Opinion ID: 1717292
Heading Depth: 1
Heading Rank: 4

Heading: Buyer in the Ordinary Course of Business.

Text: The district court concluded that Percival was a buyer in the ordinary course of business with respect to those crops the proceeds of which were distributed to Jan Zach and to Zach and Shirley Ag Services as joint payees. These payments totaled $13,365.59. Iowa Code section 554.1201(9) (1983) provides, in pertinent part, as follows: Buyer in ordinary course of business means a person who in good faith and without knowledge that the sale to him is in violation of the ownership rights or security interest of a third party in the goods buys in ordinary course from a person in the business of selling goods of that kind but does not include a pawnbroker... Buying may be for cash or by exchange of other property or on secured or unsecured credit and includes receiving goods or documents of title under a pre-existing contract for sale but does not include a transfer in bulk or as security for or in total or partial satisfaction of a money debt. Percival Grain contends its status as a buyer in ordinary course gives it rights superior to First State Bank's unperfected security interest. This claim is grounded in Iowa Code section 554.9301(1)(c) (1983) which provides, in pertinent part, as follows: Except as otherwise provided in Subsection 2, an unperfected security interest is subordinate to the rights of ... in the case of goods ... a person who is not a secured party and who is ... a buyer of farm products in ordinary course of business, to the extent that he gives value and receives delivery of the collateral without knowledge of the security interest and before it is perfected. We note that because Percival was not a secured party with respect to the crops which were exchanged for cash proceeds, it is not excluded from this section. See U.C. C. § 554.9301 comment (4) (1968). As a threshold matter, First State Bank contends that, as a portion of the transaction at issue involved the satisfaction of an antecedent debt, the entire transaction falls outside the parameters of buyer in ordinary course protection. Had the transaction at issue here been a simple transfer of the crops in exchange for the partial or total satisfaction of an antecedent debt, we are convinced that it would run afoul of the express exclusion contained in section 554.1201(9). United States v. Handy and Harman, 750 F.2d 777 at 781-83 (9th Cir. 1984); United States v. Greenwich Mill & Elevator Co., 291 F.Supp. 609, 693 (N.D. Ohio 1968); In re Skinner Lumber Co., 37 B.R. 250, 252 (Bkrtcy.D.S.C.1983). However, the transaction here was not so straightforward; it involves, in part, a total satisfaction of an antecedent debt and, in part, an exchange of crops for cash. Our research discloses that when confronted with similar fact patterns, courts have sanctioned each of the three possible outcomes: (1) rejecting the defendant's claim to buyer in ordinary course status as to all parts of the transaction, ITT Indus. Credit Co. v. H & K Mach. Serv. Co., 525 F.Supp. 170, 172 (E.D.Mo.1981); Ray v. City Bank & Trust Co., 358 F.Supp. 630, 639 (S.D. Ohio 1973); (2) granting the defendant buyer in ordinary course status only as to that part of the transaction which involved a transfer of collateral for cash and denying such status as to the remainder of the transaction, a result known as fractionalizing, Walter E. Heller Western, Inc. v. Bohemia, Inc., 61 Or.App. 57, 67, 655 P.2d 1073 (1982); and (3) granting the defendant buyer in ordinary course status as to all parts of the transaction, General Elec. Credit Corp. v. R.A. Heintz Const. Co., 302 F.Supp. 958, 963-64 (D.Or.1969). Those parts of the commercial code pertinent to this issue were designed to protect the secured party by granting buyer in ordinary course status only to those giving new value in exchange for the collateral. Handy and Harman, 750 F.2d at 782. In this way the secured party is protected because the security interest, previously inhering in the collateral, will attach to the new value, which constitutes proceeds of the collateral. See Iowa Code § 554.9306(2) (1985). If the rule were otherwise and a transferee who received the collateral in satisfaction of an antecedent debt were granted buyer in ordinary course status, the potential would exist for an unsecured creditor, or a creditor with lesser priority i.e., the transfereeto bootstrap himself into priority over a creditor with an otherwise superior secured interest. Handy and Harman, 750 F.2d at 782; Walter E. Heller Western, 61 Or. App. at 64-65, 655 P.2d at 1077-78; See Iowa Code § 554.9307(1) (1983). These latter concerns obviously do not apply to collateral which was transferred in exchange for new value. As to these transactions, the secured party's position is no different from what it would be with respect to any other buyer in the ordinary course of business: the secured party's debt can be paid off by the proceeds, in which his security interest remains. Walter E. Heller, 61 Or. App. at 65-66, 655 P.2d at 1078; Iowa Code § 554.9306(2) (1983). We see no reason why, in cases such as the present one in which the two parts of the transaction are easily segregable, both these policies should not be effectuated. Accordingly, we adopt the fractionalizing concept. Applying this concept to the present case, it readily appears that Percival Grain was a buyer in the ordinary course of business with superior rights in that portion of the collateral for which new value was given if the further qualification imposed by the Code and contested here by First State Bank was met: that Percival Grain received delivery of the collateral without knowledge of First State Bank's security interest. Iowa Code § 554.9301(1)(c) (1983). Iowa Code section 554.1201(25) defines those situations in which a person has notice of a given fact. Subsection (c) of that section provides that [a] person `knows' or has `knowledge' of a fact when he has actual knowledge of it. This actual knowledge standard applies to section 554.9301 notwithstanding pre-Code case law to the contrary. Iowa Code § 554.9301 comment 1(b). In the present appeal, First State Bank contends Percival had knowledge of First State Bank's security agreement with Zach because Percival had been served with a copy of First State Bank's foreclosure petition prior to the challenged transaction. Attached to the petition were copies of the pertinent security agreements. The sheriff's return of service was admitted into evidence at trial and is part of the record on appeal. That document states that Percival was served along with Shirley Ag Service, Inc., a defendant dismissed prior to trial. Service was had on these defendants by delivering a copy of the original notice and petition to Ron Shirley. Ron Shirley is assistant manager of Shirley Ag Service. The record, however, does not establish that he has any employment-related connection with Percival Grain. Although Ron's father, Bobby Shirley, is an employee and officer of Percival Grain, Ron testified that his father was out of town when he, Ron, had been served with the original notice and petition. In addition, Ron stated that he had not brought the papers to his father's attention upon his return. Bobby denied having read the service papers or having any knowledge of First State Bank's security interest prior to the challenged transaction. The district court found that Percival Grain had no knowledge of First State Bank's security interest prior to the challenged transaction. This finding is supported by substantial record evidence, making it binding on appeal. Iowa R.App.P. 14(f)(1). Consequently, we agree with the district court that Percival Grain was a buyer in ordinary course of business as concerns the $13,365.59 in crops the proceeds of which were distributed to Zach and co-payees Zach and Shirley Ag Service and that, as a result, First State Bank's security interest is subordinate to Percival Grain's rights. Iowa Code § 554.9301(1)(c). Percival Grain's status as a buyer in ordinary course does not extend, however, to those crops which were retained in satisfaction of Zach's antecedent debt.