Uniform Commercial Code and Texas Code
The Uniform Commercial Code abbreviated as UCC is one of the most comprehensive codes that address the most important aspects of commercial law. It is regarded as one of the most important developments ever made in commercial law in the US. The UCC provisions, revisions, and text are the product of experts of commercial law. The drafts are then submitted to the NCCUSL also known who collaborate with the ALI to ratify or reject the drafts or revisions. The commission is composed of qualified attorneys that include law professors, legislators, federal and state judges from all the states and territories of the United States (Anderson 1998).
These are not legal organizations but are quasi-public establishments. They meet to decide whether they should endorse new revisions of laws and regulations or send them back to the drafters with recommendations. The revision process often does lead to several draft documents that are all submitted to the Commissioners. It is the draft accepted by the commissioners that will be the recommended set of rules to be adopted by the states.
Uniform Commercial Code (UCC) History
The Uniform Law Commission (ULC)
The ULC was founded in 1892 and is intended to come up with constant commercial legislation. The ULC soon made a range of commercial laws that included the Uniform Stock Transfer and the Uniform Bill of Lading Act of 1909, the Uniform Warehouse Receipts Act in 1906 and the Uniform Sales Act in 1906. In 1940 the ULC was officially charged with drafting an all-inclusive code to guide all commercial transaction in the US. The ULC collaborated with the ALI in 1942 to come up with a commission that compiled commercial laws in one code that they called the Uniform Commercial Code (Anderson 1998). This was the code that was recommended for adoption to the states in 1951. Pennsylvania was the first of the states to enact the UCC and over the course of two decades the vast majority of the states also took it up.
The American Law Institute (ALI)
The American Law Institute and the ULC collaborated to come up with the Uniform Law Commission that produced the UCC. The ULC realized that trying to draft a comprehensive commercial code on its own was too huge of an undertaking and hence brought in the expertise and experience of ALI in 1942. Over a decade of working together, the two establishments met to draft the different aspects of the commercial code. Most of their meetings were funded by a grant from a foundation with banks, law firms, and other private business also chipping in.
UCC Amendments and Versions
The first version of the UCC came out in 1952 and since then there have been many versions and amendments. The Code has had major overhauls and revisions that it has become one of the most comprehensive commercial codes ever (Hawkland and Bailey, 1988). With regard to the state by state application, different sections of the UCC are enacted differently. Moreover, the states may use a different version of the UCC that may not correspond to the latest version by the ULC. For instance, the major revisions in articles 1, 2, and 2A that was made in the year 2000 have been adopted in many states though some are yet to adopt them.
It is important to note that the UCC is a recommendation or model rather than a law or regulation. As such the UCC does not have any force of law as the ULC can only recommend policy to the states. Nonetheless, every state has enacted some form of the UCC and made it part of their legislation (Quinn, 2013). For instance, we have the California Commercial Code which borrows heavily from the UCC and this code has the force of law in California. Moreover, since the states apply to closely related versions of the code, there is relatively little difference in the commercial codes. However, it is not uncommon to find huge variations in application. For instance, Louisiana never adopted the second article of the code. As such it is always important to confirm that the state’s commercial code when trying to find answers to commercial issues in real life situations.
The UCC Today
The UCC is currently managed and maintained by a Permanent Editorial board appointed by the Uniform Commercial Code. The permanent editorial board comes from both ALI and the ULC. The board was set up in 1961 and has been I charge of monitoring commercial law and then recommends revisions and amendments to the UCC as it deems necessary. The PEB also publishes an official interpretation of the UCC which the courts can use to understand the provisions of the UCC when making rulings and judgments. The UCC was initially established with funding from the Falk Foundation but now has access to UCC publication royalties which it uses to further the development, amendments, and revisions of the UCC drafts.
General Provisions – Article 1
Provides the general provisions, definitions, and principles of interpretation for all articles and transactions covered in the UCC. The last revision of the article was in 2001 though there have been a few other amendments designed to bring the article in line with reviews of other articles.
Sales – Article 2
The article regulated contracts for the sale of goods and is part of the original UCC code that came into effect in 1952. It was modernization and revision of the Uniform Sales Act of 1906 that had the stamp of approval of the NCCUSL. There was a revision that ALI and ULC recommended in 2003 but since the states were not interested in applying it, it was reversed leaving the 1952 version as the most recent version of the article. An important thing to note about article 2 is that it does not apply to sales of real estate or service contracts (Quinn, 2013).
In Pass v. Shelby Aviation, the estate of Pass and his wife brought a suit against Shelby Aviation for breach of implied warranties as set out in Uniform Commercial Code Article 2 codified in Tennessee. The defendant was accused of replacing the rear wing brackets of Mr., Pass’s plane with faulty parts during maintenance which had caused an accident that had killed him and his wife. Shelby argued that the transaction was primarily for services and not the sale of goods. The court held that the principle to be applied in the case was whether the predominant thrust of a mixed contract was the sale of goods or services. It was held that the service provided was mainly for the services and hence the motion to dismiss by Shelby was warranted.
