CO Code § 4-2-326 (2021)
2021 Colorado Code|Title 4 - Uniform Commercial Code|Article 2 - Sales|Part 3 - General Obligation and Construction of Contract|§ 4-2-326. Sale on Approval and Sale or Return - Rights of Creditors

  Unless otherwise agreed, if delivered goods may be returned by the buyer even though they conform to the contract, the transaction is:   A “sale on approval” if the goods are delivered primarily for use; and    A “sale or return” if the goods are delivered primarily for resale.       Goods held on approval are not subject to the claims of the buyer's creditors until acceptance; goods held on sale or return are subject to such claims while in the buyer's possession.    Any “or return” term of a contract for sale is to be treated as a separate contract for sale within the statute of frauds section of this article (section 4-2-201) and as contradicting the sale aspect of the contract within the provisions of this article on parol or extrinsic evidence (section 4-2-202).    The provisions of this section shall not apply to the placement of works of fine art on consignment, which shall be governed by the provisions of part 1 of article 15 of title 6.     History. Source: L. 65: P. 1317, § 1. C.R.S. 1963: § 155-2-326. L. 82: (5) added, p. 231, § 2, effective March 25. L. 2001: Entire section amended, p. 1436, § 20, effective July 1. L. 2017: (4) amended, (HB 17-1241), ch. 163, p. 605, § 5, effective August 9. History. Source: L. 65: P. 1317, § 1. C.R.S. 1963: § 155-2-326. L. 82: (5) added, p. 231, § 2, effective March 25. L. 2001: Entire section amended, p. 1436, § 20, effective July 1. L. 2017: (4) amended, (HB 17-1241), ch. 163, p. 605, § 5, effective August 9.    Editor's note - Colorado legislative change: There is no counterpart to subsection (5) in the uniform act. Subsection (5) was renumbered as subsection (4) in 2001.   OFFICIAL COMMENT   Prior Uniform Statutory Provision: Section 19(3), Uniform Sales Act.   Changes: Completely rewritten in this and the succeeding section.   Purposes of Changes: To make it clear that:   1. A “sale on approval” or “sale or return” is distinct from other types of transactions with which they have frequently been confused. The type of “sale on approval,” “on trial” or “on satisfaction” dealt with involves a contract under which the seller undertakes a particular business risk to satisfy his prospective buyer with the appearance or performance of the goods in question. The goods are delivered to the proposed purchaser but they remain the property of the seller until the buyer accepts them. The price has already been agreed. The buyer's willingness to receive and test the goods is the consideration for the seller's engagement to deliver and sell. The type of “sale or return” involved herein is a sale to a merchant whose unwillingness to buy is overcome only by the seller's engagement to take back the goods (or any commercial unit of goods) in lieu of payment if they fail to be resold. These two transactions are so strongly delineated in practice and in general understanding that every presumption runs against a delivery to a consumer being a “sale or return” and against a delivery to a merchant for resale being a “sale on approval.”   The right to return the goods for failure to conform to the contract does not make the transaction a “sale on approval” or “sale or return” and has nothing to do with this and the following section. The present section is not concerned with remedies for breach of contract. It deals instead with a power given by the contract to turn back the goods even though they are wholly as warranted.   This section nevertheless presupposes that a contract for sale is contemplated by the parties although that contract may be of the peculiar character here described.   Where the buyer's obligation as a buyer is conditioned not on his personal approval but on the article's passing a described objective test, the risk of loss by casualty pending the test is properly the seller's and proper return is at his expense. On the point of “satisfaction” as meaning “reasonable satisfaction” where an industrial machine is involved, this Article takes no position.   