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Principles Of Business Law - CHAPTER III

1. CHAPTER I

2. CHAPTER II

3. CHAPTER III

4. BOOK I CHAPTER I

5. CHAPTER II

6. CHAPTER III

7. CHAPTER IV

8. CHAPTER V

9. CHAPTER VI

10. CHAPTER VII

11. CHAPTER VIII

12. BOOK II CHAPTER I

13. CHAPTER II

14. CHAPTER III

15. CHAPTER IV

16. BOOK III CHAPTER I

17. CHAPTER II

18. CHAPTER III

19. CHAPTER IV

20. CHAPTER V

21. CHAPTER VI

22. CHAPTER VII

23. CHAPTER VIII

24. CHAPTER IX

25. CHAPTER X

26. BOOK IV CHAPTER I

27. CHAPTER II

28. CHAPTER III

29. CHAPTER IV

30. CHAPTER V

31. CHAPTER VI

32. CHAPTER VII

33. CHAPTER VIII

34. CHAPTER IX

35. CHAPTER X

36. CHAPTER XI

37. CHAPTER XII

38. CHAPTER XIII

39. BOOK V CHAPTER I

40. CHAPTER II

41. CHAPTER III

42. BOOK VI CHAPTER I

43. CHAPTER II

44. CHAPTER III

45. CHAPTER IV

46. CHAPTER V

47. BOOK VII CHAPTER I

48. CHAPTER II

49. CHAPTER III

50. CHAPTER IV

51. BOOK VIII CHAPTER I

52. CHAPTER II

53. CHAPTER III







CHAPTER III
CONDITIONAL SALES

Nature

Sec. 21. Requisites of a conditional sale. An increasingly im-
portant device used for the protection of the businessman who sells
on credit is the conditional sale. There was a time when the use
of the conditional sale was confined largely to installment sales;
but, because of its simplicity and its adaptability to the protection
of the vendor, its use has become widespread in all sales which in-
volve a period of credit. 1

A conditional sale is one in which title to the property under sale
does not pass to the vendee until some specified condition has been
satisfied. The contracting parties are at liberty to establish any
condition precedent to the passing of title which they see fit to stip-
ulate. In business, however, the conditional sale is considered one
in which the title is to pass only after full payment of the purchase
price. In other words, in a conditional sale, title is retained by the
vendor as security for the purchase price, although possession is sur-
rendered to the vendee.

The only formal requisite required by the law of most states for
the validity of a conditional sale is a stipulation in the agreement
which indicates that title is retained by the vendor. 2 By statute,
in a slight majority of the states, the agreement must be signed by
the purchaser, and must be recorded or a copy must be filed in the
recorder's office. The common law required no record; but, for the
protection of innocent third parties, who often are led to purchase
the property because of the apparent ownership of the vendee, a
slight majority of the states have enacted legislation which requires
either recording or filing. In those states which have no such leg-
islation, the innocent purchaser from a conditional vendee takes
subject to the title of the vendor. The conditional vendee has no
title and is, therefore, incapable of transferring it. 3

The conditional sale is not available as a general security device.
It grows out of a sale of personal property and cannot be used effec-
tively after title has passed to the buyer. Similarly, an attempt to
secure a loan or a past due indebtedness by the execution of a note
which states that the creditor is retaining title to certain goods un-

1 See form #8.

2 Adams v. Askins, 1927, 215 Ala. 632, 112 So. 199; p. 779.

3 Fairbanks-Morse & Co. v. Parker et al., 1925, 167 Ark. 654, 269 S.W. 42; p. 779.

358



CONDITIONAL SALES 359

til the debt is paid, is meaningless. In such a case, title to goods
belonging to the debtor cannot be retained by the creditor since the
latter never at any time held title to them.

Sec. 22. Other conditions. A recent tendency has been ob-
served to provide that title shall not pass until the purchase price
and all bills for repairs on the article sold, arising during the life of
the contract, have been paid. Thus, the retailer of automobiles or
tractors often provides that title shall not pass until bills for repairs
supplied or services rendered are satisfied. From this point, it is
only a short step to a more inclusive clause which calls for reten-
tion of title until all debts owing the seller, for this or other items,
shall have been liquidated. Thus, certain retail concerns engaged
in installment selling now make the transfer of title dependent
upon final payment of all credit transactions arising during the life
of the contract. Theoretically, since the transfer of title is a mat-
ter of contract, it seems that such agreements should be enforce-
able. At present there is no well-defined law on the subject, but,
considering the fact that many states do not have recording laws for
conditional sales and that in a few states all security transactions
of this character are treated as mortgages, it is questionable if these
provisions will be enforced against third parties.

