The UCC: Sales and Secured
Transactions
“A commodity appears at first
sight an extremely obvious, trivial
thing. But its analysis brings out
that it is a very strange thing,
abounding in metaphysical
subtleties and theological
niceties.”
Karl Marx,
German political philosopher

UCC was created to solve two problems:
◦ Old contract law principles did not reflect modern
business practices
◦ Laws had become different from one state to
another

Good: Moveable physical object except for
money and securities

Scope of Article 2
◦ UCC §2-102: Article 2 applies to the sale of goods
◦ Regulates sales
 Sales: One party transfers title to the other in
exchange for money

Mixed contracts
◦ UCC will govern if the predominant purpose is the
sale of goods
 Common law will control if the predominant purpose is
providing services

Merchant: Someone who routinely deals in
the particular goods involved
◦ UCC holds a merchant to a higher standard of
conduct than a non-merchant

Formation basics: Section 2-204
◦ Rules
 Any manner that shows agreement
 Moment of making is not critical
 One or more terms may be left open

Statute of frauds
◦ Rules
 Contracts for goods worth $500 or more
 Writing sufficient to indicate a contract
 Must be signed by the defendant
 Enforceable only to the quantity stated

Statute of frauds
◦ Rules
 Exception
 Merchant exception
 Specialty goods exception
 Judicial admission exception

Added terms: Section 2-207
◦ An acceptance that adds or alters terms will often
create a contract
◦ Intention

Added terms: Section 2-207
◦ Additional terms: Terms that raise issues not
covered in the offer
 When parties are merchants, additional terms become
part of the bargain
 Additional terms do not bind the parties when:
 Original offer insisted on its own terms
 Additional terms materially alter the offer
 Offeror promptly objects to the new terms

Added terms: Section 2-207
◦ Different terms: Terms that contradict those in the
offer
 Cancel each other out
 Gap-fillers – Code supplies its own terms when there
is no clear oral agreement

Modification
◦ UCC does away with consideration requirement for
changes in contracts
 Long as both sides agree to the modification

Buyer’s remedies
◦ Seller is expected to deliver what the buyer ordered
◦ Buyer has the right to inspect the goods before
paying or accepting
◦ Cover
 If the seller breaches, the buyer may “cover” by
reasonably obtaining substitute goods
 Buyer may then obtain the difference between the
contract price and the cover price:
 Plus incidental and consequential damages, minus
expenses saved

Buyer’s remedies
◦ Incidental damages cover such costs as:
 Advertising for replacements
 Sending buyers to obtain new goods
 Shipping the replacement goods
◦ Consequential damages are those resulting from
the unique circumstances of this injured party

Seller’s remedies
◦ Refuse to deliver the goods when buyer breaches
before the seller has delivered the goods
◦ The injured seller may resell the goods when buyer
unjustly refuses to accept or pay for goods
 The seller may recover difference between the resale
price and contract price:
 Plus incidental damages, minus expenses saved
◦ Seller may simply sue for the contract price if:
 Buyer has accepted the goods
 Goods are conforming and resale is impossible

Contractual assurance that goods will meet
certain standards
◦ Express warranty: One that the seller creates with
his words or actions
 Disclaimer: Statement that a particular warranty does
not apply
◦ Implied warranties: Are created by the Code itself,
not by any act or statement of the seller
 Implied warranty of merchantability
 Merchantable: Goods are fit for the ordinary purposes for
which they are used
◦ Implied warranties - Created by the Code itself, not
by any act or statement of the seller
 Implied warranty of merchantability
 Merchantable: Goods are fit for the ordinary purposes for
which they are used
 Principles




Unless excluded or modified
Merchantability
Implied
Merchant with respect to goods of that kind
◦ Implied warranties
 Implied warranty of fitness for a particular purpose
 When the seller:
 Knows about a particular purpose for which the buyer
wants the goods
 Knows that the buyer is relying on the seller’s skill and
judgement
 Consumer sales
 Code provides stronger protection for consumers than for
businesses

