New York Law Review

Tag: Uniform Commercial Code

  • Created Gemstones, Inc. v. Union Carbide Corp., 47 N.Y.2d 23 (1979): Buyer’s Right to Deduct Damages from Payment

    Created Gemstones, Inc. v. Union Carbide Corp., 47 N.Y.2d 23 (1979)

    Under UCC § 2-717, a buyer can deduct damages resulting from a seller’s breach of contract from the price still due under the same contract, even in a seller’s action for goods sold and delivered, precluding summary judgment for the seller when breach issues remain unresolved.

    Summary

    Created Gemstones sued Union Carbide for breach of contract after Union Carbide limited Created Gemstones’ credit line and demanded cash payments for orders. Union Carbide counterclaimed for the outstanding balance on goods already delivered. The New York Court of Appeals held that summary judgment for Union Carbide on its counterclaims was improper because factual issues remained regarding whether Union Carbide breached the contract by unilaterally imposing a credit limit. The buyer’s right to deduct damages from the price due under the contract (UCC § 2-717) directly impacts the seller’s entitlement to payment. Therefore, the breach of contract claim and the counterclaim are intertwined and must be resolved together at trial.

    Facts

    In March 1972, Created Gemstones (buyer) and Union Carbide (seller) entered into a contract where Created Gemstones would distribute Union Carbide’s synthetic gems, agreeing to purchase a minimum of $400,000 worth annually for ten years.
    Until May 30, 1974, the agreement proceeded without issues.
    On that date, Union Carbide informed Created Gemstones that its credit line was limited to $200,000, and purchases exceeding that limit required cash payment.
    Despite this notice, Union Carbide continued to extend credit, with Created Gemstones owing $224,681.73 by July 31, 1974.
    In August 1974, Union Carbide allegedly refused to ship two gem orders on credit, demanding prepayment for all orders exceeding the $200,000 limit.

    Procedural History

    Created Gemstones sued Union Carbide for breach of contract.
    Union Carbide counterclaimed for $224,681.73 due for previous deliveries and a small overcredit.
    Special Term denied summary judgment on the complaint but granted it to Union Carbide on the counterclaims.
    A divided Appellate Division upheld the summary judgment on the counterclaims.
    The Court of Appeals granted leave to appeal, limiting the appeal to the issue of summary judgment on the counterclaims.

    Issue(s)

    Whether summary judgment may be granted on a seller’s counterclaim for goods sold and delivered when there are unresolved factual issues concerning whether the seller breached the underlying contract of sale.

    Holding

    Yes, because under UCC § 2-717, a buyer may deduct damages resulting from any breach of contract from any part of the price still due under the same contract. Therefore, if Union Carbide breached the contract, Created Gemstones’ liability on the counterclaims would be extinguished to the extent of the damages caused by the breach.

    Court’s Reasoning

    The Court relied on UCC § 2-717, which allows a buyer to “deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.” This provision is an updated version of Section 69 of the Uniform Sales Act, which gave the buyer the right to recoup damages for breach of warranty.
    The court stated that “the intent underlying enactment of section 2-717 was not to alter the prior rule, but to expand it ‘so as to cover any breach of contract’”. Therefore, a buyer can defeat a seller’s action for goods sold and delivered by asserting a valid counterclaim for breach of contract.
    If Union Carbide breached the contract by improperly imposing the credit limit and demanding cash payments, Created Gemstones would be entitled to deduct any damages from the amount owed on the goods delivered.
    The court noted that if Union Carbide “did indeed refuse to perform unless plaintiff complied with a condition which went beyond the contract, then defendant’s conduct would amount to a repudiation”. In that situation, Created Gemstones could suspend their own performance without breaching the contract.
    Ultimately, the question of whether summary judgment should be granted as to the counterclaims must await resolution of the factual question of whether a breach occurred. “Whatever the ultimate result, proper disposition of the counterclaims must await resolution of this factual question. It was therefore error to grant summary judgment.”

