequential damages.

Seller Whittlestone entered a 20 year contract to supply Handi-Craft with products. Buyer Handi-Craft was required to purchase a minimum amount each year. Buyer terminated the contract early. Seller filed suit, claiming the termination was a breach of contract. Buyer asked for damages under the contract, including the value of the lost minimum amount of sales over the remaining term of the contract.

Oops. Buyer's and seller's contract provided that in the event of "termination due to a material breach," "neither party shall be liable to the other for compensation, reimbursement, or damages because of the loss of anticipated sales...." The court enforced this literally against seller, finding that seller could not sue for direct lost sales to the breaching buyer. The court struck the language in the complaint damages for "the lost value of the twenty year contract..., lost profits, consequential damages."

This result is not within the typical spirit of consequential damage limitations, which are generally intended to eliminate liability for lost sales to third parties, not lost direct contract sales between the parties. On the other hand, because of the long term, the parties may have specifically contemplated this when the agreement was drafted.

Moral of the story: be careful about a limitation on "lost sales" that is so broad you don't have any direct damages left under the contract.

Sun-Dried Tomatoes, Anyone? Seller Recovery on Buyer Breach: Damages Based on A Lost-Volume Seller Theory UCC 2-702(2)

noreply@blogger.com (Gregory E. Robinson) — Sat, 06 Dec 2008 21:42:00 +0000

Culinary Farms, Inc. v. Mooney, 2008 WL 4889621 (Cal. App 3 Distr. Nov. 13, 2008) (Not Officially Published- Non Citable)

This case concerned the appropriate measure of damages where a buyer failed to complete the purchase of sun-dried tomatoes. Although the seller was able to recover possession and resell the tomatoes, it claimed damages as a “lost-volume seller” under Section 2708(2) of the Commercial Code.

A lost-volume seller is one who can establish that the buyer’s breach meant a lost sale that was not recouped by a resale of the product to another buyer, because the seller would have sold product to the other buyer in any event. Under these circumstances, the seller is allowed to recover its lost profits under Commercial Code Section 2708(2), because the seller would not otherwise be able to recover the economic damages suffered when the buyer refused to purchase.

In this case the defaulting buyer asserted that although the seller may have been a lost-volume seller for dried tomatoes generally, the particular product at issue was California sun-dried tomatoes, and the seller was not a lost-volume seller of this type of tomatoes. This was a good theory, and may have worked, but unfortunately for the seller, the facts got in the way. The court found that the breaching seller had not actually proved its contention, and in fact cited the defendant’s own deposition testimony against the defendant.

Unsecured Creditor's Levy on Deposit Account Defeats Prior Secured Creditor--UCC 9-332(b)

noreply@blogger.com (Jeffrey A. Robinson) — Wed, 22 Oct 2008 17:12:00 +0000

In a reported case of first impression under California law, the California Court of Appeal, First District, Division 5 ruled that an unsecured creditor's garnishment or levy on funds in a deposit account will defeat the prior secured creditor. Orix Financial Services, Inc. v. Kovacs, 83 Cal. Rptr. 3d 900, 08 Cal. Daily Op. Serv. 12,845 (Sept. 30, 2008).

The debtor defaulted on $1.5 million in secured debt held by Orix. Kovacs independently obtained a judgment against the same debtor for about $150,000. Kovacs was an unsecured creditor. In traditional analysis of creditors' priorities, Orix's claim was superior to Kovaks. However, Kovacs obtained a writ of execution and levied on the debtor's deposit accounts. The deposit account holders paid the funds to Kovacs. The prior secured creditor Orix sued the unsecured creditor Kovacs for unjust enrichment and imposition of a constructive trust.

The court of appeal ruled that the unsecured creditor was entitled to keep the money as a "transferee" under California's version of UCC 9-332(b) (California Comm. Code 9332(b)), which states:
"A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party."

The term "transferee" is not defined. However, considering the underlying commercial policy favoring certainty in routine deposit account transactions--most of which involve transfers to unsecured creditors--the court ruled that the levying creditor should fall within the definition of "transferee" within UCC 9-332(b).

