COMMERCIAL TRANSACTIONS
TRANSACTIONS
COMMERCIAL
John Krahmer*
Krahmer*
OF CONTENTS
CONTENTS
TABLE OF
GENERAL PROVISIONS
PROVISIONS.................................
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 996
996
I. GENERAL
A. CONSPICUOUSNESS
CONSPICUOUSNESS .....................................
.................................... 996
996
B.
B. SECURITY
SECURITY INTEREST
INTEREST OR
OR LEASE?
LEASE? .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 998
998
C.
CHOICE OF LAW
LAW AND FORUM
FORUM SELECTION
SELECTION .............
............. 999
999
C. CHOICE
....................................... 1001
II. SALE OF GOODS
GOODS .......................................
A. MODIFICATION
MODIFICATION OF
OF SALES
SALES CONTRACTS
CONTRACTS .................
................. 1001
III.
IV.
V.
VI.
VII.
BREACH OF
B.
B. DAMAGES
DAMAGES RECOVERABLE
RECOVERABLE FOR
FOR BREACH
OF
W
ARRANTY ...........................................
WARRANTY.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
C. GooD
GOOD FAITH
FAITH PURCHASE
PURCHASE...............................
. . . . . . . . . . . . . . . . . . . . . . . . . . . ..
D. NOTICE
NOTICE OF BREACH
BREACH ...................................
...................................
....................................
LEASES OF GOODS ....
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
..................................
A. UNCONSCIONABILITY
UNCONSCIONABILITy..................................
............................
B. EFFECT
EFFECT OF
OF CANCELLATION
CANCELLATION ............................
................................
WAIVER OF DEFENSES
DEFENSES ................................
C. WAIVER
C.
NEGOTIABLE
NEGOTIABLE INSTRUMENTS
INSTRUMENTS..........................
. . . . . . . . . . . . . . . . . . . . . . ..
................
A. LIABILITY
LIABILITY OF
OF MAKERS AND
AND DRAWERS
DRAWERS ................
B. HOLDING
HOLDING IN
IN DUE COURSE
COURSE.............................
. . . . . . . . . . . . . . . . . . . . . . . . . ..
C. ISSUES
ISSUES REGARDING
REGARDING INDORSEMENTS
INDORSEMENTS....................
. . . . . . . . . . . . . . . . ..
D. STATUTE
STATUTE OF LIMITATIONS
LIMITATIONS .............................
.............................
...............
BANK DEPOSITS AND COLLECTIONS
COLLECTIONS ...............
A BANK
ITS
A. RELATIONSHIP
RELATIONSHIP BETWEEN
BETWEEN A
BANK AND ITs
CUSTOM ER ............................................
CUSTOMER.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
SECURED TRANSACTIONS
SECURED
TRANSACTIONS.............................
. . . . . . . . . . . . . . . . . . . . . . . . . ..
SECURITY INTEREST ......................
A. CREATING A
A SECURITY
. . . . . . . . . . . . . . . . . . ..
...................
SECURITY INTEREST ...................
B. PERFECTING A
A SECURITY
PARTIES ............................
C. RIGHTS
RIGHTS OF THIRD PARTIES.
. . . . . . . . . . . . . . . . . . . . . . . . . ..
D. DISPOSITION
DISPOSITION OF COLLATERAL
COLLATERAL ............................
.........................
CONCLUSION
...........................................
CONCLUSION...........................................
1002
1002
1003
1003
1004
1004
1005
1005
1005
1005
1005
1005
1006
1007
1007
1007
1009
1011
1011
1013
1013
1013
1013
1013
1013
1015
1015
1015
1015
1016
1016
1017
1017
1018
1018
1020
1020
ECAUSE 2008 was not a legislative year in Texas, developments
B
ECAUSE 2008 was not a legislative year in Texas, developments
commercial law resulted exclusively from court decisions interin commercial
Code.'
preting and applying the Texas Uniform Commercial Code.)
Tech UniUniFoundation Professor
Professor of
of Commercial
Law, Texas
Texas Tech
of Law
and Foundation
**Professor
Professor of
Law and
Commercial Law,
versity. B.A., J.D., University of Iowa; LL.M., Harvard
Harvard University.
1. As adopted in Texas, the Uniform Commercial Code (the Code) comprises
comprises the
the
& COM.
Commerce Code. See TEX. Bus. &
first eleven chapters of the Texas Business and Commerce
COM.
1.101-.108 (Vernon 2009).
CODE ANN. §§ 1.101-.108
2009).
995
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Cases discussed in this Survey are organized in the same order as the
chapters in the Code.
I.
GENERAL PROVISIONS
GENERAL
A.
CONSPICUOUSNESS
CONSPICUOUSNESS
"conspicuVarious provisions in the Code require
require that certain terms be "conspicueffective. 2 In the seminal case of Dresser
Dresser Industries,
Industries, Inc.
Inc. v.
ous" to be effective?
Page Petroleum,
Petroleum, Inc.,3
Inc.,3 the Texas Supreme
Supreme Court adopted and applied the
Page
conspicuousness to all contracts whether or not arising
Code standard for conspicuousness
under the Code. Since the decision in Dresser, the Code definition of
"conspicuous" was
amended to
"safe harbor"
"conspicuous"
was amended
to include
include aa "safe
harbor" for clauses that
are displayed in larger type, font,4 or color, or set off by symbols or marks
clause. 4
the clause.
to the
that call attention to
Longhorn DFW Moving,
Moving, Inc.,
In Mickens v. Longhorn
Inc.,55 household goods were
destroyed by fire while being moved by a moving company. The contract
contract
contained a clause limiting the moving company's liability to sixty cents
company's possession. 66 The
per pound for goods destroyed while in the company's
owners contended
contended the clause was ineffective
ineffective because
because it was not conspicuconspicuous. The Dallas Court of Appeals disagreed. Citing Dresser
Dresser and referring
"conspicuous," the court noted that the
to the amended definition of "conspicuous,"
agreement had an outlined
outlined box containing the limitation of liability
clause in capitalized
capitalized letters
letters and one of the property owner's
owner's signatures
less than one inch below the capitalized
capitalized clause. The court held that, as a
conspicuous. 77
matter of law, the clause was
was conspicuous.
The property
property owners also alleged their claim was for negligence
negligence and
their recovery
recovery should
should not have been limited to contract damages. On this
point, the court noted that whether a claim
claim sounds in tort or contract
contract
depends
action."' 8 Because
depends on "the
"the substance
substance of the cause of action."8
Because the property
owners'
owners' claim for mental
mental anguish
anguish had not survived summary
summary judgment,
2. See, e.g., TEX. Bus.
& COM. CODE ANN.
Bus. &
ANN. § 2.316(b) (Vernon
(Vernon 2009)
2009) (clause
(clause disclaiming
conspicuous); TEX. Bus. &
& COM.
ing warranties
warranties in
in contract
contract for
for sale of goods must be
be conspicuous);
COM. CODE
ANN.
ANN. 2A.303(h)
2A.303(h) (Vernon
(Vernon 2009) (prohibition on transfer
transfer of interest in consumer
consumer lease
lease inef(Vernon 2009) (disfective unless
unless conspicuous);
conspicuous); TEX. Bus. &
& COM. CODE ANN. § 2A.214
2A.214 (Vernon
claimer of
claimer
of warranties in
in lease must be conspicuous;
conspicuous; TEX. Bus. &
& COM.
COM. CODE
CODE ANN.
ANN. § 77104(c)
104(c) (Vernon
(Vernon 2002 &
& Supp.
Supp. 2008)
2008) (legend
(legend that
that document
document of title is non-negotiable
non-negotiable must
must
be conspicuous);
conspicuous); TEX.
TEX. Bus. &
& COM. CODE ANN.
ANN. §§ 8-204(1)
8-204(1) (Vernon
(Vernon 2002)
2002) (restriction on
right to transfer
conspicuous).
transfer certificated
certificated security must be conspicuous).
3.
3. 853 S.W.2d
S.W.2d 505,
505, 508-09
508-09 (Tex.
(Tex. 1993).
1993).
4. TEX. Bus. &
(Vernon 2009).
& COM.
COM. CODE
CODE ANN.
ANN. §§ 1.201(b)(10)
1.201(b)(1O) (Vernon
2009). Chapter 1 of
of the
Code
1-21, 2003 Tex. Gen.
Code was amended
amended by Act of June 20,2003,
20,2003, 78th Leg., R.S., ch.
ch. 542,
542, § 1-21,2003
Laws 1840-54
& COM.
COM. CODE
CODE ANN. § 1.101-.310
1.101-.310 (Vernon
(Vernon
1840-54 (current
(current version
version at TEX. Bus. &
2009)).
2009)).
5.
5. 264 S.W.3d
S.W.3d 875
875 (Tex. App.-Dallas
App.-Dallas 2008, pet. denied).
denied).
6. Id.
[d. at 877.
7. Id.
[d. at 879.
8. Id.
determining whether
[d. at 879. This test for determining
whether aa claim sounds in tort or contract
contract
originated in Jim
originated
Jim Walter Homes,
Homes, Inc. v. Reed, 711
711 S.W.2d 617 (Tex. 1986),
1986), where
where the court
court
also stated:
"The acts
stated: "The
acts of aa party
party may breach
breach duties in
in tort
tort or contract alone or
or simultanesimultaneously in both. The nature
nature of
of the injury most often
often determines
determines which
which duty or duties
duties are
are
breached."
breached." Id.
[d. at 618.
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Commercial
997
the only
only remaining
remaining claim
claim was
was for
for the
the loss
loss of
of personal
personal property
property that
that ococthe
curred while
while the
the property
property was
was being
being moved
moved during
during performance
performance of
of the
the
curred
The court
court held
held this loss made
made the
the claim
claim one
one for
for breach
breach of
of conconcontract. The
tract and
and not
not one
one in tort. The limitation
limitation of liability
liability clause
clause was,
was, therefore,
therefore,
tract
effective.9
effective.
One of
of the
the most
most common
common instances
instances in
in which
which the
the issue
issue of
of conspicuousconspicuousOne
0
In Morgan
arise involves
involves the disclaimer
disclaimer of
of implied
implied warranties.
warranties. 110
Morgan
ness can arise
Buildings and Spas,
Spas, Inc.
Inc. v. Humane Society
Society of
of Southeast
Southeast Texas,"
Texas,11 the manBuildings
ufacturer of
of aa portable
portable steel
steel building delivered
delivered a structure
structure that varied
varied
ufacturer
considerably from the
the contract
contract specifications
specifications regarding
regarding size,
size, color, and
and
considerably
The purchaser
purchaser sued for
for breach
breach of
of warranty,
warranty, breach
breach of
of contract,
frame. The
12 BeDeceptive Trade
Trade Practices
Practices Act ("DTPA")
("DTPA") violations, and
and fraud.
fraud. 12
BeDeceptive
cause deciding
deciding whether
whether a clause
clause is
is conspicuous
conspicuous is determined
determined as a matter
matter
cause
of law, the Beaumont
Beaumont Court of Appeals
Appeals reviewed
reviewed the
the disclaimer.
disclaimer. It held
held
that the
the disclaimer
disclaimer met
met the requirements
requirements of the Code
Code because
because it was set
set
that
clause
off by a centered, bold print heading
heading in uppercase
uppercase letters
letters and the clause
off
itself was also in'' 13
bold print, uppercase
letters that included
included the word
word
uppercase letters
bold
itself
"merchantability.
As
"merchantability."13
As to
to the
the DTPA
DTPA and
and fraud claims,
claims, the court held
held
the contract
contract expressly
expressly disclaimed
disclaimed any reliance
reliance by the purchaser
purchaser on any
the
representations
representations made
made by the seller outside
outside the
the terms
terms of the contract itself.
The purchaser,
purchaser, therefore,
therefore, could not recover
recover for breach
breach of warranty,
warranty,
or fraud. The court
court further held, however, that the purDTPA violations,
violations, or
DTPA
chaser did have a valid claim
claim for breach
breach of contract because the delivered
delivered
chaser
14
building did not conform
conform to the contract specifications.
specifications. 14
The court
building
pointed out that section 2.714 of the Code not only allows
allows actions for
pointed
breach of warranty,
warranty, but also for "'any
perform
"'any failure of the seller to perform
breach
15
The case was reaccording to his obligations
obligations under the contract.'
contract." "15
manded for a new trial on the breach
breach of contract claim.
manded
in
disclaimer was conspicuous
The question of whether a disclaimer
conspicuous also arose in
Inc.,16
Corn, Inc.,16
Control.Com,
Component Control.
Inc. v. Component
Instruments, Inc.
& Instruments,
Fieldtech Avionics &
Fieldtech
ordinary sale of
this time in the context of a finance lease. Unlike an ordinary
goods between
between a seller and a buyer, or a direct lease between a lessor and
a lessee, a finance lease involves three parties: a lessor, a lessee, and a
supplier of the goods. In such leases, a finance lessor enters into a contract with a supplier to purchase the goods, but the goods are to be delivbetween the
ered directly to the lessee under a separate lease agreement between
9. 264 S.W.3d at 879.
9.
lease of goods,
goods and the lease
of goods
Chapters 2 and 2A governing the sale of
10. Under both Chapters
10.
& COM.
TEX. Bus. &
be conspicuous.
conspicuous. See TEX.
respectively, disclaimers of implied warranties must be
2009).
(Vernon 2009).
CODE ANN. §§
2A.214(b) (Vernon
§§ 2.316(b),
2.316(b), 2A.214(b)
no pet.).
App.-Beaumont 2008, no
11. 249 S.W.3d 480 (Tex. App.-Beaumont
11.
CODE
COM. CODE
appears as TEX. Bus. && COM.
Trade Practices Act appears
12.
12. The Texas Deceptive Trade
2002 &
& Supp. 2008).
§§ 17.41-.63
17.41-.63 (Vernon 2002
ANN. §§
the word
include the
effective disclaimer
disclaimer include
that an effective
The requirement
requirement that
at 490.
490. The
13. 249 S.W.3d at
13.
2009).
ANN. §§ 2.316(b) (Vernon 2009).
CODE ANN.
stated in TEX. Bus. && COM. CODE
"merchantability"
"merchantability" isis stated
490-91.
14. 249 S.W.3d at 490-91.
14.
