(8)(A): Bank's Security Interest Covers After-Acquired Property

Under Article 9, a security interest in goods attaches when 1) the secured party gives value 2) the debtor has rights in the property and 3) the debtor authenticates a written security agreement covering the terms of the arrangement. Attachment of a security interest makes the secured party's interest in the goods effective as against the debtor for purposes of enforcing the underlying obligation of the security agreement.

Also, under Article 9, a security agreement can cover both property presently owned by the debtor as well as property that they later own when the security agremeent and financing statement contain clear language that indicates the intent that the security interest shall attach to after-acquired property.

Here, Bank extended a loan to CCC that was secured by CCC's inventory. The facts indicate that a security agreement was executed between the parties that presumably met the requirement that the agreement be authenticated by the debtor. Therefore, because Bank gave value and because CCC obviously had an interest in its own inventory and because the security agreement was authenticated, the Bank's security interest will attach. The security agreement between CCC and Bank also clearly stated that the security agreement would extend to after acquired property by using the words "inventory now owned, and inventory acquired in the future." The financing statement properly filed by Bank mirrors this language. Therefore, the security agreement between CCC and Bank covers after-acquired property and Bank's security interest will attach to inventory acquired after the security agreement was executed.

(8)(B): Bank Did Not Have A Valid Security Interest in the Oven While Bev Owned It.

Even when a valid security interest exists with respect to certain goods, certain buyers, called "buyers in the ordinary course of business" take ownership of those goods free and clear of any prexisting security interest. To be a buyer in the ordinary course of business, the seller must be substantially in the business in selling those goods, the buyer must pay fair value for the goods, the buyer must purchase those goods for their own personal use (that is, the goods must go from being inventory to being consumer goods) and the buyer must be unaware that their purchase might violate the terms of a preexisting security agreement (that is, they must not have actual knowledge of the preexisting interest).

Here, as explained above, Bank did have a valid security interest in the oven while it was a part of CCC's inventory. However, Bev purchased the oven for her own personal use from CCC. CCC is a local business whose business purpose is selling inventory like the oven. No fact indicates that Bev was aware of any possible violation of a security agreement in her purchase. Therefore, Bev was likely a buyer in the ordinary course of business, and therefore took the oven free and clear of the Bank's security interest.

(8)(C): CCC's Security Interest in the Oven was Automatically Perfected as a Purchase Money Security Interest.

Certain types of security interests are automatically perfected without the need to file a financing statement with the Virginia State Corporation Commission. One example is a purchase-money security interest or PMSI. A PMSI is perfected, generally speaking, at the moment of attachment. Attachment for a PMSI works essentially identically to other security interests: secured party gives value, debtor obtains rights in the property, and a written security agreement is authenticated. For a transaction to qualify as a PMSI, either the secured party must have lent the debtor the money subject to the security agreement for the purpose of purchasing the collateral, or the debtor must have been buying the goods in question on credit from the secured party (that is, buying something with the purpose of paying for in installments over time or all at once at a later date).

Here, CCC's security interest in the oven it sold to Bev was automatically perfected despite CCC's failure to record the security interest with the Commission. Bev purchased the oven on credit, which means that CCC gave value and Bev has an interest in the collateral, and the written agreement made between Bev and CCC called for 36 monthly payments. Therefore, Bev's purchase of the oven qualifies as a purchase money security interest as a purchase of goods on credit and CCC's interest was automatically perfected without the further requirement of filing a financing statement.

(8)(D): CCC Cannot Enforce its Secutity Interest Against Warner Due To The Garage Sale Exception

Similar to the the exception for buyers in the ordinary course of business, certain consumer buyers can take property free and clear of preexisting security interests under the consumer buyer or "garage sale" exception. To qualify for this exception, the goods in question must be consumer goods at the time they are sold (that is, not from a store that is in the business of selling such goods) and the buyer must be unaware that their purchase might violate some preexisting security interest (that is, they must be without actual knowledge of the preexisting interest and that their purchase might violate it). Such purchasers take goods free and clear of a preexisting security interest even without paying fair value.

Here, Warner spotted the oven literally in Bev's garage after she bought it and stopped using it and offered to purchase it. Warner paid $2,000 for the oven. Warner had no knowledge of Bev's failure to keep up payments on the oven and does not appear to have been aware that it was subject to any security interest at all. We do not know how much of the purchase price Bev had paid up to this point, but for purposes of Warner's status as a consumer buyer, it does not matter. Therefore, because the oven was a consumer good at the time of the purchase and because of Warner's lack of knowledge as to the preexisting security interest, Warner took the oven free and clear of CCC's security interest and CCC will unable to successfully assert its interest against Warner.

a) No, the Security Agreement (SA) between Bank and CCC was not limited to inventory owned by CCC at the time the Agreement was executed.