UCC Warranty Limitations--New Article in Orange County Lawyer Magazine

noreply@blogger.com (Jeffrey A. Robinson) — Tue, 07 Oct 2008 18:50:00 +0000

Our blogger Gregory E. Robinson published an article in the October 2008 edition of Orange County Lawyer Magazine, the official publication of the Orange County [California] Bar Association. "Beyond the Battle of the Forms--UCC Warranty Limitations: 'How to Make 'Em and How To Break 'Em," Vol. 50, N0. 10, Orange County Lawyer, page 18 (October 2008). The article discussed common situations in which express and implied warranties arise (UCC Sections 2-213, 2-314, 2-315). Sellers' exclusions and limitations of warranties are also considered (UCC 2-306) along with buyers' strategies to defeat these restrictions. Buyers' strategies include omission of these limits or exclusions from the contract (Section 2-207), subsequent dealings between the parties giving rise to new obligations, and failure of an essential purpose. (UCC 2-719). We have added a link to the article. Copies can be ordered from the Orange County Bar Association website, http://www.ocbar.org/ or from Robinson & Robinson, LLP.

Implied and Express Warranty Claims: Duck Feet Have No Class

noreply@blogger.com (Jeffrey A. Robinson) — Mon, 06 Oct 2008 17:08:00 +0000

The Central District of California recently denied class certification in a lawsuit alleging breach of express warranty and implied warrant of merchantability. Gable v. Land Rover of North America, 2008 WL 4441960 (C. D. Cal. Sept. 29, 2008)--not reported in F. Supp. 2d. Plaintiff claimed that Land Rovers sold in Michigan in 2005 and 2006 had a defective "toe-out" condition in the rear tires, causing the vehicles to be "duck-footed." The court found that many different circumstances can cause duck-footed misalignments. Without "individual inquiry" there was no way to determine whether the duck-footedness was caused by the manufacturer or driver. The court also noted that plaintiff had not shown that even a majority of the class vehicles experienced the defect. These two factors caused the judge, Andrew J. Guilford, to rule that the plaintiff had "no class." The opinion noted that courts often split over the issue of class certification involving defects that can be caused by the manufacturer or owner. (See Sammuel-Bassett v. Kia Motors America, Inc., 212 F.R.D. 271, 282 (E.D. Pa. 2002) [class certification granted in premature brake wear case]; Kia Motors America Corp. v. Yvonne Butler, No. 3D05-11455 (Florida Third District Court of Appeals, 2008) [class certification denied in case involving the exact same claims.]) Maybe the Ninth Circuit will have to determine whether duck feet have no class.

Statute of Limitations—Student Loans—6 years under Section 3-118

noreply@blogger.com (Jeffrey A. Robinson) — Thu, 25 Sep 2008 18:21:00 +0000

When enforcing or defending an action on a promissory note, remember that the UCC may specify a longer statue of limitations. A student borrower tried to block enforcement of her student loans by asserting the basic 4-year statute of limitations for breach of written contracts (California Code of Civil Procedure Section 337)*. She appealed the judgment against her and lost. In an unpublished decision, the California Court of Appeal, Section District (Los Angeles) found that the 6-year statute of limitations of Ca. Comm. Code Section 3118 (UCC 3-118) applied. The promissory notes were considered “negotiable instruments” covered by the longer statute of limitations. Under Section 3-106, reference to the “disclosure statement” in the notes did not make them “conditional” and therefore non-negotiable. Education Resources Institute v. Yokoyama, 2008 WL 3906834 (Aug. 26, 2008).

(*with thanks to Anonymous for correcting our mistaken reference to the Civil Code.)

Arbitration Wars and the UCC – Unconscionability and Limits on the Arbitrator’s Powers

noreply@blogger.com (Gregory E. Robinson) — Thu, 10 Apr 2008 02:11:00 +0000

A recent California appeals court decision highlighted some interesting issues concerning the interplay between arbitration and the Uniform Commercial Code.