2.714 cmt. 22 (Vernon
CODE ANN. §§ 2.714
& COM.
COM. CODE
from TEX.
TEX. Bus. &
(quoting from
15. [d.
Id. at 491 (quoting
15.
2009)).
2009)).
no pet.).
2008, no
App.-Fort Worth 2008,
262 S.W.3d
S.W.3d 813 (Tex. App.-Fort
16. 262
16.
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finance lease is that it effectively
lessor and the lessee. The advantage of a finance
insulates the finance lessor from warranty claims arising from defects in
the goods. Indeed, except for express warranties made by the lessor and
implied warranties against interference and infringement, Chapter 2A
2A
does not imply any warranties
warranties regarding the quality of the goods between
between
17
the lessor and the lessee.
lessee.17
The sole remedy of a lessee for breach of an
implied warranty
warranty of quality is
is against the supplier of the goods. In
Fieldtech,
the
Fort
Worth
Court
of Appeals recognized
recognized that the lessee's
lessee's
Fieldtech,
breach of warranty
warranty claims regarding the leasing and licensing of software
would not lie against the finance lessor, with or without a conspicuous
disclaimer by the lessor.1
lessor.188 Perhaps out of an abundance of caution (always a good idea in contract
contract drafting), the finance lessor did include a
conspicuous disclaimer of warranties in the lease agreement
agreement although
although
such a disclaimer would not technically
technically be required. The disclaimer appeared
capitalized type quoted
peared under a bold face, capitalized heading in capitalized
19
in full in the opinion. 19
The supplier, however, was not as careful with its
"clickwrap"
disclaimer which appeared on the third page of a five page "clickwrap"
agreement and was not distinguished by larger type or by a contrasting
20 The disclaimer
font or color.20
disclaimer was, therefore, ineffective to disclaim
disclaim implied
plied warranties. As to express warranties, the court noted that while
nothing
nothing in the Code requires disclaimers
disclaimers of express warranties to be conspicuous, any disclaimer of such warranties
warranties must be communicated
communicated
before
Because there was no evidence
evidence that the
before the sale
sale is completed.221' Because
lessee
lessee was aware that express warranties
warranties were being disclaimed
disclaimed until two
months
months after the lease
lease agreement
agreement had been
been signed,
signed, the attempted dis22
Sumclaimer
claimer of express
express warranties by the supplier was also ineffective.
ineffective. 22 Summary
mary judgment
judgment in favor of the finance
finance lessor was affirmed, but summary
judgment
remanded for trial on
judgment in favor of the supplier
supplier was reversed
reversed and remanded
the
the claims against
against the supplier.
B.
SECURITY INTEREST OR LEASE?
SECURITY
LEASE?
A
transaction is a disA perennial
perennial issue faced
faced by the courts
courts is whether
whether a transaction
23 If the transaction
guised
guised security
security interest or a true lease. 23
transaction is a disguised
disguised
security
Chapter 9 of the Code. If it is a lease, itit
security interest, it is governed by Chapter
is governed
governed by Chapter 2A and the rights
responsibilities of the parrights and responsibilities
also TEX.
17. See
See TEX.
TEX. Bus. & COM. CODE
CODE ANN. §§ 2A.210-.211
2A.210-.211 (Vernon
(Vernon 2009);
2009); see
see also
TEX.
Bus.
Bus. & COM.
COM. CODE
CODE ANN.
ANN. § 2A.407
2A.407 cmt. 55 (Vernon
(Vernon 2009).
18.
18. 262
262 S.W.3d
S.W.3d at 823.
19. Id.
Id. at 819-20.
819-20.
20. Id.
"clickwrap" agreement
Id. at 829. A "clickwrap"
agreement is aa term that has come
come into use to
to describe
describe an
an
agreement
agreement that appears on a computer
computer screen
screen when
when aa purchaser
purchaser downloads
downloads or installs
software.
Id.
software. The court
court noted
noted that Texas
Texas recognizes
recognizes the validity
validity of clickwrap
clickwrap agreements.
agreements. Id.
at
at 818 n.1 (citing
(citing RealPage,
RealPage, Inc. v. EPS, Inc.,
Inc., 560
560 F. Supp. 2d 539 (E.D. Tex. 2007)).
2007».
21.
of N. Am.,
Am., Inc. v. Dickenson,
Dickenson, 720 S.W.2d
21. 262
262 S.W.3d
S.W.3d at 829 (citing
(citing Mercedes-Benz
Mercedes-Benz of
844,
App.-Fort Worth
Worth 1986,
1986, no
no writ)).
writ».
844, 852 (Tex. App.-Fort
22. 262
262 S.W.3d at 829-30.
23.
Raymond T. Nimmer,
23. See generally
generally Raymond
Nimmer, U.C.C.
V.CC Article 2A: The New
New Face
Face of
of Leasing,
Leasing, 3
DEPAUL
DEPAUL Bus. & COM.
COM. L.J. 559
559 (2005).
(2005).
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999
ties are
are very
very different
different from
from those
those contained
contained in Chapter
Chapter 9.24
9. 24 One
One of
of the
the
ties
most important
important results
results of
of deciding
deciding that aa transaction
transaction is
is really
really aa disguised
disguised
most
security interest
interest rather
rather than
than aa lease
lease isis the
the treatment
treatment each
each isis accorded
accorded in
in
security
bankruptcy. A
A security
security interest
interest may
may be
be avoidable
avoidable (with
(with aa consequent
consequent loss
loss
bankruptcy.
25
secured status),
status), while
while aa true
true lease
lease can
can only
only be
be affirmed
affirmed or
or rejected.
rejected. 25
of secured
26
In In re Ecco Drilling
Drilling co.,
co., Ltd.,
Ltd.,26
the bankruptcy
bankruptcy court
court determined
determined that
that
the
In
lease of
of drilling
drilling rigs
rigs allowing
allowing the lessee
lessee to purchase
purchase the
the rigs
rigs for at least
least
aa lease
percent of their
their value
value at the end
end of the
the lease
lease term
term should
should be
be
fifteen percent
recharacterized as aa security
security interest
interest instead
instead of
of a lease. In
In reaching
reaching this
recharacterized
decision, the
the court
court applied
applied New
New York
York law as required
required by the
the terms
terms of the
the
decision,
agreement, but
but noted that
that Texas
Texas law
law would
would be the
the same
same so
so far as
as applicaagreement,
27
Using this test, the
of the "economic
"economic realities"
realities" test was
was concerned.
concerned.27
tion of
that exercise
exercise of the purchase
purchase option
option was so
so likely
likely in view of
of the
court held that
amount required
required and the amount
amount already
already spent by the lessee
lessee in
in
nominal amount
procuring and
and adapting
adapting the
the rigs, itit was not credible to believe
believe the lessee
lessee
procuring
28 Judgment
would fail to exercise the option.28
Judgment was
was rendered
rendered in favor
favor of
of the
lessee who sought to have
have the
the transaction
characterized as a security intransaction characterized
lessee
29
terest rather than a lease. 29
C.
C.
SELECTION
AND FORUM SELECTION
CHOICE
CHOICE OF LAW AND
With a few exceptions,
exceptions, section 1.301
parties to
to
1.301 of the Code allows the parties
to
relation
agree that the law of any state or nation that has a reasonable
shall govern their rights and responsibilities. 3300 Not infrethe transaction shall
choice of law clause
clause is joined
joined with a forum selection clause;
clause;
quently, a choice
after all, if the parties
parties have chosen the law of a given state to govern
govern their
transaction, it would make
make sense to have a court in that state hear distransaction,
of
enforceability of conjoined choice of
putes applying that state's law. The enforceability
TradTexas
v.
in
Ramsay
law and forum selection clauses was addressed
Ramsay
Texas Trad31 In Ramsay, an investor challenged enforceability on the
ing
Inc. 31
the
ing Co., Inc.
selection
grounds that it was a venue selection clause rather than a forum selection
permissive rather than
clause and the language of the clause made it permissive
contains aa
24. See,
9.602 (Vernon 2002) which contains
ANN. § 9.602
& COM. CODE ANN.
e.g., TEX. Bus. &
See, e.g.,
no
Chapter 9. Chapter 2A has no
list of several
several rights that cannot be waived by a debtor under Chapter
similar
similar list and some of the rights that cannot be waived under Chapter 9 are fully waivable
by a lessee under Chapter 2A.
CODE:
UNIFORM COMMERCIAL CODE:
25. See JAMES
S. SUMMERS,
SUMMERS, 4 UNIFORM
ROBERT S.
J. WHITE
WHITE & ROBERT
JAMES J.
13 (West Group 2002).
30-3, 13
PRAcnTIONER
PRACTITIONER TREATISE SERIES § 30-3,
2008).
26. 390 B.R. 221 (Bankr.
(Bankr. E.D. Tex. 2008).
test focuses on whether it is reasonable
realities test
economic realities
27. See 390
at 226. The economic
390 B.R. at
term
of the
the lease term
end of
at the
the end
purchase at
option to
to purchase
to expect that a lessee will not exercise
exercise an option
greater than the
the lease
lease equal to or greater
of the
and identifies
identifies four main factors: (1) is the term of
(2) is the lessee bound to renew the lease at the end
the goods?;
goods?; (2)
remaining economic
life of
of the
economic life
have an
goods?; (3) does the lessee have
of their
the owner of the goods?;
to become the
life or to
economic life
their economic
lease
the original lease
end of the
option to renew the lease
no consideration at the end
nominal or no
lease for nominal
or no
no
for nominal
nominal or
goods for
purchase the goods
term?;
option to purchase
the option
have the
the lessee
lessee have
and (4) does the
term?; and
Id. at 227-28.
the lease
lease term? [d.
of the
at the
the end of
consideration
consideration at
Id. at
at 232.
232.
28. [d.
28.
29.
29. [d.
Id.
2009).
30.
1.301(a) (Vernon 2009).
ANN. §§ l.301(a)
CODE ANN.
COM. CODE
& COM.
Bus. &
30. TEX.
TEX. Bus.
denied).
pet. denied).
App.-Texarkana 2008, pet.
S.W.3d 620 (Tex. App.-Texarkana
31. 254 S.W.3d
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mandatory. The Texarkana Court of Appeals rejected the former argument because the clause merely allowed the action to be filed in any court
32
in Illinois in accord with any applicable Illinois venue rules. 32
As to the
defendant
latter argument, the court was not persuaded that allowing the defendant
broker to exercise discretion about whether to bring an action in Illinois
unenforceable. Pointing out that it was
instead of Texas made the clause unenforceable.
required
enforce the contract as written, the court found no authority
required to enforce
holding
holding that allowing
allowing a party discretion about whether to bring the suit in
one state rather than another rendered the clause invalid or
33
unenforceable.
unenforceable. 33
In In
re Lyon Financial
Services, Inc.,34
Inc.,34 the dispute centered
centered on
In re
Financial Services,
whether a forum selection clause allowed an unjust result because the
plaintiff would be unable to assert usury claims under Pennsylvania
Pennsylvania law
plaintiff
and whether this was inconsistent with Texas public policy. Furthermore,
the clause
clause was allegedly
overreaching and fraudulent reprethe
allegedly the result of overreaching
result in increased costs of litigation for the plainsentations
that
would
35
tiff.
Reviewing each
each of
of these
these objections,
tiff.35 Reviewing
objections, the supreme court held the
clause did not violate
violate Texas public policy because
because there was no Texas
Texas statute requiring
requiring suit to be brought
brought in Texas and the plaintiff made no showing that a Pennsylvania court would not apply Texas
Texas law in determining
determining
the rights of the parties. 3366 The supreme
supreme court also held that mere allegasufficient to invalidate
tions of disparity in bargaining
bargaining power were not sufficient
invalidate the
37
Nor were allegations
costs-without eviforum selection. 37
allegations of increased
increased costs-without
dence of what those costs would be-enough
be-enough to make the clause unen38 The trial court was directed to enter an order
forceable. 38
order granting the
39
motion to
defendant's motion
defendant's
to dismiss.
dismiss. 39
In Delaney v. Gulf Stream
Stream Coach,
Inc.,40 the plaintiffs
Coach, Inc.,40
plaintiffs purchased
purchased a motor home
from
a
local
dealer
in
Texas.
The
manufacturer
home
dealer
The manufacturer of the home was
located in Indiana.
After
delivery,
the
Indiana. After
the plaintiffs
plaintiffs discovered
discovered mold and
and
water damage in the motor
home
and
the
dealer
motor
dealer told them to bring
bring the
home back to the dealership
dealership for repairs. Attempts by both
both the
the dealer
dealer and
and
the manufacturer
manufacturer to correct the problems
problems were ineffective. The plaintiffs
sued for breach
breach of warranty
warranty and DTPA violations. The defendant
defendant asserted that a forum selection
selection clause in aa limited
limited warranty
warranty agreement
agreement allegedly signed
signed by one of the plaintiffs
plaintiffs at the time of purchase
purchase required
required
suit in Indiana.
The
The U.S. District
District Court
Court for the
the Southern
Southern District
District of Texas found there
there
was
was insufficient
insufficient evidence
evidence to show that either
either plaintiff
plaintiff signed
signed the limited
limited
32.
32. Id.
Id. at 626.
33.
33. Id. at 631.
63l.
34.
35.
36.
37.
37.
38.
3S.
39.
39.
40.
257
S.W.3d 228
257 S.W.3d
22S (Tex.
(Tex. 2008).
200S).
Id. at 231.
23l.
Id. at 234-35.
Id.
Id. at 233.
Id. at 233-34.
Id.
Id. at 235.
No. H-08-2018,
*1 (S.D. Tex.,
H-OS-201S, 2008
200S WL 5114955,
5114955, at *1
Tex., Dec. 3, 2008).
200S).
