Professor Margit Livingston on U.C.C. Article 9 Security Interests under the Federal Food Security Act

The normally impregnable status of the senior perfected security party is justified by the need to facilitate the extension of secured credit at reasonable interest rates. But in the case of buyers in the ordinary course of business, the policies work differently.

Excerpt:

Generally, senior perfected secured parties rule the world under Article 9 of the Uniform Commercial Code. They receive priority over most other claimants to their debtor's collateral. See U.C.C. §§ 9-317 (Official Text 2012) (giving perfected security interests priority over lien creditors and certain buyers); 9-322 (a) (according perfected senior secured parties priority over later secured parties). One major exception, however, involves buyers in the ordinary course of business ("BIOCOBs"). Such a buyer takes free of any 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). See also U.C.C. § 1-201 (b)(9) (defining "buyer in ordinary course of business").

The normally impregnable status of the senior perfected security party is justified by the need to facilitate the extension of secured credit at reasonable interest rates. But in the case of BIOCOBs, the policies work differently: merchants need to be able to sell their goods freely to their customers without any worry by the merchant or the customer that the merchant's secured party will jump out of the woodwork and try to enforce its security interest in property that has passed to a customer. The secured party in that situation should seek to enforce its security interest in the proceeds from the sale of the collateral. See U.C.C. § 9-315 (a)(1) (giving secured parties a security interest in identifiable proceeds of collateral).

The Article 9 drafters, however, created an exception to the BIOCOB rule. Buyers of farm products from farmers do not take free of security interests created by their sellers. U.C.C. § 9-320 (a). Thus, suppose D, a farmer, gives a security interest in his corn crop to SP, a bank, in exchange for a loan. D then sells part of his crop to B in the ordinary course of business. B will not fall under the BIOCOB rule. Instead, B will be subject to the general Article 9 priority rules, which will allow SP to follow its security interest in the corn into B's hands and will give SP priority over B. See U.C.C. §§ 9-201 (a) (providing that a security agreement is "effective . . . between the parties, against purchasers of the collateral, and against creditors") and 9-315 (a)(1) (providing that a security interest continues in collateral "notwithstanding sale . . .thereof unless the secured party authorized the deposition free of the security interest"). By not including buyers of farm products from farmers under the BIOCOB rule, the Article 9 drafters recognized that the typical power positions between secured creditors and buyers are reversed in the agricultural arena. Lenders to farmers tend to be small local banks and credit unions whereas buyers of farm products tend to be large agri-businesses. In that situation, buyers are arguably better able to protect themselves than secured creditors.

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