Other Amendments (Articles 1, 2, and 2A)
The 2022 Amendments make changes to Article 1, 2, and 2A to address issues created or exacerbated by emerging technologies. The 2022 Amendments provide new or revised Article 1 definitions for “conspicuous,” “electronic,” “send,” and “sign.”
Notable changes to Articles 2 and 2A reflect clarifications regarding “hybrid transactions,” such as those involving goods and services.<_NoterefInNote> With respect to Article 2, framed by the limitations and challenges of the existing approaches to hybrid transactions, the 2022 Amendments resolve the difficulties presented by current approaches by adopting a bifurcation approach that includes a new definition for “hybrid transaction,” accompanied by extensive commentary. <_NoterefInNote>Even where the sale of goods does not predominate the hybrid transaction, under the 2022 Amendments, the provisions of Article 2 that relate to the sale aspects, rather than the transaction as a whole, apply to those aspects.<_NoterefInNote> A similar approach is taken in Article 2A with respect to “hybrid leases.”
Case Developments
There were interesting developments under Article 2 of the U.C.C., including cases that implicated Article 2’s provisions on scope and a buyer’s right to specific performance. In one case that would potentially be different under the 2022 Amendments, the buyer and seller orally agreed to the purchase of garbage trucks and customer routes for $6.1 million, but the court declined to apply Article 2 to any part of the transaction because the predominant purpose of the hybrid contract was the customer routes, an intangible asset. In other cases, courts considered buyer claims to specific performance, holding one aggrieved buyer could not likely obtain that relief with respect to a unique Ferrari that had been sold to a bona fide purchaser, but in another case finding such relief appropriate as to an aircraft purchased for organ transplant transportation where other aircraft were not suitable.
The survey of cases under the United Nations Convention on International Sales of Goods (“CISG”) covered one notable case that considered whether the CISG applied and whether it provided a cause of action for breach of the implied covenant of good faith and fair dealing. The court concluded that the sale of PPE by a United States company to a Canadian company would fall within the CISG as both are signatories to the CISG, even where the contract at issue provided for the law of the State of New York, because New York law includes the CISG. The court also concluded that the CISG does provide a cause of action for breach of the covenant of good faith and fair dealing, though it provided little guidance as to such claims and ultimately dismissed the buyer’s claim as duplicative.
The most noteworthy leasing case decided in 2022 involved application of the bright-line test of section 1-203(b) under Wisconsin law. A bankruptcy court was faced with whether certain rent-to-own (“RTO”) agreements were true leases or disguised secured transactions. Though the leases were terminable by the lessees, the court noted a split in the courts as to whether terminability of a purported lease should conclusively determine its characterization as a “lease” pursuant to the first prong of the bright-line test in U.C.C. section 1-203(b) or if the factors of the second prong should be considered after the first prong is met. Ultimately, the court chose not to resolve the split, noting that the RTO agreements were true leases under the “economic realities” test. Interestingly, some of the factors the court considered—whether the lessee has an option to renew the lease or to become the owner of the property, whether the amount of rent exceeds the fair market value of the property, and whether the debtor is responsible for the payment of taxes, insurance, and other costs incident to ownership—are similar to factors found in section 1-203(c) which states “[a] transaction in the form of a lease does not create a security interest merely because” it contains one of those factors.
