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In Re Western Iowa Limestone, Inc.

Court of Appeals for the Eighth Circuit
66 U.C.C. Rep. Serv. 2d (West) 542, 538 F.3d 858, 2008 U.S. App. LEXIS 17210 (2008)
ELI5:

Rule of Law:

Under the Iowa Uniform Commercial Code, the term 'possession' for the purpose of establishing a buyer's status as a 'buyer in the ordinary course of business' (BIOC) includes constructive possession. A buyer constructively possesses goods, and thus achieves BIOC status, when title passes and there is an explicit agreement for the seller to retain physical custody on the buyer's behalf, without any requirement of notice to third-party creditors.


Facts:

  • United Bank of Iowa held a perfected security interest in all assets, including inventory, of Western Iowa Limestone, Inc. (WIL) to secure a $6 million loan.
  • In 2004, WIL began marketing agricultural lime (ag lime), a byproduct of its quarry operations.
  • In January and February 2005, Independent Inputs, LLC, and Leinen, Inc. (collectively 'Dealers') purchased large quantities of ag lime from WIL.
  • The Dealers paid for the ag lime in full at the time of the purchases.
  • The bills of sale stipulated that the purchased ag lime would remain at WIL's quarry, stored in a single fungible pile with WIL's other ag lime, until the Dealers resold it to their own customers.
  • Following the sales, the Dealers began removing portions of their purchased ag lime from WIL's premises as needed for their customers.
  • On December 12, 2005, WIL filed for Chapter 11 bankruptcy while a significant amount of the ag lime purchased by the Dealers remained on WIL's property.

Procedural Posture:

  • Western Iowa Limestone, Inc. (WIL) filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court.
  • The Dealers filed a joint objection to the proposed distribution from the sale of WIL's inventory, asserting a priority claim over United Bank.
  • The bankruptcy court initially ruled that the Dealers were not BIOCs but, on a motion to alter or amend, reversed itself, finding the Dealers had constructive possession and thus achieved BIOC status.
  • United Bank, as appellant, appealed the bankruptcy court's final decision to the Eighth Circuit Bankruptcy Appellate Panel (BAP).
  • The BAP, siding with United Bank, reversed the bankruptcy court, holding that the Dealers did not have constructive possession under Iowa law.
  • The Dealers, as appellants, appealed the BAP's decision to the U.S. Court of Appeals for the Eighth Circuit.

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Issue:

Does a buyer who pays for fungible goods and, by agreement, leaves them in the seller's physical custody 'take possession' of the goods under Iowa Code § 554.1201(9) to qualify as a buyer in the ordinary course of business (BIOC) and thereby take priority over the seller's secured creditor?


Opinions:

Majority - Hansen, Circuit Judge.

Yes. A buyer who pays for goods and leaves them with the seller pursuant to an agreement takes constructive possession, which satisfies the possession requirement under Iowa Code § 554.1201(9) to achieve buyer in the ordinary course of business (BIOC) status. The court reasoned that the term 'possession' in the statute is ambiguous and, guided by Iowa common law principles, should be interpreted to include both physical and constructive possession. The court looked to the Iowa Supreme Court's decision in Lamoni Livestock Sales, which recognized constructive possession in another UCC context, and found no legislative intent to exclude it here. This interpretation aligns with the purpose of BIOC status, which is to sever a lender's security interest at the logical point when possessory rights transfer from seller to buyer, allowing the security interest to attach to the proceeds of the sale instead. The court held that constructive possession is established by the agreement between the buyer and seller, focusing on factors like the passing of title, identification of the goods to the contract, and the parties' explicit arrangement for the seller to act as a bailee. The court explicitly rejected the argument that constructive possession requires notice to third parties, distinguishing older case law as being based on a since-repealed statute.



Analysis:

This decision provides significant clarity on the 'take possession' requirement for BIOC status under the UCC, confirming that physical delivery is not strictly necessary. It protects buyers in commercial arrangements where leaving goods with the seller is practical, such as for storage or phased delivery. The ruling reinforces the idea that the UCC's priority rules are designed to facilitate commerce; by allowing constructive possession to suffice, it places the risk on the secured lender to monitor its debtor's sales and proceeds, rather than on a good-faith buyer. This precedent will influence future cases involving disputes between buyers and secured creditors, particularly in industries where delayed delivery or seller-retained storage is a common business practice.

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