  • Rotuba Extruders, Inc. v. Ceppos, 46 N.Y.2d 223 (1978): Establishing Representative Capacity on a Negotiable Instrument

    Rotuba Extruders, Inc. v. Ceppos, 46 N.Y.2d 223 (1978)

    Under UCC § 3-403(2)(b), a representative signing a negotiable instrument is personally obligated if the instrument names the represented person but does not show that the representative signed in a representative capacity, unless otherwise established between the immediate parties.

    Summary

    Rotuba Extruders sued Kenneth Ceppos on promissory notes signed by him, seeking to hold him personally liable. The notes named Kenbert Lighting Industries, Inc., the company Ceppos represented, but did not indicate he signed in a representative capacity. The court held that Ceppos was personally liable because he failed to demonstrate an agreement or understanding with Rotuba that he was signing only on behalf of the corporation. The court emphasized that the UCC requires more than a mere assertion of subjective intent to overcome the presumption of individual liability when the instrument itself is ambiguous.

    Facts

    Rotuba Extruders, Inc. sold goods to Kenbert Lighting Industries, Inc., where Kenneth Ceppos was the chief executive officer. Rotuba required a personal guarantee due to Kenbert’s precarious financial situation. Ceppos signed seven promissory notes to Rotuba. The notes named “Kenbert Lighting Ind. Inc.” above Ceppos’s signature but did not indicate Ceppos’s representative capacity (e.g., no “by” or title). When the notes went unpaid, Rotuba sued Ceppos personally.

    Procedural History

    Rotuba moved for summary judgment based on the notes. The Supreme Court granted the motion, holding Ceppos personally liable. The Appellate Division reversed, finding a question of fact as to who was liable. Rotuba appealed to the New York Court of Appeals.

    Issue(s)

    Whether Kenneth Ceppos, as an authorized representative, is personally obligated on promissory notes that name the represented corporation but do not indicate he signed in a representative capacity, given the absence of an explicit agreement with the other party.

    Holding

    No, because to escape personal liability under UCC § 3-403(2)(b), the signer must establish an agreement, understanding, or course of dealing demonstrating that the taker of the note knew or understood the signer intended to execute the instrument in a representative status only.

    Court’s Reasoning

    The court relied on UCC § 3-403, which aims to create certainty in commercial paper law. The court stated that unless “otherwise established between the immediate parties,” a signer is personally liable if the instrument names the represented person but does not show the representative capacity of the signer. The court emphasized that a signer’s subjective intent is insufficient to overcome the presumption of personal liability. The signer bears the burden of proving an agreement or understanding with the other party that he was signing in a representative capacity only. The court found that Ceppos failed to provide sufficient evidence of such an agreement or understanding. Ceppos’s affidavit lacked factual allegations demonstrating that Rotuba knew or should have known that he intended to sign only as a representative. The court distinguished the facts from situations where a course of dealing or other evidence establishes a mutual understanding of representative liability. The court noted Ceppos’s reliance on a prior transaction where he guaranteed a note, but deemed this insufficient to establish a course of dealing. The court emphasized that summary judgment is appropriate when the opposing party fails to present evidentiary facts establishing a triable issue. The court observed, “the showing Ceppos essayed was lacking in substance. His submissions simply lacked the evidentiary facts on which a meritorious defense could be made out.”

  • Hechter v. Chemical Bank, 47 N.Y.2d 428 (1979): Statute of Limitations for Collecting Bank’s Liability on Forged Endorsement

    Hechter v. Chemical Bank, 47 N.Y.2d 428 (1979)

    The payee of a negotiable instrument possesses a cause of action in contract against a collecting bank that has collected the instrument over the payee’s forged endorsement, and this action is governed by the six-year statute of limitations applicable to contract actions, even after the adoption of the Uniform Commercial Code.

    Summary

    Rochelle Hechter sued Chemical Bank, alleging it wrongfully collected checks with her forged endorsement. Her attorney had deposited checks intended for her into his personal account at Chemical Bank after forging her signature. Hechter sued Chemical Bank more than five years after the deposit. The Court of Appeals addressed whether the action was time-barred. It held that because Hechter brought the action in contract, she was entitled to a six-year statute of limitations. The Court reasoned that the UCC did not eliminate the common-law right of a plaintiff to choose a contract remedy over a tort remedy in cases of forged endorsements.

