Application of the US Commercial Law - Case Study Example

4899 words Running head: United States Commercial law Name: University/College: Course: Lecturer: Date: Application of the US Commercial Law Introduction The United States Commercial law is lauded as one of the best and most organized in the world. These laws help streamline the business world ensuring that all activities are carried out with proper reference to the word of law and due diligence (Nowka, 2009). This has ensured that fraudsters and other people who would benefit from those who have worked so hard are not given an opportunity to defraud them. Under the US Commercial Law lies the Uniform Commercial Code (UCC). The UCC forms an integral part of the Commercial Law and ensures that business transactions are carried out as they should be. Ranging from article 1-9, the UCC focuses on secured transactions and payments. Secured transactions simply mean people using their property as collateral in order to get a loan. The UCC forms the basis of this paper, whose main focus is secured transactions and payments. Based mainly on Article 9, but also on the other articles, the paper is a series of questions that seeks to address issues related to secured transactions and payments. The question then focuses on how to create and enforce a security interest as well as how to resolve disputes between competing claimants. The payments section focuses on the creation, transfer, payment, and liability on commercial paper including the concepts of negotiability, negotiation, holders in due course, forgery, and alteration. The paper is an application of the aforementioned laws, and as such, looks at case scenarios that are fictional of course, but could actually happen in real life. It seeks to help us understand and therefore be in a position to apply the said laws if we are to ever encounter the issues presented, or those that are similar. This way, the US Commercial Laws become applicable and real, not just written on a piece of paper. Question 1 ONB seeks to understand how the collateral provided by Massive Dynamics for the loan it is borrowing should be perfected to ensure that in case Massive Dynamics defaults in its loan repayments, ONB will be in a position to confiscate what they were given by Massive Dynamics. A.10 acres of land in Arizona which Massive Dynamics uses to conduct product safety tests. The land is ten acres and is classified under Article 9 as tangible collateral, which is land in this case. This is classified under Article 9, Section 203. This means that indeed, Article 9 applies with regard to the piece of land as collateral. To perfect a security interest in the land, there are several things ONB can do to ensure that it has priority in case of a default in repayment of the loan. One of the ways it can do this is by filing a financing statement, which will list Massive Dynamics as debtor to ONB in the certificate of title. However, ONB must ensure that this filing is done in Arizona (Section 9 – 316). Failure to do this can ensure that ONB will lose the land due to the fact that they will not have jurisdiction in Arizona, as ONB is located in Texas. The second method of perfection which ONB is to take possession of the certificate of title that entitled Massive Dynamics the land in question. In our case, the certificate of title is the land title deed. The title deed is the proof that indeed, Massive Dynamics is the sole owner and therefore manager of the 10 acres of land in Arizona. It is legal for ONB to do the above as specified under Section 9 – 313(a). It must then ensure that Massive Dynamics properly signs and endorses the title to ONB to ensure that they have the first priority in case there is a conflict over the land. Having the proof of ownership also gives ONB priority over other institutions that might have the same kind of interest in the land. I would then advise ONB to not only file a financing statement with the proper authority in Arizona, but to take possession of the certificate of title which is a move that will give them the control over the land in case of a dispute. B.Crops growing on 100 Acre piece of land in Kansas which ONB actively farms for organic food for its employees. Article 9 applies in this case as stated in Section 9-334. The products thereof are classified as consumable goods. In order to perfect the collateral, there are a few things that should be noted. First of all, the produce offered by the company is crops. Second, the crops are Kansas, and third, they are used for consumption by Massive Dynamics employees. These facts raise a few complications that ONB needs to be aware of first before it selects the best way for perfection. The fact that the collateral is consumable goods, that is crops, means that they are subject to the elements of nature. This means that as there is climate change, we can have no guarantee that they will still exist in a few months, or that the land will be able to produce the crops themselves. This makes the collateral a risky undertaking for ONB in case they are destroyed due to changes in the weather pattern and Massive Dynamics defaults in payment. Second, as the crops are in Kansas, ONB will need to file a financing statement in that state to ensure that they are given a priority over all others (Section 9 -315(a) as read with Section 9 – 311(b)). Third, the fact that the crops are meant for consumption by Massive Dynamics employees gives ONB the need to come to a certain