Consumers Buying and Selling Goods Subject to Security Interest
When Goods subject to a Security Interest are Sold to Consumers
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What statutory provision protects individuals purchasing goods from a buyer in the ordinary course?
The buyer-in-the-ordinary course protection does not apply to subsequent purchases from a buyer in the ordinary course because the seller is not a seller of goods of the kind. So, if a BYOC subsequently sells the collateral purchased, the purchaser will take the goods subject to the original secured partys security interest. This is a harsh result for the unsuspecting purchaser. UCC 9-320(b) may remedy this harsh result by offering protections to the buyer if the security interest is not perfected. Under 9-320(b) the buyer takes the collateral free of the security interest under the following conditions:
Consumer Goods - The goods are consumer goods in the hands of the seller;
Note: The buyer in the ordinary course cannot be a business.
No Knowledge of Security Interest - The buyer buys without knowledge of the security interest;
Provide Value for Goods - The buyer buys the collateral for value (generally cash);
Note: The recipient of a gift is not protected.
Personal Use - The buyer buys the collateral for his own personal, family, or household purposes; and
No Financing Statement - The secured party has not filed a financing statement covering the goods prior to the purchase.
This is a very limited protection when the secured party does not perfect or relies on automatic perfection of a security interest in the sale of consumer goods. Further, the buyer and in the ordinary course and the subsequent buyer must be consumers.
Next Article: The Shelter Principle and Buyers of Collateral Back to: SECURED TRANSACTIONS
Discussion: What do you think about this extension of protections to purchasers who do not qualify as buyers in the ordinary course? Is this protection adequate or is it too narrow in its protections? Why?
Practice Question: Venus has a lawnmower that she purchased from ABC Corp. Venus financed the purchase through ABC Corp. She later offers to sell her lawn mower to Wyatt. Wyatt agrees to purchase the mower. What information do we need to know to determine whether Wyatt takes the lawn mower subject to ABCs security interest?