Leases – Article 2A
Article 2A of the code was first added in 1987 and revised in 1990 and covers the leasing of personal property. According to the article, a true lease is when a person gives possession and the right to use goods to another for a fixed period of time in return for rent yet retains the title to the property. The article also deals with finance leases where the lessor supplies goods to the lessee as a form of financing.
In Hertz Commercial Leasing Corp. v. Dynatron, Inc. Hertz Commercial Leasing sued Dynatron Inc. for breach of a leasing contract and sought deficiency judgment on the basis of default on the part of the defendant. The plaintiff relies on Article 2A of the UCC as the basis for its suit. The defendant has negotiated for office equipment with another company for the lease of a copier. The agreement has designated the plaintiff as a secured party or lessor and the defendant as lessee according to the provisions of the UCC. The defendant did not make any payments and asked that the plaintiff collect the faulty machine. The machine was repossessed by the plaintiff and sold off. Since the machine was sold for less than a quarter the amount of the lease the plaintiff sued claiming deficiency judgment. The defendant offered his defense under article 2-302 of the UCC terming the lease unconscionable and hence unenforceable. The court ruled for the defendant under the UCC.
Negotiable Instruments – Article 3
The article directs negotiable instruments such as promissory notes, notes or checks that may have autonomous value due to being negotiable (Stone and Steinheimer, 1992). Any instrument that can be reassigned to another individual is negotiable and will be actionable against the original person that promised to make payment. It has been revised several times with the last of these amendments coming in 2002.
In Re Veal, 449 B.R. 542 (9th Cir. BAP 2011) the Veals wrote a promissory note to GSF Mortgage Corporation in 2006. In 2009 the Veal declared chapter 13 bankruptcy listing AHMSI as a secured creditor. The Veals sought a stay against AHMSI but Wells Fargo sought relief from the stay as the trustee for AHMSI’s asset-backed securities. Under the UCC article 3 provisions, the court held that Wells Fargo has a right to claim since the promissory note was transferred to them as a person entitled to enforce it under the definition of the UCC.
Collections and Bank Deposits – Article 4
The code is all about collections, checks, bank deposits, and the banking process including rules for automated interbank collections.
Schultz Food Company the plaintiff had an account with the defendant Wachovia Bank. Schulz refused to pay extra for the products and services the defendant used to prevent check fraud. The defendant made the plaintiff sign an agreement asserting that they would not have any liability should check fraud occur on his account. When a check by the plaintiff was stolen and paid by the defendant, Schulz demanded that the bank bear the loss but it refused. Cincinnati Insurance which paid a claim to the plaintiff sought to recover the amount from Wachovia and brought a suit under the provisions of UCC § 4-401(a) which charged their clients account for an altered check. It was held that Schulz could not depend on the UCC since there was no case for a contract of adhesion as he could have opened his account at any other bank and not have had to sign the deposit agreement.
Funds Transfers – Article 4A
The article that was first created in 1989 governs the rules for the receiving bank and the sender. The article was amended in 2012 to make it conform to federal law and associated regulations on electronic fund transfers (Quinn, 2013).
While the UCC does not deal with the issue of electronic funds transfers, the courts have made the reasoning from the concepts analogized therein. In Delbrueck & Co v. Manufacturers Hanover Trust Company, it was held that transfer of funds through the Clearing Interbank Payments System was irrevocable. According to the courts, the concepts of the UCC did not apply to the case but that the concepts therein such as checks being final once accepted could make a good case for these transfers being irrevocable.
Letters of Credit – Article 5
These are instruments of payment that are promises made by a provider of credit to a beneficiary on behalf of the applicant. These are normally dispensed by a bank to their customers to facilitate trading transactions. The bank will typically present a draft on behalf of the person receiving the payment.
In Philadelphia Gear Corporation, Plaintiff-Appellee, v. Central Bank, Defendant-Appellant central bank issued credit to the tune of 4.5 million dollars to Philadelphia Gear Corporation who was to deliver unspecified machinery to United Machinery Services. A few months later United and Philadelphia’s relations soured and United refused to pay for goods it said were not ordered. Philadelphia sued claiming a declaratory judgment asserting that the drafts were enforceable and that he was entitled to damages for wrongful dishonor. Relying on the provisions of the UCC the courts found that Philadelphia should be compensated for wrongful dishonor given that he had delivered goods as specified in the contract.
Bulk Sales – Article 6
Under article 6 creditors of businesses selling merchandise from stock get protection from bulk sales risk (Tepper, 2016). The bulk sale refers to a situation in which a business sells a significant part of their inventory to a single buyer who then vanishes with the goods.
In Reed v. Anglo Scandinavian Corporation Dorothy Hansen sold a huge assortment of ski boots and skis to the Anglo Scandinavian Corporation. The defendant was declared bankrupt a few months later and now the trustee is seeking summary judgment. According to the plaintiff, the sale of merchandise is illegal under the California Commercial code which makes certain bulk transfers null and void. Article 6 of the code holds that any substantial bulk transfer is void and fraudulent against the original owner of the goods unless adequate notice of such transfer is given. The court held that any transfer even if it is as little as 6.3% is deemed substantial and hence the plaintiff was entitled to get summary judgment.