In the payments area, several federal regulatory updates and developments are reported. The Consumer Financial Protection Bureau (“CFPB”) acted in several instances to regulate unanticipated overdraft fees, including a consent order involving Regions Bank overcharges, as well as the release of a circular answering affirmatively the question: “Can the assessment of overdraft fees constitute an unfair act or practice under the [CFPA], even if the entity complies with the Truth in Lending Act (TILA) and Regulation Z, and the Electronic Funds Transfer Act (EFTA) and Regulation E?” Moreover, the FDIC and CFPB each issued guidance cautioning against the indiscriminate charging of NSF fees on multiple re-presentments, and returned deposited item fees, respectively. Additionally, the Board of Governors of the Federal Reserve System (“Board”) issued Guidelines for Evaluating Account and Services Requests, whereby the Federal Reserve Banks have been directed to consider a number of principles of risk associated with access to Federal Reserve Bank accounts and financial services. In caselaw developments, a federal district court in Florida addressed a check-related issue on which a split of authority has developed, that being whether the improper cashing of a check by one joint payee (not alternative) “without the knowledge, involvement, or endorsement” of the other co-payee (and in violation of section 3-11(d)), nevertheless operates to discharge the issuer’s obligation to pay the check or the underlying contractual obligation. The court predicted that Florida would side with the jurisdictions that have held such an improper cashing would not release the issuer from liability or discharge its underlying contractual obligation (as against cases that have held such a cashing does constitute a discharge).
There were a number of decisions concerning letters of credit during the survey period. One set of decisions involved requests by applicants for injunctions against letter-of-credit draws, as authorized by section 5-109. One such case arose as a result of a force majeure clause in an equipment manufacture and purchase contract, which was alleged to have been triggered by EU sanctions against Russia as a result of its Ukrainian invasion. As a result of this, a New York court issued a restraining order, which was eventually stipulated to extend to a preliminary injunction against the issuing bank. In another case affected by the sanctions against Russian companies, an issuing bank declined to honor a letter of credit draw, which precipitated suit by the beneficiaries for wrongful dishonor. The case was ultimately resolved via regulatory authority approvals, but the cases nevertheless highlight the manner in which letter of credit disputes are often resolved in the context of requests for equitable relief.
This year saw only a very small amount of caselaw addressing Article 7, including one case involving a claim for flooding damages against a warehouse bailee. The bailment agreement required the warehouse to insure the stored goods, and further contained no liability limitation—on the other hand, the warehouse issued warehouse receipts that contained a definite liability limitation clause. Holding that the bailment agreement qualified as a “storage agreement” under section 7-204(b) and determining that the bailor had not manifested assent for the bailment agreement to be modified (via the warehouse receipts or otherwise), the court determined that the bailment agreement prevailed in the conflict.
The Investment Securities portion of this year’s Uniform Commercial Code Survey examines a Delaware Supreme Court decision that answers a certified question from the Eleventh Circuit involving section 8-502. The case delves into the issue of what constitutes an adverse claim, based on compelling and relatively intricate facts involving a stranger-initiated life insurance (STOLI) policy. Though the STOLI was void ab initio it was nonetheless sold into the secondary market where it was held in Article 8’s indirect holding system. Following the death of the insured, but before the insurer discovered the policy’s unenforceability, the insurer paid its benefits to its then owner, and the estate of the insured sued the payee based on a state-created statutory right to that payout. The owner/payee asserted a defense to that lawsuit under the indirect holding system’s primary version of a bona fide purchaser rule, U.C.C. section 8-502, which protects against adverse claims to financial assets. The Delaware Supreme Court ruled that the section 8-502 defense was not available as there was no adverse claim.
Notable cases took up issues involving enforcement of a security interest under Article 9. In one case, the court considered what it means for a filing office to have a search logic in a case involving an incorrect debtor’s name and whether a search would disclose an incorrect debtor’s name, concluding that Florida did not have a search logic for purposes of Article 9, such that any error in the debtor’s name in a filed financing statement renders the financing statement ineffective to perfect. In another case, the court held that the debtors had not stated a cause of action for breach of contract or conversion against a secured party that repossessed and sold their recreational vehicle even though they were current on their payments where the security agreement also obligated the debtors to keep the vehicle in their possession and not attempt to sell it without written permission, which they did not do. Another court, though, ruled in favor of a debtor where the repossession occurred before the debtor was in default where the agreement prohibited the debtor from “permanently” taking the car out of state without consent, but the debtor had just taken the car to Florida on a non-permanent basis.
