Protections of a Buyer in the Ordinary Course of Business

A buyer in the ordinary course of business takes collateral free of any security interests created by the seller. 9-320(a). This is true whether the security interest is perfected or no. As such, the buyers knowledge that a security interest exists is irrelevant.

• Note: This rule does not include farm products sold by individuals engaged in farming. 1324(e)(1) & (2) limits this harsh rule for buyers of farm products. The only way a secured lender with an interest in farm products can protect herself is through a state-operated central filing system or by giving any potential buyers pre-notification of the security interest. The debtor can face a fine for failure to notify purchasers of the products.

What is required to be a buyer in the ordinary course of business?

A buyer in the ordinary course of business must meet the following characteristics:

Good Faith - The purchaser of the collateral must buy it in good faith and without the intent to defraud or deceive;

Not Aware of Violation of Rights - The buyer cannot know that the sale of the collateral violates the security interest of a third party. She can know about the security interest but cannot be aware that the sale of the collateral is not authorized; and

Ordinary Course of Business - The buyer must purchase the goods under normal purchasing conditions from a seller of goods of that kind. Basically, the collateral purchased must be inventory that is regularly sold by the seller. 1-201(9)

Example: Buying a used piece of operational equipment from a business that does not regularly sell that type of equipment would not qualify.

The buyer-in-ordinary course exception only applies to security interests that were validly entered into by the seller of the goods of this kind. It does not protect anyone who later purchases the collateral from the BOCB. This harsh result is addressed via UCC 9-320(b) and the Shelter Principle.

Note: UCC 1-201(9) intentionally excludes pawnbrokers from buyers in the ordinary course. It also excludes bulk transfers of goods or the transfer of goods as a security interest or in satisfaction of an existing debt.

Related Topics

• Secured Transactions Law (Intro)
• What is a Security Interest?
• Collateral 
• Pledge as Collateral
• Collateralize
• Cross Collateralization
• After-Acquired Collateral
• Unsecured Loan Definition
  
• Unencumbered Asset
• What is a Secured Creditor?
• Unsecured Creditor
• What are the benefits of security interests for creditors?
• Limited Recourse Debt
• Uniform Commercial Code - Article 9
  
• What are the common types of security interest in real property (land)?
• What is a mortgage?
• How does a security interest protect the mortgage holder?
• Lis Pendens
• Deficiency Judgment
• What is a Deed of Trust or Security Deed?
• What is a Land Sale Contract?
• What is a security interest in personal property?
• How does one establish a security interest in personal property?
• What is Perfection of a security interest?
• What are the methods of perfecting a security interest in personal property?
• UCC-1 Statement
• How does one establish a security interest in real property (land)?
• Register of Deeds
• What is Automatic Perfection of a security interest?
• What is a Purchase Money Security Interest (PMSI) in consumer goods?
• What is a Purchase Money Grace Period for a PMSI in non-consumer goods?
• How does one continue perfection of a PMSI in non-consumer goods?
• What is Temporary Automatic Perfection in Proceeds from the sale of goods?
• How is a security interest created in Assignment of Accounts Receivable and Contract Rights?
• How does one perfect a security interest by Possession of the collateral?
• How does on perfect a security interest by Control of collateral?
• How does one perfect a security interest by Filing a Financing Statement?
• What authorization is required to file a financing statement?
• Where is the appropriate office to file a financing statement?
• Defeasance
• Continuation Statement
• What is Priority of a security interest?
• What role does perfection play in establishing the Priority of a secured party?
• What are the common conflicts arising as to priority of a security interest?
• What is the priority of parties secured by common law and statutory liens?
• Lien - Definition
• Blanket Lien Definition
• Unperfected Lien
• Possessory Lien 
• Non-Possessory Lien 
• Tax Lien
• Mechanics Lien Definition
• Construction Lien
• Cloud on Title
• What is the priority of a buyer of collateral that is subject to a security interest?
• What is required to be a buyer in the ordinary course of business?
• How does 9-320(b) protect consumers who purchase goods from other consumers?
• What is the Shelter Principle?
• What are the general Priority Rules for Conflicting security interests?
• Subordination Agreement
• Who has Priority in Proceeds from the sale of collateral?
• What is a secured party's priority in future advances to a debtor?
• What is the priority of a PMSI in goods (other than inventory and livestock)?
• What is the priority of a PMSI in inventory?
• What is the priority of conflicting PMSIs?
• What is the priority of security interests in fixtures?
• What is the scope of fixture priority rules?