Chapter 19 Title Risk Insurable Interest Introduction Sale

Chapter 19 Title, Risk & Insurable Interest

Introduction Sale of goods requires different rules than real property transactions: risk should not always pass with title. UCC replaces title with identification, risk, and insurable interest. 2

§ 1: Identification For any interest to pass to buyer, goods must be: üIn existence. üIdentified as specific goods in the sales contract (by serial numbers and/or physically separated from others. Except for fungible goods which do not need separation). 3

Identification [2] Gives the buyer the right: üTo obtain insurance on the goods. üTo recover from third parties who damage the good. Identification occurs: üIf goods are designated when contract is made. If goods are not designated when contract is made, then identified at time of designation. 4

§ 2: When Title Passes to Buyer When agreed to by the parties, or If no agreement, depends on whether contract is shipment or destination contract: üShipment: title passes at time and place of shipment. üDestination: title passes when goods are tendered at the destination. 5

When Title Passes to Buyer [2] Delivery “without movement” of the goods title passes when agreed by the parties, or üWith document of title: when and where document delivered. üWithout document: when sales contract is made, if goods have been identified or when identification occurs if they have not been identified. 6

Sales or Leases By Non-Owners Void Title: true owner gets goods back. Voidable Title: good faith purchaser keeps goods. Entrustment rule: good faith purchaser keeps goods. Seller’s Retention of Sold Goods: good faith purchaser wins. üSham transactions or preferential transfers. 7

§ 3: Risk of Loss ROL does not necessarily pass with title. ROL is important because of insurance concerns. Unless agreed otherwise, ROL passes to Buyer depending on whether delivery is with or without movement of the goods. Delivery With Movement of the Goods. üShipment vs. Destination Contracts. 8

ROL: Delivery with Movement of Goods In a shipment contract, ROL passes when seller tenders goods to carrier. In a destination contract, ROL passes when goods tendered at destination. Shipping terms 9

ROL: Shipping Terms Term Definition F. O. B. Free on Board. Sales price includes shipping to specific FOB place in contract. Example: FOB Chicago. F. A. S. Free Along Side. Requires seller to deliver goods alongside the ship before ROL passes to buyer. C. I. F. Cost, Insurance and Freight. Seller puts the goods in possession of a carrier Delivery Ex. Ship Deliver from Carrying shipping vessel. ROL passes to buyer when goods leave the ship or unloaded. 10

ROL: Delivery Without Movement of Goods Held by Seller: üDocument of Title is generally not used. üIf Seller is a merchant, ROL passes when buyer takes physical possession of goods. Goods Held by Bailee (Warehouse). ROL passes when: üBuyer receives document of title; bailee acknowledges Buyer’s right to goods and buyer receives title and has reasonable time to pick up. 11

ROL: Conditional Sales Sale on Approval. üROL passes when buyer approves expressly or implicitly. Sale or Return. (Consignment is sale or return unless it complies with Art. 9. ) üROL passes to buyer with possession. 12

ROL: Breach of Contract Generally breaching party bears ROL. Seller’s Breach. üRejection - risk stays with seller. üRevocation of acceptance - risk passes back to seller to the extent that buyer’s insurance does not cover the loss. Buyer’s Breach. Goods are identified, risk passes to buyer for a reasonable amount of time after seller learns of the breach, to the extent that seller’s insurance does not cover loss. 13

§ 4: Insurable Interest Buyer has an insurable interest in goods that have been identified. Seller has an insurable interest in goods as long as they retain title or a security interest. Both buyers and sellers can have an insurable interest at the same time. 14

§ 5: Bulk Transfers Covered by Article 6 of the Uniform. Commercial Code. A bulk transfer is defined as: üMajor part of seller’s inventory. üNot made in the usual course of business. UCC 6 is becoming obsolete and has been repealed by many states. 15

Case 19. 1: Memphis Hardwood v. Daniel (Voidable Title) FACTS: üDaniel owned 800 acres of land. After an ice storm, Daniel contracted with Northern Hardwood to cut from the southern half of the property the “disaster hardwood timber” that was twenty inches or more in diameter. üMore than a year later, in a second contract, Daniel agreed to the cutting of the timber down to sixteen inches, for which Northern would pay $150, 000. üThe same day, Northern told Memphis Hardwood that Northern had an agreement to cut all of the timber on all of Daniel’s land. 16

Case 19. 1: Memphis Hardwood v. Daniel (Voidable Title) FACTS (cont’d) üNorthern and Memphis agreed that Northern would conceal Memphis and buy for both. üMemphis paid Northern $410, 000 to cut Daniel’s timber. üWhen Memphis proceeded to cut the timber, Daniel sued Memphis and the others, alleging fraud. üThe court canceled the agreement between Northern and Memphis appealed, asserting that it was a good faith purchaser. 17

Case 19. 1: Memphis Hardwood v. Daniel (Voidable Title) HELD: FOR DANIEL. AFFIRMED. üTo establish the status of a good faith purchaser “[t]he elements the innocent purchaser must prove are a valuable consideration, the presence of good faith, and the absence of notice. ” üAs to the second element, intentional concealment of Memphis showed lack of good faith. üAlso, Memphis not only had actual notice, it was a knowing and willing participant in the defrauding of Daniel. 18

Case 19. 2: De. Weldon v. Mc. Kean (Entrustment Rule) FACTS: üDe. Weldon, a famous artist and art collector, owned three paintings valued at $26, 000 that were displayed in his home. üWhen he declared bankruptcy, De. Weldon, Ltd. , bought the paintings and entrusted them to De. Weldon, Ltd. , did not put up signs or tags to indicate that he no longer owned the paintings. Within a year, De. Weldon sold them to Robert Mc. Kean for $50, 000. üDe. Weldon, Ltd. , sued in a federal district court to recover the paintings. 19

Case 19. 2: De. Weldon v. Mc. Kean (Entrustment Rule) HELD: FOR MCKEAN. üDe. Weldon, Ltd. entrusted the paintings to Felix De. Weldon. üMc. Kean was a buyer in the ordinary course of business and Felix De. Weldon acted as a merchant within the meaning of the [UCC]. üHe was a well‑known artist and he held himself out as having knowledge and skill peculiar to art and the art trade. 20

Case 19. 3: Windows v. Jordan Panel (Risk of Loss) FACTS: üJordan ordered windows from Windows. The contract required the goods to be “delivered to New York City. ” The windows were damaged during the shipment. üJordan salvaged what it could and ordered a new shipment from Windows (delivered without incident). Jordan did not pay Windows for either shipment and sued the carrier. üThe court granted Windows’ motion for summary judgment against Jordan appealed. 21

Case 19. 3: Windows v. Jordan Panel (Risk of Loss) HELD: FOR WINDOWS. AFFIRMED. üThe contract was a shipment contract. When Windows put the goods into the hands of the carrier, the risk of loss passed to Jordan. üBecause the parties did not “expressly specify” that the contract required Windows to deliver the goods to a particular destination, the contract was a shipment contract. üWindows thus satisfied its obligations to Jordan when it put the goods, properly packaged, into the possession of the carrier for shipment. 22