COMMERCIAL TRANSACTIONS
TRANSACTIONS
COMMERCIAL
John Krahmer*
Krahmer*
John
I. GENERAL
GENERAL PROVISIONS...
PROVISIONS. . . . . . . .....................
........................
CONSPICUOUSNESS ........................
....................................
............
A. CONSPICUOUSNESS
SALE OF GOODS
GOODS.. .................................
.. .. .. .. .. . .. .. .. .. .. .. .. .. .. .. .. ..
II. SALE
STATUTE OF
OF FRAUDS..................................
FRAUDS..................................
A. STATUTE
DISCLAIMER OF
OF WARRANTIES
WARRANTIES..........................
........................
B. DISCLAIMER
C. DEMANDS
DEMANDS FOR
FOR ASSURANCE
ASSURANCE AND
AND SUSPENSION
SUSPENSION OF
OF
PERFORMANCE.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.........
........................................
PERFORMANCE
D. ACTIONS
ACTIONS FOR
FOR BREACH
BREACH OF
OF CONTRACT
CONTRACT..................
................
E. REMEDIES AND
AND EXCUSED
.............
EXCUSED PERFORMANCE .............
III. NEGOTIABLE
NEGOTIABLE INSTRUMENTS.............
INSTRUMENTS. . . . . . . . . . . . . . . . . . .......
. . . . . ..
A. LIABILITY
LIABILITY OF
OF PARTIES
PARTIES ........................
................................
........
IV. BANK
BANK DEPOSITS AND
AND COLLECTIONS .............
...............
RELATIONSHIP BETWEEN
BETWEEN PAYOR
BANKS AND
AND THEIR
PAYOR BANKS
A. RELATIONSHIP
CUSTOMERS............................................
..........................................
CUSTOMERS
TRANSACTIONS. . . . .....................
........................
V. SECURED
SECURED TRANSACTIONS.
INTEREST ...
A. CREATING
CREATING AND
AND PERFECTING
PERFECTING A
A SECURITY
SECURITY INTEREST...
B. SCOPE OF
OF A
A SECURITY
SECURITY INTEREST.
.....................
INTEREST ......................
EFFECT OF
OF TERMINATING
A SECURITY
SECURITY INTEREST.
.....
INTEREST ......
TERMINATING A
C. EFFECT
D. REPOSSESSION
REPOSSESSION AND
DISPOSITION OF COLLATERAL.....
COLLATERAL.....
AND DISPOSITION
..................................
CONCLUSION
VI. CONCLUSION...........................................
ALTHOUGH
A
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452
INTRODUCTION
INTRODUCTION
2009 was a legislative year, no significant legislative
LTHOUGH 2009 was a legislative year, no significant legislative
changes were made to the Uniform Commercial
(the
Commercial Code (the
reported during
Code). However, several cases of interest were reported
the Survey period. These are discussed in the same order as the chapters
in the Code.
Code.'1
I.
GENERAL
GENERAL PROVISIONS
A.
A.
CONSPICUOUSNESS
CONSPICUOUSNESS
In Dresser
Industries, Inc.
Petroleum, Inc., the Texas Supreme
Page Petroleum,
Inc. v. Page
Dresser Industries,
Court held that the Code definition
definition of "conspicuous"
be applied
"conspicuous" should be
applied
** Professor of Law and Foundation Professor of Commercial
Commercial Law, Texas Tech University. B.A., J.D., University of Iowa; LL.M. Harvard University.
1.
contained in the first
Commercial Code is contained
1. The Texas version of the Uniform Commercial
Business and Commerce
&
eleven chapters
chapters of the Texas Business
Commerce Code (the Code). See TEX. Bus. &
COM. CODE ANN. §§
§H 1.101-11.108
1.101-11.108 (Vernon 2009).
425
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to any
any case
case in
in which
which the
the conspicuousness
conspicuousness of a contract
contract term
term was
was at
at issueissueto
whether or
or not
not the
the case
case arose
arose under
under one
one of
of the
the chapters
chapters in
in the
the Code.22 In
In
whether
an interesting
interesting pair
pair of
of cases,
cases, the
the courts
courts cited
cited Dresser
Dresser in applying
applying the
the definidefinian
tion of
of "conspicuous"
"conspicuous" to determine
determine whether
whether the contracts
contracts in
in question
question
tion
complied with
with the
the fair
fair notice
notice requirements
requirements of Texas
Texas law
law governing
governing indemindemcomplied
Corp. Savings Plan
Plan v.v. Hewitt
Hewitt Associates,
Associates,
nity provisions.
provisions. In
In Enron Corp.
nity
L.L.C.,3 the
the administrator
administrator of
of an
an employer's
employer's employee
employee benefit
benefit plans
L.L.C.,3
sought indemnification
indemnification from
from the
the employer
employer arising
arising from
from the
the administraadministrasought
of benefits under
under the
the plans. The
The federal
federal district
district court
court
miscalculation of
tor's miscalculation
Southern District
District of
of Texas
Texas noted
noted that
that Texas
Texas law
law requires
requires that aa
for the Southern
clause indemnifying
indemnifying aa party against
against its own
own negligence
negligence must
must provide
provide fair
fair
clause
The court
court further noted that determination
determination
notice and be conspicuous.
conspicuous.44 The
notice
of conspicuousness
conspicuousness is aa matter
matter of
of law for the court.
court.s5 Reviewing
Reviewing the clause
clause
of
was not conspicuous
conspicuous because
because the
the uniformuniformin question, the court found it was
agreement
headings in the lengthy
lengthy agreement
ity of typeface, font size, and bold headings
not such that the indemnity
indemnity provisions
provisions would be called to the
the attenwere not
motion by
by the employer
employer to
to dismiss the
the
tion of
of aa reasonable
reasonable person. 66 A motion
tion
7
administrator's
indemnity claims was granted.
granted.7
administrator's indemnity
II. SALE
SALE OF GOODS
A.
STATUTE OF FRAUDS
FRAUDS
STATUTE
codified as
Although the Code was first adopted
adopted in Texas
Texas in 1965 and codified
Although
part of the Business and Commerce
Commerce Code one year later, it was not until
2001 that a Texas
Texas court addressed the issue of whether distributorship
distributorship
contracts for the sale of goods.8s
contracts were contracts
contracts for services or contracts
Fourteenth
In Continental
Continental Casing
Houston Fourteenth
Corp.,9 the Houston
Siderca Corp.,9
Corp. v. Siderca
Casing Corp.
Court of Appeals noted that no Texas case had previously addressed this
other jurisissue, but, following the view of a majority of cases decided in other
"essence," of a
dictions, the court ruled that the predominant
predominant factor, or "essence,"
distributorship
distributorship contract is a sale of goods, subject to the Code statute of
1993). In Dresser,
2. 853 S.W.2d 505, 509-11 (Tex. 1993).
Dresser, the supreme court interpreted
interpreted the
& Commerce
definition of "conspicuous"
appeared in Texas
Texas Business &
Commerce Code. See
"conspicuous" as it then appeared
(explained and
(Vernon 2009) (explained
id.
1.201(b)(10) (Vernon
also id.
id. §§ 1.201(b)(1O)
see also
1.201(10) (Vernon 2009); see
id. §§ 1.201(10)
revised
revised definition).
3. 611 F.
Tex. 2009).
Supp. 2d 654 (S.D.
(S.D. Tex.
F. Supp.
4. Id.
Id. at 663.
5. Id.
Id.
6. Id.
Id. at 673.
District of North
7. Id. at
Enron, the federal district court for the District
to Enron,
at 675. In contrast to
Dakota, applying Texas law,
law, held
held in EOG
EOG Resources,
Resources, Inc.
Inc. v. Badlands
Badlands Power
Power Fuels,
Fuels, LLC,
where the clause folthat an
notice and was conspicuous where
fair notice
an indemnity clause provided fair
dealt
section that dealt
part of a section
lowed
were themselves part
which were
capitals which
out in capitals
set out
two paragraphs set
lowed two
this
court reached this
The court
2009). The
solely
(D.N.D. 2009).
731, 739
739 (D.N.D.
2d 731,
F. Supp. 2d
621 F.
indemnity. 621
with indemnity.
solely with
of
or in
in a font of
capitals or
out in
in capitals
not set out
conclusion even though the
in question was not
the paragraph
paragraph in
a different size or
.
or color. Id.
Id.
on June 30, 1966,
in Texas on
8.
first became effective in
Code first
Commercial Code
The Uniform Commercial
8. The
721, 1957
1957 Tex. Gen.
ch. 721,
R.S., ch.
59th Leg., R.S.,
1965, 59th
having
of May
May 31, 1965,
in the Act of
adopted in
been adopted
having been
Act
Code. See Act
Laws
Business &
& Commerce
Commerce Code.
the Texas Business
part of the
In 1967
1967 it became
became part
1, 1-316. In
Laws 1,
Laws 2343-2782.
of
1967 Tex.
Tex. Gen.
Gen. Laws
785, §§
§§ 1-6
1-6 1967
R.S., ch.
ch. 785,
60th Leg.,
Leg., R.S.,
1967, 60th
of May
May 29, 1967,
pet.).
2001, no pet.).
9.9. 38
App.-Houston [14th Dist.] 2001,
S.W.3d 782 (Tex. App.-Houston
38 S.W.3d
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frauds.1°0 The
The Siderca
Siderca court
court further
further held that because
because the
the distributorship
distributorship
frauds.1
contract
was
not
in
writing
and
none
of
the
exceptions
to
the writing
writing rereexceptions to the
none
in writing
contract
quirement
were
met,
the
alleged
agreement
was
unenforceable
as
a
matmet, the alleged agreement was unenforceable
quirement
law.1 1 In East Hill
Hill Marine,
Marine, Inc.
Inc. v. Rinker Boat Co.p
ter of law."
Co.,1 2 the Fort
Court of Appeals,
Appeals, citing Siderca,
Siderca, reached
reached a similar
similar result.'
result. 133 It is
Worth Court
well-established that distributorship
distributorship contracts
contracts are subject
subject to
to the
the
now well-established
& M Edwards,
Edwards, Inc.
Inc. v. Bio-Cide
Bio-Cide
Code statute of frauds, as illustrated
illustrated by D &
Code
parties conceded
conceded that the Code
Code governs
International, Inc.,14
Inc. ,14 in which the parties
International,
enforcement of distributorship
distributorship contracts.
contracts. Despite this
this agreement
agreement on the
the
enforcement
of
application of the Code, however,
however, the plaintiff
plaintiff still faced the difficulty of
application
the requirements
requirements of the
the Code. The
The plaintiff
plaintiff
producing a writing that
that met the
producing
had agreed
agreed on the
the
argued that during an exchange
exchange of emails, the
the parties had
argued
agreement for the distribution of a product used
used in meat
meat
terms of
of an agreement
terms
defendant moved
moved to dismiss the claim
claim on the
the ground that
processing. The defendant
alleged agreement
agreement had never been reduced to writing. While the fedthe alleged
eral district
district court for the Northern
Northern District of Texas was willing to coneral
statute of frauds, the
sider the emails as a writing that might satisfy the statute
attached the
plaintiff hit a procedural
procedural stumbling block
block because
because it had not attached
emails to its pleading. The court, therefore,
therefore, denied the motion to dismiss
but required
required the plaintiff to amend its petition
petition to inprejudice but
without prejudice
em ails and
and allege facts to support
support its additional
additional claim that the
clude the emails
agreement
defendant had breached
breached a fiduciary duty by failing to put the agreement
defendant
into a formal writing.'
writing. 1s5
B.
DISCLAIMER
WARRANTIES
DISCLAIMER OF WARRANTIES
Chapter 2 of the Code includes provisions dealing with three different
warranties of quality: (1) express warranties
warranties created
created by affirmations of
warranties
(2) implied
implied warfact, descriptions, or the display of samples or models; (2)
ranties of merchantability;
merchantability; and (3)
(3) implied warranties of fitness for a pardisclaimer of an
law.1166 The disclaimer
ticular purpose created by operation of law.
inconsistent
express warranty is ineffective
ineffective to the extent the disclaimer is inconsistent
implied
with words or conduct creating the warrantyP
warranty.' 7 Disclaimers of implied
warranties must be conspicuous, and, in the case of the implied warranty
of merchantability, the disclaimer
disclaimer must mention merchantability
merchantability specifically.IS
disclaimed by using terms such as
cally.' 8 Implied warranties can also be disclaimed
10. [d.
of
ANN. §§ 2.201 (Vernon 2009) (statute of
CODE ANN.
& COM. CODE
Id. at 787-88. See TEX. Bus. &
frauds governing
.
governing the sale of goods).
11.
11. 38 S.W.3d
S.W.3d at 787-88.
12. 229 S.W.3d 813 (Tex. App--Fort
App.-Fort Worth 2007, pet. denied).
13. [d.
Id. at 818.
14. No. 3:08-CV-0670-L,
(N.D. Tex. Jan. 14, 2009).
3:08-CV-0670-L, 2009 WL 102732, at *3 (N.D.
15. [d.
Id. at *5.
id.
warranties); id.
16. See TEX. Bus. &
(Vernon 2009) (express warranties);
ANN. §§ 2.313 (Vernon
& COM. CODE ANN.
§§ 2.314 (warranty of merchantability);
id. §§ 2.315 (warranty of fitness for a particular purmerchantability); id.
operation of law under the
warranty of good title is also created
created by operation
pose). An implied warranty
quality of
dealing with the quality
Texas Business and Commerce
Commerce Code, but this is not a warranty dealing
the goods. See id.
id. §§2-312 (Vernon 2009).
17. [d.
Id. §§ 2.316(a).
18. [d.
2.316(b).
Id. §§ 2.316(b).
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9 An
"as is"
is" or
or "with
"with all
all faults."'
faults."19
An effective
effective disclaimer
disclaimer can
can be
be used
used not
not only
only
"as
for
bar
claims
but
to
Code,
to
exclude
warranty
claims
brought
under
the
Code,
but
to
bar
claims
for
the
under
to exclude warranty claims brought
the
Decepunder
brought
negligent
misrepresentation,
fraud,
and
claims
brought
under
the
Decepnegligent misrepresentation, fraud, and claims
20 This
This point
point is nicely
nicely illustrated
illustrated
tive Trade
Trade Practice
Practice Act
Act (DTPA)
(DTPA) as
as well.
well.20
tive
the
where
Corp.,21
BASF
Thermacor
Process,
L.P.
v.
BASF
Corp.,2!
where
by
the
decision
in
by the decision in Thermacor Process, L.P.
purchaser of
of spray
spray foam
foam sued
sued the seller
seller for negligent
negligent misrepresentation,
misrepresentation,
purchaser
The federal
federal Fifth
Fifth
fraudulent inducement,
inducement, and
and violations
violations of the DTPA. The
fraudulent
Appeals held
held that
that a disclaimer
disclaimer printed
printed in
in capital
capital letters
letters
Circuit Court
Court of Appeals
Circuit
contained in the
the seller's
seller's "terms
"terms and
and conditions"
conditions" accompanying
accompanying each
each
and contained
other
order of the
the product
product in question,
question, as
as well
well as
as in sales
sales orders
orders for other
sales order
products sold
sold to
to the buyer
buyer over
over a period
period of years, was
was effective
effective to bar
bar all
products
22
22
between
the buyer's
buyer's claims.
claims. Based
Based on
on aa long-standing
long-standing relationship
relationship between
of the
the terms
terms and conditions,
conditions, the
the
sophisticated parties
parties who
who were
were aware
aware of the
sophisticated
"terms and conditions"
should not be
be
reason why the "terms
conditions" should
court found no reason
23
effect.23
given effect.
C.
DEMANDS FOR ASSURANCE
ASSURANCE AND
AND SUSPENSION
SUSPENSION OF
OF PERFORMANCE
PERFORMANCE
DEMANDS
general law
law of contracts, if one
one party to
to a contract
contract has reaUnder the general
sonable doubts about whether
whether the other
other party has been or will be perparty with
with doubts runs the risk of itself breaching the
forming, the party
24
contract if it acts too soon in declaring
declaring the other party to be in breach.
breach.24
contract
include the innovative
innovative concept of
of
This risk led the drafters of the Code to include
allowing a party to demand
demand a reasonable
performance if
assurance of performance
reasonable assurance
there are "reasonable
"reasonable grounds for insecurity"
insecurity" about the other party's willrequesting assurance
assurance
ingness to perform. 25 Pending a response, the party requesting
is entitled
entitled to suspend its own performance
performance under the contract, thereby
ameliorating
ameliorating the difficulty of making what might be viewed in hindsight
as a precipitous decision that did not justify a suspension of performwarranties may be dis19. Id.
2.316(c). This section also provides that the implied warranties
Id. §§ 2.316(c).
discovered any defects or
claimed when the buyer has examined the goods and should have discovered
when the course of dealing, course of performance, or usage of trade would exclude these
warranties. See id.
id.
20. Claims for negligent
negligent misrepresentation
misrepresentation and fraud are, of course, common law
Comthe Texas Business and Comarise under the
claims. Deceptive
Trade Practice Act claims arise
Deceptive Trade
merce Code. TEX. Bus.
(Vernon 2002).
17.41-.63 (Vernon
ANN. §§ 17.41-.63
CODE ANN.
& COM. CODE
Bus. &
21.
567 F.3d 736 (5th Cir. 2009).
21. 567
156,
S.W.2d 156,
22. Id.
v. Jefferson Assocs., 896 S.W.2d
Id. at 743 (citing Prudential Ins. Co. of Am. v.
161
fraud and DTPA claims); Coastal Bank SSB v.
effective to bar fraud
1995) (disclaimer effective
161 (Tex. 1995)
App.-Houston [1st Dist.] 2004,
Chase Bank of Tex., N.A.,
843-44 (Tex. App.-Houston
135 S.W.3d 840, 843-44
N.A., 135
the conmisrepresentation claim)). As to the
no
negligent misrepresentation
pet.) (disclaimer effective to bar negligent
no pet.)
met the
capital letters met
spicuousness
of bold, capital
spicuousness of the disclaimer, the court held that the use of
See
Code. See
Texas Business and Commerce Code.
requirements
in the Texas
stated in
requirements for conspicuousness stated
2009).
