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COMMERCIAL TRANSACTIONS

SALES: Article 2
I. FORMATION A. Role and Scope of Codes in Sales System 1. Scope: Article 2 applies to transactions in goods. 2-102. a. Goods, 2-105: Goods means all things which are moveable at the time of identification to the K for sale other than the money in which the price is to paid, investment securities (stocks) and things in action. b. Mixed Ks: Mixed Ks are those Ks involving a combination of goods and services, or combination of goods and something other than services. Two approaches to mixed Ks: i. Predominant Purpose Test: Under the PPT, the court decides whether the predominant purpose of the transaction is to sell goods or to sell services. 1. If it is goods, then Article 2 applies to the whole transaction, even the services portion of it. 2. If it is services, then Article 2 does not apply to any part of the transaction, not even the goods portion. ii. Gravamen of the Action Test (minority of courts): The court determines whether the gravamen of the action (the source of the complaint) is with the goods or the services portion of the transaction. 1. If the problem lies with the goods, then article 2 applies even if the predominant purpose of the transaction is services rather than goods 2. If the problem lies with services, then Article 2 does not apply to the dispute even if the predominant purpose of the transaction is goods rather than services. 2. Priority for Resolving Disputes, 2-208(2) a. express terms of the K, b. course of performance (COP), 2-208: Where the K for sale involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection shall be relevant to determine the meaning of the agreement. c. course of dealing (COD), 1-205(1): A course of dealing is a sequence of previous conduct btwn the parties which is to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct. d. usage of trade (UOT), 1-205(2): A usage of trade is any practice or method of dealing having such regularity of observance in a place or trade as to justify an expectation that it will be observed with respect to the transaction in question. e. U.C.C. Gap Fillers: UCC gap-fillers should only be used when there is in fact a gap to be filled. A UCC gap-filler may be superseded if express terms of K, course of performance, course of dealings, or trade usage establish the terms between the parties. 3. Central Questions to Formation: 1

a. Is there a K? i. Is there an agreement? is there a bargain in fact, is there mutual assent. ii. Offer? 1. Article 2 doesnt define offer and the common law remains the proper and sole source of meaning. 2. Restatement 24: An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it. iii. Acceptance? b. If so, on what terms? B. Formation Generally 1. Definitions: a. Contract, 1-201(11): the total legal obligation which results from the parties agreement as affected by this Act and any other applicable rules of law. b. Agreement, 1-201(3): the bargain of the parties in fact as founding their language or by implication from other circumstances including COD (1-205), UT (1-205), or COP (2-208) 2. Formation Principles, 2-204: a. a K may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of a K, 2-204(1); b. an agreement sufficient to constitute a K for sale may be found even though the moment of its making is undetermined, 2-204(2); AND c. a K does not fail for indefiniteness if 1)the parties have intended to make a K and 2)there is a reasonably certain basis for giving an appropriate remedy, 2-204(3). i. All you really need: 1. Quantity term AND a. A quantity term need not be expressed if it can be derived from the price term. b. Example: Some hay. Does some have meaning that can be derived from course of dealing, course of performance, or usage of trade? 2. Description of good. ii. Dont Need: Price, delivery, payment, warranty, risk of loss or choice of law. Once quantity and description of goods are established, all other terms can be fairly worked out through the hierarchy express terms, conduct, gap-fillers, etc. 3. Firm Offers, 2-205: A firm offer is one in which the offeror promises to keep his offer open for a period of time. a. Elements: Firm offers are binding even in the absence of consideration if i. the offeror is a merchant under Merchant Group 1 AND 1. Merchant, 2-104(1): A merchant is either 1) a person who deals in goods of the kind or 2) a person who holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. 2-104(1). Under merchant group 1, almost every person in business is deemed to be a merchant and therefore subject to the special rules of those sections. ii. the offer is contained in a signed writing; AND 2

1. Must be a signed writing. Cannot be merely oral. Must give the terms and assurances that it will be held open. iii. the writing by its terms give assurances that it will be held open. b. Length of time: In the absence of a stated time, a firm offer is only open for a reasonable time, and in no event would such a gratuitous firm offer remain irrevocable longer than 3 months. i. Greater than 3 months: If the firm offer is explicitly open for more than 3 months, 2-205 will hold it open for only 3months. Comment 3. If the offeree wants to have the firm offer extend beyond the 3-month limitation, she needs to provide additional consideration for the additional time to make the offer binding on the offeror. 4. Acceptance, 2-206: 2-206 is relevant to determine whether an agreement has been reached. In cases of conflict, the more specific rules of 2-206 govern over 2-204. a. Valid acceptance, 2-206: An offer may be accepted: i. by any reasonable manner and by any reasonable medium under the circumstances, 2-206(1)(a); AND ii. when a buyer offers to purchase goods for immediate shipment, the seller may accept such an offer either by shipping the goods or by promising to ship them, 2-206(1)(b); 1. Shipment of Non-Conforming Goods, 2-206(1)(b): A shipment of non-conforming goods will count as an acceptance unless the seller specifically indicates that the non-conforming shipment is offered only as a mere accommodation to the buyer, in which case the shipment would constitute a counter-offer. b. Not Valid Acceptance, 2-207(1): Two ways in which a purported acceptance might not operate as a valid acceptance under 2-207(1), if the acceptance is: i. not a definite and seasonable expression of acceptance OR ii. expressly made conditional on assent to the additional or different terms. C. Battle of the Forms: Additional or Different Terms in Acceptance or Confirmation 1. 2-207: A communication which is either 1)a definite and seasonable expression of acceptance or 2)a written confirmation which is sent within a reasonable time operates as acceptance even though that communication states terms additional to or different from those offered or agreed upon unless acceptance is expressly made conditional on assent to the additional or different. 2. Is there a K? a. K by Writings? i. True acceptance (no pre-existing oral K), 2-207(1): Where there is no pre-existing oral K, the offerees form will act as true acceptance even though it states terms additional to or different from those that were offered and there will be a K by the writings, unless the response is: 1. not a definite and seasonable expression of acceptance OR a. Definite: the response must indicate a willingness to go forward with the deal. This is not a bright line. b. Seasonable: find out what the industry standard is. 2. expressly conditioned upon acceptance of additional or different terms. a. Expressly conditioned: In order to be expressly conditional, the qualifying language needs to be stated 3

clearly in such a place, manner, and language that the offeror will understand in the commercial setting of the transaction that no acceptance has occurred. b. If the response is expressly conditioned, then it is really a rejection and counteroffer. If the offeror/buyer expressly assents then there is K and those terms are included. But if the offeror/buyer does not expressly assent then there is no acceptance of the offerees terms and no K. ii. Confirmation (pre-existing oral K): Where there is a pre-existing oral K, the offerees form acts as written confirmation of the K unless the response: 1. is not sent within a reasonable time OR 2. expressly conditioned upon acceptance of additional or different terms. b. K by Conduct? i. Is there a K by conduct? 2-207(3): To create a K by the parties conduct, there must be conduct by both parties which recognizes the existence of such a K. This is a fact and circumstances inquiry. See 2-204(1) (A K for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a K.) 1. When applied, 2-207(3): You only resort to 2-207(3) if the writings of the parties do not otherwise establish a K. The parties writings do not establish a K when 1)the purported acceptance was not a definite and seasonable expression of acceptance or 2) the acceptance was expressly made conditional on assent to the additional or different term. (2-207(1)). If you dont fit into these two exceptions, then there is a K by the writings and you must determine its terms by using 2-207(2) rather than 2-207(3). 2. Example: Buyers PO said seller must accept all terms of offer or no K. Sellers acknowledgment form, besides including additional and different terms, also included a conspicuous statement that this acceptance is expressly made conditional on buyers assent to the additional or different terms contained herein. Despite these terms, the seller shipped the machines and the buyer accepted them. Within a few months, buyer has trouble with machines and wants to sue seller on a breach of implied warranty theory. This is where 2-207(3) comes in. 2-207(3) would conclude that there is a K here although the writings of the parties do not otherwise establish a K 3. What are the terms of the K? a. K by Writings: i. What are the original K terms? 1. True acceptance (no pre-existing oral K): In a situation of true acceptance with varying terms, the terms of the offerors form are the K terms. This is true even if the offerees acceptance has additional or different terms. 2. Confirmation (pre-existing oral K): In a situation of pre-existing oral K and single confirmation with varying terms, the terms of the oral K are the K terms. 4

ii. Are Additional Terms part of the K?: The same analysis applies to both true acceptance and confirmation. Whether additional terms become part of the K depends in part on whether the transaction is between merchants. 1. Is the transaction between merchants? A transaction is between merchants where both parties are merchants. A merchant is either 1) a person who deals in goods of the kind or 2) a person who holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. 2104(1). This section falls under Merchant Group 1, and in this group almost every person in business is deemed to be a merchant. 2-104(1) cmt. 2. a. Non-merchant transaction, 2-207(2): For non-merchant transactions (where at least one party is not a merchant), the additional terms found in the offerees form are mere proposals to modify the K. They are counter-offers. i. Offeror must expressly accept: If the offeror expressly accepts these proposals, they become part of the K. If he rejects them or does nothing, they fall out. The offerors assent must be express, conduct (performance) will not act as assent. b. Merchant transaction, 2-207(2): If the transaction is between merchants, acceptance of additional terms is automatic unless: i. the offer limits acceptance to the terms of the offer; OR ii. the additional terms materially alter the K; OR 1. Exam: If the additional terms are material alteration, the terms are not included in the K unless expressly agreed by the other party. Example: Is a 10% fee increase a material alteration? Probably not. iii. notification by the original offeror of objection to the additional terms has already been given by the original offeror, or is given within a reasonable time after notice of then is received by the original offeror. iii. Are Different Terms part of the K?: Different Terms are those terms that contradict terms in the offer or the pre-existing oral K. The same analysis applies to both merchants and non-merchants. 1. True acceptance (no pre-existing oral K): a. Judicially-created Knock-Out Rule: The new, different term and conflicting term of the offer knock each other out and the court then fills the gaps with UCC provisions. 2. Confirmation (pre-existing oral K): a. 2-207(2): i. Single confirmation knockout rule: Where there is a different term in a single confirmation, the different term is treated as a mere proposal that will 5

become part of the K only if expressly agreed upon. The knockout rule is not applied. ii. Two conflicting confirmations = knockout rule: Where there are two or more conflicting confirmations, the knockout rule is applied for the differing terms contained in the confirmations. No term of the existing oral K is knocked out since after the knockout, the K will consist of the terms originally agreed to orally, terms on which confirmations agree, and gap-fillers. b. Terms of K by Conduct, 2-207(3): i. Original K terms: The terms of a K by conduct consist of: 1. those terms on which the writings of the parties agree, AND 2. any supplementary terms incorporated under any provisions of the UCC. (i.e., implied warranty of merchantability, etc.) ii. Additional/ different terms = Knockout Rule: Where the terms of the forms are in disagreement, they knockout each other, and neither becomes part of the K by conduct. The UCC gap-fillers (the supplementary terms) fill missing terms. Thus, the additional terms and different terms are knocked out under 2-207(3). You knockout both additional terms and different terms. D. Statute of Frauds, 2-201: 1. General: In deciding what the parties to a K of sale actually committed themselves to (whats their K), the agreement is the starting point. But then there are constraints imposed by 2-201(SOF) and 2-202 (Parol Evidence rule). 2. Text of 2-201(1): Generally, a K for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a K for sale has been made btwn the parties and signed by the party against whom the enforcement is sought.A writing is not insufficient b/c it omits or incorrectly states a term agreed upon but the K is not enforceable beyond the quantity of goods shown in such writing. a. Significance: Statute of frauds is a defense to K enforcement. Example: Don orally agrees to buy Karens car for $600. Later, Karen doesnt want to go through with it. Karen can assert SOF b/c no signed writing. If there was a signed writing, must still prove that there was a K. 3. Elements of Statute of Frauds: a. First, does SOF apply? i. A K for the sale of goods? ii. For a price of $500 or more? b. Second, is SOF satisfied? If any of these elements are not met the K is not enforceable under SOF. i. Writing sufficient to indicate that the K has been made? 1. The writing must show more than mere negotiations or tentative agreement. 2. Writing: Writing includes printing, typewriting or any other intentional reduction to tangible form. 1-201(46). ii. Signed by the party who is trying to avoid the K? iii. Does the K contain a written quantity term? 6