specified agreement with Massive Dynamics. The agreement will answer questions such as to how the proceeds will be divided between Massive Dynamics and ONB. This is a fact that will be necessary as there will be no conflict of interest between ONB and Massive Dynamics’ employees in case of a default in payment. This will be true in that each party will be aware of exactly what percentage of the proceeds they are getting. Thus, filing a financing statement that has the above agreement on the disposal of the crops is the best way to perfect their agreement. C. Certificate of 20,000 shares of Massive Dynamics stock. Article 9 applies in this case as shares are classified under Section 9 – 102. Shares and stock are classified under the UCC as investment property. The shares can be perfected in several ways. One of the ways is by filing a financing statement with the proper authorities, listing ONB as a secured party with interest in the shares. This will ensure that ONB gets priority over the shares, just in case there is conflict. The second way of perfecting the security interest is by taking possession of the certificate of title that lists Massive Dynamics as the owner of the said shares (Section 9 – 313(a)). While perfecting the interest, ONB should be aware of the value of the shares they are being offered as security. Failure to do this amounts to negligence on ONBs part. This knowledge is necessary in that it will help the company be aware of the real value of what they have been given. The value of shares fluctuate with time and circumstances, and as a such, just because shares for a specific company lies at say, $20 each at one point does not mean that they will remain the same 10 hours later. This possible fluctuation in value makes it very necessary for ONB to be aware of exactly what it is they have been given. Doing this will help ONB perfect the security by control which is the third way in which the collateral can be perfected (Section 9-314 (a)). Perfection by control entails reaching an agreement whereby the dividends from the shares may be distributed between the two companies. It is therefore recommended that ONB perfect its interest in the shares by first taking possession of the certificate of title. They can also take control over the shares by ensuring that they have a say in the way the shares are handled, meaning that they will have the first priority right in case of a conflict. D. A Megalon Model NCC-1701 computer that Massive Dynamics uses to manage its accounts receivables and payroll. First and foremost, Article 9 applies in this case. The computer that is used on a daily basis by Massive Dynamics staff is classified as business equipment (Section 9 – 102 (b) (12)). However, more important than the computer itself is the software it uses to manage its Payrolls and account receivables. Software can be offered as collateral in business dealings and is thus classified under Section 9 – 102(11) read with Section 9 - 330. The software is licensed and was made with the needs of Massive Dynamics in mind. This title of ownership of the software is called chattel paper. In order to perfect the chattel paper, ONB can file a financing statement that will have its name listed in the chattel paper, with Massive Dynamics as its debtor. This will ensure that it has the first priority right in case of a conflict of interest. It can also perfect its interest by control meaning that it can have its name included on the list of owners of the software. To this end, it will be wise for ONB to perfect its interest by filing as this will ensure that it is given the first priority right in case of a conflict of interest. E. A Super Cool Model Mark VI central air conditioning unit that is installed in Massive Dynamics’ manufacturing facility located in Grand Haven, Michigan. Article 9 applies in this case as the air conditioning system is described as fixtures or goods to become fixtures (Section 9 – 334(a)). Because it is installed in a business premise and as such can be deemed to be of use in conducting the company’s business, the central conditioning system is classified as business equipment Section 9 – 102 (b) (12)). The collateral can be perfected by filing a financing statement that ensures that Massive Dynamics is listed as debtor to ONB with regard to the interest. As the interest is located in Michigan, it will be wise for ONB to perfect the interest in Michigan, to reduce the probability of losing the interest5 to a third party on the grounds of it being an external lender (Section 9 – 301(a)(3)(A)). Perfection by filing in Michigan will be sufficient to ensure that ONB does not lose out if there be any conflicting interests. F. A limousine used by the company’s CEO. Article 9 applies in this case, specifically, Section 9-311(a). The vehicle can be classified as consumable goods (Section 9 – 313(b)). Perfection can be done by first filing a financing statement. This ensures that when it comes to the car, Massive Dynamics is listed as a debtor to ONB. In addition, ONB can perfect the security interest by taking possession of the certificate of title that confirms Massive Dynamics as the owner of the vehicle. This means that ONB have its name included in the list of owners of the vehicle. In addition to having its name on the logbook, it can also take the logbook and have it in its possession to ensure that it has control over the security interest. This way, even if there is a conflict, ONB will have the first