    Facts

    Rochelle Hechter was the payee on three checks totaling over $135,000 in life insurance proceeds. Her attorney, Emanuel Pavsner, was authorized to deposit the checks into a bank account in her name. Instead, Pavsner forged Hechter’s endorsement on the checks and deposited them into his personal account at Chemical Bank. Chemical Bank collected the checks from the drawee banks. Pavsner then withdrew the funds and misappropriated the portion belonging to Hechter. A prior action against Pavsner resulted in an unsatisfied default judgment.

    Procedural History

    Hechter sued Chemical Bank for wrongfully collecting the checks over forged endorsements. Chemical Bank moved for summary judgment, arguing the action was time-barred. Special Term denied the motion. The Appellate Division affirmed. The Court of Appeals granted leave to appeal and certified the question of whether the order affirming the denial of summary judgment was properly made.

    Issue(s)

    Whether Section 3-419(1)(c) of the Uniform Commercial Code abolished the pre-code contract action against a collecting bank for collecting an instrument over a forged endorsement, restricting the payee’s remedy to a suit in conversion with its attendant three-year limitation period?

    Holding

    No, because nothing in the express language of section 3-419 of the Uniform Commercial Code can be read to sweep aside the historic principle that a litigant may abandon his tort cause of action in favor of one grounded in contract.

    Court’s Reasoning

    Before the UCC, New York law recognized a payee’s cause of action against a bank collecting an instrument over a forged endorsement, which could be styled in either conversion or contract. The court noted, “That this contract action had as its theoretical basis the well-known common-law action for money had and received”. Choosing the contract action entitled the payee to a six-year statute of limitations. The court stated that the UCC did not eliminate the common-law right to elect a contract remedy over a tort remedy. Section 1-103 of the UCC states that “[u]nless displaced by the particular provisions of this Act, the principles of law and equity * * * shall supplement its provisions”. The court reasoned that only an express code provision limiting a plaintiff’s remedy to a conversion suit would destroy the action ex contractu. Further, subdivision (3) of section 3-419, stating that a bank “is not liable in conversion or otherwise” suggests that all pre-code actions regardless of form were to continue. The court emphasized that a clear and specific legislative intent is required to override the common law, and no such intent to abolish the pre-code contract action was found. Therefore, a cause of action styled in contract, commenced within six years of accrual, is not time-barred.

  • Television Corp. v. Neuman, 48 A.D.2d 148 (N.Y. App. Div. 1975): Anticipatory Repudiation Excuses Tender of Performance

    Television Corp. v. Neuman, 48 A.D.2d 148 (N.Y. App. Div. 1975)

    Under UCC § 2-610, a buyer’s anticipatory repudiation of a contract for the sale of goods excuses the seller from the obligation to tender delivery of the goods.

    Summary

    Television Corporation sued Carl Neuman for breach of contract after Neuman refused to accept delivery of television sets that he had agreed to lease. Neuman argued that Television Corporation had failed to tender delivery as required by the Uniform Commercial Code. The New York Appellate Division held that Television Corporation was not required to tender delivery because Neuman had anticipatorily repudiated the contract by informing Television Corporation that the sets were no longer needed. The Court of Appeals reversed the Appellate Division’s dismissal of the complaint and reinstated the trial court’s judgment for Television Corporation.

    Facts

    Television Corporation agreed to lease television sets to James Square Nursing Home, a trade name for Carl Neuman. The agreements included an option for Neuman to purchase the sets for one dollar each at the end of the lease term. The agreements stipulated that Television Corporation would not file UCC-1 forms related to the transaction. Television Corporation requested Neuman to execute UCC-1 forms, which he refused. Television Corporation then attempted to deliver the televisions, but Neuman’s representatives informed them that the sets were not needed and delivery would not be accepted. Television Corporation never physically tendered the sets.

    Procedural History

    Television Corporation sued Neuman for breach of contract. The trial court found that Television Corporation had tendered delivery and allowed recovery for a portion of the sets. Neuman’s counterclaim was dismissed. The Appellate Division reversed, finding that Television Corporation failed to prove it could supply the goods without secondary financing and charged Television Corporation with breach, remanding for a hearing on Neuman’s damages. Television Corporation appealed to the New York Court of Appeals.