1. No quantity term = fails: if there is no quantity term, then the K fails the statute of frauds and is unenforceable. Quantity need not be expressed in units, it is sufficient to express it in terms of output or requirements. 4. Exceptions: If an exception applies, it only means that the statute of frauds is satisfied, not that a K exists. Must still prove that a K exists. a. Merchant Confirmation Exception, 2-201(2): The Merchant Exception, 2201(2), applies, and the requirements of 2-201 satisfied, if: i. between merchants 1. Between merchants = both parties merchants. If one party is not a merchant, the merchant exception does not apply. a. Merchant, 2-104(1): a merchant is either 1) a person who deals in goods of the kind or 2) a person who holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. b. Merchant Group 1 of 2-104(1), Comment 2: For purposes of this group, almost every person who operates in his mercantile capacity is considered a merchant. ii. a writing in confirmation of the K and sufficient against the sender; 1. Sufficient against sender: most courts hold that written confirmation to be sufficient against the sender must have a quantity term. iii. is sent within a reasonable time, 1. Reasonable time, 1-204(2): What is a reasonable time for taking any action depends on the nature, purpose and circumstances such action. iv. AND is received by the other party who has reason to know of confirmations contents, v. UNLESS the recipient of the confirmation sent a written notice of objection within 10 days of receipt. b. Specialty Goods Exception, 2-201(3)(a): The Specialty Goods Exception, 2201(3)(a), applies, and the requirements of 2-201 met if: i. the goods are to be specially manufactured for the buyer; AND ii. the goods are not suitable for sale in the ordinary course of the sellers business; AND iii. the seller before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, iv. has made either a substantial beginning of their manufacture or commitments for their procurement. 1. Example: Buyer asks for 3 specialty machines. She almost finishes one of them. So she can probably recover the one she nearly finished, but maybe not the two she never started. v. Remedies = just apportionment, 2-201, comment 2: If the court can make a just apportionment the agreed price of any goods actually delivered can be recovered without writing or, if the price has been paid, the seller can be forced to deliver an apportionable part of the goods. c. Admissions Exception, 2-201(3)(b): The Admission Exception, 2-201(3)(b), applies, and the requirements of 2-201 met, if despite the lack of writing the party seeking to avoid the K admits in his pleading, testimony, or otherwise in court 7

that a K for sale was made. In court admissions include interrogatories, requests for admission, depositions, and other forms of out of court discover. d. Part Performance Exception, 2-201(3)(c): Under the Part Performance Exception, 2-201(3)(c), to the extent that either the seller receives and accepts payment for the goods or the buyer receives and accepts the goods, neither party can deny the existence of the oral K. i. Unilateral action not enough: unilateral action by one party is not enough. So the buyer cannot get the benefit of the provision just b/c he makes a payment, nor can the seller get the benefit simply by shipping the goods. Rather, there must be either payment by the buyer and acceptance of that payment by the seller, or delivery by the seller and acceptance of that delivery by the buyer. ii. Damages: Damages are equal to the amount accepted. Example: Dan agrees to buy 50 cattle of Mike for $100 a head. Dan sends $200 to Mike and Mike keeps the money. Part performance exception applies. What are Dans damages? Only 2 heads of cattle b/c that is all Mike had accepted in terms of money. 5. Note: Once a party produces sufficient evidence that some K was in fact made either within 2-201(1) or the exceptions of 2-201(2) or 2-201(3), then proof of other terms not included in the writing may be permitted. a. Need Written Quantity Term: The exception is the quantity term. If the quantity term does not appear in the key writing or is not evidenced in the exceptions, the admitted K is not enforceable. b. Parol evidence can resolve ambiguity in written quantity term: Parol evidence may be admitted to resolve an ambiguity in a quantity term as long as there is some quantity term. E. Parol Evidence Rule, 2-202: 1. 2-202 Breakdown: a. A writing i. Writing: Writing includes printing, typewriting or any other intentional reduction to tangible form. 1-201(46). b. intended by both parties as a final expression of agreement terms i. Final: A writing which reasonably appears to be a complete agreement is final as to the terms therein unless it is established by other evidence that the writing did not constitute a final expression. The parole evidence rule wont bar the parties from introducing extrinsic evidence to explain or supplement non-final or missing terms. ii. Absence of Merger Clause: Absence of a merger clause may suggest that the writing was not intended to be final expression. 1. Example of Merger Clause: This Agreement contains all of the terms and conditions of the Agreement and shall constitute the complete and exclusive Agreement btwn the parties. c. may not be contradicted by evidence of any prior agreement or contemporaneous oral agreements i. Post-oral agreements: Parties may introduce extrinsic evidence (even if contradictory) of oral or written agreements that occurred after the final writing to prove, for example, that the agreement had been modified (but modification must be agreed by both parties.) d. BUT this writing may be explained or supplemented by: 8

i. (a) course of dealing, trade usage, or course of performance; AND ii. (b) evidence of consistent additional terms UNLESS the court finds the writing to have been intended as a complete and exclusive statement of the terms of agreement. 1. Consistent = reasonable harmony: Under the majority of courts, to be consistent the additional term must be in reasonable harmony with the language of the writing and respective obligations of the parties. 2. Complete and exclusive: However, even if the additional terms are consistent, the extrinsic evidence will not be allowed if the writing was intended to be a complete and exclusive statement of the terms. a. *Factors for determining if writing was complete and exclusive, per Betaco: i. the inclusion of merger clauses in the document, ii. the disclaimer of warranties, iii. whether the extrinsic term is one that the parties would certainly have included in the document had it been part of their agreement, iv. the sophistication of the parties, v. the nature of scope of both prior negotiations between the parties and any purported extrinsic terms. b. Result = no extrinsic evidence: If it is complete and exclusive agreement, then no extrinsic comes in, even if it is meant to explain or supplement. 2. Judge-Made Exceptions to Parole Evidence Rule a. Fraud: a party may not invoke 2-202 to shield his own fraud. b. Mistake: 2-202 will not bar evidence of mutual mistake or unilateral mistake. c. True Ambiguous Terms: 2-202 will not bar evidence bearing on a genuine issue of interpretation arising b/c of ambiguity or uncertainty in the writings terms. F. Unconscionability 1. Unconscionability as Excuse for Nonperformance, 2-302: If a K or a term of the K was unconscionable at the time of contracting, a judge may 1) refuse to enforce the K at all, 2)enforce the remainder of the K without the unconscionable clause, or 3)limit the application of any unconscionable clause in order to avoid an unconscionable result. a. Two Types of Unconsionability: For some courts need to prove both types, others only one. i. Procedural Unconscionability: an absence of meaningful choice ii. Substantive Unconscionability: unreasonably favorable terms.

II. TERMS Generally 1. Analytical Framework: In order to recover under a breach of warranty theory you must show: a. Warranty was made b. Warranty was breached c. Breach of warranty caused harm complained of d. Extent of damages e. Negation of affirmative defenses i. Effective Disclaimers, 2-316 ii. Lack of notice 2-607(3) iii. Lack of privity 2-607(5)(a)/ 2-318(A) iv. Assumption of risk v. Statute of limitations A. Warranties with Sales of Goods 1. Express Warranties by Affirmation, Description, Sample, and Model, 2-313: there are 3 ways that express warranties can be created. a. Express Warranty By Affirmation of Fact Or Promise, 2-313(1)(a): Affirmations of fact or affirmations of promises relating to the goods create express warranties that the goods shall conform to the affirmation or promise if they become part of the basis of the bargain. i. Two elements: 1. affirmation of fact or promise, AND: Whether a statement is an affirmation of fact or mere puffery is a question of whether it was reasonable for the buyer to rely on the sellers statement. a. Factors to Consider: i. specific language, 1. Example: this car gets 22 miles to the gallon v. this is a wonderful car. ii. written v. oral, iii. context, iv. sophistication of parties, v. whether statement can be empirically tested, AND vi. when the statement was made (during preliminary negotiations or final negotiations? 2. the statement is a basis for the bargain: A statement becomes a basis for the bargain if the buyer reasonably relied on the statement in entering the K. 2-313, cmt. 3. The seller has the burden of proving that the buyer did not reasonably rely on statements. ii. Post-Sale Representations Can Become Part of the Bargain: If language is used after the closing of the deal, the warranty becomes a modification, and need not be supported by consideration if it is otherwise reasonable and in order. 2-313, Comment 7. 1. Courts have taken three different approaches to this: a. Modification must be in writing b. Modification must be in writing if over $500 c. Modification must be in writing if it otherwise affects under 2-201(really means if quantity term) 10

iii. Ads, Labels Product Packaging: many cases accept the idea that an express warranty can be created by representations contained in catalogues, ads, labels, or product packaging, whether those writing were seen before, during or shortly after the sale took place. b. Express Warranty by Description, 2313(1)(b): Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description. i. Basis of the bargain: The description becomes a basis for the bargain if the buyer reasonably relied on the description in entering the K. ii. Source of description irrelevant: Unlike express warranties created through promises or statements of fact, a description does not have to be made by the seller to the buyer. As long as the description becomes part of the basis of the bargain, its source is irrelevant. c. Express Warranty by Sample or Model, 2-313(1)(c): Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model. i. Basis of the Bargain Element: The sample or model becomes a basis for the bargain if the buyer reasonably relied on the sample/ model in entering the K. 2. The Implied Warranty of Merchantability, 2-314 a. Is there warranty of merchantability?: Two ways a warranty of merchantability can be created: i. Merchant with respect to goods of that kind? 2-314(1): A warranty that the goods shall be merchantable is implied in a K for their sale if the seller is a merchant with respect to goods of that kind. 2-314(1). 1. Merchant, 2-104(1): a merchant is either 1) a person who deals in goods of the kind or 2) a person who holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. a. Merchant Group 2, 2-104(1), Comment 2: More restricted category: Implied warranty of merchantability is only implied if seller is a merchant with respect to goods of that kind. Must have a professional status as to the particular kind of good. ii. All People Must Act in Good Faith: All sellers are required to obey a subjective standard of good faith (i.e., disclose hidden material defects). 1-209(19). In addition, merchants must obey an objective standard of good faith: whether the merchants conduct would be viewed as fair by the average member of his trade. 2-103(1)(b). So, must first ask if the person is a merchant under 2-103(1)(b). 1. Merchant Group 3, 2-104, cmt 2: Generally, any person in business will be subject to the requirements of this group. b. Standards of mechantability, 2-314(2): (2)Goods to be merchantable must be at least such as i. (a)pass without objection in the trade under the K description; ii. (b)in the case of fungible goods, are of fair average quality within the description; iii. (c) are fit for the ordinary purpose for which goods of that description are used; 1. This is the most important one. 11

iv. (d) run, within the variations permitted by the agreement, of even kind, quality, and quantity within each unit and among all units involved; v. (e)are adequately contained, packaged, and labeled as the agreement may require; vi. (f)conform to the promise or affirmations of fact made on the container or label if any. c. Compared to Express Warranty: In contrast to an express warranty, which can be breached with a perfect product if the seller has overpromised its capabilities, the implied warranty of merchantability cannot be breached unless the product is defective. d. Used Goods: Used goods are warranted to perform as used goods, not as if they are new goods. 2-314, Comment 3. 3. The Implied Warranty of Fitness for a Particular Purpose, 2-315: a. Text of 2-315: Where the seller at the time of contracting has reason to know of any particular purpose for which the goods are required and that the buyer is relying on the sellers skill or judgment to select or furnish suitable goods, there isan implied warranty that the goods shall be fit for such purpose. b. Three Elements: Under 2-315, the implied warranty of fitness for a particular purpose applies, if, at the time of contracting: i. seller has reason to know of buyers particular use; 1. Particular use: a. Ordinary Good Sold for Specific Purpose = Warranty of Fitness: an implied warranty of fitness arises when goods with an ordinary purpose are sold for use by the buyer for special or limited purpose. i. Example: shoes generally used for the purpose of waling upon ordinary grounds, but a seller knows that a particular pair was selected to be used for climbing mountains. b. Ordinary Goods Sold for Ordinary Purpose Warranty of Fitness although warranty of merchantability may apply. c. Special Goods Sold for Special Purpose Warranty of Fitness: the reasoning is that although the special goods are being used for a particular purpose, that purpose is the ordinary use of the special goods. Implied warranty of merchantability may apply. d. Special Goods Sold for Ordinary Purpose Warranty of Fitness: reasoning is that this is the exact opposite of what 2-315 contemplates. ii. seller has reason to know that buyer is relying on the sellers expertise; AND iii. the buyer in fact relied on the sellers expertise. 1. Turns on Relative Skill of Parties: the issue of reliance turns on the relative skills of the parties. Where the buyer is highly knowledgeable in his own right, there is little chance that he actually relied on the sellers expertise and that the seller made a fitness warranty. B. Reducing or Eliminating Warranty Liability 1. To Recover for Breach of Warranty Plaintiff (buyer) Must Show 12

Warranty, warranty was breached, the breach of warranty caused the harm complained of, the extent of the plaintiffs damages, AND the plaintiffs ability to fend certain affirmative defenses, including: i. privity, ii. lack of notice, iii. disclaimers, iv. statute of limitations, and v. assumption of the risk 2. Privity: a. Vertical privity: Vertical privity refers to the possibility that goods may be bought and sold more than once before they come into the hands of the ultimate buyer. Parties are said to be in vertical privity with the buyer if they are part of the chain of distribution that ends with the sale to the buyer. i. Warrantor is liable only to party to which it had a K. ii. However, retailer can sue the manufacturer for indemnity. 2-607(5)(a) b. Horizontal privity: Issues of horizontal privity revolve around who other than the ultimate buyer may sue for injuries resulting from some fault with the product. i. When non-buyer sues manufacturer ii. Allowed under Alternative A 2-318 iii. Also allowed under the Magnuson-Moss Act 1. Federal statute 2. Has minimum standards that relate to remedies and duration of implied warranties. 3. Notice, 2-607(3)(a): When buyer discovers defect, buyer must notify the seller in a reasonable time or else the buyer loses the right to remedy for breach. a. Reasonable time: What is a reasonable time depends on the nature, purpose, and circumstances of each action. 1-204(2). 4. Warranty Disclaimer, 2-316 a. Disclaiming Express Warranties, 2-316(1): A partial or total disclaimer of express warranties is inoperative unless the seller can find a way to make the disclaimer consistent with the express warranties, subject to the parol evidence rule. As caselaw has shown, the general rule is that once express warranties are made, they cannot be disclaimed. b. Disclaiming the Implied Warranties, 2-316(2) i. Must be conspicuous, 2-316(2): To exclude or modify the implied warranty of merchantability, the word merchantability must be used conspicuously either orally or in writing. To exclude or modify the implied warranty of fitness, the exclusion must be by a writing and conspicuous. 1. Conspicuous, 1-201(10): A term or clause is conspicuous when it is so written that a reasonable person in the partys situation ought to have noticed it. a. Ambiguity construed against draftsmen (i.e., seller): Any ambiguity in the language of a warranty disclaimer is likely to be construed against he seller that drafted it. ii. Unless, 2-316(3): However, the implied warranty may still be excluded or modified if: 13

a. b. c. d. e.

