Statute of Frauds
In Quality Pork international v. Rupari Food Services, Quality Pork International, a Nebraska corporation, filed a suit in 2000 against Rupari Food services, a Florida corporation, to recover the costs of the goods of a third shipment ( 44, 051. 98 ) to a third party, Star Food International, and to receive the payment from Rupari Food services.
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The original agreement was arranged under an oral contract by Midwest brokerage. Rupari billed Star Food International for the 3 shipments but paid Quality Pork International only for the first two shipments arguing that there was no formal agreement between Quality and Rupari as required by UCC S 2-201. Section 2-201 states that a contract for the sales of goods for a price of 500 USD and above must be in writing to be eligible.
Formal requirements: Statute of Frauds.
(1) Except as otherwise provided in this section a contract for the sale of goods for the price of five hundred dollars or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. Writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract and is not enforceable under this division beyond the quantity of goods shown in such writing. “
Under Section 2-201 (3) of the UCC the exceptions when an oral contract is enforceable are:
1) Custom made goods specifically manufactured ones are not suitable for resale when the seller has already started the production process or has already arranged the production of the goods.
2) Admission. In this case, where there is an admission in a testimony, a pleading or court proceeding, plus the oral contract will be enforceable to the extent of the quantity of goods admitted.
3) Partial performance. When goods have been received and accepted or when payment is made, the oral contract will be enforceable at least to the extent of the performance who actually took place.
In the case Quality v. Rupari, the court ruled in Quality’s favor. Rupari appealed and the appellate court reversed the judgment. Quality appealed and The Supreme Court of Nevada reversed the judgment of the appellate court under one exception which was stated in (Partial Performance) of Section 2-201(3) of the UCC. The shipment and acceptance of the three orders, the payment of the first two, and the billing from Rupari to Star of all orders are sufficient evidences that Rupari accepted the third shipment and that a contract between Quality and Rupari existed for the entire order.
Shipment and Destination Contracts
On September 29 2003 Karen Pearson, Steve and Tara Carlson entered into a sales contract with DeMartini’s RV sales for the purchase of a 2004 Dynasty RV in Grass Valley, California. The contract stated that ” the seller agrees to deliver the vehicle to you on the specific date this contract is signed by Seller and you.”
Buyers and seller also signed a warranty registration form acknowledging that the RV was both inspected and accepted. Karen, Steve and Tara on the same day, made a down payment of 145, 000 in order to avoid California sales tax buyers from requesting the RV to be delivered in Nevada. On October 7, Steve went back to DeMartini’s to accompany the seller to Nevada. After that, the RV started having problems which became the buyer’s reason for suing the manufacturer for violating the Monaco Coach Corp alleging violations of the Song-Beverly Consumer Warrant Act, and the Magnuson-Moss Federal Trade Commission Act.
The Song-Beverly Consumer Warrant is a California lemon law and applies only to goods sold in California.
The title was passed to the Buyer under UCC 2-401 (2) which states that “ Unless otherwise explicitly agreed, the title passes to the buyer at the time and place at which the seller completes his performance with reference to the specific delivery of the goods “.
Under UCC 2-401 (2) (A) on the other hand states that, when a contract does not specify a destination where to deliver the goods, it will be considered a shipment contract. In a shipment contract, the title will be passed at the time and place of delivery. In this case, the contract signed on September 29 did not provide for a location where the RV should be delivered or accepted. Therefore, the title should be transferred to the buyers in Grass Valley California, the place of delivery, on September 29, 2003. The buyers could raise this claim under the California law.
The scope of security interest
Edward is wrong. First, the bank perfected a security interest by filing a financing statement. “ Perfection” is the legal process that protects a secured party (The Bank), against claims from other creditors of the same property by using collateral to be given to the secured party. The best instrument to perfect a security interest is the process of filing a financing statement. The financing statement is a document that contains detailed information about the debtor and the collateral that gives public notice about the secured interest. It is filed with the appropriate filing office.
The bank perfected a security interest in the whole inventory and not just on the present one. UCC 9-204 states that (1) “ Except as otherwise provided in subsection (b), a security agreement may create or provide for a security interest in after-acquired collateral”. As per their agreement, an acquired inventory was also a part of the collateral used to secure financing from the bank. Edward will normally sell the inventory during ordinary course of business replacing it with new inventory; therefore, reducing and depleting the inventory that was available at the time he received the loan from bank.
Edward defaulted on the loan. The Bank now has the right to take possession of the whole inventory even though it is now twice as large as it was when the loan was made.
