What the **** is the Uniform Commercial Code?

An explanation using time machines and sex dolls

The prior installment of this LinkedIn Newsletter explained how a business that sells goods to other businesses can protect its right to get paid in the event of the insolvency of its customer by deploying a consignment arrangement (and how easy it is to do that incorrectly and thereby not be protected).?In that installment, I mentioned Article 9 of the Uniform Commercial Code

That installment generated more emails than most, and most of those emails were from people who had questions about Article 9, as in, what is it, and what is the Uniform Commercial Code?

I suppose some archaeologists walk around assuming that everyone knows what a resistivity meter-- which I dig (see what I did there?) -- is? I was, in other words, being myopic.

Who is the UCC Important to?

The UCC is important to you if your company sells goods to anyone, lends money to anyone, pledges non-real estate collateral when borrowing money, and in a multitude of other contexts. It deserves some explanation. So here goes…

The UCC is not the Law Anywhere, Yet its the Law Everywhere, Sort of

The Uniform Commercial Code (“UCC”) is not the law in any state. Rather, it is a comprehensive suggestion to the legislators of the 50 states by an organization established in 1961 called the Permanent Editorial Board for the Uniform Commercial Code (“PEB”). The PEB, in turn, is composed by members appointed by the Uniform Law Commission (established in 1892) and American Law Institute (established in 1923).?

Your company’s attorney probably took one course in law school in which these organizations were briefly mentioned and, if you asked, she or he probably would be hard-pressed to explain what they are in anything other than the vaguest terms.

The UCC is divided into articles (“Articles”). Most of the states have adopted each Article of the UCC.?Again, however, the UCC itself is not the law in any state. But I just said that it has been adopted by most states. So, what am I trying to say?

Here’s the deal: a state legislature doesn’t have a binary choice: the UCC is not a take it or leave it proposition. Rather, a state can pick the pieces (Articles or parts of Articles) it likes and reject the pieces it doesn’t like. So, each state has its own version of the UCC.

Think of the word “Article” here not as what you read in a magazine but, rather, think of it in the same way as one thinks of the Articles of the U.S. Constitution. In other words, it’s just a fancy way of saying “chapter.” I could say that it’s also another way of saying “section,” and it is, but in the context of the UCC, each Article has many sections.

Article Adoption Without Much Adaptation

Anyway, each state gets to pick and choose the Articles it wants to adopt. And when a state adopts an Article of the UCC, it can adopt that Article without making any changes or it can make a lot of changes, That is totally up to the state. But when a state adopts an Article of the UCC, it usually adopts it without a lot of changes.?

Article 9 of the UCC governs security interests in personal property. It and Article 2, which governs sales, are perhaps the most widely accepted Articles of the UCC. And they tend to be adopted without any significant changes. So, while each state technically has its own “version” of UCC Article 9, all of them are virtually identical (other than the way they are numbered since each state has to fit the sections of Article 9 into its own pre-existing ordering system for its statutes.

So, for example, while security interests governed by New York law are governed by New York’s specific adoption of UCC Article 9 (as the New York legislature may have revised it), in practice most attorneys do not usually look at the New York version. Rather, they look at the UCC as drafted by the PEB. At the end of the day, lawyers have to confirm that the specific sections at issue in the UCC are in all important ways indeed identical to those in New York’s version, but they almost always are.

Case Law is Where the Action Is

The place where UCC Article 9 gets different depending on what state’s version applies is in court. Here’s what I mean: even if two states have enacted the same exact version of UCC Article 9, the courts in one state will have a history of how it interprets various sections of Article 9, and another state’s courts will have a different interpretive history. This is not unique to Article 9 and it is not unique to the UCC. It’s the way a lot of the law works. In other words, statutes provide a framework and statutes answer a lot of questions. But statutes cannot anticipate every question presented by a multitude of factual circumstances. Here’s a silly but not-so-silly example:

“I cannot eat too much watermelon.”

Did I just tell you that there is no way to satiate my love of watermelon and no matter how much I eat, I want more (the same is true of Peking Duck, and lox and bagels, in case we ever meet each other for a meal (though that assumes I will leave my ranch at some point (I don’t really live on a ranch, but I sound sexier saying that than saying “my basement”))).?