TEX. Bus. && COM.
(Vernon 2009).
1.201(b)(10) (Vernon
ANN. §§ 1.201(b)(1O)
CODE ANN.
COM. CODE
23. 567 F.3d at 743.
breach"
"total breach"
committed a "total
party has committed
other party
24. The difficulty
determining ifif the other
lies in determining
difficulty lies
justifying the
in refusing
refusing to perform its own obligations under the
the non-breaching party in
not
does not
which does
breach," which
contract
committed only a "partial breach,"
has committed
party has
other party
whether the other
or whether
contract or
OF
(SECOND) OF
RESTATEMENT (SECOND)
See RESTATEMENT
allow
party to refuse performance. See
non-breaching party
the non-breaching
allow the
CONTRACTS
(1981).
§H 242-43 (1981).
CONTRACTs §§
2009).
25.
2.609(a) (Vernon 2009).
ANN. §§ 2.609(a)
COM. CODE
CODE ANN.
See TEX. Bus. && COM.
25. See
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26 The
ance,26
The concept
concept proved
proved useful
useful enough
enough to be
be included
included in
in the
the RestateRestateance.
of
all
contracts
ment
(Second)
of
Contracts
as
a
device
applicable
to
contracts
of
all types
types
device applicable to
ment (Second) of Contracts
27
27
on
the
variation
and
not
limited
to
the
sale
of
goods.
An
interesting
variation
on
the
and not limited to the sale of goods. An interesting
of
demanding
assurance
of
performance
arose
in
Flint
idea
ReHills
in
Flint
idea of demanding assurance of performance arose
LP v. JAG
JAG Energy Inc.
Inc.,2s
in which
which aa contract
contract allowed
allowed aa buyer
buyer of
of
sources LP
,28 in
the
condennatural
gas
condensate
to
request
evidence
of
clear
the
condenfor
title
of
clear
natural gas condensate to request evidence
sate from
from the seller. The
The contract
contract also
also provided
provided that
that a failure
failure of
of the
the seller
seller
sate
to respond
respond to
to such a request
request allowed
allowed the
the buyer
buyer to
to withhold
withhold payments
payments and,
and,
ultimately, to cancel
cancel the contract.
contract. When
When the buyer
buyer learned
learned that
that some
some
Mexican oil companies
companies were
were selling
selling stolen
stolen condensate
condensate in the
the United
United
Mexican
ifif it
States,
the
buyer
became
concerned
about
potential
criminal
liability
liability
criminal
States, the buyer became concerned about potential
as
identified
purchased
stolen
condensate
even
though
its
seller
identified
was
not
its
seller
though
purchased stolen condensate
one that
that might
might be engaged
engaged in such
such activity.
activity. To
To clarify
clarify its position, the
the
buyer asked
asked the seller to
to provide
provide evidence
evidence of
of title. Although
Although the
the seller
seller
initially promised to provide
provide documents
documents showing
showing its right
right to sell
sell the condensate, such documents
documents were never provided, and the buyer
buyer cancelled
cancelled
the contract. Based on the contract
contract terms, the
the federal
federal Fifth
Fifth Circuit Court
Court
of Appeals
Appeals held
held that it did not
not need to reach the issue
issue of whether
whether the
under the
buyer's request
request and cancellation
were commercially
commercially reasonable
reasonable under
cancellation were
buyer's
buyer
Code, because
because the contract itself had
had the effect
effect of granting
granting the buyer
29
these rights if the seller failed to respond to a request for information.
information.29
The district
district court
court had found the buyer's
buyer's request
request for information and susunreasonable
pension
of
performance
commercially
unreasonable under the Code
be
commercially
to
pension performance
and
had
granted
summary
judgment
for
the
seller. The Fifth Circuit,
Circuit,
and
granted summary judgment
relieved the buyer from the need
however, ruled that the contract terms relieved
to prove the commercial
reasonableness of its actions. It reversed the
commercial reasonableness
summary judgment for the
judgment in favor of the seller and rendered summary
3 0 In effect, this ruling gives a contracting party a way to avoid
buyer.30
buyer.
assurance and possible susfactual disputes about whether a demand for assurance
pension of performance or cancellation is reasonably justified by contractually expanding
expanding the party's rights beyond those provided by the Code.
D.
ACTIONS
BREACH OF CONTRACT
ACTIONS FOR BREACH
The title of section 2.709, "Action
"Action for the Price," sounds like it gives
the seller a universal remedy-if the buyer breaches, sue for the price.
Unfortunately, the title is misleading in its simplicity. Actions for the
price are, in fact, quite limited and available to the seller in only two
circumstances:
(1) if the goods have been accepted or if conforming
circumstances: (1)
26.
26. See
See id.
id.
Robertgenerally R.J. RobertSee generally
(1981). See
27.
OF CONTRACTS
CONTRACTS §§ 251 (1981).
(SECOND) OF
27. RESTATEMENT
RESTATEMENT (SECOND)
CommerUniform CommerPerformance:Uniform
Due Performance:
son, Jr., The
Assurance of Due
AdequateAssurance
DemandAdequate
to Demand
The Right
Right to
L.
Section 251, 38 DRAKE L.
ContractsSection
cial
(Second) of Contracts
Restatement (Second)
and Restatement
Section 2-609 and
Code Section
cial Code
and RestateUCC §§ 2.609 and
application of DCC
REV.
and application
history and
(discussing the history
(1988-89) (discussing
305 (1988-89)
REV. 305
ment
ment §§ 251).
28.
(5th Cir.
Cir. 2009).
2009).
559 F.3d 373
373 (5th
28. 559
29.
at 376.
376.
29. [d.
Id. at
30.
Id.
30. [d.
HeinOnline -- 63 S.M.U. L. Rev. 429 2010
430
430
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[Vol.
goods have
have been
been lost
lost or
or damaged
damaged after
after the
the risk
risk of
of loss
loss has
has passed
passed to the
the
goods
and (2)
(2) ifif the
the goods
goods in
in the
the seller's
seller's possession
possession have
have been
been identified
identified
buyer, and
be resold,
resold, or
or the
the circumstances
circumstances indicate
indicate an
an
the contract
contract and
and cannot
cannot be
in the
effort to resell
resell them
them would
would be
be fruitless.
fruitless.331! In
In Nazareth
Nazareth International,
International, Inc.
Inc.
effort
J.e.
Co.,n aa clothing
clothing supplier
supplier sold goods to a department
department store
store
C. Penney Co.,32
v. J.
chain under
under the
the chain's
chain's standard
standard wholesale
wholesale contract.
contract. The
The contract
contract alchain
lowed the
the chain
chain to
to charge
charge back
back costs
costs incurred
incurred for inspection
inspection and distribulowed
tion ifif the supplier
supplier failed
failed to
to comply
comply with
with the
the terms
terms of
of the
the contract
contract and to
tion
deduct the
the charge-backs
charge-backs from the
the amounts
amounts owed
owed to the
the supplier. As
deduct
events unfolded,
unfolded, the charge-backs
charge-backs reached
reached a point
point where
where the supplier
supplier
events
owed more
more money
money to the chain
chain for charge-backs
charge-backs than
than the
the chain
chain owed
owed to
to
owed
the supplier for the
the goods.
goods. Following
Following a demand by
by the supplier
supplier for paythe
ment and
and the refusal of the chain
chain to
to do so, the supplier
supplier sued
sued on various
various
ment
including an action for the
the price.
price. The
The Dallas
Dallas Court of Appeals
theories, including
recognized that
that this was a proper
proper case
case for such aa claim,
claim, since
since goods had
had
recognized
been delivered
delivered to the
the buyer and payment
payment had not
not been
been made,
made, but the
been
the Code allows
allows a buyer to deduct
deduct
court also found that section
section 2.717 of the
damages from the price for any breach
breach resulting
resulting from a seller's
seller's breach.3333
damages
Based on the contract
contract terms and the evidence produced
produced at trial, the court
court
could find an action for the price
price would not stand where
where
held that a jury could
exceeded the amount demanded
demanded by the supcharge-backs exceeded
the right to charge-backs
34 The supplier's other claims for usury, fraud, and negligent
negligent misplier. 34
representation were also without merit, because
because a jury could
could reasonably
reasonably
representation
decide that dealings
dealings between
between the parties
parties showed
showed that the supplier
supplier underdecide
stood the terms of the wholesale contract and was not misled by conversations and correspondence
correspondence about how charge-backs
charge-backs were determined.3355
36
a
Logistics, LLC,
Target Logistics,
In Global
Integrated Building
LLC,36
Building Systems v. Target
Global Integrated
manufacturer of prefabricated
contracted with a buyer to manuprefabricated buildings contracted
manufacturer
facture forty-four housing units to be resold by the buyer to a university
for temporary student housing. After ten units had been delivered to the
university, they were found to be substantially defective, so the buyer
notified the manufacturer
manufacturer to cease production. Following discussions between the manufacturer, the buyer, and the university, production
production resumed and twenty-eight
twenty-eight additional units were delivered in installments.
The buyer declined to pay for the last four of these units because of costs
incurred by the buyer in correcting defects. The manufacturer delivered
the remaining six units to its secured creditor who resold them to a third
are posited
situations are
31. TEX. Bus. &
2.709 (Vernon 2009). Both situations
COM. CODE
CODE ANN. §§ 2.709
& COM.
of the
out of
goods are out
and the goods
on
completed performance and
has completed
the seller has
theory that the
on the theory
effectively
buyer that the seller is effectively
seller's control or have such
any other buyer
such limited utility to any
has breached the
exist, and
and the buyer has
these situations exist,
"stuck"
If neither of these
"stuck" with them. If
damages
for damages
are to
to sue for
seller are
contract
remedies for a seller
common remedies
more common
the more
contract before delivery, the
id. §§
§§ 2.706,
2.706, 2.708.
under section 2.708
goods under section 2.706. See id.
or resell the goods
2.708 or
32. 287 S.W.3d 452 (Tex. App.-Dallas 2009,
denied).
2009, pet. denied).
33. Id.
Id. at 458.
34.
458-59.
Id. at 458-59.
34. Id.
35. Id.
Id. at 459-61.
3, 2009).
2009).
Feb. 3,
(S.D. Tex. Feb.
36.
H-06-2637, 2009 WL 259360 (S.D.
36. No. H-06-2637,
HeinOnline -- 63 S.M.U. L. Rev. 430 2010
2010]
2010]
Commercial Transactions
Transactions
Commercial
431
431
The manufacturer
manufacturer sued
sued the
the buyer,
buyer, the
the university,
university, and
and others
others for
for
party. The
37 As
As part
part of
of its
its claim
claim against
against the
the buyer,
buyer, the
fraud and
and breach
breach of
of contract.
contract.37
fraud
manufacturer sought
sought recovery
recovery of
of consequential
consequential damages
damages resulting
resulting from
manufacturer
lost profits
profits anticipated
anticipated from
from contracts
contracts with
with third
third parties,
parties, start-up
start-up
future lost
to manufacture
manufacture the
the units,
units, and
and damages
damages suffered
suffered by
by the
costs incurred
incurred to
costs
The
manufacturer in
in lawsuits
lawsuits brought
brought against
against itit by
by its
its own
own suppliers.
suppliers.38 The
manufacturer
federal district
district court
court for the Southern
Southern District
District of
of Texas
Texas correctly
correctly pointed
pointed
federal
not provide
provide for the
the recovery
recovery of
of consequential
consequential
out that
that the
the Code
Code "does
"does not
out
9 As
As a result,
result, the
the
damages by a seller"
seller" and limits
limits this remedy
remedy to buyers.
buyers.339
damages
4o The court also
summary judgment. 40
also determined
determined
buyer was entitled
entitled to summary
buyer
that the
the manufacturer
manufacturer failed to show the
the necessary
necessary elements
elements to
to support
support its
that
to the buyer
buyer on
on these
fraud claims,
claims, and
and summary
summary judgment
judgment was
was granted
granted to
fraud
Other issues
issues associated
associated with
with the breach
breach of contract
contract
claims as well. 4411 Other
claims
claims and
and counterclaims
counterclaims between
between the manufacturer,
manufacturer, the
the buyer, and
and the
the
claims
tria1. 42
university were
were reserved
reserved for trial.42
university
Under section
section 2.305
2.305 of the Code, the parties
parties can
can agree
agree to an open-price
open-price
Under
of providing
providing for a coneither party
party to set the
the price
price instead
instead of
term allowing either
Such an arrangement
arrangement is useful
useful when a contract is
tractually fixed price.4
price. 433 Such
tractually
expected
to extend over
over a period of time during
during which market
market prices
prices are expected
difficulty with such an arrangement,
arrangement, however,
to fluctuate. One obvious difficulty
abuse that right by
by
is that the party with the right to set the price may abuse'
abuse, the Code
Code
setting a price that is too high or too low. To avoid such abuse,
specifies that the price be one that is set "in
"in good faith."44 "Good
"Good faith"
specifies
observance of reasonable
is defined to mean
mean "honesty
reasonable
"honesty in fact and the observance
commercial standards."4
standards."455 In Exxon Mobil Corp.
Corp. v. Gill,46
Gill,46 the Texas Sucommercial
breached its duty of
preme Court considered
considered whether an oil company had breached
Gill, the oil company had
station dealers. In Gill,
good faith to its service station
disclose that the prices it set for gasoline sold to the dealers from
failed to disclose
recoupment of rebates to dealers
time to time allowed for the company's recoupment
specified
specified hours and for selling specified
for keeping stations open for specified
amounts of gasoline. Determination
Determination of this issue was critical because the
certification of
suit was brought by a state-wide group of dealers seeking certification
claims as a class action. The dealers specifically limited their claims to
breach of contract instead of alleging fraud because it was clear that fraud
would require individual proof of reliance on the oil company's represen47
action.47
tation, and the need for individual proof would preclude a class action.
37.
38.
39.
39.
[d.
*3.
Id. at
at *3.
[d.
at *10.
Id. at
[d.
616 F.2d 212, 216 (5th Cir.
Koppers Co., 616
U.S.A., Inc. v. Koppers
Chem., U.S.A.,
Id. (quoting
(quoting Nobs Chern.,
1980».
1980)).
40.
Id.
40. [d.
41.
Id. at *9.
41. [d.
42.
*11.
Id. at
at *11.
42. [d.
43.
ANN. §§ 2.305(b) (Vernon 2009).
CODE ANN.
COM. CODE
Bus. && COM.
43. TEX.
TEX. Bus.
44.
Id.
44. [d.
45.
1201(b)(20).
45. [d.
Id. §§ 1201(b)(20).
46.
2009).
(Tex. 2009).
124 (Tex.
S.W.3d 124
46. 299
299 S.W.3d
Inc. v.v.
Schein, Inc.
Henry Schein,
in Henry
47.
had been established previously in
at 127.
127. This point had
47. [d.
Id. at
Stromboe.
686 (Tex.
(Tex. 2002).
675, 686
Stromboe. 102 S.W.3d 675,
HeinOnline -- 63 S.M.U. L. Rev. 431 2010
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SMU LAW
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48 the suReferring to its
its earlier
earlier decision
decision in
in Shell Oil Co.
Co. v.v. HRN,
HRN, Inc.,
Inc.,48
the
Referring
to disclose
disclose the
the recoupment
recoupment of
of rebates
rebates as
as a
preme court
court held
held that
that failure
failure to
preme
not violate
violate the
the good-faith
good-faith standard
standard where
where the
the
factor in
in setting
setting prices
prices did
did not
factor
seller
dealers made
made no
no claim
claim that
that anything
anything in
in the contracts
contracts prohibited
prohibited the seller
dealers
considering rebate
rebate costs
costs when
when setting
setting a price
price and
and made
made no claim
claim
from considering
case was
was rethat the prices
prices were
were commercially
commercially unreasonable.
unreasonable.4499 The case
that
of whether
whether the
the dealers'
dealers' claims
claims met
met the
the reremanded for
for reconsideration
reconsideration of
manded
50
quirements for class
class certification.
certification.50
quirements
,' a
Midstream Services,
Services, L.P.
L.P. v. Apache
Apache Corp.
Corp.,51
a producer
producer of
of
In Dynegy Midstream
natural gas
gas sued
sued the
the buyer
buyer for an alleged
alleged failure
failure to pay for
for gas delivered
delivered
natural
to the
the buyer at
at the buyer's
buyer's processing
processing plant. The issue
issue centered
centered on
on the
to
term requiring
requiring the
the buyer
buyer to
to pay
pay the
the seller
seller
interpretation of
of aa contract
contract term
interpretation
based on
on a percentage
percentage of gas
gas sold
sold by
by the
the buyer
buyer to third
third parties. Under
Under
based
the system used for delivery, the amount
amount of gas was measured
measured at the
the
seller's wellhead
wellhead and
and at the "tailgate"
located at the buyer's plant. The
"tailgate" located
seller's
quantity produced
produced at the
the wellwelldelivered quantity was
was always less
less that the quantity
delivered
head because
because of
of leakage
leakage during pipeline transmission, use of some gas as
head
operate pumping
pumping through
through the pipeline, gas
gas lost during repairs,
repairs, and
and
fuel to operate
the like. Both
Both parties agreed
agreed that the buyer was not required to pay for
wellhead and
and that decreases
decreases in the
the amount of gas produced at the wellhead
tailgate were at the seller's risk. They
amount of gas delivered
delivered at the tailgate
disagreed, however,
however, about whether
whether the buyer
buyer was liable for "unac"unacof
measured by the difference
difference between
between the amount of
counted-for"
counted-for" gas as measured
gas delivered
delivered at the tailgate and the amount
amount of gas sold by the buyer
buyer to
third parties. The Texas Supreme Court held that the contract terms repercentage of the sales made by the buyer
quiring payment
payment based on a percentage
unambiguously
placed the risk of loss for unaccounted-for
unaccounted-for gas on the
unambiguously placed
S.W.3d 429 (Tex. 2004). In HRN,
HRN, the Texas Supreme
Supreme Court
Court held that the duty
48. 144 S.W.3d
of good faith was not violated when an oil company allegedly set prices with the intent to
force independent
profitable
independent dealers out of business so they could be replaced with more profitable
conclusion, the court reasoned
company-owned
Id. at 430-31. In reaching this conclusion,
company-owned stations. ld.
that a good faith violation of section 2.305 would occur if a seller set discriminatory
discriminatory prices
allowing some dealers to purchase gasoline at a lower price while demanding that other
Id. at
dealers pay a higher price, but not where the same price was charged to all dealers. ld.