priority with regard to the vehicle. Question 2 Establishing priority in case of a conflict of interest. A. The office table. The office table was bought by Sara on January 13th; eleven days after ONB signed a security agreement with Gloria, giving them a security interest in all of her inventory, before the agreement and after. However, when Sara paid the full price for the table, it became hers legally, meaning that neither of Gloria’s creditors had any right to it as it did not belong to her. Sara returned the table to Gloria who promised her help in securing a buyer for it. This gave her a 10% interest in the table. However negligible her ownership was, Gloria was still an owner of the office table. However, both ONB and Tom had perfected their interests in all of Gloria’s property, ONB earlier than Tom. This means that in anything related to the table, it has priority over Tom as a result of the first to file rule that gives priority to one who filed for perfection first. Willy on the other hand is an unsecured creditor, which means that his rights come after those of the secured parties. However, despite the fact that Gloria has an interest in the office table, it still belongs to Sara. This means that Sara is still the owner and even despite the dispute she has the first priority rights over it. B. The Oriental rug. The Oriental rug was bought from Tom on credit, and in he filed for financing stamen that gave him rights over the office the said rug, and in all the rest of her office equipment and furnishings, which included a picture of Davy Crockett. However, ONB filed a financing statement before Tom did. This ensures that it has a first priority right over the rug. Nonetheless, the rug is specified collateral in Tom’s case. Despite this though, ONB retains the first priority right over the rug, as Section 9-504 states that it is not necessary for a creditor to be specific on all the goods that they are attaching as a security interest. Simply stating that the financing statement covers all assets or all personal property is enough to ensure that one is accorded the due priority. This means that even if Tom’s financing statement was specific to say exactly what he would have control over in case of a default, ONB still has the priority over Tom. As Willy is an unsecured party, he does not have any precedence before the other two parties. Even if he was secured though, ONB would still have precedence over him as a result of the first to perfect rule. C. The portrait of Davy Crockett. Tom has the advantage over ONB in the sense that the collateral was specified. However, ONB filed for perfection before Tom did. This means that they have the first in priority right over the portrait. As stated above, it is not necessary for one to be specific while detailing all the assets that they have a secured interest in (Section 9-504). This fact applies to this portrait too. This means that ONB has precedence over Tom in matters concerning the portrait. On the other hand, Willy has an unsecured interest in the portrait as well. Note, Willy’s interest in unsecured. When a conflict arises between two parties, one being secured and the other unsecured, the secured party has the first priority. Consequently, as Willy attached all of Gloria’s assets after ONB did, ONB has the priority over him. D. The antique roll top desk. This desk was bought by Maude on 29th February, two days before Willy attached Gloria’s assets, and ten days before Tom did. Maude was unaware of all the conflicting interests in Gloria’s assets, and she therefore bought the table in good faith. When the money exchanged hands, Maude became the owner of the property regardless of the fact that it was a security interest in the case involving Gloria. As the security interest in the above asset had not yet been perfected, Maude maintains all the right over the table, seeing that she not only paid for it, but it was also in her control Section 9 – 317 (b). This was possible due to the fact that in selling the property to Maude, Gloria ended her right of ownership over the table. This means that even while there is conflict over the table, she is the owner, meaning that the creditors have no right over it. This includes ONB who filed a financing statement before she bought the table. As Tom and Willy brought forth their claims after the table had already been bought and was in the possession and control of someone else, they have no rights over it either. Question 3 Maria bought the Subaru Forrester form Big Auto Sale and wrote them a promissory note. The agreement between the two parties probably stated how much she was supposed to pay, when she was supposed to pay what she owed, what mode she was to use, and what would happen in case she defaulted on her payments. Clearly then, she was aware of the fact that the company would repossess the vehicle in case she failed to pay them what she owed. On the other hand, Big Auto Sale owed Maria due diligence when repossessing their vehicle. It was not necessary for them to follow a judicial process in order to take away their vehicle (Section 9-609 (A) (2)). This means that they could readily repossess it without informing her of their intentions. In essence, Big Auto Sale was right in repossessing their vehicle the way they did without informing her. This means that Maria does not have a case against them for improper repossession. In the course of repossessing their vehicle, Big Auto Sale hired Expert Repo to do the job for