Or did I tell you that if I eat too much watermelon, that I will get sick, and so I cannot eat too much of it?

So, if a statute says that “people cannot get too much sun,” that statute is arguably vague. Statutes can also be ambiguous. And they can be lots of other things that may help cause a dispute to end up in court.

By the way, Article 2 is really good at creating default terms for sales transactions. I don’t want to spend too much time on this (I want to watch the new Twilight Zone (with Jordan Peele -- the man is a genius)) and it’s already late, so I hope the following will suffice.

Let’s say I own a book publishing company (and let’s also assume that people still buy enough books to keep me in business). Let’s assume further (as unrealistic as it may be) that Bryan owns a profitable chain of bookstores called "Bry's Book Bash."?My company sells books to Bryan's Book Bash.

What if we don’t have a written contract? Or suppose we do but it is too short and really pretty shitty?

Guess what? UCC Article 2 comes to the rescue because it provides terms that govern our relationship where the contract is unwritten or incompletely specified, including filling in some key terms as default provisions to apply when we weren’t smart enough to include them in our contact. And it does so much more. Seriously, I cannot decide whether to ask Article 2 or Article 9 to the Prom.

I suppose to be complete I should at least list out all the Articles of the UCC. Here they are:

Art. Name

1- General Provisions

2- Sales

2A- Leases

3- Negotiable Instruments

4- Bank Deposits and Collections

4A- Funds Transfers

5- Letters of Credit

6- Bulk Transfers and Bulk Sales

7- Warehouse Receipts, Bills of Lading and Other Documents of Title

8- Investment Securities

9- Secured Transactions

More Uniform than Not

Even though case law (“precedent”) can and does evolve differently from state-to-state, the differences are not so great. This is for two reasons: first, judges who decide these cases are not so different from one state to the next and they are interpreting the same darn statute. Second, the very reason the UCC was created was to make the economy work better by making it easier to engage in interstate commerce.

After all, if I’m a manufacturer of sex dolls (or times machines if you prefer sci fi) located in one state and I sell to retailers located in 37 other states, do I want to have to worry about how 37 different state laws could govern our contractual relationship? And do I want to have contracts that are 1,000 pages long with my resellers or would I prefer a 10-page contract?

The UCC pretty much takes away my worry about the 37 different state laws with respect to how retailers spread across the U.S. and I do business. Since all 37 versions of the UCC will all say pretty much the same thing, I can use a much shorter standard contract and the good ole’ UCC (Article 2) will fill in the blanks.

(Note that I just told you that UCC Article 2 governs the contractual relationship between me and my retailers and I didn’t say anything about other laws. Maybe sex dolls or time machines are legal to sell in some states and not others. Maybe some states regulate their sale more than others. These matters are not covered in UCC Article 2 (or any Article of the UCC). Rather, UCC Article 2 is about the commercial relationship between seller and buyer.

Our economy would not work as well as it does without the UCC. It really is that simple.

Back to Article 9

Article 9 generally governs the relationship between a party who pledges personal property to secure payment or performance of an obligation and the party to whom the pledge is made. What is personal property? It’s everything and anything other than real estate.

Article 9 tells a lender (or another party to whom money is owed) how to, in UCC parlance, “attach” a “security interest” in some or all of the personal property of the party (often but not always a borrower) that pledges that personal property as “collateral” for its performance of an obligation to the first party. The first party, in UCC parlance, by the way, is the “secured party” and the second party (the one pledging the collateral) is the “debtor.”.

The UCC also tells the secured party how to make sure its security interest is enforceable against third parties (that is, how to “perfect” its security interest) and how to enforce its security interest against the collateral. All the definitions in quotes here come straight from the UCC. I recommend reading 90 Second Lesson: What is a “UCC Article 9” Sale? , 6 Common Mistakes in Drafting Collateral Descriptions and Best Practices for UCC-3 Terminations and Continuations to learn more about these things. If you have nothing to do for a few hours, my favorite (I am biased) is Dealing With Defaults Under Article

9 of UCC: A Player’s Guide for the 21st Century .

Article 9 does a lot more than I've conveyed here, and this installment certainly doesn't tell you all you need to know about it, but that wasn't its purpose.