437-38.
49.
that comment 3 of
noted that
supreme court noted
HRN, the supreme
Citing HRN,
S.W.3d at 128. Citing
49. Gill,
Gill, 299 S.W.3d
standard as one
good faith standard
section 2.305
Code describes
describes the good
2.305 of the Business and Commerce Code
that
that creates
creates aa safe harbor for the party setting the price by allowing that party to use aa
HRN, the court
court described the purpose
from HRN,
"posted price" as the price charged. Quoting from
"posted
of comment
comment 3 as a means
prices under open-price-term
setting of prices
to minimize
minimize judicial intrusion into the setting
price could be
contracts
drafters reasonably foresaw that almost any price
. . The drafters
contracts......
attacked unless
from aa strong presumption. Thus, they adopted
unless it benefitted from
the practo preserve the
a safe harbor, Comment
posted price presumption, to
Comment 3's posted
discriminatory
tice
while seeking to avoid discriminatory
standard prices while
using sellers'
sellers' standard
tice of
of using
prices.
good faith requirement had to be measured
[d.
the good
that the
The court also noted that
127-28. The
Id. at 127-28.
in every
every
seller in
having a jury decide ifif a seller
to avoid having
objectively
than subjectively to
objectively rather than
fell
the price
price ultimately set fell
even ifif the
motive even
§§ 2.305(b)
with an improper motive
acted with
case had acted
2.305(b) case
within
Id. at 128.
128.
prices. [d.
reasonable prices.
range of
of commercially reasonable
within the range
50.
50. [d.
Id. at
at 129.
129.
51. 294 S.W.3d
S.W.3d 164
164 (Tex. 2009).
2009).
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2010]
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433
seller rather
rather than
than the
the buyer,
buyer, even
even ifif the decrease
decrease in
in quantity
quantity occurred
occurred
seller
52
52
after
delivery
at
the
buyer's
tailgate.
tailgate.
buyer's
at
the
after delivery
E.
E.
REMEDIES AND
AND EXCUSED
EXCUSED PERFORMANCE
PERFORMANCE
REMEDIES
5 3 addressed
Virginia Power
Power Energy Marketing,
Marketing, Inc.
Inc. v.
v. Apache
Apache Corp.
Corp.53
addressed apVirginia
plication of the
the force
force majeure doctrine
doctrine where
where the
the seller
seller failed
failed to
to deliver
deliver
plication
Rita.
and
gas
because
of
interruptions
caused
by
Hurricanes
Katrina
and
Rita.
Katrina
Hurricanes
by
caused
interruptions
of
because
gas
When the buyer
buyer discovered
discovered that gas it purchased
purchased in the
the spot
spot market
market to
to
When
its
deducted
the
buyer
cover
shortfall
in
deliveries
seiler,
buyer
deducted
its
seller,
from
came
in
deliveries
a
shortfall
cover
alleged damages
damages from the amount
amount it paid
paid to the seller
seller for deliveries
deliveries that
that
alleged
been made
made under
under their
their contract,
contract, and
and the seller
seller sued
sued to
to recover
recover the
had been
54 The trial
amount deducted. 54
court accepted
accepted the seller's
seller's force
force majeure
The trial court
amount
The buyer
buyer
excuse and
and granted
granted summary
summary judgment
judgment in favor of the seller. The
excuse
appealed on two
two grounds:
grounds: first, that the seller was required
required to use reasonappealed
avoid the disruption
disruption of deliveries
delivery at an
an
deliveries by making delivery
able efforts to avoid
alternate delivery
delivery point;
point; and second,
second, that
that there was a genuine
genuine issue of
of
alternate
material fact about whether
had an adequate
adequate supply
supply of gas
gas to
to
whether the seller had
material
meet the buyer's
buyer's needs.
needs.
meet
on
The Houston Fourteenth
agreed with the seller
seller on
Fourteenth Court of Appeals agreed
The
55 The purchase
locatwo
at
delivery
the first issue.55
contract
provided
for
delivery
provided
purchase contract
tions. Location 1 was damaged
damaged by the hurricanes. Location
Location 22 was undamaged. Although the seller could have delivered
the
delivered at either location, the
specific
required
expressly
court
held
that
because
the
contract
expressly
required
a
terms
because
court
majeure
amount of gas to be delivered
delivered at a specific location, the force
force majeure
clause would be rendered meaningless if the seller had to deliver more
gas to the undamaged Location 2 than called
called for under the contract.5566
issue.5 7
Summary judgment
judgment in favor of the seller was affirmed
affirmed on this issue.57
On the second issue, the court had a different view. At Location
Location 2, the
dekatherms of gas to be
seller was required to deliver a total of 1,550,000
1,550,000 dekatherms
divided equally between
between five different buyers, including the defendant,
52. [d.
Id. at 169,
169. The court noted there was no claim that the buyer had converted any
evidence
gas and sold it to third parties without accounting for it. There was simply no evidence
amount delivered at the
the
about why
why the
the amount of gas sold by the buyer was less than the amount
tailgate,
Id.
tailgate. [d.
53. 297 S,W.3d
denied).
Dist.] 2009, pet. denied),
(Tex. App.-Houston [14th Dist.]
S.W.3d 397 (Tex,
than a little irritated
54. One can understand that the buyer may have been more than
when its seller,
our contract because of
you under
under our
effect, said, "I can't deliver gas to you
seller, in effect,
price-buy it there if
market at a higher price-buy
hurricanes,
hurricanes, but II can sell the same gas in the spot market
you want it."
amounts owed to a seller is
from amounts
it." The right of a buyer to deduct damages from
provided
2009).
2.717 (Vernon 2009),
ANN. §§ 2,717
& COM. CODE ANN.
Bus. &
See TEX,
TEX. Bus,
2.717. See
provided in section 2,717.
55. Apache Corp"
S.W.3d at 40l.
401.
Corp., 297 S.W,3d
for substituted perform56. [d.
that while
while the Code provides for
Id. at
at 403-05. The court held that
provision is a
ance
in section 2.614, this provision
alternate delivery method or location in
of an alternate
ance by use of
and the parties
parties had done just
of the parties,
parties, and
by agreement of
"gap-filler"
"gap-filler" that can be varied by
2.614 (Vernon
that under
ANN. §§ 2,614
& COM. CODE
CODE ANN.
TEX. Bus. &
contract. See TEX.
purchase contract.
under the purchase
J.
JAMES J.
Code. See JAMES
2009),
the Code,
Chapter 22 of the
in Chapter
are numerous
numerous gap-filler provisions in
There are
2009). There
TREAWHITE
PRACTITIONER TREA·
CODE: PRACTITIONER
COMMERCIAL CODE:
UNIFORM COMMERCIAL
SUMMERS, 11 UNIFORM
& ROBERT
ROBERT S. SUMMERS,
WHITE &
135 n.62,
n.62.
id. at
at 135
See id.
them. See
TISE
listed among
among them,
1995). Section
Section 2.614 isis listed
ed. 1995).
(4th ed.
125-35 (4th
TISE SERIES
SERIES 125-35
57.
409.
at 409,
297 S.W.3d
S.W.3d at
Corp., 297
57. Apache Corp.,
HeinOnline -- 63 S.M.U. L. Rev. 433 2010
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58 After
equating to
to 310,000
310,000 dekatherms
dekatherms to
to each
each buyer.
buyer.58
After the
the hurricanes,
hurricanes,
equating
more gas
gas to
to Location
Location 22 than
than called
called for by
by the
the
the seller
seller actually
actually delivered
delivered more
the
In
contracts and
and did
did not divide
divide the
the output
output equally
equally among
among the
the buyers.
buyers. In
five contracts
one buyer
buyer received
received more
more than
than three
three times
times the
the amount
amount required
required
fact, one
559,111 dekatherms
dekatherms to
to be
be divided
divided among
among
under its contract,
contract, leaving
leaving only
only 559,111
under
than
more
to
supply
able
the
seller
was
able
supply
more
than
the
other
Because
was
the
seller
Because
buyers.
four
the other
issue
of
2,
an
2,
an
issue
of
enough
gas
to
satisfy
its
contract
requirements
Location
at
Location
requirements
contract
its
enough gas to satisfy
to
reduce
used
material
fact
existed
about
why
the
additional
gas
was
not
used
to
reduce
was
not
gas
additional
why
the
about
existed
material
the defendant
defendant buyer
buyer caused
caused by
by the
the damage
damage at
at
the shortfall
shortfall in
in deliveries
deliveries to the
the
59
59
the
buyers.
among
equally
Location
1
and
why
the
gas
was
not
equally
among
buyers.
not
divided
was
gas
Location and why
issue,
and
this
Summary
judgment
in
favor
of
the
seller
was
reversed
on
on
this
issue,
and
reversed
was
the
seller
Summary judgment
force
the case was remanded
remanded for reconsideration
reconsideration of
of whether
whether the
the asserted
asserted force
majeure excused
excused the seller
seller from performing
performing at
at Location
Location 2.60
Stevenson, LLC
LLC v. Galveston
Galveston Party
Party Boats,
Boats, Inc.,61 a buyer
buyer
In Stewart & Stevenson,
part
purchased six marine
marine engines from a seller. The sale was financed
financed in part
purchased
Commission on Environmental
Environmental Quality
by aa state grant from the Texas Commission
program designed
designed to encourage
encourage businesses to use low(TCEQ) through a program
emission diesel
diesel engines. The contract
contract between
between the
the buyer,
buyer, the
the seller, and
emission
mention of arbitration. The engines were delivered
delivered
the TCEQ made no mention
the
consisting of two engines and the second of four
in two lots: the first consisting
instance, invoices were sent after the engines had been
been
engines. In each instance,
All of the invoices contained
contained an arbitration
shipped.62 All
arbitration provision.
The buyer began experiencing
problems with the engines
engines within a few
experiencing problems
weeks after
after installation.
installation. The
The seller
seller attempted
attempted to resolve the problems
under its warranty, but the attempts were unsuccessful. The buyer ultibreach of warranty, fraud, and
mately sued on several grounds, including breach
violations of the DTPA. The seller's motion
motion to compel arbitration was
denied by the trial court, and the seller appealed.6633 As a threshold matter, the Houston First Court of Appeals found that the arbitration
arbitration provision on the invoices, if effective, would require arbitration under the
64
Federal Arbitration Act. 64
As to the effectiveness
effectiveness of the provision, howbecame part of the conever, the court reasoned that the provision never became
tract between the parties, because (1)
(1) there was no reference to
was defined as one million British thermal
58.
"dekatherm" was
58. Under the contract, aa "dekatherm"
units.
Id. at
at 400 n.2.
units. !d.
59.
59. [d.
Id. at 408.
60.
60. [d.
Id. at 409.
App.-Houston
61. Nos. 0l-09-00030-CV,
01-09-00111-CV, 2009 WL 3673823 (Tex. App.-Houston
01-09-00030-CV, 0l-09-00l11-CV,
[1st Dist.] Nov. 5,
5, 2009, no pet.).
62. The
The opinion indicates that invoices were sent
sent a few days after
after each
each lot was
was shipped,
followed
approximately ten months after shipment and instaldated approximately
invoices dated
additional invoices
followed by additional
lation.
lation. See id.
id. at
at *2-3.
*2-3.
an order
order
appeal an
to appeal
1, 2009,
2009, the procedure to
63. The
September 1,
after September
court noted that after
The court
former
by the former
appeal and not by
interlocutory appeal
denying aa motion to
was by interlocutory
to compel arbitration was
the
appeal was filed before the
this appeal
procedure of requesting a writ of mandamus. Because this
interlocutory
effective
the court
court held that it lacked jurisdiction over an interlocutory
change, the
the change,
effective date of the
at *6
*6
Id. at
of mandamus.
mandamus. [d.
writ of
for a writ
appeal and reviewed
seller's petition for
reviewed the case on the seller's
nn.5-6.
nn.5-6.
64.
§§ 1-16
1-16 (2000).
(2000).
*5; see
see 9 U.S.c.
U.S.C. §§
64. [d.
Id. at
at *5;
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435
435
arbitration in the
the original
original purchase
purchase contract,
contract, (2)
(2) there
there was no
no "meeting
"meeting of
of
arbitration
the minds"
minds" on
on the
the use
use of arbitration, (3) the contract
contract had
had not been
been effeceffecthe
tively modified,
modified, (4)
(4) the buyer's
buyer's acceptance
acceptance and
and use
use of
of the
the goods
goods was
was not
not
tively
sufficient to show an agreement
agreement to arbitrate,
arbitrate, and (5)
(5) the
the buyer
buyer had
had not
not
sufficient
ratified the use of arbitration
arbitration by
by any of its actions.6655 The seller's petition
petition
ratified
66
mandamus was
was denied.66
for a writ of mandamus
effectiveness of an
an arbitration
arbitration provision was also addressed
addressed in HarHarThe effectiveness
Blockbuster, Inc.,67 which was
was set against
against a novel
novel factual
factual backbackris v. Blockbuster,
become more
more common
common as technology
technology progresses.
progresses. In
In
ground that may become
Harris, a video provider
provider operated
operated a video rental service in association
association
Harris,
Facebook that allowed
allowed aa customer
customer to rent a movie
movie online.
online. The
The cuswith Facebook
tomer's movie choices
choices would
would then
then be
be disseminated
disseminated by the seller to the
tomer's
customer's friends through the customer's
customer's Facebook
Facebook account.
account. The plaincustomer's
Privacy Protection
Protection
sued for an alleged violation
violation of the federal Video Privacy
tiff sued
statute that prohibits a video provider
provider from disclosing information
information
Act, a statute
customer without having the customer's informed, written conabout a customer
68 The provider's website
disclosure. 68
website contained
contained the
sent at the time of the disclosure.
"Terms
including an arbitration proviConditions" governing rentals, including
"Terms and Conditions"
provision purporting to allow the provider
provider sole discretion to
to
sion and a provision
be
change the "Terms
Conditions" at any time. Any change was to be
"Terms and Conditions"
effective immediately
charged with the responsibilimmediately and the customer was charged
periodically review the "Terms
"Terms and Conditions"
Conditions" and to quit using
ity to periodically
the website if the customer
customer did not agree to any changes. The customer's
customer's
agreement
signified by
by clicking
clicking a box to complete
complete a so-called
so-called "click"clickagreement was signified
wrap" agreement. The customer argued that the ability of the provider to
wrap"
make unilateral changes to the contract terms, including the arbitration
arbitration
make
unconscionable.
provision, made the agreement to arbitrate illusory and unconscionable.
provision,
In its discussion, the federal district court for the Northern District of
of
69
Corp.69
Morrison v. Amway
Texas reviewed
reviewed the Fifth Circuit decision in Morrison
Amway Corp.
which was
and found that it involved a very similar arbitration clause, which
held illusory because the right to change the terms did not limit the effect
effect
change to subsequent dispute, but instead permitted
permitted change in
in
of such a change
70 Bemade.7°
Beterms to apply to disputes that arose before the change was made.
65. Galveston
Party Boats,
Boats, Inc., 2009 WL 3678323, at *7-12. An important element
element in
Galveston Party
the court's reasoning was that the original contract was silent on the subject of arbitration,
... served to put
and the court was unwilling to hold that a "post-contract
"post-contract course of dealing ...
... would subject it to
[the buyer] on notice that its acceptance of and payment
payment for goods ...
mandatory arbitration in the event of a dispute."
Id. at *11.
*11.
dispute." Id.
66. Id.
Id. at *13.
67. 622 F. Supp. 2d 396 (N.D.
(N.D. Tex. 2009).
68. See Video Privacy Protection Act, 18 U.S.C.
U.S.c. §§ 2710 (2000). The Act allows recovId.
ery of $2,500 in liquidated damages for each violation. Id.
69. 517 F.3d 248 (5th Cir. 2008).
70. Harris,
Harris,622 F.
F. Supp. 2d at 398. Permitting one party to a contract to unilaterally
change the terms applying to disputes arising both before and after a change
change is not only
change in the rules to
"changing
to
game," but also allowing a change
"changing the rules in the middle of the game,"
reminiscent
reverse the result of rules used to make decisions earlier in
in the game. This is reminiscent
of
S.W.2d
Zerniel. 880
880 S.W.2d
Nat'l Bank v. Zerniel.
in Mauriceville
Mauriceville Nat'l
"Razoo Rule"
Rule" noted by the court in
of the "Razoo
282
per curiam,
1995). As deS.W.2d 858 (Tex. 1995).
curiam, 892 S.W.2d
rev'd per
1995), rev'd
App.-Beaumont 1995),
282 (Tex. App.-Beaumont
keeps" and
scribed
scribed by the court, the Razoo Rule was one used in playing marbles "for keeps"
HeinOnline -- 63 S.M.U. L. Rev. 435 2010
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video provider
provider had
had unfettered
unfettered discretion
discretion to change
change the arbitraarbitracause the video
terms, the
the court
court found the relevant
relevant clause,
clause, like the clause
clause in
tion terms,
to be
be illusory and unenforceable.
unenforceable.771' Having
Having found the
the arbitraMorrison, to
held that
that it did
did not need
need to
to address
address the
the
tion provision illusory, the court held
72
unconscionability.72
issue of unconscionability.
73
Arbitration in In re Olshan
Olshan Foundation
Foundation Repair
Repair Co.
