Chapter 21: Title and Risk of Loss 3
Chapter 21
Title and Risk of Loss
Introduction
Before the Uniform Commercial Code (UCC), title was a central concept in sales law. The party who had title bore the risk of a loss of goods (and could thus buy insurance against it). It was often difficult to determine when title passed from seller to buyer, however, and thus which party had title at the time of a loss. The UCC divorced the question of title from the question of the rights and obligations of buyers, sellers, and others (subsequent purchasers, creditors). Title remains relevant under the UCC in some situations, and the UCC has rules for locating title.
In most situations, however, the UCC replaces the concept of title with other concepts: identification, risk of loss, and insurable interest. Generally, the UCC attempts to place a loss on a party who breaches a contract, the party who has physical control of the goods, or the party who is most likely to have thought of obtaining insurance. Of course, the rules do not apply if a different party caused the loss or if the parties allocated the risk in their contract. The last point is important: parties can agree on who will bear the risk of loss.
Chapter Outline
I. Identification
Before an interest in goods can pass from seller to buyer, the goods must exist, and they must be identified to the contract [UCC 2–105(2)]. Identification gives a buyer the right to obtain insurance on goods and the right to recover from third parties who damage goods.
A. Existing Goods
If a sale involves specific goods already in existence, identification occurs when the contract is made.
B. Future Goods
If a sale involves unborn animals to be born within twelve months, identification occurs when the animals are conceived. If a sale involves crops to be harvested within twelve months, identification occurs when the crops are planted or begin to grow. Identification of other future goods occurs when they are shipped, marked, or otherwise designated as the contract goods.
C. Goods That Are Part of a Larger Mass
Problems may occur when goods exist in a larger mass, in which case identification can often be made only by separating the goods from the mass. If owners hold fungible goods in common, title and risk can pass without separation [UCC 2–105(4)].
II. Passage of Title
If the parties do not expressly agree to when and under what conditions title passes, it passes at the time and place at which the seller delivers the goods [UCC 2–401(2)], according to the delivery terms.
Case Synopsis—Case 21.1: United States v. 2007 Custom Motorcycle
Timothy Allen commissioned a custom motorcycle from Indy Route 66 Cycles, Inc., based in Indiana. Indy built it and issued a “Certificate of Origin.” Later, federal law enforcement officers arrested Allen on drug charges and seized the Indy-made cycle from the garage of Allen’s sister Tena. The government alleged that the cycle was subject to forfeiture as the proceeds of drug trafficking. Indy filed a claim in a federal district court against the government. Indy argued that it owned the cycle, as evidenced by the “Certificate of Origin,” which the company still possessed. Indy claimed to have been keeping the cycle in storage. The government asserted that the cycle had been delivered to Allen and filed a motion to strike.
The court granted the motion to strike. Under UCC 2–401(2)], “title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods.” Testimony by Indy’s former vice president Vince Ballard was “inconclusive.” Ballard implied that Indy delivered the cycle to Allen and asserted that Indy kept it in storage. But the cycle was found in Tena Allen’s garage. This “strongly indicates that claimant delivered it to Allen.
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Notes and Questions
As in many cases, there may have been unstated reasons for the court’s decision against Indy in this case. When asked whether Indy inquired into the occupations of its customers, the seller said no, because if it did, it would likely lose half of them. In response to queries about the price of Allen’s custom cycle, Indy gave different answers at different times. The seller was also not clear on how much the buyer still owed on the price. When asked how long the cycle had been in storage, Indy provided a date that fell after the cycle had been seized by law enforcement officers.
Is it ethical for the government to seize goods that arguably constitute the proceeds of a crime even if those goods are not in the possession of the criminal? Yes. Ethics has to do with the fairness, justness, rightness, or wrongness of action. A crime is illegal and generally unethical—a crime is not fair to its victims, whether they are individuals or society as a whole. It is just and fair, however, for the government to seize goods that constitute the proceeds of a crime, regardless of whose possession they are in, so that the “wrongness” of the crime can be made right.
Should the passage of title be tied so closely to the possession of the goods? Discuss. Yes. Before the creation of the UC, title—the right of ownership—was the central concept in sales law, controlling all of the issues of rights and remedies of the parties to a sales contract. There are numerous problems with this concept, however, making it difficult to predict and determine which party had title and when. The UCC divorced the question of title as completely as possible from the question of the rights and obligations of the parties, replacing the concept in most situations with the concepts of identification, risk of loss, and insurable interest. The concept of title is still relevant but its passage is tied to the possession of the goods—once the seller has relinquished possession of sold goods, the buyer has them, and the parties expect no further action by the seller, the buyer also has title. The UCC allows the parties to “otherwise explicitly agree.” This provides for the parties to create their own rule to pass title. The UCC rules apply only if they do not otherwise agree.
