Opinion ID: 2412047
Heading Depth: 1
Heading Rank: 1

Heading: ucit v. banks

Text: We now come to the question of priority of liens between the two banks and C. I. T. on the cars which Mary Sharp and Edward Mason purchased. The lower court directed a verdict for the banks on this issue. The facts in this issue are fairly clear. Early in December, Mason went to the Commercial Bank to borrow money to buy a new Valiant from the motor company. At their request he procured a signed and notarized sale contract from the motor company to him, which reserved a security interest in the motor company. The motor company then assigned this lien to the bank and the bank made out a draft to the motor company for the wholesale price of the car. This draft was deposited to the account of the motor company. Mason kept this car at the place of business, with dealer's tags on it, and accounted for it on car checks. C. I. T. did not realize that it had been sold until shortly before the claim and delivery action was brought. The motor company did not at any time pay or offer to pay the wholesale loan on this car which was owing to C. I. T. Mason did not present the bank with a registration certificate, indeed did not obtain one in his name until January 30. The Mary Sharp transaction occurred during the final hectic week. She went to the bank on Monday, January 25, and applied for a personal loan of $2000 to be secured by a 1963 Plymouth she said she owned. The car in question had been traded in to the company. C. I. T. had advanced $1750 on this car and a trust receipt evidencing this advance was signed by Mary Sharp herself. On January 27 she had a registration receipt issued to herself. She took this registration receipt to the bank where she gave a security interest on the car and obtained the $2000. She testified that she gave her husband $1000 from this and traded in a car she owned which was worth $750. Her husband verified the transfers and the ownership of the traded-in car. C. I. T. offered evidence that the car she claimed to have traded was registered in the name of the motor company. Sometime on January 30 the motor company through their accountant offered to pay C. I. T. for certain cars. One of these was the Mary Sharp vehicle. This was after the stop-payment order to the bank on checks to C. I. T. and this offer was made in lieu of paying anything else at the time. Though the entire history of these two transactions is riddled with questionable behavior on the part of Mary Sharp and Edward Mason, it is nowhere shown that the banks knew or should have known of anything wrong. The sort of transactions involved herein is not uncommon among the types of businesses involved. Generally with this type of inventory financing, the lien of the wholesale financer is automatically extinguished upon sale. This is under KRS 355.9-307 which provides that A buyer in ordinary course of business (as defined in KRS 355.1-201(9))    takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence. KRS 355.2-403(2) provides that where goods are entrusted to a dealer, he can give good title, but this section again requires that the one to be protected must be a buyer in ordinary course of business. Considering these sections alone, the banks prevail only if Mary Sharp and Edward Mason were buyer in ordinary course of business and if they would have prevailed against C. I. T. The code sets out very specific requirements for such a person. KRS 355.1-201(9), the definitional section provides, (9) `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   . Obviously, Mary Sharp and Edward Mason do not meet these requirements. There is a definite question about their good faith in this situation. The Pennsylvania Supreme Court reached this result under similar facts in Taylor Motor Rental, Inc., v. Associates Discount Corp., 196 Pa.Super. 182, 173 A.2d 688 (1961). However, here we have additional facts which in our opinion will have to change the result. In the case at bar the contract provided, the motor company shall have liberty to exhibit and to sell each chattle in the ordinary course of trade and for the respective Principal Obligations shown in the respective statements. (Emphasis added). Therefore, the lien would be released under KRS 355.9-306(2) which provides: Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor. (Emphasis added). The effect of this provision of the code and the provisions of the security agreement is to release the lien. The banks' evidence shows that sales to officers and employees were common and usual among car dealers in the area. From this evidence we conclude that this sale was in the ordinary course of trade. [1] They further presented evidence that the individuals involved paid the motor company the wholesale price of the cars which is the respective Principal Obligations referred to in the security agreement. This evidence was not seriously disputed, therefore, the judge was not clearly erroneous in directing a verdict for the banks. We do not hereby decide the issue of what would happen if the security agreement did not allow such sales. It could be that the section above referred to is broad enough to protect a bank, which with no knowledge of violation of the agreement, loans money in this type situation in reliance on the apparent authority of the retailer to make the sales. The official annotation to the code and the case of Clovis National Bank v. Thomas, 77 N.M. 554, 425 P.2d 726 seem to indicate that this might be the result under such a factual situation. For the reasons stated above, the judgment for Middlesboro Motor Sales against C. I. T. is reversed and on remand the trial judge should enter a judgment n. o. v. for C. I. T. The judgment for the appellee banks against C. I. T. is affirmed. All concur.