CO.73 focused on the
the
Arbitration
issue of whether proceedings
proceedings were
were to be
be conducted
conducted under
under the
the Federal
Federal
Arbitration Act (FAA)
(FAA) or under the Texas
Texas General
General Arbitration
Arbitration Act
Act
Arbitration
of
con(TGAA) when
when the owners
owners of a home
home sued the seller for breach
breach
(TGAA)
breach of warranty,
warranty, and violations
violations of the DTPA for failing to make
make
tract, breach
74 The
foundation repairs.
repairsJ4
The seller
seller filed a plea in abatement,
abatement, arguing that
that
foundation
the case was subject to arbitration
FAA. The
The homeowners
homeowners conconarbitration under the FAA.
the
tended that the TGAA
TGAA governed
governed their
their claims and, under
under that act, the
the
tended
arbitration clause
clause was
was void
void because
because their attorney
attorney did not sign
sign the agreearbitration
court denied the plea in abatement. The
ment. After a hearing, the trial court
sought a writ of mandamus
mandamus to require
require arbitration
arbitration under the FAA.
FAA.
seller sought
Court of Appeals held that the contract made an effective
effective
The Dallas Court
choice of Texas
Texas law
law and did not require
require language
language excluding
excluding application of
choice
federal law, noting that existing case law does not require
require "'magic'
"'magic'
the federal
language" to exclude the FAAJs
court was
FAA.75 The judgment of the trial court
language"
"triggered an unwritten legal
legal concept
concept known as 'absolute
'absolute and unquestioned
ownership' of
of
unquestioned ownership'
"triggered
all the
the marbles which could
could be grabbed
grabbed by any of the players. The fairness of the 'Razoo
'Razoo
players 'agreed'
'agreed' to the rule."
rule." Id. at 292.
Rule'
Rule' was derived from the fact that all players
71. Harris,
398-99. The court
court also noted that the Fifth Circuit in
Harris, 622 F. Supp. 2d at 398-99.
Texas Supreme
Supreme Court had
Morrison
distinguished In re
re Halliburton
Halliburton Co., in which the Texas
Morrison had distinguished
approved a contract
contract allowing
allowing a party to change
change an arbitration
arbitration clause because
because any changes
would not be effective
effective until ten days after notice
notice was given to the other party and would
not apply to disputes
disputes arising before
before a change
change was made. Morrison,
Morrison, 517 F.3d at 254-47; see
see
Halliburton Co., 80 S.W.3d
S.W.3d 566, 569-70 (Tex. 2002). This limitation on the ability to
In re Halliburton
significant difference between the arbitration
unilaterally change
change the terms was viewed
viewed as a significant
unilaterally
provisions in Harris
Halliburton. See Harris,
Harrisand Halliburton.
Harris,622 F. Supp. 2d at 398-99.
398-99.
Id. at 397.
72. Id.
73. 277 S.W.3d 124 (Tex. App.-Dallas, pet. denied).
§§ 1-16 (1999); Texas General
74. Id.
Id. at 127. See Federal Arbitration
Arbitration Act, 9 U.S.C.
V.S.c. §§
General
&
§§ 171.001 -.098 (Vernon
PRAC. &
& REM.
REM. CODE ANN. §§
(Vernon 2005 &
Arbitration Act, TEX. CIv. PRAC.
Arbitration
Home Solicitation Act, TEX. Bus. &
& COM.
COM. CODE ANN.
ANN. §§
§§ 39.001-.009
39.001-.009
Supp. 2009); Texas Home
(Vernon 2009). A violation of the Texas Home Solicitation Act is also a violation of the
(Vernon
DTPA. See id.
id. § 39.008(e).
75.
75. In re Olshan,
Oishan, 277 S.W.3d at 131. In reaching this conclusion, the court noted an
apparent disparity between
apparent
between two Fifth Circuit cases on the wording that must be used to
effectively choose the TGAA
Health Plans
Plans of
of
Ford v.
v. NYLCare
NYLCare Health
TGAA as the governing law. In Ford
the Gulf Coast,
Coast, Inc., the court upheld a clause that chose the TGAA as the governing law,
1998).
141 F.3d 243 (5th Cir. 1998).
application of the FAA. 141
but contained no language excluding application
Pers. of Tex., Inc., the court held
In Pedcor
Pedcor Mgmt.
Plan v. Nations
Nations Pers.
Inc. Welfare
Welfare Benefit Plan
Mgmt. Co., Inc.
In re L &
& L
that application of the FAA must be expressly excluded, basing its decision on In
V. Nations Pers. of Tex.,
Kempwood Assoc.
Benefit Plan v.
Assoc. Pedcor Mgmt. Co., Inc. Welfare Benefit
355, 361 (5th Cir. 2003); see In re L &
Inc., 343 F.3d 355,
& L Kempwood Assocs., 9 S.W.3d 125,
1999). The Dallas Court of Appeals in Olshan reasoned that the
127-28, 127 n.15 (Tex. 1999).
language used in the arbitration clause was adequate to meet the Kempwood test without
having to use any particular
particular phrase such as, "Arbitration under this contract
contract is governed by
is exapplication of the Federal Arbitration Act is
the Texas
Texas General Arbitration Act and application
cluded." See
at 132. Nonetheless, careful drafting would indicate that language
S.W.3d at
See 277 S.W.3d
Olshan.
of the kind illustrated by Olshan.
excluding
might avoid disputes of
excluding application of the FAA might
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Transactions
Commercial
437
437
766
upheld and
and the
the mandamus
mandamus petition
petition was
was denied.
denied.1
upheld
In aa pair
pair of
of cases
cases reported
reported during
during this
this Survey
Survey period,
period, the
the Texas
Texas SuIn
fees
preme
Court
addressed
the
right
of
parties
to
recover
attorney's
fees in
in
attorney's
to
recover
parties
right
of
the
addressed
Court
preme
Operatbreach
of
contract
cases.
In
MBM
Financial
Corp.
v.
Operatv.
Woodlands
Corp.
Financial
In
MBM
cases.
contract
breach
77 an
ing Co.,
Co., L.P.,
L.P.,77
an equipment
equipment lessee
lessee had
had rented
rented nineteen
nineteen copiers
copiers under
under a
ing
the
lease,
four-year
lease.
When
the
lessee
decided
to
renew
the
lease,
the leslesthe
to
renew
not
decided
lessee
the
When
four-year lease.
sor engaged
engaged in
in aa series
series of
of maneuvers
maneuvers to
to prevent
prevent the
the lessee
lessee from terminatterminating the lease
lease so
so the
the lessor
lessor could
could collect
collect rent
rent for an
an additional
additional year. The
The
ing
rechanging
lessor's
stalling
tactics
included
withholding
information,
changing
information,
withholding
included
lessor's stalling tactics
return
for
newal
in
leases,
and
refusing
designate
location
return
a
location
designate
to
refusing
leases,
and
in
the
dates
newal
of the copiers. Because
Because of
of the delay,
delay, the lessee
lessee sought
sought recovery
recovery for time
wasted in
in seeking
seeking the lessor's
lessor's cooperation
cooperation and for legal
legal costs
costs incurred
incurred in
wasted
the process. At
At trial, however, the lessee
lessee introduced
introduced no
no evidence
evidence placing
placing
lost time,
time, but the trial
trial court
court entered
entered judgment
judgment in favor of
a value on the lost
the lessee
lessee for nominal
nominal damages
damages of $1,000
$1,000 plus attorney's
attorney's fees of
$145,091.59.18 The Beaumont
Beaumont Court
Court of Appeals affirmed
affirmed the award
award of
of
$145,091.59.78
attorof
nominal
damages
but
remanded
recalculation
the
recalculation
for
the
case
remanded
but
damages
nominal
ney's fees.
fees.1799 On further appeal, in aa copiously
copiously footnoted opinion
opinion detailney's
nominal damages
damages in Texas and elsewhere,
elsewhere, the Texas
ing the history of nominal
Supreme Court ruled that an award of $1,000
$1,000 was not nominal, and given
given
produce any evidence
evidence about the value
value of the
the failure of the lessee to produce
80 The
time lost in dealing with the lessor,
lessor, the award
award had to be reversed.80
The
supreme court then turned to the issue of whether
whether attorney's
attorney's fees were
recoverable
absent proof
proof of damage. On
On this issue, the supreme
supreme court
recoverable absent
held that proof of some damage was required and that attorney's fees
could not be recovered
recovered on the basis of the lessor's bad-faith pre-litigation
declaratory relief for
conduct or by recasting
recasting the lessee's
lessee's claim as one for declaratory
the sole purpose of recovering
recovering attorney's fees. 881'
76. Id.
Id. As of September
of a motion
September 1, 2009, the proper procedure to challenge denial of
interlocutory appeal. See supra
to compel arbitration is by interlocutory
supra note 63. As to the grounds for
an appeal from an adverse arbitration decision, see infra
infra note 124.
77. 292 S.W.3d 660 (Tex. 2009).
78.
Id. at 663.
78. [d.
App.174, 184 (Tex. App.79.
79. MBM Fin. Corp. v. Woodlands Operating Co., 251 S.W.3d 174,
Beaumont 2008), rev'd,
rev'd, 292 S.W.3d 660 (Tex. 2009).
80.
Fin. Corp.,
Corp., 292 S.W.3d at 666. The court noted it had previously held that a
80. MBM Fin.
case would not be reversed and remanded simply to allow a party to recover nominal
(Tex.
damages. Id.
(citing Travelers Ins. Co. v. Employers Cas. Co., 380 S.W.2d 610, 614-15 (Tex.
Id. (citing
was not
held that it was
court held
1964)). Because the lessee's damage recovery was $0.00, the court
the
necessary to reach
of whether nominal damages alone would support the
question of
reach the question
award of attorney's
Id.
attorney's fees. Id.
pre-litigaon pre-litigafees based
based on
81.
at 670. The court reasoned that recovery of attorney's fees
Id. at
81. [d.
tion
the Texas
Texas Rules of Civil Procedure because
13 of the
tion bad faith was not allowed by rule 13
of attorney's
attorney's
award of
an award
such
667. As to an
Id. at 667.
recovery is posited on post-litigation conduct. /d.
such recovery
Act, allowing recovery of
fees under section
Judgments Act,
of the
the Texas Declaratory Judgments
37.004(b) of
section 37.004(b)
fee recovery prolimits on fee
attorney's fees in the context of this case
would frustrate the limits
case would
permitting a
Code by permitting
Remedies Code
vided
Practice and Remedies
Civil Practice
Texas Civil
the Texas
38.001 of the
in section 38.001
vided in
suit based on a matured
declaratory
onto aa standard suit
tacked onto
"merely tacked
to be "merely
declaratory judgment claim to
37.001-.011,
ANN. §§
§§ 37.001-.011,
CODE ANN.
REM. CODE
breach
CIV. PRAC. && REM.
see TEX. CIv.
at 670;
670; see
Id. at
contract." Id.
of contract."
breach of
38.001
(Vernon 2008).
38.001 (Vernon
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[Vol.
In the
the second
second case,
case, Intercontinental
Intercontinental Group Partnership
Partnership v.v. KB
KB Home
Home
In
Texas
the
MBM
Financial,
as
MBM
Financial,
the
Texas
Lone
Star
L.P.,
decided
on
the
same
day
L.P., decided on the same day as
Lone
alclause
a
contract
Supreme
Court
held
in
a
five-to-four
decision
that
a
contract
clause
ala five-to-four decision that
Supreme Court held
lowing recovery
recovery by
by the "prevailing
"prevailing party"
party" in
in litigation
litigation was
was also
also ineffective
ineffective
lowing
82 The
The supreme
supreme court
court reached
reached this
to permit
permit recovery
recovery of
of attorney's
attorney's fees.82
to
the term
term in
in the
the contract,
contract, a
result by
by reasoning
reasoning that, absent
absent aa definition
definition of the
result
"prevailing party"
party" must
must recover
recover something
something in
in the
the lawsuit.
lawsuit. In this case,
case,
"prevailing
but found
found $0.00
$0.00
the jury
jury found the defendant
defendant had
had breached
breached the contract
contract but
the
Because the
the contract
contract did not address whether
whether there would
would be
be
damages.8833 Because
breach without
without damages,
damages, the
the lower
lower
"prevailing party"
party" in the event of a breach
a "prevailing
court's award
award of attorney
attorney fees
fees was reversed
reversed and
and judgment
judgment rendered
rendered in
court's
Four justices
justices joined
joined in aa vigorous
vigorous dissent
dissent writwritfavor of
of the
the defendant.
defendant.84 Four
favor
Justice Brister, who
who had written
written the
the majority
majority opinion
opinion in MBM
MBM FiFiten by Justice
nancial. The dissent reasoned
reasoned that the
the contract terms
terms made it clear that
nancial.
either the plaintiff or the defendant. In
In
the "prevailing
"prevailing party"
party" could be either
the
view of the dissent, the critical
critical language
language in the contract
contract was that
that it
the view
allowed the recovery
recovery of fees by either
either party
party who prevailed
prevailed "in
"in an
an action
action
allowed
85 Because
Because the plaintiff
plaintiff obtained
obtained a jury de'to declare
declare rights hereunder."
hereunder.' "85
'to
termination that the defendant
defendant had breached
breached the contract, this made the
termination
86
plaintiff the "prevailing
party."86
"prevailing party."
plaintiff
applied
These two cases present
present an interesting
interesting study of legal reasoning applied
statutes and contracts. They
They are well worth
worth readinterpretation of statutes
to the interpretation
discussions, but for the light they cast
cast
ing, not only for their substantive discussions,
contract drafting and on the judicial
judicial process.
importance of contract
on the importance
III. NEGOTIABLE
NEGOTIABLE INSTRUMENTS
INSTRUMENTS
A.
LIABILITY OF PARTIES
Chapter 3 of the Code contains
contains an elaborate
provisions detailelaborate series of provisions
87
87 While most of
on
negotiable
instruments.
ing
the
liability
of
parties
ing the liability
82. 295 S.W.3d
S.W.3d 650, 652 (Tex. 2009).
83. Id.
Id.
84. Id.
Id. at 653, 662.
85. Id.
Id. at 662.
86. Id.
Id.
of
87. See,
ANN. §§ 3.412 (Vernon 2002) (Obligation of
CODE ANN.
& COM. CODE
See, e.g., TEX. Bus. &
(Obliid. §§ 3.414 (Obliof Acceptor); id.
Issuer of
id. §§ 3.413 (Obligation of
of Note or Cashier's Check); id.
gation
The official text of UCC Article 3
of Indorser). The
(Obligation of
id. §§ 3.415
3.415 (Obligation
of Drawer); id.
gation of
1995. See Act
in Texas in 1995.
was substantially revised in 1990,
1990, and this revision was adopted in
(codified at
of
Gen. Laws 4582 (codified
§§ 1-2,
1-2, 1995 Tex. Gen.
Leg., R.S., ch. 921, §§
1995, 74th Leg.,
of May 29, 1995,
sections in the earlier
the parallel sections
TEX.
revision, the
to the revision,
3). Prior
Prior to
CODE ch. 3).
CoM. CODE
& COM.
Bus. &
TEX. Bus.
of
"Contract of
Maker, Drawer, and Acceptor," "Contract
"Contractof Maker,
Article 3 were titled in the
the form,
form, "Contract
the
and the
Interdependence, and
Independence, Interdependence,
Indorser," etc. See Peter A. Alces,
Essay on Independence,
Alces, An Essay
added). The
(emphasis added).
(1993) (emphasis
447, 479
479 n.120 (1993)
Suretyship
REV. 447,
U. ILL. L. REV.
1993 U.
Principle, 1993
Suretyship Principle,
change
this change
of the
the reason for this
discussion of
but there isis no discussion
titles were
the revision, but
changed by the
were changed
Conference of Commissioners on Uniform
in the
the transcript of the meetings of the National Conference
Law InstiAmerican Law
of the American
State Laws (NCCUSL)
transcript of the proceedings of
or in the transcript
(NCCUSL) or
THE NCCUSL
NCCUSL
OF THE
HANDBOOK OF
tute (ALI)
of the
the revision. See HANDBOOK
final approval
approval of
(ALI) that preceded final
NINETY-SEVENTH
ITS NINETY-SEVENTII
MEETING IN ITS
AND
CONFERENCE MEETING
ANNUAL CONFERENCE
THE ANNUAL
OF THE
PROCEEDINGS OF
AND PROCEEDINGS
MEETANNUAL MEET67m ANNUAL
OF THE
THE 67TH
PROCEEDINGS OF
NCCUSL]; PROCEEDINGS
YEAR
[hereinafter NCCUSL];
(1988) [hereinafter
YEAR 313-19 (1988)
only references
The only
Jordan). The
L. Jordan).
ING
Robert L.
(transcribing Robert
(1990) (transcribing
405 (1990)
382, 405
A.L.I. 382,
THE A.L.1.
OF THE
ING OF
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Commercial Transactions
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Commercial
439
these provisions
provisions apply to issuers
issuers and transferors,
transferors, a few
few deal
deal with
with the
the liathese
8
8
88
bility
of
transferees.
In
Woods
Code
3,
Inc.
v.