1. under the circumstances, language commonly understood as a disclaimer, like as is, or with all faults, calls the buyers attention the exclusion of warranties, 2-316(3)(a); OR a. Factors: i. Relative bargaining power and sophistication of parties; ii. the price paid; iii. usage of trade, course of performance, course of dealing iv. what the words of the K actually said 2. the buyer 1)examines the goods as fully as he desired or 2)has refused to examine the goods and the defect is one which an examination ought to have revealed, 2-316(3)(b); OR a. Refusal means the seller actually demanded an inspection and the buyer refused, not merely that the seller gave the buyer an opportunity for an inspection and buyer didnt take or asked the buyer to look at it. Must be a demand. b. The inspection must occur prior to contracting. If the contract has already formed, an inspection that occurs upon delivery will not operate to exclude warranty liability. 3. the implied warranty is excluded or modified by course of dealing, course of performance, or trade usage, 2-316(3)(c). iii. Post-contracting disclaimer valid: sellers sometimes deliver disclaimers to buyer after the K has been consummated (i.e., on an invoice). Courts invalidate such disclaimers on the ground that they represent unilateral attempts to modify existing Ks. 5. Modification or Limitation of Rights and Remedies, 2-719 a. Substituted Remedy Clauses, 2-719: 2-719(1) permits the parties agreement to provide for remedies that are in addition to or in substitution for those that would otherwise be available, and to limit or alter the ordinary measure of damages. However, resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy. 2-719(1) (b). i. For a buyer to be limited by the substituted remedy 1. there must be express agreement that the remedy be exclusive; 2. the remedy must not fail its essential purpose; and a. Example: The remedy is that seller agrees to repair the product up to one year after the sale. If seller is unable to repair the product, then the remedy fails its essential purpose and the substituted remedy clause is invalid. 3. the remedy must not be unconscionable (see 2-302 for unconscionable.) b. Consequential Damages, 2-719(3): Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not.

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c. Limiting buyers right to reject goods, 2-719: The seller can contractually limit the buyers remedies, including the right to reject, thereby obligating the buyer to accept the sellers efforts to repair or replace the defective parts. III. PERFORMANCE A. The Post-Agreement Pre-Shipment Stage 1. Anticipatory Repudiation, 2-609, 610, 611: a. Adequate Assurance, 2-609: (1) When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return. (2)Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards. (3)Acceptance of any improper delivery or payment does not prejudice the aggrieved partys right to demand adequate assurance of future performance. (4)After receipt of a justified demand failure to provide within a reasonable time not to exceed thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the K. b. Anticipatory Repudiation, 2-610: When either party repudiates the K with respect to a performance not yet due the loss of which will substantially impair the value of the K to the other, the aggrieved party may (a) for a commercially reasonable time await performance by the repudiating party; or (b) resort to any remedy for breach; and (c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on the sellers right to identify goods to the K notwithstanding breach or to salvage unfinished goods. c. Retraction of Anticipatory Repudiation, 2-611: (1) Until the repudiating partys next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially altered his position or otherwise indicated that he considers the repudiation final. (2) Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under 2-609. (3)Retraction reinstates the repudiating partys rights under the K with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation. 2. Excuse from or Adjustment of the K for Changed Circumstances a. Casualty to Identified Goods, 2-613 i. Elements: 1. the K requires delivery of goods identified by the K when it is made, AND: this means that the parties must acknowledge from the outset of the K that certain specified goods are the only ones that can be properly tendered, so that their destruction makes performance literally impossible. The K involves non-fungible goods. a. Example: K for sale of pink Caddy owned by Elvis. If the day before sale the car is destroyed by earthquake w/o fault of either party, the seller is excused from performance. In contrast, suppose the K calls for the sale of 10 cars located on sellers floor and seller has 100 cars on floor and the ten 10 are not specifically identified by the K. If the 10 cars 15

are destroyed by the earthquake, there is no impossibility of performance under 2-613 b/c performance was not predicated on the continued existence of those particular 10 cars. (Sellers only hope for excuse is under 2-615.) 2. the loss or damage to the goods was not the fault of either party, AND 3. the risk of loss did not yet pass to the buyer.: The time when the risk of loss passes to the buyer can be set in the parties K, by course of dealing, trade usage, or gap filling provisions. See 2509(3): The risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery. ii. If Elements Met: 1. If the loss is total, the K is avoided completely 2. If the loss is partial, the buyer is given a choice of avoiding the K or taking the remaining goods with a price adjustment. b. Commercial Impracticability of Performance, 2-615 i. Elements: To invoke the excuse of nonperformance for impracticability, the seller (or buyer, per Lawrence) must show: 1. a delay in the delivery or non-delivery of the goods by the seller, 2. either a. the occurrence of a contingency the non-occurrence of which was a basic assumption on which the K was made AND the occurrence was not objectively foreseeable OR, i. Not sellers fault: the occurrence of a contingency cannot be the sellers fault. ii. Source of supply: When the event upon which excuse is premised causes an exclusive source of supply to fail, the event that causes failure must be beyond the control of the seller, in addition to being unforeseeable. Examples of seller fault: sellers failure to seek alternative source of supply, sellers overestimate of supply of goods, etc. b. unforeseeable government regulation that precludes performance 3. AND the seller must show resulting commercial impracticability: Generally, this means showing increased financial hardship that continued performance would impose. However, the seller must show that it can operate only at a loss and that loss would be so severe and unreasonable that failure to excuse performance would result in a grave injustice. The cases indicate that when prices only double, relief is generally unavailable. 4. (AND the seller must seasonably notify the buyer of the delay in delivery or that delivery will not occur at all.) ii. If Elements Met:

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1. Delay or non-delivery of entire performance, 2-615(c): If delay or non-delivery of the entire performance is excused under 2615(a), the seller must: a. give the buyer seasonable notification. b. The buyer then has the options set forth in 2-616(1), including the right to terminate and thereby discharge any unexpected portion of the K. 2. Delay or non-delivery of part performance, 2-615(b): In excused cases of delivery or non-delivery in part, the seller must: a. allocate production and deliveries among the sellers customers under a fair and reasonable plan, AND b. give the buyer seasonable notification of partial delay or nondelivery, and send an estimate quota. i. Upon receiving notification, a buyer has the option to terminate the executory portion of the K or acquiesce and modify the K by agreeing to take his available quota in substitution. 2-616(1). 3. A seller who fails to allocate deliveries in a fair and reasonable manner cannot assert the defense of commercial impracticability under 2-615. A buyer who fails to exercise the statutory option within a reasonable time loses the opportunity to preserve an adjusted K for future performance. 2-616(2). c. Difference between 2-613 and 2-615: For 2-613 to apply, the nature of the K must be such that the K requires for its performance certain goods that are identified when the K is made: Ill that painting; Ill sell you my 1998 Toyota Camry. If a seller earmarks certain fungible goods for the buyer and they end up being destroyed, the sellers only hope for excuse must come from 2-615 rather than 2-613. d. Force Majeure Clauses: Force majeure clauses provide for adjustment to the K or total relief from the K upon the occurrence of certain described events such as earthquakes, labor strikes, fires, etc. and can be included in the K to limit one or both parties liability. B. Closing the Sale 1. Are goods conforming? a. Nonconforming goods: i. Nonconforming: Nonconforming goods are the tender of anything less than exact performance. ii. **Buyers options, 2-601: Buyer has three option when goods are nonconforming: 1. reject all of the goods; 2. accept all of the goods; OR 3. accept any commercial units and reject the rest. a. Commercial unit, 2-105(6): Commercial unit means such a unit of goods as by commercial usage is a single whole for purposes of sale and division. b. Conforming goods: A buyer has a duty to accept conforming goods, 2-301. A rejection by the buyer of conforming goods constitutes a buyers breach, and also essentially precludes acceptance by returning the goods back to the seller. 17

2. Acceptance of Goods, 2-606(1): a. Three Ways to accept, 2-606(1): Acceptance of goods occurs if the buyer: i. affirmatively signifies that buyer has accepted after a reasonable opportunity to inspect them, 2-606(1)(a), OR: 1. Reasonable opportunity to inspect goods, 2-513: The inspection right may be specified in the parties K; otherwise it is at a reasonable time, place, and manner as determined by trade usage, course of dealing, and other circumstances of the case. ii. fails to reject the goods after a reasonable opportunity to inspect them, 2606(1)(b), OR: 1. In other words, acceptance is automatic if the buyer does not act. iii. does an act that is inconsistent with the sellers ownership, 2-606(1)(c). 1. This depends on the situation. In some cases, it will mean using the goods before rejection. However, in some instances the buyer may need to use the goods to inspect them. b. Use of Goods After Rejection, 2-606(2)(a): After rejection, any exercise of ownership by the buyer with respect to any commercial unit is wrongful as against the seller. The buyers post-rejection use of the goods may amount to acceptance if it is ratified by the seller. c. Rights and Duties after Acceptance: i. Buyer must pay for goods, 2-607(1): A buyer who accepts goods must pay for them at the contract rate. ii. Cant reject accepted goods, 2-607(2): Acceptance precludes rejection of the accepted goods. 2-607(2). Even if the buyer had the right to reject nonconforming goods, the failure to make effective rejection automatically results in acceptance and terminates the right to reject. iii. Revocation of acceptance, 2-608: After acceptance, the only opportunity to return the goods is through revocation of acceptance under 2-608. iv. Breach: 1. Burden of proving breach, 2-607(4): Upon acceptance, the buyer has the burden of proving any breach by the seller with respect to the accepted goods. 2. Notification of breach, 2-607(3)(a): The buyer must notify the seller within a reasonable time after the buyer discovers or should have discovered any breach. Failure to do so bars the buyer from any remedy. 2-607(3)(a). 3. Rejection of Goods, 2-601 a. Rightful Rejection Requirements, 2-602: In order to the reject the goods, buyer must show: i. the goods were nonconforming/ not perfect tender; ii. goods rejected within a reasonable time after their delivery or tender; iii. buyer seasonably notified seller of the rejection; AND iv. must give specific grounds for rejection (per 2-605): 1. where the seller could have cured the defect if seasonably stated; OR 2. btwn merchants when the seller has after rejection requested in writing for a full and final written statement of all defects on which the buyer proposes to rely. b. Sellers Right to Cure, 2-508: i. Right to cure? 18

1. Time for performance not yet expired, 2-508(1): Where the buyer rejects nonconforming goods and the time for performance has not yet expired (i.e., the seller tendered goods earlier than called for by the K), the seller has an automatic right to cure the defect if a. the seller provides the buyer with seasonable notification of the intent to cure. 2. No Additional Time for Seller Performance, 2-508(2): Where the buyer rejects nonconforming goods and the time for performance has expired, the seller may have a further reasonable time to substitute a conforming tender if: a. seller provided the buyer with seasonable notification of the intent to cure AND; b. buyer rejected a nonconforming tender that the seller had reasonable grounds to believe would be acceptable to the buyer with or without a money tender. ii. Result of cure? 1. If the seller provides conforming/ perfect tender, the original nonconformity will be cured and the buyers right to reject is terminated. 2. If the seller does not cure within the time allowed the buyers rejection will become effective. 3. If the seller provides another nonconforming tender, the buyer must respond with a new rejection. c. Rights and Duties After Rightful Rejection/ Revocation: i. Cure: see below. ii. Merchant? Merchant, 2-104(1): a merchant is either 1) a person who deals in goods of the kind or 2) a person who holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. Merchant group 3, 2-104(1), cmt. 2: Generally, any person in business will be subject to the requirements of this group of special merchant requirements. 1. Non-Merchant, 2-602(2)(b): Where a non-merchant buyer has effectively rejected the goods of which he has taken physical possession, he must hold them with reasonable care at the sellers disposition for a time sufficient to permit the seller to remove them. 2. Merchant, 2-603(1): Where a merchant buyer has effectively rejected the goods of which he has taken physical possession and the seller has no agent at the place of rejection, the merchant buyer must follow any reasonable instructions of the seller as to resale, storage, or the like. If the goods are perishable or will lose their value quickly, the buyer must sell them on the sellers behalf. iii. Reselling rejected goods, 2-711(3): On rightful rejection a buyer has a security interest in the goods in his possession for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, etc. and may hold such goods and resell them in like manner as an aggrieved seller (2-706).

