1 professor of law loyola law school, los angeles chapter 1 introduction
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- CHAPTER 4 CONTRACT TERMS A. Title 1. Does the Seller have Title to Convey
- SUBURBAN MOTORS, INC. v. STATE FARM MUTUAL AUTOMOBILE INSURANCE CO.
- Notes, Questions and Problems
- 2. The Warranty of Title FRANK ARNOLD CONTRACTORS v. VILSMEIER AUCTION COMPANY U
- Notes and Problems 1) The approved amendments to UCC § 2-312 codify the result of this case. Problem 29
- B. Warranties of Quality
- 1. Express Warranties FEDERAL SIGNAL CORPORATION v. SAFETY FACTORS, INC.
Problem Problem 26 – A sale of goods contract covered by the CISG has a provision indicating that all modifications to the contract must be evidenced by a signed writing. Subsequently, the parties orally agree to a change in the design of the goods. The seller makes the design change, and then ships the goods to the buyer. The buyer has subsequently changed its mind, and prefers the original design. Can the buyer reject the goods on the grounds that the modification needed to be evidenced by a writing and that the goods are thus non-conforming? Could the buyer insist that for future deliveries, the original design must be used? See CISG Art. 29, Secretariat Commentary on Article 27 of the 1978 Draft [draft counterpart to Article 29], http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-29.html. CHAPTER 4 CONTRACT TERMS A. Title 1. Does the Seller have Title to Convey? Both the UCC and the CISG have provisions creating an implied warranty that the seller has good title to the goods being sold to the buyer. See UCC § 2-312 & CISG Art. 41. The UCC also has sections dealing with when title passes and when it is that a seller has the ability to convey good title to the buyer. See UCC §§ 2-401 & 2-403. The CISG on the other hand does not address questions of title. See CISG Article 4. This means that questions of title in international sales will have to be dealt with by other law determined by choice of law principles. If the law of a jurisdiction adopting the UCC is determined to be governing law, then sections 2-401 and 2-403 will have application. The following case illustrates the application of section 2-403. SUBURBAN MOTORS, INC. v. STATE FARM MUTUAL AUTOMOBILE INSURANCE CO. California Court of Appeal 218 Cal. App. 3d. 1354, 268 Cal. Rptr. 16 (1990) PUGLIA, Presiding Justice. Defendant State Farm Mutual Automobile Insurance Company (State Farm) appeals from a summary judgment declaring plaintiff, Suburban Motors, Inc., has valid title to an automobile. State Farm contends its title, obtained directly from the lawful owner whom it insured and from whom the vehicle was stolen, is superior to the claim of Suburban Motors, a bona fide purchaser for value under a "chain of title" traceable to the thief. We agree and shall reverse the judgment. The summary judgment motion was submitted to the trial court on stipulated facts. Richard Kirschner was the lawful owner of a 1981 Mercedes Benz bearing Vehicle Identification Number WDBBA45A6BB006051. Kirschner was the named insured under State Farm's policy insuring the vehicle against theft. Sometime prior to November 27, 1985, the Mercedes was stolen by a thief or thieves unknown. State Farm paid Kirschner the approximate sum of $41,000 under its policy of insurance for the loss of the Mercedes in consideration for which Kirschner transferred title to State Farm. On or about November 27, 1985, Steven Taglianetti, a licensed wholesale automobile dealer, presented the stolen Mercedes to an auction operated by California Auto Dealers Exchange (CADE). Taglianetti knew or should have known the Mercedes was stolen. CADE had no knowledge the vehicle was stolen. The original Vehicle Identification Number (VIN) on the Mercedes had been changed to WDBBA45A5BB007904. Sometime before November 27, 1985, the California Department of Motor Vehicles (DMV) had issued documents of title for the Mercedes under the altered VIN based upon a certificate of title from Louisiana.17 Suburban Motors eventually acquired the Mercedes after it had passed from CADE through a succession of "owners" who, like Suburban Motors, had purchased the vehicle without knowledge it had been stolen. Suburban Motors leased the Mercedes to an individual named Sergeant. On or about April 4, 1986, the California Highway Patrol (CHP) discovered the Mercedes was a stolen automobile. Sergeant voluntarily relinquished possession of the vehicle to the CHP who subsequently turned it over to State Farm. Thereafter Suburban Motors filed a "complaint for possession of personal property or its value, for declaratory relief, and for damages," naming several defendants including State Farm. Cross-complaints were filed bringing into the action CADE and CADE's surety, Aetna Life and Casualty Company (Aetna). CADE and Aetna moved for summary judgment, requesting the trial court declare and adjudge that Suburban Motors "has the right