Priority of Buyers

Buyer in ordinary course of business is defined

"a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker."

"[A] buyer of goods from a person who used or bought the goods for use primarily for personal, family, or household purposes takes free of a security interest, even if automatically perfected, if the buyer buys:

(1) without knowledge of the security interest; (2) for value; (3) primarily for the buyer's personal, family, or household purposes; and (4) before the filing of a financing statement covering the goods." Rev. §9-320(b).

The conflict between purchasers of chattel paper and secured parties claiming a perfected security interest in the chattel paper arise in virtually every chattel paper setting.

. Every time a secured party holds a perfected security interest in inventory, that is inventory with dollar value capable of creating chattel paper financing, a conflict will arise between the perfected inventory secured party and the subsequent purchaser of the chattel paper.

Metzger

Exception for COT provisions when the DMV fails to to note the security interest. A buyer of the goods, other than a person in the business of selling goods of that kind, takes free of the security interest if the buyer gives value and receives delivery of the goods after issuance of the certificate and without knowledge of the security interest. If, while a security interest in goods is perfected by any method under the law of another jurisdiction, this state issues a certificate of title that does not show that the goods are subject to the security interest or contain a statement that they may be subject to security interests not shown on the certificate: (1) A buyer of the goods, other than a person in the business of selling goods of that kind, takes free of the security interest if the buyer gives value and receives delivery of the goods after issuance of the certificate and without knowledge of the security interest

Buyer in ordinary course of business

takes free of a security interest created by buyer's seller. New good are best because there may be previous secured interests. Case*

a buyer of goods from a person who used or bought the goods for use primarily for personal, family, or household purposes

takes free of a security interest, even if perfected, if the buyer buys: (1) without knowledge of the security interest; (2) for value; (3) primarily for the buyer's personal, family, or household purposes; and (4) before the filing of a financing statement covering the goods.

Priority of these buyers and lessees over unperfected secured parties is limited by an exception granted to the purchase money secured party.

The purchase money secured party has a grace period in which to file a financing statement and acquire priority over an intervening buyer. So long as the purchase money secured party files a financing statement before or within 20 days after the debtor receives delivery of the collateral, the security interest takes priority over the rights of a buyer or lessee which arise between the time the security interest attaches and the time of filing

Buyer not in ordinary course of business.

Buy in good faith without notice for value before secured party perfects. Otherwise you lose to secured party.

Note, however, that these purchasers of indispensable paper may take subject to a perfected security interest, if provided in one of the other articles of the Uniform Commercial Code

For example, under the language of Article 7, the holder to which a negotiable document of title has been duly negotiated takes subject to a previous owner or secured party with paramount rights in the goods covered by the document of title. Rev. §9-331, comment 3. Consider the following fact pattern. Debtor's inventory, subject to a perfected security interest held by Bank A, is stolen. The thief bails the inventory at Warehouse, where the Warehouse issues a negotiable warehouse receipt covering the inventory. The thief pledges and negotiates the negotiable warehouse receipt to Bank B as collateral for a $10,000 loan. Bank B is a holder to which a negotiable document of title has been duly negotiated, nevertheless, Bank B takes subject to Bank A's paramount perfected security interest in the goods. UCC §7-503.

Marine Midland Bank, N.A. v. Smith Boys, Inc.

If that sale satisfied the requirements of section 9 307 (1), defendants would prevail. Since Bauer purchased the collateral out of the inventory of Transit, presumably without knowledge of any security interest, in good faith and for value, Bauer was a buyer in ordinary course of business. However, Bauer can only take free of security interests created by his seller. Security interest is created only by the party granting the interest (i.e., the debtor). The security interest the bank wins because the seller is not the debtor that created the security interest. Vanderburgh and Transit and assigned by Transit to the plaintiff provided that Vanderburgh not sell the collateral without the prior consent of the secured party) and Vanderburgh was not in the business of selling goods of that kind. As between a secured party who has perfected by filing and a purchaser who purchases out of his seller's inventory, with no notice of any security interest, the secured party will prevail unless the purchaser can show (1) he is a buyer in the ordinary course of business; and (2) the security interest was created by his seller; or that he purchased from a party who fulfills the requirements of section 9 307 (1).

