Monday, October 26, 2009

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

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

A used car dealership sold cars it obtained on consignment from a wholesale automobile purchaser. The dealership was financed by a secured creditor. When the car dealership went under, the secured creditor and the consignor both sent tow trucks to repossess the remaining vehicles. There was a battle of the tow trucks. When the last car was towed off the lot, the consignor had recovered 31 of 45 vehicles, the secured creditor had 14.The consignor sued for the value of the 14 vehicles taken by the secured creditor. The consignor won.
The secured creditor argued that it had a lien in the consignor’s cars under Section 9310(a), since it had filed a UCC-1 financing statement but the consignor had not.
However, under Section 9102(a)(20)(A)(iii), the secured creditor’s lien does not reach a consignor’s goods when the consignee “is generally known to be substantially engaged in selling the goods of others.” The court held that when a secured creditor has actual knowledge that the goods belong to the consignor, the creditor cannot claim the protection otherwise available under Section 9310(a). The consignor should have filed its own UCC-1 financing statement; this would also have protected it.
The case is one of first impression in California, although it cites supporting authorities from other jurisdictions.

Thursday, July 9, 2009

Double-Crossed Diamond Dealers Dinged By UCC 2-403

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

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

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

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

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

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

Tuesday, June 23, 2009

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

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

A June 15, 2009 decision by the California Court of Appeal threw a life preserver to a boat owner and all purchasers of consumer products. One Jess Mexia bought a boat from Rinker Boat Co. The boat came with an express limited warranty. Mexia claimed that the boat could not be repaired due to corrosion in the engine. Mexia sued Rinker Boat Co., not under the UCC, but rather the Song-Beverly Act, which covers consumer goods in California. The trial court ruled in favor of Rinker Boat Co., but the Court of Appeal reversed. The Court discussed the greater protections available to the consumer under the Song-Beverly Act, as compared to the UCC.
  • Implied warranty of merchantability. Under the UCC, the purchaser must typically show a breach at the time of sale or delivery. Under the Song-Beverly Act, this implied warranty generally lasts as long as the express warranty or one year and the breach may arise after the sale.
  • Statute of Limitations. Claims under the Song-Beverly Act are governed by the same limitations period as UCC 2-725, generally four years after the cause of action has accrued. The accrual period is often upon the date of delivery.
  • Rejection of Nonconforming Goods. This is required, within a reasonable time, by UCC 2-602, 2-607. This deadline for rejection is not required by the Song-Beverly Act.
  • Consumer’s Rights Under the Song-Beverly Act Will Prevail Over Contrary Provisions In UCC. The rights of buyers of consumer goods under Song-Beverly Act prevail over contrary provisions of the UCC.

Friday, March 27, 2009

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

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

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

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

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

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

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

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

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

Thursday, March 26, 2009

Conspicuous Disclosure Under UCC 1-201(10)

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

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

Monday, January 26, 2009

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

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

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

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

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

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