Sec. 23. Fixtures. Retention of title to articles which the con-
ditional vendor knows or has reason to believe will be attached to
larger items gives the vendor a right to repossess as against the
vendee or any one having an equity in the larger item, which equity
arose prior to the conditional sale. This is true only if the article
can be repossessed without serious injury to the larger unit. Thus,
the conditional vendor of automobile tires may repossess them as
against the conditional vendor of the car, but is compelled to ac-
count for the old tires in case he traded for them.

One who acquires a later equity in or title to the larger unit has
a superior claim to the conditional vendor of the fixture. A manu-
facturer of refrigerators, having sold some to the owner of an apart-
ment house for installation therein, cannot repossess them, upon
default, as against a later mortgagee of the premises. The later
lien claimant has extended credit on the strength of the larger unit
in its improved condition and ought to have full protection ac-
corded to him.

Sec, 24. Sale for the purpose of resale. Where goods are sold
under a conditional sale agreement to a vendee whose business it is
to resell them, the retention of title clause is not effective as against
those who purchase in the ordinary course of business. Thus, a
manufacturer who sells his product on credit to a retailer and pro-
tects himself with the use of the retention of title clause, cannot ex-



360 SECURITY FOR CREDIT TRANSACTIONS

pect to assert his right to the property as against one who purchases
from the retailer in the ordinary course of business. This rule ap-
plies, despite the fact that the retailer has failed to pay for the
goods. In the majority of states, however, such a retention of title
is good against attaching creditors and against those who take the
goods other than as purchasers in the ordinary course of business.
Thus, goods sold by the manufacturer under such an agreement
cannot be levied on and sold by creditors of the retailer unless the
goods have been paid for by the latter. The only reason the ordi-
nary purchaser obtains good title is that the manufacturer who sells
to a retailer impliedly assents to the resale of, and transfer of title
to, such goods. It is only through a resale of the property that
the manufacturer expects to receive his money. Therefore, he im-
pliedly waives his title to the goods whenever they are sold by the
retailer, whether they are sold for cash or on credit.

A manufacturer or wholesaler who sells to a retailer and uses the
conditional sale as security for the credit extended, has no equity or
interest in the proceeds realized by the retailer at the time the goods
are sold. The proceeds belong to the retailer, and the manufacturer
or jobber becomes an ordinary creditor in the event the retailer fails
to pay his obligation. The latter's agreement with the producer is
usually so worded as to require him to pay promptly after the goods
have been sold.

Sec. 25. Rights of the vendor. The conditional vendor has a
choice of two remedies in the event of default in payment by the
vendee. He may elect to rescind the agreement, or he may institute
suit to recover the amount due under the sale agreement. If he
decides to rescind, he informs the vendee, and, if payment is not
made, he demands possession of the property. Rescission entitles
the vendor to possession of the property and to the right to retain all
payments previously made, but it gives him no right to recover any
possible deficit. Thus, in the absence of an agreement to the con-
trary, when property is repossessed by the vendor and resold for less
than the balance due, the loss must be borne by the vendor. On
the other hand, if the property sells for more than the balance due,
the vendor is entitled to keep the surplus. Even though the prop-
erty sells for enough to create a surplus after all the costs of resale
are paid, the vendee has no right to it. Because of these rules, it is
customary to include in conditional sale agreements a provision
which calls for payment to the vendor of any deficit after all ex-
penses of repossessing and resale are cared for. Such a provision
adequately protects the vendor, but accords the vendee no right to
recover in case a surplus exists. A provision giving this right to the
vendee may be, but seldom is, included. A few of the states have



CONDITIONAL SALES 361

adopted the Uniform Conditional Sales Act, which definitely pro-
vides for the recovery of any deficit by the vendor and of any sur-
plus by the vendee. 4

