Passing of title

Sellers, protect yourselves!
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Published : 11/08/13
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This month I’d like to put to rest a common myth, namely that the nearly ubiquitous clause in coin dealer invoices stating “title doesn’t pass until paid in full” has any legal force at all. It doesn’t. And here’s why.

The Uniform Commercial Code is a body of law created by legislators in just about every state of the Union. It’s purpose is to codify existing law as it’s practiced in every state, to resolve any differences, and to make the application of law to commercial transactions predictable.

Protection by law

This encourages commercial actors (you and me) to do more business, in the knowledge that we are protected by laws we understand.

How does this relate to the “title doesn’t pass” situation? It’s simple. When someone buys something (say, a coin) from someone else, they don’t know for sure how the seller obtained the item.

In other words, they don’t know whether the seller paid in full for the coin. If they feared that they could pay for the coin and then lose their investment because the seller didn’t have clear title, they’d be less inclined to make the purchase in the first place.

The Uniform Commercial Code’s drafters are dedicated to furthering business, and not hindering it. So they determined that furthering business requires buyers to have confidence that the goods that they pay for will belong to them regardless of the seller’s “voidable title.”

So a general rule is that unless goods are actually stolen property, they can be transferred to an “innocent” third party free and clear of any prior claims.

OK. But can’t a prior seller protect itself in its invoices against buyers who don’t pay? The answer is no in almost all circumstances.

The issue is one of granting credit. If, for example, a dealer delivers a coin to a customer who hasn’t fully paid for it, the dealer is giving the customer credit.

If that customer sells the coin to a third party, that third party isn’t expected to know whether or not his or her seller is fully paid up. That’s the UCC’s “innocent” buyer.

So the dealer, when giving credit, is accepting the risk that its customer will transfer possession of the coin to a third party. The Uniform Commercial Code gives that third party the security of knowing that the coin will never be taken away, thus justifying the third party’s decision to make the purchase.

What about problems?

If there’s a problem, it’s between the dealer and the person to whom the dealer chose to give credit.

Now this doesn’t always sit well with dealers. And just about everyone in the business includes in their terms and conditions some kind of “title doesn’t pass” clause. But unfortunately for those dealers, the UCC specifically invalidates those clauses.

Uniform Commercial Code section 2-401 states, “Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest.”

A security interest gives the seller priority over its buyer’s other creditors, but not the right to demand the coin back.

I’m not trying to encourage buyers to renege on their obligations, or tell dealers they have no recourse against their customers who take delivery and don’t pay.

Contracts are still enforceable, and buyers must pay for what they have received.

However, dealers should know that the body of laws meant to encourage free commerce in goods such as coins requires sellers to protect themselves fully, to make appropriate inquiries or take collateral, before delivering goods that haven’t been paid for.

Armen R. Vartian is an attorney and author of A Legal Guide to Buying and Selling Art and Collectibles. Contact him at www.vartianlaw.com.

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