to possession, title and control" of the Mercedes. State Farm countered with its own motion for a summary judgment declaring it has valid title to and the right to possession of the Mercedes. The trial court granted the motion of CADE and Aetna and denied State Farm's motion. Judgment was entered declaring that Suburban Motors has the right to possession, title and control of the Mercedes and ordering State Farm to transfer possession and control to Suburban Motors. This appeal followed. State Farm contends its title should prevail over the claim of Suburban Motors who, although a bona fide purchaser for value, claims under a title "laundered" through another state by the thief or a successor to the thief; that title, State Farm asserts, is not merely voidable, but void notwithstanding that the documents of title issued by DMV appear facially valid. In support of its claim of title, Suburban Motors advances two arguments: First, the California Uniform Commercial Code has altered the common law rule that good title cannot pass from a thief; second, California is a "full title" state in respect to vehicles and therefore its reliance on apparently valid title documents cannot be defeated. Although section 2-403 may enlarge the circumstances in which, at common law, a good faith purchaser for value can take good title, there is no authority for Suburban Motors's contention that section 2-403 validates a second chain of title to an automobile spuriously created after it has been stolen. Indeed, the language of section 2-403 itself, the decisions in jurisdictions construing cognate statutes, and authoritative comment on the Uniform Commercial Code belie the notion that by a process of "laundering" a thief or his successors can generate a second chain of valid title to a stolen vehicle no matter how facially credible the product of these efforts. Section 2403 does not in terms restrict the creation of voidable title to the four circumstances expressly identified [in subsection 1]. However, each of the four listed circumstances involves the "voluntary" transfer of goods and title, not the "involuntary" transfer as by larceny. Moreover, the statute limits the power to pass good title to one who has obtained the goods through delivery as part of a "transaction of purchase." (§ 2-403, subd. (1).) Although there may be no moral distinction between larceny and theft by false pretenses (see § 2-403, subd. (1)(d)), the larcenist here obviously did not obtain the vehicle through a "transaction of purchase" and therefore acquired no title which could be transferred to his successors in the chain of possession. The consequences of the creation of a whole new title to a vehicle through "laundering" are not specifically addressed in the California Uniform Commercial Code. Nor have California appellate courts dealt with the issue. However, appellate courts of other states, applying section 2-403, have rejected the notion that title to a stolen vehicle, good as against that of the owner or his successor in interest, can be created by the process of "laundering" as employed here. For example, in Inmi-Etti v. Aluisi (1985) 63 Md.App. 293, 492 A.2d 917 a person who purchased an automobile from a thief bearing apparently valid title documents claimed to have passed title good as against the owner. The court rejected the claim under section 2-403 of the Uniform Commercial Code because "voidable title under the Code can only arise from a voluntary transfer or delivery of the goods by the owner. If the goods are stolen or otherwise obtained against the will of the owner, only void title can result." (Id. at p. 923.) On similar facts, Allstate Ins. Co. v. Estes (Miss.1977) 345 So.2d 265 upheld the title of the successor to the owner of a stolen automobile as against the claim of a good faith purchaser for value relying on facially valid title documents. Applying Mississippi's version of section 2403 of the Uniform Commercial Code, the court stated: "Regardless of the number of transactions, one cannot remove himself from the confines of the rule: A purchaser can take only those rights which his transferor has in the subject goods; a thief has neither title nor the power to convey such." (Id. at p. 266, fn. omitted.) A respected commentator states: "The possessor of stolen goods does not have voidable title and therefore cannot convey good title under [Uniform Commercial Code section 2403] regardless of how innocently the goods had been acquired by him." (3 Anderson, Uniform Commercial Code (3d ed. 1983) § 2-403:26, at p. 584, fn. omitted.) Thus, "a sale by the thief or any other person claiming under the thief does not vest any title in the purchaser as against the owner, though the sale was made in the ordinary course of trade and the purchaser acted in good faith." (Id. § 2-401:61, at p. 555, fn. omitted.) Any title derived from a thief, despite an authentic certificate of title, is therefore considered void, not "voidable" as the