Application of the Uniform Commercial Code - Essay Example

4321 words Running head: The Uniform Commercial Code (UCC) Name: University/College: Course: Lecturer: Date: Application of the Uniform Commercial Code Introduction The UCC forms the basis of the United States commercial law. The UCC ensures that all negotiations and agreements are carried out as they should, and in essence, regulates the commercial sector. This is necessary, as there are individuals who might not necessarily be honest, and would therefore seek to profit from other people. This paper is a series of essays that focus on the UCC, particularly Section 9. The paper has two main sections of interest: section one focuses on secured transactions, that is how one can use their personal property as collateral when trying to obtain a loan. It will also focus on how disputes between several claimants can be resolved, if their debtor has defaulted from paying what they owed. The second section is the commercial paper which focuses on creation, transfer payment and liability. As the essays will prove, the UCC is important as errors, such as negligence, forgery, and misrepresentation can lead to huge economic losses, meaning that it does regulate the system, ensuring at least that there is fairness in all transactions. Question one Massive dynamics seeks to obtain a loan worth $ 1, 000,000 from Octopus National Bank, and offers the following items as collateral: 1. Massive Dynamics offers ten acres of land which it uses to conduct product safety tests in Arizona. Article 9 applies in this case, as specified under section 9-203. It can be classified as tangible collateral, as it is a piece of land. It should however, be noted that the land is located outside Texas, in Arizona to be specific, and as such, is under a different jurisdiction. This means that a different law applies in this case (Section 9-311). In order to perfect security interest in that piece of land, ONB must complete the fixture filing in Arizona (Section 9 – 316). This is to ensure that it is listed in the certificate of title, detailing Massive Dynamics as debtor. This means that in case Massive Dynamics is unable to pay back the loan, ONB will be in a position to possess the land, even if it is not in Texas. Alternatively, ONB can perfect its interest in the piece of land by securing the proof of ownership. This, when it comes to a piece of land, is the title deed. Massive Dynamics should list ONB as the creditor in the certificate of title, which gives ONB an exclusive right over the collateral (Section 9 – 313(a)). This method of perfection is recommended as ONB has the direct control over the property. This means that in case a conflict of interest arises, ONB will have no cause to worry as it will have the first in priority right (Section 9 – 314(b)). They can not lose the land to others in that case. 2. Crops growing on 100 acres of land in Kansas which Massive Dynamics farms for use by its employees. First of all, Article 9 applies, and classifies the crops as consumable goods (Section 9 – 334). The crops grown on the land are solely used for consumption by employees of Massive Dynamics. In addition, the said crops are dependent on the elements. If for example, there is a hail storm that destroys all the crops grown, then ONB will be disadvantaged. In my opinion, crops are not necessarily the best form of collateral to offer due to the fact that one cannot be entirely certain that they will mature and be harvested in good form. However, Massive Dynamics has offered the above crops as collateral. Therefore, ONB has no option but to accept. They can perfect the crops by first of all filing a financing statement in Kansas as that is where the land they are grown in is located (Section 9 -315(a)) as read with Section 9 – 311(b)). When this is done, the two firms should enter into an agreement about how much, or what part of the proceeds ONB can have control over. This is an important aspect, as the crops are not for sale, merely for consumption by employees of Massive Dynamics. This agreement will ensure that in case Massive Dynamics defaults, ONB will have priority over the proceeds of the crops (Section 9 - 334). 