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iv. Use after rejection/ revocation, 2-602(2)(a): A buyers use of the goods after rejection results in acceptance if it is ratified by the seller. 2602(2)(a). 4. Revocation of Accepted Nonconforming Goods, 2-608 a. Does the right to revoke exist? i. Discovery of defect before acceptance, 2-608(1)(a): When a buyer discovers a defect prior to accepting and then accepts the goods anyway, revocation of acceptance is possible only if 1. the buyer accepted on the reasonable assumption that the defect would be cured AND 2. it is not seasonably cured. ii. Discovery of defect after acceptance, 2-608(1)(b): When a buyer accepts without having discovered nonconformities in the goods, revocation is available only if the acceptance was reasonably induced either: 1. by the buyers difficulty in discovering the defect, OR 2. by assurances from the seller. b. Further requirements: i. nonconformity substantially impairs value of goods to the buyer; 1. Whether the value of the product has been impaired is determined subjectively, from the buyers perspective. Whether such impairment is substantial, however, is determined based on the objective evidence. NAL v. Hopkins ii. revocation must be within a reasonable time, 2-608(2); iii. seasonable notification of revocation by buyer, 2-608(2), AND; iv. no substantial change in the goods, 2-608(3). c. Duties/ Rights, 2-608(3): A buyer who revokes has the same rights and duties with regard to the goods involved as if he had rejected them. C. Risk of Loss & Delivery Terms 1. Risk of Loss Generally: a. Negligent Party Bears Risk: If the destruction or damage to the goods occurs through either the buyers or sellers fault, the negligent party bears the risk of loss and the risk of loss rules of Article 2 do not come into play. b. Result: i. If Buyer has risk: Where the risk of loss has passed to the buyer, the buyer has a duty to pay for the goods (2-301), which the seller can enforce by a cause of action for the price in the risk of loss context under 2-709(1) (a). ii. If Seller has risk: If the risk of loss has not yet passed to the buyer when the goods are lost or destroyed, the seller must make a substitute, conforming tender in order to avoid liability for nondelivery arising out of its duty to transfer and deliver goods under 2-301. Buyer can enforce this obligation with its remedies for seller nondelivery indexed under 2-711. c. FOB: FOB means free on board which means that at the named place (the sellers or the buyers place), the seller must pay all charges necessary for the goods to arrive, on board, at the designated location, free of charge to the buyer. 2. Express Allocations of Risk: There are two ways to expressly allocate risk in a K. a. Express Terms, 2-509(4): The seller and buyer can agree in their K on when the risk of loss should pass to the buyer, but the K terms must be clear, especially when the risk of loss is to pass to buyer before delivery. 20

i. Example: K that reads, All shipments travel at the risk and cost of the seller will allocate the risk of loss to seller. b. Express FOB Delivery Terms in the K: This only applies if an FOB term was expressly used in the K. If it just says, UPS will ship it, this is not express FOB term. i. Shipment K, 2-319(1)(a): same as 2-509(1)(a). FOB place of shipment 1. Example: Seller is from Boston, Buyer from NYC. K says FOB Boston. This is a shipment K. ii. Destination K, 2-319(1)(b): same as 2-509(1)(b). FOB place of destination. 1. Example: Seller is form Boston, Buyer is from NYC. K says FOB NYC. This is a destination K. 3. No Express Allocation of Risk: First look at COP, COD, and UOT. If these dont help, then go to UCC gapfillers. a. COP, COD, and Trade Usage: First, go to these. Then, if these dont help, go to the UCC gapfiller of 2-509. (Look at hierarchy.) b. Absence of Breach, 2-509: The loss itself is not the breach. Must prove there is some other nonconformity or breach. i. Goods Shipped by Third-Party Carrier: 1. Shipment K, 2-509(1)(a): With a shipment K, under 2-509(1)(a), risk of loss shifts to the buyer when the goods are duly delivered to the carrier and the buyer is responsible for paying the cost of freight. a. **Presumption: Under Article 2, unless the seller otherwise clearly agrees, a shipment K is presumed. b. Duly Delivered, 2-504: Under 2-504 to affect such due delivery, the seller must: i. put the goods into the carriers possession; ii. make a reasonable K for their transport; 1. reasonable K: If goods need refrigeration, need to rent a refrigerated truck. To breach a duty of reasonable K, the seller must act recklessly or egregiously. Cook Specialty. iii. deliver any document necessary to enable the buyer to take delivery; and iv. promptly notify the seller that the goods have been sent. c. If Seller Does not Perform Duties: if the seller does not perform the duties listed above, he is liable to the buyer for any loss caused thereby. 2. Destination K, 2-509(1)(b): With a destination K, under 2-509(1) (b), the risk of loss does not shift to the buyer until the goods are duly tendered to the buyer at the stated destination and the seller is responsible for paying the cost of freight. a. Duly Tendered, 2-503: To affect such due tender of the goods, 2-503 requires that the seller: i. put and hold conforming goods at the buyers disposition for the period necessary for the buyer to take possession; 21

ii. give the buyer notice of tender; and iii. give the buyer any documents that are needed for the buyer to take delivery. ii. Goods Held by a Bailee, 2-509(2): Where the goods are held by a bailee to be delivered without being moved, risk of loss passes to the buyer: 1. on buyer's receipt of a negotiable document of title covering the goods, 2-509(2)(a); OR a. Negotiable Document of Title, 7-104(1)(a): A negotiable document of title entitles the buyer to possession of the goods. 2. on acknowledgment by the bailee of buyers right to possession of the goods, 2-509(2)(b); OR 3. after buyers receipt of a non-negotiable document of title or other written direction to deliver and buyer has had a reasonable opportunity to present this document to the bailee, 2-509(2)(c). iii. All Other Cases, 2-509(3) 1. Is seller a merchant? Merchant, 2-104(1): a merchant is either 1) a person who deals in goods of the kind or 2) a person who holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction. Merchant group 3, 2-104, comment 2: Generally, any person in business will be subject to the requirements of this group of special merchant requirements. a. Seller is a Merchant, 2-509(3): Risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant. i. Receipt, 2-103(1)(c): Receipt under 2-103(1) (c) means taking actual physical possession of the goods. The risk of loss thus remains on the merchant seller who delivers goods at his or her place of business until the buyer takes physical possession of them. b. Seller is Not a Merchant, 2-509(3): Risk of loss passes to the buyer on tender of delivery if the seller is not a merchant. i. Tender of Delivery, 2-503: There are three requirements for tender of delivery: 1. seller must put and hold conforming goods at the buyers disposition for the period necessary for the buyer to take possession; AND 2. the seller must provide any necessary notification of tender to the buyer; AND 3. the seller must give the buyer any documents needed to take delivery. c. Event of Breach, 2-510: The breach is not the loss of the goods. The breach is that the goods are nonconforming. i. Breach by Seller: 1. If buyer has right to reject, 2-510(1): Where a tender or delivery of goods so fails to conform to the K as to give a right of rejection, the risk of their loss remains on the seller until cure or acceptance. 22

(Buyer must just have the right to reject, doesnt have to actually reject.) a. Effect of cure, 2-510, cmt. 2: New tender has no effect on the risk of loss of the goods originally tendered. 2. If buyer accepts nonconforming goods: If buyer accepts nonconforming goods, the risk of loss transfers from the breaching seller to the buyer. 3. If buyer has rightfully revoked, 2-510(2): Where the buyer rightfully revokes (actually gone through the process of revocation under 2-608) acceptance, he may to the extent of any deficiency in his insurance coverage treat the risk of loss as having rested on the seller from the beginning. a. Deficiency in insurance coverage: i. If the loss is fully covered by the buyers insurance, the risk of loss remains on the buyer. ii. If the buyer has no insurance coverage, the entire loss can be passed on to the breaching seller. iii. Partial insurance coverage results in the buyers retaining the risk of loss for the insured portion of the loss, with the loss of the remainder being passed back to the seller. b. Example: Suppose the buyer of X-Boy robots (whose bad plastic defect was difficult to discover) first accepts the goods, and then realizes that they are nonconforming. Before he can revoke his acceptance, a lightening fire destroys the X-Boy robots. Buyer suffers the risk of loss. c. Example: If before the fire that destroyed the X-Boy robots, the buyer had in fact revoked his acceptance, the risk of loss would have shifted back to the seller to the extent that the buyers insurance didnt cover the loss. ii. Breach by Buyer, 2-510(3): Where the buyer as to conforming goods already identified is in breach and before risk of their loss has passed to him, the seller may to the extent of any deficiency in his insurance coverage treat the risk of loss as resting on the buyer for a commercially reasonable time. 1. Risk of loss will pass to a breaching buyer only if 3 conditions met: a. the goods must conform to the K; b. the goods must have been identified to the K before the buyer breaches; c. AND the seller must have a deficiency in its insurance coverage. i. Operates the same as 2-510(2): if loss is fully covered by sellers insurance, the risk of loss remains on the seller; if seller has no insurance coverage, the entire loss can be passed on to the breaching buyer; if partial insurance coverage, the seller retains the risk of loss for the insured portion of loss, with the loss of the remainder being passed back to the buyer. 23

2. Commercially reasonable time: When these 3 conditions are met, the aggrieved seller is entitled to pass the risk of loss to the buyer to the extent of the sellers insurance coverage, but only for a commercially reasonable time. 4. Risk of Loss and Doctrine of Impossibility of Performance: In addition to suffering economic loss for lost goods, is the seller liable in damages to the buyer for nondelivery? a. Impossibility, 2-613: i. If the doctrine of impossibility is applicable, the seller is excused from his obligation to make delivery; he has an excuse for nonperformance. ii. If the doctrine of impossibility is not applicable, the seller is liable for damages on account of nondelivery, unless he tenders replacement goods for those damaged or destroyed. b. Risk of Loss i. If the buyer has the risk of loss (and excuse from performance under 2-613 is thus not available to the seller), the seller does not need to perform by sending a conforming good and the buyer must pay the seller for the destroyed goods. IV. REMEDIES A. General 1. Policy, 1-106: The goal of all remedy provisions in the Code is that the aggrieved party may be put in as good a position as if the other party had fully performed. Thus, the goal is not to provide a windfall to the nonbreaching party. B. Sellers Remedies 1. Four Ways Buyer Might Breach, 2-703 a. wrongfully reject goods; b. wrongfully revoke acceptance; c. fail to make a payment when due; OR d. anticipatorily repudiate the K 2. Seven Possible Remedies an Aggrieved Seller Might Pursue, 2-703 a. withhold delivery, 2-703; b. stop delivery by any bailee, 2-703; c. identify goods to the K in the case of an anticipatory repudiation, 2-703; d. resell and recover damages under 2-706; i. Elements of 2-706: The seller is eligible for resale damages whenever: 1. the buyer breaches, 2. the seller reasonably identifies the goods being resold as referring to the broken K, 3. the seller gives the buyer notice of resale, AND 4. the seller resells the goods within a commercially reasonable manner/ time, which is determined by looking at the circumstances, including the type of market. ii. Formula for 2-706: Resale Damages = K Price Resale Price + Incidental Damages Expenses Saved As a Consequence of Buyers Breach. e. recover K-market difference (without resale) under 2-708(1); i. Formula: K-market difference damages = K Price Market Price + Incidental Damages Expenses Saved as Consequence of Buyers Breach. 24

1. Market Price: The market price under 2-708(1) is measured as of the time and place for tender, both of which are defined by the K. The time for tender will be the stated performance date in the K, and the place for tender will be a function of the delivery term. 2. Incidental Damages for Seller, 2-710: Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyers breach, in connection with return or resale of the goods otherwise resulting from the breach. f. recover lost profits under 2-708(2), if the K-market difference is inadequate; i. 2-708(2): If the K-market difference is inadequate to put the seller in as good a position as performance would have done, then the measure of damages is the profit which the seller would have made from full performance by the buyer, together with any incidental damages, due allowance for costs reasonably incurred and due credit for payments or proceeds of resale. g. sue buyer for the price of the K under 2-709; AND/OR i. Three circumstances, 2-709(1): Seller is eligible to sue for the price of the K only if one of the following circumstances exist: 1. where the buyer has accepted the goods; OR 2. where conforming goods, whether or not accepted, have been lost or damaged within a commercially reasonable time after risk of their loss has passed to the buyer; OR 3. where the seller has identified goods to the K and there is no reasonable prospect of reselling them to a third party for a reasonable price. ii. Possible Results, 2-709(2): 1. Buyer pays judgment: If the buyer ultimately pays the judgment for the price, the buyer is entitled to the goods. 2. Seller resells goods: If while the seller is holding the goods for the buyer resell becomes possible, then the seller may resell and must deduct from its action for the price any proceeds of resale. iii. Incidental damages: The seller who sues for the price is also eligible to recover incidental damages. 1. Incidental damages, 2-710: Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyers breach, in connection with return or resale of the goods otherwise resulting from the breach. 2-710 h. cancel the K. 2. No Consequential Damages, 1-106: Consequential damages are not allowed for the seller unless there is a specific provision made for them in the Code C. Buyers Remedies: Two Remedies Sections 1. Buyer has Not Accepted Goods or May Revoke, 2-711: a. Three Triggers: Three triggers, one of which must occur to allow a buyer to the remedies under 2-711. Where: i. the seller fails to make delivery; 25

ii. the seller repudiates; OR iii. the buyer rightfully rejects or justifiably revokes acceptance. b. Available Remedies: Where the seller has 1)failed to make delivery or 2)repudiated, or 3)the buyer has rightfully rejected or justifiably revoked acceptance, the buyer may: i. cancel the K AND ii. recover as much of the price as has been paid, AND in addition: 1. either: a. cover, 2-711(1)(a) OR i. Cover:The buyer covers by buying comparable goods from another seller and using any increase of these comparable goods to calculate damages. ii. Cover Elements, 2-712(1): To have a remedy of cover, the aggrieved buyer must: 1. cover in good faith; 2. act without reasonable delay; AND 3. make a reasonable substitute purchase. iii. Cover Formula, 2-712(2): Cover Damages = Return of any Purchase Price + Cost of Cover Contract Price + Incidental Damages + Consequential Damages Expenses Saved 1. Incidental damages, 2-715(1): Incidental damages to an aggrieved buyer include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach. 2. Consequential damages, 2-715(2): Consequential damages available to an aggrieved buyer include injury to person or property (not economic loss) proximately caused by sellers breach and any loss (including economic loss) so long as: a. the seller either knew or had reason to know of the special damages that could flow from a breach; AND b. the buyer has mitigated damages; AND c. the breach was the but-for cause of the loss; AND d. the buyer can prove consequential damages with reasonable certainty (i.e., lost profits); b. recover K-market price differential, 2-713. i. Formula: Damages = Return of any Purchase Price + Market Price Contract Price + Incidental 26