Documents of Title - Article 7
Last revised in 2003, the article governs titles for personal assets that may include bills of lading, warehouse receipts and any other documents of commercial trade. The article seeks to take care of problems that arise during the transfer of title during shipping and storage. The main documents are usually the bill of lading by the carrier and the warehouseman’s receipts.
In Davies Warehouse Co. v. Bowles, 321 U.S. 144 (1944) a public warehouse is the business that the state declares to be a public utility and hence is subjected to comprehensive regulation. These include all aspects of documentation that include the shipping and storage of goods.
Investment Securities – Article 9
The article last amended in 1994 offers an up-to-date legal structure and system governing the transfer of investment securities. It specifies a mechanism for holding and ownership of mutual fund shares, bonds, stocks, and limited partnership shares. It also sets out the duties and rights of the persons participating in the system (White and Summers, 2000).
In Hulse v. Consolidated Quicksilver Mining Corp, the plaintiff entered into a contract with his sister Hulse to sell his shares to her. However, while he proceeded to file the necessary papers the company refused to transfer the shares as expected. Using article 8 of the UCC the court held that the company had violated its procedures that allowed members to transfer their shares to anyone they pleased as long as it was at par value.
Secured Transactions - Article 9
The article last edited in 2010 governs any secured transactions that involve the use of the personal property for granting of credit. Each state has an office where one may file finance statements that disclose what interest they have in a secured property. The creditor may repossess and sell the property in the instance of the debtor defaulting on the debt (Quinn, 2013).
In John Giovanni Granata v. Edward F. Broderick, Jr. Granata retained the services of Acciavatti to work in a legal malpractice case against Broderick and Gather. Acciavatti got $10,000 upfront and was to get a contingency fee when the case was won. Granata won the case and was awarded $1,597,193. The Supreme Court was to make a decision on whether the fees that an attorney expects to receive might be secured under the UCC article 9 and be deemed account receivable. The court also sought to determine if the lender was in compliance with the requirements of the UCC in perfecting its security interest.
Texas has implemented the following Articles of the UCC:
Article 3: Negotiable Instruments
The articles do not apply to payment orders or money transactions governed by Article 8 or Article 4A. Article 9 will always be superior to Article 4 if there ever is a conflict between the two (Anderson, 1998). Nonetheless, the operating circulars and regulations of the board of governors of the Federal Reserves will be superior to any provisions in the article to the extent that they are inconsistent with it.
In Southwest Bank, Appellant and Appellee, v. Information Support Concepts, Inc., Appellee and Appellant No. 2-01-348-CV the court was to decide whether the proportionate responsibility principle of the Uniform Commercial Code Article 3 is applicable. According to Section 3.4 of the UCC, the law of negotiable instruments applies to that of conversion of personal property. Other than negotiation an instrument is also covered if it is taken by transfer from an individual without the authority to receive payment or enforce the instrument.
Article 4: Bank Collections and Deposits:
Deals with the liability of a bank when it comes to non-action or action with regard to items it handles for the purposes of collection, payment, or presentment. It typically varies depending on the location of the bank. In the instance of non-action or action at a separate office or branch of a bank, its liability will be determined by the law of place where the separate office or branch is located.
In American Dream Team v. Citizens State Bank, it was held that when there is a chargeback due to non-action then Section 4.214 of the UCC will apply. The UCC preempted any cause of action that the plaintiff had in terms of suing for compensation under breach of contract. The UCC authorized the defendant to effect a chargeback as soon as it noticed that the monies sent were counterfeit. The chargeback would also have been a legal action in terms of the contract entered into by the two parties.
Article 8: Investment Securities:
The article is applicable to similar equity or share interest that has been issued by an organization that operates under federal investment company law as an investment company. Investment company security will not include annuity contract, endowment, or insurance policy issued by an insurance company (Tepper, 2016).
Article 8 is yet to be used in Texan case law
The Uniform Commercial Code UCC an excellent guideline for commercial law and arguably one of the best legal frameworks ever. Regularly updated by experts, the UCC is always being improved and expanded to cover all manner of commercial issues. While the code does not have the force of law, the fact that it has been adopted and enacted in all states in the US means that it is excellent commercial code. In fact, it has been used to decide many commercial cases since it has been codified into the commercial law of the states. Going forward, it is only going to get stronger and even more relevant as more states adopt the provisions and recommendations of the Uniform Law Commissioners who head the UCC.
Anderson, R. A. (1998). Anderson on the uniform commercial code. St. Paul, MN: West Group.
Hawkland, W. D., & Bailey, H. J. (1988). Commercial paper. Santa Monica, CA: Herbert Legal Series.
Quinn, T. M. (2013). Quinns uniform commercial code commentary and law digest. Boston, MA: West Publ.
Stone, B., & Steinheimer, R. L. (1992). Uniform commercial code forms with practice comments. St. Paul, MN: West Pub.
Tepper, P. (2016). Law of contracts and the uniform commercial code. Place of publication not identified: Delmar.
White, J. J., & Summers, R. S. (2000). Uniform commercial code. St. Paul, MN: West Group.