CASE 11.1 CONDITIONAL SALE Prewitt v. Numismatic Funding Corp., 745 F.2d 1175 (8th Cir. 1984). "Under the provisions of the UCC relating to risk of loss, as adopted in Missouri,the risk of loss remains with the seller." Judge Bright, United States Court of Appeals for the Eighth Circuit Facts Numismatic Funding Corporation (Numismatic), with its principal place of business in New York, sells rare and collector coins by mail throughout the United States. Frederick R. Prewitt, a resident of St. Louis, Missouri, responded to Numismatic's advertisement in the Wall Street Journal. Prewitt received several shipmentsof coins from Numismatic via the mails. These shipments were "on approval" for 14 days. Numismatic gave no instructions as to the method for returning unwanted coins. Prewitt kept and paid for several coins and returned the others to Numismatic, fully insured, via FedEx. Numismatic mailed Prewitt 28 gold and silver coins worth over $60,000 on a 14-day approval. Thirteen days later, Prewitt returned all the coins via certified mail and insured them for the maximum allowed, $400. Numismatic never received the coins. Prewitt brought this action seeking a declaratory judgment as to his nonliability. Numismatic filed a counterclaim. The district court awarded Prewitt a declaratory judgment of nonliability. Numismatic appealed. Issue Who bears the risk of loss, Prewitt or Numismatic? Language of the Court The trial court determined, and the parties do not dispute, that the delivery of coins between seller Numismatic and buyer Prewitt constituted a sale "on approval." Under the provisions of the UCC relating to risk of loss, as adopted in Missouri, the risk of loss remains with the seller. Appellant Numismatic contends that the parties impliedly agreed to shift the risk of loss to Prewitt. It argues that an agreement by Prewitt to assume the risk of loss arose by implication from the prior course of dealing between the parties in which Prewitt had returned coins fully insured via Federal Express. The trial court found that Numismatic shipped the coins to Prewitt through the U.S. Postal Service and that no instructions on the method of return were ever given by Numismatic. In light of this finding, and the absence of any specific evidence in the record indicating that the parties had agreed upon a method of return, we reject Numismatic's contention that there was an understanding between the parties that Prewitt would return the coins fully insured via Federal Express. Decision The court of appeals held that the transaction in question was a sale on approval and that under UCC 2-327(1), Numismatic, the owner of the coins, bore the risk of their loss during the return shipment from Prewitt. The court of appeals affirmed the decision of the district court. Law & Ethics Questions 1. Do you agree with how the UCC assesses risk of loss in sale on approval transactions? 2. Ethics Should Prewitt have fully insured the coins before sending them back to Numismatic? 3. How could Numismatic have protected its interests in this case? Web Exercises 1. Web Visit the U.S. Court of Appeals for the Eighth Circuit at www.ca8.uscourts.gov. 2. Web Use www.google.com and find an article that discusses conditional sales. CASE 11.2 BUYER IN THE ORDINARY COURSE OF BUSINESS Lindholm v. Brant, No. X05CV020189393, 2005 Conn. LEXIS 2366, at *1 (Super. Ct. Aug. 29, 2005), aff'd, 925 A.2d 1048 (Conn. 2007). "Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business." Judge Rogers, United States Court of Appeals for the Eighth Circuit Facts In 1962, Andy Warhol, a famous artist, created a silkscreen on canvas entitled Red Elvis. Red Elvis consisted of 36 identical faces of Elvis Presley with a red background and is approximately 5.75 feet in height and 4.35 feet in width. Kerstin Lindholm was an art collector who, for 30 years, had been represented by Anders Malmberg, an art dealer. In 1987, with the assistance and advice of Malmberg, Lindholm purchased Red Elvis for $300,000. In 1996, the Guggenheim Museum in New York City decided to sponsor an Andy Warhol exhibition. The staff of the Guggenheim contacted Malmberg to see if Lindholm was willing to lend Red Elvis to the exhibition. Lindholm agreed and Red Elvis was placed in the Gugenheim exhibition. Once the Guggenheim exhibition was completed in 2000, Malmberg told Lindholm he could place Red Elvis on loan to the Louisana Museum in Denmark if Lindholm agreed. By letter dated March 20, 2000, Lindholm agreed and gave permission to Malmberg to obtain possession of Red Elvis from the Guggenheim Museum and place it on loan to the Louisana Museum. Instead of placing Red Elvis on loan to the Louisana Museum, Malmberg, claiming ownership to Red Elvis, immediately contracted to sell Red Elvis to Peter M. Brant, an art collector, for $2.9 million. Brant had his lawyer does a UCC lien search and search of the Art Loss Registry related to Red Elvis. These searches revealed no