Additional Cases Addressing this Issue —
Passage of Title
Cases involving the passage of title in a sales contract include the following.
• Usinor Industeel v. Leeco Steel Products, Inc., 209 F.Supp.2d 880 (N.D.Ill. 2002) (title passed to the buyer at the time and place at which the seller physically delivered the goods—steel—despite the seller’s reservation, in their contract, of a security interest in the goods).
• Arcadia Financial, Ltd. v. Southwest-Tex Leasing Co., 78 S.W.3d 619 (Tex.App.—Austin 2002) (title to motor vehicles did not pass to the buyer on the physical delivery of the goods because the parties had agreed that transfer of title was contingent on the seller’s receipt of payment).
• In re Pro Page Partners, LLC, 270 Bankr. 221 (E.D.Tenn. 2001) (title passed to the buyer at the time and place at which the seller physically delivered the goods—office equipment—despite the seller’s reservation, in their contract, of a security interest in the goods).
• Right Touch of Class, Inc. v. Superior Bank, FSB, 536 S.E.2d 181 (Ga.App. 2000) (title to motor vehicle passed to the buyer on the physical delivery of the goods in a sale between used-car dealers for the express purpose of the vehicle’s resale to a third party).
• Concord General Mutual Insurance Co. v. Sumner, 762 A.2d 849 (Vt. 2000) (title to motor vehicle passed to the buyer on the physical delivery of the goods in a sale between dealers).
A. Shipment and Destination Contracts
Under a shipment contract, title passes at the time and place of shipment. Under a destination contract, title passes when goods are tendered at the destination.
B. Delivery without Movement of the Goods
• When a buyer is to pick up goods and a document of title is required, title passes when and where the document is delivered.
• When a buyer is to pick up goods and a document of title is not required, title passes at the time and place of contracting, if the goods have been identified; if they have not, title passes on identification [UCC 2–401(3)].
C. Sales or Leases by Nonowners
1. Void Title
If a seller or lessor is a thief, his or her title is void, the buyer or lessee acquires no title, and the owner can reclaim the goods.
2. Voidable Title
If a seller or lessor obtained goods by fraud; with a check that is later dishonored; on credit, when the seller or lessor was insolvent; or from a minor, the seller or lessor has voidable title.
• A seller with voidable title can transfer good title to a good faith purchaser for value—and the owner cannot recover the goods [UCC 2–403(1)].
• A seller with voidable title can transfer good title to a good faith lessee for value. The owner can recover the proceeds from the lease and the lessor’s interest in the return of the goods [UCC 2–403(1)].
3. The Entrustment Rule
Entrusting goods to a merchant who deals in goods of the kind gives the merchant power to transfer all rights to a buyer or sublessee in the ordinary course of business [UCC 2–403(2), 2A–305(2)].
Case Synopsis—Case 21.2: Lindholm v. Brant
In 1987, Kerstin Lindholm of Greenwich, Connecticut, bought a silkscreen by Andy Warhol titled Red Elvis from Anders Malmberg, a Swedish art dealer, for $300,000. In 1998, Lindholm loaned Red Elvis to the Guggenheim Museum in New York City for an exhibition to tour Europe. Peter Brant, one of the museum’s trustees, believed that Lindholm was the owner. Stellan Holm, a Swedish art dealer, told him, however, that Malmberg had bought it and would sell it for $2.9 million. Malmberg refused to provide a copy of an invoice between Lindholm and himself on the ground that such documents normally and customarily are not disclosed in art deals. A search of reliable databases and other sources revealed no problems with the title. Malmberg “sold” the work to Brant in April 2000. Lindholm filed a suit in a Connecticut state court against Brant, alleging conversion. The court issued a judgment in Brant’s favor. Lindholm appealed.
The Connecticut Supreme Court affirmed. The court pointed out that a person buys goods in good faith if there is “honesty in fact and the observance of reasonable commercial standards of fair dealing” in the conduct or transaction concerned under UCC 1–201(20). “[O]n the basis of all the circumstances surrounding this sale” Brant was a buyer in the ordinary course of business and, therefore, took all rights to Red Elvis under UCC 2–403(2).. Brant followed the usual and customary practices of sophisticated buyers and sellers in the commercial art trade. Among other things “[i]t is customary to rely upon representations made by respected dealers regarding their authority to sell works of art.”