The case is J.C. Gury Company v. Nippon Carbide Insurance (USA) Inc. (2007) 152 Cal. App. 4th 1300, 62 Cal. Rptr. 118. Here, a manufacturer brought an arbitration proceeding against its supplier (Nippon Carbide). Apparently the manufacturer had encountered problems with the supplier's product after the supplier moved its production operations from Japan to China. The contract contained an arbitration agreement. The arbitration clause provided that the arbitrator would not have the power to change, modify or alter any expressed term of the contract. The contract also contained a fairly standard limited warranty and a limited remedy providing that the buyer's sole recourse was the replacement of the defective product.

In the arbitration proceeding the buyer sought consequential damages greatly in excess of the replacement costs, and attacked the warranty and remedy limitations as unconscionable. The arbitrator concluded that the exclusion of consequential damages would be unconscionable, based upon the lengthy course of dealing between the parties, the absence of any discussion concerning a warranty disclaimer or damage limitation and Nippon Carbide's superior bargaining position.

Nippon Carbide sought to overturn the arbitration award based on a claim that it was in excess of the arbitrator's powers. Its argument was founded on the contract clause prohibiting the arbitrator from varying the terms of the contract.

The court ruled against the manufacturer, noting that Nippon Carbide had never raised this issue with the arbitrator. By failing to raise a claim of limited powers with the arbitrator, Nippon Carbide had waived its right. In so doing it unequivocally submitted the issue of unconscionably to the arbitrator, and could not thereafter complain about the result.

The obvious moral of the story: it is imperative to raise all issues directly concerning the arbitrator's powers at the actual hearing.

But the case raises some other interesting issues. For example, was the manufacturer best served by an arbitration clause in this commercial context? Would it have done better if it had been able to bring its claim before a court, especially a federal court sitting in diversity jurisdiction? In that context would it have obtained a more favorable forum for consideration of the concept of unconscionability?

A second interesting issue: the court stated, with virtually no analysis, that an arbitrator's determination of “unconscionability” would in fact violate the arbitration agreement’s prohibition on the arbitrator modifying or altering the contract. This implies or suggests that the parties are free to indirectly waive the unconscionability protections of the Uniform Commercial Code by their use of an arbitration clause of the type found here. Did the court fully intend this result? Under the analysis suggested by this court, a party using an arbitration agreement could be free to impose contractual terms that would otherwise be oppressive, burdensome and unconscionable under the standards of the Uniform Commercial Code.

When your Mercedes-Benz C320 lurches, smells and clanks, check your “implied warranty” under Sections 2-314 and 2-315

noreply@blogger.com (Jeffrey A. Robinson) — Fri, 21 Mar 2008 23:50:00 +0000

An interesting appellate case upheld a jury verdict in favor of a woman who bought a new Mercedez-Benz C320. Isip v. Mercedes-Benz USA, LLC, (Sept. 12, 2007; Review Denied Nov. 28, 2007) 155 Cal. App. 4th 19.

The buyer’s new car soon car began to issue headache-inducing smells, lurch like a slingshot when shifting gears, hesitate and pull when slowing down, besides tugging, clanking, leaking and emitting white smoke. Nobody seemed to be able to fix it even though the car could be driven.

The buyer claimed breach of the implied warranty of merchantability applicable to consumer goods under the Federal Magnuson-Moss Warranty Act and California Song-Beverly Consumer Warranty Act. The jury found for the buyer after being instructed that to meet the implied warranty of merchantability, the car must be “in a safe condition and substantially free of defects.” Pp. 23, 25-26. Mercedez-Benz USA argued that the verdict should be reversed because the proper test of merchantability was the lower standard of whether the car was “unfit for ordinary transportation.” P. 25.

The court relied on the Uniform Commercial Code Sections to uphold the jury instructions. UCC Section 2-314 (Ca. Commercial Code 2314) provides that goods must be “merchantable” and “fit for the ordinary purpose” for which they are intended. UCC Section 2-315 (Ca. Commercial Code 2315) establishes an implied statutory warranty of fitness for a particular purpose. The court held that the “core test of merchantability” is “fitness for the ordinary purpose for which goods are used.”

