Conditional Sales and Risk of Loss
Let us look more closely at two supposed examples of the abandonment of title and the disaggregation of property in Article 2 of the U.C.C.—the treatment of conditional sales and risk of loss.
Conditional Sales as Substance over Form
U.C.C. § 2-401(2) states, in effect, that even if a seller and buyer expressly agree that the passage of title in a good which is sold on credit is conditioned upon the buyer's payment in full of the purchase price, the U.C.C will treat the transaction as though title vested in the good to the buyer immediately. The seller will only have a purchase money security interest in the good, subject to the perfection and other requirements of Article 9. This can be read, at first blush, as not merely a rejection or disaggregation of "Title" analysis but an abrogation of freedom of contract. These impressions are inaccurate.
U.C.C. § 2-401(2) can only be understood in context. U.C.C. § 9-102(1)(a) provides that Article 9 applies "to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures. . . ." U.C.C. § 2-401(2) is not, therefore, a rejection of property or freedom of contract per se but merely a restatement of the general U.C.C principle that substance should prevail over form. A selfserving statement as to the location of "Title" standing alone should not necessarily determine all property-related issues for all commercial-law purposes. This is a corollary to the proposition which I discussed in section II.B of this chapter that conveyances of property, which affect third-party rights, should be "objectively" recognizable and verifiable by third parties. Among themselves (i.e., contract), the two parties may characterize their relationship according to their private, subjective, idiosyncratic will. But if they wish to bind third parties (property), their actions must be public, objective, and recognized by the community. In other words, if possession (title) must be objectified and if exchange (conveyancing) is the process by which possession is altered, the contract of conveyance should also have a Community Objective aspect.
In contradistinction, common-law "Title" doctrine raised form over substance. The (subjective) declaration of the location of "Title" determined property issues despite, not because of, the allocation of the (objective) substantive rights constituting property. Llewellyn called such
declarations of the form of "Title" over the substance of property "paper thunderings."
Formal declarations of "Title" become even more troublesome when one examines the substance of the typical mercantile transaction. During the sales process, "Title" (understood as the totality of all incidences of property) by definition cannot be definitively located because it is a moving target. It cannot, therefore, be fixed through the subjective intent of the contracting parties. This was precisely Llewellyn's criticism of the common law of conditional sales in which
the papers . . . make clear that it is not to be a sale, that "property" is not to pass. Something is to pass: The "buyer" is to get possession, and privileges of user, and come under a solid debt for the price; but "property" he is not to get.
In other words, in a so-called conditional sale the transferee has conditionally acquired significant elements of ownership—the right to immediate physical possession and use. Although the transferee in these transactions may not immediately have the third traditional right of alienation, it is anticipated that she will obtain this right as well upon the payment of the purchase price. Indeed, even when the further alienation of the entire property interest in the collateral by the buyer-debtor is wrongful under the terms of the contract, the debtor always has the power to convey her equity in the collateral.
The seller–secured party also has some property rights in the good. In section II.B of this chapter I discussed how a secured party has rights to repossess the good, and to alienate it in a foreclosure sale or to use it through collection or, less often, in strict foreclosure. Since buyer and seller can both be said to have some form of property rights in a conditionally
sold good, we cannot say that either party owns the good free and clear—that is, full "Title." Nevertheless, in our legal system, when property rights are divided, we customarily say one party "owns" the property, subject to the rights of the other party. Consequently, we need to make a pragmatic decision as to which of the parties—the conditional seller or the buyer—will be called the "owner."
If property should be "objective," then all transactions structured in the same way should be given the same legal treatment. The drafters of the U.C.C. made a pragmatic decision that the division of the significant incidences of property in a conditional sale is substantially identical with the division in a hypothecation. We are accustomed to call the debtor's present rights in a hypothecation "ownership." These rights consist of the residual value in the collateral after payment of the secured transaction. As a buyer in a conditional sale similarly acquires the residual upon payment of the purchase price, it seems consistent also to call the conditional buyer the "owner."
In contradistinction, the common law allowed the private, subjective intent or opinion of the contracting parties to override the public, objective analysis of the transaction—that is, form governed over substance.
This is inconsistent with the competing common-law doctrine of ostensible ownership—property interests which are not open and notorious are constructively fraudulent against creditors.
In other words, the concept of location of "Title" as a matter of subjective intent is inadequate in theory and practice to the lengthy processes of mercantile sales which require property to be determinable by objective evidence. Accordingly, Llewellyn described Article 2's treatment of title as follows:
[A]n objectively manifested act becomes the title-passing point without regard to the intention of the parties to pass or retain title. Such intention is controlling under present law.
This is why U.C.C. § 2-401 provides that the objective rules of Articles 2 and 9 apply despite subjective declarations of the location of "Title" to the contrary.
Risk of Loss and the Movement of the Indicia of Ownership
The risk-of-loss rules of Article 2 are another familiar example of the supposed disaggregation of property. Risk of loss is not one of the three traditional elements of property—unless one masochistically believes risk to be the dark side of enjoyment. Nevertheless, it has traditionally been considered closely related to property because it deals with certain obligations of contract parties with respect to specific objects of property. In the great majority of cases, simple unitary property concepts (i.e., "Title") still determine who bears the loss from casualty to a good—the "owner." This is the farmer's world, where "use and control and possession and risk and power of disposition sit comfortably in the same fist. . . ." In this paradigm, risk of loss passes at the same time as "Title" (in the sense of the totality of ownership) not because risk of loss is related to "Title" per se but because all aspects of the sale—contract as well as conveyance—are consummated simultaneously. What the drafters of Article 2 questioned was whether this simple rule results in an appropriate answer during the ambiguous period when the ownership of the good is itself in flux—during the sales process.
Since the elements of property are dispersed during the sales process, contractual statements of the location of "Title" confuse, rather than aid, the analysis of property issues during the transition period. Recognizing that property is temporarily dispersed places us in the position to ask which, if any, incident of property is related to risk of loss. Llewellyn's analysis reveals that during the pendency of the sales process, risk of loss can always be reduced to a pricing term of the sales contract. The cost of the risk (monetized into the cost of insurance) can either be included in the price quoted by the seller (i.e., the seller bears the risk of loss) or be an additional cost charged to the buyer over and above the purchase price (i.e., the buyer bears the risk of loss). Consequently, risk of loss is not an incident of property (conveyancing) at all. It is just another two-party contract term which does not directly affect third-party rights. Its allocation should, therefore, be governed by the U.C.C.'s general principle of freedom of contract. The U.C.C., therefore, merely needs to set forth "default" rules which apply when a contract is silent.