The Uniform Commercial Code Survey: Introduction

The survey that follows highlights the most important developments of 2023 dealing with domestic and international sales of goods, personal property leases, payments, letters of credit, documents of title, investment securities, and secured transactions. Along with the usual descriptions of interesting judicial decisions highlighted in the survey, there has also been legislative progress in several areas. The 2022 Amendments to the Uniform Commercial Code (“U.C.C.”) (the “2022 Amendments”) have been adopted in twenty-four states plus the District of Colombia and introduced in five states.

There were also significant and instructive judicial developments in 2023. There were interesting developments under Article 2, including one case decided in 2023 that is of note if only for its dicta. A federal case brought in the Southern District of Ohio involved the purchase of 300,000 3M N95 masks. The masks turned out to be counterfeit and the buyer sued for a refund. The court concluded that the goods were non-conforming under the perfect tender rule and that the time to cure had passed. However, the court considered the seller’s argument that the common law doctrine of substantial performance applied but concluded that, even if it did arguendo apply, the seller nonetheless failed to substantially perform under the contract. The survey author notes that another decision in the Sales survey from the federal Northern District of Ohio makes the same mistake of assuming arguendo that the doctrine of substantial performance could apply to a seller’s obligations under Article 2, despite the fact that the doctrine of substantial performance does not apply wholesale to Article 2 contracts and is inconsistent with the perfect tender rule.

The survey of cases under the United Nations Convention on International Sales of Goods (“C.I.S.G.”) covered cases in 2023. One notable case raised multiple issues under the C.I.S.G., including whether the C.I.S.G. applied to a claim where there was a sale of filter presses, but also design, manufacture, installation, and testing of the presses, finding that the C.I.S.G. did govern the matter of whether a contract was formed in light of the services component being a small proportion of the entire contract price. Moreover, an express choice of law clause providing for the application of “New York law” did not disclaim application of the C.I.S.G.

The most interesting case in this year’s Leases survey involves an Eighth Circuit appellate decision out of the federal District of Minnesota which was previously covered in the 2022 survey. The case involved an attempt to recharacterize an equipment lease as having created a security interest governed by U.C.C. Article 9 and not a true “lease” governed by U.C.C. Article 2A. The district court concluded that it was a true lease and, on appeal, the Eighth Circuit affirmed. The Eighth Circuit’s opinion is notable in that it provides useful insight as to the intentions of the parties, the contract terms, and the equipment’s useful life considerations, as well as the court’s explanation as to why it followed what might be considered a lessor-favorable interpretation of the text and purposes of Section 1-203, including why that was consistent with Article 2A.

In the payments area, several federal regulatory updates and developments are reported. The Consumer Financial Protection Bureau (“CFPB”) proposed new “open banking” rules that include insuring access to personal financial data held by financial institutions, as well as privacy protections for such data. The proposed rules also encourage development of open banking industry standards. Another CFPB proposal sought to supervise “larger participant[s] of a market for . . . consumer financial products or services,” by asserting authority over providers of digital wallets, payment apps, and the like. These proposals seek to both define the market and also identify larger participants in the market for increased oversight. The United States Department of the Treasury issued a final rule that amended existing regulations of payment of checks drawn on the Treasury, to shift liability for canceled Treasury checks to financial institutions. In case developments, one case recently highlighted a problem that can arise with the now common practice of remote deposit of checks via a mobile app. In the case, the payee of a check electronically deposited the check via the remote deposit function on his banking app; then, however, still in possession of the physical paper check, the payee negotiated it to a check-cashing service. The service ultimately presented it to the drawee bank, who dishonored it based on the prior payment via the remote deposit process. In litigation, the court held that the check cashing service was a proper holder in due course of the check under Article 3, and the drawee’s prior payment was a mere “personal” defense (discharge) to which the holder in due course was not subject. Accordingly, the drawee bank was required to pay twice. The court noted that Regulation CC provides some protection for this scenario when multiple banks are involved but not, as here, when a non-bank (the check cashing service) was involved. The court observed: “we would be remiss if we did not comment on the inequities that this all too familiar scenario has created” and that “[w]ithout question, the only person who did anything ‘wrong’ in this case is [the payee], who is not a party to this action and is, most likely, long gone” and that “any revision to the [U.C.C.], which is sorely needed considering the technological advancements in banking . . . must come from the legislature, not the courts.”

There were several decisions concerning letters of credit in 2023. Several of the reported cases involved unsuccessful attempts to obtain court injunctions against drawing on letters of credit. As indicated in the survey report, “[f]ew U.S. cases enjoin beneficiaries from presenting and issuers from honoring complying drawings under LCs based on claims of forged or materially fraudulent presentations because applicants must meet all section 5-109 conditions to obtaining injunctive relief for fraud and the non-prevailing party must pay its own, the issuer’s, and beneficiary’s attorneys’ fees.” In one of the reported cases, another obstacle presented to injunctive relief was the requirement to show irreparable harm. In the case, a commercial tenant of a warehouse lease posted a letter of credit to secure the lease. After discovering damage to its property and moving out, the tenant filed a lawsuit and also sought to enjoin the landlord from drawing on the letter of credit. The court denied the injunction, based on the failure of the tenant to show it would suffer irreparable injury which was not redressable by a claim for monetary damages.

This year saw only a small amount of case law addressing Article 7, including one case that addressed the assignability of Article 7 warehouse liens. The U.C.C. does not address or provide for whether such liens are assignable. However, one court found that simple contract language accomplished such an assignment. In that case, a person purchased the lien rights of an airport storage facility to an airplane that had been somewhat neglected by the owner. The specific rights contemplated were those under a non-U.C.C. lien statute, but the contract also included a residual clause which purported to additionally convey “any and all other right, title and interest [the storage facility] may have in the Aircraft.” The court found that this generic and broad language was sufficient to convey whatever Article 7 lien may have been acquired by the aircraft storage facility.

The Investment Securities portion of this year’s Uniform Commercial Code Survey includes an interesting bankruptcy decision out of the Western District of Pennsylvania. Though the underlying facts are complex, the survey focuses on the court’s summary examination of the LLC membership instruments and Article 8. Debtors transferred their LLC memberships to creditors who took possession of the certificates evidencing the interests, but the creditors did not file a U.C.C. financing statement. Subsequently, the debtors filed for bankruptcy, and thereafter there were attempts to transfer the LLC membership interests to another party and to cancel the initial certificates. The bankruptcy court, as an initial mater, had to classify the LLC membership interests and concluded that they were not “securities” under Article 8 because the interests were not “dealt or traded on securities exchanges or in securities markets,” as required under section 8-103(c) of the U.C.C., but were rather “general intangibles” under Article 9. The survey author notes that the 2022 Amendments now include two specific commentary examples that describe when LLC membership interests are assets covered by the Article 8 direct holding system or general intangibles.

One notable case in the Secured Transactions Survey took up the issue of whether an Article 9 lender had a security interest when the security agreement identified the correct name for the debtor, but the debtor dissolved and a second security agreement for a reincorporated debtor was executed in an incorrect name. The court concluded a “misnomer” in the debtor’s name did not impair the effectiveness of a contract, including a security agreement. Moreover, the court also expressed skepticism that the dissolution of the debtor affected attachment, even though when the debtor was reincorporated its name was slightly different, but the business operations passed to the reincorporated entity.