term is used in section 2-403. Other commentators concur. (See, e.g., 1 White & Summers, Uniform Commercial Code (3d ed. 1988) § 3-11.) Applying the foregoing principles to the instant facts, it is apparent Taglianetti's title to the Mercedes was void, not merely voidable. Thus on November 27, 1985, CADE, Suburban Motors's predecessor, did not acquire valid title although a good faith purchaser for value. We recognize that neither Suburban Motors nor State Farm share any legal or moral blame for the illegal conduct which created this impasse. We agree with Suburban Motors that many automobile owners have insurance and therefore can shift the risk of theft to an insurer who accepts premium payments in contemplation of precisely that contingency. Yet, not all vehicle owners have or can afford theft insurance. And if insurers are unable to recoup their costs through recovery of stolen vehicles, it will inevitably drive the rates still higher and increase the numbers who cannot afford insurance. But we do not rest our decision on these policy considerations which have, in any event, been resolved by the Legislature adversely to Suburban Motors' position. Under section 2-403, Suburban Motors' claim to the vehicle is clearly subordinate to that of State Farm. The judgment is reversed and the trial court is directed to enter judgment in favor of State Farm. State Farm is to recover its costs. Notes, Questions and Problems 1) In another part of the opinion that has been omitted here, the court noted that the California certificate of title law was not conclusive on the issue of title. Doesn’t this decision undermine the utility of the certificate of title law? Note the discussion of the competing equities of the claimants to the car near the end of the opinion. Should the law make certificates of title conclusive on the issue of rightful ownership? The 2003 proposed amendments to UCC § 2-108 permit the states to list any certificate of title statutes that protect the holder of the certificate against claims of ownership arising under Article 2. Problem 27 - Assume that rather than having the car stolen, Kirschner sold his Mercedes to a car dealership in return for a check that was subsequently dishonored. The dealership immediately sold the car to one of its customers, who had no idea where or how the dealership obtained the car. Would Kirschner be entitled to get the car back? See UCC § 2-403(a)(b), § 2-507, official comment 3. Why distinguish the bounced check case from the theft case? Problem 28 - Assume that you bring your expensive gold watch to a local jeweler for repair. The jeweler sells the watch to one of its customers who walks into the jewelry store. Besides repairing watches, the jewelry store is in the business of selling watches. The customer had no idea how or where the store got the watch and paid a fair price for it. Obviously, you could sue the jewelry store. But if the store is insolvent, could you get the watch back from the person who bought it? See UCC §§ 2-403(2) & (3). 2. The Warranty of Title FRANK ARNOLD CONTRACTORS v. VILSMEIER AUCTION COMPANY United States Court of Appeals, Third Circuit 806 F.2d 462 (1986) SEITZ, Circuit Judge. Defendant Vilsmeier Auction Company, Inc. ("Vilsmeier") appeals from the final judgment of the district court in favor of plaintiff Frank Arnold Contractors, Inc. ("Arnold"). I. In August 1980, ITT Industrial Credit Company ("ITT") loaned money to Edward McGinn General Contractors, Inc. ("McGinn"). In return, McGinn gave ITT a security interest in several pieces of construction equipment, including a Caterpillar hydraulic excavator. ITT properly perfected the security interest. In the summer of 1981, ITT became aware that McGinn was experiencing significant financial problems and had failed to make certain payments to ITT on its loan agreements. While the parties dispute succeeding events, it is clear that following discussions between McGinn and ITT representatives the hydraulic excavator was sold at auction by Vilsmeier in October 1981. Vilsmeier president Hutchinson admitted that prior to the commencement of the auction, Vilsmeier made a public announcement to the effect that all of the equipment being sold was free and clear of any liens, encumbrances or other security interests. Vilsmeier did not disclaim this warranty of title. Appellee Arnold purchased the hydraulic excavator at the auction for approximately $44,000, and began using it in its business. While it possessed the machine, Arnold invested over $5,000 in repair and maintenance of the excavator. In May 1983, Arnold learned that ITT was suing it to recover the excavator on the basis of the perfected security interest. Although the suit, filed in federal court, was dismissed for lack of jurisdiction, Arnold incurred legal expenses of over $3100. ITT subsequently filed the same claim against Arnold in state court. On the advice of counsel, Arnold surrendered the excavator to ITT in October 