#36 - Buyers Against Secured Creditors

Question 1

The Consumer to Consumer Sale Exception 9-320(b)

Answer 1

A buyer of consumer goods takes free and clear of a prior security interest, even if the security interest is perfected, if the buyer purchases (1) without knowledge of the security interest; (2) for value; (3) for use as consumer goods for the buyer’s own personal, family, or household purposes; and (4) prior to the filing of a financing statement covering the consumer goods. U.C.C. § 9-320(b).

Buyer is protected from an automatically perfected PMSI in consumer goods too. Thus, even if you are a PMSI creditor you shouldn’t just rely on your PMSI to automatically perfect just because it’s a consumer good.

Question 2

The Buyer in the Ordinary Course Exception 9-320(a)

Answer 2

A buyer in the ordinary course of business is a person who buys in good faith and without knowledge that the sale violates another’s rights in the goods. The seller must be someone in the business of selling such goods, and the sale must comport with the usual, customary practice of the seller or the seller’s business. The seller may not be a pawnbroker. When a buyer in the ordinary course of business buys any goods other than farm products from a person engaged in farming operations, the buyer takes free of any prior existing security interest in those goods. A buyer in the ordinary course of business takes free and clear of any prior existing security interest, even if the buyer knows about the security interest.

Donees and gift recipients are NOT buyers in the ordinary course.

Question 3

General Rule for “Take Free” Situations

Answer 3

General Rule: Security Interests Survive Sale of Collateral

9-201: a sec agr is effective according to its terms against purchasers of the collateral

9-315(a)(1): a sec int continues in collateral notwithstanding the sale… unless…

EXCEPTION 1: CONSENT - the secured party (explicitly or implicitly) authorizes the disposition free of the security interest

Question 4

“Take Free” Rule 1 (Exception to General Rule): Consent by Creditor

Answer 4

EXCEPTION 1: CONSENT - the secured party (explicitly or implicitly) authorizes the disposition free of the security interest

Question 5

“Take Free” Rule 2 (Exception to General Rule: Buyer in the Ordinary Course

Answer 5

Buyer in the Ordinary Course (Exception 2)

1) 9-320(a): a buyer in the ordinary course of business takes free of a sec int created by the buyer’s seller, even if the sec int is perfected and the buyer knows of its existence
-> Unless buyer knows it violates terms of sec agr (and accompanying docs) 1-201(b)(9) MUST BE ACTUAL KNOWLEDGE.
-> Or if the collateral is in the possession of the secured party under 9-313

Related Rules:
Q: Who is a “buyer in the ordinary course”?
1) Buying is in the ordinary course only if it is from a person that is in the business of selling goods of the kind bought.
2) Become a buyer when goods identified in the contract.

Q: What does it mean to be “created by the buyer’s seller?
1) The seller was the debtor that gave the sec int to the secured creditor. Result: buyer does not take free of sec ints created by previous owners of the collateral.
Example: Manufacturer > retailer > buyer. If manufacturer granted the sec int, the buyer does NOT TAKE FREE. But if the retailer created it, then the buyer would take free. But remember: if the retailer is a buyer in the ordinary course, that would suffice to cut off manufacturer’s created sec int.

Question 6

“Take Free” Rule 3 (Exception to General Rule: Buyer Not in Ordinary Course (Exception 3)

Answer 6

9-317b = buyer takes free of an UNPERFECTED sec int if it gives value and receives delivery WITHOUT KNOWLEDGE of the sec int.

There is 1 way a buyer would take subject to an unperfected sec int which is HAVING ACTUAL KNOWLEDGE. Not a suspicion. But you actually know that the thing you’re buying is already subject to an unperfected security interest.

Question 7

“Take Free” Rule 4 (Exception to General Rule: Consumer to Consumer (Exception 4) “Yard Sale / Ebay exception”

Answer 7

9-320(b): buyer of goods from a person who used or bought the goods for use primarily for personal, family, or household purposes (“Consumer”) takes free of a sec int, even if perfected, if the buyer buys:

1) without knowledge of the sec int
2) for value / give value (can’t be a gift)
3) primarily for the buyer’s personal, family, or household purposes (consumer purposes of the buyer themselves, basically both people used it for consumer purposes) AND
4) before filing of a financing statement covering the goods
–» All of this has to happen before the filing of a financing statement covering these goods. Seems counterintuitive because “even if perfected” but then before filing? Which means it only works to
—»> Defeat secured party with PMSI in consumer good perfected automatically