    Issue(s)

    Whether a buyer’s communication that goods are no longer needed and that delivery will not be accepted constitutes an anticipatory repudiation of the contract, excusing the seller from the obligation to tender delivery under the Uniform Commercial Code.

    Holding

    Yes, because the buyer, Neuman, communicated a clear and unequivocal intention not to perform the contract, relieving the seller, Television Corporation, of its obligation to tender delivery.

    Court’s Reasoning

    The court reasoned that under UCC § 2-610(c), repudiation of a contract by the buyer eliminates the need for further performance by the seller. An anticipatory repudiation occurs when there is an “overt communication of intention” not to perform. The court found that Neuman’s communication, through his agents, that the sets were no longer needed and would not be accepted, constituted a clear and unequivocal repudiation of the contract. The court emphasized that the trial court had expressly credited the testimony regarding these communications. The court stated that “the repudiation was more than amply demonstrated by the communication to plaintiff by an administrator and a purchasing agent of defendant nursing home that the sets were no longer needed and that delivery would not be accepted.” Because of this repudiation, Television Corporation was not obligated to make a formal tender of the goods. The court cited pre-UCC cases like Windmuller v. Pope, 107 N.Y. 674 and Nichols v. Scranton Steel Co., 137 N.Y. 471 to reinforce the principle that a seller is relieved of the obligation to tender when the buyer states they will not receive or pay for the goods. The court noted it could not grant greater relief to the plaintiff than the trial court had because the plaintiff had not appealed the limitation on damages to the Appellate Division.

  • Chase Manhattan Bank v. State, 40 N.Y.2d 590 (1976): Actual Notice Required to Prevent Setoff by Account Debtor

    Chase Manhattan Bank v. State, 40 N.Y.2d 590 (1976)

    Under UCC § 9-318(1)(b), an account debtor can set off claims against the assignor that accrue before the account debtor receives actual notification of the assignment; constructive notice via UCC filing is insufficient to prevent setoff.

    Summary

    Chase Manhattan Bank, as assignee of Francis Brown, sought payment from the State for engineering services Brown provided. The State claimed a right to set off unpaid withholding and unemployment insurance taxes owed by Brown. Chase argued its perfected security interest, filed before the State’s tax claims arose, barred the setoff. The New York Court of Appeals held that the State could set off the tax debt because it did not receive actual notice of Chase’s assignment before the tax claims accrued. Constructive notice through UCC filing was insufficient; actual notice is required to preclude an account debtor’s right to set off subsequent debts.

    Facts

    In 1964, Brown contracted with the State Department of Transportation for highway survey and design work.

    In November 1964, Brown granted Chase a security interest in all his personal property, including contract rights and accounts receivable, to secure existing and future loans.

    Chase perfected its security interest by filing a financing statement on December 14, 1964.

    From 1966 to 1967, Chase made multiple loans to Brown totaling over $700,000.

    Brown completed his work for the State in 1968, but a payment dispute arose, leading to litigation and a judgment in Brown’s favor.

    In 1968 and 1969, the State accumulated claims against Brown for unpaid withholding and unemployment insurance taxes, totaling $14,087.97.

    Procedural History

    Chase, as Brown’s assignee, filed an Article 78 proceeding seeking payment of the judgment against the State.

    Special Term awarded judgment to Chase.

    The Appellate Division modified the judgment to allow the State’s setoff for unpaid taxes.

    Chase appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether, under the Uniform Commercial Code, a perfected assignment bars a subsequently arising setoff in favor of an account debtor who is without actual notice of the assignment.

    2. Whether filing with the Secretary of State constitutes actual notice of the assignment to the State when the State is both the account debtor and the official UCC filing repository.

    Holding

    1. No, because UCC § 9-318(1)(b) requires actual notice to the account debtor to preclude the right of setoff, and constructive notice through filing is insufficient.

    2. No, because filing with the Secretary of State as a UCC filing repository does not constitute actual notice to the State as an account debtor.