Damages + Consequential Damages Expenses Saved 1. Market Price: a. Place, 2-713(2): Location for purposes of calculating market price is the place for tender except in cases of rejection after arrival of acceptance, it is the place of arrival (i.e., the buyers local market). b. Time, 2-713(1): Market price is to be determined at the time when the buyer learned of the breach. 2. Further, under 2-711(b), where 2)the seller has repudiated or 3)the buyer has rightfully rejected or justifiably revoked acceptance, the buyer may obtain a. specific performance AND i. Specific performance, 2-716: Specific performance is available only where monetary damages are insufficient b/c the goods are unique or other circumstances exist. b. Replevin i. Replevin, 2-716(3): The buyer has the right to replevin for goods identified to the K if: 1. after a reasonable effort he is unable to effect cover for such goods; OR 2. the circumstances reasonably indicate that such effort to effect cover will be unavailing; OR 3. if the goods have been shipped under reservation and satisfaction of the security interest in them has been made or tendered. 2. Buyer has Accepted Goods, 2-714: a. Obligation to Pay, 2-607(1): If the buyer accepts the sellers goods, even though they are defective, the buyer is obligated to pay the purchase price for the goods. Consistent with this obligation, the aggrieved buyer is not entitled to the return of any of the purchase price that has been paid for accepted goods. b. Notification of breach, 2-607(3)(a): After the buyer has accepted the goods, he must notify the seller within a reasonable time after the buyer discovers or should have discovered any breach. Failure to do so bars the buyer from any and every remedy. 2-607(3)(a). i. Burden of proving breach, 2-607(4): Upon acceptance, the buyer has the burden of proving any breach by the seller with respect to the accepted goods. c. Available Remedies: i. Recovery of ordinary loss, 2-714(1): Where the buyer has accepted goods and given notification (2-607(3)) he may recover as damages, including incidental (2-714(3)) and consequential damages (2-715), for any nonconformity of tender the loss resulting in the ordinary course of events from the sellers breach as determined in any manner which is reasonable. 27

ii. Breach of warranty, 2-714(2): First, make out the elements of breach of warranty: 1)warranty, 2)warranty breached, 3)breach caused the harm complained of, 4)the extent of Ps damages, and 5) the Ps ability to fend of certain affirmative defenses. 1. Formula: Damages for breach of warranty = Value of the Conforming Goods Value of Nonconforming Goods + Incidental Damages + Consequential Damages a. Value of goods: The value of the conforming/ nonconforming goods is determined at the time and place of acceptance. i. Objective: the value of the goods according to some objective standard (i.e., K price, market value) ii. Subjective: the value of the goods to the buyer. b. Special Circumstances, 2-714(2): The standard formula makes the difference between VCG and VNCG subject to the proviso unless special circumstances show proximate damages of a different amount. iii. Incidental and Consequential Damages, 2-715: see above. A typical result of a warranty breach may be that the buyer is deprived of the use of the goods during the time they are being repaired or replaced.

Payment Systems: Articles 3 & 4


GLOSSARY for Articles 3 & 4 1. Types of checks: a. Check: Check means (i) a draft payable on demand and drawn on a bank or (ii) a cashiers check or tellers check. 3-104(f). An instrument may be a check even though it is described on its face by another term, such as money order. b. Cashiers check: Cashiers check means a draft with respect to which the drawer and drawee are the same bank or branches of the same bank. 3-104(g). c. Tellers check: Tellers check means a draft drawn by a bank (i) on another bank or (ii) payable at or through a bank. 3-104(h). d. Travelers check: see 3-104(i) e. Certificate of deposit: see 3-104(j) 2. Overdue, 3-304: a. 3-304(a): An instrument payable on demand becomes overdue at the earliest of the following times: i. (1)on they day after the day demand for payment is duly made; ii. (2)if the instrument is a check, 90 days after its date; OR iii. (3)if the instrument b. 3-304(b): i. (1)If the principal is payable in installments and a due date has not been accelerated, the instrument becomes overdue upon default under the instrument for non-payment of an installment, and the instrument remains overdue until the default is cured. ii. (2) If the principal is not payable in installments and the due date has not been accelerated, the instrument becomes overdue on the day after the due date. 28

iii. (3) if a due date with respect o principal has been accelerated, the instrument becomes overdue on the day after the accelerated due date. c. 3-304(c): Unless the due date of principal has been accelerated, an instrument does not become overdue if there is default in payment of interest but no default in payment of principal. i. If a due date is accelerated, then it is due now. I. PAYMENT SYSTEMS People involved 1. Issue: Issue means the first delivery of an instrument by the maker or drawer, whether to a holder or nonholder, for the purpose of giving rights on the instrument to any person. 3-105(a). a. Nonissuance is a defense: Nonissuance is a defense. 3-105(b). 2. Issuer: Issuer means a maker or drawer of an instrument. 3-105(c). Two types of issuers: a. Drawer: Drawer means a person who signs or is I dentified in a draft as a person ordering payment. 3-103(a)(5). (i.e., a check) b. Maker: Maker means a person who signs or is identified in a note as a person undertaking to pay. 3-103(a)(7). 3. Payee: the person to whom the check is issued is the payee. 3-105(a). 4. Drawee: Drawee means a person ordered in a draft to make payment. 3-103(a)(4). (A bank can be the drawee and the payor bank.) a. Acceptor: Acceptor means a drawee who has accepted a draft. 3-103(a)(1). 5. Indorser: An indorser is anyone that signs an instrument in any capacity other than as a drawer, acceptor or maker. A person may indorse an instrument to negotiate it to a third person. 3-204. 6. Person entitled to enforce, 3-301: Person entitled to enforce an instrument means: a. (i) the holder of the instrument; b. (ii) a nonholder in possession of the instrument who has the rights of a holder (i.e., transferee); OR c. (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to 3-309 or 3-418(d). A. The Banks Right to Pay 1. When is it Proper to Pay? a. Properly Payable Rule, 4-401(a): It is proper for the bank to charge a customers account for any check that is properly payable. A check is properly payable if the customer has authorized the payment 4-401, cmt 1. i. Not authorized payment: 1. forgery: a. Stolen from customer and forged b. Stolen from payee and indorsement forged 2. alteration 3. stale check, 4-404: Where a check is more than six months old, a bank may or may not pay the check, but must do so in good faith. Thus, undergo a good faith inquiry (i.e., bank could call the customer, etc.) 4. valid stop payment order, 4-403: A stop payment order is valid, and t/f a check ceases to be properly payable if: 29

a. the customer notifies the bank at a time and in a manner that affords the bank a reasonable opportunity to act on it before any final action by the bank with respect to the item; b. the customer allows the bank to identify the check with reasonable certainty (i.e., bank needs the account # and check #); AND c. the stop order is valid for only six months (must renew every six months to remain unpayable). 5. check is post-dated and bank has been notified of post-date. a. The customer must follow the rules for stopping payment (reasonable opportunity for bank to act, six-month duration, reasonable certainty.) b. Overdrafts, 4-401(a), 4-402(a): A payor bank may honor or dishonor a check that is overdrafted, unless the bank has agreed to pay the overdraft (look at K between the parties overdraft protection). No good faith requirement. i. Joint Account, 4-401(b): A person in a joint account is not liable to the payor bank for another account holders overdraft if the person did not sign the check and did not enjoy any benefits of the check. 2. Remedies for Improper Payment a. Recredit Customers account, 4-401: The basic remedy for an improper transaction is that the bank must recredit the customers account with the funds improperly paid out. b. Proximate Damages, 4-402(b): A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Whether any consequential damages are proximately caused by the wrongful dishonor is a question of fact. i. Damages can include consequential and incidental damages such as lost income, lost value of a business, and/or emotional distress. Maryott. c. Stop Order = Subrogation Rights of Bank, 4-407: If a payor bank has paid an item over a valid stop order, the bank becomes subrogated to the other parties to prevent unjust enrichment. i. For example, if the drawer had kept the goods, the payor bank can assert the payees rights on the underlying transaction if the drawer tries to make the bank recredit his account. Or, if the payor bank had recredited the drawers account and the goods are crappy or werent delivered, it can go after the payee on the underlying transaction. B. The Banks Obligation to Pay Checks 1. Overall rule: 4-402(a): If the customer has funds available to cover an item, the bank has an affirmative obligation to pay the check. a. Damages, Wrongful Dishonor, 4-402(b): A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. Whether any consequential damages are proximately caused by the wrongful dishonor is a question of fact. 2. Are Funds Available for Payment? a. Time of Evaluation, 4-402(c): The bank is free to determine whether the account has sufficient funds at any time between the time the item is received by the payor bank and the time that the payor bank returns the item. 30

i. Example: Cliff writes check to Archie on September 28, knowing that his salary will be deposited automatically into his account on September 30. If Archie presents the check to Rocky Mountain on Sept. 29, the bank is free to evaluate the account at that time and decide to dishonor it if the account does not contain sufficient funds. Then, if the amount of available funds increases on Sept. 30, the bank could still dishonor the check, even though the account at the time of dishonor contained funds sufficient to cover the check. b. Availability of Funds: Regulation CC governs this. i. Counting Days, Regulation CC: 1. Banking days, 229.2(f): Banking day means that part of any business day on which an office of a bank is open to the public for carrying on substantially all of its banking functions. Reg. CC, 229.2(f). 2. Business days, 229.2(g): Business days are all calendar days other than Saturdays, Sundays, and federal holidays. Reg. CC, 229.2(g). a. Non-business days: Saturdays, Sundays, January 1, the third Monday in January, the third Monday in February, the last Monday in May, July 4, the first Monday in September, the second Monday in October, November 11, the fourth Thursday in November, or December 25. If January 1, July 4, November 11, or December fall on a Sunday the next Monday is not a business day. Reg CC 229.2(g). ii. Rules of Withdrawal, Regulation CC: 1. Local checks: a. Noncash withdrawals from local checks: The bank must make $100 available on the first business day after the banking day on which the funds are deposited. Regulation CC, 229.10(c)(1)(vii). The rest of the funds must be available for withdrawal no later than the second business day after the banking day on which the funds are deposited. Regulation CC, 229.12(b) b. Cash withdrawals from local checks: The bank must make $100 available on the first business day following the banking day on which the funds are deposited and must make an additional $400 available on the second day (for a total of $500) following the banking day on which the funds are deposited. The bank may defer the availability of any remaining amount until the third business day following the banking day on which the funds are deposited. Reg. CC, 229.12(b) & (d). 2. Nonlocal checks: a. Noncash withdrawals from nonlocal checks: The bank must make $100 available on the first business day after the banking day on which the funds are deposited. The rest of the funds must be available for withdrawal no later than the fifth business day after the banking day on which the funds are deposited. Reg. CC, 229.12(c)(1) 31

