GSNC

Editor’s Note.

Former G.S. 25-1 to 25-199 (the N.I.L.) were repealed by Session Laws 1965, c. 700, which enacted the U.C.C.

To maintain uniformity with the commercial codes adopted by other states, the designation and indentation of subsections, subdivisions and further divisions of sections in Chapter 25 have not been changed to conform to the system and style employed elsewhere in the General Statutes. The numbering of sections corresponds to that used in the 1962 Official Text of the U.C.C., as amended, except that each number is preceded by the chapter number “25.” Thus, “G.S. 1-101” of the Official Text is “G.S. 25-1-101” in this chapter.

Where sections of the U.C.C. are similar to sections repealed by Session Laws 1965, c. 700, the historical citations to the former sections have been added to the historical citations to the sections of the U.C.C.

Following each section of the U.C.C., Official Comments have been included. The Comments headed “North Carolina Comment” first appeared in “North Carolina Annotations — The Uniform Commercial Code,” a 1965 report of the former Legislative Council to the General Assembly of North Carolina. Appropriate comments were selected at the time of initial publication of Chapter 25 and edited under the supervision of the Division of Legislative Drafting and Codification of Statutes of the Department of Justice. The Comments headed “Official Comment” are the Comments of the National Conference of Commissioners on Uniform State Laws and The American Law Institute which appeared in the “1962 Official Text with Comments” of the U.C.C., with the exceptions noted hereafter.

Official Comments, copyright 1978, 1987, 1989, 1990, 1991, 1993, 1994, 1995, 1998-2000 are reprinted in Articles 1 to 11 with the permission of The American Law Institute and the National Conference of Commissioners on Uniform State Laws. It is believed that the Official Comments will prove of value to the practitioner in understanding and applying the text of this Chapter.

Where they appear in this Chapter, “Amended Comment” usually means that an error in the original comment has been corrected by a subsequent amendment, and “Supplemental Comment” pertains to a later development, such as an amendment to the statute text. North Carolina Comments explain where the General Assembly has enacted variations to the text of the Uniform Act.

Article 8 of Chapter 25 was amended in 1989 and again in 1997, and contains Amended Official Comments thereto.

Articles 2A and 4A of Chapter 25 were enacted by the General Assembly in 1993, and contain the Official Comments thereto.

Article 5 of Chapter 25 was revised in 1999 and contains revised Official Comments.

Article 9 was revised in 2000 and contains revised Official Comments thereto. This revised Article 9 supersedes the revision of Article 9 by Session Laws 1975, c. 862, s. 1.

Article 8 of Chapter 25 contains a North Carolina Comment to the 1989 revision. Articles 3 and 4 of Chapter 25 contain revised North Carolina Comments to the 1995 Revision. Article 5 of Chapter 25 contains two North Carolina Comments to the 1999 Revision.

The Official Comments and the North Carolina Comments printed in this Chapter have been printed by the publisher as received, without any significant editorial change.

The user should also note that Amended Official Comments have not been received in conjunction with all amendments to sections of the U.C.C., and therefore, subsequent amendments to the Official Comments and the North Carolina Comments may not be reflected in some instances.

The Comment under the title of the Act states in part: “Uniformity throughout American jurisdictions is one of the main objectives of this Code; and that objective cannot be obtained without substantial uniformity of construction. To aid in uniform construction these Comments set forth the purpose of various provisions of this Act to promote uniformity, to aid in viewing the Act as an integrated whole, and to safeguard against misconstruction.”

Article 1. General Provisions.

(Revised)

Editor’s Note.

Official Comments in Article 1: Copyright 2001 by the American Law Institute and the National Conference of Commissioners on Uniform State Laws. Reprinted with permission of the Permanent Editorial Board of the Uniform Commercial Code.

The Official Comments appearing under individual sections in this Article have been printed by the publisher as received, without editorial change, and relate to the Article as originally enacted. However, not all sections in this Article may carry Official Comments. Furthermore, Official Comments may or may not have been received or updated in conjunction with subsequent amendments to this Article and, therefore, may not reflect all changes to the sections under which they appear.

Session Laws 2006-112, s. 1, effective October 1, 2006, rewrote Article 1 of Chapter 25 of the General Statutes. At the end of Article 1 are tables showing comparable sections and their disposition in new Article 1. Where appropriate, historical citations to sections of former Article 1 have been placed under corresponding sections of revised Article 1.

Session Laws 2006-112, s. 61, provides: “The Revisor of Statutes shall cause to be printed along with this act all relevant portions of the official comments to Uniform Commercial Code Revised Article 1 and Uniform Commercial Code Revised Article 7 and all explanatory comments of the drafters of this act as the Revisor deems appropriate.”

Part 1. General Provisions.

§ 25-1-101. Short titles.

This Chapter may be cited as the Uniform Commercial Code.
This Article may be cited as Uniform Commercial Code — General Provisions.

History. 1965, c. 700, s. 1; 2006-112, s. 1.

Official Comment

Former Section 1-101.

OFFICIAL COMMENT

Changes from former law:. Subsection (b) is new. It is added in order to make the structure of Article 1 parallel with that of the other articles of the Uniform Commercial Code.

Each other article of the Uniform Commercial Code (except Articles 10 and 11) may also be cited by its own short title. See Sections 2-101, 2A-101, 3-101, 4-101, 4A-101, 5-101, 6-101, 7-101, 8-101, and 9-101.

Legal Periodicals.

For symposium on the Uniform Commercial Code in North Carolina, see 44 N.C.L. Rev. 525 (1966).

For note on choice of law rules in North Carolina, see 48 N.C.L. Rev. 243 (1970).

For survey of 1980 commercial law, see 59 N.C.L. Rev. 1076 (1981).

For symposium on the North Carolina Commercial Code, see 18 Wake Forest L. Rev. 161 (1982).

For note, “Real Estate Finance—Subordination Causes: North Carolina Subordinates Substance to Form—MCB Ltd. v. McGowan,” see 23 Wake Forest L. Rev. 575 (1988).

For comment, “Is it a Sale or a Lease?: The Implications of Article 2A and Revised U.C.C. Section 1-201(37) in North Carolina,” see 18 N.C. Cent. L.J. 187 (1989).

For article, “The Paper Chase: Securization, Foreclosure, and the Uncertainty of Mortgage Title,” see 63 Duke L. J. 637 (2013).

For article, “Contracts Ex Machina,” see 67 Duke L.J. 313 (2017).

For article, “Regulating Derivatives: A Fundamental Rethinking,” see 70 Duke L.J. 545 (2020).

§ 25-1-102. Scope of Article.

Except as provided in G.S. 25-1-301 , this Article applies to a transaction to the extent that it is governed by another Article of this Chapter.

History. 2006-112, s. 1.

Official Comment

New.

This section is intended to resolve confusion that has occasionally arisen as to the applicability of the substantive rules in this article. This section makes clear what has always been the case - the rules in Article 1 apply to transactions to the extent that those transactions are governed by one of the other articles of the Uniform Commercial Code. See also Comment 1 to Section 1-301.

North Carolina Comment

The General Statutes Commission added the reference to G.S. 25-1-301 to make applicable that section’s choice of law rules to a transaction that is not subject to the Uniform Commercial Code as enacted in this State but is governed by the Uniform Commercial Code as enacted in one or more other states with contacts to the transaction, as to which North Carolina law would not apply under G.S. 25-1-301 .

§ 25-1-103. Construction of this Chapter to promote its purposes and policies; applicability of supplemental principles of law.

This Chapter shall be liberally construed and applied to promote its underlying purposes and policies, which are:
1. To simplify, clarify, and modernize the law governing commercial transactions;
2. To permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and
3. To make uniform the law among the various jurisdictions.
Unless displaced by the particular provisions of this Chapter, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, and other validating or invalidating cause supplement its provisions.

History. 1917, c. 37, s. 56; C.S., s. 4039; 1941, c. 353, s. 18; G.S., s. 55-98; 1955, c. 1371, s. 2; 1965, c. 700, s. 1; 2006-112, s. 1.

Official Comment

Former Section 1-102 (1)-(2); Former Section 1-103.

OFFICIAL COMMENT

Changes from former law:. This section is derived from subsections (1) and (2) of former Section 1-102 and from former Section 1-103. Subsection (a) of this section combines subsections (1) and (2) of former Section 1-102. Except for changing the form of reference to the Uniform Commercial Code and minor stylistic changes, its language is the same as subsections (1) and (2) of former Section 1-102. Except for changing the form of reference to the Uniform Commercial Code and minor stylistic changes, subsection (b) of this section is identical to former Section 1-103. The provisions have been combined in this section to reflect the interrelationship between them.

The Uniform Commercial Code is drawn to provide flexibility so that, since it is intended to be a semi-permanent and infrequently-amended piece of legislation, it will provide its own machinery for expansion of commercial practices. It is intended to make it possible for the law embodied in the Uniform Commercial Code to be applied by the courts in the light of unforeseen and new circumstances and practices. The proper construction of the Uniform Commercial Code requires, of course, that its interpretation and application be limited to its reason.
Applicability of supplemental principles of law. Subsection (b) states the basic relationship of the Uniform Commercial Code to supplemental bodies of law. The Uniform Commercial Code was drafted against the backdrop of existing bodies of law, including the common law and equity, and relies on those bodies of law to supplement it provisions in many important ways. At the same time, the Uniform Commercial Code is the primary source of commercial law rules in areas that it governs, and its rules represent choices made by its drafters and the enacting legislatures about the appropriate policies to be furthered in the transactions it covers. Therefore, while principles of common law and equity may supplement provisions of the Uniform Commercial Code, they may not be used to supplant its provisions, or the purposes and policies those provisions reflect, unless a specific provision of the Uniform Commercial Code provides otherwise. In the absence of such a provision, the Uniform Commercial Code preempts principles of common law and equity that are inconsistent with either its provisions or its purposes and policies.
Application of subsection (b) to statutes. The primary focus of Section 1-103 is on the relationship between the Uniform Commercial Code and principles of common law and equity as developed by the courts. State law, however, increasingly is statutory. Not only are there a growing number of state statutes addressing specific issues that come within the scope of the Uniform Commercial Code, but in some States many general principles of common law and equity have been codified. When the other law relating to a matter within the scope of the Uniform Commercial Code is a statute, the principles of subsection (b) remain relevant to the court’s analysis of the relationship between that statute and the Uniform Commercial Code, but other principles of statutory interpretation that specifically address the interrelationship between statutes will be relevant as well. In some situations, the principles of subsection (b) still will be determinative. For example, the mere fact that an equitable principle is stated in statutory form rather than in judicial decisions should not change the court’s analysis of whether the principle can be used to supplement the Uniform Commercial Code - under subsection (b), equitable principles may supplement provisions of the Uniform Commercial Code only if they are consistent with the purposes and policies of the Uniform Commercial Code as well as its text. In other situations, however, other interpretive principles addressing the interrelationship between statutes may lead the court to conclude that the other statute is controlling, even though it conflicts with the Uniform Commercial Code. This, for example, would be the result in a situation where the other statute was specifically intended to provide additional protection to a class of individuals engaging in transactions covered by the Uniform Commercial Code.
Listing not exclusive. The list of sources of supplemental law in subsection (b) is intended to be merely illustrative of the other law that may supplement the Uniform Commercial Code, and is not exclusive. No listing could be exhaustive. Further, the fact that a particular section of the Uniform Commercial Code makes express reference to other law is not intended to suggest the negation of the general application of the principles of subsection (b). Note also that the word “bankruptcy” in subsection (b), continuing the use of that word from former Section 1-103, should be understood not as a specific reference to federal bankruptcy law but, rather as a reference to general principles of insolvency, whether under federal or state law.