    Court’s Reasoning

    The court reasoned that UCC § 9-318(1)(b) subordinates the rights of an assignee to any claims of the account debtor that accrue before the account debtor receives notification of the assignment. UCC § 1-201(26) defines “receives” as when notice comes to the person’s attention or is duly delivered to their place of business. Taken together, these provisions establish a requirement of actual notice.

    The court emphasized that this interpretation aligns with the underlying policies of the UCC’s notice filing provisions. While the UCC simplifies secured transactions through filing, the protection afforded by filing is not absolute. “Section 9-318, in its first subdivision, which, as noted, subordinates the rights of assignees to defenses and claims of account debtors, was said by its drafters to make no substantial change in prior law”. Prior law required actual notice. The court reasoned that “receives notification” makes no sense except as a reference to actual notice rather than constructive notice.

    The court noted the assignee can protect its rights by verifying the specific accounts assigned and notifying account debtors of the assignment.

    Regarding whether filing with the Secretary of State constituted actual notice to the State, the court found this view unrealistic. A paper filed solely as a commercial repository to give constructive notice to all the world is not actual notice. The official receiving the financing statement has no duty beyond filing and indexing the statement; that indexing and filing is for the benefit of outsiders whose duty it may be to search the index and read the statements before they extend credit.

  • Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977): Enforceability of Liquidated Damages for Attorney’s Fees in Sales Contracts

    Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977)

    Under the Uniform Commercial Code, a liquidated damages provision for attorney’s fees in a sales contract is enforceable if it reasonably relates to either the anticipated or actual harm caused by the breach, and it is not so unreasonably large as to be a penalty.

    Summary

    Truck Rent-A-Center sued Puritan Farms for breach of contract, seeking to enforce a clause stipulating that Puritan Farms would pay 30% of the recovery amount as attorney’s fees. The trial court found Puritan Farms liable but deemed the 30% fee excessive, awarding a lesser amount. The appellate court modified the award, increasing attorney’s fees. The New York Court of Appeals reversed and remanded, holding that the liquidated damages provision for attorney’s fees could be enforceable if reasonable in relation to either anticipated or actual harm, and not a penalty. The court emphasized that the fee should be related to the normal contingent fee charged by attorneys in similar collection cases and must not be unreasonably large.

    Facts

    Truck Rent-A-Center (plaintiff) contracted to supply lumber and building materials to Puritan Farms 2nd, Inc. (defendant), a builder. The contract included a clause requiring the buyer (Puritan Farms) to pay a “reasonable counsel fee” of 30% of the recovery if the seller (Truck Rent-A-Center) had to turn the matter over to an attorney for collection. Puritan Farms took delivery of the materials but then refused to pay, ceasing operations and abandoning its office. Truck Rent-A-Center sued to recover the purchase price and the stipulated attorney’s fees.

    Procedural History

    Truck Rent-A-Center sued in the Supreme Court, Kings County. The Supreme Court granted summary judgment for Truck Rent-A-Center for the unpaid purchase price, but declined to enforce the 30% attorney’s fees provision, awarding a lesser amount after a hearing. The Appellate Division modified the judgment, raising the attorney’s fees. Truck Rent-A-Center appealed to the New York Court of Appeals.

    Issue(s)

    Whether a liquidated damages provision in a commercial sales contract, stipulating that the breaching buyer will pay the seller’s attorney’s fees calculated at 30% of the recovery amount, is enforceable under the Uniform Commercial Code.

    Holding

    No, not necessarily. The 30% fee is not automatically enforceable. The case was reversed and remitted because the court must determine (1) if the 30% fee was reasonable in light of anticipated damages, related to the normal fee an attorney would charge for collection, or (2) if the fee corresponded to the actual fee arrangement between Truck Rent-A-Center and its attorney, and even if so, whether the amount stipulated was unreasonably large or disproportionate to the likely damages, making it a penalty.

