Assignment 36
Priority: Buyers vs. Secured
Creditors
Reference: Understanding Secured
Transactions §§ 11.01, 11.02, 11.03
Priority vs. Buyer: Rules
• § 9-201(a): SI enforceable unless Art. 9 says otherwise • § 9-315(a)(1): SI enforceable against buyer unlesssecured party authorized sale “free and clear”
• § 9-317(b): buyer w/out knowledge of SI takes free of SI if it is unperfected
• § 9-317(e): PMSI perfected by filing w/in 20-day grace period has priority over grace-period buyer
• § 9-320(a): buyer in ordinary course takes free of SI created by its seller
• § 9-320(b): buyer in consumer-to-consumer sale takes free of SI unless secured party filed UCC-1
• § 9-323(b): buyer vs. secured party (future advances)
Buyer v. Secured Party: General Rule
• Baseline priority rule: security interest is
effective against purchasers of the collateral
(which includes buyers, §§ 1-201(b)(29),
(30)), unless another section of Article 9
provides otherwise [§ 9-201(a)]
– Derivative title: absent some basis for estoppel, buyer takes subject to prior-in-time interests
Problem
36.6(a)
• Bank has a perfected SI in theinventory of Sound City, Inc. – Security agreement: Sound City
can make no sales on credit; only for cash
• Sound City sells a sound system on credit to Fried
– Fried was unaware of restriction vs. credit sales
• If Sound City defaults to Bank, Can Bank repossess sound system from Fried?
Problem 36.6(a): Can UCB Repossess the
Sound System from Fried?
A. No, b/c Fried took free of Bank’s
SI as a buyer in ordinary course
of business [§ 9-320(a)]
B. Yes, b/c sale to Fried violated
the Bank’s security agreement
C. Yes, b/c Fried is not a “buyer in
ordinary course of business”
No, b/ c Fried took fr ee o... Yes, b /c sa le to Frie d vio... Yes, b/c Fried is not a “b... 0% 0% 0%Buyers of Inventory
• Buyers of inventory typically are protected by one (or both) of two statutory estoppel rules
– (1) Buyer of a good (other than farm products) in ordinary course of business takes free of SI created by its seller [§ 9-320(a)]
– (2) Buyer takes free of SI if the secured party
authorized the disposition free of the SI [§ 9-315(a)(1)] (inventory security agreements typically so authorize)
§ 1-201(b)(9). “Buyer in the ordinary course”
means a person that buys goods in good faith,
without knowledge that the sale violates the rights
of another person in the goods, and in the ordinary
course from a person, other than a pawnbroker, 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…. A buyer in ordinary course
of business may buy for cash, by exchange of other
property, or on secured or unsecured credit….
Problem 36.6(a)
• Fried is protected as a buyer in the ordinary course (BOCB) [§§ 9-320(a), 1-201(b)(9)]
– Sound City is “person … in the business of selling goods of that kind”
– The sale in fact may have violated Sound City’s security agreement, but Fried didn’t know that – Credit sales of sound equipment are common in
modern retailing (e.g., consistent with “usual and customary practice” among such retailers)
Problem
36.6(b)
• Bank has a perfected SI in inventory of Sound City • Sound City installs a
$14,000 home stereo system into home of its lawyer, Paulos
– Paulos agreed to take the sound system in partial payment of his past-due legal services bill
Problem 36.6(b): Can UCB Repossess the
Sound System from Paulos?
A. No, b/c Paulos took the sound
system free of Bank’s SI as a
buyer in ordinary course of
business
B. Yes, b/c Paulos is not a “buyer
in ordinary course of business”
No, b/c Pa ulos took
the. ..
Yes, b/c Pa ulos is not a
...
0% 0%
Problem 36.6(b)
• Paulos not a BOCB protected by § 9-320(a) • Buyer is not a BOCB if Buyer acquire goods “intotal or partial satisfaction of a money debt” [§ 1-201(9)]. Rationale?
– This isn’t a “customary” transaction, b/c it doesn’t produce any “proceeds” to which the inventory lender’s SI would attach
– Buyer in Paulos’ position should be suspicious and should investigate Seller’s authority further
Problem 36.6(b)
• Can Paulos qualify for protection under §
9-315(a)(1)?
