Reproduced with permission of 17 New York International Law Review (Winter 2004) 103-109, published by the New York State Bar Association, One Elk Street, Albany, New York 12207
209 E Supp. 2d 880 (N.D. Ill. 2002)
The Convention on Contracts for the International Sale of Goods (CISG) does not apply to third persons who are not parties to a contract, so a dispute arising between a buyer, a seller and a third party with a security interest is governed by the local law of the state that has the most significant contacts to the contested property.
In Usinor Industeel v. Leeco Steel Products, Inc., the United States District Court for the Northern District of Illinois denied plaintiff's motion for replevin and plaintiff's motion for avoidance of the sales contract. Plaintiff sought replevin to recover possession of steel shipments it made to defendant under their sales contract. The court held that the remedy of replevin was not available because plaintiff did not have title to the steel. In the alternative, plaintiff sought to avoid the contract under the Convention on Contracts for the International Sale of Goods (CISG). The court also denied this motion on the ground that a third-party bank had a right to control the steel shipments. The court determined that the CISG did not apply to the dispute because the CISG only governed two-party transactions and the present action involved a third-party secured creditor. Since the CISG did not govern the rights of a third-party secured creditor, the court resolved the matter under the local law of Illinois, including the Uniform Commercial Code (UCC). Under the UCC, the court determined [page 103] that plaintiff held an unperfected security interest in the steel shipments. Under the UCC, a party with an unperfected security interest will lose priority over a party with a perfected security interest in the same collateral. The third party, a bank that had given defendant a secured loan, had perfected a security interest in defendant's inventory, including the steel shipments. Since plaintiff's security interest was not perfected, the third party's interest prevailed over that of plaintiff.
II. Facts and Procedural Posture
In February 2000, defendant Leeco Steel Products ("Leeco") placed an order with plaintiff Usinor Industeel ("Usinor") for the purchase of steel. Usinor was a corporation incorporated under the laws of France with its principal place of business in France. Leeco was a corporation incorporated under the laws of the state of Illinois with its principal place of business in Illinois. Leeco placed a large order with Usinor because it planned to sell the steel to Caterpillar Inc., which in turn planned to use the steel in constructing truck beds for mining facilities. Later in 2000, Caterpillar decided to halt production of the truck beds and notified Leeco that it would not buy any additional steel from Leeco. By this time, Leeco had possession of eighteen tons of steel from Usinor that it had not paid for. Leeco had purchased the steel on secured credit from a third party; LaSalle Bank ("LaSalle"). Usinor brought suit in [page 104] order to assert priority over the third-party bank's claim to the steel shipments. The District Court for the Northern District of Illinois had original jurisdiction over the matter.
III. The Court's Analysis
A. The CISG Governs Only the Rights of the Buyer and Seller
The CISG was ratified by the United States on December 11, 1986, and became effective on January 1, 1988. This treaty was adopted in order to establish "substantive provisions of law to govern the formation of international sales contracts and the rights and obligations of the buyer and the seller. The treaty is federal law and therefore should preempt any inconsistent state law under the Supremacy Clause of the United States Constitution. The court made clear that if the dispute had only involved the buyer and seller, the CISG would have preempted all local laws. However, the issue that arose was whether the CISG governed a contract dispute when a third party had a security interest in the goods.
The court noted that, although the CISG has a very broad scope, there have been very few cases in the U.S. courts that have had to apply the treaty. The case was one of first impression for the District Court for the Northern District of Illinois. However, the court sought guidance from a United States District Court for the Northern District of California decision, which held that the CISG governed only the rights of the buyer and seller to a contract. Additionally, a number of legal scholars have interpreted the treaty as being limited in scope to [page 105] the rights of only the buyer and seller in a sales contract. Article 4 of the CISG states that the treaty "governs only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract." The treaty makes no mention of the rights of third parties to a contract between the buyer and seller. The court concluded that the treaty was not intended to govern the rights of third parties to a contract. Once the court determined that the CISG did not govern the rights of the third-party secured creditor, the court looked to local law for the resolution.
B. Local Law Governs the Rights of Third Parties
The court needed to decide whether the local law of France or Illinois would apply because the parties were not from the same state or country. In making this determination, the court applied the five factors of the "most significant factors rule" to ascertain which law should apply. Under this rule, there are five factors that a court should look to in order to determine which local law should apply: 1) place of contracting; 2) place of negotiating; 3) place of performance; 4) location of subject matter in the contract; 5) domicile, residence, place of incorporation and business of the parties. The court determined that the place where the goods were located was the most relevant factor in this case, and the laws of that jurisdiction should apply. In the present matter, the steel shipments were located in Illinois, so the court applied Illinois law. Under Illinois law, the UCC governs disputes between a buyer, seller and third-party bank with a secured interest in, the goods in dispute. [page 106]
C. Applying the UCC
Under the UCC, both plaintiff, Usinor, and the third-party bank, LaSalle Bank, had a security interest in the steel shipments. Under Article 9 of the UCC, a holder of a security interest must perfect its security interest in order for it to be effective against other creditors. In order to perfect an interest in a debtor's inventory, the creditor must file a financing statement.
