Commercial Transactions Outline

Commercial Transactions Adams Fall 2016

Quick Reference Definitions

Notes (promise to pay) are two party paper, the two parties being:

(i) the promisor/maker and

§3-103(a)(7) Definition of “Maker”

Means a person who signs or is identified in a note as a person undertaking to pay

(ii) the promise/payee

Draft(also called bill of exchange) = order to pay
Draft – an instrument that is an order.

“bill of exchange” is a synonym for the term “draft”
Three party paper, the three parties being:

(i) drawer- orders payment to be made (§3-103(a)(5))
(ii) drawee- party that receives the order and if accepts the order, makes payment accordingly, and (§3-103(a)(4))
(iii) The payee- draft is payable to

§3-104(f) – shows that a check is a type of draft

Drawer – person writing the check
Drawee – the bank that the drawer has his money in
Payee – person you make the check out to

Buyer in ordinary course of business (BIOCOB) = bona fide purchaser for value

Article 3/4 Definitions

(1) “Bank” means a person engaged in the business of banking, including a savings bank, savings and loan association, credit union, or trust company;
(2) “Depository Bank” means the first bank to take an item even though it is also the payor bank, unless the item is presented for immediate payment over the counter;
(3) “Payor/Drawee Bank” means a bank that is the drawee of a draft;

The bank that will be ultimately paying the check where the drawee/maker holds the account

(4) “Intermediary Bank” means a bank to which an item is transferred in course of collection except the depository or payor bank;

In most fact patterns will be Fed 1 or Fed 2 bank OR private collection channels that take the item and transfer it along
Are the banks that have no real connection to the depositor or the drawer; really just used to transfer the item along

(5) “Collecting Bank” means a bank handling an item for collection except the payor bank;

Its role is to send the item on its way to the “payor” bank for payment

(6) “Presenting Bank” means a bank presenting an item except a payor bank.”

Last bank with the item before it “presents” it to the payor bank

Comment 1: the definition of “depository bank” does not include the bank to which a check is made payable if a check is given in payment of a mortgage.

Article 9 Definitions

Purchase money security interest (PMSI) à where using the object you are purchasing as the collateral for the loan

Non purchase money security interest – where using collateral you already own in order to secure financing for a loan to buy other objects

“Buyer in ordinary course of business” means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker

CHAPTER 1: INTRODUCING COMMERCIAL LAW

Historical Context and the UCC

The UCC: Its Origins and Authorship

§1-102. Scope of Article: A commercial transaction, as that term is used in the UCC, is any matter that falls within one of the Code’s ten substantive articles
Question 1 – What two organizations are responsible for the drafting of the Uniform Commercial Code? How are they different from one another?

Both are private organizations
American Law Institute (ALI);

Purpose of the ALI is “educational and [] to promote the clarification and simplification of the law and its better adaptation to social needs, to secure the better administration of justice, and to encourage and carry on scholarly and scientific legal work.”

Scholarly perspective

ALI members, all of which are lawyers, are elected by an internal process

The National Conference of Commissioners on Uniform State Laws (NCCUSL)

The purpose of the NCCUSL is “to promote uniformity in the law among the several States on subjects as to which uniformity is desirable and practicable.”

More a practical perspective
Some classes are ex-officio members

Automatically invited

Chief Judge of highest court of each state
Bar leaders
Dean of law schools

NCCUSL members are appointed by the states independently of one another, and typically chosen by the Governors of each state à political process

The UCC is not law until it is adopted by a state legislature
Question 2 – What was the year of the first official UCC text?

1952. Was not the beginning of the Code, even though it was the year of the first official text of the code

Has much deeper roots than this; The previous acts needed substantial revision to keep them in step with modern commercial practices and to integrate each of them with the others.

Question 3 – Since there were already sources of uniform commercial law in the United States prior to the UCC, why was the UCC needed?

It had been recognized for some years that the old acts needed substantial revision to keep them in step with modern commercial practices and to integrate each of them with others.
Need to have uniformity and all written by a single drafter – creates a lot of internal consistency in terms of themes and vocabulary

§1-302. Variation by Agreement: Many of the UCC’s provisions are default terms; the parties can K around many UCC standards if they want to

Question 4 – What does it mean to say that most of the provisions of the UCC are default terms, and why is this important?

Under §1-302 it says that Many of the UCC’s provisions are default terms; the parties can K around many UCC standards if they want to

Exceptions exist with regard to duties – like good faith, diligence, reasonableness, and care – that are deemed too important to be waived by private agreement
Even with regard to these exceptions, however, §1-302(b) provides the parties with some means of defining their obligations within reasonable parameters
Important because default terms are not always the right fit for all transactions

The Purpose and Philosophy of the UCC

§1-103(a). Construction of UCC to Promote Its Purposes and Policies: purpose of the Code is to:

(1) simplify, clarify, and modernize the law governing commercial transactions
(2) permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and
(3)to make uniform the law among the various jurisdictions
Question 5 – The text emphasizes that it was important to the UCC drafters that the Code be specific, yet flexible. Why are both qualities particularly important in the field of commercial law?

§1-103 Comment 1: “the UCC is drawn to provide flexibility so that, since it is intended to be a semi-permanent and infrequently amended piece of legislation, it will provide its own machinery for expansion of commercial practices
It is intended to make it possible for the law embodied in the UCC to be applied by the courts in the light of the unforeseen and new circumstances and practices” à flexible
Has to be specific enough to have some real meaning to it
But at some point can become so vague that it cannot even be used

Question 6 – How does the Uniform Commercial Code reflect the influence of Legal Realism?

A focus on the outcome rather than the law itself that is something that is sacrosanct
Legal realism is consistent with the notion that law is not important for its own sake
What matters about law is its ability to be effective, and to be relevant in this particular case, business
**With the UCC, the law is meant to follow and serve business, not to lead business in a certain direction

ALI and NCCUSL decided to create a Code that incorporates business norms and the principles of the law merchant, as well as earlier successful uniform codes of law

Question 7 – In your own words, what is the “law merchant” and how is it related to the Uniform Commercial Code?

Black’s: “a system of customary law that developed in Europe during the Middle Ages and regulated the dealings of mariners and merchants in all the commercial countries of the world until the 17th century”

*Commercial law begins