3. A certificate of 20,000 shares of Massive Dynamics stock. Shares are classified under investment property that is Section 9- 102 (49). In order to perfect this security interest, ONB should first be aware of the exact market value of each share. This will help them determine the value of the total number of shares Massive Dynamics has proffered. However, shares are subject to fluctuation, meaning that their real value today may not be their value after a few hours, much less a few months. ONB can perfect the above security interest by filing a financing agreement (Section 9 – 312 (a)). In addition, it can perfect a security agreement by possessing the certificate of title that Massive Dynamics issued to them. This is consistent with Section 9-313 (a). This in point of fact, is the recommended method. Securing the certificate of title gives ONB the right to dispose of the shares in the way it sees fit. This means that they have a greater control over what happens to the shares and what does not. 4. A Megalon computer which Massive Dynamics uses on a day to day basis as it runs its company operations. Electronics are catered for under Article 9, as stated in Section 9-203 (b). The collateral can be described as business equipment. In addition the computer is used to maintain accounts receivable and to manage Massive Dynamic’s payroll. This means that it is a computer that is extremely important to the company. In addition, it uses software that is licensed, whose value is maintained as a chattel paper. Under article 9, the software can be described as intangible property (Section 9 – 102(11) read with Section 9 - 330). ONB can perfect this security interest by filing a financing statement. Section 9-104 states that intangible property, for example chattel papers can be perfected by control. This is whereby ONB can get its name included in the list of owners, meaning that in case there are conflicting interests, ONB will have priority over the computer. This is the method of perfection that is recommended. 5. A central air conditioning system installed in Massive Dynamic’s manufacturing facility in Michigan. Article 9 applies in this case, and the collateral can be classified as business equipment (Section 9-203(b)). In order to perfect this collateral, ONB has the option of filing a financing statement. As the system is not in Texas, but in Michigan, ONB needs to do the filing in Michigan. This is to ensure that they have jurisdiction over the system, in case of a default. Not filing in Michigan will mean that in case Massive Dynamics does default, ONB will not have the right to possess the system, as it is not within Texas (Section 9 – 301(a)(3)(A)) 6. A limousine used by the president if Massive Dynamics to show potential clients around its facilities. Section 9-311(a) governs security agreements relating to automobiles of any kind. ONB has three ways of perfecting the security interest. The first way is by filing a financing statement (Nowka, 2009). In addition, ONB can get its name added to the certificate of title. Alternatively, ONB may choose to possess the security. This can be done by taking the limousines logbook, or it may decide to possess the car, taking it from Massive Dynamics. The advisable method is to possess the logbook from Massive Dynamics, and also to get its name on the certificate of title. This will give ONB priority over the vehicle. Question 2 1. The office table. The table was an inventory in Gloria’s depot until such a time as Sara bought it. This move by Sara means that Gloria no longer had any control over the table. When the table was brought back into the depot, it still belonged to Sara, despite the fact that Gloria had a 10% interest in it. Though Tom and ONB have perfected interests, this is limited to Gloria’s property. On the other hand, Willy has an unsecured interest, and even if the table belonged to Gloria, he would still not have the first priority over her items. Section 9-317(b) applies in this case, meaning that Sara retains priority in the table. 2. The Oriental rug. Gloria bought the rug from Tom who has a secured interest in the inventory in Gloria’s depot. The security interest that Tom has includes specifically, the Oriental rug. On the other hand, ONB also has a security interest in Gloria’s entire inventory that includes all the assets acquired after their agreement. In addition, Willy has an unsecured interest in all of Gloria’s property. However, as Willy has an unsecured interest in the rug, he cannot be considered in the ownership battle. This means that only Tom and ONB, who have a secured interest in the rug, are contenders for its ownership. Tom enjoys a priority over ONB as a result of the specificity of his agreement with Gloria: he had security interest over the Oriental rug and over the rest of her property. However, ONB perfected the interest way before Tom did, ensuring that the Bank is given priority over Tom (Section 9-339, read with Section 9-322) as a result of being the intermediary secured creditor. 3. The portrait of David Crocket. ONB perfected their security interest in Gloria depot’s entire inventory on January 3rd. Tom, perfected his interest in the very same inventory on February 15th. On the other hand, Willy, who was an unsecured creditor moved to levy all of Gloria’s assets on February 22. In this case, it may be said that on that ONB has priority over the portrait as it filed the financing statement before either Tom or Willy did. Willy might have had the priority over Tom had he secured the loan. However, this was not so, and as such, Tom gets the priority over Willy. Consequently, ONB has the priority over the portrait (Section 9 – 334(i) (vi)). 