Creating a Security Interest
On May 02, 2002, Michael Sabol, DBA of Sound Farm productions, obtained a loan from Morton Community Bank amounting 58, 000 for business purposes. During the application process, Sabol signed a promissory note for the whole amount with a reference in the note to the bank’s rights in “ any collateral“, and a letter saying: “ In consideration for Morton Community Bank granting a loan to Michael S. Sabol, DBA of Sound Farm Productions, the undersigned hereby authorize Morton Community Bank to execute, file and record all financing statements, amendments, termination statements and all other statements authorized by Article 9 of the Illinois Uniform Commercial Code, plus any security interest in the loan or refinancing presently sought by the undersigned, as well as all loans, refinancing or workouts hereafter granted by Morton Community Bank to Michael S. Sabol DBA Sound Farm Productions.”
On July 18, 2002 the bank filed a standard UCC financing statement. The description of the collateral included inventory, account receivable and equipment. Sabol did not sign the financing statement. Three Years later Sabol filed for bankruptcy before the loan was repaid. The bank filed a proof of claim, asserting a secured claim in the amount of $36, 967. 34. The trustee filed a report of possible assets, disclosing that he intended to administer the sound equipment (the collateral) as assets of the bankruptcy estate and brought this adversary complaint to determine the validity of the bank’s lien.
UCC 9-203 states that in order to have a security interest enforceable, the collateral must be in possession of the secured party, or there must be a security agreement written or authenticated with the description of the collateral signed or authenticated by the debtor.
In this case, there was no document or language evidencing a security agreement. The financing statement was not signed by the debtor and only contained a brief description about the collateral. The reference in the promissory note does not have a description of the collateral but just the words “ any collateral “ and it was not acceptable.
The court ruled in favor of the trustee and determined that the bank did not have a valid enforceable security interest in the collateral which is now a part of the estate of the bankruptcy estate. The court allowed the claim as an unsecured credit for the same amount.
A Question of Ethics
Daniel Fox is the owner of Fox and Lamberth Enterprises—it is a kitchen and bath remodeling business in Dayton Ohio. Craftsmen Home Improvement is in the same business. Fox leased a building from Carl and Bellulah Hussong. When Fox decided to close his business, Craftsmen offered him to buy his showroom assets. They agreed to a price of 50, 000. Craftsmen’s owners gave Fox a list of the items they wanted to buy and a bill of sale with the terms of the payments. At that time, they did not discuss the lease arrangement but Craftsmen were planning to renegotiate the lease with Hussong and make changes to the showroom. Craftsmen couldn’t come to an agreement with Hussong on the terms of the new lease. For this reason, Craftsmen called Fox and told him that the deal was off. Because of that, Daniel Fox sued Craftsmen for breach of contract while Craftsmen raised the statute of frauds as a defense.
Section 2-201 of the UCC requires that a contract for the sales of goods for a price of 500 USD or more must be in writing to be enforceable.
“ 2-201. Formal requirements: Statute of Frauds. (1) Except as otherwise provided in this section a contract for the sale of goods for the price of five hundred dollars or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. Writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this division beyond the quantity of goods shown in such writing. “
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Under Section 2-201(3) of the UCC, the exceptions when an oral contract is enforceable are:
1) Custom made goods specifically manufactured that are not suitable for resale when the seller has already started the production process or has already arranged the production of the goods.
2) Admission. In this case where there is an admission in a testimony, a pleading or court preceding the oral contract will be enforceable to the extent of the quantity of goods admitted.
3) Partial performance. When goods have been received and accepted, or payment is made, the oral contract will be enforceable at least to the extent of the performance who actually took place.
The partial performance exception may be applied by the courts when the buyer actions are inconsistent with the seller ownership of the goods like in this case. The trial court awarded Fox 41, 262. 32 in damages. Craftsmen appealed and the appellate court affirmed the lower court decision. The court concluded: “ Partial performance in the present case occurred when Craftsmen entered the Better Kitchen showroom, modified displays, and removed portions of the displays to Craftsmen’s showroom. These actions were inconsistent with ownership of the assets by Better Kitchen. “ Craftsmen also argued that the trial court improperly mixed the ” use of the premises” with the ” sale of goods.”
The predominant factor test is a test used by the courts to determine whether a mixed contract is primarily for the sales of good or for services. In this case, the court determined that the contract was for the sales of goods and therefore should be regulated under the UCC. There was no indication that the parties had the intention to enter into a lease. Nothing in the writings indicated that the agreement was subject to a lease negotiation as well.
It is fair to hold a party to a contract to buy a business’s assets when the buyer is unable to negotiate a lease where the assets are located unless the same contract was subject to the landlord’s approval. If the parties had the contingency clause in the agreement, there wouldn’t be a dispute in the first place. After the parties agreed on the price, Fox told his employee to find another job because he was selling the business. He stopped taking orders and gave to his customers Craftsmen’s phone number to call for future orders. Probably if they had the lease contingency in the agreement, Fox would have been more prudent and waited until Craftsmen and the landlord had reached an agreement.