Article 9: Terms and scope
◦ Applies to any transaction intended to create a
security interest in personal property or fixtures

Article 9 vocabulary
◦ Fixtures: Goods that have become firmly attached
to real estate
◦ Security interest: Interest in personal property or
fixtures that secures the performance of an
obligation
◦ Secured party: Party who holds the security interest
◦ Collateral: Property subject to the security interest

Article 9 vocabulary
◦ Debtor: Person who has some original ownership in
the collateral
◦ Obligor: Person who must repay money
◦ Security agreement: Contract which gives a security
interest to the secured party
◦ Default: When the debtor fails to pay
◦ Repossession: When the secured party takes back
the collateral because the debtor has defaulted

Article 9 vocabulary
◦ Perfection: Steps the secured party must take to
protect rights in the collateral against people other
than the debtor
◦ Financing statement: Document filed by secured
party to give notice of security interest in the
collateral
◦ Record: Information on paper or other medium
◦ Authenticate: To sign a document (includes use of
symbols or electronic encryption)

Attachment: Three-step process that creates
an enforceable security interest
◦ The two parties made a security agreement and
either
 Debtor has authenticated a security agreement
describing collateral
 Secured party has possession of the collateral
◦ The secured party gave value in order to get the
security agreement
◦ The debtor has rights in the collateral

Agreement
◦ Without an agreement, there can be no security
interest


Control and possession
Value
◦ For the security interest to attach, secured party
must give value

Debtor rights in the collateral
◦ Debtor can grant security interest in goods only if
he has some legal right to those goods himself

Kinds of perfection
◦
◦
◦
◦
Perfection
Perfection
Perfection
Perfection
by filing
by possession
of consumer goods
of moveable collateral and fixtures

The common way to perfect an interest is by:
◦ Filing a financing statement with one or more state
agencies

Financing statement: Gives the names of all
parties, describes the collateral, and outlines
the security interest
◦ Contents of the financing statement
 Sufficient if it provides:
 Name of the debtor
 Name of the secured party
 Indication of the collateral

Financing statement
◦ Place of filing
 Secured party must file in the state of the debtor’s
location
 Goods – Central location will be the Secretary of State’s
office
 Fixtures – Secured party has choice between
 Filing in the same central office
 Filing in the local country office
◦ Duration of filing
 Effective for five years

Advantages
◦ Notice to other parties is very clear
 If debtor defaults, secured party has no difficulties
repossessing

Impose one important duty
◦ Secured party must use reasonable care in the
custody and preservation of collateral in possession
or control

UCC gives special treatment to security
interests in most consumer goods
◦ Consumer goods – Used primarily for personal,
family, or household purposes
◦ Purchase money security interest (PMSI): Interest
taken by the person who sells the collateral or
advances the money so the debtor can buy it
 PMSI in consumer goods perfects automatically,
without filing

Once security interest is perfected:
◦ Remains effective regardless of whether collateral is
sold, exchanged, or transferred

Buyers in ordinary course (BIOC): Buys goods
in good faith from a seller who routinely
deals in such goods
◦ Takes goods free of a security interest created by
its seller even though the security interest is
perfected

Three principal rules
◦ Party with a perfected security interest takes
priority over a party with an unperfected interest
◦ If neither secured party has perfected, the first
interest to attach gets priority
◦ Between perfected security interests, the first to file
or perfect wins

Default - When debtor fails to make
payments due or enters bankruptcy
◦ Taking possession of the collateral
 When the debtor defaults, the secured party may take
possession of the collateral
◦ Disposition of collateral
 Secured party may sell, lease, or otherwise dispose of
the collateral in any commercially reasonable manner
 Debtor is liable for any deficiency

Termination
◦ Happens when the debtor pays the full debt
◦ Termination statement - Document indicating that
there is no longer a security interest in the
collateral