Even prior to the enactment of the Uniform Commercial Code, courts were careful to keep broad acts from being hampered in their effects by later acts of limited scope. See Pacific Wool Growers v. Draper & Co. , 158 Or. 1, 73 P.2d 1391 (1937), and compare Section 1-104. The courts have often recognized that the policies embodied in an act are applicable in reason to subject-matter that was not expressly included in the language of the act, Commercial Nat. Bank of New Orleans v. Canal-Louisiana Bank & Trust Co. , 239 U.S. 520, 36 S. Ct. 194, 60 L. Ed. 417 (1916) (bona fide purchase policy of Uniform Warehouse Receipts Act extended to case not covered but of equivalent nature), and did the same where reason and policy so required, even where the subject-matter had been intentionally excluded from the act in general. Agar v. Orda , 264 N.Y. 248, 190 N.E. 479 (1934) (Uniform Sales Act change in seller’s remedies applied to contract for sale of choses in action even though the general coverage of that Act was intentionally limited to goods “other than things in action.”) They implemented a statutory policy with liberal and useful remedies not provided in the statutory text. They disregarded a statutory limitation of remedy where the reason of the limitation did not apply. Fiterman v. J. N. Johnson & Co. , 156 Minn. 201, 194 N.W. 399 (1923) (requirement of return of the goods as a condition to rescission for breach of warranty; also, partial rescission allowed). Nothing in the Uniform Commercial Code stands in the way of the continuance of such action by the courts.

The Uniform Commercial Code should be construed in accordance with its underlying purposes and policies. The text of each section should be read in the light of the purpose and policy of the rule or principle in question, as also of the Uniform Commercial Code as a whole, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved.

The language of subsection (b) is intended to reflect both the concept of supplementation and the concept of preemption. Some courts, however, had difficulty in applying the identical language of former Section 1-103 to determine when other law appropriately may be applied to supplement the Uniform Commercial Code, and when that law has been displaced by the Code. Some decisions applied other law in situations in which that application, while not inconsistent with the text of any particular provision of the Uniform Commercial Code, clearly was inconsistent with the underlying purposes and policies reflected in the relevant provisions of the Code. See, e.g., Sheerbonnet, Ltd. v. American Express Bank, Ltd. , 951 F. Supp. 403 (S.D.N.Y. 1995). In part, this difficulty arose from Comment 1 to former Section 1-103, which stated that “this section indicates the continued applicability to commercial contracts of all supplemental bodies of law except insofar as they are explicitly displaced by this Act.” The “explicitly displaced” language of that Comment did not accurately reflect the proper scope of Uniform Commercial Code preemption, which extends to displacement of other law that is inconsistent with the purposes and policies of the Uniform Commercial Code, as well as with its text.

Legal Periodicals.

For note on choice of law rules in North Carolina, see 48 N.C.L. Rev. 243 (1970).

For article on contract modification under Article 2, see 59 N.C.L. Rev. 335 (1981).

For note on promissory estoppel as regards subcontractors’ liability in construction bidding cases, in light of Allen M. Campbell Co. v. Virginia Metal Indus., Inc., 708 F.2d 930 (4th Cir. 1983), see 63 N.C.L. Rev. 387 (1985).

For comment, “Return to the Conservative View of Security Agreements in Commercial Transactions,” see 8 Campbell L. Rev. 505 (1986).

CASE NOTES

Editor’s Note. —

Some of the cases cited below were decided under former G.S. 25-1-102 and G.S. 25-1-103 .

The provisions of the UCC are not exclusive and do not preclude an action for unfair and deceptive trade practices. United Va. Bank v. Air-Lift Assocs., 79 N.C. App. 315, 339 S.E.2d 90, 1986 N.C. App. LEXIS 1978 (1986).

Chapter 75 is applicable to commercial transactions which are also regulated by the UCC. United Va. Bank v. Air-Lift Assocs., 79 N.C. App. 315, 339 S.E.2d 90, 1986 N.C. App. LEXIS 1978 (1986).

Termination of Petroleum Franchise. —

The Petroleum Marketing Practices Act, 15 U.S.C. § 2806(a), did not preempt G.S. 75-1.1 or subsection (3) of this section or the common law duty of good faith dealing as they arose in litigation involving wrongful termination of a franchise. L.C. Williams Oil Co. v. Exxon Corp., 627 F. Supp. 864, 1985 U.S. Dist. LEXIS 20614 (M.D.N.C. 1985).

Use of Cases from Other Jurisdictions. —

Cases from other jurisdictions, including some opinions by referees in bankruptcy and by the federal district courts, were not necessarily authoritative in this jurisdiction, but the Court of Appeals would look to them for guidance and explanation, remembering that one of the purposes of the Uniform Commercial Code is “to make uniform the law among various jurisdictions.” Evans v. Everett, 10 N.C. App. 435, 179 S.E.2d 120, 1971 N.C. App. LEXIS 1647 , rev'd, 279 N.C. 352 , 183 S.E.2d 109, 1971 N.C. LEXIS 802 (1971).

A contractual provision expanding seller’s damages upon breach of the buyer will be upheld where the contractual provision is reasonable and in good faith. Martin v. Sheffer, 102 N.C. App. 802, 403 S.E.2d 555, 1991 N.C. App. LEXIS 496 (1991).

Parties were free to shape their remedies according to their particular needs, and an expansion of the seller’s remedies beyond those specified in the Uniform Commercial Code to include specific performance was neither unreasonable nor unconscionable. Martin v. Sheffer, 102 N.C. App. 802, 403 S.E.2d 555, 1991 N.C. App. LEXIS 496 (1991).

Trust Doctrine. —

One principle made applicable by this section is the doctrine of trust pursuit, under which a cestui que trust is enabled to follow the trust funds through changes in their state and form in the hands of the trustee. Michigan Nat'l Bank v. Flowers Mobile Homes Sales, 26 N.C. App. 690, 217 S.E.2d 108, 1975 N.C. App. LEXIS 2137 (1975).

Rescission. —

Assuming without deciding that rescission remains available to a buyer as a remedy by virtue of this section, the Supreme Court gave effect to a buyer’s allegation of “rescission” as an allegation of “revocation of acceptance” since that Code concept more nearly reflected the claims asserted by the buyer. Performance Motors, Inc. v. Allen, 280 N.C. 385 , 186 S.E.2d 161, 1972 N.C. LEXIS 1256 (1972).

Supplier’s failure to modify express terms of contract with distributor could not be considered violative of the UCC’s concept of good faith, as the purpose of the good faith obligation is to determine the terms to be implied in the contract when the terms are not expressly provided. L.C. Williams Oil Co. v. Exxon Corp., 625 F. Supp. 477, 1985 U.S. Dist. LEXIS 12700 (M.D.N.C. 1985).

§ 25-1-104. Construction against implied repeal.

This Chapter being a general act intended as a unified coverage of its subject matter, no part of it shall be deemed to be impliedly repealed by subsequent legislation if such construction can reasonably be avoided.

History. 1965, c. 700, s. 1; 2006-112, s. 1.

Official Comment

Former Section 1-104.

OFFICIAL COMMENT

Changes from former law:. Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-104.

This section embodies the policy that an act that bears evidence of carefully considered permanent regulative intention should not lightly be regarded as impliedly repealed by subsequent legislation. The Uniform Commercial Code, carefully integrated and intended as a uniform codification of permanent character covering an entire “field” of law, is to be regarded as particularly resistant to implied repeal.

§ 25-1-105. Severability.

If any provision or clause of this Chapter or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this Chapter that can be given effect without the invalid provision or application, and to this end the provisions of this Chapter are severable.

History. 1965, c. 700, s. 1; 2006-112, s. 1.

Official Comment

Former Section 1-108.

OFFICIAL COMMENT

Changes from former law:. Except for changing the form of reference to the Uniform Commercial Code, this section is identical to former Section 1-108.

This is the model severability section recommended by the National Conference of Commissioners on Uniform State Laws for inclusion in all acts of extensive scope.

§ 25-1-106. Use of singular and plural; gender.

In this Chapter, unless the statutory context otherwise requires:

Words in the singular number include the plural, and those in the plural include the singular; and
Words of any gender also refer to any other gender.

History. 1965, c. 700, s. 1; 2006-112, s. 1.

Official Comment

Former Section 1-102(5). See also 1 U.S.C. Section 1.

OFFICIAL COMMENT

Changes from former law:. Other than minor stylistic changes, this section is identical to former Section 1-102(5).

This section makes it clear that the use of singular or plural in the text of the Uniform Commercial Code is generally only a matter of drafting style - singular words may be applied in the plural, and plural words may be applied in the singular. Only when it is clear from the statutory context that the use of the singular or plural does not include the other is this rule inapplicable. See, e.g., Section 9-322.

§ 25-1-107. Section captions.

Section captions are part of this Chapter. The subsection headings in Article 9 of this Chapter are not parts of this Chapter.

History. 1965, c. 700, s. 1; 2000-169, s. 4; 2006-112, s. 1.

Official Comment

Former Section 1-109.

OFFICIAL COMMENT

Changes from former law:. None.

Section captions are a part of the text of the Uniform Commercial Code, and not mere surplusage. This is not the case, however, with respect to subsection headings appearing in Article 9. See Comment 3 to Section 9-101 (“subsection headings are not a part of the official text itself and have not been approved by the sponsors.”).

North Carolina Comment

The General Statutes Commission added the second sentence of this section to bring forward the second sentence of former G.S. 25-1-109.

§ 25-1-108. Relation to Electronic Signatures in Global and National Commerce Act.

This Article modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. § 7001, et seq., except that nothing in this Article modifies, limits, or supersedes Section 7001(c) of that Act or authorizes electronic delivery of any of the notices described in Section 7003(b) of that Act.

