Brief Fact Summary. Joseph and Marijane Daniel, (Plaintiffs), entered into a contract to purchase a van from Don Hofstadter, Inc., a motor vehicle dealership. When Plaintiffs attempted to complete the purchase, the Bank of Hayward, (Defendant), who had taken over the dealership pursuant to a security agreement, refused to release the van unless Plaintiffs paid Defendant’s interest in the vehicle, an amount greater than that which Plaintiffs owed pursuant to the sales contract. Plaintiffs paid the amount and brought suit to recover damages to the extent of overpayment.
Synopsis of Rule of Law. Purchasers become buyers in the ordinary course of business when the product is identified to the contract.
As a general rule, the holder of a perfected security interest has an interest in the the secured property which is superior to the interests of the debtor, unsecured creditors of the debtor and subsequent purchasers of the secured property, Sec. 409.201 provides as follows: Sec. 409.201.View Full Point of Law
Issue. Whether a purchaser becomes a buyer in the ordinary course of business when s/he takes title to the goods.
Held. No. The purchasers become buyers in the ordinary course of business when the vehicle is identified to the contract.
Discussion. A buyer in the ordinary course of business takes free of a security interest created by the seller. The words “ordinary course of business” require the court to consider the substance of the transaction; a court must look to the customary manner in which sales are made in the seller’s business and to the expectation s of the buyer under the contract. Once goods have been identified purchasers have an insurable interest in the goods and can maintain an action against a third party who has injured them through his or her dealings with the goods. Here, Defendant was in a better position than Plaintiffs to guard against the risk of loss. Accordingly, Plaintiffs were buyers in the ordinary course of business upon identification of the merchandise to the contract. Reversed and remanded for determination as to when the van was identified to the contract.
Commercial Law Keyed to Warren & Walt’s Sixth Edition