2. Pursuant to the general policies of this Act which require good faith not only between the parties to the sales contract, but as against interested third parties, subsection (3) resolves all reasonable doubts as to the nature of the transaction in favor of the general creditors of the buyer. As against such creditors words such as “on consignment” or “on memorandum”, with or without words of reservation of title in the seller, are disregarded when the buyer has a place of business at which he deals in goods of the kind involved. A necessary exception is made where the buyer is known to be engaged primarily in selling the goods of others or is selling under a relevant sign law, or the seller complies with the filing provisions of Article 9 as if his interest were a security interest. However, there is no intent in this Section to narrow the protection afforded to third parties in any jurisdiction which has a selling Factors Act. The purpose of the exception is merely to limit the effect of the present subsection itself, in the absence of any such Factors Act, to cases in which creditors of the buyer may reasonably be deemed to have been misled by the secret reservation.   3. Subsection (4) resolves a conflict in the pre-existing case law by recognition that an “or return” provision is so definitely at odds with any ordinary contract for sale of goods that where written agreements are involved it must be contained in a written memorandum. The “or return” aspect of a sales contract must be treated as a separate contract under the Statute of Frauds section and as contradicting the sale insofar as questions of parol or extrinsic evidence are concerned.   4. The transactions governed by this section are sales; the persons to whom the goods are delivered are buyers. This section has no application to transactions in which goods are delivered to a person who has neither bought the goods nor contracted to buy them. See PEB Commentary No. 20, dated January 24, 2019. Transactions in which a non-buyer takes delivery of goods for the purpose of selling them are bailments called consignments and are not “sale on approval” or “sale or return” transactions. Certain consignment transactions were dealt with in former Sections 2-326(3) and 9-114. These provisions have been deleted and have been replaced by new provisions in Article 9. See, e.g., Sections 9-109(a)(4); 9-103(d); 9-319.   Cross References:   Point 2: Article 9.   Point 3: Sections 4-2-201 and 4-2-202 .   Definitional Cross References:   “Between merchants”. Section 4-2-104 .   “Buyer”. Section 4-2-103 .   “Conform”. Section 4-2-106 .   “Contract for sale”. Section 4-2-106 .   “Creditor”. Section 4-1-201 .   “Goods”. Section 4-2-105 .   “Sale”. Section 4-2-106 .   “Seller”. Section 4-2-103 .   ANNOTATION   I.GENERAL CONSIDERATION.   Law reviews. For article, “Exclusion and Modification of Warranty under the U.C.C. — How to Succeed in Business Without Being Liable for Not Really Trying”, see 46 Den. L.J. 579 . For article, "Buyer-Secured Party Conflicts Under Section 9-307(1) of the Uniform Commercial Code", see 46 U. Colo. L. Rev. 333 (1974-75).   II.SALE ON APPROVAL; SALE OR RETURN.   “Sale or return” under subsection (1) is not defined in the Uniform Commercial Code. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   “Sale or return” transaction is not a new concept in Colorado law. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   A “sale or return” is a contract for the sale of goods whereby title passes immediately to the buyer subject to his option to rescind or return the goods if he does not resell them. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   Sale and delivery distinguished from bailment. An option to return a purchase, if one does not approve, is different from an option to purchase, if one does approve. In the former case, the title passes, subject to the right to rescind and return; in the latter, the title does not pass until the option to buy is determined. The former is a sale and delivery, the latter a bailment which may be converted into a sale, at the option of the bailee. Ferry-Morse Seed Co. v. Bd. of County Comm'rs, 126 Colo. 426 , 250 P.2d 1003 (1952) (decided under repealed CSA, C. 143A, § 19, uniform sales act).   III.CLAIMS OF BUYER'S CREDITORS.   Subsection (2) provides that goods held on sale or return are subject to the claims of the buyer's creditors while such goods are in the buyer's possession. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   Consignments are subject to the claims of the buyer's creditors. Consignment transactions, in which the owner (consignor) delivers goods to a dealer (consignee) for sale by that dealer, are governed by the “sale or return” provisions of subsection (2), and the goods held on sale or return are subject to the security interests of the consignee's creditors. Am. Nat'l Bank v. Quad Constr., Inc., 31 Colo. App. 373, 504 P.2d 1113 (1972).   