Under the Uniform Commercial Code (UCC) Article 2 as adopted in Virginia, which covers financing statements and and commercial transactions, a future acquired or after-acquried property clause is valid and enforceable. The language does not have to exactly reference “after-acquired” property but must indicate that the security agreement covers property that the debtor acquires after the security agreement is executed. Further, it is understood that “inventory” is generally fluid and comes and goes off a stores ‘shelves.’ Thus, a security interest only in currently owned inventory would not be that impactful.

Here, the security agreement explicitly covers after-acquired property by stating that the Bank has a security interest in all of its inventory, including inventory now owned, “and inventory acquired in the future.” That language is clear and strong enough to cover any future or after-acquried property. Further, the filed financing statement also refers to after-acquired inventory and names CCC. Thus, CCC was on notice of the after-acquired property clause and could have challenged it sooner if it wanted to.

Nonetheless, no, the security agreement between Bank and CCC was not limited to inventory owned by CCC at the time the SA was executed and will extend to future-acquired property.

b) No, Bank did not have a valid security interest in the oven against Bev during the time she owned it because Bev was a buyer in the ordinary course of business (BIOCB).

Under UCC Article 2 as incorporated into Virginia law, Bev was a “buyer in the ordinary course of business” or a BIOCB who will be protected from the Bank’s security interest. A BIOCB is a buyer who takes goods for personal or family use without knowledge that the item is subject to a security interest. When a buyer is a BIOCB, the holder of a security interest cannot enforce the secuirty interest against the goods of the buyer, and thus the security interest is invalid as against the purchaser of the goods. The BIOCB will be protected when she takes dleivery of the goods.

Here, Bev had no knowledge of Bank’s security interest in CCC’s inventory. Further, Bev purchased the pizza oven for personal use in her home. Thus, Bev will be protected as a BIOCB and Bank’s security interest will be unenforceable as against the oven when Bev owned it.

Thus, while Bank had an enforceable security interest in the oven while it was inventory at CCC, Bank’s security interest in the oven was extinguished when Bev took delivery of the oven without knowledge of the security agreement.

c) Yes, CCC obtained an automatically perfected PMSI in the oven when it delivered the oven to Bev, despite the fact that CCC never filed the Financing Statement with the Virginia State Corporation Commission.

In order for a security interest in tangible goods to be perfected, first the security interest must attach. A securtiy interest attaches when there is a valid security agreement or the secured party has possession of the collateral. After there is a valid security agreement (possession is not implciated here as Bev, not CCC, has possession of the oven), then the secured party may perfect his interest by filing a financing statement with the Virginia State Corporation Commission. A security interest that is a Purchase Money Security Interest (PMSI), however, perfects automatically upon the obtaining of a valid security agreeement and value given by the lender. A PMSI is created when a lender lends money for the specific item purchased with the money. This is frequently done when a store directly finances the purchase of an item to a customer on credit. Value given can be satisfied by the delivery of the goods subject to the security agreeement.

Here, Bev accepted CCC’s offer to finance the purchase of the oven and Bev signed a security agreement covering the oven. This is where CCC’s security interest attached. This also created a PMSI, which under Virginai’s UCC Article 2 law, automatically is perfected. CCC’s security interest is perfected as a PMSI despite the fact that the CCC customer service representative put the security agreement in a drawer rather than filing it with the Virginia State Corporation Commission.

Thus, yes, CCC obtained a perfected security interest in the oven when it sold and delivered it to Bev.

d) The Court will likely rule that CCC cannot successfully assert its interest against Warner becasue Warner is protected by the garage sale rule and the BIOCB shelter rule.

Under the garage sale rule as adopted in the Virginia UCC Article 2, the garage sale rule protects certain innocent buyers from security interests he or she was unaware of from being enforced in goods he buys without knowledge of the security interest and which are obtained for personal or family use. The rule is called the garage sale rule because the quintissential scenario that is implciated is when someone innocently buys goods at a garage sale, unaware that there was a security interest attached to those goods. The purchaser at the “garage sale” will be protected from enforcement of the security interest.

Garage Sale Rule:

Here, the oven actually was purchased out of Bev’s garage, but that does not really matter for enforcement of the rule. Warner was unaware that CCC had a security interest and that Bev had not fully paid off the oven at the time he brought it from her. Further, there is no indication that Warner was using the oven for commercial purposes. Thus, Warner will be protected by the Garage Sale Rule.

BIOCB Shelter Rule:

Under the shelter rule of UCC Article 2 as adopted by Virginia, an innocent buyer who purchases from a BIOCB will also obtain protected BIOCB status.

Here, as stated above, Warner took the oven with no knowledge either that CCC had a security interest in the oven or that Bev had fallen behind on its payments. As stated above in (b), a BIOCB is a buyer who takes goods for personal or family use without knowledge that the item is subject to a security interest. Because Bev took the oven without knowledge of Bank’s security interest in CCC’s inventory, Bev was a BIOCB. And becuase Warner was an innocent purchaser of the oven from Bev without knowdlege that CCC had a security interest in the oven, Warner will obtain Bev’s BIOCB status.

Thus, the Court will rule that CCC cannot successfully assert its interest against Warner.