IPMorgan
Chase
Bank,
bility of
JPMorgan Chase Bank,
89
N.A.,89
a
dishonest
bookkeeper
with
authority
write
checks
on
her
emchecks
on
to
write
authority
N.A.,
dishonest bookkeeper
ployer's
account
embezzled
funds
by
writing
several
hundred
checks
on
on
checks
hundred
several
writing
embezzled
ployer's
the
account,
making
them
payable
to
herself
or
fictitious
and
deentities,
and
fictitious
herself
payable
the
positing them in
in her personal
personal account. The employer
employer sued
sued the bank
notice
that the
had
under
section
3.307
of
the
Code,
alleging
the
bank
notice
bank
alleging
under section 3.307
90 The trial
employee
was
breaching
her
fiduciary
duties
to
her
employer.90
employer.
fiduciary duties
employee was breaching
court entered
entered a take-nothing
summary judgment
judgment in favor of the
the bank. On
take-nothing summary
appeal, the
the Beaumont
Beaumont Court
Court of
of Appeals
Appeals held
held that indorsements
indorsements on some
some
of the checks
checks did not give
give the bank notice
notice of a breach
breach of fiduciary duty
because the payee
payee names
names shown on the checks did not indicate
indicate they were
because
payable
to
the
employer
or
to
the
employee
as
a
fiduciary.91
fiduciary. 9 1 Furtherthe employee
employer or
payable
more, for checks
checks deposited
deposited without
without indorsement
indorsement by the employee,
employee, the
court pointed out that section 4.205 of the Code allows a bank
bank to take
court affirmed
affirmed summary
summary judgunindorsed checks
checks for collection.92 The court
about changes in terminology
terminology appear
appear in the introductory
introductory remarks
remarks in the NCCUSL
NCCUSL ConferConfer·
"a more modern
Proceedings referring to the revision
revision as a "change
"change in structure,"
structure," "a
modern
ence Proceedings
somewhat
structure," and the statement
statement at the ALI proceedings:
proceedings: "The
"The language
language might
might be somewhat
structure,"
67TH
same." NCCUSL,
NCCUSL, supra;
supra; PROCEEDINGS OF THE 67TH
substance is the same."
different, but the substance
ANNUAL MEETING
OF THE
THE A.L.I.,
A.L.I., supra
supra (transcribing
The failure of
(transcribing Robert L. Jordan). The
MEETING OF
ANNUAL
"Obligation" had no
the court to recognize
wording from "Contract"
no
"Contract" to "Obligation"
recognize that the change in wording
substantive significance
significance seems
seems to have led to an erroneous
erroneous decision
decision in Time Out Grocery v.
substantive
Vanguard
Group., Inc., in which
which the court
court denied recovery of attorney's fees in an action
Vanguard Group.,
ground that the drawer's liability was based on a
against the drawer
drawer of
of a check on the ground
statutory obligation rather than aa contractual
contractual obligation. 187 S.W.3d
S.W.3d 41 (Tex. App.-Dalstatutory
1013,
las 2005, no pet.); see also John
John Krahmer, Commercial
Commercial Transactions,
Transactions, 59 SMU L. REv.
REV. 1013,
1030-31 (2006) (discussing
(discussing Time Out Grocery). Unfortunately, this error now seems to
have been perpetuated by the decision in Zamora
Zamora v. The Money Box, in which the court,
denied recovery
relying on Time Out Grocery,
recovery of attorney's fees in an action brought
Grocery, denied
against the drawer
drawer of a check without
without recognizing
recognizing the change in section titles was apparterminology and not a change in substance. No. 04-08ently regarded as a mere change in terminology
00549-CV, 2009 WL 2050207, at *4 (Tex. App.-San Antonio
Antonio July 15,2009,
15, 2009, pet. denied).
00549-CV,
A petition
petition for rehearing
rehearing on the denial of the appeal in Zamora has been filed and one
hopes that, if the case ultimately results in a decision by the Texas Supreme
Supreme Court, it will
recognize that claims against drawers, makers, acceptors, and indorsers
indorsers are based on contract and not on a statutorily created obligation. It is worth noting that the only two law
review articles directly addressing the liability of drawers under the revision both refer to
such liability as contractual. See Henry J. Bailey, New 1990
1990 Uniform Commercial Code:
Article 3,
Negotiable Instruments,
Instruments, Article 4, Bank Deposits
Deposits and Collections
Collections 29 WIL3, Negotiable
LIAMETIE
(1993); Donald W. Garland, A New Law of Negotiable InstruLIAMETTE L. REv. 409, 419 (1993);
ments: Revised Article 3 of the
(1992).
BANKING L.J. 557 (1992).
the UCC
UCC 109 BANKING
88. See, e.g.,
e.g., TEX.
& COM. CODE
ANN. §§ 3.404 (Imposters; Fictitious Payees)
CODE ANN.
TEX. Bus. &
(Vernon 2002); id.
(Employer's Responsibility
Fraudulent Indorsement by EmResponsibility for Fraudulent
id. §§ 3.405 (Employer's
ployee); id.
Contributing to Forged Signature or Alteration
Alteration of Instru(Negligence Contributing
id. § 3.406 (Negligence
allocated between the transferor and the
ment). In each of these sections, the loss may be allocated
transferee if the transferee fails to exercise ordinary care in taking or paying an instrument.
See id.
§§ 3.404-.406.
id. §§
89. 292 S.W.3d 795 (Tex. App.-Beaumont
App.-Beaumont 2009, no pet.).
90. Id.
ANN. § 3.307 (Vernon
2002)). If
If a
(Vernon 2002».
& COM. CODE ANN.
Id. at 796 (citing TEX. Bus. &
transferee has notice that an instrument is being transferred in breach of a fiduciary duty,
transferee
the transferee is
is subject
subject to claims by the rightful owner of the instrument under section
3.306. TEX.
& COM. CODE ANN. §§ 3.306.
TEX. Bus. &
91. Woods Code
Code 3, Inc., 292 S.W.3d at 798.
92.
Id. at 797.
92. Id.
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SMU LAW
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[Vol. 63
63
[Vol.
93
ment in
in favor
favor of
of the
the bank. 93
ment
negotiable instrument
instrument under
under Chapter
Chapter 33 isis subject
subject to
to acceleration
acceleration at
at
A negotiable
94 An
the option
option of
of the
the holder
holder ifif the
the note
note so
so provides.
provides.94
An important
important addenaddenthe
dum to
to the
the right
right of
of acceleration
acceleration under
under Texas
Texas case
case law
law isis the
the requirement
requirement
dum
that the
the holder
holder first give notice
notice of intent
intent to
to accelerate
accelerate before
before giving
giving notice
notice
that
96 one
95 In
acceleration.95
In Burns
Burns v. Stanton,
Stanton,96
one co-owner
co-owner of
of aa business
business
of acceleration.
bought out
out the
the other
other co-owner
co-owner in
in exchange
exchange for shares
shares of stock
stock in
in the
the comcombought
pany and
and a promissory
promissory note. The note
note included
included aa clause
clause allowing
allowing acceleraccelerpany
any of several
several events
events of default,
default, one
one of
of which
which was the transfer
transfer
ation upon any
maker of the
the note.
note. When
When the
the maker
maker converted
converted the
the comof stock by the maker
corporation to aa partnership,
partnership, his
his stock
stock was
was transferred
transferred to the
pany from a corporation
partnership. The holder declared
declared aa default
default and gave notice that
that he inpartnership.
tended to use
use the enforcement
enforcement actions
actions permitted
permitted by
by the note.
note. The
The Texartended
Appeals held
held that an
an event
event of
of default
default had
had occurred
occurred within
kana Court of Appeals
meaning of the note
note and that notice
notice that the holder would
would use his
the meaning
available enforcement
enforcement actions
actions was sufficient
sufficient notice of intent to acceleravailable
There was no requirement
requirement that the holder
holder use the specific
specific phrase
phrase
ate.9977 There
98
"intent
accelerate. "98
"intent to accelerate."
encounter in exercising a right
right
One of the difficulties that a holder can encounter
99 A usury
acceleration is the risk of miscalculating
miscalculating the interest
interest due. 99
of acceleration
violation resulting from miscalculation
miscalculation of interest
interest can
can sometimes be
violation
avoided by using a savings clause to disavow any intent
intent to charge
charge usurious interest
interest and to allow the holder to correct
correct any error in the amount
amount
loo0 A savings clause will not be effective,
effective, however, if it is "didemanded.10
creditor
contract" or if the creditor
explicit terms of the contract"
rectly contrary to the explicit
makes no effort
effort to use the savings
savings clause to correct an erroneous
erroneous calculamakes
tion. 10l In Kennon v. McGraw,
McGraw, a note contained a savings
savings clause that
tion.101
stated, "It is further expressly
expressly agreed that interest
interest on this note will not be
charged in excess of the highest legal rate specified
specified by the Laws of the
State of Texas and that future adjustments will be made to avoid the pay-
93. [d.
Id. at 798.
94. TEX. Bus. &
(Vernon 2002).
CODE ANN.
ArN. § 3.108 (Vernon
& COM. CODE
1982). The Texas
95. See Ogden v. Gibraltar Say. Ass'n, 640 S.W.2d
S.W.2d 232, 233-34 (Tex. 1982).
Supreme Court has held
held that rights to
to notice of intent to accelerate, notice of acceleration,
acceleration,
specifically identifies the
presentment, and notice of
of dishonor
dishonor may be waived if the waiver specifically
890, 893 (Tex.
S.W.2d 890,
rights being waived. See Shumway v. Horizon Credit Corp., 801 S.W.2d
1991).
1991).
96. 286 S.W.3d 657 (Tex. App.-Texarkana
App.-Texarkana 2009, pet. denied).
97. [d.
Id. at 661.
98.
98. [d.
Id. at
at 661-62.
661-62.
1984);
(Tex. 1984);
S.W.2d 324 (Tex.
99.
v. Schuenemann,
Schuenemann, 668 S.W.2d
generallyJim Walter Homes, Inc. v.
99. See generally
1998, pet. deChristi 1998,
Pentico v.v. Mad-Wayler,
S.W.2d 708 (Tex. App.-Corpus Christi
Mad-Wayler, Inc., 964 S.W.2d
App.(Tex. App.nied); Oyster Creek Fin. Corp.
Invs., II, Inc., 957 S.W.2d 640 (Tex.
Richwood Invs.,
v. Richwood
Corp. v.
AmariIlo
1997, pet. denied).
Amarillo 1997,
Jim Walter
Walter
very strongly suggested in lim
100.
100. This is the method the Texas Supreme Court very
Homes.
668 S.W.2d
S.W.2d at 333 n.6.
Walter Homes,
Homes, 668
Jim Walter
Homes. See lim
(Tex.
Ltd., 57 S.W.3d 37, 47 (Tex.
101.
Apartments, Ltd.,
Steppes Apartments,
Armstrong v. Steppes
See generally
generally Armstrong
101. See
(Tex.
793 (Tex.
843 S.W.2d 790, 793
Dorst, 843
v. Dorst,
State Bank v.
App.-Fort Worth
First State
denied); First
pet. denied);
Worth 2001, pet.
App.-Austin 1992,
1992, pet.
pet. denied).
denied).
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Commercial
441
441
0 2 When the maker of the
ment of
of interest
interest in
in excess
excess of
of such
such limits."1
lirnitS."102
When the maker of the note
ment
defaulted, the
the holder
holder accelerated
accelerated the
the note
note and
and demanded
demanded payment
payment of
of indefaulted,
terest on the
the entire
entire unpaid
unpaid balance.
balance. The
The holder
holder was
was twice
twice advised
advised that
that
terest
method of
of calculation
calculation was
was incorrect
incorrect and
and constituted
constituted aa demand
demand for
for
this method
usurious interest.
interest. Despite
Despite such
such notice,
notice, the
the holder
holder persisted
persisted in her
her deusurious
The Eastland
Eastland Court
Court of
of Appeals
Appeals held
held that
that under
under these
these circumcircummand. The
10 3 The
not immunize
immunize against
against aa usury
usury claim.
claim.lo3
The
stances, the
the savings
savings clause
clause did
did not
stances,
case was
was remanded
remanded for the
the trial
trial court
court to
to determine
determine the
the amount
amount of the
case
usurious charge
charge by
by calculating
calculating the
the amount
amount of
of interest
interest that could
could be legally
legally
usurious
charged under
under the clause
clause and
and comparing
comparing that amount
amount to the amount
amount decharged
104
manded by the holder.
holder.l04
manded
3.311 regarding
regarding accord
accord
The Code introduced
introduced some new rules in
in section
section 3.311
The
1055 Under
and satisfaction
satisfaction by use of
of "payment-in-full"
"payment-in-full" checks.
checks.1°
Under the
the general
general
and
law of
of contracts,
contracts, if
if aa creditor
creditor cashed
cashed a payment-in-full
payment-in-full check
check tendered
tendered by
by
law
unliquidated or disputed claim, the creditor
creditor was deemed
deemed
the debtor on an unliquidated
have agreed
agreed to a contract
contract discharging
discharging the debtor from any further
further
to have
Under section
section 3.311,
3.311, aa creditor
creditor who
who inadvertently
inadvertently cashes a
claim.l06
claim. 10 6 Under
check tendered
tendered in full satisfaction
an unliquidated
unliquidated or
or disputed
disputed claim
claim
satisfaction of an
can avoid a discharge
discharge of the debtor by tendering
tendering a refund
refund of the
the amount
amount
of the check
check within ninety days after payment
payment of the check.10
check.10 77 Alternacreditor can notify persons
persons with whom
whom it deals
organizational creditor
tively, an organizational
payment-in-full checks
checks should be sent to a designated
designated office
office or perthat payment-in-full
son to give the creditor
creditor an opportunity to avoid the unintentional
unintentional cashing
0 8 In Milton M. Cooke Co.
First Bank &
& Trust,109
of such checks.'
checks.los
Trust,'0 9 a
Co. v. First
company borrowed
borrowed money from a bank. In an unrelated
unrelated series of events,
the company's bookkeeper embezzled funds from the company to support her gambling habit. The bank refused to reimburse the company for
unauthorized checks issued by the bookkeeper to
the amounts paid on unauthorized
checks
herself. In an attempt to recoup its losses, the company issued two checks
to the bank in the amount of its usual monthly payments, but added a
notation that the checks were "payment
"payment in full" for the loans.11
loans. 1100 In an "action by the bank to collect on the notes, the company argued that it was
discharged from any further liability by an effective accord and satisfaction under section 3.311. The Houston First Court of Appeals disagreed,
pointing out that the terms of the notes expressly required that any check
tendered as payment in full be sent to a specified office of the bank.1
bank."'11
102.
App.-Eastland 2009, no pet.).
(Tex. App.-Eastland
651 (Tex.
648, 651
102. 281 S.W.3d 648,
103.
Id. at 652.
103. [d.
104. [d.
Id. at
at 653-54.
653-54.
105. See TEX.
2002).
(Vernon 2002).
ANN. §§ 3.311 (Vernon
CODE ANN.
COM. CODE
& COM.
TEX. Bus. &
106. See E. ALLAN FARNSWORTII,
ARTHUR LINTON CORBIN,
282 (1982);
(1982); 66 ARTIlUR
CONTRACTS 282
FARNSWORTH, CONTRACfS
CORBIN ON CONTRACfS
(1962).
H§ 1277-78
1277-78 (1962).
CONTRAcrs §§
107. TEX. Bus.
3.311(c).
ANN. § 3.311(c).
Bus. && COM. CODE ANN.
108. [d.
Id.
109.
App.-Houston [1st Dist.] 2009, no pet.).
S.W.3d 297 (Tex. App.-Houston
109. 290 S.W.3d
and $2,888.91
$2,888.91
$3,471.38 and
110.
of $3,471.38
the amounts of
written in the
were written
The checks
checks were
at 301. The
110. [d.
Id. at
Id.
respectively. Id.
against
$193.156.51, respectively.
and $193.156.51,
loans that then totaled $122,218.53 and
against loans
111.
at 305.
305.
Id. at
111. [d.
HeinOnline -- 63 S.M.U. L. Rev. 441 2010
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LAW REVIEW
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[Vol. 63
Because an officer
officer of the
the company
company had
had given
given the
the checks
checks to aa teller
teller instead
instead
Because
of sending
sending them to the designated
designated office,
office, the
the court held that
that no
no accord
accord
of
1l2 Summary
Summary judgment
judgment was
was affirmed
affirmed in
and satisfaction
satisfaction had taken
taken place. 112
and
favor of the bank.113
bank. l13
favor
IV. BANK
BANK DEPOSITS
DEPOSITS AND
AND COLLECTIONS
A.
PAYOR BANKS
BANKS AND
AND THEIR CUSTOMERS
BETWEEN PAYOR
RELATIONSHIP BETWEEN
Although Chapter 4 of the Code contains
contains numerous
numerous provisions
provisions outlinAlthough
responsibilities of banks and their
their customers, many
many of
of
ing the rights and responsibilities
varied by agreement.11
agreement. 1l44 Such agreements
agreements have
have
provisions can
can be varied
those provisions
been subject to litigation
litigation in Texas during
during the Survey
Survey period."1
period. lI55
been
Morgan Stanley & Co., the
the Texas
Texas Supreme
the
Supreme Court addressed the
In In re Morgan
validity of arbitration
arbitration clauses
clauses contained
contained in brokerage
brokerage account
account agreements
agreements
validity
116
where the account holder
holder allegedly lacked
lacked mental
mental capacity
capacity to contract. 116
where
supreme court held that determination
capacity was to be
determination of mental capacity
The supreme
supreme court reaarbitrator.!177 The supreme
determined by the court, not by the arbitrator."
soned that issues
issues of contract
contract formation go to the very existence
existence of a consoned
challenge be
be
tract and are not subject
subject to the usual requirement that a challenge
18 The
made separately
specifically to the arbitration
arbitration clause itself.'
itself. lIS
The
separately and specifically
supreme court upheld
upheld the decision
decision of the trial court denying
denying a motion
motion to
to
119
compel arbitration. 119
important issue regarding
regarding arbitration
arbitration in the context of bank acAn important
counts was addressed
addressed by
by the federal Fifth Circuit Court of Appeals in
20 In Bacon,
Bacon. 120
Citigroup
Bacon, a customer submitInc. v. Bacon.1
Global Markets,
Markets, Inc.
Citigroup Global
ted a claim in arbitration against a bank for reimbursement
reimbursement of $238,000 in
112. Id. at 306.
Id. at 312.
113. Id.
TEX. Bus. &
(Vernon 2002).
2002).
ANN. §§ 4.103(a) (Vernon
& COM. CODE ANN.