1983. Arnold thereafter purchased a replacement excavator for $41,000. Arnold later filed this diversity action against both Vilsmeier and ITT. During trial before a jury, the district court directed a verdict as to liability for Arnold and against Vilsmeier. The court also granted ITT's motion for a directed verdict as to liability. The court permitted the jury to determine Arnold's damages. After considering Vilsmeier's and Arnold's evidence on damages, the jury awarded Arnold $52,150.50. The district court subsequently denied Vilsmeier's motion for a new trial, and entered judgment in favor of Arnold. This appeal followed. II. Vilsmeier raises two challenges to the proceedings in the district court. We will consider these challenges in turn. A. Vilsmeier argues that the district court's grant of a directed verdict for Arnold improperly precluded the jury from considering whether ITT had waived its security interest in the excavator purchased by Arnold. Under Vilsmeier's view of the case, if ITT had waived its security interest in the excavator, Vilsmeier sold the excavator without an encumbered title, and Arnold would not be entitled to damages for breach of warranty of title. The district court rejected Vilsmeier's view of the case. The court determined that whether ITT had actually waived its security interest was irrelevant to Arnold's cause of action, because the excavator had a cloud on its title. The district court held as a matter of law that Vilsmeier breached its warranty of title to Arnold by selling the excavator with a cloud on its title, regardless of whether the title was actually encumbered. The district court's ruling construes § 2-312 of the Uniform Commercial Code ("UCC"), adopted in Pennsylvania. That provision states that as a general rule, a contract for the sale of goods includes a warranty by the seller that the goods sold are sold without title encumbrances, unless the warranty is disclaimed. Comment 1 to § 2-312 explains further that the provision provides for a "buyer's basic needs in respect to a title." A seller accomplishes this objective whenever he transfers to his purchaser "a good clear title ... in a rightful manner so that [the purchaser] will not be exposed to a lawsuit in order to protect it." Id. Finally, Comment 1 notes that "[d]isturbance of quiet possession, although not mentioned specifically, is one way, among many, in which the breach of warranty of title may be established." Id. While the Pennsylvania courts have not addressed whether a cloud on a title is sufficient to breach a seller's warranty under § 2-312, the courts in a number of other states have construed their versions of UCC § 2-312 in these circumstances. In the majority of these cases, the courts have concluded that there need not be an actual encumbrance on the purchaser's title to permit recovery for a breach of warranty of title. Often relying on the above-quoted language from Comment 1, the courts have indicated that so long as there is a "substantial shadow" on the purchaser's title, American Container Corp. v. Hanley Trucking Corp., 111 N.J.Super. 322, 332, 268 A.2d 313, 318 (Ch.Div.1970), the protection of § 2-312 "applies to third party claims of title no matter whether eventually determined to be inferior or superior to the buyer's ownership." Jefferson v. Jones, 286 Md. 544, 550, 408 A.2d 1036, 1040 (1979). This view is supported by the policy that a purchaser should not be required to engage in a contest over the validity of his ownership. At least two courts have indicated, however, that a purchaser must demonstrate more than a cloud on his title before he will be permitted to recover for a breach of warranty of title. These courts apparently require the purchaser to establish the existence of a superior or paramount title in a third party. See C.F. Sales, Inc., v. Amfert, Inc., 344 N.W.2d 543, 554 (Iowa 1983); Skates v. Lippert, 595 S.W.2d 22, 25 (Mo.Ct.App.1979). We believe the majority approach is well-reasoned and is firmly grounded in the policy of the statute. For this reason, we believe that were the Pennsylvania Supreme Court confronted with this question, it would hold that a purchaser can recover for a breach of warranty of title when he demonstrates the existence of a cloud on his title, regardless of whether it eventually develops that the third party's title is superior. We need not in this case determine all the circumstances in which a purchaser's title is clouded, cf. Jefferson, 286 Md. at 550-53, 408 A.2d at 1040-41, for ITT's two lawsuits plainly demonstrate the cloud over Arnold's title. Under these circumstances, the district court's entry of directed verdicts in favor of Arnold and against Vilsmeier was not error. Notes and Problems 1) The approved amendments to UCC § 2-312 codify the result of this case. Problem 29 - How would the case be decided under CISG Art. 41? Does Article 41 provide even broader protection to buyers than this court’s interpretation of