84-2-403. Power to transfer; good faith purchase of goods; "entrusting". (1) A purchaser of goods acquires all title which his transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though
(a) the transferor was deceived as to the identity of the purchaser, or
(b) the delivery was in exchange for a check which is later dishonored, or
(c) it was agreed that the transaction was to be a "cash sale," or
(d) the delivery was procured through fraud punishable as larcenous under the criminal law.
(2) 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.
(3) "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.
(4) The rights of other purchasers of goods and of lien creditors are governed by the articles on secured transactions (article 9) and documents of title (article 7).
History: L. 1965, ch. 564, § 65; L. 1992, ch. 302, § 10; July 1.
KANSAS COMMENT, 1996
1. This section protects good faith purchasers of goods in many cases in which a seller has defective title to the goods. Subsection (1) provides that a purchaser acquires all title that the transferor had unless, of course, the purchaser is acquiring less than the full interest of the transferor. In addition, a purchaser acquires all title that the transferor "had power to transfer," as discussed in the comments below. This section extends beyond sales transactions to include gifts and other voluntary transactions creating an interest in property. See 84-1-201(32) (defining purchase) & (33) (defining purchaser). In addition, implicit in subsection (1) is a "shelter" principle under which a purchaser may be able, in appropriate circumstances, to transfer good title even to a person who could not otherwise take good title. Cf. 84-3-203 and Official Comment 4 to that section.
2. Subsection (1) also states the general principle that a person with "voidable" title has the power to transfer good title to a good faith purchaser for value. Non-Code law will determine when a purchaser has voidable title. Examples include title obtained through misrepresentation or duress or in cases of mistake or incapacity. For a discussion of "good faith," see 1996 Kansas Comment 3 to 84-2-103. As noted above, "purchaser" as defined in the Code extends beyond buyers and includes, for example, secured and other creditors that obtain some sort of voluntary interest in the property. Finally, "value" is defined in 84-1-201(44).
3. Subsection (1) also clarifies issues that were troublesome under prior law. Paragraph (1)(a) deals with the problem of imposters and impersonation. The result in Farm Bureau Mut. Ins. Co. v. Carr, 215 K. 591, 528 P.2d 134 (1974), illustrates how the section was meant to operate, although neither the court nor the parties cited this section. Paragraphs (1)(b) and (1)(c) abolish the old "cash sale" doctrine and explicitly recognize that a person who acquires goods by a check that later is dishonored can nonetheless transfer good title to a good faith purchaser. See Iola State Bank v. Bolan, 235 K. 175, 679 P.2d 720 (1984); Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 238 K. 41, 708 P.2d 494 (1985). Paragraph (1)(d) makes clear that it does not matter whether a fraud is criminal. The fact that a person has committed a crime does not prevent the person from acquiring voidable title and passing good title.
4. Under subsections (2) and (3), a merchant has power to transfer title to goods with which it has been entrusted to a buyer in ordinary course of business. This doctrine is closely related to pre-Code theories of estoppel and agency. Those theories continue to be available, see Official Comment 1 to this section; but under these subsections, the original owner may lose merely because of its entrustment to the merchant, apart from any resort to notions of estoppel and the like. See Executive Fin. Serv., Inc. v. Pagel, 238 K. 809, 715 P.2d 381 (1986) (quoting Kansas Comment 1983). The court in Executive Fin. Serv., Inc. v. Pagel, supra, identified four typical fact patterns in which entrustment occurs: (1) an owner allows the merchant to sell the goods for the owner; (2) a wholesaler gives a merchant goods on consignment; (3) an owner leaves goods to be repaired by a merchant; and (4) an owner buys goods from the merchant but leaves them with the merchant. The reason the goods were in the possession of the merchant, and any condition to which the merchant's possession was subject, are irrelevant. Id. The definition of "merchant" is discussed in 1996 Kansas Comments 2 & 3 to section 84-2-104. Note, however, that the merchant must be one who "deals in goods of that kind." Persons who are merchants because of their knowledge of business practices would not qualify under this subsection. "Buyer in ordinary course of business" is defined in 84-1-201(9). For application of these subsections in the context of a certificate of title sale, see Ellsworth v. Worthey, 612 S.W.2d 396 (Mo. App. 1981) (applying Kansas law).