    Court’s Reasoning

    The Court of Appeals reasoned that under UCC § 2-719(1), parties can agree to remedies beyond those in the UCC. However, this is limited by UCC § 2-718(1) regarding liquidated damages and UCC § 2-302 on unconscionability. UCC § 2-718(1) allows liquidated damages if the amount is reasonable in light of the anticipated or actual harm and the difficulty of proving loss, but invalidates terms fixing unreasonably large damages as a penalty. The court noted that the UCC allows courts to consider actual harm at the time of the breach, a departure from prior law that focused solely on anticipated harm at the time of contracting. The court emphasized that even if the liquidated damages provision is reasonable under the “anticipated or actual harm” test, it still cannot be so unreasonably large as to be a penalty. It stated, “liquidated damages constitute the compensation which, the parties have agreed, must be paid in satisfaction of the loss or injury which will follow from a breach of contract. They must bear reasonable proportion to the actual loss… Otherwise an agreement to pay a fixed sum upon a breach of contract, is an agreement to pay a penalty”. The court also considered whether the fee arrangement was unconscionable under UCC § 2-302, but found no evidence of disparity in bargaining power or oppressive practices in this commercial transaction. The court remanded the case to determine whether the 30% fee was reasonable in light of anticipated damages or corresponded to the actual fee arrangement and, if so, whether it was unreasonably large as to be a penalty.

  • Adrian Tabin Corp. v. Climax Boutique, Inc., 34 N.Y.2d 210 (1974): Transferee’s Duty of Inquiry in Bulk Sales

    Adrian Tabin Corp. v. Climax Boutique, Inc., 34 N.Y.2d 210 (1974)

    Under UCC Article 6 (Bulk Transfers), a transferee who lacks actual knowledge of the transferor’s creditors may rely on an affidavit of no creditors furnished by the transferor and has no duty to make a careful inquiry.

    Summary

    Adrian Tabin Corp., a creditor of L.D.J. Dress, Inc., sued Climax Boutique, Inc., the transferee of L.D.J.’s business, alleging the bulk sale was ineffective because Climax failed to notify Adrian Tabin as a creditor. L.D.J. provided Climax with a bill of sale and an affidavit stating it had no creditors. Climax’s attorney also performed a lien search and was assured by L.D.J.’s attorney that no creditors existed. The New York Court of Appeals held that under UCC § 6-104, a transferee without actual knowledge of the transferor’s creditors can rely on the affidavit of no creditors, and the UCC imposes no duty of careful inquiry.

    Facts

    L.D.J. Dress, Inc. sold its business to Paul Warman, who then resold it to Climax Boutique, Inc.
    At the closing, L.D.J. furnished a bill of sale with a schedule of property and an affidavit stating the business was free of all claims and that L.D.J. had no creditors.
    Climax’s attorney conducted a lien search that revealed no liens and inquired about creditors, receiving assurances from L.D.J.’s attorney that none existed.
    Adrian Tabin Corp., a creditor of L.D.J., was not notified of the sale.

    Procedural History

    The trial court voided the sale, holding that Climax had a duty to inquire carefully about creditors.
    The Appellate Division reversed, finding that Climax could rely on the affidavit of no creditors and had no duty to make a careful inquiry.
    The New York Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    Whether a transferee of a bulk sale, who lacks knowledge of the transferor’s creditors, may rely on an affidavit of no creditors furnished by the transferor, or whether the Uniform Commercial Code imposes a duty of careful inquiry as existed under former law.

    Holding

    No, because the transferee of a bulk sale who has no actual knowledge of creditors of the transferor may rely on an affidavit of no creditors furnished by the transferor, and the Uniform Commercial Code imposes no duty of careful inquiry as existed under former law.