UCC § 2-312? See the U.N. Secretariat Commentary to Article 41, http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-41.html. Problem 30 – You purchase goods from a retailer and are told that the goods are sold “as is.” Does this disclaim the implied warranty of title? UCC §§ 2-312(2), comment 6 & 2-316. If you purchase a diamond necklace for a bargain price out of the trunk of the seller’s car in a parking lot, do you receive a warranty of title? See UCC § 2-312, official comment 5. Problem 31 - Buyer in Country A purchases goods for resale from Seller in Country B. Seller is aware that Buyer intends to resell the goods in Country A. When Buyer begins to resell the goods, a third party complains that the goods violate a patent that third party has on the goods in Country A and demands that Buyer cease selling the goods. Country A has a patent registry in which the patent could be found, although there is some question about whether the goods in question infringe on the patent. If the CISG applies to the transaction, would the Seller be liable? See CISG Art. 42. See also the Secretariat Commentary to Art. 40 (the precursor to Article 42), http://www.cisg.law.pace.edu/cisg/text/secomm/secomm-42.html. See also Schlechtriem, Uniform Sales Law – The UN Convention on Contracts for the International Sale of Goods 72-75 (1986), reproduced at http://www.cisg.law.pace.edu/cisg/biblio/schlechtriem-42.html. If the UCC applies, same analysis? See UCC § 2-312(3) & official comment 3. B. Warranties of Quality Both the UCC and the CISG contain warranties regarding the quality of the goods being sold. In the UCC, these are contained in sections 2-313 – 2-315 while in the CISG they are contained in Article 35. The warranties are similar in that they include express warranties, warranties that the goods are fit for the ordinary purpose and warranties that the goods are fit for the particular purpose of the buyer, under circumstances in which the seller had reason to know the buyer’s purpose and that the buyer was relying on the seller’s judgment in selecting the goods. 1. Express Warranties FEDERAL SIGNAL CORPORATION v. SAFETY FACTORS, INC. Supreme Court of Washington 125 Wash.2d 413, 886 P.2d 172, 25 UCC Rep. Serv. 2d 765 (1994) MADSEN, Justice. Appellant Safety Factors, Inc. (Safety Factors) bought seven Night Warrior light towers from Respondent Federal Signal Corporation (Federal Signal). Safety Factors experienced a number of problems with the equipment and never paid Federal Signal for the towers. Federal Signal sued Safety Factors to recover amounts due and Safety Factors counterclaimed for damages for breach of warranty. The trial court found in Federal Signal's favor. The case was then certified for appeal to this court. We reverse several of the trial court's conclusions and remand for additional findings. FACTS Safety Factors is in the business of renting, repairing, and selling equipment. The Night Warrior light towers were purchased for rental and sale. Steve Fors, president of Safety Factors, testified that before Safety Factors purchased the light towers he and David Robbins of Federal Signal discussed the capabilities and features of the Night Warrior and compared this newer product to the TPME, an older model with which Safety Factors had good experiences. These statements were made either orally or in an advertising brochure. Safety Factors purchased seven of these newer towers. Before renting or selling the Night Warriors, Safety Factors tested the towers "through a full field of motion" for approximately 5 minutes without incident. However, problems arose as soon as the towers were used in the field, beginning in late February 1989 with the first rental customer, Tucci & Sons. The first night Tucci & Sons used the towers, it experienced what the parties referred to as the "restrike problem.” The lamps would either fail to relight following an interruption of operation or shut down once the lamps reached full intensity. One of the towers would not run because the fuel lines were reversed. Safety Factors replaced these with other towers after it unsuccessfully attempted to repair the defective towers. On the second night, one of the replacement towers failed due to the restrike problem. Tucci & Sons experienced the problem with all of the rental towers over a 4- or 5-day period until it threw the towers off the job. [The court discusses a number of other problems that the buyer had with the towers, including oil leakage from the generators that powered the towers, problems with the winches that were used in raising and lowering the towers and rusting of the exhaust pipes.] In his oral decision, the trial judge stated that "the only warranties that applied in this case were the implied warranties of merchantability and fitness for a particular purpose.” He concluded that no express warranties were made. Download 1.49 Mb. Share with your friends:
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