claims or liens against Red Elvis. Brant paid $2.9 million to Malmberg and received an invoice of sale and possession of Red Elvis. Subsequently, Lindholm discovered the fraud. Lindholm brought a civil lawsuit in the state of Connecticut against Brant to recover Red Elvis. Brant argued that he was a buyer in the ordinary course of business because he purchased Red Elvis from an art dealer to whom Lindholm had entrusted Red Elvis, and there he had a claim that was superior to Lindholm's claim of ownership. Issue Was Brant a buyer in the ordinary course of business who had a claim of ownership to Red Elvis that was superior to that of the owner Lindholm? Language of the Court The Brant defendants have pleaded a special defense to all counts that Brant is a buyer in the ordinary course pursuant to Conn. Gen. Stat. Sections 42a-2-403(2) and (3). A person with voidable title has power to transfer a good title to a good faith purchase for value. Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business. "Entrusting" includes any delivery and any acquiescence in retention of possession regardless of any condition expressed between the parties to the delivery or acquiescence and regardless of whether the procurement of the entrusting or the possessor's disposition of the goods have been such as to be larcenous under the criminal law. That statutory provision sets forth the circumstances in which an innocent, good faith purchaser of goods who acquires them from a dealer in goods of that kind has a right to the goods superior to the rights of the owner/entrustor of the goods. This special defense requires the Brant defendants to show that Brant was a buyer in the ordinary course. K. Lindholm's March 20, 2000 letter constituted an entrustment of Red Elvis to a merchant, Malmberg. Once K. Lindholm entrusted Red Elvis to Malmberg she gave him the power to transfer all of her rights as the entruster to a buyer in the ordinary course. Plaintiff's expert, Hoffeld, admitted that the Art Loss Registry is the best recognized mechanism for determining whether a piece of art is stolen. Accordingly, it was reasonable in investigating title for Brant to search the Art Loss Registry and the UCC liens to determine if there were any claims on Red Elvis. Neither Brant nor his attorneys were focused on the possibility that Malmberg was simply stealing the painting from K. Lindholm. Based on Brant's lawyer's failure to identify to Brant that this might be an outright theft by Malmberg and based on Malmberg's excellent reputation in the art world as well as the fact that the Guggenheim released the painting to Malmberg, it was reasonable for Brant to believe that Malmberg had title to the painting when Malmberg physically delivered the painting to the agreed-upon bonded warehouse. After considering all of the evidence, the court finds that pursuant to Conn. Gen. Stat. Section 42a-2-403 Brant took good title to Red Elvis. Specifically, Brant purchased Red Elvis from Malmberg in good faith and in the ordinary course of business. Brant honestly believed Malmberg owned Red Elvis when he purchased the painting from him. Brant also observed reasonable commercial standards of fair dealing in the art industry when he purchased Red Elvis from Malmberg. Accordingly, because Brant has proven his special defense of being a buyer in the ordinary course, judgment will enter in favor of the defendants on all counts. Decision The court held that Brant was a buyer in the ordinary course of business who obtained ownership to Red Elvis when he purchased the stolen Red Elvis from Malmberg. The court held that Brant's claim of ownership as a buyer in the ordinary course of business was superior to Lindholm's claim of ownership because Lindholm had entrusted Red Elvis to an art dealer who sold the stolen Red Elvis to Brant. Law & Ethics Questions 1. What does the rule of buyer in the ordinary course of business provide regarding the purchase of stolen property? Explain. 2. Did Lindholm entrust Red Elvis to Malmberg, an art dealer? What could be the consequence of entrusting property to a merchant who sells the type of property that is entrusted to him? 3. Ethics Did Malmberg act ethically in this case? Did he act criminally? 4. Ethics Did Linholm have a good case to try to recover Red Elvis from Brant? Web Exercises 1. Web Visit the website of the Superior Court of Connecticut at www.jud.state.ct.us. 2. Web Use www.google.com and find a short biography of Andy Warhol. 3. Web Visit the website of the Guggenheim Museum in New York City at www.guggenheim.org. 4. Web Use www.google.com and find a picture of Red Elvis

• For Case 11.1, Conditional Sale, do you agree with how the UCC assesses the risk of loss in the sale on approval transactions? Why or why not?
• For Case 11.2, Buyer in the Ordinary Course of Business, what does the rule of the ordinary buyer in the course of business provide regarding the purchase of stolen property? Explain.