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1001
warranty
warranty document
document when
when the
the motor home
home was
was purchased. 4411 The
The quesquesthe court, therefore,
therefore, was whether
whether the
the plaintiffs
plaintiffs could
could be
be
tion before the
2
On this issue,
the forum selection
selection clause
clause as nonsignatories.
nonsignatories.442
issue,
bound by the
court applied
applied the
the same
same tests used to determine
determine if nonsignatories
non signatories could
could
the court
43 The defendant
be bound
bound by
by an
an arbitration
arbitration clause.
clause.43
defendant argued
argued only
only that the
plaintiffs
plaintiffs should
should be
be bound to the
the forum
forum selection
selection clause
clause by equitable
equitable esestoppel. The court
court held
held that estoppel
estoppel did
did not
not apply because
because the
the plaintiffs'
plaintiffs'
were based on
on implied warranties
warranties that arose independently
independently from
claims were
and not as part
part of the
the limited
limited warranty
warranty
the sale of the motor home itself and
Furthermore, the defendant
could not
not avail
avail itself of the feddefendant could
document. 44 Furthermore,
provisions allowing a change
change of venue
venue because
because neither
neither the prieral law provisions
vate factors that might
might favor a venue change,
change, such as availability
availability of
of
witnesses, nor the public
public factors,
factors, such as administrative
administrative difficulties in conconlitigation, would be served
ducting the
served by
by transferring
transferring the case to
to
45
Indiana. 45
II.
A.
A.
SALE OF GOODS
MODIFICATION OF SALES
MODIFICATION
SALES CONTRACTS
Section
Section 2.209 of the Code abolishes
abolishes the common law rule requiring
requiring
Inc. v.
GraybarElectric
consideration for contract
Electric Co., Inc.
contract modifications. 46 In Graybar
consideration
47
(14th DisLEM &
& Associates,
Associates, L.L.C.,
L.L.C.,47
the Houston
Houston Court
Court of Appeals
Appeals (14th
District) ruled that the trial court
court had erred by applying
applying the common
common law rule
electrical equipment. Because
modification of a purchase
purchase order
order for electrical
Because
to the modification
contract was
the contract
contract was for the sale of goods, the court held the contract
was
clearly
clearly covered by section 2.209 and the buyer
buyer was entitled to a price
approximately $2.6 million under the terms of the change
reduction
reduction of approximately
change
48
order.
order.48
The court also rejected the trial court's determination
determination that the
49
duress. 49
change
change order was void as a result of fraudulent
fraudulent inducement
inducement or
or duress.
*2.
41. Id.
[d. at *2.
42. Id.
[d.
Id. The court listed six theories that could be used to bind non-signatories:
43. [d.
non·signatories: (1)
(1)
(2) assumption of a contract
incorporation of a clause
clause by reference in another document; (2)
contract
incorporation
containing
containing the relevant
relevant clause; (3) agency; (4)
(4) veil-piercing or alter ego; (5) estoppel; and
(6) third-party beneficiary
[d.
(6)
beneficiary theory. Id.
*3.
44. Id.
[d. at *3.
transferred beId. at *4. Even without a forum selection clause, venue may be transferred
45. [d.
1404(a)
V.S.c. §§ 1404(a)
tween federal courts if the interests of justice would be served. See 28 U.S.C.
(2006).
(2006).
& COM. CODE ANN. §§ 2.209(a) (Vernon 2009). At common law, a modi46. TEX. Bus. &
ineffective under the preexconsideration is ineffective
changed consideration
fication unsupported by separate or changed
1. Even at common law, inroads have been made on the
isting duty rule. See §§ 2209 cmt. 1.
consideration requirement by allowing a modification to be enforceable
enforceable if the modification
induces a material change
change in the position of the party relying on the modification. See
(1981).
RESTATEMENT (SECOND)
(SECOND) OF
RESTATEMENT
OF CONTRACTS § 89(c) (1981).
47. 252 S.W.3d 536 (Tex. App.-Houston [14th Dist.] 2008, no pet.).
48. Id.
[d. at 545-47.
49. Id.
[d. at 546-47.
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RECOVERABLE FOR
FOR BREACH
DAMAGES RECOVERABLE
BREACH OF WARRANTY
The same facts often give rise to an action asserting claims for breach
of warranty, DTPA violations, and negligence or strict liability in tort.
explored some of
Two significant cases decided during the Survey period explored
the ramifications of the overlap between these theories.
Medical City
City Dallas,
Dallas, Ltd.
Ltd. v. Carlisle
Carlisle Corp.,50
Corp.,50 a building owner sued a
In Medical
manufacturer of roofing material for breach of an express warranty. As
part of its claim, the owner sought recovery of attorney's fees. The manurecoverable only in contract acfacturer argued that attorney's fees were recoverable
warranty. 51 This argument
argument
tions and not in actions for breach
breach of express warranty.51
JHC Ventures,
Ventures, L.P.
L.P. v. Fast
Fast Truckwas based on lower court decisions in JHC
53
52
Co.,
Const. CO.,53
Baker Concrete
Concrete Const.
v. Baker
Corp. v.
Packaging Corp.
ing, Inc. 52
and Harris
Harris Packaging
ing,
where
where the courts
courts of appeal held that actions for "breach of contract
contract and
breach
action. '54 The quoted lanbreach of warranty are not the same cause of action."54
guage first appeared in Southwestern
Southwestern Bell Co.
Co. v. FDP
Corp.5 5 and the
FDP Corp.55
unfortunate
unfortunate phrasing introduced an additional complexity into breach of
56 In Medical
warranty
warranty actions under
under Texas
Texas law. 56
Medical City, the Texas Supreme
Court reviewed
the
relationship
between
tort and warranty
it
reviewed
warranty claims as it
has developed
in
Texas
law.
The
supreme
reasoned
court
that
while
the
developed
defendant
contract and
defendant manufacturer
manufacturer was correct
correct in stating that breach of contract
breach
of
warranty
are
distinct
causes
of
action,
the
appropriate
breach
warranty
appropriate test is
whether
the
plaintiff
is
seeking
economic
damages
based
on a failure to
whether
perform
according
to
contract
terms
or
whether
the
plaintiff
perform according
contract
whether
plaintiff is seeking
57
in tort.
tort.57
recoverable
appropriately
are
more
that
damages
non-economic
non-economic damages that are more appropriately recoverable in
The supreme court
concluded
that
actions
for
breach
of
express
warranty
court concluded
seeking recovery
contract and
seeking
recovery for economic
economic loss are actions founded on contract
58
58
permit
recovery
of
attorney's
fees
under
Texas
law.
The
supreme
permit
under
supreme court
court
specifically
disapproved
the
decisions
in
JHC
and
Harris
to the extent
specifically disapproved
decisions
JHC
Harris
extent
59
with the
they were
Medical City.
City.59
were inconsistent with
the holding
holding in
in Medical
In JCW Electronics,
Inc. v. Garza,60
Garza,60 the supreme
Electronics, Inc.
supreme court rendered
rendered another significant
warranty litigation
significant decision affecting
affecting warranty
litigation in Texas. In JCW,
JCW,
an electronics
company installed telephones
electronics company
telephones for inmate use in a city jail.
Following an arrest for public
public intoxication, an inmate committed
committed suicide
suicide
by hanging
hanging himself
himself with the telephone
telephone cord provided
provided by the electronics
50. 251 S.W.3d
50.
S.W.3d 55 (Tex. 2008).
51. Id.
Id. at
at 58.
58. TEX.
TEX. CIv.
Crv. PRAC.
PRAC. & REM.
REM. CODE § 38.001(8)
38.001(8) (Vernon
(Vernon 2008)
2008) (allowing
(allowing the
recovery
recovery of attorney's
attorney's fees in
in actions founded on
on an oral
oral or
or written contract).
contract).
52. 94 S.W.3d
S.W.3d 762 (Tex. App.-San
App.-San Antonio
Antonio 2002,
2002, no pet.).
pet.).
1998, pet. denied).
53. 982 S.W.2d
S.W.2d 62 (Tex. App.-Houston
App.-Houston [1st Dist.] 1998,
54. JHC
lHC Ventures, 94
94 S.W.3d
S.W.3d at
at 769.
769.
55. 811 S.W.2d
1991).
S.W.2d 572, 576 (Tex.
(Tex. 1991).
56. The author has previously
previously noted
noted this
this phrase
phrase was
was taken
taken out of
of context
context and
and seems
seems to
to
have misled
misled the lower courts
courts in JHC
lHC and
and Harris
Harris to
to reach
reach a doubtful
doubtful result. See John
John
Krahmer,
Krahmer, Commercial
Commercial Transactions,
Transactions, 56 SMU
SMU L. REV. 1255,
1255, 1261 (2003).
(2003).
57. Medical
Medical City Dallas,
Dallas, 251
251 S.W.3d at 60-61.
60-61.
58. Id.
Id. at
at 61-62.
59. Id.
Id. at
at 62.
60.
60. 257 S.W.3d
S.W.3d 701 (Tex.
(Tex. 2008).
2008).
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company
company as part of the telephone
telephone installation. The decedent's
decedent's mother
sued the city and the electronics
electronics company for negligence, misrepresentamisrepresentation, and breach of the implied warranty
warranty of fitness for a particular pur61
pose. 61
The jury allocated sixty percent
percent of the liability
liability to the inmate,
twenty-five
twenty-five percent to the city, and fifteen percent
percent to the electronics company. On appeal, the electronics
electronics company argued that Chapter 33 in the
Texas Practice and Civil Remedies
Remedies Code applied and the allocation of
of
sixty percent of the liability to the inmate should operate to bar any recovery. 62 The supreme court reviewed
covery.62
reviewed the origins of implied warranty liability and, as in Medical
Medical City, reasoned
reasoned that the nature of the damages
resulting from a breach
considerable importance
breach of warranty
warranty were of considerable
importance in
determining if an action should be regarded
regarded as a tort claim or a contract
contract
determining
63 In addition, examination of legislative
legislative history and legislative inclaim. 63
tent led the court
court to believe
believe that implied warranty
warranty claims seeking recovery for injuries to persons or property were covered by the proportionate
proportionate
responsibility
33. 64 Based on the jury finding that the
responsibility rules of Chapter 33.64
contributory negliinmate was sixty percent responsible for his death, his contributory
against
gence barred recovery
recovery and a take nothing judgment was entered
entered against
65
plaintiff.65
the plaintiff.
C.
GOOD FAITH
FAITH PURCHASE
PURCHASE
Section
Section 2.403 of the Code
Code is designed to protect
protect good faith purchasers
of goods when a purchase is made from a seller who has only a voidable
66
The application
Carter
title to the goods. 66
application of this section was explored
explored in Carter
67
v. Cookie Coleman
Coleman Cattle
Cattle CO.,67
Co.,
On
in a somewhat unique transaction. On
January 12, 2005,
of
2005, a buyer issued a check to a seller for the purchase of
61. Id.
[d. at 702-03.
702-03. The implied warranty of fitness for a particular purpose appears in
2009).
ANN. § 2.315 (Vernon 2009).
TEX. Bus. & COM.
COM. CODE
CODE ANN.
responsible for a loss in
62. 257 S.W.3d at 703. Liability is apportioned among those responsible
"any action based on tort." TEX.
& REM.
"any
TEX. Civ.
CJv. PRAC.
PRAC. &
REM. CODE § 33.002(a)(1)
33.002(a)(1) (Vernon 2008).
2008).
percentage of responsibility is greater
If a claimant's
claimant's percentage
greater than fifty percent,
percent, the claimant
claimant is
barred from any recovery
33.001. If a claim involves death, the term "claimant"
"claimant"
recovery under §§ 33.001.
includes not only the party seeking
seeking damages, but also the decedent. Id.
[d. § 33.011(1)(A-B).
33.011(1)(A-B).
63. 257 S.W.3d at 705.
64. Id.
[d. at 705.
705.
65. Id.
F. Supp. 2d
2d
[d. at 707-08. In Diamond
Diamond H. Recognition
Recognition LP v. King of Fans, Inc., 589 F.
JCW to conclude that the proportionate
proportionate responsi772 (N.D. Tex. 2008), the court
court relied on JeW
bility rules of Chapter 33
33 applied
applied to the case at bar. In Diamond
Diamond H., however,
however, the court
CIV. PRAC. & REM. CODE § 82.003(a)(7)
2005)
also had to determine
determine if TEX. CJv.
82.003(a)(7) (Vernon 2005)
applied to permit the immediate
immediate seller of a heater to designate
designate a Chinese
Chinese manufacturer
manufacturer as a
responsible third party and have the jury apportion responsibility
responsibility between
between the retailer and
and
Expressing some misgivings
misgivings about
about the effect such
such
the manufacturer. 589 F. Supp. 2d at 774. Expressing
court nonetheless
nonetheless granted leave
leave to designate.
designation might have on the litigation, the court
Id. at 776.
designation
[d.
776. The court noted, however,
however, that the plaintiff
plaintiff could move to strike the designation
Id. at 777.
if the Chinese company
company was
was beyond the jurisdiction of the court. [d.
& COM. CODE ANN.
2.403(a) (Vernon 2009) (providing
(providing in part,
66. See TEX.
TEX. Bus. &
ANN. § 2.403(a)
transfer
"A purchaser of goods acquires all title which his transferor had or had power
power to transfer
except
except that a purchaser
purchaser of a limited interest acquires
acquires rights only to the extent of the interest purchased.
purchased. A person
person with voidable
voidable title has power to transfer good title to aa good faith
purchaser
purchaser for value.").
67. 271 S.W.3d 856 (Tex. App.-Amarillo
App.-Amarillo 2008, no pet.).
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cattle.
cattle. At that
that time, however,
however, the
the seller
seller (an
(an order
order buyer
buyer of
of cattle)
cattle) did
did not
not
own the cattle.
cattle. On
On January
January 16,
16, 2005,
2005, the
the seller
seller purchased
purchased enough
enough cattle
cattle to
to
own
cover the buyer's
buyer's purchase,
purchase, but the check
check issued
issued by the seller
seller was
was dishoncover
ored
ored on
on or
or about
about January
January 26, 2005. Since
Since the
the original
original owner
owner of
of the
the cattle
cattle
had
had not been
been paid,
paid, the owner
owner sued
sued the
the remote
remote buyer
buyer for conversion.
conversion. The
The
dispute centered
centered on
on whether
whether the
the remote
remote buyer
buyer was aa good
good faith purchaser
purchaser
dispute
under
under section 2.403.
2.403.
Based
Based on evidence
evidence that it was not customary
customary in the cattle
cattle business for a
buyer
buyer to pay
pay in
in full before delivery,
delivery, the
the Amarillo Court of Appeals decided
cided the remote
remote buyer
buyer did not qualify as a good
good faith purchaser
purchaser under
under aa
definition of good
good faith requiring
requiring "honesty
"honesty in fact and
and the observance
observance of
of
'68
Judgment
commercial standards
reasonable
reasonable commercial
standards of
of fair dealing."
dealing."68
Judgment in favor of
of
affirmed.
the
cattle
was
of
the original owner
owner
the
was
D.