Usinor had a security interest in the steel shipments pursuant to UCC § 2-401. That section provides that, when the seller attempts to reserve or retain title in the goods shipped, only a security interest is created. Here, Usinor and Leeco agreed that Usinor was to retain title in the goods until the payments by Leeco were complete. However, under the UCC, this retention of title was effective only as retention of a security interest because title automatically passed to the buyer when performance was completed by delivery of the goods. When the steel shipments were delivered to Leeco in Illinois, Leeco possessed title to the goods and Usinor retained a security interest over those steel shipments.
Although Usinor had a security interest in the steel shipments, it failed to perfect the security interest, because it never filed a financing statement as required under the Uec. [page 107]
LaSalle had a security agreement with Leeco which secured Leeco's entire inventory as collateral. Under UCC § 9-203, a security interest is created if the security interest has attached, value has been given, the security agreement has been authenticated and the debtor has sufficient rights to the collateral. The court determined that Leeco had sufficient rights to the steel shipments because title to the goods had passed to Leeco when shipment was completed. LaSalle had given value when it advanced the loan to Leeco and the security agreement had been authenticated when it was signed by both parties. [page 108]
LaSalle then perfected its security agreement by completing a proper filing statement.  LaSalle first filed a financing statement covering Leeco's entire inventory on February 11, 1997. At that time, Leeco did not have sufficient rights to the steel shipments because the steel had not yet been delivered. The security agreement did not cover inventory acquired after the agreement was made. However, after the steel deliveries were made to Leeco, LaSalle filed a second financing statement on November 15, 2001, thereby securing an interest in the steel shipments made by Usinor.
Under the UCC, a party holding a non-perfected security interest is vulnerable to a party who has an unsecured interest and who first attempts to seize the collateral for repayment of the debt. At the time Usinor filed its complaint against Leeco, Usinor had an unperfected security interest in the steel shipments arid LaSalle had a perfected security interest in those same goods. Therefore, the court held that under the UCC, LaSalle's perfected security interest had priority over Usinor's unperfected security interest. [page 108]
The United States District Court for the Northern District of Illinois concluded that the CISG could not apply to a contract between a buyer and seller where a third party lender had a perfected security interest in the goods in dispute. Instead, the court applied the local law of the state where the goods were located to resolve the conflict over the collateral. Since the third-party lender had perfected its security interest in the steel and the Plaintiff had not, the third party's claim to the steel took priority over that of Plaintiff. Therefore, the court denied Plaintiff's motion for replevin and its motion to avoid the contract under the CISG.
Although the Usinor decision places a responsibility on parties to an international sales contract to examine local sales law before drafting their sales agreement, the District Court provided clear guidelines for which local law would apply, thereby significantly alleviating this burden. The court points out that compliance with local law is not cost-prohibitive, even for companies doing business in multiple jurisdictions. Although plaintiff merely failed to get legal advice on compliance with local law, plaintiff further hurt its chance of recovery by delaying the filing of the complaint until the third party bank perfected its security interest. Furthermore, the opinion of the court upholds the importance of predictability and dependency within lending transactions. The UCC has a set of clear-cut guidelines for establishing priority among creditors, and creditors rely on these procedures in assessing risk in loan transactions. In its adherence to these guidelines, the court properly shifted the loss to the party who failed to take the proper course of action to secure its own interests in the contract.[page 109]
1. 209 E Supp. 2d 880 (N.D. Ill. 2003) ("Usinor").
2. Id. at 888.
3. Id. at 881. Plaintiff Usinor Industeel ("Usinor") had delivered eighteen shipments of Creusabro 8000 steel to defendant Leeco Steel Products, Inc. ("Leeco"). These steel shipments were valued at over $1 million, but Leeco had made less than $15,000 in payment at the time the suit was filed.
4. Id. The court found that Usinor had reserved a security interest in steel shipments, but did not have title to those shipments. See Hanaman v. Davis, 155 N.E.2d 344, 347 (2d Dist. 1959) (defining replevin as a possessory action in which plaintiff can only recover on "the strength of his own title or his right to immediate possession").