History. 2006-112, s. 1.

Official Comment

New.

The federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. Section 7001et seq became effective in 2000. Section 102(a) of that Act provides that a State statute may modify, limit, or supersede the provisions of section 101 of that Act with respect to state law if such statute, inter alia, specifies the alternative procedures or requirements for the use or acceptance (or both) of electronic records or electronic signatures to establish the legal effect, validity, or enforceability of contracts or other records, and (i) such alternative procedures or requirements are consistent with Titles I and II of that Act, (ii) such alternative procedures or requirements do not require, or accord greater legal status or effect to, the implementation or application of a specific technology or technical specification for performing the functions of creating, storing, generating, receiving, communicating, or authenticating electronic records or electronic signatures; and (iii) if enacted or adopted after the date of the enactment of that Act, makes specific reference to that Act. Article 1 fulfills the first two of those three criteria; this Section fulfills the third criterion listed above.
As stated in this section, however, Article 1 does not modify, limit, or supersede Section 101(c) of the Electronic Signatures in Global and National Commerce Act (requiring affirmative consent from a consumer to electronic delivery of transactional disclosures that are required by state law to be in writing); nor does it authorize electronic delivery of any of the notices described in Section 103(b) of that Act.

Part 2. General Definitions and Principles of Interpretation.

§ 25-1-201. General definitions.

Unless the context otherwise requires, words or phrases defined in this section, or in the additional definitions contained in other Articles of this Chapter that apply to particular Articles or Parts thereof, have the meanings stated.
Subject to definitions contained in other articles of this Chapter that apply to particular articles or parts thereof:
1. “Action,” in the sense of a judicial proceeding, includes recoupment, counterclaim, setoff, suit in equity, and any other proceeding in which rights are determined.
2. “Aggrieved party” means a party entitled to pursue a remedy.
3. “Agreement,” as distinguished from “contract,” means the bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in G.S. 25-1-303 .
4. “Bank” means a person engaged in the business of banking and includes a savings bank, savings and loan association, credit union, and trust company.
5. “Bearer” means a person in control of a negotiable electronic document of title or a person in possession of a negotiable instrument, negotiable tangible document of title, or certificated security that is payable to bearer or indorsed in blank.
6. “Bill of lading” means a document of title evidencing the receipt of goods for shipment issued by a person engaged in the business of directly or indirectly transporting or forwarding goods. The term does not include a warehouse receipt.
7. “Branch” includes a separately incorporated foreign branch of a bank.
8. “Burden of establishing” a fact means the burden of persuading the trier of fact that the existence of the fact is more probable than its nonexistence.
9. “Buyer in ordinary course of business” means a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course 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. A person that sells oil, gas, or other minerals at the wellhead or minehead is a person in the business of selling goods of that kind. A buyer in ordinary course of business may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under a preexisting contract for sale. Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 of this Chapter may be a buyer in ordinary course of business. “Buyer in ordinary course of business” does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt.
10. “Conspicuous,” with reference to a term, means so written, displayed, or presented that a reasonable person against which it is to operate ought to have noticed it. Whether a term is “conspicuous” or not is a decision for the court. Conspicuous terms include the following:
  1. A heading in capitals equal to or greater in size than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same or lesser size; and
  2. Language in the body of a record or display in larger type than the surrounding text, or in contrasting type, font, or color to the surrounding text of the same size, or set off from surrounding text of the same size by symbols or other marks that call attention to the language.
11. “Consumer” means an individual who enters into a transaction primarily for personal, family, or household purposes.
12. “Contract,” as distinguished from “agreement,” means the total legal obligation that results from the parties’ agreement as determined by this Chapter as supplemented by any other applicable laws.
13. “Creditor” includes a general creditor, a secured creditor, a lien creditor, and any representative of creditors, including an assignee for the benefit of creditors, a trustee in bankruptcy, a receiver in equity, and an executor or administrator of an insolvent debtor’s or assignor’s estate.
14. “Defendant” includes a person in the position of defendant in a counterclaim, cross-claim, or third-party claim.
15. “Delivery,” with respect to an electronic document of title means voluntary transfer of control and with respect to an instrument, a tangible document of title, or chattel paper, means voluntary transfer of possession.
16. “Document of title” means a record (i) that in the regular course of business or financing is treated as adequately evidencing that the person in possession or control of the record is entitled to receive, control, hold, and dispose of the record and the goods the record covers and (ii) that purports to be issued by or addressed to a bailee and to cover goods in the bailee’s possession which are either identified or are fungible portions of an identified mass. The term includes a bill of lading, transport document, dock warrant, dock receipt, warehouse receipt, and order for delivery of goods. An electronic document of title means a document of title evidenced by a record consisting of information stored in an electronic medium. A tangible document of title means a document of title evidenced by a record consisting of information that is inscribed on a tangible medium.
17. “Fault” means a default, breach, or wrongful act or omission.
18. “Fungible goods” means:
  1. Goods of which any unit, by nature or usage of trade, are the equivalent of any other like unit; or
  2. Goods that by agreement are treated as equivalent.
19. “Genuine” means free of forgery or counterfeiting.
20. “Good faith,” except as otherwise provided in Article 5 of this Chapter, means honesty in fact and the observance of reasonable commercial standards of fair dealing.
21. “Holder” means:
  1. The person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession;
  2. The person in possession of a negotiable tangible document of title if the goods are deliverable either to bearer or to the order of the person in possession; or
  3. The person in control of a negotiable electronic document of title.
22. “Insolvency proceeding” includes an assignment for the benefit of creditors or other proceeding intended to liquidate or rehabilitate the estate of the person involved.
23. “Insolvent” means:
  1. Having generally ceased to pay debts in the ordinary course of business other than as a result of bona fide dispute;
  2. Being unable to pay debts as they become due; or
  3. Being insolvent within the meaning of federal bankruptcy law.
24. “Money” means a medium of exchange currently authorized or adopted by a domestic or foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more countries.
25. “Organization” means a person other than an individual.
26. “Party,” as distinguished from “third party,” means a person that has engaged in a transaction or made an agreement subject to this Chapter.
27. “Person” means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity.
28. “Present value” means the amount as of a date certain of one or more sums payable in the future, discounted to the date certain by use of either an interest rate specified by the parties if that rate is not manifestly unreasonable at the time the transaction is entered into or, if an interest rate is not so specified, a commercially reasonable rate that takes into account the facts and circumstances at the time the transaction is entered into.
29. “Purchase” means taking by sale, lease, discount, negotiation, mortgage, pledge, lien, security interest, issue or reissue, gift, or any other voluntary transaction creating an interest in property.
30. “Purchaser” means a person that takes by purchase.
31. “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
32. “Remedy” means any remedial right to which an aggrieved party is entitled with or without resort to a tribunal.
33. “Representative” means a person empowered to act for another, including an agent, an officer of a corporation or association, and a trustee, executor, or administrator of an estate.
34. “Right” includes remedy.
35. “Security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation. “Security interest” includes any interest of a consignor and a buyer of accounts, chattel paper, a payment intangible, or a promissory note in a transaction that is subject to Article 9 of this Chapter. “Security interest” does not include the special property interest of a buyer of goods on identification of those goods to a contract for sale under G.S. 25-2-401 , but a buyer may also acquire a “security interest” by complying with Article 9 of this Chapter. Except as otherwise provided in G.S. 25-2-505 , the right of a seller or lessor of goods under Article 2 or 2A of this Chapter to retain or acquire possession of the goods is not a “security interest,” but a seller or lessor may also acquire a “security interest” by complying with Article 9 of this Chapter. The retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer under G.S. 25-2-401 is limited in effect to a reservation of a “security interest.” Whether a transaction in the form of a lease creates a “security interest” is determined pursuant to G.S. 25-1-203 .
36. “Send” in connection with a writing, record, or notice means:
  1. To deposit in the mail or deliver for transmission by any other usual means of communication with postage or cost of transmission provided for and properly addressed and, in the case of an instrument, to an address specified thereon or otherwise agreed, or if there be none to any address reasonable under the circumstances; or
  2. In any other way to cause to be received any record or notice within the time it would have arrived if properly sent.
37. “Signed” includes using any symbol executed or adopted with present intention to adopt or accept a writing.
38. “State” means a State of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.
39. “Surety” includes a guarantor or other secondary obligor.
40. “Term” means a portion of an agreement that relates to a particular matter.
41. “Unauthorized signature” means a signature made without actual, implied, or apparent authority. The term includes a forgery.
42. “Warehouse receipt” means a document of title issued by a person engaged in the business of storing goods for hire.
43. “Writing” includes printing, typewriting, or any other intentional reduction to tangible form. “Written” has a corresponding meaning.

History. 1899, c. 733, ss. 25, 56, 191; Rev., ss. 2173, 2205, 2340, 3032; 1917, c. 37, ss. 4, 5, 58; 1919, c. 65, ss. 1, 10, 32, 42; c. 290; C.S., ss. 280, 283, 292, 314, 2976, 3005, 3037, 4037, 4044, 4046; 1941, c. 353, s. 22; G.S., s. 55-102; 1955, c. 1371, s. 2; 1961, c. 574; 1965, c. 700, s. 1; 1967, c. 562, s. 1; 1975, c. 862, ss. 2, 3; 1989 (Reg. Sess., 1990), c. 1024, s. 8(a)-(c); 1993, c. 463, s. 2; 1995, c. 232, s. 3; 2000-169, ss. 5-7; 2006-112, ss. 1, 26.

OFFICIAL COMMENTS

Source: Former Section 1-201.

Changes from former law: In order to make it clear that all definitions in the Uniform Commercial Code (not just those appearing in Article 1, as stated in former Section 1-201, but also those appearing in other Articles) do not apply if the context otherwise requires, a new subsection (a) to that effect has been added, and the definitions now appear in subsection (b). The reference in subsection (a) to the “context” is intended to refer to the context in which the defined term is used in the Uniform Commercial Code. In other words, the definition applies whenever the defined term is used unless the context in which the defined term is used in the statute indicates that the term was not used in its defined sense. Consider, for example, Sections 3-103(a)(9) (defining “promise,” in relevant part, as “a written undertaking to pay money signed by the person undertaking to pay”) and 3-303(a)(1) (indicating that an instrument is issued or transferred for value if “the instrument is issued or transferred for a promise of performance, to the extent that the promise has been performed.” It is clear from the statutory context of the use of the word “promise” in Section 3-303(a)(1) that the term was not used in the sense of its definition in Section 3-103(a)(9). Thus, the Section 3-103(a)(9) definition should not be used to give meaning to the word “promise” in Section 3-303(a).