Sec. 26. Foreclosure. No formal procedure has been estab-
lished for the foreclosure of the conditional sale. It is entirely a
matter of rescission by the vendor. 5 The vendee having defaulted
in payment of the purchase price, the vendor is entitled to posses-
sion of the property after making a demand, unless the payments
due are paid. If possession is not voluntarily surrendered, the
vendor may use any peaceable means at his disposal to obtain pos-
session. Some state courts have held that the vendor may exercise
reasonable force in reducing the property to possession. 6

After the property has been repossessed, no formal court order is
essential before it may be resold. The vendor is at liberty to sell it
or not, as he sees fit. All interest of the vendee in the property or
the proceeds of sale have been cut off by the rescission, except in
those rare instances in which the agreement or special legislation
has increased his common-law rights.

Many conditional sale agreements provide that the vendor shall
have the right to enter and take the goods whenever the vendee
attempts to sell, mortgage, or move them, or whenever creditors of
the vendee levy on the goods or the vendor deems himself insecure.
In the event the vendor elects to retake the property because of a
breach of any of the above provisions, he has no right to sell or to
dispose of the property unless that right has been expressly con-
ferred by the agreement. The right to rescind and to sell the prop-
erty arises only upon default in payment, unless the agreement
stipulates otherwise.

Sec. 27. Rights of the vendee. The conditional vendee has a
right to the possession and beneficial use of the property until such
time as the vendor elects to rescind upon proper cause. He may
sue and recover damages for any wrongful interference with his pos-
session or use of the property. He is entitled to the benefits con-
ferred by any of the warranties, either express or implied, just as
though he had title. A breach of any warranty gives him the same
right that it would give to any other purchaser.

In addition to these rights, the vendee may assign his conditional
sale agreement to third parties and thus dispose of his interest in
the property, subject only to the rights of the vendor. This right
to assign the agreement may be barred by a provision in the con-



*Hare & Chase, Inc. v. Hutchison et al., 1927, 3 W.W. Harr. 384, 138 Atl. 611;
p. 780.

5 C. I. T. Corporation v. Corey, Sheriff, 1938, 58 Ida. 763, 79 Pac.(2) 542; p. 781
Lambert v. Robinson et al., 1894, 162 Mass. 34, 37 N.E. 753; p. 782.



362 SECURITY FOR CREDIT TRANSACTIONS

tract of sale forbidding it. In any event, an assignment of the
agreement does not relieve the vendee of liability for the balance of
the contract price. In effect, he becomes a surety for the faithful
performance of the contract by the assignee.

Transfer of Title

Sec. 28. Title passes at time of payment. Title to goods sold
under a conditional sale agreement automatically passes to the
vendee upon payment of the purchase price, unless other conditions
are prescribed in the contract. 7 A valid tender of payment has the
same effect, although the tender is refused by the vendor.

Some little conflict exists where notes are received in settlement
for goods sold under such an agreement. The mere taking of a note
does not, by the law of most states, constitute payment; the note
represents only the agreement for an extension of credit. There-
fore, receipt of a note in settlement for goods sold does not cause
title to pass. 8 Furthermore, it has become customary in many lo-
calities to use what is known as a "title retaining note." Such a
note definitely stipulates that title to the goods for which it is given
is to be retained by the holder of the note until the goods are paid
for. Such a note clearly indicates that title is being retained until
the indebtedness is paid.

The conflict becomes more pronounced, however, where security
is accepted in addition to the note itself. What effect upon title
has the giving of a note by the vendee, if the note is secured by a
pledge, surety, or chattel mortgage upon other goods? The cases
are fairly evenly divided on this question, but the slight weight of
authority, as well as the better view, seems to be that such a note
does not represent payment and that title does not pass until final
payment is made, unless an agreement is reached that the note is to
constitute payment.

Whenever the payee of a conditional sale note sells or discounts
it, the retention of title clause acts as security for the benefit of the
new holder of the note. In case the buyer defaults in payment,
the holder of the note has all the rights which were formerly at-
tached to the conditional vendor. If the note is not a title-retain-
ing one, the purchaser of it is better protected by having the con-
tract of sale assigned to him at the time the note is acquired. Even
where this precaution has not been taken, it has been held in a few



7 Automobile Service Corporation v. Community Motors, Inc., 1941, 312 111, App.
263,38 N.E.(2) 512; p. 783,

8 McMullen Machinery Co. v. Grand Rapids Trust Co., 1927, 239 Mich. 295, 214
N.W. 110; p. 785.



CONDITIONAL SALES 363

cases that title follows the note and rests in the purchaser until the
purchase price is paid.