5. Apr. 10, 1980, S. Treaty Doc. No. 98-99 (1983); 19 I.L.M. 668-99 (1980); U.N. Doc. NCONE97/18. Entered into force Jan. 1. 1998; Usinor, 209 E Supp. 2d at 883. Plaintiff sought to terminate the contractual relationship with defendant under the CISG because it believed that by doing so, the third-party secured creditor would lose any rights to the steel shipments. See 15 U.S.CA app. at 32 (1998) (stating that the CISG governs "only the formation of the contract of sale and the rights and obligations of the seller and the buyer arising from such a contract").
6. Usinor, 209 E Supp. 2d at 881.
7. Id. at 885 (explaining that the plain language of Article 4 of the CISG only applies to transactions between a buyer and a seller and does not govern the rights of third persons who are not parties to the contract between buyer and seller).
8. Id. at 886. The court determined that when the CISG does not apply to a third-party secured creditor's rights, the court should then evaluate the local law of the state with the most significant contacts to the collateral in question. In this case, Illinois law, including the UCC, applied.
9. Id. at 887. Usinor was deemed to have reserved a security interest in the steel, but had failed to perfect that security interest because Usinor never filed a filing statement. See UCC § 2-401 (2)(a)(1998) ("any retention or reservation by the seller of the title in goods shipped or delivered to buyer is limited in effect to a reservation of a security interest").
10. See UCC § 9-317 (1999). The Code provides that a security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest is perfected.
11. Usinor, 209 E Supp. 2d at 888. The security agreement between Defendant and the third-party bank gave the bank a security interest in "all inventory in all of its forms, including, but not limited to, all goods held for sale or lease or to be furnished under contracts of service or so leased or furnished."
12. Id. The third party; LaSalle Bank, had given defendant a secured loan and had taken a security interest in all of Leeco's inventory. The bank then perfected its security interest by properly filing a .financing statement.
13. Id. at 882.
14. Id. at 881. Usinor was a global leader in steel production. The company processed and distributed steel that was used by its customers in the automotive, mining and construction industries. In particular, Usinor produced a steel called Creusabro 8000 which was produced to withstand extreme conditions. Creusabro 8000 steel was sold to defendant in the present action.
15. Id. Leeco was an independent steel center that processed and delivered steel. Leeco had operations throughout the United States, including Chicago, St. Louis and Pittsburgh.
16. Id. at 882.
17. Usinor, 209 F. Supp. 2d at 882.
18. Id. The steel shipped to Leeco was valued at $1,188,817.30. Leeco still had an outstanding balance of $988,817.36 at the time suit was filed.
19. Id. Usinor instructed suit against Leeco because it believed Leeco was in default on its loan from LaSalle and did not want Leeco to sell off the steel in order to repay LaSalle. Also, since Leeco was facing insolvency, Usinor sought replevin, believing that Leeco would be unable to pay any monetary damages awarded to Usinor.
20. Id. at 882-83. Both LaSalle and Usinor had a claim over the steel shipments. LaSalle had a security interest in the steel arising from the security agreement between itself and Leeco. Usinor had a security interest in the steel because, under its agreement with Leeco, Usinor reserved title in the steel until payment was made in full.
21. Id. at 882. The court had subject matter jurisdiction pursuant to 28 U.S.C. § 1332. The dispute was between two parties that were citizens of different countries and the amount in controversy exceeded $75,000.
22. Usinor, 209 F. Supp. 2d at 884. See 15 U.S.C.A app. at 32 (1998) (outlining the text of the Convention on Contracts for the International Sale of Goods).
23. Usinor, 209 F, Supp. 2d at 884.
24. U.S. CONST. art. VI, cl. 2. See Asante Technologies, Inc. v. PMC-Sierra, Inc., 164 F, Supp. 2d 1142,1152 (N.D. Cal. 2001) (concluding that the CISG preempted California law where an issue arose regarding the contract rights of a buyer and seller in international transactions).
25. Usinor, 209 F, Supp. 2d at 884. See generally Sunil R. Hajani, The Convention of Contracts for the International Sale of Goods in United States Courts, 23 HOUS. J. INT'L L. 49, 53 (2000) (stating that in a two-party transaction, the Convention would preempt all local law, including UCC provisions); William S. Dodge, Teaching the CISG in Contracts, 50 J. LEGAL EDUC. 72, 73 (2000) (noting that the CISG is a treaty and therefore a federal law which preempts state common law and the UCC).