D.
NOTICE
NOTICE OF BREACH
The non-uniform
non-uniform Texas
Texas version of section
section 2.318
2.318 of the
the Code
Code provides
provides
The
between a
that the courts have
have discretion
discretion to determine
determine whether
whether privity
privity between
immediate buyer is required
seller and anyone
anyone other
other than an immediate
required in breach
breach of
Texas, Inc.
Several years ago, in Nobility Homes of Texas,
warranty
warranty actions. 6699 Several
Inc. v.
70
Shivers,70
supreme court ruled that privity
privity was not required in implied
implied
the supreme
Shivers,
71
warranty
warranty actions
actions brought by a buyer
buyer against
against aa remote
remote manufacturer.
manufacturerJl
Under section 2.607(c)
2.607(c) of the Code, however, notice
notice of a breach
breach of warranty must be given
given by the buyer or the buyer
buyer will "be barred
barred from any
72
remedy."
remedy."72
This requirement
requirement gives rise to two related
related questions. First, to
to
whom must notice of breach be given?
given? Second,
Second, who must give
give the notice?
answered authoritatively
The first question
question has never been answered
authoritatively by the Texas
73
The
Supreme Court and lower court decisions are split on the issue. 73
74
Corp. In Alvasecond question was addressed in Alvarado v. Conmed CorpJ4
rado,
during the course of a surgical
surgical procedure. She
rado, a patient was injured during
1.201(b)(20) (Vernon 2009)).
68. Id.
[d. at 860 (quoting TEX. Bus. &
& COM. CODE
CODE ANN. § 1.201(b)(20)
2009)).
& COM. CODE ANN. §§ 2.318 (Vernon
69. TEX. Bus. &
(Vernon 2009) ("This
("This chapter
chapter does not
provide whether anyone other than a buyer
buyer may take advantage
advantage of an express or implied
warranty of quality made to the buyer or whether the buyer or anyone entitled to take
take
immediate
buyer may sue a third party other than the immediate
advantage of a warranty made to the buyer
advantage
These matters are left to the courts
courts for
seller for deficiencies in the quality
quality of the goods. These
their determination.").
determination.").
S.W.2d
70. 557 S.
W.2d 77 (Tex. 1977).
Id. at 81.
71. [d.
2.607(c)(1) (Vernon 2009).
& CoM.
72. See TEX. Bus. &
COM. CODE ANN. § 2.607(c)(1)
Compare Vintage Homes, Inc. v. Coldiron, 585 S.W.2d 886, 887-88 (Tex. Civ.
73. Compare
with Wilcox v.
manufacturer) with
App.-El
App.-EI Paso 1979, no writ) (not requiring notice to remote manufacturer)
1985, writ ref'd n.r.e.)
Hillcrest Mem'l Park, 696 S.W.2d 423 (Tex. App.-Dallas 1985,
n.r.e.) (requiring
notice to remote manufacturer). In a per curiam opinion affirming Wilcox, the Supreme
Court noted the split of authority, but did not find it necessary to resolve the issue in the
1986) (per
(per
case before it. See Wilcox v. Hillcrest Mem'l Park, 701 S.W.2d 842 (Tex. 1986)
App.curiam). More recently in U.S. Tire Tech, Inc. v. Boeran, 110 S.W.3d 194 (Tex. App.Houston [1st Dist.] 2003, pet. denied), the court reviewed
reviewed the conflicting decisions
decisions and
approach of the Supreme Court regarding
concluded that the general approach
concluded
regarding notice
notice in other contexts required a buyer to give notice to a remote manufacturer.
13, 2008).
(W.D. Tex., Mar. 13,2008).
EP-06-CV-0198-KC, 2008 WL 2783510 (W.D.
74. No. EP-06·CV-0198-KC,
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subsequently sued on theories
subsequently
theories of strict liability, negligence,
negligence, and breach of
implied warranties. The plaintiff failed to prove her injuries were caused
caused
by use of a defective
defective surgical instrument
instrument and all of her claims were dismissed. Nonetheless, the U.S. District Court for the Western
Western District of
of
Texas addressed the notice issue. Based
Based on comment five to section 2.607,
the court opined that a person who is directly benefited
benefited by a product
product
must give notice of breach
breach even if that person is not a buyer of the
75
product. 7s
III.
A.
LEASES
LEASES OF GOODS
UNCONSCIONABILITY
UNCONSCIONABILITY
76
In Oden
Oden v. Vanguard
Vanguard Car
a lessee rented a car.
Car Rental,
Rental, USA, Inc.,
Inc.,76
When she returned
the
car
with
less
than
a
full
tank
of gas, the lessor
returned
charged her $4.95 per gallon
to
fill
the
tank.
Although
this was the
gallon
amount specified
in
the
lease
agreement,
the
plaintiff
alleged this
specified
agreement,
amounted
to
an
unenforceable
and
unconscionable
penalty
under secamounted
unenforceable
unconscionable
tions 2A.108 and 2A.504,77
2A.504. 77 The U.S. District Court for the Eastern
Eastern District of Texas rejected this argument, pointing out that both sections
sections are
couched in terms that make them available only as affirmative
affirmative defenses
claims. 78 The action was dismissed with leave to amend if the
and not as claims,78
plaintiff was able to state a valid claim under Texas
Texas law.
B.
EFFECT OF CANCELLATION
EFFECT
CANCELLATION
79
In Frank's
Inc. v. Smith International,
International,Inc.,
the parties
Frank's International,
International, Inc.
Inc.,79
entered into a lease
portion
lease of oilfield equipment.
equipment. The lessee withheld a portion
of the rental
government
rental payments for the payment of taxes to a foreign government
in the belief that the tax liability was that of the lessor and not that of the
lessee. The lessor disagreed, contending
contending that any tax liability was the responsibility of the lessee. After this dispute arose, the parties cancelled
cancelled a
provision in the original lease
that
dealt
with tax withholding by the
lease
lessee and substituted a new provision concerning
concerning tax liability that ex-
75. Id.
CODE ANN. §§ 2.607 cmt. 5
[d. at *9. The relevant
relevant part of TEX. Bus. &
& COM.
COM. CODE
(Vernon 2009) states,
[T]he reason of this section does extend
extend to requiring the beneficiary
beneficiary to notify
the seller that an injury has occurred. What is said above, with regard to the
extended
extended time for reasonable notification from the lay consumer
consumer after the
the
injury is also applicable
applicable here;
beneficiary can be properly held to
here; but even a beneficiary
to
the use of good faith in notifying, once he has had time to become aware
aware of
the legal situation.
The court also cited Iberra
Iberra v. Nat'l Constr. Rentals,
Rentals, Inc.,
Inc., 199 S.W.3d
S.W.3d 32, 37-38 (Tex. App.App.beneficiary is
San Antonio 2006, no pet.), in support
support of its conclusion
conclusion that notice by a beneficiary
2783510, at *9.
required. Alvarado,
Alvarado, 2008 WL 27S351O,
2:07CV261, 2008
76. No. 2:07CV261,
200S WL 901325 (E.D. Tex., Mar. 31, 2008).
2008).
77. Id.
& .504 (Vernon
Id. at *2 (quoting TEX.
TEX. Bus. & COM. CODE
CODE ANN. §§ 2A.108
2A.lOS &
2009)).
2009».
78. Id.
7S.
Id. at *3. The plaintiff did not assert a cause of action under the DTPA which does
permit
unconscionability to be used as a claim. See TEX. Bus. &
& COM. CODE ANN.
permit unconscionability
§ 17.50(a)(3)
17.50(a)(3) (Vernon 2008).
200S).
79. 249 S.W.3d 557, 560-61
560-61 (Tex. App.-Houston
App.-Houston [1st Dist.] 2008,
200S, no pet.).
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pressly superseded
superseded the earlier
earlier provision.
provision. However,
However, the new
new provision
provision did
pressly
not specify
specify which
which party
party had
had responsibility
responsibility for the
the past
past taxes. The lessor
lessor
not
sued to recover
recover the
the amounts
amounts that had been withheld
withheld under
under the
the original
original
sued
lease
lease agreement.
agreement.8800
The lessee
lessee asserted
asserted that
that the cancellation
cancellation agreement
agreement amounted
amounted to a disThe
charge of any
any liability
liability the lessee
lessee might have
have had
had under the original lease.
charge
The
The Houston Court
Court of Appeals
Appeals (1st District)
District) pointed
pointed out
out that under sec2A.505, unless
unless the
the agreement
agreement to cancel
cancel clearly
clearly shows an intent to
to
tion 2A.505,
discharge
prior to cancellation,
cancellation, the aggrieved
aggrieved party, in this
discharge claims arising prior
81 A summary
case the lessor, has the
the right to recover
recover for prior defaults. 81
summary
judgment
judgment entered
entered by the trial court
court in favor of the lessee was reversed
reversed
and the case
case was remanded
remanded for trial.
c.
C.
WAIVER
WAIVER OF DEFENSES
82 an assignee
Optical Systems, Inc.,
Corp. v. Specialty Optical
IFC Credit
Credit Corp.
Inc.,82
assignee
In IFC
assignment of
of leases
leases from a company
company that provided telecommutelecommutook an assignment
equipment to customers. The assignor required cusnication services and equipment
boxes" which purportedly
purchase "matrix
"matrix boxes"
purportedly enabled the
the
tomers to purchase
The
lease
cost
services.
assignor to provide
provide low
services.
lease contained
contained a waiver
waiver of
against
defenses clause stating that a customer could
could not assert any claims
claims against
the assignee that the customer might have against the assignor.8833 The
lease also provided
provided that customers
customers were responsible
responsible for making payments
telecommunications services
even
if telecommunications
was
delivered
box
once the matrix
matrix
services
884
4
received the matrix box
who
the
lessees
were never
never provided. One of
to make payments
signed for delivery
delivery refused
payments and sued to have the
and signed
85
lease declared
declared unenforceable. 85
The Dallas Court of Appeals reasoned that the assignee's
assignee's knowledge of
a high rate of default and numerous customer complaints
complaints about a lack of
86 The
service put the assignee on notice of claims and defenses. 86
court also
participated in
held the assignee had not acted in good faith because it participated
"script" used by the assignor to deceive customers about the
developing a "script"
developing
8 7 Because
services they would receive
receive under the lease.
lease.87
Because the assignee
assignee did
80. Id.
[d. at 561.
(Vernon 2009)).
§ 2A.505
ANN. §
CoM. CODE ANN.
81. [d.
2A.505 (Vernon
& COM.
Id. at 565 (citing TEX. Bus. &
82. 252 S.W.3d
S.W.3d 761,
761, 763-66 (Tex. App.-Dallas 2008, pet. denied).
Id. at 766; TEX. Bus. &
83. [d.
& COM. CODE ANN. §§ 9.403(b)
9.403(b) (Vernon 2002) (providing
(providing that
that
containing a waiver of defenses clause in a transaction
assignment of a contract containing
transaction other than
consumer transaction gives the assignee rights parallel to those of a holder in due course
a consumer
if the assignee takes the contract for value, in good faith, and with notice of a claim or
defense).
defense).
Id. A clause of this kind is the hallmark of a finance lease. It makes the obligation
84. [d.
of a lessee irrevocable and independent upon the lessee's acceptance
acceptance of the goods regardless of any claims, defenses, or setoffs the lessee might otherwise have against the supplier
supplier
2A.407(a) (Vernon
& COM. CODE ANN.
of the goods. See TEX. Bus. &
ANN. §§ 2A.407(a)
(Vernon 2009). Such a clause
"hell or high water clause,"
is generally called a "hell
clause," meaning that the lessee must make lease
id. at cmt. 6.
payments
payments "come hell or high water." See id.
Corp., 252 S.W.3d at 766.
IFC Credit
Credit Corp.,
85. [FC
Id. at 768.
86. [d.
Id. at 768-69.
87. !d.
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2009]
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not qualify for holder in due course protection under section 9.403, the
customer was entitled to assert a defense of fraudulent inducement ren88
dering the lease unenforceable. 88
The court did, however, vacate a portion of the trial court's judgment imposing additional sanctions on the
89
assignee. 89
IV.
A.
NEGOTIABLE INSTRUMENTS
LIABILITY OF MAKERS AND
AND DRAWERS
LIABILITY
Although a negotiable note carries with it a number of special characteristics associated with the concept of "negotiability,"
"negotiability," it remains, at
at
heart, a specialized form of contract subject to many of the rules of ordi90
nary contract law, including the parol evidence rule. 90
The Houston
DeClaire v. G &
& B McInCourt of Appeals reaffirmed this principle
principle in DeClaire
91
Family Limited Partnership,
tosh Family
Partnership,91
where the payee of a note attempted
to enforce a prior oral agreement
agreement with the maker. According
According to the
payee, the parties had orally agreed that if the collateral
collateral securing the note
was insufficient
insufficient to pay the note in full, the maker would be liable for the
deficiency. The note itself, however, contained
contained a clause
clause stating that the
collateral
collateral was to be the sole source for repayment of the note. The trial
court allowed
evidence of the oral agreement and
allowed the payee
payee to introduce evidence
entered judgment in favor of the payee based on that agreement. On apentered
peal, the court held that the terms of the note92were clear and parol eviterms.
the terms.92
change the
used to
be used
not be
dence could not
to change
The payee also claimed
claimed that the fraud exception
exception to the parol
parol evidence
evidence
rule permitted
permitted proof
proof of the oral agreement.
agreement. On this issue, the court ruled
that
that the payee
payee failed to introduce
introduce sufficient
sufficient evidence
evidence of reliance
reliance on any
93
exception. 93
to satisfy
alleged
alleged misrepresentations
misrepresentations to
satisfy the
the fraud
fraud exception.
94
Bank of Texas v. VR Electric,
Electric,Inc.
Inc. 94 is an interesting
interesting decision about the
balance
balance of
of fault provisions
provisions in the Texas
Texas version of section 3.406 of the
95
Code
Code 95
•. The plaintiff
plaintiff wrote a check on its account
account at the drawee bank, but
88. Id.
[d. at 771.