them who were supposed to do this without breaching her peace. Their representative Paul repossessed the vehicle with Maria’s children inside, a move that made her call her husband and the police, informing them that the children had been kidnapped. Consequently, Maria does have a cause of action against Expert Repo. This, however, can only be possible if she proves beyond a reasonable doubt that indeed, in those few minutes when her children were missing, she suffered psychological harm. Otherwise, she will not be able to win in court. As Paul was just doing his job when he repossessed the vehicle, she does not have a case against him, seeing that he was there in the first place on the instructions of his employers, Expert Repo. Question 4 A. The note’s signature is computer- generated. It is not necessary for one to handwrite their signature for it to become acceptable in the eyes of the law. Doing it electronically is sufficient proof (Section 9 – 203(b)). This means that ONB can buy the note. However, I would advise against any such action on the grounds that anyone can generate a signature electronically. Just because I can sigh the president’s signature using my computer does not mean I am the president. Consequently, ONB should ask for valid proof that indeed the generator of the signature is who he claims to be. Failure to produce the proof will lead me to advise them not to buy the note. B. This note is very precise in explaining the conditions under which it will be paid. That is to William Bell, at the prize of $1000 if the author makes the highest mark in Commercial Law at La Trobe University, during the winter 2010 term. Failure to make the specified mark in that specified University in the specified exam at that specified time will ensure that the note is not paid. I would advise ONB to buy the note as they are under no illusions as to what they are getting themselves into, due to the clarity of the note. C. The note is subject to the contract signed with the payee. While the payee has been noted, there still remain a few uncertainties as to what exactly the contract entailed. For what reason did they sign the note? At how much? The above note should be disregarded as we are not Party to the said agreement. For all we know, the note was in payment of a murder that will be committed. D. The note is in payment for a Sony Television bought from the maker. This is a note that should be accepted as we know why it was written. The conditions are acceptable as a result of their clarity. E. The clarity of the note cannot be questioned. We thus know that it will be paid only from the proceeds of the cotton crop, and only from the crop of 2011. Regardless of the clarity, I would not advise ONB to buy it. As mentioned previously, crops are subject to the elements. What if, as a result of one element or the other, the crop is lost? This uncertainty in nature is what has led to my decision. This is because, in case the crop is destroyed, the maker will have no cause to pay ONB, which means that it will lose in the process. F. The note has clearly given the conditions at which it will be paid, and that is at 2% above the US prime rate of interest. As the rate of interest in US is applicable country wide, I would then advise ONB to buy it as the conditions can be managed. G. Payment must be made in Euros as any other currency is not acceptable. These conditions are express, and therefore not acceptable. The said conditions will limit the bank when it comes to payment. For example, what if it is more comfortable being paid in dollars, as it located in the US? The note is subject to the author’s owner decisions, and as they are restrictive to the buyer, it is not advisable then to buy it. H. The maker of a note is allowed to extend the payment period by whatever length of time he deems fit. This is legal and is based on the US commercial law. However, this time may extend to a period of time that is not acceptable to the bank. Consequently the note makes the payment period so uncertain as to make me advise ONB not to buy it. I. The Weather is nice today. This is a note whose author seems to lack seriousness. It is a note that is not clear on anything, and seems to have been written by someone who just wanted to have a good time at the expense of others. Since we do not have any conditions about when, where and how it should be paid, and since the probability of there being anyone called ‘The Weather is nice today’ is minimal, I advise ONB to disregard it for the joke it seems to be. J. The note has clearly stated to who it should be paid. These conditions are acceptable. I therefore advise ONB to buy it as it knows to whom the note has been written. Additionally, the conditions are clear and precise, thereby acceptable. Question 5 A. The contract that existed between Maker and Seller was based on acts of good faith. Maker bought goods form Seller and in exchange gave him an instrument that she was to pay. These actions ensured that there was consideration in their transactions. In the process of trying out the goods, Maker noticed that they were faulty. Working on the assumption that she made Seller aware of the situation, there was a total failure of consideration, meaning that the instrument she had given him held no value as a result of the faulty goods. When Seller gave the instrument to George, being aware that the instrument was worthless, he acted in bad faith and as such, should be held accountable for his actions. Despite