Tuesday, November 13, 2012

Usage of Trade--Between "Friends"--UCC Section 1-303

Howard Entertainment, Inc. v. Kudrow (Aug. 22, 2012) 208 Cal.App.4th 1102

You have to love it when big stars produce big court rulings--which periodically occurs in California, where entertainment is a major industry.  Years ago, Lee Marvin gave us "palimony" in the celebrated "Martin v. Martin" case.  This year, we have Emmy Award winning actress/writer/producer Lisa Kudrow, star of the Friends TV show, giving us a "friendly" ruling on "usage of trade."  OK, maybe it is not a titanic issue, but the case does illustrate some important aspects of practice for lawyers.  In both of these cases, the stars came out on the wrong side of the ruling.

In Howard Entertainment, Inc. v. Kudrow, Lisa Kudrow's former professional manager Scott Howard sued Kudrow for commissions allegedly due on earnings received after Kudrow terminated him.  They had an oral agreement.  They did not specifically discuss post-termination earnings before the termination.  Howard claimed that it was common practice in the professional management industry for clients to pay post termination commissions on earnings received after the termination attributable to contracts made by the entertainer prior to the termination.
  • Lesson No. 1:  Avoid oral agreements. Put it in writing!  (Of course, lawyers know this rule, clients often disregard it, and by the time the lawyer finds out what happened its usually too late to do anything about it.)
The lower court twice ruled in favor of Kudrow, and the appellate court twice reversed.
  • Lesson No. 2:  Litigation is expensive, time consuming, and unpredictable--especially when Lesson No. 1 is not followed.
In the second opinion, the appellate court ruled that Howard's industry expert could testify that there existed, at the time of the Howard-Kudrow oral agreement, an industry custom and usage or "usage of trade" for payment of post-termination commissions.   Kudrow argued unsuccessfully that since the "professional management" industry was in its infancy when she hired Howard, as a matter of law no such "usage of trade" could be implied into their agreement.  The court of appeal disagreed and reversed, relying in part on the Uniform Commercial Code's definition of usage of trade.
  • Lesson No. 3: The UCC may be accepted as persuasive guidance on a general principles of contract law even when the UCC does not technically apply to the transaction.
The trial court quoted extensively from UCC 1-303 (Cal. Uniform Commercial Code section 1303), Comment 5. A "usage of trade" must have "regularity of observance" but need not be "universal" or "ancient."  Full recognition is available for "new  usages" and for "usages currently observed by the great majority of decent dealers."  The court of appeal also cited the Restatement Second of Contracts, section 221, comment b. The "more general and well-established" a usage is, the stronger is the inference that the party knew or should have known about the rule. Sending the matter back to the lower court, the court of appeal noted that the trier of fact might discount or disbelieve Howard's expert--but that the expert could testify.

If the case does not settle (reference Lesson No. 2), there will be an encore in the trial court, and perhaps yet a third appeal.

Monday, November 5, 2012

Promissory Note Lacking Consideration Is Not Enforceable

Terry v. Myers (October 29, 2012)  2012 WL 5307912 (Unpublished)
California Court of Appeal, Second District, Division 3

Relying on the UCC, the Court of Appeal upheld the trial court's decision that a promissory note was unenforceable because it lacked consideration.

Terry and Myers both loaned money to a promoter in a real property transaction that turned out to be a Ponzi scheme.  The promoters required that Myers issue a $50,000 promissory note to Terry, as a condition to investing in the scheme.  When the scheme collapsed, Terry sued Myers on the $50,000 note. 

Myers' defense was that the note lacked consideration, because Myers did not actually borrow any funds  from from Terry.  Terry argued that consideration was presumed.  The court held that Terry had not established that the note was enforceable, and Myers had supplied sufficient evidence that the note lacked consideration to overcome the presumption.

Citing UCC 3-303(b) (specifically, California Commercial Code Section 3303(b)) the Court of Appeal held that negotiable instruments, including a promissory note, are subject to the defense of lack of consideration.  Consideration is defined as "any consideration sufficient to support a simple contract."  UCC 3-303(b). (Cal. Comm. Code Section 3-303(b).)  While a promissory note is presumed to be supported by consideration, that presumption may be overcome.  Myers was able to demonstrate that, under the circumstances of the investment--as to which Myers had no culpability-- he had not received consideration for the note.  Importantly, Myers did not receive $50,000 from Terry for the note; did not benefit from Terry's investment in the scheme; and Terry did not rely on the note to invest in the scheme.  Under these circumstances, the court of appeal held that the trial court had properly relied on basic UCC contract law to determine lack of enforceability of the note.