89. Id.
[d. at 772-73.
90.
90. See,
See, e.g.,
e.g., Simmons
Simmons v. Compania Financiera
Financiera Libano, S.A.,
S.A., 830
830 S.W.2d
S.W.2d 789 (Tex.
App.-Houston [1st
App.-Houston
[1st Dist.]
Dist.] 1992,
1992, writ
writ denied);
denied); Litton v. Hanley, 823 S.W.2d 428 (Tex.
App.-Houston [1st
App.-Houston
[1st Dist.]
Dist.] 1992,
1992, no
no writ); Mfrs. Hanover
Hanover Trust
Trust Co. v. Kingston
Kingston Investors
Corp.,
S.W.2d 607
Corp., 819 S.W.2d
607 (Tex.
(Tex. App.-Houston
App.-Houston [1st Dist.]
Dist.] 1991,
1991, no
no writ); Bailey
Bailey v. Gulfway
Gulfway
Nat'l
(Tex. App.-Corpus
Nat'l Bank,
Bank, 626
626 S.W.3d
S.W.3d 70
70 (Tex.
App.-Corpus Christi 1981,
1981, writ
writ ref'd
ref'd n.r.e.).
n.r.e.).
91.
91. 260
260 S.W.3d
S.W.3d 34,
34, 38-41
38-41 (Tex.
(Tex. App.-Houston
App.-Houston [1st
[1st Dist.]
Dist.] 2008,
2008, no pet.).
pet.).
92. Id.
[d. at
at 45-46.
45-46.
93.
93. Id.
[d. at
at 47.
94.
94. 276
276 S.W.3d
S.W.3d 671 (Tex.
(Tex. App.-Houston
App.-Houston [1st Dist.] 2008,
2008, no
no pet.).
pet.).
95.
ANN. §§ 3.406(b)
3.406(b) (Vernon
2002) differs
95. TEX.
TEX. Bus.
Bus. &
& COM.
COM. CODE
CODE ANN.
(Vernon 2002)
differs from
from the Official
Official
Text
Text by
by changing
changing the
the burden
burden of
of proof
proof for aa party who
who pays
pays an
an instrument
instrument or takes
takes it for
for
value
The change
change was
value or
or for
for collection.
collection. The
was effected
effected by
by leaving
leaving the word
word "substantially"
"substantially" in
in
subsection
subsection (a)
(a) but deleting it in
in subsection
subsection (b)
(b) as shown
shown in
in the following
following text
text of
of the section:
section:
(a)
(a) A person
person whose
whose failure to exercise
exercise ordinary
ordinary care
care substantially
substantially contributes
utes to
to an
an alteration
alteration of an
an instrument
instrument or
or to the
the making
making of aa forged
forged signature
signature
on
from asserting
is precluded
precluded from
asserting the alteration
alteration or the forgery
on an
an instrument
instrument is
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96 The
left
left the
the signature
signature line blank. 96
The drawer's
drawer's bookkeeper
bookkeeper put the
the unsigned
unsigned
check on a counter
counter in
in an
an area
area accessible
accessible to the public.
public. A contractor's
contractor's
check
employee
employee who
who was
was working
working with
with the plaintiff
plaintiff stole the
the check,
check, forged the
the
drawer's
negotiated the check
check to a used
used car
car dealer. Although
Although
drawer's name, and negotiated
the
the drawer
drawer discovered
discovered the
the check
check was missing before
before it reached
reached the
the
drawee
drawee bank, the drawer
drawer believed
believed the
the check
check had been
been lost somewhere
somewhere in
the
the drawer's offices and
and did not issue a stop
stop order
order on the
the check. Because
Because
the
the check
check was
was in an amount
amount well below
below the drawee
drawee bank's
bank's alert
alert amount, itit
automated payment
was
was processed
processed and
and paid by the
the bank's automated
payment system. When
When
the forgery was
was discovered,
discovered, the drawer promptly
promptly notified
notified the bank, but
the bank
bank refused
refused to recredit
recredit the drawer's account on the ground that the
drawer
drawer had
had been
been negligent
negligent in handling
handling the check.
check.
In an action
action by the drawer against
against the bank and the car dealer,
dealer, the jury
jury
found the
the drawer
drawer and the bank
bank each fifteen
fifteen percent
percent responsible
responsible for the
loss and the
the car dealer
dealer seventy
seventy percent
percent responsible
responsible for the loss. The trial
trial
court held that while the evidence
evidence supported
supported a finding of breach
breach of conconevidence also supported
supported a finding of
tract on the part of the bank, the evidence
contributed" to the forgery
negligence
negligence by the plaintiff that "substantially
"substantially contributed"
required by section 3.406(a) and entered
entered judgment
judgment against the bank
bank for
as required
eighty-five
eighty-five percent
percent of the loss by aggregating the liability of the bank
bank and
97 The bank appealed.
appealed.
the car dealer. 97
the bank
that
In reviewing evidence
evidence
bank had failed to exercise
exercise ordinary
3.406(b), the Houston
section 3.406(b),
Houston
care that contributed
contributed to the loss under section
inconsistency
that
there
was
Court of Appeals
Appeals (1st District) found
there
inconsistency in the
Court
testimony by the bank's
bank's Vice President of Operations
Operations about when checks
when
they
would
examined
and
manually
would be manually examined
would be processed solely
98
98
ranged
from stating that the bank
Her
testimony
by automated
means.
automated
testimony
bank
over $100,000,
$100,000, to stating
review
of
checks
policy
for
manual
had a verbal
greater than
that manual review of checks only applied to checks greater
99 She
was. 99
verbal
policy
what
the
bank's
being
sure
of
$250,000,
to
not
$250,000,
matter
and
that
policy
on
the
had
no
written
that
the
bank
also testified
policy
that
over
was
"just
by
the
bank
the average amount of checks processed
over
against
against a person
person who, in good faith, pays the instrument or takes it for value
value
(emphasis added.)
or for collection. (emphasis
(b) Under Subsection
Subsection (a), if the person asserting the preclusion
preclusion fails to exercise ordinary care in paying or taking the instrument
instrument and that failure [substantially]
stantially] contributes to loss, the loss is allocated between the person
precluded
precluded and the person asserting the preclusion
preclusion according to the extent to
ordinary care contributed to the loss.
which the failure of each to exercise ordinary
As a result of this change, in the case of a check, a drawee bank has the burden of proving
substantially contributed
contributed to an alteration
the negligence of the drawer substantially
alteration or forgery, but the
contributed to the loss.
drawer has the burden of proving only that the action of the bank contributed
explain this change was made "in the interest of
The State Bar Committee Comments explain
maintaining a more appropriate balance
balance between banks and their customers."
customers." See the
ANN.§§ 3.404 (Vernon 2002).
& COM. CODE ANN.
State Bar Committee Comments to TEX. Bus. &
96. 276 S.W.3d at 675-76.
Id.
97. [d.
Id. at 682.
98. [d.
99. [d.
Id.
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1009
1009
$1,000."100 Other employees
$1,000."100
employees generally
generally testified to the same effect about
the bank's verbal policy. The court held that this evidence
evidence and the lack of
a written policy were sufficient to support
support the jury finding that the bank
failed to exercise
exercise ordinary care that contributed
contributed to the 10SS.101
loss. 10 1
aggregation of damages, the bank argued that the proporAs to the aggregation
tionate
responsibility provisions of Chapter 33 in the Texas Civil Practice
tionate responsibility
and Remedies
Remedies Code
Code prohibited the aggregation
aggregation resulting from adding the
fifteen percent
percent attributed
attributed to the bank to the seventy percent attributed to
10 2
the car dealer. 102
Without aggregation, the bank
bank would be liable for only
fifteen percent
percent of the damages and not for the eighty-five
eighty-five percent assessed by the trial court. On this point, the court held that Chapter 33 did
creates its own
not apply and that section 3.406
3.406 creates
own "discrete
"discrete fault scheme,
specifically allocating responsibility
specifically
responsibility among parties to a banking relationship.' ' 10 3 Because
ship."l03
Because the bank only asserted that the case was governed
governed by
by
Chapter 33, and did not challenge
challenge the apportionment of damages
damages under
under
of
section 3.406, the court
court held it was not required to reach the issue of
10 4
under that section. 104
judgment
the trial
proper apportionment
The
judgment
of
10 5
court was affirmed. lOS
B.
HOLDING IN DUE COURSE
HOLDING
6
In Max Duncan
Investments, Ltd.
Inc.,10
Duncan Family
Family Investments,
Ltd. v. NTFN Inc.,
106 the president
of a corporation
corporation entered into an agreement
agreement to personally
personally purchase
purchase some
real estate for $1.5
$1.5 million. The purchaser
purchaser funded most of this purchase
purchase
corporate property
with personal
personal financing. However,
However, he used corporate
property as collateral to secure
secure his promissory
promissory note for the $320,000 balance. The seller of
of
investment company, did not request docthe property,
property, a limited
limited liability
liability investment
purchaser had
umentation from the corporation
corporation to confirm
confirm whether the purchaser
authority to pledge the corporation's
corporation's property. After
After the purchaser defaulted, the corporation
corporation sought an injunction
injunction to prevent foreclosure
foreclosure of its
property, claiming
claiming the transaction
transaction was invalid under
under the interested direc07
it
tor doctrine. 107
The seller contended that the deal was proper
proper and that it
was a holder
holder in due course although it was the payee
payee listed on the note
and not a transferee.
transferee. The trial court held the lien was void and unenforceun enforce-
100. ld.
Id.
100.
101. ld.
Id. at 683.
101.
102. TEX. CIv. PRAC. & REM.
(Vernon 2008) (limiting
102.
REM. CODE
CODE § 33.013
33.013 (Vernon
(limiting the liability of a
defendant to the percentage
percentage found by the trier of fact unless
unless the defendant's liability is
found to be more than fifty percent
percent or if the claim involves
involves personal injury, property damenvironmental hazard).
age, death, or environmental
103. 276 S.W.3d at 683. In support of its ruling, the court cited Sw. Bank v. Info. SupChapter
port Concepts, Inc.,
Inc., 149
149 S.W.3d 104, 105 (Tex. 2004) (holding that application of Chapter
conversion actions under §§ 3.420 could disrupt the discrete
33 to conversion
discrete fault scheme of the Code).
Id. at 684.
104. ld.
Id. at 686.
105. ld.
106. 267 S.W.3d 447, 449-50
449-50 (Tex. App.-Dallas 2008, pet. denied).
between
107. Under TEX.
TEX. Bus. CORP. ACT ANN.
ANN. art. 2.35-1 (Vernon
(Vernon 2003), transactions between
a director
director and a corporation for which the director acts are void unless specific criteria are
are
corporation.
met to avoid harm to the corporation.
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0 8 The
able. lOS
The seller
seller appealed.
appealed.
able.'
Dallas Court
Court of
of Appeals
Appeals reasoned
reasoned that
that the president
president
On appeal, the Dallas
was not purchasing
purchasing from
from the corporation
corporation for which he
he was
was a director
director and
and
was
the purchaser
purchaser was
was not
not a director
director or officer
officer of
of the seller
seller so
so the interested
interested
director doctrine
doctrine did not
not apply.
apply.110099 On
On the holder
holder in
in due
due course
course issue, the
the
court referred
referred to section
section 3.302
3.302 of
of the Code
Code defining
defining a holder
holder in due
due
course as one
one who
who takes
takes an instrument
instrument for (1) value (2)
(2) in good faith, and
and
0 The court
(3)
(3) without
without notice
notice of any
any claim or defense
defense to the instrument.'
instrument. IIO
noted
noted that while the
the holder in due
due course doctrine most often involves
involves a
this case,
course.
In
holder
in
due
sometime
be
a
can
transferee, a payee
payee can sometime
due
the
the
seller
knew
evidence
that
found
there
was
the
court
however,
however,
there
evidence
seller
the
request
yet
failed
to
and
of
the
corporation
was
a
fiduciary
purchaser
purchaser
corporation
request
confirmation
purchaser had authority to bind
bind the corporation)
corporation. I11II
confirmation that the purchaser
The
The evidence
evidence also established
established that the
the seller
seller had notice of the
the purchaser's
purchaser's
11l2
1 2 As a result, the seller did not qualify
to
the
corporation.
breach of
of duty
As
seller
13
affirmed. 1l13
as aa holder
holder in
in due course
course and trial court's
court's judgment
judgment was
was affirmed.
14
a debtor executed
In Austin v. Countrywide
Countrywide Home Loans,
Loans,114
executed a thirtyyear promissory
promissory note secured
secured by a deed
deed of trust to purchase
purchase real property. The note was reassigned
reassigned multiple times and ended up in the hands
of a mortgage company
company as the holder of the note. After
After the debtor
stopped making payments,
payments, he began filing instruments
instruments in the real property records
records purporting
purporting to amend or revoke the deed of trust. The debtor
eventually
holder for fraud, breach of contract, and breach
breach of
of
eventually sued the holder
recovery of the
fiduciary duty. The holder counterclaimed
counterclaimed for foreclosure, recovery
the
outstanding balance
outstanding
balance on the note, a declaration that the instruments
instruments filed
filed
"clouds on the title,"
in the property
property records constituted
constituted forbidden "clouds
title," and
and
judggranted
summary
trial court
dismissal of the debtor's claims.
The
court
granted
summary
15
holder. 115
ment in favor of the holder.1
On appeal by the debtor, the Houston Court of Appeals affirmed the
6 The court
116
recover
summary judgment.11
noted that: (1) an obligee may recover
on a negotiable
negotiable instrument
instrument by making a showing that the obligee
obligee is the
(3) an
legal holder of the note; (2)
(2) the debtor executed
executed the note; and (3)
an
117
unpaid balance exists on the instrument. 117
The court concluded that the
holder was the legal holder of the note by proper transfer and met the
8
other requirements
requirements for holding in due course.11
lIS The court also held that
since the debtor admitted the debt in a prior bankruptcy
bankruptcy case, he was
barred by res judicata
judicata from relitigating
relitigating the ownership issue or the exis-
108.
lOS.
109.
110.
111.
111.
267 S.W.3d at 450.
Id. at 451.
[d.
3.302(a)(2) (Vernon 2002).