Mere transportation from point A to point B did not meet the warranty of merchantability. The court rejected the lower “fitness for ordinary transportation” language. The buyer did not have to settle for a vehicle that “smells, lurches, clanks, and emits white smoke over an extended period of time.” P. 27. Especially when the buyer paid more than $46,000 for the car!

Judges Are Not Like Pigs: UCC 2-725 allows short 1-year statute of limitations for breach of warranty claim

noreply@blogger.com (Jeffrey A. Robinson) — Fri, 01 Feb 2008 17:59:00 +0000

What is the statute of limitations for breach of warranty claims? Under UCC 2-725 (1), the default limitations period is the later of four years from the breach, or one year from discovery. The parties can subsitute a shorter limitations period (at least in non-consumer settings).

California's version of UCC 2-725 (Ca. Comm. Code Section 2275(1)) provides a four year statute, but the statute accrues when the breach occurs regardless of knowledge of the breach. Ca. Comm. Code Section 2275(1), (2). This period can be shortened to one year by agreement of the parties (not restricted to non-consumer cases).

In a recently released unpublished opinion, Mendelson v. Country Coach, Inc., (Nov. 19, 2007) (U.S. D. Dt., Central Dist. of Ca., No. EDCV 06-00572-SGL (OPx), 2007 WL 4811927) the court came down on the side of the manufacturer of a motor home. Although the claim was to "enforce a warranty" under California's Magnuson-Moss Warranty Act, the court applied UCC 2-725 (California's version, Ca. Comm Code Section 2725). The court enforced a contract term that required "any action to enforce this express or any implied warranty" to one year of the "expiration of the warranty." The purchaser complained that the statute should have been tolled, or equitably estopped, while some forty attempts to repair the vehicle were undertaken. The court denied this argument, since the purchaser's evidence did not clearly establish that these involved the same or related problems. Judge Stephen G. Larson declined the purchaser's suggestion that he review the service record in evidence: "judges are not like pigs, hunting for truffles buried in the record" --quoting Albrechtsen v. Board of Regents of University of Wisconsin System, (7th Cir. 2002) 309 F. 3d 433, 476.

Interestingly, the opinion does not discuss a potential discrepancy between the one year limitations period contemplated by Section 2275(1) and the contract terms in the case. Section 2275 states the parties may reduce the limitations period to "not less than one year," presumably "after the cause of action has accrued." The Country Coach contract tied the one-year claims period to the "expiration of the warranty." The opinion appears to assume that, a breach of the warranty, if it occurs at all, would occur before the expiration of the warranty period. If the repair is unsuccessfully undertaken outside he warranty period, for a defect that first became apparent within the warranty period, one might argue that the breach ocurrred when the repair failed, and that the one-year period for a claim should accrue then. Under these circumstances, the contractual limitation of the period to one year from the expiration of the warranty might be unenforceable under California's Section 2275, as being less than one year from the date the breach accrued.

Take away for the manufacturer: make sure the contract includes a one-year limit on claims for breach of warranty.

Take away for the purchaser: (1) file a claim sooner, rather than later!; and (2) make sure you present a detailed explanation of all events that have any bearing on the occurrence of the breach, tolling while repairs of the same or related defect are underway, and any equitable estoppel, because "judges are not like pigs" and they don't want to root around in the record looking for evidence that may save your case.

UCC § 4A-505. Zengen is a Zinger! Recovering money taken with an unauthorized payment instruction.

noreply@blogger.com (Jeffrey A. Robinson) — Thu, 03 Jan 2008 00:18:00 +0000

UCC § 4A-505 requires a bank customer to “notify the bank of the customer’s objection” within one year.

Suppose your company employee forges the CEO’s name and faxes the bank payment instructions directing the bank to transfer funds into the employee’s own account. You want the bank to credit back the funds. Is it enough to tell the bank that the transfer was “fraudulent and unauthorized” like one defrauded bank customer did? In Zengen, Inc. v. Comerica Bank, 2007 WL 4424947 (Dec. 19, 2007), the court came down in favor of the bank and said, “NO.” The customer also should have informed the bank that it “objected” to the bank’s conduct in processing the transfer and should have specifically asked for the money to be transferred back into its account. The customer should also have notified the bank that it erred in following the established security procedures.