the faultiness of the instrument, George was a holder in due course as a result of there being an exchange between the two of them. He passed this right on to Sam, who was to act in his place by claiming what was owed to him as a result of the (faulty) instrument. B. If Sam is to take Maker to court, the probability of winning the case is not high, but it is there. This is because, Maker should have returned the faulty goods and taken back her instrument in the process. This would have ensured that Seller would not have had the opportunity to misuse the instrument and defraud others. Had she returned the goods, she would not be in facing charges in the first place. Her actions then constitute carelessness that might ensure that she loses the case. However, Sam would have a much higher chance of winning the case if he decides to sue Seller instead of Maker. Question 6 A.ONB did the right thing by refusing to honor the check that had been sent to them by CSB. A check written to two people will have to be endorsed by the very two people in order to ensure that it is payable to someone else. What ONB did was right because there is a high possibility that Betty was not aware of the transactions between Dan and Bill. It is also possible that she what was going, but was against the move by Dan to purchase the camera at that price. Either way, when ONB refused to honor the check, it did the right thing, quite unlike what CSB did. B.CSB properly debited $500 from Dan’s account. The reason for this was that Dan should have gotten the amount from Adam’s account in ONB to replace what CSB had erroneously deposited into his account. ONB’s failure to honor the check meant that CSB deposited money that Dan did not have into his account. This means that the money they placed was actually theirs. Debiting his account was juts them taking back what belonged to them. However, CSB should not have deposited the money in the account in the first place, as it was clear that despite the fact that the note was payable to two people, only one of them had endorsed it. This is sheer laxity, and they should be held responsible for their mistakes. C. Dan does have rights against Bill. The contract between them was a business transaction that entailed the exchange of money (in the form of a check), and an antique camera. If their agreement was that Dan was to give the camera to Bill for free, then he would have had nothing against him. However, this was not the case. Therefore, Bill is obligated to either find another way of paying back Dan for the check that bounced, or he should return the camera to ensure that they are at par in their transactions (Section 9-609 (A)). D. Dan has no legal claim against Betty as the transaction was not between the two of them. The money was half hers, and even if she was aware of the transaction, she was not obligated to endorse the check. This is only right as she might not have wanted the camera in the first place. Dan therefore has no claim against her. E. Dan has no claim against Adam. The reason for this is that the contract was between him and Bill. He might have had a claim against Adam if Betty had endorsed the check only to find that there was no money in Adam’s account. As this was not the case, he has no rights against Adam. Question 7 A. Julie does not have a claim against ONB because it was not the bank that cashed the check. The Bank that cashes the check is the one that needs to ensure that the person who cashes the check is real, and not stealing an identity. It was up to them therefore to confirm with records and ensure that it really was Julia, who cashed the check, not the thief. B.ONB can recover the money from CSB as it was their negligence that led to the loss of the money in the first place. This means that they should be held responsible for what they did, and this entails giving the money to ONB. C. Julia does not have a claim against Stan. The two conducted their transaction, and Julia was paid in the form of a check, that would have been cashed had she been the one who cashed it. Her carelessness, however, is what led to the loss of the check, and consequently, the money. Therefore, she has n claim against Stan for what was her mistake. D. No, Julia does not have a claim against ONB. This is simply because rebates do not require a proof of identification in order to be cashed. ONB did what was within the law. However, they should have been more careful in at least trying to ascertain that indeed that was Julia cashing the check. E. Yes, she does have a claim against Elroy Electronics. After all, it was their mistake that made someone else cash the check. This would not have happened had they sent it to the right address. Therefore, if Julia holds them liable for their mistake, she will only be doing what is right. Conclusion As noted from the above applications, secured transactions and payments are crucial to business dealings and may involve a lot of money. Consequently, one should be careful in all their business undertaking to ensure that they are not shortchanged if someone else does not stick to their end of the bargain. Due care should be taken to ensure that legally, they are protected. This will help them in case there is a conflict of interest, and will give them the upper hand. References Richard H. Nowka, (2009) Mastering Secured Transactions UCC Article 9. Carolina Academic Press. Uniform Commercial Code. Retrieved from http://www.Law.Cornell.Edu/Ucc/Ucc.Table.html. Read More