CODE ANN. § 3.302(a)(2)
TEX. Bus. &
& COM. CODE
267 S.W.3d at 453.
Id.
112. [d.
Id. at 454.
113. [d.
114.
115.
116.
117.
118.
2008, no pet.).
68, 71 (Tex. App.-Houston
261 S.W.3d 6S,
App.-Houston [1st Dist.] 200S,
Id.
[d.
Id. at 76.
[d.
Id. at 72-73.
[d.
Id.
[d.
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2009]
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1011
19
tence of
of the
the debt.]
debt. 119
tence
C.
ISSUES
ISSUES REGARDING
REGARDING INDORSEMENTS
INDORSEMENTS
Learning is hard,
hard, and
and sometimes
sometimes slow.
slow. Fourteen
Fourteen years
years have
have passed
passed
Learning
since Texas
Texas adopted
adopted revised
revised Article
Article 3.120
3. 120 One
One of
of the
the changes
changes made
made in
in the
the
since
revision was
was reversal
reversal of the
the rule dealing
dealing with
with ambiguity
ambiguity in instruments
instruments
revision
payable to multiple
mUltiple payees.
payees. Under
Under the
the former
former version
version of
of section
section 3.116,
3.116, if
payable
instrument was
was made
made payable
payable to "A and/or
andlor B,"
B," it was deemed
deemed to be
be
an instrument
2 1 Repayable jointly
jointly and both
both A and
and B
B had
had to indorse
indorse the instrument.1121
Repayable
section 3.110
3.110 now provides
provides that
that an instrument
instrument payable
payable to "A
"A and/or
andlor
vised section
122
B" isis payable
payable in the alternative
alternative and can be indorsed
indorsed by
by either
either of
of them.
themP2
B"
The El
EI Paso Court of Appeals recently
recently addressed
addressed this issue in New
123 where a check
Wave Technologies,
Technologies, Inc.
Inc. v. Legacy Bank of
of Texas,
Texas,123
check stated
payable to "Maxim
"Maxim Solutions
Solutions Group/New
Group/New Wave
on its face that it was payable
Techn."124
legend on the
the back
back of
of the check
check stated
stated that
that "Each
"Each Payee
Techn. 1 24 A legend
' 12 5 Maxim
Endorse Exactly
Exactly as Drawn.
Drawn."125
Maxim Solutions
Solutions indorsed
indorsed the check
check
Must Endorse
number on the back and depositing
depositing the check in its
by putting its account number
Technologies did not indorse the
account at a depositary bank. New Wave
Wave Technologies
account
withholding taxes owed
owed to the IRS
check. Maxim used the funds to pay withholding
bank for converfor Maxim
Maxim employees.
employees. New Wave
Wave Technologies
sued
the
Technologies
Code. 12 6
under section
section 3.420 of the CodeP6
sion under
Although the court found no Texas
Texas cases addressing
addressing the effect of a virindorsement, it did find several
("I") on the proper form of indorsement,
several cases
gule ("/")
means
of
a
that
from1 other
jurisdictions
holding
use
virgule
commonly
jurisdictions
"or."' 27 In
In reference
to the
reference to
the legend
legend on the back of the check, the court
"0r."127
increased ambiguity because the face of
statement only increased
reasoned that the statement
reasoned
the check indicated either payee could indorse while the back of the
payees.1 2 8 The court concluded incheck required indorsement by both payees.128
required.1 29 The bank, therefore, had
dorsement
dorsement by only one payee was required.l
indorsement and sumacted properly in taking the check with only one indorsement
119.
Id. at 73.
119. [d.
1990
in Texas in 1995 with the adoption of the 1990
extensively revised in
120.
120. Chapter 33 was extensively
ch. 921, §§ 4, 1995
1995, 74th Leg., R.S., ch.
Official
3. See Act of May 28, 1995,
Official Text of UCC Article 3.
CODE ANN. §§ 3.101 -& COM. CODE
Tex. Sess. Law Servo
Serv. 4582 (Vernon), codified as TEX. Bus. &
& Supp. 2008).
2002 &
.605 (Vernon 2002
.605
& COM. CODE
CODE ANN. §§ 3.110(d) (Vernon 1968) (amended 2002) (current
121.
121. TEX. Bus. &
3.110(d) (Vernon 2002).
& COM.
COM. CODE ANN. §§ 3.1l0(d)
TEX. Bus. &
version at TEX.
version
3.110(d).
& COM. CODE ANN. §§ 3.1l0(d).
122. TEX. Bus. &
122.
Paso 2008, pet. denied).
123.
99 (Tex.
(Tex. App.-El Paso
123. 281 S.W.3d 99
Id. at 100.
100.
124. [d.
using the Code
an "e"
"e" instead of using
"endorse" with an
spells "endorse"
this statement spells
Id. Note that
that this
125. [d.
to
continue to
the statutory
statutory usage, banks continue
"i." Despite the
the word
word with an "i."
convention
convention of spelling the
Corp. v.
v.
Perini Corp.
guaranteed." Perini
as "P.E.G.,"
"P.E.G.," standing for "Prior endorsements guaranteed."
stamp
stamp checks as
mentioned that
n. 11 (5th
(5th Cir. 1977), mentioned
398, 401 at n.
First Nat'l Bank of Habersham, 553 F.2d 398,
understandable reluctance to stamp
be attributed to the bankers' understandable
could be
"'[T]his practice could
'''[T]his
Id.
they handle.'''
handle.'" /d.
checks they
backs of the checks
on the
the backs
any Bank PIG" on
"Pay any
"Pay
id.
2002); id.
3.420 (Vernon
(Vernon 2002);
& COM. CODE ANN. §§ 3.420
126. TEX. Bus. &
126.
at 101.
101.
127. 281 S.W.3d at
127.
128. [d.
Id. at
at 102.
102.
Id.
129. [d.
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conversion claim was
mary judgment in favor of the bank on the conversion
130
affirmed. 130
Citibank Texas v. Progressive
Progressive Casualty
Casualty Insurance
Insurance CO.,131
Co.,13 ' the Fifth
In Citibank
Circuit Court of Appeals held the surety on a financial institution bond
was not collaterally estopped from relitigating the issue of whether indorsements on a series of checks had been forged within the definition of
"unauthorized" signatures
signatures or
or indorsements
indorsements contained
contained in the bond. This
"unauthorized"
case first arose in a state court action for conversion brought
brought by an unhappy employer against a bank when the employer discovered that an
an
employee had indorsed a series of checks made payable to the company
132 The
and deposited the checks in the employee's
employee's personal account. 132
The
bank sought to have the surety join in the defense of the state action, but
the surety declined to do so. The bank was ultimately held liable for con133
version in the state court action.
action.133
At this point, the drama shifted to federal court in an action by the
bank against the surety on the theory that the surety was liable under the
1 34
34
bond because
because the indorsements
indorsements were unauthorized.
unauthorized.l
The district court
court
reasoned that the surety was collaterally
reasoned
collaterally estopped from litigating the validity of the indorsements
indorsements because
because it had chosen not to participate
participate in the
35 Alternatively,
action.1 35
defense of the state court action.1
Alternatively, the district court further held that if the issue were relitigated, the same result would be
indorsements were unauthorized under the terms of
reached, that is, the indorsements
the bond.
On appeal to the Fifth Circuit, the court initially agreed that the surety
was collaterally
collaterally estopped but, upon panel rehearing,
rehearing, reversed itself and
held that the terms of the bond did not cover
cover indorsements made by a
person who had some authority
authority to indorse checks,
checks, but who exceeded
exceeded the
the
36 According
scope of his authority.1
authority. 136
According to the court, the issue
issue was not
whether the indorsements
indorsements were unauthorized
unauthorized within the meaning
meaning of section 1.201(b)(
1.201(b)(41)
of
the
Code,
but
whether they were unauthorized
41)
unauthorized within
137 Because
the meaning of the definition
definition contained in the bond.
bond.137
Because the terms
of the bond also provided
provided that participation
participation in the defense
defense would render
render
the surety
surety liable
liable for any loss, whether or not the loss was otherwise
otherwise covcovered by the bond, the court
court held that "the
"the language of [the bond] expressly
pressly prevented
prevented [the surety]
surety] from exercising its option to defend
defend [the
130. Id.
[d. at 103.
131.
131. 522
522 F.3d 591
591 (5th Cir. 2008).
2008). This decision replaced
replaced a prior decision by the
the court
court
reaching
Citibank Tex.,
Tex., N.A.
N.A. v. Progressive
Progressive Cas. Ins. Co.,
Co., 508
508 F.3d
F.3d
reaching a different
different result. See Citibank
779
779 (5th Cir. 2007).
2007).
132.
132. 522
522 F.3d
F.3d at
at 592.
592.
133.
133. Id.
[d.
134. Id.
[d. at 593.
135.
135. See Citibank
Citibank Tex.,
Tex., N.A. v. Progressive
Progressive Cas. Ins. Co.,
Co., No. 3:06-CV-0395-H,
3:06-CV-0395-H, 2006 WL
WL
3751301,
3751301, at *4
*4 (N.D.
(N.D. Tex., Dec. 21,
21, 2006).
2006).
136. 522
522 F.3d
F.3d at
at 594-95.
594-95.
137. Id.
"an endorsement
[d. at 595. The bond defined
defined the term as
as "an
endorsement not
not reflected
reflected on
on the
the
appropriate
appropriate signature
signature card or named
named in the
the Insured's records
records for the account
account or
or accounts
accounts in
question."
question." Id.
[d.
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bank] in state court without waiving
waiving its rights. It would be inequitable,
then, for us to prevent [the surety] from having any opportunity
opportunity to con' 13 8
court."138
The surety, therefore,
therefore,
test its liability for [the bank's] loss in court.
determination that the indorsements
was not bound by the state court determination
surety.1 399
the surety.B
of the
favor of
were unauthorized. Judgment was rendered
rendered in
in favor
D.
STATUTE OF LIMITATIONS
LIMITATIONS
Corp.,a40 the Dallas
Markets Realty Corp.,140
Citigroup Global
Global Markets
In Burney v. Citigroup
accrued
Court of Appeals held that a cause
cause of action
action for foreclosure accrued
Court
unequivocal notice of in- .
when the maker of a note received a clear and unequivocal
tent to accelerate
accelerate and notice
notice of acceleration.
acceleration. Because an application
application for
for
four years later, the foreclosure
foreclosure
foreclosure was not filed until more
than
141
action
action was barred by
by limitations.
limitations. 141
V.
v.
A.
BANK
BANK DEPOSITS
DEPOSITS AND COLLECTIONS
A BANK
RELATIONSHIP
RELATIONSHIP BETWEEN
BETWEEN A
BANK AND
AND ITS
ITs CUSTOMER
CUSTOMER
Bank,1 42 a mortWashington Mutual
Markets, LLC v. Washington
Capital Markets,
In Orix Capital
Mutual Bank,142
gage-backed securities
securities business
business deposited mutual funds with a bank. The
gage-backed
stated that the depositor
depositor would "maintain" money
money
deposit agreement
agreement stated
market deposit accounts at the bank, and the bank would
would pay a monthly
market
incentive
incentive fee based on the average daily balance
balance for the previous
previous month.
The contract stated
stated that either party
party could terminate
terminate the arrangement
arrangement
arrangement continued
continued satisfactoupon giving three months notice. The arrangement
rily with both parties performing
performing until the depositor sold the deposit balances to a third party. At that point, the bank stopped paying
paying the
the
incentive
incentive fees. The depositor sued for breach
breach of contract
contract and recovery
recovery of
the fees. 143 The bank
bank alleged
alleged it did not breach the contract because the
the
sold
depositor did not continue
continue to own and control the accounts after
it
sold
144
the bank.
of the
favor of
them. The trial court entered
entered judgment
judgment in
in favor
bank.144
On appeal
appeal by the depositor, the Dallas Court of Appeals
Appeals held that the
bank had breached
breached its agreement
incentive fees. 145 The court reaagreement to pay incentive
138. Id.
Id.
139. Id.
Id. at 597.
S.W.3d 900, 903-04 (Tex. App.-Dallas 2008, no pet.).
140. 244 S.W.3d
& COM. CODE ANN.
141. Id.
141.
Id. at 904. Although TEX. Bus. &
ANN. §§ 3.118(b)
3.118(b) (Vernon 2002)
limitations period applies to actions on notes, a non-uniform Texas
provides that a six year limitations
§§ 16.035 && .036
3.118(h) provides that the four year limitations
amendment in §§ 3.118(h)
limitations period in §§
.036
amendment
of the Civil Practice and Remedies
Remedies Code applies to the foreclosure of liens on real propv. Wolf, 44 S.W.3d 562 (Tex. 2001), the Texas
in Christ v.
erty. In Holy Cross Church
Church of God in
Supreme Court held that a lender need only give notice of intent to accelerate and notice
notice
of acceleration
acceleration to trigger the four year limitations period; there was no requirement that a
Wolf in
Id. at 562. The court in Burney relied on Wollin
lender take steps to initiate foreclosure. Id.
in Rabo
Agrifinance,
reaching its decision. 244 S.W.3d at 904. The same rule was applied
applied in
Rabo Agrifinance,
Wolf but, in this
Inc. v. Terra XXI Ltd., 257 F. App'x 732 (5th Cir. 2007), which also cited Wol/but,
Id. at 734-35.
case, the foreclosure was commenced
commenced within the four year limitations period. Id.
142. 260 S.W.3d
S.W.3d 620, 622 (Tex. App.-Dallas
App.-Dallas 2008, no pet.).
pet.).
143. Id.
Id.
144. Id.
Id.
145. Id.
Id. at 625.
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soned that the depositor had always held the funds as a custodian, not as
an owner, and the bank was aware that third parties typically owned deposits from servicing companies. Further, the contract required the decourt
positor to maintain the funds, not own and control them. The court
interpreted the plain meaning of "maintain"
interpreted
"maintain" as "to retain."146
retain.' 46 The depositor did not close the account or withdraw funds. The language of the concontract
tract did not indicate
indicate that the bank's incentive
incentive to enter into the contract
was contingent on the depositor's ability to control the funds. The funds
remained in an account
account with the bank for the entire period
period in question
and the relationship between the depositor
depositor and the bank did not change
change
after the sale. The depositor was on record as the account holder and its
employees were the only authorized
authorized signatories
signatories on the accounts. The
bank had no duty to determine ownership of the funds. The bank's regulations, incorporated
incorporated by reference
reference into the contract, protected it from
claims of ownership by third parties. The court rendered judgment in
favor of the depositor, but remanded
remanded the issues of attorney's
attorney's fees and
147
147
interest to the trial court.
court.