In other words, it is not enough to complain; you must ask for what you want. Don’t just notify the bank of the loss; ask for the money back or submit a claim. Since a bank is not necessarily liable for fraudulent or unauthorized funds transfers unless it fails to follow established security procedures, UCC § 4A-202(b), the court found that mere notification of a fraudulent or unauthorized transaction would not necessarily imply a claim against the bank.

Zenger is a Zinger for the customer. Most cases will not involve this situation because if a customer goes to the trouble of notifying the bank about an unauthorized funds transfer, the customer will also ask for the money to be credited back into the account.

The case was decided (in an unreported and uncitable decision) by the California Court of Appeal on remand from the California Supreme Court’s earlier decision in Zengen, Inc. v. Comerica Bank, (2007), 41 al. 4th 239, 59 Cal. Rptr. 3d 240. The case involved California’s UCC equivalent, California Commercial Code Section 11505.

UCC 2-312--"Rightful Claim" of Breach of Warranty Against Patent Infringement May Be Asserted At Outset of Lawsuit

noreply@blogger.com (Jeffrey A. Robinson) — Wed, 12 Dec 2007 19:02:00 +0000

What is a “rightful claim” of patent infringement, allowing the buyer to sue seller for breach of the UCC 2-312 statutory warranty against claim of infringement?
The 2-312 statutory warranty against infringement may be triggered when the purchaser is sued, even if the purchaser denies the infringement claim. Phoenix Solutions, Inc. v. Sony Electronics, Inc. (December 6, 2007), 2007 WL 4287546 (US D. Ct., N. Dist. CA; Judge Marilyn Hall Patel). Phoenix sued the buyer (Sony) for use of an infringing product (software products for an interactive voice response system). Buyer answered Phoenix’s complaint by denying liability and infringement. Buyer also filed a third-party complaint against the seller of the software (Intervoice), asserting that seller breached the statutory 2-312 breach of warranty against infringement. The seller moved to dismiss under Rule 12(b)(6), arguing that the statutory warranty only covered “rightful claims” of infringement, and that since the buyer had denied any infringement, no “rightful claim” had been asserted. Since the complaint against infringement cast a “substantial shadow” over the title to the product, the Court allowed the purchaser’s lawsuit to proceed. The Court held that the “rightful claim” standard of UCC 2-312 was satisfied because the buyer alleged that plaintiff’s lawsuit “gave rise to a colorable claim of patent infringement,” even though buyer was “denying the ultimate merits of the claim.”
The Court also held that the buyer need not wait until the ultimate infringement is adjudicated before asserting the breach of warranty under 2-312. Citing the UCC comments, the Court held that “the buyer’s remedy arises immediately upon receipt of notice of infringement.”
This was an unusual case because the seller and the plaintiff agreed that seller had not infringed the plaintiff’s patents. Seller presented a stipulation with plaintiff that the seller’s software (in the unmodified state in which buyer purchased it) was not infringing, and that the buyer’s modifications caused the infringement. However, the court found that these facts were disputed by buyer and could not be resolved in the context of a motion to dismiss—which only covers the pleadings.
Does UCC 2-312 impose a duty to defend or merely to indemnify? Presumably, a court would not ultimately find that the UCC 2-312 warranty had been breached (giving rise to damages) merely by the filing of plaintiff’s lawsuit, and if the buyer or seller ultimately proves no infringement, there would be no breach of the statutory warranty. (However, this was not discussed in the opinion and I have not checked into this point in other cases.)
How to avoid the lawsuit entirely? UCC 2-312 allows the parties to exclude the warranty at the time of sale with specific language. UCC 2-312(2), (3).
Note: The opinion (Phoenix Solutions, Inc. v. Sony Electronics, Inc. (December 6, 2007), 2007 WL 4287546) cites 2-312(3), which is the form of UCC adopted in California. This corresponds to the official UCC 2-312(2).