Priority of Security Interests in Deposit Accounts, Letter-of Credit Rights, and Investment Property

These three types of collateral are grouped together for purposes of discussing priority rules since they share a common method of perfection, control. Control is the only method for perfecting a security interest in a deposit account or letter-of-credit right. Generally, when control is the method of perfection, two priority rules govern conflicting security interests. First, a security interest held by a secured party having control, has priority over a conflicting security interest held by a secured party not having control. Rev. §§9-327(1), 9-328(1), 9-329(1). Second, security interests perfected by control rank according to priority in time of obtaining control. §§9-327(2), 9-328(2), 9-329(2). Different priority rules apply to some security interests in investment property, since security interests in investment property may be perfected by methods other than control.

A buyer in the ordinary course of business "takes free of a security interest created by the buyer's seller."

This means that a buyer in the ordinary course of business takes subject to a perfected security interest created by someone other than the buyer's seller.

T & O Mobile Homes, Inc. v. United California Bank

Who prevails in a contest between a lender with a perfected security interest in a mobile home and a dealer who purchased the mobile home from private owners in reliance on the certificate of ownership erroneously issued by the Department of Motor Vehicles without naming the secured creditor as legal owner? Buyer in ordinary course of business' means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker. Lender UCB wins. When DMV makes a mistake in the certificate it issues, the very system which makes reliance on the certificate appropriate has broken down. In that circumstance the more specific statutes reviewed above require a decision that the perfected security interest is prior to the interest of every buyer except a buyer in ordinary course of business. Since T & O is not a buyer in ordinary course of business, it took title to the mobile home it bought from the Morgans subject to UCB's perfected security interest. UCB's security interest in the mobile home continues notwithstanding the sale to T & O. The provisions of section 9307 do not invalidate UCB's security interest in the mobile home in the hands of T & O because T & O is not a buyer in ordinary course of business. Buyer in ordinary course of business' means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker. In this case T & O bought from the Morgans who were not in the business of selling mobile homes or other similar vehicles

if the chattel paper or an instrument indicates that it has been assigned to an identified secured party other than the purchaser

a purchaser of the chattel paper or instrument has knowledge that the purchase violates the rights of the secured party."

Unlike purchasers of chattel paper, purchasers of accounts

accounts may not take possession or obtain control of the intangible account collateral.

The purchaser of accounts must

file a financing statement covering the accounts to establish priority with respect to the purchase. Importantly, "while the buyer's security interest is unperfected, the debtor is deemed to have rights and title to the account or chattel paper identical to those the debtor sold."

The purchaser of chattel paper has priority over a security interest

in chattel paper claimed merely as proceeds of inventory if the purchaser acts in good faith, in the ordinary course of the purchaser's business, gives new value and takes possession of the chattel paper or obtains control over it. Rev. §9-330(a). Furthermore, the paper may not indicate that it has been assigned to an identified assignee.

For example, a secured party perfected by filing a financing statement against instruments will

lose to the buyer of a negotiable instrument with holder in due course status as defined in Article 3, §3-302. The priority afforded the holder in due course is essential if negotiable instruments are to be accepted freely in commerce as cash equivalents.

rule applies to

sales of inventory collateral and, thus, to merchant sellers, persons who deal in goods of the kind

Valley Bank and Trust Company

security interest continues in collateral notwithstanding sale, exchange, or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor" (emphasis added). a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and buys in the ordinary course from a person ... 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.Credit Union contends that although Bank had a perfected security interest in the dealership's inventory, the interest terminated because Bank authorized disposition of the inventory, leaving it with a security interest in the proceeds only. We agree. Reversed. ).

A buyer in the ordinary course of business, other than a buyer of farm products from a person engaged in farming operations,

takes free of a security interest created by the buyer's seller even if the security interest is perfected and the buyer knows of its existence. o What is ordinary course of business?

Except as otherwise provided in subsection (e), a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations

takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence.