114. See TEX.
(2010) (discuss865, 885-87 (2010)
Trusts, 63 SMU L. REV. 865,885-87
115. See Gerry W. Beyer, Wills and Trusts,
S.W.3d
ing Holmes
Holmes v. Beatty, 290 S.W.3d 852, 854-59 (Tex. 2009); Nipp v. Broumley, 285 S.W.3d
pet.».
552,558-69
App.-Waco 2009, no pet.)).
552, 558-69 (Tex. App.-Waco
116. 293 S.W.3d
S.W.3d 182,
182, 183 (Tex. 2009).
117. Id.
Id.
118. Id. at 187-88. In its opinion,
opinion, the court
court described Buckeye
Buckeye Check Cashing,
Inc. v.
Cashing, Inc.
Cardegna,
challenges to arbitration clauses: (1)
Cardegna, as a case that created three categories of challenges
challenges
challenges to the validity of the contract generally, (2) challenges to the arbitration clause
Id.
existence. Id.
specifically, and (3)
(3) challenges based on whether a contract ever came into existence.
n.1 (2006). In the
at 187; see Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S.
U.S. 440,
440, 444 n.l
categories were to be deterchallenges falling into the first two categories
view of the supreme court, challenges
mined by the arbitrator; challenges in the third category were to be determined by the
reaching its conclusion that an issue of contract formation arising
arising
court. Id. at 188-89.
188-89. In reaching
from an assertion of mental incapacity was a question for the court, the supreme
supreme court
Primerica
asserted that it was not bound by a contrary result reached by the Fifth Circuit in Primerica
Life Insurance
Insurance Co.
of
Co. v. Brown, because Texas state courts are bound only by decisions of
higher Texas state courts and by the United States Supreme Court. Id.
Id. at 189-90; see
re
Primerica Life Ins.
Ins. Co. v. Brown, 304 F.3d 469, 472 (5th Cir. 2002). The opinion in In re
Morgan
Morgan Stanley includes citations to other cases and secondary sources that are critical of
the Primerica
"must reads" for attorneys considering challenges to arbiPrimericadecision and are "must
tration clauses. In
188.
S.W.3d at 188.
In re
re Morgan
Morgan Stanley, 293 S.W.3d
119. Id.
190.
Id. at 190.
120. 562
562 F.3d
F.3d 349 (5th Cir. 2009).
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443
withdrawals made
made by
by her
her husband's
husband's forgery
forgery of
of checks
checks drawn
drawn on
on her
her indiindiwithdrawals
vidual retirement
retirement accounts.
accounts. The
The customer
customer notified
notified the
the bank
bank as
as soon
soon as
as
vidual
she discovered
discovered the
the unauthorized
unauthorized withdrawals.
withdrawals. The
The arbitration
arbitration panel
panel
she
awarded the
the customer
customer $218,000
$218,000 in
in damages
damages and
and $38,000
$38,000 in
in attorney's
attorney's fees.
fees.
awarded
The bank
bank requested
requested vacatur
vacatur of
of the
the award,
award, and
and the
the district
district court
court granted
granted
The
the motion
motion to vacate,
vacate, holding
holding that the
the award
award was
was made
made in
in manifest
manifest disrethe
1211 The
gard of
of the
the law. 12
The holding
holding was
was based
based on three
three grounds:
grounds: (1) the
the cuscusgard
tomer was not
not harmed
harmed by
by the
the withdrawals
withdrawals because
because her
her husband
husband used
used the
tomer
money for
for her
her benefit
benefit and
and promised
promised to
to pay
pay her
her back;
back; (2)
(2) the customer's
customer's
money
claims were
were barred
barred by
by Texas law,
law, which
which required
required the
the customer
customer to report
report
claims
an unauthorized
unauthorized transaction
transaction within thirty days
days of
of the withdrawal;
withdrawal; and (3)
(3)
an
Texas law required
required apportionment
apportionment among the liable
liable parties
parties (in this case
case
Texas
12 2 On
customer's husband).
husband).122
On appeal,
appeal, relying on the United States
States Suthe customer's
C. v. Mattel,
preme Court decision
decision in
in Hall
Hall Street Associates,
Associates, L.L.
L.L.c.
Mattei, Inc.,123
Inc.,123
preme
the Fifth Circuit held that a manifest disregard
disregard of the law
law was not
not an
the
independent, non-statutory
non-statutory ground for vacating
vacating awards
awards under the
independent,
124 The court
FAA.124
court concluded
concluded that section
section 10 of
of the
the FAA
FAA limits
limits the
FAA.
grounds for vacatur
vacatur and
and modification
modification of arbitration
arbitration awards.
awards. 125 The court
court
grounds
exclusive grounds
under the FAA,
FAA, statutory
statutory provisions
provisions are the
the exclusive
held that under
26
for vacatur
vacatur and
and any non-statutory
rejected. 126
The court
non-statutory claims must be rejected.1
27 Similar
Similar
vacated the district court's
court's judgment
judgment and remanded the case.1
case. 127
vacated
decisions on use of manifest
manifest disregard
disregard of the law
law as a basis for appealing
decisions
arbitration award
award were reached
reached by the Dallas Court of Appeals
Appeals in
in
an arbitration
28 and by the
Ancor Holdings,
Holdings, LLC
LLC v. Peterson,
Peterson, Goldman
Goldman &
Inc.,128
& Villani,
Villani, Inc.,1
29 and
Alistyle Coil Co.
Co. v. Carreon'
Carreon 129
Houston First Court of Appeals in Allstyle
30
30
Homes, L.P.
Bates.1
L.P. v. Bates.'
Royce Homes,
Another issue that can arise between a customer
customer and a payor financial
institution about the payment of unauthorized withdrawals is whether the
customer has complied
complied with the time limits in UCC section 4-406 or any
3'
agreement.'131
modification of those time limits contained
contained in a deposit agreement.
In
32
Berry,132 several forged checks were charged by a bank
Estate of Berry,1
In re
re Estate
121. Bacon, 562 F.3d at 350.
122. [d.
Id. at 358.
123. 552 U.S. 576 (2008).
(2008).
124. Bacon, 562 F.3d at
at 358.
125. [d.
Id.
126. [d.
Id.
127. [d.
Id.
128. 294 S.W.3d
denied).
App.-Dallas 2009, pet. denied).
S.W.3d 818, 828 (Tex. App.-Dallas
129. 295 S.W.3d
Dist.] 2009, no pet.).
App.-Houston [1st Dist.]
42, 44
44 (Tex. App.-Houston
S.W.3d 42,
Dist.] Jan.
App.-Houston [1st Dist.)
130.
at *11
*11 (Tex. App.-Houston
184216, at
WL 184216,
01-08-00191-CV, 2010 WL
130. No. 01-08-00191-CV,
21, 2010,
2010, no pet.).
pet.).
131.
requires notice of forgerand Commerce Code requires
131. Section
Section 4.406 of the Texas Business and
to be
be given within aa reasonable time
ies of
alterations to
signature and notice of alterations
of aa customer's signature
after bank
Bus. &
& COM.
TEX. Bus.
to the customer. TEX.
or made available to
are sent or
statements are
bank statements
CODE ANN.
are made by the same wrongdoer,
If repeated forgeries are
(Vernon 2002). If
ANN. §§ 4.406 (Vernon
occur,
the time
Id. Whether or not repeated forgeries occur,
time period is specified as thirty days. [d.
or
of forgeries or
section 4.406
year for giving notice of
limit of one year
also provides
provides an outside limit
4.406 also
alterations. [d.
Id.
132.
no pet.).
pet.).
App.-Dallas 2009, no
478 (Tex. App.-Dallas
S.W.3d 478
132. 280 S.W.3d
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[Vol.
against aa customer's
customer's account
account between
between February
February 14,
14, 2003,
2003, and
and March
March 4,
4,
against
throughaddress
2004.
Statements
of
account
were
sent
the
customer's
address
throughcustomer's
to
the
sent
were
of
account
2004. Statements
bank to
to reout this
this period.
period. In
In September
September 2005,
2005, the
the customer
customer sued
sued the
the bank
out
of
Court
Eastland
The
cover
the
amounts
paid
on
the
forged
checks.
The
Eastland
Court
of
checks.
forged
the
cover the amounts paid on
the
bank,
to
the
Appeals
held
that,
even
if
filing
suit
constituted
notice
to
bank,
the
notice
Appeals held that, even filing suit constituted
customer's action
action was
was barred
barred by
by the one-year
one-year time limit
limit for giving
giving notice
customer's
1 33
of
forgeries
that
is
found
in
section
4.406(f).133
of forgeries that found in section 4.406(f).
On occasion,
occasion, aa death
death occurs
occurs and
and the
the decedent's
decedent's body is unclaimed. In
In
On
such aa situation,
situation, an effort
effort is made
made to find
find relatives
relatives of the
the decedent.
decedent. In
In
such
larger counties, this
this job
job is
is often
often assigned
assigned to a county
county employee.
employee. Such
Such was
larger
Bexar County, where
where a county
county clerk named
named Melvyn
Melvyn Spillman
Spillman
the case in Bexar
had this
this responsibility
responsibility for several
several years. Spillman
Spillman discovered
discovered that with his
had
home computer
computer and
and a county
county seal,
seal, itit was
was aa simple
simple matter
matter to
to create
create fake
fake
home
of administration,
administration, name himself as administrator
administrator of decedents'
decedents' esletters of
tates and present
present the documents
documents to banks
banks to give
give himself authority
authority to
to
134
write checks
checks and
and withdraw
withdraw funds from their bank
bank accounts.
accounts.134
When his
scheme was discovered,
discovered, the inevitable
inevitable legal
legal tangle ensued
ensued surrounding
scheme
the liability
liability of banks that paid
paid checks on these
these accounts
accounts based on the
35 a lawfully
false letters of administration.
administration. In Lenk
Lenk v. Guaranty
Guaranty Bank,1
Bank,135
lawfully
agreement
deposit
appointed administrator
bank for breach
breach of its
agreement
administrator sued a bank
on behalf of one of the looted estates. Summary
Summary judgment
judgment was entered
entered in
in
of
the Texas
186
favor of the administrator
administrator on the ground
ground that section
Probate Code
Code did not allow a bank
bank to rely on fraudulent letters of adminProbate
36 Lenk
istration to avoid a breach of contract
contract claim.1
claim.136
Lenk v. Jefferson
Jefferson State
37
137
commercial law standpoint, is
Bank
Bankl involves the same issue but, from a commercial
a more interesting
addresses the application of
interesting decision because it also addresses
the notice
notice requirement
requirement in section 4.406 of the Business
Business and Commerce
Code. After reaching
reaching the same conclusion that the bank could not rely
contract
on section
section 186 of the Probate
Probate Code as a defense to a breach of contract
claim, the San Antonio Court of Appeals also held that the notice requirement in section 4.406 was not triggered because the bank had sent
account statements
statements to an address provided by Spillman
Spillman and not to the
1388 Because
customer.13
Because the statements were sent to Spillman instead of the
customer, the one-year
one-year bar in section 4.406(f) did not preclude the lawfully appointed administrator from
from asserting a claim based on checks
4.406(f).
ANN. §§ 4.406(f).
& COM. CODE ANN.
133. Id.
Bus. &
Id. at 481; see TEX. Bus.
134. Over the years, Spillman stole something in excess of four million dollars, and the
Cashes In, CBS,
Clerk Cashes
County Clerk
story
Scammed: County
David Kohn, Scammed:
story made the national news. See David
Nov. 8, 2002, available
at http://www.cbsnews.comfstories/2002/11/07/48hours/
http://www.cbsnews.com/stories/2002/11/07/48hours/
available at
INSANDRA RING, IN·
& SANDRA
ERIC COLE
COLE &
main528514.shtml. A more detailed
in ERIC
appears in
detailed account appears
THEFr 128SPYING, AND THEFf
SIDER THREAT:
SABOTAGE, SPYING,
ENTERPRISE FROM SABOTAGE,
PROTECTING THE ENTERPRISE
THREAT: PROTECTING
34 (Syngress
2006).
Publishing 2006).
(Syngress Publishing
2, 2008, no
July 2,
Antonio July
135.
WL 2602121
2602121 (Tex. App.-San Antonio
04-07-00503-CV, 2008 WL
No. 04-07-00503-CV,
135. No.
pet.) (mem.
granted).
motion granted).
(rule 53.7(f) motion
(mem. op.) (rule
136.
*1.
Id. at
at *1.
136. Id.
137.
137. No. 04-07-00828-CV,
04-07-00828-CV, 2009
2009 WL 618693
618693 (Tex.
(Tex. App.-San
App.-San Antonio
Antonio Mar. 11,
11, 2009,
pet.
op.).
(mem. op.).
pet. granted) (mem.
138.
at *3.
*3.
Id. at
138. Id.
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39
drawn by
by Spillman
Spillman and
and paid
paid from
from the
the decedent's
decedent's account.'
account. 139
drawn
SECURED TRANSACTIONS
TRANSACTIONS
V. SECURED
A.
CREATING AND
AND PERFECTING
PERFECTING A
A SECURITY
SECURITY INTEREST
INTEREST
CREATING
The basic
basic rules
rules for the
the creation
creation of aa security
security interest
interest under
under Chapter
Chapter 9
The
can be
be stated
stated rather
rather easily:
easily: (1) the
the debtor
debtor must
must agree
agree to grant
grant a security
security
can
interest in described
described collateral
collateral to the
the secured
secured party, (2)
(2) the
the debtor
debtor must
must
interest
have rights in the
the collateral,
collateral, (3)
(3) value
value must be
be given
given by
by the
the secured
secured party,
have
40
and (4)
(4) the
the agreement
agreement must
must satisfy the
the Chapter
Chapter 99 "statute
"statute of frauds."1
frauds."140
and
Once these requirements
requirements have
have been
been met, the
the security
security interest
interest is said to
to
Once
"attach" to the
the collateral.141
collateral.1 41 Perfection
Perfection of a security
security interest
interest requires
"attach"
anyone
methods described
described in Chapter
Chapter 9, the
compliance with any
one of five methods
compliance
most common
common of
of which
which is
is the
the filing
filing of
of aa financing
financing statement
statement to give notice
notice
most
parties that a party
party has a security
security interest
interest in
in the described
described collatcollatto third parties
42 One of the more
eral. 142
more common problems
problems in the application
application of these
eral.1
requirements is the failure
failure of the parties
parties to properly
properly describe the
the collatrequirements
43 This situaagreement or in the
the financing statement.1
statement.t43
eral in the security agreement
Come rica Bank,
Bank, Inc.,144
Inc., 144 in which both
both the
occurred in Sanders v. Comerica
tion occurred
security agreement
agreement and the financing statement
statement described
described the collateral
claimed a security interest
as stock in a corporation, but the secured party claimed
in construction
construction equipment. The
The secured
secured party
party argued that a subsequent
subsequent
identified the collateral
collateral as construction
construction equipment,
statement identified
financing statement
there was no security
security agreebut the Fort Worth Court of Appeals held there
ment granting
granting a security
security interest
interest in equipment, and the financing state45
interest.1145
ment, standing alone, did not operate
operate to create a security interest.
The
secured party also argued that a competing
secured lender knew of his
competing secured
agreement
barred because
because the account
account agreement
139. [d.
Id. The bank also argued that the claim was barred
shortened the time period from one year to sixty days. The court pointed out that the
shortened
contractual
contractual modification was irrelevant because it would only apply if section 4.406(a)
satisfied by sending account statements to the customer. [d.
Id. at *4.
were satisfied
140. See TEX. Bus. &
ANN. §§ 9.203(b)
9.203(b) (Vernon 2002). These requirements
& COM. CODE ANN.
& ROBERT
are often conflated as "Agreement,
Rights." See e.g., 4 JAMES J. WHITE &
"Agreement, Value, Rights."
S. SUMMERS,
SUMMERS, UNIFORM COMMERCIAL CODE § 31-2 (6th ed. 2010). In fact, section
any one of
9.203(b)(3)
9.203(b)(3) indirectly creates a statute of frauds requirement by specifying that anyone
three
three conditions be met to make aa security
security agreement enforceable. Under this subsection,
there
and signed by the
(usually written and
agreement (usually
authenticated security agreement
there must be an authenticated
debtor),
collateral, or the secured party
have possession of the collateral,
secured party must have
debtor), or the secured
must have "control"
Id.
"control" of the collateral. [d.
141. See TEX. Bus.
ANN. §§ 9.203(a).
CODE ANN.
& COM. CODE
Bus. &
142. See id.
9.310(a)-(b). The five perfection methods are: (1) filing aa financing stateid. §§ 9.31O(a)-(b).
the collateral, (4)
ment,
(3) obtaining control of the
collateral, (3)
(2) taking possession of the collateral,
ment, (2)
id.
automatic
perfection. See id.
automatic temporary perfection, and (5) automatic permanent perfection.
or in
in a financing
the security agreement or
143. Errors in
either the
in either
in description can occur in
v.
Credit Alliance, Inc. v.
statement filed
See, e.g., Orix Credit
security interest. See,
perfect the security
filed to
to perfect
dism'd)
writ dism'd)
114th Dist.] 1993, writ
Omnibank,
591 (Tex. App.-Houston [14th
S.W.2d 586, 591
N.A., 858
858 S.W.2d
Omnibank, N.A.,
attachment); Chase
permit attachment);
(overly
ineffective to permit
in security agreement ineffective
(overly broad description in
App.Manhattan Bank,
204, 208 (Tex. App.S.W.2d 204,
& LL Gen. Contractors, Inc., 832 S.W.2d
Bank, N.A.
N.A. v. JJ &
no
list, but
but no
on attached list,
Beaumont 1992,
collateral on
referred to collateral
(financing statement referred
1992, no pet.) (financing
list was
attached).
was attached).
144.
pet.).
2008, no pet.).
App.-Fort Worth 2008,
274 S.W.3d
S.W.3d 861 (Tex. App.-Fort
144. 274
145.
Id. at 864.
145. [d.
