Question/Answer for February 1-4, 2013

A good bunch of questions over the weekend and today about the material from Thursday and Monday:

1. The footnote on page 149 suggests that pawnbrokers aren't considered merchants under the entrustment rule. Why is that?

Actually, that's not quite what the footnote says. A pawnbroker is a merchant (a pawnbroker does sell goods). What the UCC says is that a "buyer in the ordinary course" is someone who buys from a merchant in goods of that type, other than a pawnbroker. Thus, someone who buys from a pawnbroker cannot qualify as a buyer in ordinary course of business. Thus, someone who buys from a pawnbroker would not be entitled to the protection of the UCC entrustment rule in § 2-403(2).

Thus, take this example: Jennifer takes a ring to Pete Pawnbroker and pawns it for a $200 loan, which Jennifer has to pay back within one month. Three weeks later, Pete Pawnbroker sells the ring to Wells, who pays $500 for it and has no idea that Pete Pawnbroker's sale is in violation of Jennifer's rights (since Jennifer still has a week to pay back the loan). In this circumstance, Jennifer has entrusted her ring to Pete Pawnbroker, who is a merchant in goods of that kind, and thus her entrustment gives Pete Pawnbroker the power to convey Jennifer's title as entruster to a buyer in the ordinary course. However, Wells is not a buyer in the ordinary course (since Wells is buying from a pawnbroker), and thus for the next week, Jennifer would be in a position to reclaim the ring from Wells by paying back the $200 loan (with whatever interest Jennifer was obligated to pay).

Now suppose two more weeks pass, and Jennifer still hasn't paid back the loan. At this point, under the laws governing the relationship between pawnbrokers and their customers in most states, Jennifer would no longer have been able to reclaim the ring from Pete Pawnbroker, and thus she could no longer reclaim it from Wells either. This wouldn't mean that Wells had now become a buyer in ordinary course of business; just that Wells was a buyer who got a valid derivative title from Pete Pawnbroker, who would have acquired title to the ring once the time for Jennifer to repay the loan had expired.

2. Under the entrustment rule, does the buyer have to know the seller is a merchant? What if I buy a TV from a neighbor who owns a TV store, but I don't know that, and I buy it from him at his weekend garage sale at his house? It turns out, the TV had been entrusted to him by his next door neighbor for safekeeping while the neighbor was out of the country. Can the neighbor recover the TV, or do I get to keep it under the entrustment rule?

To be a buyer in ordinary course of business, one has to buy "in the ordinary course from a person ... in the business of selling goods of that kind." U.C.C. § 1-201(b)(9). The statute also states that "A person buys goods in the ordinary course of business if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices."

Courts have interpreted the term "in the ordinary course" to mean that the transaction has to have the traditional hallmarks of a purchase from a merchant. If I walk into a Wal-Mart and purchase inventory of their shelves, that's in the ordinary course of business. If I place an order from someone that I know is a merchant in goods of the type I'm buying, that's "in the ordinary course" even if I don't go into the merchant's store and the goods are delivered to me at home. Thus, buying from a web retailer like barnesandnoble.com would be buying in ordinary course of business.

But if I'm buying from someone that I don't know is a merchant, a court would probably say that is not "in the ordinary course." My expectations as the buyer probably should be different if I'm buying a TV at a garage sale (as compared to buying it in a TV retailer).

3. In the discussion of the Wells/Dessem hypo in class (Problem 4), the facts said that Dessem paid less than full fair market value for the watch. Would he still be a buyer in the ordinary course if the fair market value of the watch was more than he paid for it, or would he lack good faith and thus not be a buyer in ordinary course?

It is possible that the price could go so low that a buyer could no longer be a buyer in the ordinary course of business, but it is hard to say how low that price must be — much lower than in the facts in the Problem.

To be a buyer in ordinary course, the buyer must buy (a) in good faith, (b) for value, (c) without knowledge that the sale violates the rights of another person, (d) in the ordinary course, and (e) from a person in the business of selling goods of that kind. In the hypo in class, Dessem would fit all of these characteristics. He buys from a watch merchant, without knowledge that the sale violates Wells' rights. He buys the watch over the jewelry counter, the way you typically buy watches. He paid "value," which means money or money's worth, when he paid $2000 in cash. And he acted in good faith if he was subjectively honest and observed reasonable commercial standards of fair dealing. If the only strange thing about the transaction is that he got about a 30% discount on the price, there's nothing about that transaction that should call into question the reasonableness of Dessem's behavior — merchants discount merchandise frequently, and there's a lot of merchants at the mall these days with signs advertising anywhere from 40-75% off their merchandise. I wouldn't customarily think that a "50% off" sign or a "75% off" sign means that the merchant lacks title to their goods.

At some point, the price could go so low that we might say any buyer should be suspicious. If he was buying the watch and the clerk offered to sell it to him for 50 cents, a reasonable person in Dessem's position should be suspicious about the merchant's title in that situation (or at least suspicious about whether the clerk in question has the actual authority to sell at that price). Dessem probably wouldn't be protected as a buyer in ordinary course if he paid 50 cents. But because the determination is always contextual, I can't tell you precisely where, in between 50 cents and $3,000 (the fair market value), a court would be inclined to draw the line. Likely though, the price would have to go pretty low. Again, just because the signs say "40-75% off" doesn't mean I have to be inherently suspicious about the merchant's title or their authority to sell.