Some definitions in former Section 1-201 have been reformulated as substantive provisions and have been moved to other sections. See Sections 1-202 (explicating concepts of notice and knowledge formerly addressed in Sections 1-201(25)-(27)), 1-204 (determining when a person gives value for rights, replacing the definition of “value” in former Section 1-201(44)), and 1-206 (addressing the meaning of presumptions, replacing the definitions of “presumption” and “presumed” in former Section 1-201(31)). Similarly, the portion of the definition of “security interest” in former Section 1-201(37) which explained the difference between a security interest and a lease has been relocated to Section 1-203.

Two definitions in former Section 1-201 have been deleted. The definition of “honor” in former Section 1-201(21) has been moved to Section 2-103(1)(b), inasmuch as the definition only applies to the use of the word in Article 2. The definition of “telegram” in former Section 1-201(41) has been deleted because that word no longer appears in the definition of “conspicuous.”

Other than minor stylistic changes and renumbering, the remaining definitions in this section are as in former Article 1 except as noted below.

“Action.” Unchanged from former Section 1-201, which was derived from similar definitions in Section 191, Uniform Negotiable Instruments Law; Section 76, Uniform Sales Act; Section 58, Uniform Warehouse Receipts Act; Section 53, Uniform Bills of Lading Act.
“Aggrieved party.” Unchanged from former Section 1-201.
“Agreement.” Derived from former Section 1-201. As used in the Uniform Commercial Code the word is intended to include full recognition of usage of trade, course of dealing, course of performance and the surrounding circumstances as effective parts thereof, and of any agreement permitted under the provisions of the Uniform Commercial Code to displace a stated rule of law. Whether an agreement has legal consequences is determined by applicable provisions of the Uniform Commercial Code and, to the extent provided in Section 1-103, by the law of contracts.
“Bank.” Derived from Section 4A-104.
“Bearer.” Unchanged from former Section 1-201, which was derived from Section 191, Uniform Negotiable Instruments Law.
“Bill of Lading.” Derived from former Section 1-201. The reference to, and definition of, an “airbill” has been deleted as no longer necessary.
“Branch.” Unchanged from former Section 1-201.
“Burden of establishing a fact.” Unchanged from former Section 1-201.
“Buyer in ordinary course of business.” Except for minor stylistic changes, identical to former Section 1-201 (as amended in conjunction with the 1999 revisions to Article 9). The major significance of the phrase lies in Section 2-403 and in the Article on Secured Transactions (Article 9).
“Conspicuous.” Derived from former Section 1-201(10). This definition states the general standard that to be conspicuous a term ought to be noticed by a reasonable person. Whether a term is conspicuous is an issue for the court. Subparagraphs (A) and (B) set out several methods for making a term conspicuous. Requiring that a term be conspicuous blends a notice function (the term ought to be noticed) and a planning function (giving guidance to the party relying on the term regarding how that result can be achieved). Although these paragraphs indicate some of the methods for making a term attention-calling, the test is whether attention can reasonably be expected to be called to it. The statutory language should not be construed to permit a result that is inconsistent with that test.
“Consumer.” Derived from Section 9-102(a)(25).
“Contract.” Except for minor stylistic changes, identical to former Section 1-201.
“Creditor.” Unchanged from former Section 1-201.
“Defendant.” Except for minor stylistic changes, identical to former Section 1-201, which was derived from Section 76, Uniform Sales Act.
“Delivery.” Derived from former Section 1-201. The reference to certificated securities has been deleted in light of the more specific treatment of the matter in Section 8-301.
“Document of title.” Unchanged from former Section 1-201, which was derived from Section 76, Uniform Sales Act. By making it explicit that the obligation or designation of a third party as “bailee” is essential to a document of title, this definition clearly rejects any such result as obtained in Hixson v. Ward, 254 Ill.App. 505 (1929), which treated a conditional sales contract as a document of title. Also the definition is left open so that new types of documents may be included. It is unforeseeable what documents may one day serve the essential purpose now filled by warehouse receipts and bills of lading. Truck transport has already opened up problems which do not fit the patterns of practice resting upon the assumption that a draft can move through banking channels faster than the goods themselves can reach their destination. There lie ahead air transport and such probabilities as teletype transmission of what may some day be regarded commercially as “Documents of Title.” The definition is stated in terms of the function of the documents with the intention that any document which gains commercial recognition as accomplishing the desired result shall be included within its scope. Fungible goods are adequately identified within the language of the definition by identification of the mass of which they are a part.
“Fault.” Derived from former Section 1-201. “Default” has been added to the list of events constituting fault.
“Fungible goods.” Derived from former Section 1-201. References to securities have been deleted because Article 8 no longer uses the term “fungible” to describe securities. Accordingly, this provision now defines the concept only in the context of goods.
“Genuine.” Unchanged from former Section 1-201.
“Good faith.” Former Section 1-201(19) defined “good faith” simply as honesty in fact; the definition contained no element of commercial reasonableness. Initially, that definition applied throughout the Code with only one exception. Former Section 2-103(1)(b) provided that “in this Article... good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.” This alternative definition was limited in applicability in three ways. First, it applied only to transactions within the scope of Article 2. Second, it applied only to merchants. Third, strictly construed it applied only to uses of the phrase “good faith” in Article 2; thus, so construed it would not define “good faith” for its most important use — the obligation of good faith imposed by former Section 1-203.
“Holder.” Derived from former Section 1-201. The definition has been reorganized for clarity.
“Insolvency proceedings.” Unchanged from former Section 1-201.
“Insolvent.” Derived from former Section 1-201. The three tests of insolvency- “generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute as to them,” “unable to pay debts as they become due,” and “insolvent within the meaning of the federal bankruptcy law” — are expressly set up as alternative tests and must be approached from a commercial standpoint.
“Money.” Substantively identical to former Section 1-201. The test is that of sanction of government, whether by authorization before issue or adoption afterward, which recognizes the circulating medium as a part of the official currency of that government. The narrow view that money is limited to legal tender is rejected.
“Organization.” The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
“Party.” Substantively identical to former Section 1-201. Mention of a party includes, of course, a person acting through an agent. However, where an agent comes into opposition or contrast to the principal, particular account is taken of that situation.
“Person.” The former definition of this word has been replaced with the standard definition used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
“Present value.” This definition was formerly contained within the definition of “security interest” in former Section 1-201(37).
“Purchase.” Derived from former Section 1-201. The form of definition has been changed from “includes” to “means.”
“Purchaser.” Unchanged from former Section 1-201.
“Record.” Derived from Section 9-102(a)(69).
“Remedy.” Unchanged from former Section 1-201. The purpose is to make it clear that both remedy and right (as defined) include those remedial rights of “self help” which are among the most important bodies of rights under the Uniform Commercial Code, remedial rights being those to which an aggrieved party may resort on its own.
“Representative.” Derived from former Section 1-201. Reorganized, and form changed from “includes” to “means.”
“Right.” Except for minor stylistic changes, identical to former Section 1-201.
“Security Interest.” The definition is the first paragraph of the definition of “security interest” in former Section 1-201, with minor stylistic changes. The remaining portion of that definition has been moved to Section 1-203. Note that, because of the scope of Article 9, the term includes the interest of certain outright buyers of certain kinds of property.
“Send.” Derived from former Section 1-201. Compare “notifies”.
“Signed.” Derived from former Section 1-201. Former Section 1-201 referred to “intention to authenticate”; because other articles now use the term “authenticate,” the language has been changed to “intention to adopt or accept.” The latter formulation is derived from the definition of “authenticate” in Section 9-102(a)(7). This provision refers only to writings, because the term “signed,” as used in some articles, refers only to writings. This provision also makes it clear that, as the term “signed” is used in the Uniform Commercial Code, a complete signature is not necessary. The symbol may be printed, stamped or written; it may be by initials or by thumbprint. It may be on any part of the document and in appropriate cases may be found in a billhead or letterhead. No catalog of possible situations can be complete and the court must use common sense and commercial experience in passing upon these matters. The question always is whether the symbol was executed or adopted by the party with present intention to adopt or accept the writing.
“State.” This is the standard definition of the term used in acts prepared by the National Conference of Commissioners on Uniform State Laws.
“Surety.” This definition makes it clear that “surety” includes all secondary obligors, not just those whose obligation refers to the person obligated as a surety. As to the nature of secondary obligations generally, see Restatement (Third), Suretyship and Guaranty Section 1 (1996).
“Term.” Unchanged from former Section 1-201.
“Unauthorized signature.” Unchanged from former Section 1-201.
“Warehouse receipt.” Unchanged from former Section 1-201, which was derived from Section 76(1), Uniform Sales Act; Section 1, Uniform Warehouse Receipts Act. Receipts issued by a field warehouse are included, provided the warehouseman and the depositor of the goods are different persons.
“Written” or “writing.” Unchanged from former Section 1-201.

The first sentence of paragraph (9) makes clear that a buyer from a pawnbroker cannot be a buyer in ordinary course of business. The second sentence explains what it means to buy “in the ordinary course.” The penultimate sentence prevents a buyer that does not have the right to possession as against the seller from being a buyer in ordinary course of business. Concerning when a buyer obtains possessory rights, see Sections 2-502 and 2-716. However, the penultimate sentence is not intended to affect a buyer’s status as a buyer in ordinary course of business in cases (such as a “drop shipment”) involving delivery by the seller to a person buying from the buyer or a donee from the buyer. The requirement relates to whether as against the seller the buyer or one taking through the buyer has possessory rights.

Dock warrants were within the Sales Act definition of document of title apparently for the purpose of recognizing a valid tender by means of such paper. In current commercial practice a dock warrant or receipt is a kind of interim certificate issued by steamship companies upon delivery of the goods at the dock, entitling a designated person to have issued to him at the company’s office a bill of lading. The receipt itself is invariably nonnegotiable in form although it may indicate that a negotiable bill is to be forthcoming. Such a document is not within the general compass of the definition, although trade usage may in some cases entitle such paper to be treated as a document of title. If the dock receipt actually represents a storage obligation undertaken by the shipping company, then it is a warehouse receipt within this section regardless of the name given to the instrument.

The goods must be “described,” but the description may be by marks or labels and may be qualified in such a way as to disclaim personal knowledge of the issuer regarding contents or condition. However, baggage and parcel checks and similar “tokens” of storage which identify stored goods only as those received in exchange for the token are not covered by this Article.

The definition is broad enough to include an airway bill.