4. The antique roll top desk. Maude bought the roll top desk form Gloria on February 20th. This was after ONB had perfected the security interest on Gloria’s entire inventory on January 3rd by filing a financing agreement. Tom has a limited interest in the desk, as he perfected his interested after Maude had bought the table. On the other hand, Willy levied Gloria’s inventory two days after the table had been bought. Not only does this mean that he has no interest over the table, but he is also unsecured, meaning that he will be given the last priority. Nevertheless, ONB does not have priority over the table as Gloria sold it to Maude in good faith, meaning that Maude became the owner of the table the moment she paid the amount that was required of her in full. It passed from Gloria’s hands to hers (Section 9-317(b)), and as ONB only has an interest over Gloria’s property and the table belongs to Maude, it has no priority over it. Therefore, Maude has the full rights, control and priority over the table. Question 3 Maria failed to pay Big Auto Sale the amount she had written on the promissory note, and as a result, the Company hires Expert Repo to repossess the vehicle, a Subaru Forrester from her. Accidentally, Paul, an employee from Expert Repo tows the vehicle form Maria’s compound without being aware that her two children were in the back of the car. This prompts Maria to react and call 911 and her husband, stating that her children were kidnapped. Clearly, despite the fact that this is what she thought, it was not true. Section 9-609(a) allows for repossession of goods that have been defaulted without having to inform the concerned party. This means that Expert Repo did not owe Maria any notice before deciding to repossess the vehicle. They cannot therefore be held accountable for the action they took. This means that Maria does not have a cause of action against them as they did what the law allowed them to do. However, it can be stated that not finding her children where she expected to find them gave Maria psychological torture. While Expert Repo did what they were supposed to do, they were meant to do this without causing any distress to the debtor (Section 9 – 609(b) (2)). This fact gives Maria grounds for filing a law suit against Expert Repo. All she has to do then is to prove beyond a reasonable doubt that in fact, the actions of Expert Repo, through its representative Paul caused her untold misery in the few minutes that she thought her children were missing. While on duty, Paul was acting on behalf of the company he was employed by, meaning that anything he did when on duty was done for his company. He cannot therefore be held personally responsible for what he did in his capacity as a representative of Expert Repo. Question 4 1. Signature is computer- generated. Section 9 – 203(b) states that it is not necessary for a promissory note to have a handwritten signature. Instead, it may be computer-generated. This means that indeed, ONB can buy the note. However, it may not be advisable for ONB to buy the note as really, just about anyone might have generated the particular signature, and made it seem as if someone else did. This means that in case it was a matter of stolen identity, ONB might be sued for endorsing a note without ensuring that the signature was generated by the person who wrote the note. 2. The note is explicit in stating who the note is to be paid to, how much is supposed to be paid, and under what conditions. The note is conditional and thus, cannot frustrate ONB in when it presents it for payment. I would therefore advice ONB to purchase the note. 3. The note is subject to certain unspecified conditions that the writer and the payee. The question then becomes, what sort of agreement did the two have? Under what exact conditions was it to be paid? As we are unsure of what they had agreed on, it would be unwise to purchase the note. 4. The note is in payment for a Sony television purchased from the maker. The note is clear and precise, and unlike the one above, expresses for what reasons it is being paid. This way, we are aware that it is not in payment of a sofa set, or some other undefined purchase that we are not party to. As a result of the clarity of the conditions expressed, it will be in order for ONB to purchase it. 5. The note is payable from the proceeds of my 2011 cotton crop. This note is clear and to the point. Only the proceeds from the cotton crop, not any other one, are to be used. And only from the crop of 2011. We cannot question the legality of the note from that point of view. However, I will be hesitant to advice ONB to buy it. Crops, as we well know, are subject to the elements. What if there is no rain for a few months and all the crops dry up? Or conversely, what if there is too much rain and the entire crop is lost? If this were to happen, then the payer will have no cause to pay ONB, and ONB will have no way of coercing him to pay. The argument will be, the note clearly stated a specific produce from a particular period, and as it is lost through no fault of the payer, he cannot be held responsible. I will therefore advice ONB not to buy it on these grounds. 