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claim to
to the equipment,
equipment, but the
the court
court correctly
correctly pointed out that
that knowlknowlclaim
edge of
of a claim
claim does
does not
110t obviate
obviate a valid agreement
agreement creating
creating a security
security
edge
146
interest in the claimed
claimed collateral.
collateral. 146
interest
the most important
important differences
differences between
between the pre-2002
pre-2002 Chapter
Chapter 9
One of the
and the present
present Chapter 99 was
was a change in the
the location
location where
where financing
financing
and
to perfect
perfect a security
security interest
interest in
in collateral. Under
Under
statements must be filed to
the former
former Chapter
Chapter 9, filings
filings were to be
be made in
in the
the state
state where
where the colthe
147 Under
lateral was located.
located.147
Under the current
current Chapter
Chapter 9, filings must be made
lateral
8 Section
148
where the debtor is located. 14
Section 9.307
9.307 contains a series
in the state where
49 For
determine the location
location of a debtor.
For a corporate
corporate debtor
debtor
debtor.1149
of rules to determine
(a "registered
organization" in the terminology of Chapter
Chapter 9),
9), the localoca(a
"registered organization"
the debtor
debtor is the state
state where
where the debtor's certificate
certificate of incorporaincorporation of the
5 0 This change
issued. 150
location for filing resulted in one
one of
of
change in the location
tion was issued.1
most significant
significant cases decided
decided during the Survey
Survey period.
the most
affiliated
In In re SemCrude,
SemCrude, L.P.,151 a parent
parent corporation
corporation and several affiliated
companies were engaged in the business
business of buying oil and gas from Texas
companies
producers and then reselling it to refiners
refiners and other
other resellers. In 2008,
producers
volatility in the oil and gas markets caused
caused a loss to the companies
companies in
volatility
11
excess of two billion dollars. This loss resulted
resulted in the filing of Chapter
Chapter 11
bankruptcies by the parent
parent company
company and its affiliates.
bankruptcies
Under a non-uniform
non-uniform Texas provision added to the Business
Business and
and ComUnder
merce Code as section 9.343, oil and gas producers
automatically
producers have automatically
perfected
interests in oil and gas sold to a purchaser, in this case,
perfected security interests
companies engaged in buying and reselling
reselling the product. When the
the companies
producers claimed perproceedings were filed, the Texas producers
Chapter 11 proceedings
fected security interests in the product still in the debtors'
debtors' hands and in
the proceeds
proceeds the debtors had received but not yet paid to the Texas pronon-uniform Texas provision and its
careful review of the non-uniform
ducers. In a careful
perfection requires filing in the state
relationship to the requirement that perfection
where the debtor is located, the bankruptcy court for the District of Delaprovision applied only to product
concluded that the non-uniform provision
ware concluded
and proceeds located in Texas; product and proceeds in the hands of the
debtors outside Texas required perfection
perfection by filing in the state of the
debtors' location, in this case, either Delaware, where the parent com52
organized.1152
pany was organized, or Oklahoma, where an affiliate was organized.
Because the Texas producers had not filed in either Delaware
Delaware or
Because
146. Id.
Id.
147. See TEX. Bus.
§§ 9.103, 9.401 (Vernon 2002).
Bus. && COM. CODE ANN. §§
148. See TEX. Bus. &
ANN. § 9.301 (Vernon 2002).
2002).
& COM. CODE
CODE ANN.
149. See id. §§ 9.307(a)-(k).
150. See id.
id. §§ 9.307(e). The term "registered
organization" is defined in section
"registered organization"
id. §§ 9.201(b)(71).
9.201(b)(71).
Commerce Code. See id.
9.201(b)(71)
9.201(b)(71) of the Texas Business and Commerce
151.
151. 407 B.R. 112 (Bankr. D. Del. 2009). This case involved oil and gas producers in
Id. at 117. Companion
Companion cases involving oil and gas producers in Kansas and
Texas. Id.
Oklahoma
In re
re SemCrude, L.P., 407 B.R. 82 (Bankr. D. Del.
issues. See In
Oklahoma raised similar issues.
2009) (Kansas producers); In
re SemCrude,
SemCrude, L.P., 407 B.R. 140 (Bankr. D. Del. 2009)
In re
(Oklahoma
producers).
(Oklahoma producers).
152.
152. In re SemCrude,
SemCrude, 407 B.R. at 138.
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2010]
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Oklahoma, their security
security interests
interests were
were unperfected
unperfected and
and subordinate
subordinate to
to
Oklahoma,
security
interests
claimed
by
banks
that
had
made
loans
to
the
parent
the
parent
and
loans
security interests claimed by banks
its affiliates
affiliates and had perfected
perfected those
those interests
interests by
by filing
filing in
in the
the correct
correct
53
locations.
153
locations.'
nicely illustrates
illustrates the hazard
hazard of
of making
making non-uniform
non-uniform
In re SemCrude nicely
amendments to the Code that may
may not have extra-territorial
extra-territorial effect under
under
amendments
section 9.301 of
of revised Article
Article 9.154
9.1 54
the choice of law rules in section
B.
B.
SECURITY INTEREST
INTEREST
SCOPE OF A SECURITY
One problematic
problematic issue about
about the
the scope of
of security interests
interests noted in the
the
One
section
last two
two Surveys
Surveys has been the effect
effect of the "hanging
"hanging paragraph"
paragraph" in section
last
5 5 The dispute
of the Bankruptcy
Bankruptcy Code.'
Code. 155
dispute has centered
centered on whether
whether
1325(a)
1325(a) of
buyer's negative equity in a trade-in vehicle
vehicle that is paid off in the
a buyer's
course of financing the purchase
purchase of a new vehicle should be included
included
within the scope
scope of a purchase money security
security interest
interest (PMSI) granted
granted to
to
secured party
party as part of the transaction. Although early
early cases
cases decided
decided
the secured
recent cases reaching
courts were deeply
deeply split on this issue, recent
in the lower courts
U.S. court of appeals
appeals are
are unanimous
unanimous in holding that
that amounts
amounts loaned
loaned
the U.S.
156
payoff
equity should be included in a PMSI.
PMSI.156
This issue
off negative equity
to pay
including negative
negative equity loans as part
now seems to be settled in favor of including
secured by a PMSI.
of the value secured
153. Id.
reached in the companion
companion cases. See In re SemCrude,
SemCrude, 407
407
Id. Similar results were reached
(Kansas producers);
(Oklahoma producers).
producers); In re SemCrude, 407 B.R. at 158 (Oklahoma
B.R. at 111 (Kansas
Because of the importance
importance of these decisions, the court certified
certified all three cases for direct
Because
appeal to the Third Circuit, but as of this writing, there is no record of an appeal.
official text of section
section 9.301(1)
"Except as other9.301(1) in revised Article 9 provides, "Except
154. The official
jurisdiction, the local law of that
wise provided in this section, while a debtor is located in a jurisdiction,
jurisdiction governs perfection,
perfection, the effect
effect of perfection
perfection or nonperfection,
non perfection, and the priority
9.301(1) (Vernon
of a security interest in collateral."
collateral." TEX. Bus. &
& COM. CODE ANN.
ANN. § 9.301(1)
significant change
change from the prior law, which required filing in the state
2002). This was a significant
where the collateral
collateral was located rather than filing in the state where the debtor
debtor was located.
See U.e.e.
(1972). Another non-uniform amendment adopted in Texas that
U.C.C. §§ 9-103(1)(b)
9-103(1)(b) (1972).
may create a trap for the unwary
unwary is section 9.503(a)(4).
9.503(a)(4). TEX. Bus. &
& COM. CODE ANN.
ANN.
§§ 9.503(a)(4) (Vernon
(Vernon Supp. 2009).
2009). This amendment attempts to clarify the use of the correct name of an individual debtor on financing
financing statements
statements by providing that the use of the
name shown on a driver's license or state identification
identification certificate issued by the state of the
debtor's residence will sufficiently provide the name of the debtor. See id.
id. This provision
would be effective in Texas for Texas residents, but it is possible that another state may
have a different standard and that the name shown on a driver's license or identification
identification
certificate may not be adequate
adequate under the filing-office search logic used in the other state.
155. See John Krahmer, Commercial
REV. 995, 1015-16,1015
1015-16, 1015
Commercial Transactions,
Transactions,62 SMU L. REV.
n.159 (2009) [hereinafter
Transactions, 61
20091; John Krahmer, Commercial Transactions,
(hereinafter Krahmer 2009];
SMU
(2008). By one account, the hanging paragraph "has no alphanuSMU L. REv. 657, 673-74 (2008).
meric designation
designation and merely dangles at the end of [11 U.S.e.]
There is no way
U.S.C.] §§ 1325(a). There
to cite to this provision other than its proximity
proximity to other citable provisions."
C.
provisions." See Dianne e.
Kerns, Cram-a-lot:
Cram-a-lot: The
BANKR. INST. J.
(2005).
J. 10, 10 (2005).
The Quest Continues, 24 AM. BANKR.
negative equity, gap
re Dale, 582 F.3d 568, 574 (5th Cir.
Cir. 2009) (including negative
156. See In re
re
insurance, and extended warranties within scope of a purchase money obligation); In re
Mierkowski,
2009) (same);
(same); In re Ford, 574 F.3d 1279, 1285 (10th
Mierkowski, 580 F.3d 740, 743 (8th Cir. 2009)
Cir. 2009) (same);
(same); In
In re Graupner,
Cir. 2009)
2009) (same);
562 F.3d 618, 625-28 (4th Cir.
(same); In
In re Price, 562
537 F.3d 1295,
1302 (11th Cir.
835, 859
859 (B.A.P.
In re
re Penrod, 392 B.R. 835,
Cir. 2008) (same); but see In
1295,1302
9th Cir. 2008) (stating that negative equity should not be treated as part of a PMSI).
HeinOnline -- 63 S.M.U. L. Rev. 447 2010
448
448
SMU LAW
LAW REVIEW
REVIEW
SMU
[Vol. 63
63
[Vol.
Another difficulty
difficulty arising
arising under
under the
the hanging
hanging paragraph
paragraph isis whether
whether aa
Another
of
debtor can
can voluntarily
voluntarily surrender
surrender aa vehicle
vehicle in
in full
full satisfaction
satisfaction of aa secured
secured
debtor
in aa Chapter
Chapter 13
13 plan
plan or
or whether
whether surrender
surrender satisfies
satisfies the
the debt
debt only
only in
in
debt in
debt
of the
the vehicle,
vehicle, allowing
allowing the
the secured
secured party
party to
to
an amount
amount equal
equal to
to the
the value
value of
an
an unsecured
unsecured deficiency
deficiency claim
claim for any
any remaining
remaining balance
balance of
of the
the
assert an
assert
part of
of PMSI"
PMSI" cases,
cases, the
the courts
courts of
of
debt. As
As in
in the
the "negative
"negative equity
equity as
as part
debt.
appeals have
have been
been unanimous
unanimous in
in interpreting
interpreting the
the hanging
hanging paragraph
paragraph to
to
appeals
allow secured
secured parties
parties to seek
seek deficiency
deficiency claims
claims despite
despite contrary
contrary interpreinterpreallow
57
tations by
by the
the lower
lower courts.'
courts. 157
tations
The worst
worst of
of the
the hanging
hanging paragraph
paragraph problems
problems may
may now
now be
be behind
behind us,
us,
The
but similar
similar issues
issues can
can arise
arise under
under state
state law.
law. In Bledsoe
Bledsoe Dodge,
Dodge, L.L.C.
L.L.c. v.
5 8 aa car
Kuberski,158
car buyer
buyer contended
contended that
that the
the inclusion
inclusion of negative
negative equity
equity
Kuberski,
cash price
price for
for a new
new vehicle
vehicle violated
violated the Texas
Texas Finance
Finance
as part
part of the cash
159 The Dallas Court of Appeals held
the buyer
buyer failed
failed to
to show
The Dallas Court of Appeals held that the
Code. 159
at
buyer
cash
price
the seller
seller would
would have offered
offered the
the same
same vehicle
vehicle to a cash buyer a price
the
lower than the price charged
charged to the buyer
buyer with
with the
the exclusion
exclusion of the
lower
60 The
payoff
negative equity.
equity.1160
The buyer
buyer also argued
argued
amount required
required to pay
off the negative
amount
that the negative
negative equity should have
have been
been treated
treated as a finance charge.
owed on
on the
the buyer's
buyer's
The court
court disagreed,
disagreed, reasoning
reasoning that the amount owed
The
amount imposed
imposed by the creditor
creditor as a condition
condition of the
trade-in was
was not an amount
trade-in
treated, instead, as part of the
seller's extension
extension of credit but should be treated,
16 1
purchase price. 161
purchase
A problem
problem with continuing
continuing the perfection
perfection of a security interest
interest followwas
ing its assignment from one secured
party
noted in the
another
to
secured
157. See In
of debt in
in
633, 640 (5th Cir. 2009) (treating the balance of
In re Miller, 570 F.3d 633,640
deficiency claim in Chapter 13 plan); In re Barexcess of value of vehicle as an unsecured deficiency
rett, 543 F.3d 1239,
Cir. 2008) (same); Tidewater Fin. Co. v. Kenney, 531 F.3d
1239, 1247 (11th Cir.
(10th Cir. 2008)
2008) (same);
(same); In
312,319
2008) (same);
re Ballard, 526 F.3d 634, 641 (10th
(same); In re
312, 319 (4th Cir. 2008)
re Long, 519 F.3d 288,291
288, 291 (6th Cir. 2008) (same, but in divided opinion); Capital One Auto
Finance
re Wright, 492 F.3d 829,
Osborn, 515 F.3d 817, 822-23 (8th
(8th Cir. 2008) (same); In re
Finance v. Osborn,
832 (7th
2007). A similar issue is whether a Chapter 13 plan can be modified by
Cir. 2007).
(7th Cir.
189
In re
re Davis, 404 B.R. 183, 189
surrender
confirmed. See In
has been confirmed.
surrender of a vehicle after a plan has
the Southern District of
for the
bankruptcy court for
(Bankr. S.D.
Davis, the bankruptcy
In re Davis,
2009). In In
S.D. Tex. 2009).
full
vehicle in full
permit surrender of a vehicle
Texas recognized that aa plan may be
be modified
modified to permit
court
satisfaction
scheduled in the plan. Nonetheless, the court
of aa debt scheduled
portion of
of the secured portion
satisfaction of
in aa wreck
declined
had been seriously damaged in
because the vehicle had
to do so in this case because
declined to
The
party. The
secured party.
and sat in a repair shop for two years before itit was repossessed by the secured
the unpaid
court
court determined that the voluntary repossession permitted reclassification of the
the
to treat the
inequitable to
be inequitable
would be
that itit would
portion
but that
as unsecured, but
secured debt as
of the secured
portion of
the
the vehicle. Thus, the
damage to the
the damage
surrender
because of the
claim because
the claim
satisfaction of the
full satisfaction
surrender as full
the ununof the
the amount
amount of
included the
court allowed
secured debt but included
reclassification of the secured
allowed reclassification
secured
196.
Id. at
at 196.
deficiency. Id.
part of the unsecured deficiency.
as part
secured debt as
no pet.).
pet.).
2009, no
158.
App.-Dallas 2009,
839 (Tex.
(Tex. App.-Dallas
S.W.3d 839
279 S.W.3d
158. 279
(defining aa
(Vernon 2006) (defining
348.004(a) (Vernon
ANN.§ 348.004(a)
CODE ANN.§
FIN. CODE
159.
TEx. FIN.
see also
also TEX.
Id. at
at 841-42;
841-42; see
159. Id.
to
business to
course of business
ordinary course
in the
the ordinary
seller offers in
cash price
retail seller
the retail
at which
which the
"price at
as the "price
price as
transaction").
to the transaction").
subject to
sell
are subject
services that are
or services
goods or
the goods
cash the
for cash
sell for
vehicle was
for the vehicle
price for
net listed
listed cash price
The net
160.
at 843.
843. The
S.W.3d at
279 S.W.3d
Kuberski, 279
160. Kuberski,
to sell
sell
seller to
by the
the seller
offer by
any offer
reflect any
not reflect
$27,350.92,
did not
court did
the court
before the
evidence before
the evidence
and the
$27,350.92, and
Id.
amount. Id.
the
that amount.
than that
for less
less than
buyer for
cash buyer
to aa cash
vehicle to
the vehicle
161.
843-44.
at 843-44.
Id. at
161. [d.
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Commercial
Commercial Transactions
Transactions
449
2009 Survey.162
Contracting Services,
Survey. 1 6 2 In In re Clark
Clark Contracting
Services, Inc.,163 the bankruptcy court for the Western
Western District of Texas held that continued
continued perfeccertificate
tion of a security interest
interest requiring
requiring perfection
perfection by notation of a certificate
of title required an assignee to record its name on the assigned titles.164
titles. l64
The court reached
reached this decision based on its reading of the Texas
Texas Certifi65
Act.1165
Because this result conflicted with section
cate of Title ACt.
Because
section 9.514 of
of
the Code, which permits, but does not require, an assignee to continue
continue
perfection by making a filing of record, the Certificate
Certificate of Title Act was
amended during the 2009 legislative
legislative session to parallel the permissive
66 The continuation
continuation rule apCode.1166
continuation approach
continuation
approach allowed by the Code.
Clark is, therefore,
therefore, no longer effective
effective for security interests
interests perplied in Clark
fected by notation on certificates
certificates of title.
C. EFFECT
EFFEcr OF TERMINATING A SECURITY
SECURITY INTEREST
Once a debt has been repaid in full, Chapter 9 imposes several duties
on a secured party, including
including filing a termination
termination statement
statement or releasing
155, at 1016-18.
162. See Krahmer 2009,
2009, supra
supra note 155,
163. 399 B.R. 789 (Bankr. W.D. Tex. 2008);
2008); see Krahmer
Krahmer 2009,
2009, supra
supra note 155,
155, at 101617.