Over time, however, amendments to the Uniform Commercial Code brought the Article 2 merchant concept of good faith (subjective honesty and objective commercial reasonableness) into other Articles. First, Article 2A explicitly incorporated the Article 2 standard. See Section 2A-103(7). Then, other Articles broadened the applicability of that standard by adopting it for all parties rather than just for merchants. See, e.g., Sections 3-103(a)(4), 4A-105(a)(6), 8-102(a)(10), and 9-102(a)(43). All of these definitions are comprised of two elements- honesty in fact and the observance of reasonable commercial standards of fair dealing. Only revised Article 5 defines “good faith” solely in terms of subjective honesty, and only Article 6 and Article 7 are without definitions of good faith. (It should be noted that, while revised Article 6 did not define good faith, Comment 2 to revised Section 6-102 states that “this Article adopts the definition of ‘good faith’ in Article 1 in all cases, even when the buyer is a merchant.”) Given these developments, it is appropriate to move the broader definition of “good faith” to Article 1. Of course, this definition is subject to the applicability of the narrower definition in revised Article 5.

Effect of Amendments.

Session Laws 2006-112, s. 26, effective October 1, 2006, in subsection (b), inserted “a person in control of a negotiable electronic document of title or” and “negotiable tangible” in subdivision (5), inserted “of title” and “directly or indirectly” in the first sentence and added the second sentence of subdivision (6), inserted “to an electronic document of title means voluntary transfer of control and with respect” and “a tangible” in subdivision (15), rewrote subdivision (16), inserted “negotiable tangible” in subdivision (21)b., added subdivision (21)c., and made minor stylistic changes, and substituted “document of title” for “receipt” in subdivision (42).

Legal Periodicals.

For article concerning liens on personal property not governed by the Uniform Commercial Code, see 44 N.C.L. Rev. 322 (1966).

For article on waiver of defense clauses in consumer contracts, see 48 N.C.L. Rev. 545 (1970).

For note on consignments and the consignor’s duty to satisfy public notice requirements, see 13 Wake Forest L. Rev. 507 (1977).

For note on commercial reasonableness and the public sale in North Carolina, see 17 Wake Forest L. Rev. 153 (1981).

For comment, “Return to the Conservative View of Security Agreements in Commercial Transactions,” see 8 Campbell L. Rev. 505 (1986).

For article, “Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law,” see 1987 Duke L.J. 1 (1987).

For article, “Public Filing and Personal Property Leases: Questions of Definition and Doctrine,” see 22 Wake Forest L. Rev. 425 (1987).

For comment, “Is it a Sale or a Lease?: The Implications of Article 2A and Revised U.C.C. Section 1-201(37) in North Carolina,” see 18 N.C. Cent. L.J. 187 (1989).

CASE NOTES

Editor’s Note. —

Some of the cases cited below were decided under former G.S. 25-1-201 .

Standing to Seek Stay Relief. —

Bank had standing to seek stay relief under 11 U.S.C.S. § 362(d), as the bank had possession of the original note specially endorsed to it. It was not necessary for the bank to establish its ownership of the note and deed of trust in the real property records; nor was it required to prove that each transfer of the note and security agreement was by an authorized seller. In re Sears, 2013 Bankr. LEXIS 2010 (Bankr. W.D.N.C. May 16, 2013).

The UCC protects buyers in the ordinary course of business from the claims of predecessors in interest who place items into the stream of commerce without warning that they subsequently will claim ownership. North Carolina Nat'l Bank v. Robinson, 78 N.C. App. 1, 336 S.E.2d 666, 1985 N.C. App. LEXIS 4241 (1985).

“Conspicuousness”. —

Determination on conspicuousness is a question of law for the court. Billings v. Joseph Harris Co., 27 N.C. App. 689, 220 S.E.2d 361, 1975 N.C. App. LEXIS 1949 (1975), aff'd, 290 N.C. 502 , 226 S.E.2d 321, 1976 N.C. LEXIS 1091 (1976); Angola Farm Supply & Equip. Co. v. FMC Corp., 59 N.C. App. 272, 296 S.E.2d 503, 1982 N.C. App. LEXIS 3102 (1982).

Language on herbicide to the effect that seller made “no other express or implied warranty of fitness or merchantability or any other express or implied warranty,” which was in darker and larger type than the other language on the label, was “conspicuous,” as defined by subdivision (10) of this section, and served to effectively disclaim any implied warranties of merchantability or fitness. Tyson v. Ciba-Geigy Corp., 82 N.C. App. 626, 347 S.E.2d 473, 1986 N.C. App. LEXIS 2610 (1986).

Forum selection clause was conspicuous where, although the font used in the forum selection clause could have been made larger, the forum selection language was found in two places on the front page of an agreement, both times in bold print and underlined. Price v. Leasecomm Corp., 2004 U.S. Dist. LEXIS 5467 (M.D.N.C. Mar. 31, 2004).

“Delivery”. —

Delivery of a deed or instrument to the named payee, subject to the control of the person delivering it or subject to an agreed condition, does not constitute delivery in the eyes of the law. State v. First Resort Properties, 81 N.C. App. 499, 344 S.E.2d 354, 1986 N.C. App. LEXIS 2306 (1986).

“Purchase.” —

“Hanging paragraph” of 11 U.S.C.S. § 1325 did not bar bifurcation of creditor’s secured claim because original financing of the car was not within 910-day period prior to bankruptcy filing; a subsequent refinancing did not constitute a “purchase” under G.S. 25-1-201(b)(29) because refinancing did not create an interest in property. In re Cunningham, 2012 Bankr. LEXIS 2025 (Bankr. W.D.N.C. May 8, 2012).

“Purchaser.” —

Bank was granted relief from automatic stay based on lack of equity because it had security interest in securities accounts, it was purchaser, and it was identified as person having a security entitlement in accounts. Security interest was perfected because bank, as purchaser, became entitlement holder over accounts, and it had control over all security entitlements held in accounts. In re Bressler, 2013 Bankr. LEXIS 4763 (Bankr. M.D.N.C. Nov. 6, 2013).

“Send.” —

Creditor’s effort to notify debtors of private sale by sending a first class letter to debtors’ last known address was reasonable where there was no evidence that the letter was returned, or that the debtors did not receive such notice, or that the debtors had provided creditor with a new address. In re Marshall, 219 B.R. 687, 1997 Bankr. LEXIS 2247 (Bankr. M.D.N.C. 1997).

Good faith (“honesty in fact”) and “notice,” although not synonymous, are inherently intertwined. Therefore, the relation between the two cannot be ignored. Branch Banking & Trust Co. v. Gill, 293 N.C. 164 , 237 S.E.2d 21, 1977 N.C. LEXIS 890 (1977).

The same facts which call a party’s “good faith” into question may also give him “notice of a defense.” Branch Banking & Trust Co. v. Gill, 293 N.C. 164 , 237 S.E.2d 21, 1977 N.C. LEXIS 890 (1977).

Albeit “good faith” is literally defined as “honesty in fact in the conduct or transaction concerned,” the Uniform Commercial Code does not permit parties to intentionally keep themselves in ignorance of facts which, if known, would defeat their rights in a negotiable document of title. Branch Banking & Trust Co. v. Gill, 293 N.C. 164 , 237 S.E.2d 21, 1977 N.C. LEXIS 890 (1977).

Honesty in Fact Required of Supplier. —

A good faith duty requiring a supplier of products to disclose its internal strategies to distributors was inappropriate, as the breadth of good faith required was limited to the “honesty in fact” definition of this section, which governed distributor’s claim under G.S. 25-1-203 , rather than the more expansive “reasonable commercial standards of fair dealing in the trade” definition of G.S. 25-2-103 . L.C. Williams Oil Co. v. Exxon Corp., 625 F. Supp. 477, 1985 U.S. Dist. LEXIS 12700 (M.D.N.C. 1985).

“Holder.” —

The definition of “holder” in subdivision (20) of this section is applicable to G.S. 45-21.16 . In re Cooke, 37 N.C. App. 575, 246 S.E.2d 801, 1978 N.C. App. LEXIS 2805 (1978).

Ownership is not indispensable to holdership. In re Cooke, 37 N.C. App. 575, 246 S.E.2d 801, 1978 N.C. App. LEXIS 2805 (1978).

There was ample evidence that the beneficiaries of a deed of trust were holders of a valid debt where the notes secured by the deed of trust were payable to the beneficiaries or order, the notes were not endorsed, and the notes were in the possession of the original beneficiary-payees. In re Cooke, 37 N.C. App. 575, 246 S.E.2d 801, 1978 N.C. App. LEXIS 2805 (1978).

As evidence that a plaintiff is holder of a note is an essential element of a cause of action upon such note, the defendant was entitled to demand strict proof of this element. The incorporation by reference into the complaint of a copy of the note was not in itself sufficient evidence to establish for purposes of summary judgment that the plaintiff was the holder of the note. Liles v. Myers, 38 N.C. App. 525, 248 S.E.2d 385, 1978 N.C. App. LEXIS 2231 (1978).

Where a negotiable instrument is made payable to order, one becomes a holder of the instrument when it is properly endorsed and delivered to him, and mere possession of a note payable to order does not suffice to prove ownership or holder status. Econo-Travel Motor Hotel Corp. v. Taylor, 301 N.C. 200 , 271 S.E.2d 54, 1980 N.C. LEXIS 1152 (1980).

It is the fact of possession which is significant in determining whether a person is a holder, and the absence of possession defeats that status. Connolly v. Potts, 63 N.C. App. 547, 306 S.E.2d 123, 1983 N.C. App. LEXIS 3143 (1983).

Bank which had cancelled and released a promissory note because of a clerical error, and therefore was not a “holder” in the traditional sense, could still meet the burden required by this section by showing that debtor never satisfied the underlying obligation. G.E. Capital Mtg. Servs. v. Neely, 135 N.C. App. 187, 519 S.E.2d 553, 1999 N.C. App. LEXIS 971 (1999).

Party seeking to foreclose did not show that it was the current holder of a note under G.S. 25-1-201(21) as although the photocopies of the note and deed of trust established the required elements under G.S. 45-21.16(d) since the debtors did not dispute that they were correct copies, the photocopies indicated that the original holder of both instruments was not the party seeking to foreclose; the photocopies did not indicate that the original holder negotiated, indorsed, or transferred the note to the party seeking to foreclose. In re Foreclosure of a Deed of Trust Executed by Hannia M. Adams & H. Clayton Adams, 204 N.C. App. 318, 693 S.E.2d 705, 2010 N.C. App. LEXIS 945 (2010).

Trial court erred in permitting a substitute trustee to proceed with foreclosure proceedings under G.S. 45-21.16(d) because there was no competent evidence that the trustee was the owner and holder of a mortgagor’s adjustable rate note and deed of trust, and production of an original note at trial did not, in itself, establish that the note was transferred to the party presenting the note with the purpose of giving that party the right to enforce the instrument; the trial court’s findings of fact did not address who had possession of the mortgagor’s note at the time of the de novo hearing, and without a determination of who had physical possession of the note, the trial court could determine, under the Uniform Commercial Code, G.S. 25-1-201(b)(21), the entity that was the holder of the note. In re Foreclosure by David A. Simpson, P.C., 211 N.C. App. 483, 711 S.E.2d 165, 2011 N.C. App. LEXIS 836 (2011).

