Changes: Policy of prior acts continued (subsection (1)).

Purposes of Changes:

1. This Section states when buyers of goods take free of a security interest even though perfected. A buyer who takes free of a perfected security interest of course takes free of an unperfected one. Section 9-301 should be consulted to determine what purchasers, in addition to the buyers covered in this Section, take free of an unperfected security interest.

Article 2 (Sales) states general rules on purchase of goods from a seller with defective or voidable title (Section 2-403).

2. The definition of "buyer in ordinary course of business" in Section 1-201(9) restricts the application of subsection (1) to buyers (except pawnbrokers) "from a person in the business of selling goods of that kind": thus the subsection applies, in the terminology of this Article, primarily to inventory. Subsection (1) further excludes from its operation buyers of "farm products", defined in Section 9-109(3), from a person engaged in farming operations. The buyer in ordinary course of business is defined as one who buys "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." This Section provides that such a buyer takes free of a security interest, even though perfected, and although he knows the security interest exists. Reading the two provisions together, it results that the buyer takes free if he merely knows that there is a security interest which covers the goods but takes subject if he knows, in addition, that the sale is in violation of some term in the security agreement not waived by the words or conduct of the secured party.

The limitations which this Section imposes on the persons who may take free of a security interest apply of course only to unauthorized sales by the debtor. If the secured party has authorized the sale in the security agreement or otherwise, the buyer takes free without regard to the limitations of this Section. Section 9-306 states the right of a secured party to the proceeds of a sale, authorized or unauthorized.

3. Subsection (2) deals with buyers of "consumer goods" (defined in Section 9-109) and with buyers of farm equipment having an original purchase price not in excess of $2500. (If the consumer goods or farm equipment are fixtures, the rule of the subsection does not apply.) Under Section 9-302(1)(c) and (1)(d) no filing is required to perfect a purchase money interest in the consumer goods or farm equipment subject to this subsection except motor vehicles required to be licensed; filing is required to perfect security interests in such goods or equipment other than purchase money interests and, for motor vehicles, even in the case of purchase money interests.

Under subsection (2) a buyer of consumer goods or farm equipment takes free of a security interest even though perfected a) if he buys without knowledge of the security interest, b) for value, c) for his own personal, family or household purposes (or in the case of farm equipment for his own farming operations), and d) before a financing statement is filed.

As to purchase money security interests which are perfected without filing under Section 9-302(1)(c) and (d): A secured party may file a financing statement (although filing is not required for perfection). If he does file, all buyers take subject to the security interest. If he does not file, a buyer who meets the qualifications stated in the preceding paragraph takes free of the security interest.

As to security interest which can be perfected only by filing under Section 9-302: This category includes all non-purchase money interests, and all interests, whether or not purchase money, in motor vehicles, as well as interests which may be and are filed, though filing was not required for perfection under Section 9-302. (Note that under Section 9-302(3) the filing provisions of this Article do not apply when a state has enacted a certain type of certificate of title law. Thus where motor vehicles are concerned, in a state having such a certificate of title law, perfection will be under that law.) So long as the security interest remains unperfected, not only the buyers described in subsection (2) but the purchasers described in Section 9-301 will take free of the interest. After a financing statement has been filed or after compliance with the certificate of title law all subsequent buyers, under the rule of subsection (2), are subject to the security interest.

As to security interests in consumer goods or farm equipment which have become fixtures: Since the rule of subsection (2) does not apply, the normal rules govern. Section 9-313 states rules of priority between a claimant of a chattel security interest in fixtures and persons who claim an interest in the fixtures as realty.

Cross References:

Point 1: Sections 2-403 and 9-301.

Point 2: Section 9-306.

Point 3: Sections 9-301, 9-302 and 9-313.

Definitional Cross References:

"Buyer in ordinary course of business". Section 1-201.

"Consumer goods". Section 9-109.

"Equipment". Section 9-109.

"Farm products". Section 9-109.

"Goods". Section 9-105.

"Knows" and "Knowledge". Section 1-201.

"Person". Section 1-201.

"Purchase". Section 1-201.

"Secured party". Section 9-105.

"Security interest". Section 1-201.

"Value". Section 1-201.