4. I had a friend in college that had a musical instrument stolen, which they later found in a pawnshop, but then ended up having to buy back from the pawnshop! Why? Based on what we said in class, shouldn't my friend have been able to have gotten the instrument back from the pawnshop without having to pay for it?

You would think so. Unfortunately, there is also a statute in Missouri that applies in cases where stolen goods pass into the hands of a pawnshop. This statute creates significant practical hoops for someone trying to recover the stolen goods. [Pawnbrokers have good lobbyists.] The statute essentially provides that to recover stolen goods from a pawnbroker, the owner must provide the pawnbroker with:

• a written demand for the return of such property,
• a copy of a police or sheriff's report filed by the owner, which contains "a particularized description of the property or applicable serial number," and
• a signed affidavit made under oath setting forth the following facts:

• that he/she is the true owner of the property,
• his/her name and address,
• a description of the property being claimed,
• that the property was taken from the owner without the owner's consent, permission or knowledge,
• that the owner has reported the theft to the police,
• that the owner will assist in any prosecution relating to such property,
• that the owner will respond to court process in any criminal prosecution relating to the property, and
• that the owner will testify truthfully as to all facts within the owner's knowledge and not claim any testimonial privilege with respect to said facts.

All of these documents have to be presented to the pawnbroker concurrently. Mo. Rev. Stat. § 367.044(5). Once the true owner does all this — if the true owner can do all this — the pawnbroker must then return the property to the owner within 7 days, unless the pawnbroker has "good reason to believe that any of the matters set forth in the claimant's affidavit are false" or if the police have placed a "hold order" on the property. If the pawnbroker refuses, the owner then has to file a petition in court seeking the return of the property, and the losing party bears the costs of that action (and attorney fees). Mo. Rev. Stat. § 367.044(6).

Based on this statute, pawnshops will tell you that they will sell you back your property for the amount for which the thief pawned it, or you can instead choose to sue them. Unless there are thousands of dollars involved, most people will quickly figure that it will cost them more in time and aggravation to file all of the necessary paperwork and (possibly) bring a lawsuit against the pawnbroker, and that if they want the item back, they're better off just buying it back. Perhaps one of you have also had this unpleasant experience. The statute doesn't legally cut off the true owner's title, of course — but it does make it so cumbersome for the true owner to assert that title and reclaim the property that most true owners don't bother at all, or they simply pay off the pawnshop.

5. I have a question about the Wells/Dessem hypothetical in class, where Wells entrusts the watch to a merchant for repair but the merchant inadvertently sells it. Doesn't the UCC in that situation deprive Wells of her property without due process of law?

No. Assuming that the legislature enacted the statute according to appropriate legislative procedures, then the legislative process itself gives members of the public sufficient notice of the existence of the statute, and members of the public are thereafter deemed to know the content of the law. The law assumes Wells was aware of this risk, even if she actually wasn't. Society wouldn't function very well if I could raise my ignorance of the law as an excuse for my conduct. If we want to have a marketplace in which people can readily transfer property rights, we have to assume that people engaging in those transactions are generally aware of the background legal principles that would be relevant to their transactions — otherwise, we would significantly increase the cost of transacting (as I would have to confirm that my transacting partner actually subjectively understood the various background principles of law that might not be explicitly reflected in our agreement).

The fact that Wells (and most other people) are oblivious to the consequences of the entrustment rule in a case like the Wells/Dessem hypo may be an argument that the rule is bad policy (though I'm not sure that it is). But if the statute was legitimately enacted by the legislature, it doesn't implicate due process concerns. And it certainly isn't "singling out" Wells, and the government is not taking her property.

6. On page 170, the book talks about how the government is immune to adverse possession claims. Doesn't that create an incentive for governmental officials to be lazy in asserting the government's rights?

In part, the explanation is historical. In England, you couldn't raise estoppel against the King. As the United States incorporated English common law, American law generally adopted the position that estoppel didn't apply against the government. Because the doctrine of adverse possession functions as a quasi-estoppel rule, American courts traditionally held that one couldn't obtain title by adverse possession of government-owned land.

This may be bad policy; it does perhaps encourage government officials to be lazy and inattentive to persons trying to appropriate public land to their exclusive possession. If we were concerned about giving public officials the right incentives, we might prefer to say that the government should be subject to adverse possession, and if that means that public land is lost because some public official slept on their rights, we would expect the responsible public officials to be voted out at the next election.

The practical problem with that argument is that the practical responsibility for managing public lands isn't really vested in an elected official, but more likely in some career civil servant. An outraged public can "vote out" the Mayor, but not the General Manager of the Department of Parks and Recreation. Because political accountability for such laziness or inattention isn't as easy, we might instead choose to take the view that public land shouldn't be at risk due to adverse possession; you and I shouldn't lose our ability to enjoy public land, to another private citizen, just because some bureaucrat didn't do their job well enough.

The note on page 170 cites to 2 articles written by Professor Paula Latovick, which contain a much more detailed discussion of the policies (sensible or not) underlying the traditional rule, as well as some recent statutes in a few states that have reversed the traditional rule, at least as to some types of government-owned land.