– No specific authorization of the sale (Bank didn’t know about this sale)
– No general authorization (security agreement only authorized “ordinary course” sales)
– Note: if Bank knew Sound City had made similar sales before, and hadn’t objected, Bank may be deemed to have authorized such transactions [p. 607]
Problem 36.5
• Davis Dept. Store soldstereo to Beavis (for home use), takes PMSI, files UCC-1
• Beavis later sells stereo to Butthead at a garage sale
– Butthead unaware of Davis’ SI
• Beavis defaults to Davis, which tries to repossess stereo from Butthead
Problem 36.5: Can Davis Repossess the
Stereo from Butthead?
A. Yes, under the derivative title
principle
B. No, b/c Butthead is a buyer in
ordinary course of business
C. No, b/c Butthead is a “garage
sale” buyer protected by §
9-320(b)
Yes, unde r th e der ivative ... No, b /c B utthead is a buy.. No, b /c B utthea d is a “g a... 0% 0% 0%“Garage Sale” Exception [§ 9-320(b)]
• In a sale transaction, buyer of a good takes it free of a SI created by seller if:
– The good is a “consumer good” in seller’s hands – The buyer pays value, without knowledge of SI – The good will also be a “consumer good” in the
hands of the buyer, and
– Secured party has not perfected its SI, either by filing or by taking possession [§ 9-320(e)]
Problem 36.5
• Davis may repossess from Butthead– Davis’s PMSI is automatically perfected [§ 9-309(1)], but Davis also filed a UCC-1, so Butthead doesn’t qualify for protection under § 9-320(b)
– Had Davis not filed, Butthead would have prevailed due to lack of knowledge [§ 9-320(b)]
• Butthead should have searched UCC-1 filings before completing purchase
Problem
36.1
• Card buys a used RV from
Sunrise RV (paying $23,000
in cash)
• This RV was sold to Eddy 1
year ago by All Seasons RV,
which took a SI in the RV
– 3 months ago, Eddy traded it in to Sunrise RV (without knowledge/consent of All Seasons RV)
– Eddy still owes All Seasons RV $17,000
Problem 36.1: Did Card Get a Clear Title to
the RV?
A. Yes, b/c Card was a buyer in
the ordinary course of business
B. No, b/c Card was not a buyer in
the ordinary course of business
C. No; if All Seasons’ SI was
perfected, Card takes the RV
subject to that SI
Yes, b/c Ca rd was a buye r... No, b /c Card was not a b... No; if All Se ason s’ SI wa s ... 33% 33% 33%• Card is a BOCB, but a BOCB only takes free
of a SI created by its own seller [§ 9-320(a)]
– As a BOCB from Sunrise RV, Card took the RV free of any SI created by Sunrise RV (its own seller)
– But All Seasons’ SI was created by Eddy, not by Sunrise RV!
– Thus, Card took the used RV subject to that SI (assuming it was properly perfected) [§§ 9-201(a), 9-317(b)]
Buyer v. Unperfected SI
• § 9-317(b): Unless Article 9 provides otherwise, buyer of goods takes free of a SI in the goods if buyer gives value and takes possession of goods:
– Without knowledge of the SI, and – Before SI is perfected
• Estoppel warranted vs. unperfected secured party (buyer relied on seller’s ostensible ownership) • If All Seasons’ RV’s SI had been unperfected,
Problem 36.1: Rationale
• BOCB rule assumes that merchant’s inventory
lender has impliedly authorized the merchant to
sell free and clear of that lender’s SI
– Sensible to say that Sunrise’s inventory lender could authorize Sunrise to sell free and clear of its lien – But Sunrise’s inventory lender can’t authorize it to
sell free and clear of another creditor’s lien!
• What should buyer of used goods do?
Used Goods: Due Diligence?