Assuming that production of a mortgagor’s adjustable rate note was evidence of a transfer of the note pursuant to the Uniform Commercial Code and that a substitute trustee was in possession of the note, that was not sufficient evidence that the trustee was the “holder” of the note under the UCC, G.S. 25-1-201(b)(21); the note was not indorsed to the trustee or to bearer, a prerequisite to confer upon the trustee the status of holder under G.S. 25-1-201(b)(21). In re Foreclosure by David A. Simpson, P.C., 211 N.C. App. 483, 711 S.E.2d 165, 2011 N.C. App. LEXIS 836 (2011).

Substitute trustee did not offer sufficient evidence that a bank, as trustee, was the holder of a mortgagor’s adjustable rate note and, thus, the party entitled to proceed with a foreclosure action under G.S. 45-21.16(d) because pursuant to the Uniform Commercial Code, G.S. 25-3-110(c), the note was payable to the bank as trustee; the note was clearly indorsed to the bank as trustee. In re Foreclosure by David A. Simpson, P.C., 211 N.C. App. 483, 711 S.E.2d 165, 2011 N.C. App. LEXIS 836 (2011).

Lender’s successor’s evidence, including a letter from the Comptroller of the Currency officially certifying a merger between the successor and the lender, was sufficient to establish the merger. The successor, as the surviving corporation after the merger, succeeded by operation of law to the lender’s status as holder of a note, pursuant to G.S. 55-11-06(a)(2). In re Foreclosure of N.C. Deed of Trust by Carver Pond I L.P., 217 N.C. App. 352, 719 S.E.2d 207, 2011 N.C. App. LEXIS 2488 (2011).

Trustee’s summary foreclosure proceeding under G.S. 45.21.16 was properly dismissed because the trustee was not the legal holder of the promissory note executed by the borrower and, therefore, lacked authorization to foreclose on the borrower’s property securing the note under a deed of trust. In re Foreclosure of a Deed of Trust of Bass, 217 N.C. App. 244, 720 S.E.2d 18, 2011 N.C. App. LEXIS 2426 (2011), rev'd, 366 N.C. 464 , 738 S.E.2d 173, 2013 N.C. LEXIS 269 (2013).

Petitioner was the holder of a note as it had physical possession of the note at the hearing and submitted a copy of that note, and a Non-Home Loan Certificate that stated that petitioner was successor by merger to the mortgagee was not challenged; because of the merger, petitioner had all the rights and powers the mortgagee had before the merger under G.S. 53-17 [repealed]. As the mortgagee was the indorser of the note in blank, petitioner received those rights in the merger. In re Yopp, 217 N.C. App. 488, 720 S.E.2d 769, 2011 N.C. App. LEXIS 2609 (2011).

Affiant’s conclusion that petitioner was the holder of a note and a deed of trust petitioner sought to foreclose was a legal conclusion and was disregarded; whether an entity was a holder under G.S. 25-1-201(b)(21) was a legal conclusion that was to be determined by a court on the basis of factual allegations. In re Yopp, 217 N.C. App. 488, 720 S.E.2d 769, 2011 N.C. App. LEXIS 2609 (2011).

Bank was a holder under G.S. 25-1-201(b)(21) of a note entitled to foreclose under G.S. 45-21.16(d) where: (1) a challenged stamp was a signature and an indorsement; (2) the presumption in favor of the validity of the signature prevailed; (3) the mortgagor was in default; and (4) the indorsements on the note unambiguously indicated an intent to transfer the note under G.S. 25-3-201(b) from each lender to the next, and finally to the bank. In re Foreclosure of a Deed of Trust Executed by Bass, 366 N.C. 464 , 738 S.E.2d 173, 2013 N.C. LEXIS 269 (2013).

Although the Federal Deposit Insurance Corporation (FDIC) did not produce an original promissory note in response to a debtor’s demand for strict proof, the FDIC was the holder of the note within the meaning of G.S. 25-1-201(b)(21) and G.S. 25-3-301 because the note was payable to a bank, the FDIC succeeded to all rights of the bank when it was appointed as the bank’s receiver, a true and accurate copy of the note was in the record, and the debtor did not produce any evidence suggesting that the copy of the note in the record was somehow inaccurate or anything but a true and correct copy. FDIC v. Cashion, 720 F.3d 169, 2013 U.S. App. LEXIS 12474 (4th Cir. 2013).

Transferee bank attained holder status of the borrowers’ promissory note because the bank, which had physical possession of the note, presented the original note in open court, the note was unambiguously indorsed in blank by the vice president of the bank’s predecessor in interest, and did not identify a person to whom it was payable. In re Dispute over the Sum of $375,757.47, 240 N.C. App. 505, 771 S.E.2d 800, 2015 N.C. App. LEXIS 322 (2015).

Trial court did not err in authorizing a substitute trustee to proceed with a foreclosure sale of property a buyer purchased at an execution sale because an assignee was the holder of the promissory note; the assignee produced the original note indorsed in blank, and that was sufficient to support the trial court’s conclusion that it was the holder of the note. In re Foreclosure of a Deed of Trust Executed by Rawls, 243 N.C. App. 316, 777 S.E.2d 796, 2015 N.C. App. LEXIS 815 (2015).

“Holder” of a promissory note may be a bank or other lending institution that is in possession of a note that has been indorsed in blank; a petitioner’s production of an original note indorsed in blank establishes that the petitioner is the holder of the note. In re Foreclosure of a Deed of Trust Executed by Rawls, 243 N.C. App. 316, 777 S.E.2d 796, 2015 N.C. App. LEXIS 815 (2015).

Superior court properly authorized a bank to proceed with foreclosure on property a purchaser bought at a foreclosure sale because the bank was the holder of the promissory note secured by the deed of trust encumbering the property; the note was indorsed in blank, and the bank had possession of the note. Greene v. Tr. Servs. of Carolina, LLC, 244 N.C. App. 583, 781 S.E.2d 664, 2016 N.C. App. LEXIS 57 (2016).

An indorsement by an authorized agent of the “holder” is sufficient to validate the transaction. Summerlin v. National Serv. Indus., Inc., 72 N.C. App. 476, 325 S.E.2d 12, 1985 N.C. App. LEXIS 3117 (1985).

“Money.” —

Debtors’ interest in unearned portion of a retainer paid to a law firm was a general intangible and as such, a creditor with a properly perfected security interest had a lien on the balance of the retainer fund; in reaching its determination that the retainer was a general intangible, the bankruptcy court reasoned that the debtors’ interest in the retainer was neither a deposit account (because the law firm was not a bank or financial institution) or “money” (because the debtors had only the right to receive a refund on the unearned portion of the retainer fund). In re E-Z Serve Convenience Stores, Inc., 299 B.R. 126, 2003 Bankr. LEXIS 1358 (Bankr. M.D.N.C. 2003), aff'd, 318 B.R. 637, 2004 U.S. Dist. LEXIS 26181 (M.D.N.C. 2004).

“Rights.” —

The term “all rights” in an assignment included the contractual right of assignor to receive C.O.D. payment from defendant. Gunby v. Pilot Freight Carriers, Inc., 82 N.C. App. 427, 346 S.E.2d 188, 1986 N.C. App. LEXIS 2451 (1986).

“Security Interest.” —

This section defines “security interest” without reference to whether title is in the vendor or the vendee under the security agreement. Szabo Food Serv., Inc. v. Balentine's, Inc., 285 N.C. 452 , 206 S.E.2d 242, 1974 N.C. LEXIS 1002 (1974).

Clause (b) of subsection (37) is not consistent with the fundamental proposition that to create a security interest the parties must have intended to create one. Szabo Food Serv., Inc. v. Balentine's, Inc., 285 N.C. 452 , 206 S.E.2d 242, 1974 N.C. LEXIS 1002 (1974).

The language of a promissory note considered together with the terms and language of a financing statement may be sufficient to create a security interest in collateral owned by the debtor on the note. Mitchell v. Rock Hill Nat'l Bank (In re Mid-Atlantic Piping Prods., Inc.), 24 B.R. 314, 1982 Bankr. LEXIS 3096 (Bankr. W.D.N.C. 1982).

A financing statement can serve as a written security agreement to satisfy G.S. 25-9-203(1)(b). Mitchell v. Rock Hill Nat'l Bank (In re Mid-Atlantic Piping Prods., Inc.), 24 B.R. 314, 1982 Bankr. LEXIS 3096 (Bankr. W.D.N.C. 1982).

Article 9 of this Chapter applies to a transaction intended to create a security interest, regardless of whom the certificate lists as the owner. Carter v. Holland (In re Carraway), 65 B.R. 51, 1986 Bankr. LEXIS 5684 (Bankr. E.D.N.C. 1986).

Deed of trust executed in 1999 by a borrower, who guaranteed two promissory notes made by the borrower’s family business in 2004 and 2005, did not provide a basis for the lender to foreclose on the deed of trust following non-payment of the 2004 and 2005 notes, which did not refer to a security interest or right to foreclose. The 1999 note signed in connection with the deed of trust had been paid, extinguishing the security interest pursuant to G.S. 25-1-201(a)(35). Tr. Servs. v. R.C. Koonts & Sons Masonry, Inc., 202 N.C. App. 317, 688 S.E.2d 737, 2010 N.C. App. LEXIS 188 (2010).

Anti-modification provision prevented debtors’ proposed modification of creditor’s claim because the creditor was secured only by real property that was the debtors’ principal residence and no additional security interest was created by boilerplate language in the deed of trust form that granted creditor rights in an escrow account and miscellaneous proceeds. In re Adams, 2015 Bankr. LEXIS 4457 (Bankr. E.D.N.C. Nov. 30, 2015).

Security Interest v. Lease. —

Where a debtor could terminate her rental agreement for a VCR and a washing machine at any time with no further obligation to continue paying rent, the agreement was a “true” lease, not a security interest, under subdivision (37) of this section. In re Frady, 141 B.R. 600, 1991 Bankr. LEXIS 2167 (Bankr. W.D.N.C. 1991).

An agreement purporting to lease equipment actually was a secured loan, where the lessee could purchase the equipment for $1 upon termination of the lease, the total monthly lease payments approximated the purchase price, the lessor was a financing company, the lessee was not responsible for maintenance, insurance, taxes, and expenses, and the transaction was referred to as a loan in the parties’ agreement. L.C. Williams Oil Co. v. NAFCO Capital Corp., 130 N.C. App. 286, 502 S.E.2d 415, 1998 N.C. App. LEXIS 918 (1998).