6. The note provides for interest of 2% above US prime rate of interest. The note is specific, stating that the interest to be levied is 2%. In addition, it has specified which rate is to be followed when levying this interest and that is the US prim rate. This leaves us with no illusions as to what should be done. I therefore advice ONB to buy the note. 7. The note states that the payment to the note should be paid in Euros, not any other currency. This is an express condition, and is thus very inconveniencing. This is because, not everyone will be comfortable being paid in euros and may prefer being paid in dollars. I would therefore advise ONB not to buy the note. 8. While the Maker of the not is allowed to extend the period of time by which to pay the note, the uncertainty that comes form the waiting is what will make me advice ONB not to buy the note. The time that will take to pay the note is subject to the Maker’s whims and as such, may take longer that necessary to pay the note he has written. 9. The weather is nice today is a note that does not say much of what is important. For example, who is to pay for the note and how much? It denotes a lack of seriousness on the part of the maker, and as such, I do indeed advice ONB to dismiss it as on the grounds that it is uncertain. 10. The note is to be paid to Walter Bishop. It states conditionally who is supposed to be the bearer, and therefore the payee to the note. As such, ONB is encouraged to buy the note as the conditions are clear. Question 5 1. The contract between Maker and Seller existed until the time that Maker discovered that the goods she had offered the instrument for were faulty. She must have made this fact clear to Seller, hence the failure in consideration. While being aware of the situation, Seller went ahead and issued the instrument that, at the moment, held no value. He acted in bad faith and as such, should be held liable for the distress that he caused George, and therefore Sam. George accepted the instrument in good faith, and gave it to his nephew as a birthday present. Despite the fact that Seller acted in bad faith, giving George an instrument that he was well aware would not get paid, George is a holder in due course as a result of the negotiation. When George transferred the instrument to Sam, he put it in his possession, meaning that Sam was the one to demand for payment form Maker. This makes Sam a holder in due course. 2. When Sam decides to go to Maker to get the payment that she was supposed to give in place of the instrument, she refuses as a result of the faulty goods. If Sam sues her, the probability of his winning the suit might not be high, but he has a chance. This is because Maker did not repossess the instrument as she was supposed to. The question then is, does the fact that she did not repossess the instrument point to the probability of her not having returned the faulty goods? If this is the case, then it can be argued that regardless of the fact that the goods were faulty, she should have returned them to Seller, and made him accountable for breach of contract. Keeping the faulty goods still gives Sam a chance of winning the case. On the other hand, if Maker did return the faulty goods, then Sam has no chance at winning. The reason being that as the goods were faulty and as they were returned to the owner, he has no hold on her. Neither Seller nor Sam can then claim compensation because of the goods that had been retained. It would be better if Sam sued Seller instead for breach of contract and acting in bad faith. This way, he can be compensated. Question 6 1. ONB refused to honor the check that CSB forwarded to them for collection. This was the right thing to do as the check was indorsed to both Betty and Bill. Consequently, both parties should have signed the check to ensure that there is no conflict of interest. Perhaps Betty was not aware of the transaction between Bill and Dan. Or she might have been aware, but was against the whole transaction. Either way, in order for the check to be honored by ONB, her signature was necessary, and without it, there was no way that ONB would have honored the check. This move by ONB raises questions about the competency of CSB. It is bewildering to note that despite the fact that CSB is a bank and is aware of the rules regulating such transactions, it still went ahead to cash the check. This is utter negligence and CSB should be held responsible for this. The bank should have been more careful. 