24 COMPETITIONS FOR COLLATERAL: Buyers vs. Secured Creditors Flashcards
What is a buyer in the ordinary course of business?
Generally, it is a person that buys goods -
1) in good faith;
2) without knowledge that the sale violates the rights of another person to the goods;
3) and in the OCB of a person, other than a pawnbroker, in the business of selling goods of the kind;
See UCC §1-201(b)
…
(9) “Buyer in ordinary course of business” 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 person that sells oil, gas, or other minerals at the wellhead or minehead is a person in the business of selling goods of that kind. A buyer in ordinary course of business may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under a preexisting contract for sale. 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. “Buyer in ordinary course of business” does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt.
How does a person become a buyer in the ordinary course of business?
A person may buy for cash, exchange of property, credit, and may acquire goods or documents of title under a preexisting contract.
Can a buyer in the ordinary course of business include a wholesaler purchasing in bulk?
Does not include a person that acquires goods in a transfer in bulk, or as a security, or in satisfaction of a money debt.
When does a party become a buyer if the goods have yet to be identified?
See Daniel v. Bank of Hayward (party becomes a “buyer” when good is identified to contract)
Note: – possibly at contract formation
Does a buyer in the ordinary course of business still purchase [collateral] free and clear of any security interest if they knew a security interest existed?
Yes and No:
• Yes - when a buyer in the ordinary course of business purchases from seller, they purchase free of any S.I. created by the SELLER regardless of whether they knew a S.I. existed
o However, a “buyer in the ordinary course of business” does NOT take free of any S.I. created by a party earlier than the seller [think supplier] that is still attached—almost impossible to find out if any earlier S.I. exists
Which the following would likely be considered a “buyer in the ordinary course of business?”
(a) a buyer who purchases goods from a seller in cash; seller is a business entity that primarily sells goods of the kind the buyer purchased?
(b) a buyer who purchases goods from a seller in exchange for satisfaction of some or all of a prior money debt owed the seller owes to the buyer; seller is a business entity that primarily sells goods of the kind the buyer purchased ?
(c) a buyer who purchases goods from a seller on credit; seller is a business entity that primarily sells goods of the kind the buyer purchased?
(d) a buyer who purchases goods from a seller on credit; seller owes a prior money debt to the buyer; seller is a business entity that primarily sells goods of the kind the buyer purchased?
(e) a buyer who purchases goods from a seller in cash; seller is a business entity that primarily sells goods of the kind the buyer purchased; buyer is a business entity who did not follow business customs in making the purchase?
(a) Yes
(b) No
(c) yes
(d) no
(e) it depends whether the buyer was acting commercially unreasonably, and thus not acting in good faith when making the purchase. Without good faith buyer is not a buyer in the ordinary course of business.
What risks exist when you prepay to buy goods from a merchant, but you delay in picking up the goods?
What is this called?
what is the effect?
Entrusting goods to a merchant who deals in goods of the kind, you enable a BOC to take free of whatever interest you have.
This is called an apparent ownership problem.
Entrusting property to its seller post-sale could make the buyer not in good faith, and therefore not a BOC
What is the limit (fine print) to the ordinary course of business exception?
A buyer in the ordinary course of business purchases free and clear of any interest CREATED BY THE BUYER’S SELLER… thus, if a prior S.I. exists from the supplier of the good to the seller, or past owners, it does NOT strip those liens!
What effect does a provision limiting the sell of collateral have in regards to the seller’s right to recover or right to any remedies when a buyer of the collateral disregards this provision and sells the collateral to another buyer?
TRANSFER RULES -
Under UCC §9-401 the S.I. rides through despite breach by the debtor; the secured creditor just gets a contract claim for default.
Criminal “out of trust” laws make it a crime for debtor to sell collateral and not use proceeds to pay down the loan.
What is the garage sale rule?
A CONSUMER buyer takes free of S.I. created by a CONSUMER seller when
- w/o knowledge;
- for value; and
- before the filing of a financial statement
See UCC §9-311((b):
Except as otherwise provided in subsection (e), 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.
