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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 buyer’s 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.
• Discussion: What do you think about the buyer in the ordinary course exception? What objective is served by this rule? Is the rule too broad or overly narrow in its protections of purchasers? Why?
• Practice Question: Rosa purchases and finances her inventory from Sam. Sam takes a security in Rosa’s inventory. Tom purchases a good from Rosa. Does Tom take the goods subject to Sam’s security interest? What facts do we need to know to answer this question?