b. Cash withdrawals from nonlocal clerks: The bank must make $100 available on the first business day following the banking day on which the funds are deposited and an additional $400 available on the fifth business day (for a total of $500) following the banking day on which the funds are deposited. The bank may defer the availability of any remaining amount until the sixth business day following the banking day on which the funds are deposited. Reg. CC 229.10(c)(1)(vii). iii. Availability Rules for Low-Risk Items, Regulation CC 1. See the table on page 322. 3. Damages for Wrongful Dishonor a. Rule, 4-402(b): A payor bank is liable to its customer for damages proximately caused by the wrongful dishonor of an item. i. The damages caused by wrongful dishonor often exceed the amount of the dishonored check. This can include lost income, lost value of a business, and/or emotional distress. Maryott. C. Collection of Checks 1. Definitions: a. Bank: Bank means a person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or trust company. 4105(1). b. Payor bank, 4-105(3): a payor bank is a bank that is the drawee of draft. (i.e., the bank in which the drawers account is.) c. Depositary bank, 4-105(2): a depository bank is the first bank to take an item even if it is also the payor bank unless the item is presented for immediate payment over the counter. i. Collecting bank: The depositary bank becomes the collecting bank when it tries to collect the money for the check from the payor bank. d. Presenting bank: Presenting bank means a bank presenting an item except a payor bank. 4-105(6). i. Presentment: Presentment means a demand made by a person entitled to enforce an instrument to (i) to pay the instrument or (ii) to accept a draft made to the drawee. 3-501(a). ii. (The presenting bank is the bank immediately preceeding the payor bank. Only the payor bank can sue under presentment warranties?) e. Collecting bank, 4-105(5): The term collecting bank is used to refer to any bank in the collection process other than the payor bank, which t/f includes the depositary bank as well as any intermediary banks involved. f. Intermediary bank: Intermediary bank means a bank to which an item is transferred in course of collection except the depositary or payor bank. 4-105(4). g. Korybut said that its possible that one bank can have three hats: the depositary bank, the presenting bank, and the collecting bank. h. Drawer: the person who issues/ writes the check. i. Payee : the person to whom the check is issued. 2. Final payment: a. Final Payment by Payor Bank, 4-215(a): Three ways Payor bank finally pays an item: 32

i. payment in cash; (An item is paid in cash by the payor bank when upon presentment over the counter to a teller, the teller pays cash for the check). ii. settles for an item without reserving the right to revoke; OR iii. fails to revoke its provisional settlement in the time and manner permitted by statute (i.e., midnight deadline), clearing-house rule or agreement. b. Results of Final Payment i. Firm up / irrevocable, 4-214(c): As of the moment of final payment by the payor bank, all provisional credits generated in the forward collection process between banks are said to firm up and become final. Final payment is irrevocable. ii. Discharge of obligation, 4-302: Once the payor bank pays the item by transferring funds to the collecting bank, the payor bank discharges its obligation to account for the check. 4-302. 3. Obtaining Payment Directly a. Two ways payee can obtain payment directly from payor: i. Over the counter, 4-301(a): Where a payee cashes a check by presenting it to the payor bank for immediate payment over the counter, the payor bank must either pay the check or dishonor it on the day of presentment. If the payor bank does not make payment that day, the check is dishonored, and the payee has an action against the drawer. 1. Obligation is final, 4-215(a)(2): Payor banks obligation becomes final immediately. Once the obligation is final, the payor bank has no opportunity to recover funds that it has disbursed. ii. On us transaction: An on us is an item where the payor bank and the depositary bank are the same: the payee and the drawer both have accounts at the same bank. 1. In depositary capacity: In its capacity as the depositary bank, the bank will make a provisional settlement to the payees account when she deposits the drawers check. The bank can charge back the account or obtain a refund if it later dishonors the drawers check under 4-214(c)/ 4-301(b). 2. In payor capacity: In its capacity as the payor bank, the bank has until its midnight deadline to decide whether to honor the check, 4301(b), which is midnight on the banking day following the banking day on which the item was received. 4-104(a)(10). 4. Indirect Payment Through Intermediaries: a. Depositary banks duties to Payee: i. Duty to try and collect from payor bank, 4-201(a): When a payee deposits a check with the depositary bank, the depositary bank agrees that it will try to collect from the payor bank. ii. Duty to deposit funds, 4-215(e)(1): The depositary bank has no duty allow the payee to draw upon the funds represented by the check until it has had a reasonable time to receive return of the check (i.e., had the check been dishonored by the payor bank). 1. Regulation CC: The depositary bank will be governed by the availability requirements of Regulation CC. a. Example: If the check is local, the funds must be available for payee for noncash withdrawal no later than the second business day after the banking day on which the check was deposited. 33

iii. Provisional settlement, 4-201(a), cmt 3: A provisional settlement is a bookkeeping act where the payees account reflects the deposited amount. 1. Revoking provisional settlement, 4-214: Where the collecting bank/ depositary bank fails to receive final payment from the payor bank, it may revoke the provisional settlement and charge back the amount of any credit given to the payee, if by its midnight deadline or within a longer reasonable time after it learns the facts, it returns the item or sends notification of the facts. 4-214. If the collecting bank/depositary bank fails these requirements, it may still revoke the settlement, but it may be liable to the payee for any loss resulting in the delay. 4-214(a). However, the right to revoke terminates if and when the payor bank makes a final payment on the check (see final payment, above). 4-214(a). a. Midnight deadline, 4-104(a)(10): A banks midnight deadline is midnight of the banking day following the banking day on which the item was received. i. Receives, 2-214(a): A depositary bank receives the item on the day it receives the check from or notice from the payor bank. b. Return, 4-214(b): Return the check means sending it to the customer. i. Sent, 1-206(36): Sent is putting the check in the mail. So to return the check, the depositary bank simply mails it to the customer. 2. Termination of right to revoke settlement, 4-214(a): A depositary/ collecting banks right to revoke a settlement terminates when the payor bank makes a final payment on the check. b. Collecting Banks duties to Payee: i. Duty of ordinary care, 4-202(a): A collecting bank owes a duty of ordinary care to its customer in performing its collection and return duties. 1. Ordinary care, 3-103(a)(7): A bank can establish a prima facie case that it exercised ordinary care if it can establish that its activities conform to general banking usage. 2. Reasonably prompt methods of collection, 204(a): a. collection through a clearinghouse, the relationship established through private K on a bank-by-bank basis; b. direct-send and correspondent clearing, the relationship established through private K on a bank-by-bank basis; OR c. collection through the federal reserve system. ii. Damages for failure to use care, 4-103(e): The measure of damages for a collecting banks failure to exercise ordinary care in handling a check is the amount of the check reduced by an amount that could not have been realized by use of ordinary care. c. Payor banks duties to Payee: i. Payor bank not obligated to payee, 3-408: The payor bank is not directly obligated to the payee, but only to its customer, the drawer. It becomes liable to drawee only if it accepts the instrument, 3-408, which is defined as the drawees signed agreement to pay the draft, 3-409. 34

d. Payors duties under Article 4: the payor bank will receive the check through one of the above methods. i. Is the check become Properly Payable? See above ii. What are the remedies if check is not properly paid? See above iii. How long does the payor bank have to pay or dishonor/ return the item to the depositor/ collecting bank? 1. Time: a. Payor Bank settles item, 4-301(a): If the payor bank settles for the check by midnight of the banking day of receipt, it has until its midnight deadline to decide whether to make a final payment on the check. i. Settle, 4-104(a)(11): Settle means to pay in cash, by clearinghouse settlement, in a charge or credit by remittance, or as otherwise agreed. A settlement may be either provisional or final. ii. Midnight deadline, 4-104(a)(1): A banks midnight deadline is midnight of the banking day following the banking day on which the item was received. 4-104(a)(10). b. Payor Bank does not settle item, 4-302(a): If the payor bank neither settles for the item nor returns it by midnight of the banking day of receipt, it is accountable for the item, which means that the person entitled to enforce the check will be able to hold the payor bank strictly liable for the amount of the check. (By retaining the check beyond its midnight deadline, the payor bank has finally paid on the check.) iv. What happens if the Payor Bank, after settling for the check with the Collecting Bank on the banking day of receipt, decides to dishonor the check? 1. 4-301(a): If, after settling the check on the day of receipt, the payor bank wishes to dishonor the check, it may revoke and recover the settlement if it returns the check or sends notice 1)before it has finally paid the item and 2)before its midnight deadline. 2. Breakdown: a. return check or send notice before final payment (see final payment, above); AND b. return check or send notice before Payor banks midnight deadline. i. Midnight deadline, 4-104(a)(1): A banks midnight deadline is midnight of the banking day following the banking day on which the item was received. 4-104(a)(10). 3. Failure to timely return check or give notice = accountable, 4301(a): Where the payor bank has failed to timely return the check or give notice, payment becomes final and it cant revoke its settlement with the collecting bank. 4-301(a). The payor bank is accountable for the check, which means it is liable for the face amount of the check, regardless of whether the holder of check 35

suffers any loss and whether the check is properly payable. 3302(a)(1). (Payor bank has made final payment.) a. Payor discharges accountability, 4-302: Once the payor bank pays the item by transferring funds to the collecting bank, the payor bank discharges its obligation to account for the check. 4. Where payor bank makes final payment, 4-215(a): Where the payor bank has made final payment under 4-215(a), the payor bank may no longer revoke its provisional settlement with the collecting bank. 4-215(a). Once the payor bank pays the item by transferring funds to the collecting bank, the payor bank discharges its obligation to account for the check. 4-302. a. Collecting banks obligations: After final payment by the payor bank, the collecting bank becomes accountable to its customer for the amount of the check. 4-215(d). Further, the collecting bank cannot revoke the provisional settlement it gave to its customer. 4-214(a). v. What does the Payor bank do if it decides to pay the bank? 1. Nothing, 4-214(a)(3): Since the payor bank will have provisionally settled for the check with the collecting bank on the banking day of receipt, it simply has to wait for the midnight deadline to pass, at which time the check is deemed to be finally paid. e. What are the Payor banks duties under Regulation CC in returning an unpaid check to the depositary bank? i. **Reg CC duties different than Article 4: Breach or performance of Regulation CC duties do not affect the duties under Article 4. They are two separate analyses. There is no overlap between them. Go through both of them separately. ii. Two Duties Where Dishonor: Under Reg CC, where a payor bank (Reg CC calls it paying bank) determines not to pay a check, it has: 1. the duty to expeditiously return the unpaid items, 299.30(a); AND a. Two tests: Paying bank must meet one of two tests to satisfy requirement: i. the two day/four day test, 229.30(a)(1); OR 1. Local: The time limit for the depositary bank to receive return of a local check is not later than 4pm on the 2nd business day following the banking day the check was presented to the payor bank. 2. Nonlocal: The time limit for the depositary bank to receive return of a nonlocal check is not later than 4pom on the 4th business day following the banking date on which the check was presented. ii. the forward collection test, 229.30(a)(2): A paying bank returns a check in an expeditious manner if it sends the returned check in a manner 36

that a similarly situated bank would normally handle a similar check. 2. the duty to give prompt notice of nonpayment of any item in the amount of $2,500 or greater such that notice is received by the depositary bank by 4:00pm local time on the second business day following the banking day on which the check was presented to the payor bank, 229.33(a). a. Notice, 229.33(a): Notice may be provided by any reasonable means, including the returned check, a writing, telephone, Fedwire, telex, or other form of telegraph. iii. Remedies: 1. Liability, 229.38: A bank that fails to exercise ordinary care (objective standard) or good faith (objective and subjective standard) may be liable to the depositary bank, the depositary banks customer, the owner of a check, or another party to the check. a. Damages for Negligence: If the bank fails to exercise ordinary care it is liable for amount incurred by the party up to the amount of the check. (capped by the amount of the check.) i. Example: If check was for $2,500, the most bank is liable for is $2,500. b. Damages for Bad Faith: If the bank acts in bad faith it is liable for the amount of the check and other damages suffered by the party as a proximate consequence. i. Example: Check was for $2,500. Bank is liable for $2,500 plus other proximate damages. 2. Breach of warranty, 229.34(d): Damages for breach of the warranty may not exceed the consideration received by the paying bank plus expenses related to the returned check. This is the sole interaction between Reg CC and Article 4. a. Thus, the payor bank is liable only for the amount of the check (the consideration) and the related expenses, not the liability incurred by the depositary bank to its customer from the wrongful dishonor of the check. D. Risk of Loss in the Checking System 1. Who is a Holder? a. Significance, 3-301(i): Any person that holds an instrument is entitled to enforce the instrument under 3-301(i). b. Holder, 1-201(20): For a person to be a holder of an instrument she must: i. have (physical) possession of the instrument; AND 1. Only one person: Only one person can be a holder at any time b/c only one person can posses the instrument at any one time. ii. the obligation evidenced by the instrument must run to her (except in the case of a collecting bank, 4-205(1)). 1. Two types of instruments: All instruments are issued either as bearer paper or order paper. a. Bearer paper, 3-201(b): When an instrument is payable to bearer, transfer of physical possession alone is sufficient 37

for its negotiation. No indorsement (signature) is necessary to negotiate bearer paper. i. Indorsed order paper: By placing an indorsement on order paper, it is converted into bearer paper. When it is either lost or stolen, the finder or the thief comes into possession of bearer paper and hence becomes its holder. 1. Special indorsement: By specially indorsing a check over to a particular person, the check is converted into an order instrument payable to the named particular person only. The indorser is no longer the holder. b. Order paper, 3-201(b): Where an instrument is payable to order, transfer of possession and indorsement (signature) is necessary to negotiate it to another person. i. Types of indorsements: 1. Blank indorsement (regular indorsement): A blank indorsement is any indorsement made by a holder that does not indicate an identified person. A blank indorsement transforms order paper to bearer paper, so that any person in possession is a holder. 2. Special indorsement: A special indorsement identifies a person to whom the instrument is to be paid. A special indorsement converts bearer paper into order paper. a. Example: If Carl had a check that he wished to transfer to Jodi, he could indorse it by writing: Pay to Jodi, /s/ Carl. This becomes order paper and Jodi is holder if she has possession of it. No one else can be holder. 3. Restrictive indorsement: A restrictive indorsement is an indorsement that purports to limit the indorsees ability to deal with the instrument. 3-106(a),(b) invalidates most types of restrictive indorsements, but does respect common restrictive indorsements of an instrument for deposit only or for collection. a. Example: Pay to Jodi, but only if Cal Ripken plays every game in 1998. /s/ Carl. This restrictive indorement will be invalidated. 4. Anomalous indorsement: An indorsement is anomalous when it is made by a person that was not a holder at the time it made the 38

