Opinion ID: 445533
Heading Depth: 2
Heading Rank: 1

Heading: Buyer in ordinary course of business.

Text: 12 Contrary to the district court's conclusion, Handy & Harman does not qualify for status as a buyer in ordinary course of business and thus cannot take the collateral free of the government's security interest under Sec. 9307(1). 13 Section 1201(9) defines buyer in ordinary course of business. Most important for this case is its proviso that  '[b]uying' may be ... on secured or unsecured credit ... but does not include a transfer ... in total or partial satisfaction of a money debt. By barring a purchaser who takes goods in satisfaction of a debt from ordinary course status, the code requires that a buyer in ordinary course of business give new value for the goods. J. White & R. Summers, Handbook of the Law under the Uniform Commercial Code Sec. 25-13 (2d ed. 1980); Skilton, Buyer in Ordinary Course of Business under Article 9 of the Uniform Commercial Code (and Related Matters), 1974 Wis.L.Rev. 1, 30 n. 75. 3 14 The new value requirement is central to the functioning of the code's system of inventory financing. Inventory is valuable to a merchant only if he can sell it to his customers. If the merchant's inventory financer could foreclose the security interest in the goods after they had been sold, prospective customers would be reluctant to buy the merchandise. Recognizing this, Sec. 9307(1) facilitates sales of inventory by providing that the ordinary buyer of inventory 4 takes the goods free of any security interest, even if he knows that they are subject to a security interest, so long as he does not have actual knowledge that the sale violates the terms of a security agreement. See Sec. 9307(1) and U.C.C. Sec. 9-307 official comment 2 (1977). 15 At the same time, the rule of Sec. 9307(1) is carefully limited to avoid unduly endangering the position of the inventory financer. By incorporating the definition of buyer in ordinary course of business, Sec. 9307(1) permits a buyer of inventory to take the inventory free of a security interest only if he gives some new value in exchange for the inventory. The inventory financer is protected because his security interest in the inventory will attach to the new value, which constitutes proceeds of the inventory. See Sec. 9306(2). If the rule were otherwise, and a transferee of inventory who received the goods in satisfaction of a pre-existing debt were permitted to keep them free of security interests, the effect would be to enable an unsecured creditor--the transferee--to bootstrap himself into priority over the secured creditor who looks to the inventory for security. The new value requirement should be strictly construed to preclude the frustration of the code's priority provisions. 16 This case illustrates the problem created when Handy & Harman decided to treat its promise to pay Coronado for the refining lots as subject to a set off against the debt Coronado already owed to Handy & Harman. While the set off was legal, it was inconsistent with the new value requirement. We conclude that Handy & Harman may not claim the status of a buyer in ordinary course of business. Handy & Harman's exercise of the offset created the very problem that the new value requirement was designed to prevent. Because of the offset, Coronado received no money to which the government's security interest could attach. The government is left in exactly the same position that it would occupy if Handy & Harman had never promised to pay Coronado and had taken the collateral in partial satisfaction of Coronado's debt in the first place. 17 We hold only that a buyer of goods on credit cannot qualify for ordinary course status under Sec. 1201(9) if he subsequently offsets his promise to pay with a debt that was in existence at the time he bought the goods. We do not hold that all defenses to, or offsets of, a buyer's promise to pay will disqualify the buyer from status as one in ordinary course of business. It may be, for example, that a buyer of goods on credit could assert a breach of warranty defense to his promise to pay without losing his status as a buyer in ordinary course. We do not decide that question, but note only that such a defense would not have the effect of offsetting the promise to pay with a debt that was in existence at the time the goods were bought. 18 Our holding is consistent with California law outside the California Commercial Code. As Handy & Harman itself points out, Cal.Civ.Proc.Code Sec. 431.70 (West Supp.1984) permits offset of cross-demands for money as a defense to an action brought on one of the demands. Case law construing former Cal.Civ.Proc.Code Sec. 440, to which Sec. 431.70 is a successor, see Cal.Civ.Proc.Code Sec. 431.70 legislative comment (West 1973), holds that cross-demands are deemed paid at the moment that they coexist. Singer Co. v. County of Kings, 46 Cal.App.3d 852, 869, 121 Cal.Rptr. 398, 409 (1975); Hauger v. Gates, 42 Cal.2d 752, 755, 269 P.2d 609, 611 (1954); Note, Automatic Extinction of Cross-Demands: Compensatio from Rome to California, 53 Calif.L.Rev. 224, 264 (1965). Assuming that Sec. 431.70 applies to this case, Handy & Harman's promise to pay would have been deemed offset with the debt Coronado owed Handy & Harman at the moment that Handy & Harman bought the collateral. The purchase of the collateral thus would have been in satisfaction of that pre-existing debt from the outset. 19