A borrower who pledges conditional sale contracts as security for
his indebtedness does not, by the act of pledging, give to the pledgee
the right to repossess the goods upon default in payment. The
power to repossess rests in the real creditor, but, if exercised, will
benefit the pledgee. The pledgee may legally exercise the right to
repossess only when the pledge agreement expressly grants him that
right.

Sec. 29. Election by the vendor. The conditional vendor be-
comes possessed of an option in the event of default by the vendee.
He may rescind the agreement and repossess the property, or he may
bring suit and obtain a judgment for the purchase price. Should
he elect one of these remedies, his election operates as a bar to the
use of the other. Thus, after the vendor has sued for the purchase
price and obtained judgment, he may not later elect to rescind and
demand possession of the goods. 9 Title passes as soon as judgment
for the full purchase price is obtained, even though the judgment
remains unpaid. The right to a judgment exists only on the theory
that title quite definitely rests with the purchaser.

Where goods are to be paid for in installments, suit for any par-
ticular installment, with the exception of the last one, does not
operate to pass title. The vendor is entitled to all installments, ex-
cept the last, without the transfer of title. It is only where the last
installment is due, and suit is brought for the entire balance due,
that title passes to the vendee.

Sec. 30. Risk of loss. As a general rulp, it may be said that
risk of loss follows title. This fact was found to be true of ordinary
sales; whether the vendor or the vendee had to bear the loss de-
pended upon which had title at the time the loss occurred. In a
conditional sale, however, title is retained by the vendor merely as
security for the purchase price ; possession and the beneficial use of
the property reside with the vendee. For these reasons, any loss
occasioned by destruction of, or damage to, the property must be
suffered by the vendee, provided title would have passed in an ordi-
nary sale. Thus, in all cases where the goods have been delivered,
the vendee assumes the risk. To illustrate : A sells B an automo-
bile for $500 on credit and retains title as security. The car is de-
stroyed by fire while $300 of the purchase price remains unpaid.
B still owes A a duty to complete his payments, although the car is
destroyed without any fault on his part.



'Loden v. Paris Auto Co., 1927, 174 Ark. 720, 296 S.W. 78; p. 787.



364 SECURITY FOR CREDIT TRANSACTIONS

Review Questions and Problems

1. What is the purpose of a conditional sale? How is it effected? In
the absence of statute is it necessary to record or to file a conditional
sale?

2. A sold the B Company some machines under a conditional sale con-
tract. The B Company paid one third of the purchase price and gave
notes for the balance. B Company defaulted in payment and A repos-
sessed the goods. May the receiver of the B Company recover the pay-
ment made to A? Has he the right to one third of the goods?

3. A, a manufacturer of wagons, sold a number of them to , a retail
implement dealer, under a conditional sale agreement. B, not having
paid A for the wagons, sold two of them to C and received payment for
them. A later demands the wagons from C. May he recover them?
Are the funds received by B to be held in trust for A!

4. A conditional vendor obtains a judgment for the unpaid purchase
price of certain goods. The judgment not being paid, he desires to take
possession of the goods. Is he free to do so?

5. Under what conditions is the vendor entitled to recover a deficit at
time of resale? May the vendee recover any surplus?

6. What effect upon the passing of title does the taking of a secured
note by the vendor have?

7. Under a conditional sale, upon whom does the risk of loss fall?

8. S sold a furnace to B under a conditional sale contract, the purchase
price to be paid in installments. The furnace was installed in a resi-
dence upon which there was a mortgage in favor of M. B failed to pay
the mortgage or to pay for the furnace. M seeks to enjoin S from re-
moving the furnace. Should he be successful?

9. D owed C $500 for money previously borrowed. He gave C a new
note for that amount, which stated that C was retaining title to certain
property, owned by D, until the note was paid. This property, which
had at all times been in the possession of D, was later sold by D to an
innocent purchaser. Did the innocent purchaser obtain good title?




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