indorsement. 3-205(d). Anomalous indorsements play no role in negotiation the anomalous indorser becomes an accommodation party. ii. Other indorsement rules: 1. A depositary bank automatically becomes a holder of a check deposited by its customer, even if the check was order paper and the customer failed to indorse it to the bank at the time of deposit. 4-205(1) 2. A bank need not indorse the check when it transfers it to any other bank instead, any agreed method that identifies the transferor bank is sufficient. 4-206. 3. Regulation CC provides that no party other than a bank can become the holder of a check once it has been indorsed by a bank. Thus, even if a bank indorsed a check in blank (so that it was bearer paper), an employee that stole the check could not become holder of the check. 2. Liability on Instruments a. General: In most cases, where a person signs her name on a negotiable instrument, she obligates herself to pay the instrument. 3-401. b. Makers Liability/ Issuer, 3-412: The party that issues a note is directly and unconditionally liable on the instrument. i. 3-412 text: The issuer of a note or cashiers check is obliged to pay the instrument (i) according to its terms at the time it was issued or, if not issued, at the time it first came into possession of a holder, or (ii) if the issuer signed an incomplete instrument, according to its terms when completed, to the extent stated in Sections 3-115 and 3-407. The obligation is owed to a person entitled to enforce the instrument or to an indorser who paid the instrument under Section 3-415. c. Drawers Liability, 3-414: If a draft is dishonored, the drawer is liable for payment to the person entitled to enforce the check and to any indorser who pays the check under 3-415. 3-414. The drawers liability is discharged if the draweepayor bank pays the draft. d. Drawees Liability, 3-413(a): The drawee of a draft has no liability on a draft unless it accepts the draft (i.e., not liable to payee). Once the drawee makes payment, the drawee has no further obligation to pay that person. e. Indorsers Liability: i. Indorser, 3-204: An indorser is anyone that signs an instrument in any capacity other than as a drawer, acceptor or maker. ii. Indorser liability, 3-415(a): The indorser promises that if the instrument is dishonored, she will pay the amount of the instrument according to its terms at the time of her indorsement. An indorsers obligation to pay is owed to the person who is 1)entitled to enforce the instrument or 2)to a subsequent indorser who pays the instrument. 1. Who can enforce a. Person entitled to enforce (i.e., holder) 39

b. A subsequent indorser who has paid out 2. Triggers: Only when the instrument has been dishonored, 3415(a), and any necessary notice of dishonor has been given, 3415(c) & 3-415(b), may a holder then seek to recover from the indorser. a. Dishonor, 3-415(a): Dishonor of an instrument by the drawee is a condition precedent to the indorsers liability. b. Timely notice of dishonor, 3-415(c): Notice of dishonor is also a condition precedent to the indorsers liability unless such notice is excused. c. Timely presentment, 3-415(e): 3. Discharge of liability: a. Payment/ acceptance, 3-415(d): If a draft is accepted/paid by a bank after an indorsement is made, the liability of the indorser is discharged. b. Untimely Presentment, 3-415(e): An indorsers liability is discharged if a check is not presented for payment or given to a depositary bank for collection within 30 days after his indorsement. iii. Limiting Liability: An indorser can limit its liability by indicating that it is signing the instrument without recourse. 3-414(e), 3-415(b). f. Transfer Warranties: Article 3 is for outside the bank collection process (like when Joe transfer check to Bill) and Article 4 is for inside the check collection process (like when Joe transfers check to SW Bank or SW Bank transfers check to NW Bank). i. Transfer, 3-203(a): An instrument is transferred when it is voluntarily, physically delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument. (Any movement of the instrument in between issuance and presentment is a transfer as long as the transfer is voluntary. Presentment is not transfer, it is only presentment.) 1. The person who transfers the instrument is the transferor and the person who receives the instrument is the transferee. ii. Transfer warranties, 3-416(a)/ 4-207(a): A person (or a customer or collecting bank for 4-207(a)) who transfers an instrument for consideration warrants to the transferee and, if the transfer is by indorsement, to any subsequent transferee that: 1. (1) the warrantor is a person entitled to enforce the instrument; 2. (2) all signatures on the instrument are authentic and authorized; 3. (3) the instrument has not been altered; a. Example: Check amount has been fraudulently raised by the payee from $50 to $5000 by inserting a couple extra zeros. 4. (4) the instrument is not subject to a defense or claim in recoupment of any party which can be asserted against the warrantor (i.e., transferor) AND 5. (5) the warrantor has no knowledge of any insolvency proceedings against the drawer of the check. iii. Who gives the transfer warranties? 40

1. a transferor who transfers an instrument for consideration. Any consideration sufficient to support a simple K will support these warranties. 3-416(a), cmt. 1. iv. Who receives transfer warranty? 1. the immediate transferee AND 2. any subsequent transferees if the transferor indorsed the instrument v. Damages for Breach, 3-416(b)/ 4-207(c): Any transferee who took the instrument in good faith may recover from the warrantor as damages for breach an amount equal to the loss suffered as a result of the breach, but not more than the amount of the instrument plus expenses and loss of interest incurred as a result of the breach. g. Presentment warranties: Article 3 is used outside check collection process and Article 4 is used inside check collection process i. Presentment, 3-501(a): Presentment means a demand made by a person entitled to enforce an instrument to (i) to pay the instrument or (ii) to accept a draft made to the drawee. ii. Presentment warranties, 3-417(a)/ 4-208(a): If an unaccepted draft is presented to the drawee for payment or acceptance and the drawee pays or accepts the draft, (i)the person obtaining payment or acceptance, at the time of presentment, and (ii) a previous transferor of the draft, at the time of the transfer, warrant to the drawee that pays or accepts the draft in good faith that: 1. (1) the warrantor is a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of the person entitled to enforce the draft; a. 3-417, cmt. 2: Subsection (a)(1) is in effect that there are no unauthorized or missing indorsements. So doesnt apply if forged drawers signature. 2. (2) the draft has not been altered; AND 3. (3) the warrantor has no knowledge that the signature of the purported drawer of the draft is unauthorized. iii. Who gives presentment warranties? 1. (i) the person who obtains payment or acceptance on a check a. this includes the presenting bank 2. (ii) any previous transferor iv. Who receives presentment warranties? 1. the drawee-payor bank that pays on a check in good faith v. Damages for Breach of Presentment Warranty, 3-417(b)/ 4-208(b): Damages for breach of presentment warranty are equal to the amount paid by the drawee less the amount the drawee is entitled to receive from the drawer plus expenses and loss of interest arising from the breach. 1. Negligent payment, 3-417(a)/ 4-208(b): That a payor or acceptor was negligent in making the payment does not deny it the warranties. h. Conversion, 3-420 i. Conversion, 3-420(a): An instrument is converted if it is taken by transfer, other than a negotiation, from a person not entitled to enforce the instrument or a bank makes or obtains payment with respect to the instrument for a person not entitled to enforce the instrument or receive payment. 41

ii. Who may bring action in conversion? The person entitled to enforce the instrument under 3-301 at the time the conversion took place is entitled to bring an action in conversion. 1. Who may not bring action in conversion? a. **issuer of instrument OR b. payee or indorsee who did not receive delivery of the instrument either directly or through delivery to an agent or a co-payee. 3-420(a). iii. Against whom may an action in conversion be brought? Any thief who steals the negotiable instrument is liable in conversion, as is any bank that makes payment to a person not entitled to enforce the instrument. iv. Damages, 3-420(b): The measure of liability is presumed to be the amount payable on the instrument, but recovery may not exceed the amount of the plaintiffs interest in the instrument 1. **Subrogation: Now, BB has paid Lydgate, so it can use subrogration. It can assert Lydgates rights against Dorothy. So BB takes the $300 from Dorothy (which was the point all along.) 3. Forgery and Grounds for Preclusion a. General: i. Signature, 3-401(a): A person is not liable on an instrument unless (i) the person signed the instrument, or (ii) the person is represented by an agent who signed the instrument and the signature is binding. ii. Unauthorized signature, 3-403(a): Generally, a forged or otherwise unauthorized signature is ineffective as the signature of the person whose name is signed, which means the person whose signature was forged is not liable on the instrument. b. Forged Drawers Signature i. Payor Bank Honors Forged Check: The general rule is that the payor bank is liable where it pays a check with a forged signature b/c under 4401(a), such a check is not authorized and thus not properly payable. 1. Payor Bank: Payor Bank can shift loss: a. Person whom payment was made, 3-418(a)(ii): The payor bank is allowed to seek recovery from the person to whom or for whose benefit payment was made unless the person took the instrument in good faith and for value or who in good faith changed position in reliance on the payment. i. Good faith: Good faith means honesty in fact and observance of reasonable commercial standards of good faith (subjective and objective standards). 3-103(a)(6); 1-201(20). ii. Result: When payment is recovered, the instrument is treated as having been dishonored. The person from whom payment is recovered is given the rights of a person entitled to enforce the dishonored instrument. As a result, this person can enforce the instrument against the drawer or indorser just as if it had been dishonored on its initial presentment. b. Presentment warranty: see above. Could be a problem with breach, though: (a)(1) only applies to forged 42

indorsers signatures, not forged drawers signatures. And unlikely under (a)(3) bank knew of forgery. c. Transfer warranty: A payor bank cannot use transfer warranties b/c the check was not transferred to it, it was presented to it. Cant have both. It is just presented, not transferred. ii. Payor Bank Dishonors the Forged Check: If the payor bank dishonors the check, the party that presented the check is left holding an uncollected check. The presenting bank has two options to reallocate the loss. 1. Presenting bank: Two options: a. Indorser liability: As the holder of the check, the presenting bank is a person entitled to enforce the check 3-301(i). Thus, under 3-415(a), it can sue on the indorser liability of indorsers in the prior chain that led to the presenting bank becoming the holder of the check. b. Transfer warranties: Under 4-207(a)(2)/ 3-416(a)(2), a transferor warrants that all signatures are authentic and authorized. A forged or unauthorized signature of a drawer, indorser, or acceptor breaches the warranty. Unlike the analogous presentment warranty, the warrantors knowledge is irrelevant for transfer warranty. i. Damages for breach of Transfer Warranty: See above. c. Forged Indorsements: i. Generally: Loss can generally be passed back to the earliest solvent person in the chain after the forgery, even if the payor bank mistakenly honors the check. ii. Payor Bank Honors the Check: Where the payor bank honors a check with a forged indorsement, it must recredit the drawers account b/c it is not authorized and thus not properly payable under 4-401(a). 1. Payor bank can shift loss: a. Payor banks recovery, 3-418(b): The payor bank is allowed to seek recovery from prior parties in the chain of collection unless the person took the instrument in good faith and for value. b. Presentment warranty, 4-208(a)(1): Breach of (a)(1) b/c forged indorsement means the person was not entitled to enforce the draft or collecting the check on behalf of a person entitled to enforce the draft. 2. Presenting bank: If the Payor bank recovered from the presenting bank under breach of presentment warranty, then the presenting bank can recover its loss from parties earlier in the chain subsequent to the forger b/c those parties breached their respective transfer warranty. iii. Payor Bank Dishonors the Check: If the payor bank dishonors the check with a forged indorsement, the presenting bank is left with the check. 1. Presenting Bank: a. Indorser liability: Indorsers are liable to the presenting bank if the presenting bank is the person who is entitled to enforce the instrument (i.e. holder) or is a subsequent 43

indorser who pays the instrument under 3-415. 4-415(a). Here, the presenting bank is neither: it is not the holder, nor has it paid the instrument under 3-415. Thus, indorser liability is not a fruitful means for the presenting bank to recover its loss. b. Transfer warranties: With respect to transfer warranty liability, b/c neither the forger nor any party after the forger in the process of collection is a person entitled to enforce the instrument under 3-301, each of those parties has breached its transfer warranty under 4-207(a)(1) or the analogous 3-416(a)(1). Thus, the presenting bank can recover its loss. 4. Grounds for Preclusion: Several grounds that a forged signature will be treated as though it was authorized. a. Imposter or fictitious payee, 3-404: A forged indorsement is deemed effective to negotiate the instrument where it is issued to an imposter or fictitious payee. In other words, the loss is allocated to the person that was victimized by the fraud, i.e., the drawer. i. Comparative negligence, 3-404, cmt 3: Where the payor bank or depository bank is negligent, the person bearing the loss (the drawer) may recover from that party for their degree of fault. See below for negligence. b. Fraudulent indorsement by an employee, 3-405: A forged indorsement is deemed effective to negotiate the instrument where an employee to whom the employer has entrusted responsibility as to instruments forges the indorsement of the payee. (The loss is allocated to the employer.) i. Comparative negligence, 3-405(b): Can argue that payor bank or depositary bank was negligent. See below for negligence. c. Negligence, 3-406(a): A person (or bank) whose failure to exercise ordinary care substantially contributes to an alteration of an instrument or to the making of a forged signature is precluded from asserting the alteration or forgery against a person who, in good faith, pays the instrument or takes it for value or for collection. i. Ordinary care, 3-103(a)(9): 1. Person: Ordinary care in the case of a person engaged in business means observance of reasonable commercial standards, prevailing in the area in which the person is located, with respect to the business the person is engaged in. 2. Bank: A bank can establish a prima facie case that it exercised ordinary care if it can establish that its activities conform to general banking usage. ii. Comparative negligence, 3-406(b): If the person asserting the preclusion is also negligent, then the loss is allocated between the person precluded and the person asserting the preclusion according to the extent to which the failure of each to exercise ordinary care contributed to the loss. d. Failure of customer to examine his bank statement, 4-406(c), (d): If on the basis of information furnished in his statement of account a customer could reasonably have discovered that the drawers signature was forged (rule doesnt apply to forged indorsements, just forged drawers signature) or there was an alteration, he is precluded from asserting the unauthorized nature of the payment. i. Two elements: 44

1. must look at bank statement with reasonable promptness to see if any forged drawers signatures or alterations; AND a. Courts say reasonable promptness is a maximum of two weeks. You have about two weeks to act. 2. must promptly notify the bank. a. From the day you know of alteration/ forgery, you have about 2 days. ii. Comparative negligence, 4-406(e): The payor bank may also be at fault for some of the losses under a comparative negligence theory. 4-406(e). 1. Example: Customer doesnt receive his statements and notifies bank. Bank doesnt send him another notice. Guy doesnt complain that he didnt get second notice. Both are somewhat negligent.