The purpose of this section is to allow a creditor of a dealer to attach a lien against property of a third person which is in the dealer's possession on consignment and to permit the creditor to treat such property as if it were owned by the dealer. Am. Nat'l Bank v. Quad Constr., Inc., 31 Colo. App. 373, 504 P.2d 1113 (1972).   Security interest not affected by transfer of possession. A security interest in consigned goods, having attached while the chattels were in consignee's possession, is not affected by a subsequent transfer of possession of the chattels from the consignee to the consignor, the transfer of possession of machines to being in violation of the perfected security interest in the chattels, and the secured party is entitled to recover possession of the goods from consignor or to recover the value of the goods if a return could not be had. Am. Nat'l Bank v. Quad Constr., Inc., 31 Colo. App. 373, 504 P.2d 1113 (1972).   This rule is consistent with the rights of a secured party as they existed prior to the enactment of the uniform commercial code, for, under the chattel mortgage statutes in effect prior to the adoption of the code, the rights of a mortgagee of chattels were superior to the rights of one acquiring possession of the chattels from the mortgagor even where the transfer purported to be absolute and in exclusion of the rights of the mortgagee, and in such cases, the mortgagee could recover the value of the chattels in an action against the transferee for conversion. Am. Nat'l Bank v. Quad Constr., Inc., 31 Colo. App. 373, 504 P.2d 1113 (1972).   Bank, as secondary creditor, had no right to go against the primary creditor's debtor on the theory that collateral on the primary debt was insufficient to cover its secondary debt, and the bank's only action is against its own debtor. Am. Nat'l Bank v. Etter, 32 Colo. App. 187, 508 P.2d 415 (1973).   Fact that prior litigation established bank to be an unsecured creditor as regards its own debtor does not place any liability on the primary creditor's debtor. Am. Nat'l Bank v. Etter, 32 Colo. App. 187, 508 P.2d 415 (1973).   IV.SELLING GOODS OF OTHERS.   Consignment transactions are governed by this section. Consignment transactions, in which the owner (consignor) delivers goods to a dealer (consignee) for sale by that dealer are governed by the “sale or return” provisions of subsection (3), and the goods held on sale or return are subject to the security interests of the consignee's creditors. Am. Nat'l Bank v. Quad Constr., Inc., 31 Colo. App. 373, 504 P.2d 1113 (1972).   Under the pre-U.C.C. common-law majority rule, the concept of title dictated that a bailee or consignee had no right to hypothecate the property; hence a consignee's creditors would have had no claim against the consignor if the consignee's assets were inadequate to satisfy their respective claims. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970).   The pre-U.C.C. majority rule placed a creditor of the consignee who relied on the consignee's possession in an unfavorable position. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970).   This section of the U.C.C. was enacted to alleviate this problem. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970).   It is noted that Colorado did not follow the pre-U.C.C. majority rule as to the relative rights of the consignor and the creditor of the consignee, for in a pre-code replevin case, it was held that one who placed his goods with a dealer for sale under consignment may not assert his ownership against a judgment creditor of the dealer who levied upon the goods to satisfy his judgment while it was in the dealer's possession. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970).   And this practice was in accord with the concept of apparent title of this section which replaced the concept of title under the pre-U.C.C. majority rule. Am. Nat'l Bank v. Tina Marie Homes. Inc., 28 Colo. App. 477, 476 P.2d 573 (1970).   The purpose of this section is to allow the attachment of a third person's consignment property within a dealer's possession by a creditor of the dealer and to permit the creditor to treat such property as if it were owned by the dealer. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Quad Constr., Inc., 31 Colo. App. 373, 504 P.2d 1113 (1972).   Subsection (3) does not distinguish between general and secured creditors. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   The section refers only to “creditors”. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   The term “creditor” as defined in § 4-1-201(12) is controlling and 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. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   To prevent the complete shift of risk to the consignor, this section provides three ways in which the consignor can protect his interest from the consignee's creditors in subsections (3)(a), (b), and (c). Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970).   The code provides three ways by which a consignor of goods can protect his goods from the creditors of the consignee in subsections (3)(a), (b), (c). Am. Nat'l Bank v. Etter, 28 Colo. App. 511, 476 P.2d 287 (1970).   The exceptions set forth in subsections (3)(a), (b), (c), apply only to transactions covered by subsection (3) and do not apply to a “sale or return” under subsection (1). Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   Consignment transactions. Consignment transactions (i.e., where title does not pass to the consignee) are covered by subsection (3), which deems such a transaction to be a “sale or return”, and are subject to the claims of the consignee's creditors, unless one of the three exceptions under subsection (3) is established. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   Consignment versus bailment. Where the purpose of the delivery of an item is to attempt to sell it, and an eventual transfer of title is clearly contemplated by the parties, such a transaction clearly is a consignment and not a bailment, and as such is deemed to be a “sale or return” as set forth in subsection (3). Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970).   The real owner can protect himself by showing that the creditor had no right to assume that the goods were owned by the consignee. Am. Nat'l Bank v. Quad Constr., Inc., 31 Colo. App. 373, 504 P.2d 1113 (1972).   One of several means by which the consignor may protect himself is by showing that the dealer is generally known by his creditors to be substantially engaged in selling the goods of others. Am. Nat'l Bank v. Quad Constr., Inc., 31 Colo. App. 373, 504 P.2d 1113 (1972).   Sufficient evidence. Finding that a dealer “was conducting or was substantially engaged in selling goods of others”, within the exception provided by subsection (3)(b), is not conclusive absent a finding that the dealer was “generally known by his creditors” to be substantially engaged in selling the goods of others, and provided there is sufficient evidence to support such a finding. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970); Am. Nat'l Bank v. First Nat'l Bank, 28 Colo. App. 486, 476 P.2d 304 (1970); Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   A creditor's actual knowledge that a debtor is substantially engaged in selling the goods of others is sufficient to establish the exception provided in subsection (3)(b). Eurpac Serv. Inc. v. Republic Acceptance Corp., 37 P.3d 447 (Colo. App. 2000).   Evidence cannot be based on hearsay. Where the trial court allowed the consignor's witnesses, both creditors and others, to testify that consignee was engaged in selling goods of others but refused to permit these witnesses to testify to conversations with other persons concerning the knowledge of such other persons that consignee was engaged in selling the goods of others, such testimony was properly excluded as hearsay. Am. Nat'l Bank v. Quad Constr., Inc., 31 Colo. App. 373, 504 P.2d 1113 (1972).   Where the creditor properly protects its interest in an item delivered to a dealer by filing according to subsection (3)(c) and the consignor does not comply with this provision, nor otherwise does anything to manifest its interest in the item, the rights of the creditor are superior. Am. Nat'l Bank v. Tina Marie Homes, Inc., 28 Colo. App. 477, 476 P.2d 573 (1970).   Right cannot be circumscribed by estoppel. Since the maxim that “equity follows the law” applies where a legal right is clearly established by a secured party under this section, the equitable doctrine of estoppel cannot be used to circumscribe that right, and the effect of this principle is reinforced where the secured party made no misrepresentation upon which consignor relied to his detriment. Am. Nat'l Bank v. Christensen, 28 Colo. App. 501, 476 P.2d 281 (1970).   Where an item is delivered for sale and the consignor fails to establish any of these exceptions, the application of the code provisions gives a secured party an interest superior to the consignor. Am. Nat'l Bank v. Etter, 28 Colo. App. 511, 476 P.2d 287 (1970).   Where the question of ownership is judicially settled in a buyer's favor, the item can thereafter be loaned to the seller without rendering such subject to attachment by the seller's creditors. Foster v. Howell, 122 Colo. 64 , 220 P.2d 717 (1950) (decided under repealed CSA, C. 143A, § 9, uniform sales act).