Although a bankruptcy debtor had a right to terminate an agreement to lease a storage barn at any time, the agreement was properly treated as a true lease rather than a disguised security agreement based on economic reality, since the lack of evidence concerning the value of the barn prevented any finding that the lessor retained a meaningful reversionary interest, a purchase option was for a nominal amount, or the debtor had a right to gain equity in the barn. In re Johnson, 571 B.R. 167, 2017 Bankr. LEXIS 1339 (Bankr. E.D.N.C. 2017).

No Assignment of Security Interest. —

Where a bank loaned money to a debtor and filed a financing statement in 1999 and a partnership entered into a factoring agreement with the debtor but did not file a statement until 2003, the bank had a priority lien on the proceeds at issue because it perfected its security interest several years before the partnership; also, a purported financing statement amendment failed to include a security agreement showing an assignment of the security interest in certain accounts receivable. Rentenbach Constructors, Inc. v. CM P'ship, 181 N.C. App. 268, 639 S.E.2d 16, 2007 N.C. App. LEXIS 79 (2007).

“Signed.” —

Because of the importance placed upon financing statements, in cases dealing with the debtor’s signature on financing statements the courts should apply the liberal definition of “signed” in subsection (39) of this section with caution. Provident Fin. Co. v. Beneficial Fin. Co., 36 N.C. App. 401, 245 S.E.2d 510, 1978 N.C. App. LEXIS 2522 , cert. denied, 295 N.C. 549 , 248 S.E.2d 728, 1978 N.C. LEXIS 1030 (1978).

Contested stamp from an original lender to a transferee was a signature under G.S. 25-1-201(b)(37) as: (1) it indicated an intent to transfer the debt to a transferee; (2) the original note was transferred in accordance with the stamp’s intent; and (3) the stamp showed that it was executed or adopted by the party with the intention to adopt or accept the writing. In re Foreclosure of a Deed of Trust Executed by Bass, 366 N.C. 464 , 738 S.E.2d 173, 2013 N.C. LEXIS 269 (2013).

“Warehouse Receipt.” —

“Household Goods Descriptive Inventory” was sufficient to constitute a warehouse receipt for purposes of holding defendant moving company responsible under Art. 7 for its actions as a warehouseman where the document listed each item picked up, its condition, the owner’s name, the origin loading address, and was signed and dated by defendant’s authorized agent and driver. Tate v. Action Moving & Storage, Inc., 95 N.C. App. 541, 383 S.E.2d 229, 1989 N.C. App. LEXIS 837 (1989).

Arbitration Is Neither an “Action” nor a “Judicial Proceeding.” —

By its terms the limitations period stated in G.S. 25-2-725 applies only to an “action,” which, under subsection (1) is a “judicial proceeding,” and an arbitration is neither an “action” nor a “judicial proceeding,” but a nonjudicial, out-of-court proceeding which makes an action or judicial proceeding unnecessary. In re Cameron, 91 N.C. App. 164, 370 S.E.2d 704, 1988 N.C. App. LEXIS 747 (1988).

§ 25-1-202. Notice; knowledge.

Subject to subsection (f) of this section, a person has “notice” of a fact if the person:
1. Has actual knowledge of it;
2. Has received a notice or notification of it; or
3. From all the facts and circumstances known to the person at the time in question, has reason to know that it exists.
“Knowledge” means actual knowledge. “Knows” has a corresponding meaning.
“Discover,” “learn,” or words of similar import refer to knowledge rather than to reason to know.
A person “notifies” or “gives” a notice or notification to another person by taking such steps as may be reasonably required to inform the other person in ordinary course, whether or not the other person actually comes to know of it.
Subject to subsection (f) of this section, a person “receives” a notice or notification when:
1. It comes to that person’s attention; or
2. It is duly delivered in a form reasonable under the circumstances at the place of business through which the contract was made or at another location held out by that person as the place for receipt of such communications.
Notice, knowledge, or a notice or notification received by an organization is effective for a particular transaction from the time it is brought to the attention of the individual conducting that transaction and, in any event, from the time it would have been brought to the individual’s attention if the organization had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information to the person conducting the transaction and there is reasonable compliance with the routines. Due diligence does not require an individual acting for the organization to communicate information unless the communication is part of the individual’s regular duties or the individual has reason to know of the transaction and that the transaction would be materially affected by the information.

OFFICIAL COMMENTS

Source: Derived from former Section 1-201(25)-(27).

Changes from former law: These provisions are substantive rather than purely definitional. Accordingly, they have been relocated from Section 1-201 to this section. The reference to the “forgotten notice” doctrine has been deleted.

Under subsection (a), a person has notice of a fact when, inter alia, the person has received a notification of the fact in question.
As provided in subsection (d), the word “notifies” is used when the essential fact is the proper dispatch of the notice, not its receipt. Compare “Send.” When the essential fact is the other party’s receipt of the notice, that is stated. Subsection (e) states when a notification is received.
Subsection (f) makes clear that notice, knowledge, or a notification, although “received,” for instance, by a clerk in Department A of an organization, is effective for a transaction conducted in Department B only from the time when it was or should have been communicated to the individual conducting that transaction.

Legal Periodicals.

For article concerning liens on personal property not governed by the Uniform Commercial Code, see 44 N.C.L. Rev. 322 (1966).

For article on waiver of defense clauses in consumer contracts, see 48 N.C.L. Rev. 545 (1970).

For note on consignments and the consignor’s duty to satisfy public notice requirements, see 13 Wake Forest L. Rev. 507 (1977).

§ 25-1-203. Lease distinguished from security interest.

Whether a transaction in the form of a lease creates a lease or security interest is determined by the facts of each case.
A transaction in the form of a lease creates a security interest if the consideration that the lessee is to pay the lessor for the right to possession and use of the goods is an obligation for the term of the lease and is not subject to termination by the lessee, and:
1. The original term of the lease is equal to or greater than the remaining economic life of the goods;
2. The lessee is bound to renew the lease for the remaining economic life of the goods or is bound to become the owner of the goods;
3. The lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement; or
4. The lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration upon compliance with the lease agreement.
A transaction in the form of a lease does not create a security interest merely because:
1. The present value of the consideration the lessee is obligated to pay the lessor for the right to possession and use of the goods is substantially equal to or is greater than the fair market value of the goods at the time the lease is entered into;
2. The lessee assumes risk of loss of the goods;
3. The lessee agrees to pay, with respect to the goods, taxes, insurance, filing, recording, or registration fees, or service or maintenance costs;
4. The lessee has an option to renew the lease or to become the owner of the goods;
5. The lessee has an option to renew the lease for a fixed rent that is equal to or greater than the reasonably predictable fair market rent for the use of the goods for the term of the renewal at the time the option is to be performed; or
6. The lessee has an option to become the owner of the goods for a fixed price that is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed.
Additional consideration is nominal if it is less than the lessee’s reasonably predictable cost of performing under the lease agreement if the option is not exercised. Additional consideration is not nominal if:
1. When the option to renew the lease is granted to the lessee, the rent is stated to be the fair market rent for the use of the goods for the term of the renewal determined at the time the option is to be performed; or
2. When the option to become the owner of the goods is granted to the lessee, the price is stated to be the fair market value of the goods determined at the time the option is to be performed.
The “remaining economic life of the goods” and “reasonably predictable” fair market rent, fair market value, or cost of performing under the lease agreement must be determined with reference to the facts and circumstances at the time the transaction is entered into.

OFFICIAL COMMENTS

Source: Former Section 1-201(37).

Changes from former law: This section is substantively identical to those portions of former Section 1-201(37) that distinguished “true” leases from security interests, except that the definition of “present value” formerly embedded in Section 1-201(37) has been placed in Section 1-201(28).

An interest in personal property or fixtures which secures payment or performance of an obligation is a “security interest.” See Section 1-201(37). Security interests are sometimes created by transactions in the form of leases. Because it can be difficult to distinguish leases that create security interests from those that do not, this section provides rules that govern the determination of whether a transaction in the form of a lease creates a security interest.
One of the reasons it was decided to codify the law with respect to leases was to resolve an issue that created considerable confusion in the courts: what is a lease? The confusion existed, in part, due to the last two sentences of the definition of security interest in the 1978 Official Text of the Act, Section 1-201(37). The confusion was compounded by the rather considerable change in the federal, state and local tax laws and accounting rules as they relate to leases of goods. The answer is important because the definition of lease determines not only the rights and remedies of the parties to the lease but also those of third parties. If a transaction creates a lease and not a security interest, the lessee’s interest in the goods is limited to its leasehold estate; the residual interest in the goods belongs to the lessor. This has significant implications to the lessee’s creditors. “On common law theory, the lessor, since he has not parted with title, is entitled to full protection against the lessee’s creditors and trustee in bankruptcy....” 1 G. Gilmore, Security Interests in Personal Property Section 3.6, at 76 (1965).

Under pre-UCC chattel security law there was generally no requirement that the lessor file the lease, a financing statement, or the like, to enforce the lease agreement against the lessee or any third party; the Article on Secured Transactions (Article 9) did not change the common law in that respect. Coogan, Leasing and the Uniform Commercial Code, in Equipment Leasing-Leveraged Leasing 681, 700 n.25, 729 n.80 (2d ed.1980). The Article on Leases (Article 2A) did not change the law in that respect, except for leases of fixtures. Section 2A-309. An examination of the common law will not provide an adequate answer to the question of what is a lease. The definition of security interest in Section 1-201(37) of the 1978 Official Text of the Act provided that the Article on Secured Transactions (Article 9) governs security interests disguised as leases, i.e. , leases intended as security; however, the definition became vague and outmoded.

Lease is defined in Article 2A as a transfer of the right to possession and use of goods for a term, in return for consideration. Section 2A-103(1)(j). The definition continues by stating that the retention or creation of a security interest is not a lease. Thus, the task of sharpening the line between true leases and security interests disguised as leases continues to be a function of this Article.

This section begins where Section 1-201(35) leaves off. It draws a sharper line between leases and security interests disguised as leases to create greater certainty in commercial transactions.

Prior to enactment of the rules now codified in this section, the 1978 Official Text of Section 1-201(37) provided that whether a lease was intended as security ( i.e. , a security interest disguised as a lease) was to be determined from the facts of each case; however, (a) the inclusion of an option to purchase did not itself make the lease one intended for security, and (b) an agreement that upon compliance with the terms of the lease the lessee would become, or had the option to become, the owner of the property for no additional consideration, or for a nominal consideration, did make the lease one intended for security.

Reference to the intent of the parties to create a lease or security interest led to unfortunate results. In discovering intent, courts relied upon factors that were thought to be more consistent with sales or loans than leases. Most of these criteria, however, were as applicable to true leases as to security interests. Examples include the typical net lease provisions, a purported lessor’s lack of storage facilities or its character as a financing party rather than a dealer in goods. Accordingly, this section contains no reference to the parties’ intent.