Credit Union
Union v. Sanders,148
Sanders,148 several account
In Security Service Federal
Federal Credit
account
holders asserted DTPA claims against a credit union for wrongfully
wrongfully
dishonoring checks,
checks, miscalculating loans balances,
balances, making unauthorized
funds transfers, and selling credit insurance. The credit union moved to
compel arbitration
arbitration under separate clauses contained in the account holdThe trial court denied the
ers' member agreements and loan agreements.
149
appealed. 149
motion and the credit union
union appealed.
account holders
On appeal, the account
holders argued
argued the arbitration
arbitration clauses were unconscionable because both arbitration
arbitration clauses allowed assessment of atconscionable
DTPA.15500
the DTPA.1
stated in
torney's fees in a manner inconsistent with that stated
in the
Under the member agreement, attorney's fees could be awarded against
the account holders without a finding that their claims were groundless.
Under the loan agreement, fees were to be borne by each party without
regard to which party prevailed. The San Antonio
Antonio Court of Appeals
agreed with the account
account holders that these changes in how attorney's
attorney's fees
awarded violated the public policy
were to be awarded
policy underlying
underlying the DTPA and
15 1
were substantively unconscionable. 151
The court further noted, however,
that Texas law permits severance
severance of an unconscionable provision and en52
forcement of the remainder
remainder of a contract.1152
Reviewing the clauses
clauses in the
loan agreements
agreements and in the member agreements
agreements separately,
separately, the court
pointed out that the clause in the loan agreements
agreements expressly prohibited
Id. at 624-25.
146. [d.
Id. at 625-26.
147. [d.
148. 264 S.W.3d 292,
296-97 (Tex. App.-San
App.-San Antonio 2008, no pet.).
292,296-97
Id. at 297.
149. [d.
Id. at 297-98. Under the Texas DTPA, attorney's fees can be awarded to a prevail150. [d.
prevailing consumer or, if the claim is determined
determined to be groundless, to the defendant. See TEx.
TEX.
17.50(c-d) (Vernon
(Vernon 2002 &
& Supp. 2008).
Bus. &
& COM.
COM. CODE ANN. § 17.50(c-d)
151. 264 S.W.3d
S.W.3d at 299-300.
Id. at 300-01.
300-01.
152. [d.
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153 Under
severance, but the clause
clause in the member agreements did not. 153
Under
these circumstances,
circumstances, the court ruled that the trial court was correct in
154 This deterrefusing to enforce
enforce arbitration under the loan agreements.
agreements. 154
to
mination did not end the case, however, because the court also had to
explore the issue of whether
whether the arbitration
arbitration clause in the member agreeagree155 On
procedurally unconscionable. I55
this issue, the court held
held
ments was procedurally
capitalized heading
that a capitalized
heading and description
description of the arbitration clause in the
member agreements
agreements was sufficient to bring it to the attention of account
unconscionaprocedurally unconscionaholders and the clause, therefore,
therefore, was not procedurally
ble. 15566 Thus, while the trial court was correct
ble.1
correct in refusing to compel
compel arbitration under the loan agreements,
agreements, it erred in failing to compel
arbitration under the member agreements. A writ of mandamus
mandamus was concourt to vacate
ditionally issued for the trial157
vacate its order and grant the credit
arbitrate. 157
union's motion to arbitrate.
VI.
A.
SECURED TRANSACTIONS
CREATING A
A SECURITY
SECURITY INTEREST
disagreement
As noted in the last Survey, there has been
been considerable
considerable disagreement
Bankruptcy
Abuse
Prevention
and
Consumer
about the effect of the Bankruptcy
Consumer Proamendments on purchase
purchase money security intertection Act ("BAPCPA")
("BAPCPA") amendments
58 This disagreement
divergent
vehicles. 158
disagreement continues with divergent
ests in motor vehicles.1
cases
decided
by
different
results reached in two recent Texas bankruptcy
bankruptcy
159
judges in the Southern
District
of
Texas.
In
In
re
Brodowski,159
the
bankBrodowski,
Southern District
ruptcy court held that it would apply the "dual status" rule to bifurcate
bifurcate a
money
claims.
Under
this
loan into purchase
purchase money and non-purchase
non-purchase
approach, funds advanced for the purchase price of a new vehicle are
pay off any negative
treated
treated as secured, but funds advanced
advanced to payoff
negative equity in a
debtor
This
result
means
a
Chapter 13 debtor
trade-in
vehicle
are
unsecured.
trade-in
debt
can
be
paid
on a
must pay the secured debt in full, but the unsecured
unsecured
60
pro-rata
pro-rata basis.'
basis. l60
decision
In In re Dale,161
Dale, 61 decided by the district court on appeal from a decision
153.
153.
154.
155.
155.
156.
157.
157.
Id.
[d.
Id.
[d.
Id. at 301-02.
[d.
Id.
[d.
Id. at 302.
[d.
REV. 673-74 (2008). The
Commercial Transactions,
Transactions,61 SMU
158. See John
John Krahmer, Commercial
SMU L. REV.
basic issue is whether a purchase
purchase money security
security interest should include both the amount
amount
off any
needed to finance the purchase
payoff
purchase price of a vehicle and the amount needed to pay
negative
debtor as part of the transaction. The courts
negative equity on a vehicle traded in by the debtor
are deeply divided on whether
whether the security interest should be bifurcated
bifurcated into secured and
unsecured
unsecured claims or whether the entire amount of the loan should be treated as secured.
The issue arises because of a lack of clarity in the unnumbered
unnumbered "hanging
"hanging paragraph"
paragraph" added
added
by the Bankruptcy
Bankruptcy Abuse Prevention
Prevention and Consumer Protection Act of 2005,
2005, Pub. L. No.
(2005) to the end of 11 U.S.C.
109-8, 119 Stat. 23 (2005)
U.S.c. §§ 1325(a).
1325(a). Id.
[d.
159. 391 B.R. 393,401-02
393, 401-02 (Bankr. S.D. Tex. 2008).
2008).
Id. at 403.
160. [d.
H-07-32451, 2008 WL 4287058 (Bankr.
C.A. No. H-07-3176,
H-07-3176, Bankruptcy Case No. H-07-32451,
161. c.A.
S.D. Tex. Aug. 14,
14, 2008).
2008).
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disagreed with the result in Brodowski
of the bankruptcy court, the court disagreed
and held the secured
secured party's claim should
should not be bifurcated
bifurcated but, instead,
should include the amount advanced
advanced to pay negative
negative equity and treated
163
162 The bankruptcy court's decision was reversed. 163
as fully secured. 162
bankruptcy
decision was reversed.
B.
PERFECTING A SECURITY
SECURITY INTEREST
INTEREST
it
Once a security interest is created, it must be perfected
perfected to protect164
bankruptcy. 64
trustees in
against the claims of other creditors, including trustees
in bankruptcy.1
perfection is the filing of a financing
While the most common method of perfection
statement giving public notice that a security
security interest
statement
interest exists in the described
scribed collateral, section 9.311 of the Code contains
contains an important exception for security interests in motor vehicles covered
covered by a certificate
certificate of
of
6 5 To
title.'
title. 165
perfect a security interest in titled vehicles, other than vehicles
held as inventory by a dealer, a secured party must comply
comply with the re66
quirements
certificate of title act.
act.'166
quirements of any relevant certificate
When a vehicle is not
part of a dealer's inventory, perfection
perfection under the Texas certificate
certificate of title
act requires a secured party to record its interest
on
the
certificate of
interest
certificate
of
16 7 Mere possession of a certificate of title does not perfect a security
title. 167
Mere
certificate
interest absent notation on the title. This point was driven home in In re
re
1 68
Moye,
where
Moye,168
where the secured party took physical possession of several certificates of title covering vehicles in the inventory
inventory of a car dealer, but
neither recorded
its
security
interest
on
the
titles nor filed a financing
recorded
security
statement
covering
the
dealer's
inventory.
Another
secured party claimed
statement
secured
a priority interest
interest in the inventory
inventory by virtue of its filed financing statement. The court had no difficulty in deciding that possession of the titles
did not perfect
perfect a security interest
interest in the individual vehicles
vehicles and failure to
file a financing statement
statement rendered
rendered the claim to the inventory un69 The court ordered the trustee to deliver the vehicles to the
perfected.
perfected.1169
claim.' 70
superior claim.17°
second secured
secured party as the creditor holding the superior
A similar certificate of title issue was addressed
Clark Conaddressed in In re Clark
1 71 this time, however, in the context
tracting
Services, Inc.,
tracting Services,
Inc.,I71
context of an assign162. 2008 WL 4287058
4287058 at *5. In reaching this result, the court included an extensive
listing and analysis
*3-5.
cases addressing this issue. See 2008 WL 4287058 at *3-5.
analysis of cases
[d. at *5.
*5.
163. Id.
164. Unperfected
Unperfected security interests are subordinate
subordinate to the claims of a variety of creditors. See TEX. Bus. &
& COM.
CODE ANN.
& Supp. 2008).
2008).
COM. CODE
ANN. §§ 9.317 (Vernon
(Vernon 2002 &
& Supp. 2008).
2008).
& COM. CODE ANN.
ANN. §§ 9.311 (Vernon
(Vernon 2002 &
165. See TEX. Bus. &
& COM.
& Supp. 2008). VehiCOM. CODE ANN.
ANN. §§ 9.311(b)
9.311(b) (Vernon
(Vernon 2002 &
166. See TEX. Bus. &
cles are not the only collateral
collateral that may be subject to perfection
perfection under law other than
Chapter
9.311(a)(2) (Vernon
Chapter 9. For example, TEX.
TEX. Bus. &
& COM.
COM. CODE ANN.
ANN. §§ 9.311(a)(2)
(Vernon 2008) lists
other statutes governing
governing boats, outboard motors, manufactured
manufactured homes, and public utility
property
property such as transmission
transmission lines or pipelines. While vehicles are held as inventory
inventory by a
dealer, perfection must be by the filing of a financing statement
statement even if a certificate
certificate of title
has been issued for the vehicle. See TEX. Bus. &
& COM. CODE ANN.
ANN. §§ 9.311(d)
9.311(d) (Vernon
2002 &
& Supp. 2008).
2008).
167. See TEX. TRANSP.
TRANSP. CODE
CODE ANN. §§ 501.111 (Vernon 2007).
168. Nos. 07-37770 &
& 07-37364,
*1 (Bankr. S.D. Tex.,
07-37364, 2008 WL 4179239,
4179239, *1
Tex., Aug. 29, 2008).
169. Id.
[d.
170. Id.
[d.
171. 399 B.R. 789 (Bankr. W.D. Tex.,
171.
Tex., Nov. 28, 2008).
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Transactions
Commercial
2009]
2009]
1017
1017
to
ment of
of aa security
security interest.
interest. In
In 2005,
2005, a debtor
debtor granted
granted aa security
security interest
interest172
to
ment
creditor to
to obtain
obtain aa loan
loan for the purchase
purchase of
of construction
construction equipment.
equipment. 172
aa creditor
The creditor
creditor filed a financing
financing statement
statement and,
and, as
as various
various items
items of
of equipThe
ment were
were purchased,
purchased, the creditor
creditor also
also applied
applied for and
and obtained
obtained certificertifiment
cates of
of title
title recording
recording its
its security
security interest
interest in
in the equipment.
equipment. In
In 2007,
2007,
cates
another creditor
creditor purchased
purchased all
all of
of the
the first creditor's
creditor's interests
interests in the
the equipequipanother
ment and
and took physical
physical possession
possession of
of the
the certificates
certificates of
of title. It did not,
ment
however, apply
apply for and receive
receive new
new certificates
certificates of title recording
recording its
its securhowever,
interest. The
The debtor
debtor eventually
eventually filed
filed a Chapter
Chapter 11 bankruptcy
bankruptcy and, as a
ity interest.
debtor in possession,
possession, sought
sought to avoid
avoid the security
security interest
interest under
under the
debtor
173
"strong-arm"
"strong-arm" powers
powers of
of the
the Bankruptcy
Bankruptcy Code.
Code. 173 After
After a careful
careful review
review
Certificate of
of Title Act, the court
court held
held the assignee's
assignee's failure
failure
of the Texas Certificate
its name
name on the
the titles following
following the assignment
assignment rendered
rendered the
the
to record its
assignee's security
security interest
interest unperfected
unperfected and
and subject
subject to avoidance
avoidance by
by the
the
assignee's
174
debtor
debtor in possession. 174
C.
RIGHTS OF THIRD PARTIES
RIGHTS
1 75
a car dealer opened
Imports, Inc.,
In THPD,
THPD, Inc.
Inc. v. Continental
Continental Imports,
Inc.,175
opened a
176
'
dealership specializing
specializing in used "muscle
"muscle cars."
cars."176 A lender perfected
perfected a sesedealership
fraudulent
curity interest in the
the dealer's
dealer's inventory. Through
Through a series of fraudulent
curity
actions, the first dealer obtained
obtained loans from other lenders by using the
the
with
bought and sold cars with
same cars as collateral. The dealer routinely bought
including some covered by the inventory
inventory lender's security
other dealers, including
transactions were
were in the form of trades or payinterest. Some of these transactions
ments of debt in lieu of cash sales. The dealer's fraud was eventually discovered and the inventory lender sued one of the other dealers for
cars.1 77
conversion of four cars.177
The Austin Court of Appeals held the inventory lender's security interneither
est continued
continued in three of the four cars because the sales were neither
authorized nor did the second dealer qualify as a buyer in the ordinary
78 As to the fourth car, however, the court held that
course of business.1178
Id. at 792-93.
172. Id.
trustee or debtor in possession
& 1107(a) (2006), gives a trustee
544(a)(1) &
173.
Id. 11 U.S.c.
U.S.C. §§ 544(a)(I)
173. Id.
CODE ANN.
& COM.
COM. CODE
TEX. Bus. &
the rights of aa hypothetical
hypothetical lien creditor. Under TEX.