    Court’s Reasoning

    The court focused on the language of UCC § 6-104(1), which requires the transferee to obtain a list of creditors from the transferor and preserve it, and § 6-104(3), which places responsibility for the list’s accuracy on the transferor.
    The court emphasized that “knowledge,” as defined in UCC § 1-201(25), means actual knowledge, not constructive knowledge.
    The court acknowledged prior New York law (Personal Property Law § 44) required careful inquiry before a transferee could rely on an affidavit of no creditors, but found this requirement absent from the face of UCC § 6-104.
    The court reasoned that while a careful inquiry requirement might protect creditors, it could also restrain the free alienation of property. The court noted, “the desirability of allowing transfers to go forward outweighs the value of protecting the omitted creditor.”
    The court cited cases from New Jersey that support the view that actual knowledge is required to render a bulk transfer ineffective.
    The court pointed out that omitted creditors are not entirely without remedy, as the Uniform Fraudulent Conveyance Act (Debtor and Creditor Law § 270 et seq.) allows recovery from a transferee who knowingly participates in a conveyance made with intent to defraud creditors. The court also noted that preferential transfers could lead to bankruptcy proceedings.
    The court highlighted optional UCC § 6-106, which New York has not adopted, that provides additional protection for omitted creditors by obligating the transferee to apply the transfer proceeds to the transferor’s debts. The court observed that adoption of 6-106 would furnish additional protection for unsecured creditors.
    The court concluded that despite strong policy reasons for imposing a duty of careful inquiry, the plain language of UCC § 6-104 and the definition of knowledge preclude such a construction. The court explicitly stated that “the simple and unambiguous language of section 6-104 and the precise and careful definition of knowledge as used in the code (§ 1-201, subd. [25]) preclude such a construction.”

  • Albany Discount Corp. v. Mohawk Nat. Bank, 28 N.Y.2d 222 (1971): Mobile Homes as Motor Vehicles Under UCC

    Albany Discount Corp. v. Mohawk Nat. Bank, 28 N.Y.2d 222 (1971)

    Under UCC § 9-302(1)(d), a mobile home that is required to be licensed or registered as a motor vehicle under state law is considered a motor vehicle, thus requiring a financing statement to be filed to perfect a purchase money security interest, even if the home is primarily used as a residence.

    Summary

    Albany Discount Corporation (ADC) sought to recover a mobile home from Mohawk National Bank, which had seized it after a default by a subsequent possessor who mortgaged it. ADC had an earlier retail installment contract, properly filed but not refiled as required by pre-UCC law. The court addressed whether a mobile home is a “motor vehicle” under UCC § 9-302(1)(d), which would require filing a financing statement to perfect a security interest. The court held that the mobile home was a motor vehicle because it was required to be licensed or registered under the Vehicle and Traffic Law, and thus ADC’s failure to properly refile its financing statement resulted in the bank having a superior lien.

    Facts

    The La Pumees purchased a mobile home in April 1962 for personal use. The mobile home was 50 feet long and 10 feet wide, containing five furnished rooms. They executed a retail installment contract, which was assigned to Albany Discount Corporation (ADC) on the same day. ADC filed the contract on April 30, 1962, but did not refile it in May 1965, as required by the then-applicable Personal Property Law. A subsequent possessor mortgaged the mobile home to Mohawk National Bank in February 1966. After a default, the bank seized the mobile home, prompting ADC to sue for conversion.

    Procedural History

    The lower court ruled in favor of Mohawk National Bank, finding that ADC had not maintained its lien against subsequent lienors due to its failure to refile the financing statement. The Appellate Division affirmed this decision. ADC appealed to the New York Court of Appeals.

    Issue(s)

    Whether a mobile home is a “motor vehicle” required to be licensed or registered under state law, as contemplated by UCC § 9-302(1)(d), such that a financing statement must be filed to perfect a purchase money security interest.

    Holding

    Yes, because the Vehicle and Traffic Law requires house trailers to be licensed or registered if operated on highways, a mobile home falls within the definition of “motor vehicle” under UCC § 9-302(1)(d), thereby requiring the filing of a financing statement to perfect a purchase money security interest.

    Court’s Reasoning

    The court reasoned that under UCC § 9-302(1)(d), a purchase money security interest in consumer goods is automatically perfected without filing, unless the goods are “motor vehicles” required to be licensed or registered. The court looked to the Vehicle and Traffic Law, which includes house trailers (mobile homes) as vehicles requiring registration when operated on the highway. The court emphasized a functional approach, noting that the Vehicle and Traffic Law focuses on public safety and revenue, while Article 9 of the UCC concerns credit transactions. The court stated that the filing requirement for motor vehicles under the UCC reflects pre-code experience that motor vehicles are chattels of greater value, more likely to be refinanced or resold, and thus likely to remain in the stream of commerce. The court also highlighted that most states with title certification statutes include house trailers. The court explicitly stated, “Consequently, the code test is satisfied if the mobile home may be registered as a motor vehicle and the mobile home need not in fact have been registered.” While acknowledging commentary suggesting that larger, less frequently moved mobile homes might warrant different treatment, the court concluded that legislative action would be necessary to establish clear distinctions based on size, equipment, or weight. The court specifically agreed with the holding in In re Vinarsky and disagreed with Recchio v. Manufacturers & Traders Trust Co. The court affirmed the lower courts’ decisions, holding that the bank was entitled to summary judgment because ADC failed to maintain its lien against subsequent lienors by not refiling its financing statement.