26. Usinor, 209 F, Supp. 2d at 885.
27. Id. at 884. See also MCC Marble Ceramic Ctr., Inc. v. Ceramica Nuovaa d' Agostino, S.p.A., 144 F,3d 1384, 1389 (11th Cir. 1998).
28. Usinor, 209 F, Supp. 2d at 884.
29. Id. See also Asante Technologies v. PMC Sierra, 164 F, Supp. 2d 1142, 1147 (holding that the CISG would preempt state laws that address the rights and obligations of only the buyer and the seller).
30. Id. at 885. See Henry Mather, Choice of Law for International Sales Not Resolved by the CISG, 20 J.L. & COM. 155, 159 (2001) (suggesting that the language of the CISG expressly excludes the rights of third parties from the scope of the treaty).
31. Usinor, 209 F. Supp. 2d at 885. See generally Lisa M. Ryan, The Convention on Contracts for International Sale of Goods: Divergent Interpretations, 4 TUL. J. INT'L & COMP. L. 99, 104 (1995) (discussing the various interpretations of Article 4 of the CISG).
32. Usinor, 209 F. Supp. 2d at 885.
33. Id. at 886.
36. Id. The court applied the five factors of the "most significant contacts rule," as laid out in another Illinois case. See also Central States, Southeast and Southwest Areas Pension Fund v. Tank Transport, No. 91-C356, 1991 U.S. Dist. LEXIS 13278 (N.D. Ill. Sept. 24, 1991) at *7-8 (applying the five factors to determine which state law should apply).
37. Usinor, 209 F. Supp. 2d at 886. The court noted that since much negotiating and contracting between parties from different companies happens via telephone or mail, the location of the collateral was more important since that state was also the place of performance. Where two parties were from different states, the places of incorporation cannot decide the issue. See also Gordon v. Clifford Metal Sales Co., 602 A.2d 535 (R.I. 1992) (holding that the site where the steel in dispute was located was the place where the transaction had the most significant contacts).
38. Usinor, 209 F. Supp. 2d at 886. The steel had been shipped to Leeco's place of business in Illinois. Therefore, the court determined that steel had the most significant contacts with Illinois.
39. Id. at 887.
40. Id. at 887-88.
41. See Dee § 9-308 (1999) (outlining the requirements to perfect a: security interest).
42. See Dee § 9-311 (1999). In general, a creditor perfects its security interest by filing of a financing statement. For some types of collateral, including inventory, the creditor can perfect by taking possession of the property; see also UCC § 9-313 (1999). However, since taking possession was not a plausible option for a seller who had just shipped goods to a buyer, filing a financing statement was the preferred method of perfection.
43. Usinor, 209 F. Supp. 2d at 887.
44. Id. Although Usinor attempted to retain title of the steel shipments until payment was complete, Usinor received only a security interest in those goods and the retention of title was ineffective. See also Dee § 2-401(1) (1998): "Any retention or reservation by the seller of the title (property) in goods shipped or delivered to the buyer is limited in effect to a reservation of a security interest. Subject to these provisions and to the provisions on Secured Transactions (Article 9), title to goods passes from the seller to the buyer in any manner and on any conditions explicitly agreed on by the parties."
45. Usinor, 209 F. Supp. 2d at 882. The parties agreed in their sales agreement that Usinor "remains the owner of the goods up to the complete and total payment of all sums due."
46. Id. at 887. See also Dee § 2-401(2) (1998): "Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest and even though a document of title is to be delivered at a different time or place."
47. Usinor, 209 F. Supp. 2d at 887.
48. Id. at 888.
49. Id. (determining that the steel shipments were goods held for sale and therefore included within Leeco's inventory). See also UCC § 9-102(48) (1999) (defining inventory as goods held for sale or lease).
50. See UCC § 9-203 (2000) (outlining the point at which a security interest attaches and becomes enforceable against the debtor).
51. Usinor, 209 F. Supp. 2d at 888.
53. See UCC § 9-311 (1999).
54. Usinor, 209 F. Supp. 2d at 888.
56. Id. But see In re Filtercorp, 163 F.3d 570, 582 (9th Cir. 1998) (holding that, because of the high turnover associated with inventory, the contract will be interpreted as presumptively including after-acquired inventory).
57. Usinor, 209 F. Supp. 2d at 888.
58. See UCC § 9-317(2)(A) (2000). A security interest is subordinate to the rights of a person who becomes a lien creditor before the security interest has been perfected.
59. Usinor, 209 F. Supp. 2d at 888.
60. Id. The court concluded, "LaSalle's perfected security interest prevails over the retained interest of Usinor in the Steel."
Pace Law School Institute of International Commercial Law - Last updated April 26, 2004
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