• To protect against this risk when buying used
goods, buyer such as Card must
– Reconstruct the chain of title to identify all prior owner(s) of the goods
– Investigate to determine whether a prior owner of the goods granted a SI that has not yet been satisfied or released (i.e., UCC/title searches vs. prior owners/inquiry of prior secured parties)
Buyer Hypo
• Fred pays $15,000 for an engagement ring
from George’s Jewelry
– Fred asks George’s to “hold the ring” for two weeks until Fred can arrange to insure it
• Two days later, George’s Jewelry defaults to
Bank, which has perfected SI in all of
George’s inventory
• Does Bank still have a valid SI in that ring?
Daniel v. Bank of Hayward [p. 600]
• M/M Daniel agreed w/Chrysler dealer to buy a not-yet-manufactured van, made down payment
– Bank financed Dealer’s inventory
– Dealer was in breach (selling cars “out of trust”) – Bank seized possession of dealership and vehicles,
right after the dealer had taken delivery of the van that M/M Daniels had agreed to buy
• Court held (under prior Article 9): Daniels were BOCBs, took van free of Hayward Bank’s SI
• Revised Article 9: “Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 may be a buyer in ordinary course of business.” [§ 1-201(9)]
• Under this standard, can Fred be a BOCB who took free of Bank’s SI in the ring?
– He didn’t take possession of the ring
– But, is the ring “identified” to the contract of sale to Fred? [§§ 2-501(1), 2-502(1)] If so, title to the ring passed to Fred, even though George’s still had possession of the ring
– Thus, Fred may still be a BOCB
Problem
• If Fred is a BOCB, is thereany problem with his leaving the ring in the possession of George’s Jewelry?
– Fred has created an
“entrustment” (bailment) by leaving George’s in
possession of the ring
– This could mislead 3d parties dealing with George’s (is the ring part of the store’s inventory?)
• Problem: By leaving the ring w/George’s, Fred “entrusted” the ring to a merchant in such goods
– “Entrustment” includes a bailment, regardless of any condition expressed by the entruster
• Entrustment to a merchant gives the merchant the power to convey the entruster’s title to a good faith purchaser for value! [§§ 2-403(2), 2-403(3)]
– This rule would protect a buyer who bought the ring from George’s w/out knowledge of Fred’s rights
Entrustment Problem
Buyers of Collateral that Secures
Future Advances
• For a line of credit arrangement, the collateral secures not only amounts already borrowed and not yet paid, but also future advances
• Suppose Buyer buys a machine from Debtor w/out consent of Bank (which has SI in the machine, securing Debtor’s line of credit from Bank)
– At time of sale, balance to Bank = $50,000 – 10 days later, balance to Bank = $70,000
• Which amount should Debtor have to pay Bank in order to redeem the collateral (and get clear title)?
§ 9-323(d) [Buyer of goods.] Except as otherwise provided in subsection (e), a buyer of goods other than a buyer in ordinary course of business takes free of a
security interest to the extent that it secures advances made after the earlier of:
(1) the time the secured party acquires knowledge of the buyer’s purchase; or
(2) 45 days after the purchase.
§ 9-323(e) [Advances made pursuant to
commitment; priority of buyer of goods.] Subsection (d) does not apply if the advance is made pursuant to a commitment entered into without knowledge of the buyer’s purchase and before the expiration of the 45-day period.
• Buyer took machine subject to SI, to extent of
$50,000 owed to Bank on date he bought the
machine [§§ 9-201(a), 9-315(a)(1)]
• B/c machine also secured future advances, it
also secures repayment of advances made to
Debtor (a) w/out knowledge of sale to Buyer
and (b) w/in 45 days after that sale [§
9-323(d)]
– Thus, answer depends on whether Bank knew of sale of machine to Buyer
• Scenario 1: Bank knew of sale to Buyer at time
of $20,000 future advance, Buyer takes machine
free of SI to the extent of those future advances
– Thus, redemption amount would be only $50,000 – This makes sense: once Bank knows of the sale, it
can act to freeze credit line, repossess collateral – It should not be able to get priority for future
advances thereafter unless it had previously committed to make them [§9-323(e)]
• Scenario 2: Bank did not know; Buyer takes
subject to SI to extent of those future advances
– Advances are within 45-day window in § 9-323(d) – Redemption amount = $70,000