5. Subsection (4) states that the rights of other purchasers of goods and of lien creditors are dealt with by Articles 7 and 9. Subsection (4) was amended in 1992 to delete a reference to Article 6 on bulk sales, which was repealed. The court in Executive Fin. Serv., Inc. v. Pagel, supra, concluded that a buyer may prevail on an entrustment theory under this section even if the buyer cannot rely on section 84-9-307, which permits a buyer in ordinary course of business to take free of a security interest created by the buyer's seller. For another case addressing a conflict between this section and Article 9, see J.I. Case Credit Corp. v. Foos, 11 K.A.2d 185, 717 P.2d 1064, rev. denied, 239 K. 628 (1986).
Law Review and Bar Journal References:
"U.C.C.: The Farmer is Not a Merchant Under the U.C.C.—Promissory Estoppel to Avoid the Operation of the Statute of Frauds," Mark A. Buck, 16 W.L.J. 230, 236 (1976).
"Agricultural Credit and The Uniform Commercial Code: A Need for Change?" Keith G. Meyer, 34 K.L.R. 469, 473, 482, 483 (1986).
"Bank's Right of Setoff—Iola State Bank v. Bolan," SueAnn S. Bradford, 33 K.L.R. 569, 570, 577 (1985).
"Some Issues Concerning the Property of Married Persons in Kansas," John C. Peck, 68 J.K.B.A. No. 8, 18 (1999).
CASE ANNOTATIONS
1. Statute not applicable; nothing in record indicates plaintiff ever claimed to be a merchant entrusted to deal with goods and to give good title. Kee v. Campbell, 8 Kan. App. 2d 561, 563, 661 P.2d 831 (1983).
2. Payment by check, although completing delivery and transfer of conditional title, does not defeat title of subsequent good faith purchaser when check later dishonored. Iola State Bank v. Bolan, 235 Kan. 175, 180, 182, 183, 679 P.2d 720 (1984).
3. Defaulting buyer has sufficient rights in collateral for bank's security interest in after-acquired inventory to attach. Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 10 Kan. App. 2d 350, 355, 699 P.2d 566 (1985).
4. Cited; bank not good faith purchaser when enriched by refusing to complete agreement with defaulting bank customer and plaintiff. Dick Hatfield Chevrolet, Inc. v. Bob Watson Motors, Inc., 238 Kan. 41, 45, 46, 708 P.2d 494 (1985).
5. Cited; lease-purchase agreement under economic development revenue bond act (K.S.A. 12-1740 et seq.) not complete sale; filing requirements inapplicable. In re Petition of City of Moran, 238 Kan. 513, 521, 522, 713 P.2d 451 (1986).
6. A buyer in ordinary course may prevail on entrustment theory even though buyer cannot prevail under K.S.A. 84-9-307(1). Executive Financial Services, Inc. v. Pagel, 238 Kan. 809, 816, 715 P.2d 381 (1986).
7. Cited; priority dispute between competing security interests to be resolved under article 9, not article 2. J.I. Case Credit Corp. v. Foos, 11 Kan. App. 2d 185, 188, 717 P.2d 1064 (1986).
8. Mentioned in discussion of dispute over ownership of cattle. Cattle Finance Co. v. Boedery, Inc., 795 F. Supp. 362, 366 (1992).
9. Seller lost right to stop delivery because of debtor's insolvency when livestock were constructively delivered to debtor. Kunkel v. Sprauge Nat. Bank, 128 F.3d 636, 643 (1997).
Law Review and Bar Journal References:
"Electronic Commerce in Kansas: Contract Formation and Formalities Under Article 2," Christopher R. Drahozal, 68 J.K.B.A. No. 5, 22 (1999).
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