Except with respect to a purchase money security interest which is subsequently perfected, "a buyer, other than a secured party, of tangible chattel paper, documents, goods, instruments, or a security certificate

takes free of a security interest or agricultural lien if the buyer gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected. o Buyer must give value and take possession of the collateral before the security interest is perfected. Additionally, the buyer must do this without knowledge of the security interest. This knowledge is treated as actual knowledge, therefore a naive buyer may receive priority under the provision. Rev. §1-201(25). This basic priority rule applies equally to lessees of collateral

as between two innocent parties relying on the record system,

the Code gives priority to the first in time. Just as "communication of a record to a filing office and tender of the filing fee or acceptance of the record by the filing office constitutes filing" and perfection, deposit of a properly endorsed certificate of ownership and paperwork with the Department of Motor Vehicles constitutes perfection of the security interest.

For most consumer purchases

the buyer is a buyer in the ordinary course of business purchasing from inventory consisting of goods of the kind and the previous priority rule applies. Occasionally however, a consumer purchases consumer goods for household purposes from another consumer. The classic example is the garage sale.

the same standard applies to both purchase situations

the purchaser of chattel paper loses priority to a perfected secured party if the paper indicates it has been assigned to an identified assignee. It is incumbent upon the purchaser of chattel paper to examine the paper for language of assignment.

The difference between the two purchase transactions relates to

to the knowledge a purchaser is permitted to have without losing priority to a previously perfected security interest. With chattel paper claimed other than merely as proceeds, a purchaser of the chattel paper may see a financing statement covering the chattel paper or know that the chattel paper is encumbered, without having knowledge that its purchase violates the secured party's rights. "However, if a purchaser sees a statement in a financing statement to the effect that a purchase of chattel paper from the debtor would violate the rights of the filed secured party, the purchaser would have such knowledge."

Note that many buyers of intangible collateral

are mostly treated as secured parties, therefore, this priority rule does not apply to their transactions.

definition of buyer in ordinary course of business and the priority rule make it clear

buyer takes free of the security interest if buyer merely knows that a security interest covers the goods, but takes subject to the security interest if the buyer knows that the sale violates a term in the security agreement.

buyer in the ordinary course of business takes free of a perfected security interest,

en though the buyer knows of its existence.

You get protection as a buyer if you buy something from someone who sells in goods of the kind,

if not, you need to check for prior security interests - buyer has an obligation to check the records before purchasing the goods

lien creditors and subsequent secured parties may acquire priority over the purchaser of accounts

if the purchaser fails to file a financing statement. The In re Cripps case illustrates application of this rule by giving priority to the trustee in bankruptcy when the purchaser fails to file as to the accounts.

purchaser of chattel paper is entitled to priority over a conflicting security interest i

in the chattel paper, claimed other than merely as proceeds of inventory, based upon similar requirements. The purchaser must give new value, take possession or obtain control, and act in good faith, all in the ordinary course of the purchaser's business. The only different requirement is the purchaser must act without knowledge that the purchase violates the rights of the secured party.

Unless the transaction is expressly excluded from the scope of Article 9 in Section 9-109, such as the assignment of accounts for the purpose of collection only, a buyer of accounts, chattel paper, payment intangibles, or promissory notes

is a secured party rather than a buyer for purposes of application of the priority rules. Rev. §9-317, comment 6.

Nothing in the Revised Article 9 limits

limits "the rights of a holder in due course of a negotiable instrument, a holder to which a negotiable document of title has been duly negotiated, or a protected purchaser of a security. These holders or purchasers take priority over an earlier security interest, even if perfected, to the extent provided in Articles 3, 7, and 8."

Ordinary course of business

merchant who deals in goods of the kind.

buyers and licensees of intangible collateral

no delivery requirement. A licensee of a general intangible or a buyer, other than a secured party, of accounts, electronic chattel paper, general intangibles, or investment property other than a certificated security takes free of a security interest if the licensee or buyer gives value without knowledge of the security interest and before it is perfected

The buyer in the ordinary course of business Exception

o A person buying farm products from a person engaged in farming operations." o Accordingly, buyers in the ordinary course of business of farm products do not take free of a security interest created by the farmer seller. o The Food Security Act basically gives a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations the same protection afforded other buyers in the ordinary course of business by Revised Article 9.