2. CSB properly debited Dan’s account for $500. This was the right thing to do as ONB had refused to honor the check, meaning that in fact, they had given Dan money he did not have. It was only right that they take back what was theirs. Though in point of fact, they should never have credited the money into Dan’s account in the first place. 3. The contract between Dan and Bill entailed the exchange of an antique camera for $500, money that was paid in the form of a check. Bill was aware that the check had been indorsed to both him and Betty, but whether or not he was aware that they were both supposed to indorse it for Dan to be paid is debatable. Regardless, he had in essence, gotten Dan’s camera for free, and this is a fact that was not part of the agreement. If Dan decided to hold Bill responsible and claim damages from him, he will be in the right. On the other hand, he can decide to repossess the camera as Bill had defaulted in paying (Section 9-609(a)). This is a move that is completely legal, especially if Bill does refuse to pay what he owes him. 4. The contract was between Dan and Bill. There is nothing to suggest that Betty was a party to the whole agreement. There is no evidence at all in fact; that Betty was aware of what was going on between the two. Therefore really, there being no contract between the two, there was no breach of any contract, meaning that Dan has no issues whatsoever with Betty. 5. Adam’s contract was with Bill and Betty. He paid what he owed them for the work they had done. There was no contract between him and Dan in whatever form that may be and consequently, Dan has no rights against him. If the check had bounced when Dan went to cash it, then there would have been a problem. As this was not the case, however, then Adam is in the clear. Question 7 1. The check was drawn on ONB, meaning that Stan had an account with the bank, and as such, his account needed to be debited for that amount. The thief cashed the check at CSB. It should have been up to CSB to ensure that indeed, the person that cashed the check was the one to whom it had been written. This however was not the done. Consequently, they paid the money to the wrong person. Therefore if any bank is to accept responsibility for the theft, it is CSB, not ONB, as they are the ones which cashed the check. 2. Can ONB recover the money from CSB? The answer is, indeed, it can. The reason for this answer is that CSB is the bank that cashed the check, meaning that it was their negligence that allowed for the money to be lost. They owe ONB the same duty of skill and care that they would have awarded their customers. This means that yes; they should indeed reimburse ONB for their mistake. 3. No, Julia has no claim against Stan. The reason for this is that Stan had indorsed the check to Julia, fully expecting her to cash it. He had sufficient funds in the bank to cover the payment of the check, for the equipment he had bought form Julia (Nowka, 2008). It was not his fault then that due to Julia’s negligence; the check got lost and was cashed. Therefore, he does not need to pay Julie any more than what he had already done as what he had paid in the check was sufficient to complete the contract there was between the two of them. 4. Julia does not have a claim against ONB as the check she was supposed to have been sent was a refund, and does not require identification by the drawee. This means that they did the right thing by sending the money to the person who had signed the check. However, it would have been prudent for ONB to have ascertained that indeed, the signature at the bottom of the check was Julia’s. This way, they would not have given the money to someone who did not deserve it. 5. Julia does have a claim against Elroy Electronics for the rebate. It was certainly not her fault that they sent the check to the wrong address, in fact, it was theirs. They should have been more careful to ensure tat they counterchecked the address they were sending the check to before posting it. It will only be fair therefore; if they refund Julia the money they owed her. Conclusion The United States Commercial Law is an important aspect of business, and should therefore be applauded for the fact that it streamlines the industry, and helps ensure that the law is followed as it should be. References Khan (2003) Secured Transactions – Outline. Richard H. Nowka, (2009) Mastering Secured Transactions UCC Article 9. Carolina Academic Press. Richard H. Nowka. (2008) Mastering Negotiable Instruments: UCC Articles 3 and 4 and other Payment Systems. North Carolina: Carolina Academic Press. Uniform Commercial Code. Retrieved from http://www.Law.Cornell.Edu/Ucc/Ucc.Table.html. Read More