When Does a Buyer Become a Buyer in Ordinary Course? U.C.C. §§ 1-201(9), 9-307(1): A Test and a Proposal

Under section 9-201 of the Uniform Commercial Code, a security interest in inventory is effective between the parties to a security agreement against purchasers of the collateral and creditors. However, under the massive exception to this general provision contained in section 9-307(1), a buyer in the ordinary course of the seller\u27s business takes the goods free of the security interest even if perfected and even though the buyer knows of its existence. The protections afforded the buyer in ordinary course under section 9-307(1) are based on notions of fairness and commercial utility. Where an innocent buyer has relied on his seller\u27s apparent authority to sell the goods, it is thought that such a purchaser has the right to avoid being harassed by his seller\u27s inventory financer. Furthermore, where goods serving as loan collateral are held for sale, the seller must be given the power to sell if he is to meet the obligations imposed under the financing agreement. The question of whether goods have been sold to a buyer in ordinary course is critical to a determination of the rights in the collateral of the buyer and the secured party. Where goods have been sold to a buyer in ordinary course, the secured party cannot exercise foreclosure and sale remedies against the defaulting seller\u27s inventory to satisfy the seller\u27s debt. On the other hand, if goods are sold to one who does not qualify as a buyer in ordinary course, the buyer has no claim to the seller\u27s inventory and will be forced to recover any prior payments of the purchase price on the same basis as the seller\u27s general creditors. The most often applied alternatives for determining the point at which a buyer achieves ordinary course status include: (1) the initial contract date, (2) the identification date, or (3) the title date; however, other possibilities include: (4) the delivery date, and (5) the acceptance date as provided in section 2-606. This Note examines the decisions adopting the various alternatives for determining when a sale has progressed sufficiently to establish buyer in ordinary course status. An interpretational test under the present Code, and a Code amendment is proposed for the determination of when a buyer becomes a buyer in ordinary course