164. In re Clark, 399 B.R. at 804.
165. Id.
Id. at 805; see also
TEX. Bus. &
CODE ANN. §§ 9.311(b)
9.311(b) (Vernon
2002) (pro& COM. CODE
(Vernon 2002)
also TEX.
viding that perfection
made in compliance
compliance
perfection of a security interest
interest in titled collateral must be made
with the Certificate
Certificate of Title Act). At the time In re Clark
Clark was decided, section
section 501.111
501.111 of
certificate of title to perfect a securTransportation Code required notation on a certificate
the Texas Transportation
ANN.
Clark, 399 B.R. at 794; see TEX.
TEX. TRANSP. CODE
CODE ANN.
ity interest in titled collateral.
collateral. In re Clark,
§§ 501.111
501.111 (Vernon
(Vernon 2007)).
2007».
Serv.
166. See Act of June 19,
19,2009,
§§ 4-5, 2009 Tex. Sess. Law Servo
2009, 81st Leg., R.S., ch. 814, §§
2049 (Vernon 2009)
2009) (codified as amendments
amendments to TEX. TRANSP.
TRANSP. CODE ANN.
ANN. §§
§§ 501.113501.113provisions governing
governing
.114). The same Act made similar
similar changes in the certificate
certificate of title provisions
19,2009,
utility security
security interests, boats, and boat motors. See Act of June 19,
2009, 81st Leg., R.S.,
2009) (codified
(codified as amendments to
to
ch. 814, §§
Serv. 2047 (Vernon 2009)
§§ 1-2,2009
1-2, 2009 Tex. Sess. Law Servo
interests); Act of June
261.012) (utility security interests);
TEX. Bus. &
CODE ANN.
June
ANN. §§
§§ 261.004, 261.D12)
& COM. CODE
(Vernon 2009) (codi(codi19,2009,
Serv. 2047 (Vernon
19, 2009, 81st Leg., R.S., ch. 814, §§ 3, 2009 Tex. Sess. Law Servo
& boat
ANN. § 31.052)
31.052) (boats &
PARKS &
& WILD. CODE ANN.
boat
fied as an amendment to TEX. PARKS
motors).
HeinOnline -- 63 S.M.U. L. Rev. 449 2010
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SMU
SMU LAW
LAW REVIEW
[Vol. 63
67 In In re
168
control over collateral. 167
Spillman Development Group,
Ltd.,168
re Spillman
Group, Ltd.,
the bankruptcy
bankruptcy court for the Western District of Texas addressed the
question of whether a credit-bid purchase of a bankruptcy debtor's assets
satisfied a debt required the secured party to return collateral
collateral to
that fully satisfied
payment
court had no difficulty in concluding that full payment
the debtor. The court
certificate of deposit pledged
pledged as security
security for the
required the return of a certificate
extinguished any liability on the part of
loan, and that full repayment also extinguished
169
169
guarantors.
the debtor's guarantors.
167. See, e.g., TEX. Bus. &
& COM.
COM. CODE
CODE ANN. §§ 9.208 (Vernon 2002)
2002) (imposing duty to
to
investment property, letter-ofrelease control of deposit accounts, electronic chattel paper, investment
credit rights, and electronic documents within ten days after demand by the debtor);
debtor); id.
id.
consumer goods transactions
§§ 9.513(a)
termination statement
statement in consumer
9.513(a) (imposing duty to file termination
9.513(b) (imposing
thirty days whether or not there is a demand by the debtor); id.
id. § 9.513(b)
(imposing
within thirty
duty to terminate filing in commercial
commercial transactions within twenty days following demand
by the debtor). See also
also id.
id. § 9.208 cmt. 4 (noting
(noting that no statutory
statutory duty was deemed necesrequire the return of collateral in the possession of a secured party upon repayment
sary to require
because common
common law conversion
conversion remedies were adequate).
adequate).
because
Although not involving
involving Texas
Texas law, the decision in Regions Bank v. Britt deserves
deserves note in
Although
the context of termination of a security
security interest. 642 F. Supp. 2d 584 (S.D.
(S.D. Miss. 2009). In
Britt, two bank customers sued aa bank for failing to release a lien after a loan had been
Britt,
paid. According
According to the bank, one of the customers had signed a promissory
promissory note and deed
of trust to secure the loan. The note and deed of trust contained
contained arbitration provisions
stating that the parties agreed
agreed to arbitrate
arbitrate any disputes that arose between them. The bank
contended that the customers'
claim fell within the arbitration
arbitration provision and filed a motion
contended
customers' claim
to compel arbitration. The customers
customers objected
objected to the bank's motion arguing that (1) the
personal jurisdiction
jurisdiction over one of the customers because
because he was never served
court lacked personal
FAA did not apply because
because the transactions did not involve interstate
with process; (2) the FAA
commerce;
commerce; (3) the deed of trust was invalid
invalid because
because it encumbered marital property
property and
only one of the parties had signed
signed it; and (4) the promissory note was unenforceable
unenforceable and
and
moot because it had been satisfied. Id. at 586-887,
586-887, 591-92.
591-92.
The federal district court for the Southern
Southern District of Mississippi held that the FAA
FAA
applied because the transaction did involve interstate commerce. Furthermore, the arbitration agreement remained enforceable
court
enforceable even though the note had been paid. The court
agreement did not stipulate that it would expire upon payoff
reasoned that the arbitration agreement
of the loan; therefore, the obligation
obligation to arbitrate
arbitrate survived by operation
operation of law. Id. at 592.
arise under sections
sections of
Britt raises questions about the arbitrability of claims that might arise
the Code requiring release of control or the filing of termination
termination statements. It also raises
questions about the effect an arbitration clause might have on the remedies
remedies stated in section 9.625(a),
9.625(a), which provides
provides that, "a
"a court may order or restrain collection, enforcement,
enforcement,
collateral on appropriate terms and conditions."
or disposition of collateral
conditions." See TEX. Bus. &
& COM.
COM.
CODE ANN.
ANN. §§ 9.625 (Vernon 2002). If a security agreement contains
contains an arbitration clause,
determination of
orders? Is determination
would the clause
clause divest the court of jurisdiction to enter such orders?
(arguably a violation
the
the validity of such a clause (arguably
violation of state law) to be determined by the
court or by the arbitrator
Cashing, Inc.
arbitrator under the rule of Buckeye Check Cashing,
Inc. v. Cardegna?
Cardegna?546
challenged as usurious
U.S. 440, 446 (2006)
(2006) (holding
(holding that that legality of aa loan contract
contract challenged
under state law was a matter for the arbitrator to decide). These questions and others
arbitration clauses indeed survive
would be raised if arbitration
survive full payment
payment of a secured debt.
168. 401 B.R. 240 (Bankr. W.D. Tex. 2009).
168.
2009).
169. Id.
[d. at 256. To emphasize
emphasize its holding, the court used some rather unusual phrasing
in the last paragraph
paragraph of the opinion, where it stated, "Fire Eagle's
Eagle's Senior Loan was paid in
full. As such Fire Eagle has no claim either against the SIG CD or the Guarantors
Guarantors under
Court's
their respective
respective Guarantees.
Guarantees. Fire Eagle's feigned
feigned ability to not understand the Court's
reasoning falls on deaf ears. This is not rocket science. The Senior
Senior Loan has been
been
PAID!!!!!"
PAID!!!!!" Id.
Id.
HeinOnline -- 63 S.M.U. L. Rev. 450 2010
Commercial Transactions
Transactions
Commercial
2010]
D.
D.
451
451
REPOSSESSION AND
AND DISPOSITION
DISPOSITION OF COLLATERAL
COLLATERAL
REPOSSESSION
Prior to the adoption
adoption of the current
current version
version of Chapter
Chapter 9,
9, the
the Texas
Texas
Prior
Supreme Court had
had established
established a procedure
procedure for actions in
in which
which a seseSupreme
recovery of a deficiency
deficiency following the disposition
disposition of
of
cured party sought recovery
Greathouse v. Charter
National Bank-Southwest, the suCharter National
collateral. In Greathouse
preme court
court announced
announced that
that the creditor
creditor was required
required to plead
plead that the
preme
170 The
disposition was done
done in a commercially
commercially reasonable
reasonable manner. 170
The
disposition
pleading could
could be done
done either specifically
specifically or generally.
generally. If done specifipleading
burden of
of proving
proving the
the specific
specific allegations;
cally, the creditor assumed the burden
done generally,
generally, the creditor did not have
have that burden, unless
unless the debtor
if done
71 Section
denied the commercial
reasonableness of the disposition.
disposition.I171
Section
denied
commercial reasonableness
9.626(a) in the present Chapter
Chapter 99 states
states essentially
essentially the same
same
9.626(a)
72
requirements. I72
requirements.1
In Jantzen
Jantzen v. American National
National Bank of
of Texas,
N.A.,n3 a secured
secured
Texas, N.A.,173
party repossessed and sold an aircraft.
aircraft. In the creditor's
creditor's action
action to recover
recover
party
a deficiency,
deficiency, the debtor asserted
asserted that the repossession
sale were
were not
repossession and sale
conducted in a commercially
commercially reasonable
reasonable manner. The creditor
creditor responded
responded
conducted
producing a letter
letter to the debtor
debtor showing that notice
notice of aa private sale
by producing
produced a bill of sale, along with the affidawas given. The creditor also produced
vit of the creditor's
creditor's agent stating that the aircraft
aircraft had been sold for the
price shown
shown in the affidavit. No
No other evidence
evidence was provided
provided by the creditor. The
The Dallas
Dallas Court of Appeals
Appeals held that this evidence failed to address many of the factors
factors used in determining
determining whether
whether a disposition
disposition was
174 Summary judgment
conducted in a commercially
commercially reasonable manner. 174
judgment
175
in favor of the bank was reversed, and the case was remanded.
remandedP5
176
Sky Technologies
AG,176 the collateral
collateral consisted of sevLLC v. SAP AG,
Technologies LLC
In Sky
eral patents. When the debtor defaulted, the secured
secured party foreclosed
foreclosed on
on
the patents, sold them at public auction, and later transferred them to
S.W.2d 173,
173, 173 (Tex. 1992).
1992).
170. 851 S.W.2d
171. Id. at 176-77.
171.
176-77.
(Vernon 2002). The Code proTEX. Bus. &
& COM. CODE ANN.
ANN. § 9.626(a)(1)-(2)
9.626(a)(1)-(2) (Vernon
172. TEX.
vides that once the amount of a deficiency
deficiency or surplus is put in issue:
secured party need
need not prove compliance
of this
compliance with the provisions of
(1) A secured
subchapter
enforcement, disposition, or acceptance
acceptance unsubchapter relating to collection, enforcement,
less the debtor or a secondary obligor places the secured party's compliance
compliance
in issue. (2)
(2) If the secured party's compliance is placed in issue, the secured
party has the burden of establishing that the collection, enforcement,
enforcement, disposiconducted in accordance
accordance with this subchapter.
tion, or acceptance
acceptance was conducted
Id.
Id.
173.
App.-Dallas 2009, no pet.).
173. 300 S.W.3d 412 (Tex. App.-Dallas
174. Id.
Id. at 415-16. The court listed the following as typical factors to be considered in
making a determination
reasonableness: (1) whether the secured party atdetermination of commercial reasonableness:
tempted to achieve the best possible price, (2) whether the sale was a public or private sale,
enhance the value of
(3) the condition of the collateral, (4) whether efforts were made to enhance
(3)
the collateral, (5) how they collateral was advertised, (6)
(6) how many bids were received,
id.
and (7)
(7) the process by which bids were solicited. See id.
175. Id.
Id. at 417. The court also reversed summary judgment in favor of the bank on a
conversion claim asserted by the debtor for the alleged loss of personal property that was
in the plane at the time of repossession, because the bank did not address issues of material
fact raised by the counterclaim. See id.
id.
176. 576 F.3d 1374, 1376
1376 (Fed. Cir. 2009).
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[Vol.
another company.
company. At
At no time
time after
after foreclosure,
foreclosure, however,
however, did
did the
the debtor
debtor
another
sign aa written
written agreement
agreement assigning
assigning its
its rights
rights in
in the
the patents
patents to
to the
the secured
secured
sign
party. The
The transferee
transferee of
of the
the patents
patents later
later sued
sued another
another company
company for patpatparty.
ent infringement,
infringement, and
and that
that company
company defended
defended by
by arguing
arguing the
the transferee
transferee
ent
had not
not acquired
acquired rights
rights in the
the patents
patents because
because the
the lack
lack of
of a written
written assignhad
ment by the
the debtor
debtor rendered
rendered the
the purported
purported transfer
transfer ineffective
ineffective under
under the
the
ment
7 7 The
ActP7
The Court
Court of Appeals
Appeals for the Federal
Federal Circuit
Circuit disFederal Patent
Patent Act.'
Federal
agreed with
with this
this contention
contention and
and held
held that
that signing
signing a security
security agreement
agreement
agreed
in the patents
patents along with
with the
the right
right to dispose
dispose
granting a security
security interest
interest in
granting
of the Massachusetts
Massachusetts
of the collateral
collateral under
under sections
sections 9-610
9-610 and 9-617
9-617 of
of
same as
as the Texas
Texas Code) allowed
allowed transfer
transfer by
by operaCode (which is the same
Code
178 The court
court reasoned
reasoned that
that transfer
transfer by operation
operation of law isis not
not
tion of
of law. 178
tion
7 9 The
an "assignment"
"assignment" that
that requires
requires aa writing
writing under
under the
the Patent
Patent Act.'
ACt. 179
an
Act preempted
preempted the
the foreforecourt also
also rejected
rejected an
an argument
argument that
that the
the Patent
Patent Act
court
closure provisions
provisions of the Code, ruling
ruling instead
instead that the transferee
transferee had
closure
make a
properly acquired
acquired ownership
ownership of the patents and had standing to make
properly
80
infringement. 18o
claim for their infringement.
VI.
CONCLUSION
CONCLUSION
Although the Code was little changed by legislation
legislation during the 2009
Although
some significant
significant impact. Two
Two
Survey period, case law interpretations
interpretations had some
Survey
federal courts stand
stand out. The decision
decision with the most direct
cases from the federal
Crude, holding that section 9.343 of
SemCrude,
effect on the Code itself was In re Sem
the Code does not provide automatic perfection for oil and gas producers
81 The other decision,
debtors. 181
for products in the hands of non-Texas debtors.1
MarCitigroup Global
Global Marwith implications extending
extending beyond the Code, was Citigroup
award
Bacon, establishing that an appeal from an arbitration award
kets, Inc. v. Bacon,
82
law.1182
arbitrator's manifest disregard of the law.
can no longer be based on an arbitrator's
In the state courts, the Texas Supreme Court revisited the doctrine of
good faith and its interaction with open price terms in sales to retail gaso8 3 At the producer level,
line dealers under section 2.305 of the Code. 183
the supreme court addressed risk-of-Ioss
risk-of-loss issues under contract terms dealproduced at the welling with quantity differences between natural gas produced
84
184
buyer.1
Cases pending before the
head and gas delivered to the buyer.
re
supreme court that may affect the application of the Code include In re
Olshan
Repair Co., LLC, holding that an arbitration clause
Foundation Repair
Olshan Foundation
specifying application of the Texas General Arbitration Act can exclude
of interests in patents
assignments of
177. Id.
U.S.C. §§ 261 (2006) (requiring assignments
at 1379;
1379; see 35 U.s.c.
Id. at
to be in
in writing).
178. Sky
at 1380.
1380.
F.3d at
Sky Technologies,
Technologies, 576 F.3d
179. Id.
1379, 1381.
1381.
Id. at 1379,
180. [d.
1381-82.
Id. at 1381-82.
181.
Del. 2009).
B.R. 112, 130 (Bankr. D. Del.
181. 407 B.R.
182.
182. 562 F.3d
F.3d 349, 358 (5th Cir. 2009).
2009).
(Tex. 2009).
183. Exxon Mobil Corp.
127-28 (Tex.
124, 127-28
299 S.w.3d
S.W.3d 124,
v. Gill, 299
Corp. v.
(Tex.
168-69 (Tex.
164, 168-69
184. Dynegy Midstream
v. Apache Corp., 294 S.W.3d 164,
L.P. v.
Midstream Servs., L.P.
2009).
2009).
HeinOnline -- 63 S.M.U. L. Rev. 452 2010
2010]
2010]
Commercial Transactions
Transactions
Commercial
453
453
8 5 and
use of
of the Federal
Federal Arbitration
Arbitration Act,
Act,185
and Lenk
Lenk v.v. Guaranty
Guaranty Bank,
Bank, dealdealuse
ing with
with the
the liability
liability of
of aa bank
bank that
that relied
relied on
on false
false letters
letters of
of administration
administration
ing
6 Finally,
to pay
pay funds
funds out
out of
of aa decedents'
decedents' account.'
account.18 86
Finally, aa case
case still
still pending
pending
to
from last
last year
year will have
have an
an impact
impact on
on the
the application
application of
of section
section 9.406
9.406 and
and
from
assignability of rights
rights to
to payment
payment when
when that section
section conflicts
conflicts with
with
the assignability
1877
other Texas
Texas law.18
other
185.
2009, pet. denied).
132 (Tex.
(Tex. App.-Dallas 2009,
124, 132
S.W.3d 124,
277 S.W.3d
185. 277
2,
July 2,
Antonio July
186.
*3-4 (Tex.
(Tex. App.-San Antonio
2008 WL 2602121, at *3-4
No. 04-07-OO503-CV,
04-07-00503-CV, 2008
186. No.
granted).
2008, pet.
motion granted).
denied) (mem. op.) (rule 53.7(f) motion
pet. denied)
677, 681254 S.W.3d
S.W.3d 677,
187.
Queen, 254
DeQueen,
First State
State Bank of De
v. First
Comm'n v.
Lottery Comm'n
See Texas
Texas Lottery
187. See
at 1018.
1018.
155, at
85 (Tex. App.-Austin
supra note 155,
Krahmer 2009, supra
granted); Krahmer
2008, pet. granted);
App.-Austin 2008,
HeinOnline -- 63 S.M.U. L. Rev. 453 2010
454
454
SMU LAW
LAW REVIEW
REVIEW
SMU
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[Vol.
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