Question

Ahmed Bank &Trust issued several loans to Orlando Timberland so that Orlando could purchase timber from various landowners. Orlando gave the bank a security interestin the purchased timber, and the proceeds from the sale of the timber were intended to repay the loans the bank had made to Orlando. The bank intending to perfect its security interest filed a financing statements with the New Jersey secretary of state’s office. However, when Orlando sold the timber to various lumber mills with which it did business, Orlando failed to remit the sales proceeds to the bank. The bank filed suit against these purchasers, alleging that the purchasers had negligently entered into contracts with Orlando for the purchase of the timber and failed to exercise good faith.   The bank further contended that the purchasers had been negligent in failing to request a lien search of UCC recordswith the New Jersey secretary of state. Had the purchasers conducted a lien search, they would have discovered the bank’s financing statement and security agreement. How would you decide this case? Do businesses have a duty to conduct lien searches with respect to firms from which they purchase goods? Assuming that the bank was successful would it have made a difference if the bank failed to file a ucc financing statement.

Answer 1

Answer:-

As per Case law of FORDYCE BANK TRUST CO v. BEAN TIMBERLAND INC

If Buyers/Purchasers of timber from Orlando were buyers in the ordinary course of business, and thus they were not required to perform a lien search on the timber purchased from Orlando.

Even if the bank failed to file a UCC- Financing Statement, the primary and conclusive event is whether buyer/Purchasers of timber from Orlando are Buyers in Ordinary course of business or not?

Under Ark.Code Ann. § 4-9-320(a) (Repl.2001), a buyer in the ordinary course of business “takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence.” Thus, if purchasers from Orlando were buyers in the ordinary course of business, they would be under no duty to perform a lien search, because even if they knew of a lien and had performed a lien search, they could nonetheless take free of the Bank's security interest.

Definition of Buyer in the ordinary course of business

A buyer in the ordinary course of business is defined in Ark. Code Ann. § 4-1-201(9) (Repl.2001), in pertinent part, as follows:

“Buyer 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. ․