Buyers in Ordinary Course of Business Under U.C.C. Article 9

The buyer in ordinary course of business ("BIOCOB"), usually takes free of even perfected security interests. In a recent federal district court case, the court tackled the issue of what it takes to be a BIOCOB in a situation where the buyer had not yet taken physical possession of the collateral at the time of the debtor's default and concluded that the buyer in question was not a BIOCOB.

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Professor Livingston writes: In the world of Uniform Commercial Code Article 9, the senior perfected secured party reigns supreme and will have priority over most competing claimants to the debtor's property. U.C.C. § 9-201 (Official Version 2009). One exception to that general rule is the buyer in ordinary course of business ("BIOCOB"), who takes free of even perfected security interests. U.C.C. § 9-320 (a). In a recent federal district court case, the court tackled the issue of what it takes to be a BIOCOB in a situation where the buyer had not yet taken physical possession of the collateral at the time of the debtor's default and concluded that the buyer in question was not a BIOCOB. Speth v. Whitham Farms Feedyard, L.P. (In re Sunbelt Grain Wks, LLC), No. 09-1222-EFM, 2010 U.S. Dist. LEXIS 32424 (D. Kan. Mar. 31, 2010).

Under Article 9, a buyer in ordinary course of business, "other than a person buying farms products from a person engaged in farming operations, takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence." U.C.C. § 9-320 (a). The term "buyer in ordinary course of business" is defined in U.C.C. Article 1 as "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 . . . in the business of selling goods of that kind." U.C.C. § 1-201 (b)(9). Reading sections 9-320 (a) and 1-201 (b)(9) together reveals that one can be a BIOCOB if one knows merely that the property purchased is subject to a perfected security interest but not if one knows that the sale violates some term of the seller's security agreement with the secured party. See U.C.C. § 9-320 cmt. 3. The purpose of the BIOCOB rule is to facilitate sales transactions between the debtor and its customers. If the debtor's customers can buy from the debtor freely, without having to worry about security interests, the debtor is likely to sell more inventory, receive more cash, and pay down the debt to the security party more quickly than if the rule allowed secured parties to follow their security interests into the buyer's hands.

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