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Notes and Questions
If the arrangement between Lindholm and Malmberg had been a consignment—that is, if Lindholm had authorized Malmberg to sell Red Elvis rather than having authorized him only to arrange for its loan—how would the legal relations among these parties have been different? The UCC views a consignment as a sale or return subject to UCC 2–326. In that circumstance, if the consignee (Malmberg) sells the goods (Red Elvis), the consignee must pay the consignor (the owner—Lindholm, here) for them. Thus, under these facts and this principle, Malmberg would be liable to Lindholm for the price paid by Brant. He could also be liable in fraud to the Japanese buyer for the funds he accepted from that individual, but he would not as likely be liable to Lindholm for that amount. Additionally, under these facts, while Red Elvis was in Malmberg’s possession, he would hold title to the work, and his creditors could prevail over Lindholm in any action to repossess it.
Considering the international locales in this case, why was Lindholm able to bring an action against Brant in Connecticut? A Connecticut state court could exercise personal jurisdiction in this case because both Lindholm and Brant were residents of Greenwich.
III. Risk of Loss
By agreement, parties can generally control when risk of loss passes from seller to buyer.
Case Synopsis—Case 21.3: Person v. Bowman
Tammy Herring and Stacy Bowman signed a document titled “Bill of Sale—Purchase Agreement” that required Herring to pay $2,200 for a horse named Toby. Until the price was paid in full, the document required Herring to board Toby at Bowman’s Summit Stables in Puyallup, Wisconsin. Bowman would provide Toby’s registration papers to Herring only when she paid in full. Before the price was paid, Tammy’s minor daughter, Alex, was driving a buggy drawn by Toby when the horse reared and threw its passenger Diana Person from the buggy. To recover for her injuries, Person filed a suit in a Wisconsin state court against Bowman, claiming that Bowman owned the horse. The court ruled that Herring owned the horse. Person appealed.
A state intermediate appellate court affirmed. “While Herring’s subjective belief may have been that she did not own Toby and that this was a lease-like agreement, the parties’ objective manifestations are consistent with this being a sale not a lease.”
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Notes and Questions
Risk of loss does not necessarily pass with title. If the parties to a contract do not specify when the risk of loss passes, and the goods are to be delivered without their movement by the seller, when does the risk pass? If the seller holds the goods and is a merchant, the risk of loss passes to the buyer when the buyer takes physical possession of the goods. If the seller holds the goods and is not a merchant, the risk of loss passes to the buyer on tender of delivery. When a bailee is holding the goods, the risk of loss passes to the buyer when (1) the buyer receives a negotiable document of title for the goods, (2) the bailee acknowledges the buyer’s right to possess the goods, or (3) the buyer receives a nonnegotiable document of title and has had a reasonable time to present the document to the bailee and demand the goods. Which of these situations existed in this case? Arguably, Stacy Bowman was a merchant, and the court ruled that Tammy Herring was a buyer (not a lessee). In that case, the risk of loss passed to Herring when she took physical possession of Toby. If Bowman did not qualify as a merchant, then Herring took the risk on Bowman’s tender of the horse.
What did the contract between Herring and the Bowmans require Herring to do? What is the significance of these provisions? The contract required Herring to keep the horse at the Bowmans’ stable, make timely payments, and not remove the horse without permission, and it gave the Bowmans the right to terminate the contract if Herring defaulted on the payments.
These stipulations give the Bowmans recourse to recover the horse in the event of Herring’s default on the payments. In other words, these provisions act as the seller's security interest, protecting the seller until it no longer has a risk of loss. Although Herring would not own Toby free and clear until she made her final payment, these provisions make it clear that Herring owned Toby. Thus, for purposes of the passage of risk, Herring owned the horse.
On the issue of liability, in whose favor did the court rule? Why? On the issue of liability, the court ruled that Herring was liable for Person’s injuries. This ruling was based on the court’s determination that Herring owned Toby the horse, according to the terms and statements in the contract between the parties. “Looking at the contract *** makes it clear that Herring owned Toby. The title of the agreement, the use of BUYER and SELLER, and the buyer’s responsibility to board the horse and pay all incidental expenses all show ownership responsibility.”
The contract required Herring to keep the horse at Bowman’s stable, make timely payments, and not remove the horse without permission, and it gave Bowman the seller the right to terminate the contract if Herring defaulted on the payments. These provisions gave the seller recourse to recover the horse should there be a default, indicating that Herring would not own Toby free and clear or have the right to remove him from the stable until she made her final payment. But for purposes of the passage of risk, Herring owned the horse.
What theory of contract interpretation supported the court’s reasoning? The theory of contract interpretation that supported the court’s reasoning in the Person case was the objective theory of contracts, or as the court phrased it, “the objective manifestation theory of contract interpretation, under which courts try to ascertain the parties' intent by focusing on the objective manifestations of the agreement, rather than on the unexpressed subjective intent of the parties.”
Here, the court reasoned that “while Herring's subjective belief may have been that she did not own Toby and that this was a lease-like agreement, the parties' objective manifestations are consistent with this being a sale not a lease.”
A. Delivery with Movement of the Goods—Carrier Cases