§§ 9.317(a)(2) (Vernon 2002 &
& Supp.
Supp. 2008), aa lien creditor has priority over an unperfected
security interest.
804.
174. 399 B.R. at 804.
174.
no pet.).
2008, no
175.
175. 260 S.W.3d 593 (Tex. App.-Austin 2008,
styling and high
eye-catching styling
are vehicles designed with eye-catching
176.
597. "Muscle
"Muscle cars" are
Id. at
at 597.
176. Id.
cars ceased
ceased
of muscle cars
engine performance without regard
The production of
regard to fuel economy. The
as used vehicles. The four
available only as
as gasoline prices rose and they are
are now generally available
1965
1965 Chevrolet Corvette, aa 1965
cars that were principally
this case
case were aa 1965
involved in this
principally involved
at 600.
600.
Id. at
Mustang, aa 1982 Ferrari, and a 1992 Chevrolet Corvette. Id.
dealer, but
the second
second dealer,
asserted other claims against the
608. The lender had also asserted
177. {d.
Id. at 608.
177.
these claims.
failed to obtain
supporting these
findings supporting
obtain jury findings
2002), aa
9.615(a) (Vernon 2002),
CODE ANN. §§ 9.615(a)
COM. CODE
178.
Bus. &
& COM.
TEX. Bus.
Under TEX.
at 614-15.
614-15. Under
Id. at
178. Id.
or
is authorized or
sale of
of the collateral is
security interest
unless the sale
in collateral
collateral unless
continues in
interest continues
of the most important provisions in Chapter 9
One of
unless
provides. One
otherwise provides.
unless Chapter 99 otherwise
al2002) al(Vernon 2002)
9.320(a) (Vernon
that
& COM. CODE ANN. §§ 9.320(a)
TEX. Bus.
Bus. &
is TEX.
provides" is
that "otherwise provides"
by
take free
free of a security interest created by
to take
of business to
course of
ordinary course
lowing
in ordinary
lowing aa buyer in
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[Vol. 62
the evidence was insufficient to show that the inventory lender's security
interest attached to this vehicle. Absent attachment, there was no conversion. 1799 The judgment of the trial court was affirmed as to three of the
sion.17
180
vehicle. 180
fourth vehicle.
the fourth
to the
four cars and reversed as to
One of the most difficult issues arising under Chapter 9 is the relationship between section 9.406 and other rules, statutes, or regulations restricting or prohibiting assignments or the creation of security interests in
governmental entity is the account
accounts or chattel paper when a governmental
account
181
In Texas Lottery Commission
Commission v. First
First State Bank of DeDedebtor. 181
Queen, 82 a lottery winner
winner entered into a composition agreement with his
Queen,182
creditors to assign funds payable to him from lottery payments due in
2013 and 2014. In a declaratory judgment
judgment action filed by the assignees,
the Texas Lottery Commission contended that Texas law prohibited assignment
signment of lottery winnings
winnings except by the procedure
procedure provided
provided in the
I83
Code. 183
Texas Government Code.
Addressing
Government
Addressing the conflict between section
section 9.406 and the Government
Code, the Austin Court of Appeals
reasoned
that
the
legislature
Appeals reasoned
legislature could
have included language in the Government
Government Code
expressly
Code expressly preempting
84
84 Viewing the Uniform Comsection
9.406,
but
had
chosen
not
to
do
so.'
section 9.406,
chosen
so.1
mercial
codification of an entire field of
mercial Code ("UCC")
("VCC") as an integrated
integrated codification
of
law, the court believed
believed that implied repeal
UCC provision
repeal of a VCC
provision should not
8 5
be
assumed.'18s
Absent an explicit
statement in the Government
be lightly
lightly assumed.
explicit statement
Government
Code
to
the
contrary,
the
court
held that section
Code
section 9.406
was
controlling
186
effective. 186
and assignment of the lottery winnings was
was effective.
D.
D.
DISPOSITION OF
COLLATERAL
DISPOSITION
OF COLLATERAL
18 7
In Tex Star Motors,
a factor entered
Motors, Inc.
Inc. v. Regal Finance
Finance Co., Ltd.,
Ltd.,187
entered
into an agreement
agreement with a car dealer to purchase
purchase installment sales
sales contracts resulting
resulting from the sale of cars
cars by the dealer. The agreement
agreement inthe seller. "Buyer
"Buyer in ordinary
ordinary course of
of business"
business" is defined
defined in TEX. Bus. &
& COM.
COM. CODE
CODE
ANN.
ANN. §§ 1.201(b)(9)
1.201(b)(9) (Vernon
(Vernon 2009).
615.
179. 260 S.W.3d
S.W.3d at 615.
180. Id.
[d. at 620.
181. TEX. Bus. &
& COM.
COM. CODE
CODE ANN. §§ 9.406(f)
9.406(f) (Vernon
(Vernon 2002)
2002) provides, in part:
(f)
(f) Except as otherwise
otherwise provided in Sections
Sections 2A-303 and 9-407, and subject
subject
to Subsections
(i), a rule of law, statute, or
Subsections (h)
(h) and (i),
or regulation that prohibits,
prohibits,
restricts, or requires the consent
consent of a government,
government, governmental
governmental body or
or official,
cial, or account
account debtor
debtor to the assignment
assignment or transfer
transfer of, or creation
creation of a sesecurity
ineffective to
curity interest
interest in,
in, an account
account or
or chattel
chattel paper
paper isis ineffective
to the extent
extent that
that
the
the rule of law, statute, or regulation:
(1)
restricts, or
the consent of the government,
or requires
requires the
government, govern(1) prohibits,
prohibits, restricts,
mental
mental body or
or official,
official, or
or account
account debtor to the assignment
assignment or
or transfer
transfer of, or
or
the
the creation,
creation, attachment,
attachment, perfection,
perfection, or enforcement
enforcement of aa security
security interest in,
the
the account
account or
or chattel
chattel paper
paper ....
....
182.
182. 254 S.W.3d
S.W.3d 677, 68-81
68-81 (Tex. App.-Austin
App.-Austin 2008, pet. abated).
abated).
183.
183. Id.
[d. at 681;
681; TEX.
TEX. Gov'T
Gov'T CODE
CODE ANN. § 466.406
466.406 (Vernon
(Vernon 2004).
2004).
184.
184. 254 S.W.3d
S.W.3d at 684-85.
185.
185. Id.
[d. at 685.
685.
186.
186. Id.
[d.
187.
187. 246 S.W.3d
S.W.3d 745,
745, 748 (Tex.
(Tex. App.-Houston
App.-Houston [14th
[14th Dist.]
Dist.] 2008, pet. granted).
granted).
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Transactions
Commercial Transactions
Commercial
1019
1019
"holdback reserve"
cluded a repurchase
reserve" clause allowing the
repurchase clause and a "holdback
factor to retain $750 of the price of each contract it purchased
purchased to reimburse the factor for repossession expenses and debts owed to the factor
by the dealer. Three years later, the factor stopped buying contracts
contracts from
the dealer and the dealer refused to repurchase
repurchase any more defaulted
defaulted contracts or make any further deposits into the reserve fund. The factor subsequently repossessed
repossessed and sold some nine hundred cars after buyers
defaulted, resulting in an alleged eight million dollar deficiency. The factor sued the dealer to recover the deficiency.188
deficiency.18 8 The dealer counterunrefunded reserve
statutory
claimed to recover unrefunded
reserve funds and
statutory damages. The
The
189
189
factor.
the
of
favor
in
verdict
a
returned
jury returned
the factor.
On appeal by the dealer, the Houston
Houston Court of Appeals (14th District)
held that the factor failed to prove
prove it sold the collateral in accordance
commercial standards as defined in the jury instrucwith reasonable
reasonable commercial
90 The court further held that the trial court erred in denying the
tions.1
tions. 190
dealer recovery on its claim for money it had received
received by virtue of its
deposits into the reserve account.
account.119911 A take nothing judgment
judgment was rendered against the factor and in favor of the dealer on its claim to recover
recover
192
the reserve funds. 192
Associates,193 a borrower obtained a loan from
In Chapa
Chapa v. Traciers
Traciers &
& Associates,193
a finance company to purchase a vehicle. After the borrower
borrower defaulted,
the finance company hired a collection
collection agency to repossess the vehicle.
The finance company told the collection agency that the vehicle would be
located at a certain address. The address
address given to the finance company,
however, was the address of the borrower's
borrower's brother, who had purchased a
vehicle identical to the one the borrower
borrower had purchased.
purchased. When the collecemployee went to the address, he saw a vehicle
tion agency's employee
vehicle of the right
right
kind parked
parked on the street. This vehicle, however,
however, belonged to the boremployee didn't know.
rower's brother;
brother; something the collection
collection agency's employee
After
The employee hooked the vehicle to his tow truck and drove away. After
vehicle's
driving for a couple of blocks, the employee
employee noticed that the vehicle's
discovered
engine was running. Upon further inspection, the employee discovered
there were children inside the vehicle. The employee
employee realized
realized that a mistake had been made and quickly returned
returned the vehicle. The borrower's
borrower's
brother and his wife sued the finance company
company and the collection agency
agency
1944 The
for breach of the peace in violation of section 9-609 of the Code.19
The
plaintiffs also asserted claims
claims based on the Restatement (Second)
(Second) of Torts
liability. 195 The trial court granted summary
and a claim for bystander
bystander liability.195
188. Id.
[d.
189. Id.
[d.
& COM. CODE
CODE ANN.
ANN. § 9.61O(b)
9.610(b) (Vernon 2002)
Id. at 752. Under TEX. Bus. &
190. [d.
2002) a sale
reasonable manner.
collateral must be done in a commercially
commercially reasonable
of collateral
191. 246 S.W.3d at 754.
191.
192. Id.
[d. at 755-56.
S.W.3d 386, 389-90 (Tex. App.-Houston [14th Dist.] 2008, no pet.).
193. 267 S.W.3d
Id. at 390.
194. [d.
(SECOND) OF TORTS
195. Id.
[d. The tort claims were asserted under RESTATEMENT
RESTATEMENT (SECOND)
TORTS §§ 424
& 427 (1965).
precautionary action required by a person by a statute
&
(1965). Section
Section 424 deals with precautionary
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196
judgment
judgment in favor of the defendants on all of the claims. 196
On appeal, the Houston Court of Appeals (14th
(14th District) reasoned
reasoned that
a claim for breach of the peace
peace required the borrower's
borrower's brother to show
197 After
conduct that would probably
probably result in a loss of public order. 197
After reother
breach
of
the
peace
viewing the facts and several
cases,
several other
cases, the court
concluded that repossessing a vehicle on a public street, absent any contemporaneous objection or confrontation,
temporaneous
confrontation, was not a breach of the peace
198
9.609.198 The court also denied recovery
under section 9.609.
recovery on the claims asRestatement (Second) of Torts and for bystander liabilserted under the Restatement
20 0
99 Summary judgment
affirmed. 20o
was affirmed.
defendants was
ity. 199
ity.1
judgment in favor of the defendants
VII. CONCLUSION
CONCLUSION
Two of the cases decided
decided during the Survey period
period stand out because
they authoritatively
authoritatively resolve issues arising
arising under the Code that were previ20 1
ously debatable. 201
A few other decisions,
decisions, however, addressed issues that
are likely to be the subject of further litigation, either in other cases or as
the subject of further appeal. These include, in particular, Bank of Texas
v. VR
VR Electric,
Inc.,202
Corp. v. Specialty Optical
Electric, Inc.
,202 IFC
IFC Credit
Credit Corp.
Optical System,
Technologies, Inc.
Texas,20 4 and In
Inc.,203 New Wave Technologies,
Inc. v. Legacy Bank of Texas,204
05
re Clark
Clark Contracting
ContractingServices,
Services, Inc. 2205
Although
Although 2008 was not a legislative
year, cases decided during the year have provided
provided useful guidance
guidance in reafinterpretations of the Code or, in some instances, raising new
firming past interpretations
issues to be considered.
or administrative regulation and section 427 deals with liability for physical
physical harm. Bystander liability can result if a bystander observes an event
stander
event causing serious
serious injury or death
to a person to whom the bystander has a significant
emotional attachment
significant emotional
attachment such as a child,
spouse, or sibling.
196. 267 S.W.3d at 390.
391.
197. Id.
[d. at 391.
198. Id.
[d. at 395.
199. The Restatement
Restatement claims
claims were denied because of the determination that no breach
of the peace had occurred, thus rendering the Restatement provisions inapplicable.
inapplicable. Id.
[d. at
at
396-98. The bystander claim was denied because
(who asserted this
because the children's mother (who
claim) did not directly
directly observe
observe the car being towed and only learned
learned about the towing after
the fact from her children. [d.
Id. at 400.
200. Id.
[d. at 398-400.
201.
201. See Med. City Dallas, Ltd. v. Carlisle
Carlisle Corp., 251 S.W.3d
S.W.3d 55, 62-63 (Tex. 2008)
2008) (allowing
attorney's fees in express
express warranty actions and disapproving
disapproving prior
lowing the recovery of attorney's
decisions
decisions to the extent
extent they held otherwise);
otherwise); JCW Elects., Inc. v. Garza, 257 S.W.3d 701,
709-10 (Tex. 2008)
(applying the proportionate
responsibility rules of Chapter
2008) (applying
proportionate responsibility
Chapter 33 in the
Tex. Civ. Prac. &
& Rem. Code to implied warranty
warranty actions resulting in personal
personal injury).
202. 276 S.W.3d
(holding the proportionate
proportionate responsibility rules of Chapter
Chapter 33 do
S.W.3d at 684 (holding
not apply to cases arising under Tex. Bus. &
& Com. Code Ann. §§ 3.406).
3.406).
203. 252 S.W.3d
S.W.3d 761,
(regarding the enforceApp.-Dallas 2008, pet. denied) (regarding
761, 769 (Tex. App.-Dallas
ability
ability of waiver of defense clauses in lease transactions).
204. 281 S.W.3d
(dealing with effect of a virgule on whether indorsement
S.W.3d at 102-03 (dealing
indorsement by
only one of two payees is required
required for proper negotiation of an instrument).
recordation of an assignee's name is required
required on a
205. 399 B.R. at 798-99 (holding that recordation
certificate
security interest).
certificate of title to continue the perfection of a security
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