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II. SYSTEMS FOR ENHANCING LIQUIDITY A. Negotiability/ Scope of Article 3 1. Scope, 3-102: Article 3 applies only to negotiable instruments. 2. Promissory Note stamped not negotiable: The following rule applies only to promissory notes. a. 3-104(d): A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by Article 3. 3. Negotiation, 3-201(a): Negotiation means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder. 4. Negotiability requirements, 3-104: UCC 3-104 sets forth seven requirements for negotiability. If an obligation fails to meet any of the seven requirements, then none of the substantive rules set forth in Article 3 applies. Seven requirements under 3-104: a. the obligation must be a written and signed promise or order; i. Promise, 3-103(a)(12): A promise is a direct commitment to pay. The party that makes a promise is called a maker, 3-103(a)(7); the instrument that contains a promise is called a note, 3-104(e). 1. Called a Note: Article 3 calls this a promissory note, 3-104(e). ii. Order, 3-103(a)(8): An order is an instruction by one person (the drawer, see 3-103(a)(3)) directing some other party to pay (the drawee, see 3-103(a)(2)). (An order, in contrast to a promise, does not contain a direct promise to pay.) An order is a three-party system. 1. Called a Draft: An instrument that contains an order is called a draft, 3-104(e). b. the obligation must be unconditional; i. Unconditional, 3-106 1. Unconditional unless: A reference to another record does not of itself make the promise or order unconditional, 3-106(a). A promise or order is unconditional unless it states a. an express condition to payment, 3-106(a)(i) OR b. that it is subject to or governed by another record, 3-106(a) (ii), OR c. that the rights or obligations with respect to the promise or order are stated in another record, 3-106(a)(iii). 2. A promise is not made conditional a. by a reference to another record for statement of rights with respect to collateral, prepayment, or acceleration, 3-106(b) (i) OR b. because prepayment is limited to resort to a particular fund or source, 3-106(b)(ii). i. Example: A nonrecourse real-estate note, which limits the payees remedies to the mortgaged real estate and bars any suit directly against the maker of the note. Under 3-106(b)(ii), that nonrecourse provision would not preclude negotiability. c. the obligation must require payment of money;

46

d.

e.

f. g.

i. This requirement excludes obligations to deliver commodities other than money. For example, The undersigned promises to deliver 100 tons of wheat on June 1, 1997 does not constitute money. the amount of the obligation must be fixed; i. Example: Excludes promises to pay unspecified amounts of money (I promise to pay to payee on-half of the 2002 profits from sales of my casebooks.) Cant be up to 25 million this is not a fixed amount. ii. Interest: But, 3-104(a) allows for an interest term to be included with the fixed amount. (In other words, must have a fixed sum, but in addition to the fixed sum can have interest term.) 1. 3-112(b): Interest may be stated in an instrument as a fixed or variable amount of money or it may be expressed as a fixed or variable rate or rates. the obligation must be payable to bearer or order; i. Payable to bearer, 3-109(a): An instrument can be payable to bearer in three general ways: 1. the instrument can state that it is payable to bearer or payable to the order of bearer OR 2. does not identify the payee, OR a. Example: A check, otherwise complete, that is made out to Pay to the Order of ______ with no name filled in on the line where the payees name usually goes is bearer paper. b. Example: Says something like Pay to bearer or I promise to pay to bearer. 3. states that it is payable to cash. a. Pay to the order of cash is bearer paper, not order paper. i. Can have variations on these. ii. Payable to order, 3-109(b): Two ways in instrument can be payable to order: 1. the document can state that it is payable to the order of an identified person: Pay to the order of Dan Keating OR 2. it can state that it is payable to an identified person or order: Pay to the order of Dan Keating or order. (Must contain the phrase or order along with an identified person.) a. Pay to the order of cash is bearer paper, not order paper. b. This is the height of formalism. Must have the exact language the order language. iii. Example: An instrument that is payable to Dan Keating is not payable to order. Indeed, it is not an instrument at all b/c it fails the bearer or order requirement. Nor does order paper include an instrument made payable simply to order. the obligation must be payable on demand or at a definite time; AND i. Acceleration and prepayment clauses, 3-108: 3-108 permits provisions that alter the time of payment to permit acceleration and prepayment. the obligation must not contain any extraneous undertakings by the issuer. i. The general concept is that a document cannot be negotiable if it includes any nonmonetary promises. Thus, a document cannot be an instrument if it includes provisions in which the maker not only promises to pay $100,000, but also promises to deliver 100 tons of wheat by a specified date. 47

ii. Exceptions: 1. 3-104(a)(3)(i): an instrument can be negotiable even if it includes provisions in which the maker promises to provide collateral to secure the debt evidenced by the instrument. 2. 3-104(a)(3)(ii) permits an authorization or power to the holder to confess judgment or realize on or dispose of collateral. 3. 3-104(a)(3)(iii) permits conditions in which the borrower waives laws intended for the benefit or protection of the borrower or obligor. B. Transfer and Enforcement of Negotiable Instruments 1. Transferring a negotiable instrument: a. Must be a holder: Only a holder is entitled to transfer a negotiable instrument. For Holder Rules, see Who is a Holder? above. Note the differences between bearer paper and order paper for becoming a holder. 2. Enforcement and Instruments a. **Person entitled to enforce, 3-301: Person entitled to enforce an instrument means: i. (i) the holder of the instrument; ii. (ii) a nonholder in possession of the instrument who has the rights of a holder (i.e., transferee); OR iii. (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to 3-309 or 3-418(d). 3. Underlying Transaction and Its Effect on the Instrument: When a party issues a negotiable instrument, it incurs liability that is completely separate from its liability on any underlying obligation. a. Near-cash instruments, 3-310(a),(c): For near-cash instruments, the underlying obligation is discharged when the obligee accepts the instrument. Near-cash instruments are certified checks, cashiers checks, and tellers checks. Each of those instruments is an instrument on which a bank has incurred liability. b. Ordinary instruments, 3-310(b): When an obligee takes an ordinary instrument, the underlying obligation is suspended. That suspension continues until the instrument is dishonored or paid. If paid, the underlying obligation is discharged. If dishonored, the suspension terminates, and the obligee has the option to enforce either the instrument or the underlying transaction. c. Paid in full checks, 3-311: i. 3-111: Paid in full check will discharge an entire obligation (even if the obligation is for more than the instrument) if 1. the instrument is tendered as full satisfaction of a disputed claim; AND a. Under common law, there must be an honest dispute between the parties as to the amount due at the time payment was tendered. 2. the payor conspicuously notifies the payee that it intends the instrument to constitute full satisfaction of the claim; AND 3. the payee successfully obtains payment of the instrument. ii. Exceptions: 1. Inadvertence, 3-311(c): If the person did not realize it was a paid in full check and sends the money back in 90 days, the entire obligation is not discharged. 48

2. Business, 3-311(c): for organization, designate a special place to send accord and satisfaction check, must be done in a reasonable time. C. Holder-in-Due Course Status (HDC) 3. Requirements for Holder-in-Due-Course status: Under 3-302, to be a holder in due course, the person must: a. be a holder under 1-201(20), b. take the instrument for value, i. Value, 3-303(a): Value is executed consideration. An instrument is issued or transferred for value if: 1. the instrument is issued/transferred for a promise that has been performed; OR 2. the transferee acquires a security interest/ lien in the instrument; OR 3. the instrument is issued/transferred as payment of an antecedent claim against any person, whether or not the claim is due; OR 4. the instrument is issued or transferred in exchange for a negotiable instrument; OR 5. the instrument is issued/transferred in exchange for incurring of an irrevocable obligation to a third party by the person taking the instrument. c. in good faith, AND i. Good faith, 3-103(a)(4): Must have honesty in fact and the observance of reasonable commercial standards of fair dealing. d. without notice that: i. the instrument is overdue, has been dishonored, or is in default; 1. A note becomes overdue on the date it is payable. 2. A check/draft is overdue 90 days after the date it is payable. 304(a) (2). 3. See Overdue Instrument, 3-304, in glossary ii. the instrument has a forgery or an alteration; iii. a third party claims to own all or part of the instrument; AND iv. one of the obligors has a defense or claim that would limit or bar enforcement of the instrument by the original payee. 3-302. 1. **Notice, 1-202(a): A person has notice of a fact when it has actual knowledge of the fact or when it has reason to know of the fact based on all the facts and circumstances known to it at the time. 4. Transferees: a. **Shelter rule, 3-203(b): Transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument, including any right as a holder in due course unless the transferee engaged in fraud or illegality affecting the instrument. So, determine if there was a transfer: A transfer is the voluntary physical delivery no consideration or indorsements needed. If the transferee was not a holder in due course, determine if the transferor was a holder in due course. i. Example: Carl gave note to Jodi. Jodi negotiated that note to Bulstrode Bank, which became a holder in due course. If Bulstrode donated the note as a charitable contribution to Wessex College, the colleges failure to 49

give value would prevent the college from obtaining its own holder in due course status. The shelter rule, however, would allow the college to assert Bulstrodes rights as a holder in due course. The result grants the college protection that is nearly the same as the protection the college would have had if it had purchased the note and attained its own holder in due course status. b. Request to indorse, 3-203(c): If an instrument is transferred for value and the transferee does not become a holder b/c of a lack of indorsement by the transferor, the transferee has the right to the unqualified indorsement of the transferor. If the subsequent indorsement elevates the person to holder and he meets the other HDC requirements, then he is an HDC. 5. Rights of Holder in Due Course a. Real Defenses that bind a holder in due course, 3-305(a)(1): A holder in due course cannot enforce an instrument if: i. it was issued by a minor that has no capacity under state law to bind itself to a simple K; ii. there is duress, lack of legal capacity, or illegality of the transaction, which nullifies the obligation of the obligor; iii. fraud induced issuance of the instrument with neither knowledge nor reasonable opportunity to learn of its character or essential terms (i.e., fraud in the factum); OR 1. Example: You ask Pujols for his autograph. He signs your paper, which is actually a note for $1 million. This is fraud in the factum (assuming he had no reasonable opportunity to learn what he was signing). iv. it is the discharge of the obligor in an insolvency proceeding. b. Personal defenses, 3-305(a)(2), (3): An HDC is not subject to personal defenses, which include i. claims in recoupment (breach of warranty claims) AND ii. lack of consideration AND iii. other common law defenses such as fraud in the inducement which involves fraudulent statements, misrepresentation, and mistake in the issuance of the instrument. 1. Example of fraud in the inducement: If you give me a check for $50,000, youll get rich off this real-estate project. c. Third-party claims, 3-306: A person having rights of a holder in due course takes free of the claim to the instrument. A holder in due course is not subject to a claim of a property right in the instrument or its proceeds, including the right to rescind a negotiation and to recover the instrument or its proceeds. i. Example: Bill writes check to Lance. Thief steals check from Lance and cashes it at Bank. Assume Bank becomes a holder in due course. Bank can enforce the check against Bill and the Bank is not subject to any property claims by Lance, even though it was stolen from him. 6. Payment and Discharge: a. Rules: i. Holder in due course status is not precluded by notice of payment or discharge (other than the real defense of discharge in insolvency proceedings as mentioned above). 3-302(b). ii. Any whole or partial discharge is effective against a person that takes with notice of the discharge. 3-302(b). 50

b. Example: Consider a party that purchases an installment note, knowing that the maker has made the first two years worth of payment. The purchaser could become a holder in due course free from personal defenses of the maker, but the purchaser would be bound to recognize the decrease in the amount owed on the note caused by the payments of which the purchaser had notice. c. Example: Assume that a financier purchases a note from which an accommodation party has been released under the guarantor-protective rules of 3605. If the financier was on notice of that discharge, the discharge of the accommodation party would be binding on the holder in due course. 3-302(b). Conversely, a discharge would not be binding on a holder in due course that took without notice of the discharge. 3-601(b).

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