Subsections (a) and (b) were originally taken from Section 1(2) of the Uniform Conditional Sales Act (act withdrawn 1943), modified to reflect current leasing practice. Thus, reference to the case law prior to the incorporation of those concepts in this article will provide a useful source of precedent. Gilmore, Security Law, Formalism and Article 9 , 47 Neb.L.Rev. 659, 671 (1968). Whether a transaction creates a lease or a security interest continues to be determined by the facts of each case. Subsection (b) further provides that a transaction creates a security interest if the lessee has an obligation to continue paying consideration for the term of the lease, if the obligation is not terminable by the lessee (thus correcting early statutory gloss, e.g., In re Royer’s Bakery, Inc., 1 U.C.C. Rep.Serv. (Callaghan) 342 (Bankr. E.D.Pa. 1963)) and if one of four additional tests is met. The first of these four tests, subparagraph (1), is that the original lease term is equal to or greater than the remaining economic life of the goods. The second of these tests, subparagraph (2), is that the lessee is either bound to renew the lease for the remaining economic life of the goods or to become the owner of the goods. In re Gehrke Enters., 1 Bankr. 647, 651-52 (Bankr.W.D.Wis.1979). The third of these tests, subparagraph (3), is whether the lessee has an option to renew the lease for the remaining economic life of the goods for no additional consideration or for nominal additional consideration, which is defined later in this section. In re Celeryvale Transp., 44 Bankr. 1007, 1014-15 (Bankr. E.D.Tenn. 1984). The fourth of these tests, subparagraph (4), is whether the lessee has an option to become the owner of the goods for no additional consideration or for nominal additional consideration. All of these tests focus on economics, not the intent of the parties. In re Berge, 32 Bankr. 370, 371-73 (Bankr. W.D.Wis. 1983).

The focus on economics is reinforced by subsection (c). It states that a transaction does not create a security interest merely because the transaction has certain characteristics listed therein. Subparagraph (1) has no statutory derivative; it states that a full payout lease does not per se create a security interest. Rushton v. Shea, 419 F. Supp. 1349, 1365 (D.Del. 1976). Subparagraphs (2) and (3) provide the same regarding the provisions of the typical net lease. Compare All-States Leasing Co. v. Ochs, 42 Or.App. 319, 600 P.2d 899 (Ct.App. 1979), with In re Tillery, 571 F.2d 1361 (5th Cir. 1978). Subparagraph (4) restates and expands the provisions of the 1978 Official Text of Section 1-201(37) to make clear that the option can be to buy or renew. Subparagraphs (5) and (6) treat fixed price options and provide that fair market value must be determined at the time the transaction is entered into. Compare Arnold Mach. Co. v. Balls, 624 P.2d 678 (Utah 1981), with Aoki v. Shepherd Mach. Co., 665 F.2d 941 (9th Cir.1982).

The relationship of subsection (b) to subsection (c) deserves to be explored. The fixed price purchase option provides a useful example. A fixed price purchase option in a lease does not of itself create a security interest. This is particularly true if the fixed price is equal to or greater than the reasonably predictable fair market value of the goods at the time the option is to be performed. A security interest is created only if the option price is nominal and the conditions stated in the introduction to the second paragraph of this subsection are met. There is a set of purchase options whose fixed price is less than fair market value but greater than nominal that must be determined on the facts of each case to ascertain whether the transaction in which the option is included creates a lease or a security interest.

It was possible to provide for various other permutations and combinations with respect to options to purchase and renew. For example, this section could have stated a rule to govern the facts of In re Marhoefer Packing Co., 674 F.2d 1139 (7th Cir. 1982). This was not done because it would unnecessarily complicate the definition. Further development of this rule is left to the courts.

Subsections (d) and (e) provide definitions and rules of construction.

Legal Periodicals.

For article concerning liens on personal property not governed by the Uniform Commercial Code, see 44 N.C.L. Rev. 322 (1966).

For article on waiver of defense clauses in consumer contracts, see 48 N.C.L. Rev. 545 (1970).

For note on consignments and the consignor’s duty to satisfy public notice requirements, see 13 Wake Forest L. Rev. 507 (1977).

For note on commercial reasonableness and the public sale in North Carolina, see 17 Wake Forest L. Rev. 153 (1981).

For comment, “Return to the Conservative View of Security Agreements in Commercial Transactions,” see 8 Campbell L. Rev. 505 (1986).

For article, “Court Adjustment of Long-Term Contracts: An Analysis Under Modern Contract Law,” see 1987 Duke L.J. 1.

For article, “Public Filing and Personal Property Leases: Questions of Definition and Doctrine,” see 22 Wake Forest L. Rev. 425 (1987).

For comment, “Is it a Sale or a Lease?: The Implications of Article 2A and Revised U.C.C. Section 1-201(37) in North Carolina,” see 18 N.C. Cent. L.J. 187 (1989).

CASE NOTES

Editor’s Note. —

Some of the cases cited below were decided under former G.S. 25-1-201 .

“Security Interest.” —

Security Interest v. Lease. —

Equipment Schedule No. 1, which covered a linear feed saw and transformer, between a creditor and a Chapter 11 debtor was a true lease under G.S. 25-1-203(b) because the debtor had the option to purchase the equipment for its fair market value, not a nominal value. In re Southeastern Materials, Inc., 433 B.R. 177, 2010 Bankr. LEXIS 2335 (Bankr. M.D.N.C. 2010).

Creditor had a security interest in equipment under G.S. 25-1-203(b) because the lease with the Chapter 11 debtor was not a true lease. It was not terminable by the lessee and the debtor had the option to purchase the equipment at the end of the term for a nominal value; however, a bank had a first priority security interest in the equipment because the creditor did not file its UCC-1 financing statement within 20 days after the debtor received possession of the equipment as required by G.S. 25-9-324(a). In re Southeastern Materials, Inc., 433 B.R. 177, 2010 Bankr. LEXIS 2335 (Bankr. M.D.N.C. 2010).

Under G.S. 25-1-203 , a bank’s contract with the debtors was a lease and not a disguised security agreement, where the lease provided the lessee with the right to terminate the lease; moreover, even if the debtors did not have the right to terminate, the contract would still be a true lease, as the residual value of the vehicle at the end of the lease term was $12,423, not a nominal sum, and there was no provision to renew the lease for the remaining economic life of the vehicle. In re Calloway, 2010 Bankr. LEXIS 4989 (Bankr. M.D.N.C. Oct. 28, 2010).

Bank that held a secured interest in equipment that was owned by a lumber company lost its right to repossess the equipment under a lease it entered with the lumber company when it failed to timely file a UCC-3 Continuation Statement with the North Carolina Secretary of State after the company declared bankruptcy. Although the lapse of a UCC-1 Financing Statement was tolled under former G.S. 25-9-403(2) if a debtor entered bankruptcy or another insolvency proceeding, G.S. 25-9-515(c) deleted the former tolling provision and imposed a new burden on secured parties to be sure that a financing statement did not lapse during a debtor’s bankruptcy; the court found that the parties’ lease created a security interest under G.S. 25-1-203 that was subject to G.S. 25-9-515(c). In re Miller Bros. Lumber Co., 2012 Bankr. LEXIS 2031 (Bankr. M.D.N.C. May 7, 2012), rev'd, 2013 U.S. Dist. LEXIS 152176 (M.D.N.C. Oct. 23, 2013).

Creditor was not entitled to reclassification of claims because separate classification of unsecured claims was not done to manipulate creditor’s votes on Chapter 11 plan. Class 8, Intercompany Claims, consisted of insider claims whose votes would not be considered for purposes of 11 U.S.C.S. § 1129(a)(10); separate classification of unsecured claims was permitted under 11 U.S.C.S. § 1122(b); Class 4 consisted of assumed contracts and leases as permitted under 11 U.S.C.S. § 1123(b)(2) and was an unimpaired class not entitled to vote; and because transaction labelled as finance lease was a disguised security interest under G.S. 25-1-203(b), the debtor had a good business judgment reason for the classification. In re Lichtin/Wade, LLC, 2012 Bankr. LEXIS 3644 (Bankr. E.D.N.C. Aug. 8, 2012).

Where debtors’ lease agreements applicable to certain trailers were security agreements given satisfaction of Bright-Line Test under North Carolina law, debtors were entitled to reconsideration of court’s earlier order terminating stay upon any failure to make adequate protection payments to trailer owners because applying that order prospectively was inequitable; thus, automatic stay continued while debtors performed under their Chapter 13 plan. In re Price, 577 B.R. 643, 2017 Bankr. LEXIS 3117 (Bankr. E.D.N.C. 2017).

§ 25-1-204. Value.

Except as otherwise provided in Articles 3, 4, and 5 of this Chapter, a person gives value for rights if the person acquires them:

In return for a binding commitment to extend credit or for the extension of immediately available credit, whether or not drawn upon and whether or not a charge-back is provided for in the event of difficulties in collection;
As security for, or in total or partial satisfaction of, a preexisting claim;
By accepting delivery under a preexisting contract for purchase; or
In return for any consideration sufficient to support a simple contract.

OFFICIAL COMMENTS

Source: Former Section 1-201(44).

Changes from former law: Unchanged from former Section 1-201, which was derived from Sections 25, 26, 27, 191, Uniform Negotiable Instruments Law; Section 76, Uniform Sales Act; Section 53, Uniform Bills of Lading Act; Section 58, Uniform Warehouse Receipts Act; Section 22(1), Uniform Stock Transfer Act; Section 1, Uniform Trust Receipts Act. These provisions are substantive rather than purely definitional. Accordingly, they have been relocated from former Section 1-201 to this section.

All the Uniform Acts in the commercial law field (except the Uniform Conditional Sales Act) have carried definitions of “value.” All those definitions provided that value was any consideration sufficient to support a simple contract, including the taking of property in satisfaction of or as security for a pre-existing claim. Subsections (1), (2), and (4) in substance continue the definitions of “value” in the earlier acts. Subsection (3) makes explicit that “value” is also given in a third situation: where a buyer by taking delivery under a pre-existing contract converts a contingent into a fixed obligation.

This definition is not applicable to Articles 3 and 4, but the express inclusion of immediately available credit as value follows the separate definitions in those Articles. See Sections 4-208, 4-209, 3-303. A bank or other financing agency which in good faith makes advances against property held as collateral becomes a bona fide purchaser of that property even though provision may be made for charge-back in case of trouble. Checking credit is “immediately available” within the meaning of this section if the bank would be subject to an action for slander of credit in case checks drawn against the credit were dishonored, and when a charge-back is not discretionary with the bank, but may only be made when difficulties in collection arise in connection with the specific transaction involved.