CHB is seeing a number of Private Part Deals (from our Broker Associates) where the seller is selling a Serial Numbered/Yellow Iron piece of equipment. This type of deal presents several challenges due to the fact that getting perfected on the collateral is hard to get accomplished. It can be done, but the extra effort may still result in the lender not having first lien on the collateral.
This is something I pulled off of Cornell Law’s website: It does a great job of defining the buyer and to a degree the philosophy of taking goods free of lien when done correctly:
In ordinary course of business, means a person that buys goods in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind. A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller’s own usual or customary practices. A person that sells oil, gas, or other minerals at the wellhead or mine head is a person in the business of selling goods of that kind. A buyer in ordinary course of business may buy for cash, by exchange of other property, or on secured or unsecured credit, and may acquire goods or documents of title under a preexisting contract for sale. Only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 may be a buyer in ordinary course of business. “Buyer in ordinary course of business” does not include a person that acquires goods in a transfer in bulk or as security for or in total or partial satisfaction of a money debt.
“Merchant” means a person who deals in goods of the kind or otherwise by their occupation holds themselves out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.
To summarize: A buyer in the ordinary course of business takes/purchases goods free of lien when purchasing from a merchant who deals in goods of the kind.
An example of this:
A grocery store is an example that sells goods that most likely has a blanket lien on the inventory they sell. The lien can be on the grocery store themselves, the producer, or even the delivery service. But since they are engaged in deals in the good of the kind by occupation, they are able to sell their product to a buyer without encumbrances or liens. If a grocery store decides to sell used lawn mowers, this would be considered to be outside of their scope of business and therefore subject to liens and encumbrances under the UCC Article 2.
Another example would be a business that does construction and they are selling a skid loader. They wish to sell this skid loader as they are ready to retire and move on. A buying prospect wishes to purchase the equipment and have it financed.
First Question – When the original purchase occurred – did you purchase this from a dealership that deals in goods of the kind? Example – Equipment Dealership
Second Question that needs to be asked – Do you have the original invoice from the “dealership” that you purchased it from?
Third Question – Do you have proof of the money that has changed hands. An example of this would be a receipt from a wire or canceled check. Cash will not work.
Even if all these questions are answered and documented as true – there can still be a UCC issue.
- What if there was a second UCC filed after the owner purchased it.
- This UCC could be an IRS or Blanket UCC filing.
- The UCC could have been filed under a business name and the equipment was purchased under the business.
A UCC search can be conducted, but may not show all the liens against the collateral.
If the equipment has been traded or sold by a Private Party, prior to you purchasing it, then the transaction takes on additional risks. These risks are for both the buyer and financer of the equipment. If there is a lien on the equipment and the person that the lien was placed on – defaults, your equipment is at risk of being repossessed and the bank is not secured in the collateral. This can even happen if the equipment was sold many times, many years ago. There is no way to track the equipment through the different owners it has had in its lifetime. Not a pretty picture for all parties involved.
We here at CHB have chosen to forgo private party deals on Yellow Iron/Serial Number pieces. If the serial numbered/Yellow Iron piece is coming from a licensed dealership (merchant that deals in goods of the kind) – then the UCC trail ends there and starts a new life when sold again. I am sure there is more to discuss and I am open to hearing what you have.
Please call Kit at 307.241.7005 or firstname.lastname@example.org – to talk more about the UCC codes.