Reference no: EM133491690

Shifting Risk under the Merchant Entrustment Rule

Section 2-403(2) of the UCC, codified in Washington as RCW 62A.2-403 states, "A purchaser of goods acquires all title which his or her transferor had or had power to transfer except that a purchaser of a limited interest acquires rights only to the extent of the interest purchased. A person with voidable title has power to transfer a good title to a good faith purchaser for value."

Although a thief cannot acquire title to stolen property (the thief's title is void), a person to whom property is entrusted by its owner acquires voidable - as opposed to void - title, and can pass good title to a third party.

That same statute states that, "[a]ny entrusting of possession goods to a merchant who deals in goods of that kind gives [the merchant] power to transfer all rights of the [owner] to a buyer in the ordinary course of business." In other words, if an owner entrusts their property to a merchant, they cannot sue to have their property returned to them in a replevin action (see Chapter 7.64 RCW) against a good faith purchaser for value.

This is the merchant entrustment rule, and its purpose is to enhance the reliability of commercial sales by merchants who deal in the kind of goods sold by shifting the risk of resale to one who leaves their property with a merchant. In other words, this rule is meant to protect buyers in the ordinary course of business by making owners - not purchasers - shoulder the financial risk associated with fraudulent transactions. If an owner knowingly delivers property into the possession of a merchant, that owner then assumes the risk of the merchant's acting unscrupulously by selling the property without the owner's consent to an innocent purchaser. This puts the onus on owners to carefully select the merchant to whom they entrust their property. If the risk in the transaction did not shift to the owner, purchasers could then be sued.

Example: you leave your vehicle with a mechanic for repairs. The mechanic also sells cars (such as a dealership). The mechanic finishes fixing your car and parks it out front. A salesperson with the mechanic sells your car to a buyer - a good faith purchaser for value. The merchant entrustment rule means that you could only sue the merchant - the mechanic/dealer - for the value of your vehicle, but you could not sue the person who bought your car to have them return the car.

1. Do you think the merchant entrustment rule is fair? Why or why not?

2. If you said it's not fair, what rule would you propose?