  • Wilson Trading Corp. v. David Ferguson, Ltd., 23 N.Y.2d 398 (1968): Enforceability of Time Limits on Warranty Claims for Latent Defects

    Wilson Trading Corp. v. David Ferguson, Ltd., 23 N.Y.2d 398 (1968)

    Under the Uniform Commercial Code (UCC), contractual limitations on remedies are generally enforceable unless unconscionable or the limited remedy fails of its essential purpose, particularly when dealing with latent defects not reasonably discoverable within the contract’s prescribed time limits.

    Summary

    Wilson Trading Corp. sued David Ferguson, Ltd. for the price of yarn after Ferguson refused to pay, claiming the yarn was defective due to color shading issues discovered after the yarn was knitted and washed. The contract had a clause limiting claims for shade defects if made after processing. The court held that the time limitation might be unenforceable if the defect was latent and not discoverable within the contractual time frame, potentially causing the limited remedy to fail of its essential purpose under UCC § 2-719(2). The court emphasized that parties must have at least a fair quantum of remedy for breach.

    Facts

    Wilson Trading Corp. sold yarn to David Ferguson, Ltd. The yarn was knitted into sweaters, and after washing, a color shading defect was discovered, rendering the sweaters unmarketable, according to Ferguson. The sales contract contained a clause stating, “No claims relating to…shade shall be allowed if made after weaving, knitting, or processing, or more than 10 days after receipt of shipment.” Ferguson claimed the defect was latent and could not have been discovered earlier.

    Procedural History

    Wilson Trading Corp. sued for the contract price. Ferguson counterclaimed for damages, alleging defective goods. The trial court granted summary judgment to Wilson Trading, which was affirmed by the Appellate Division, based on Ferguson’s failure to provide notice of the defect within the contract’s time limit. Ferguson appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the contractual time limitation for making claims was enforceable when the alleged defect was latent and not reasonably discoverable within the stated time frame.
    2. Whether the time limitation caused an exclusive or limited remedy to fail of its essential purpose under UCC § 2-719(2).

    Holding

    1. No, because if the defect was latent and not reasonably discoverable within the contract’s time frame, the time limitation may be unenforceable under UCC § 2-719(2).
    2. Yes, because if the time limitation eliminates any remedy for defects not reasonably discoverable within the contractual time limit, it fails of its essential purpose, and the general remedy provisions of the UCC apply.

    Court’s Reasoning

    The court reasoned that while parties have broad latitude to fashion their own remedies, UCC § 2-719’s official comment 1 states that a contract must provide “at least a fair quantum of remedy for breach.” Contractual limitations are generally enforced unless unconscionable. However, UCC § 2-719(2) states that if “circumstances cause an exclusive or limited remedy to fail of its essential purpose,” the general remedy provisions of the UCC apply. The court found that the time limitation clause eliminated any remedy for defects not discoverable before knitting and processing. If Ferguson’s allegations that the defect was latent and rendered the sweaters unsaleable are true, the limited remedy failed its essential purpose, allowing Ferguson to rely on the UCC’s general rule that a buyer has a reasonable time to notify the seller of a breach after discovery. The court also noted the contract created an “unlimited express warranty of merchantability” while simultaneously attempting to modify it with the time limitation. Under UCC § 2-316(1), warranty language prevails over disclaimers if they cannot be reasonably reconciled. The court noted similarity to pre-code case law where “unreasonable contractual provisions expressly limiting the time for inspection, trial or testing of goods inapplicable or invalid with respect to latent defects.” The court reversed the lower court’s decision and remanded the case for trial, finding that issues of fact remained as to the discoverability of the defects and the reasonableness of the notice.