Rayfield Investment Co. v. Kreps
2010 Fla. App. LEXIS 6149, 72 U.C.C. Rep. Serv. 2d (West) 110, 35 So.3d 63 (2010)
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Rule of Law:
Under the Uniform Commercial Code (UCC), a creditor's prior perfected security interest in a merchant's inventory has priority over a subsequent, unperfected security interest of a consignor unless the consignor perfects their interest or proves the merchant was generally known by its creditors to be substantially engaged in selling the goods of others.
Facts:
- A lender made loans totaling $300,000 to an art gallery named Style de Vie.
- The lender secured these loans with an interest in all of the gallery's inventory.
- The lender perfected its security interest by filing a UCC-1 financing statement in Florida.
- After the lender's interest was perfected, a consignor delivered a painting to the gallery to be sold on consignment.
- The consignor did not file a UCC-1 financing statement to give notice of his interest in the painting.
- The consignor also did not affix a tag to the painting or require the gallery to post a sign indicating it sold goods on consignment.
- The art gallery defaulted on its loan payments to the lender.
- Although the lender had general knowledge that the gallery sold some items on consignment, the consignor presented no evidence that the gallery was 'generally known by its creditors to be substantially engaged in selling the goods of others.'
Procedural Posture:
- The Lender sued the gallery in a trial court to foreclose on its security interest and obtained a writ of replevin for the gallery's inventory.
- The Consignor intervened in the Lender's lawsuit to assert a superior claim to the painting.
- Following a non-jury trial, the trial court found in favor of the Consignor, ruling his interest was superior because the Lender had actual knowledge that the gallery sold goods on consignment.
- The Lender, as appellant, appealed the trial court's judgment to the intermediate appellate court.
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Issue:
Does a lender's prior perfected security interest in an art gallery's inventory have priority over a subsequent consignor's unperfected security interest in a painting delivered to that gallery for sale?
Opinions:
Majority - Farmer, J.
Yes. A lender's prior perfected security interest has priority over a subsequent unperfected consignor's interest. The Uniform Commercial Code's priority rules are categorical and not subject to equitable considerations. Under § 679.322(1), a perfected security interest takes priority over unperfected interests. A consignor's interest is treated as a security interest, and to gain priority over a previously perfected creditor, the consignor must take steps to perfect their interest, such as filing a UCC-1 financing statement. The only other way for the consignor to prevail is to prove the consignee was 'generally known by its creditors to be substantially engaged in selling the goods of others.' The lender's mere general knowledge that some goods were on consignment is insufficient to defeat its perfected priority status. The consignor failed to provide any evidence to meet this statutory exception, and therefore, the lender's perfected claim prevails.
Analysis:
This decision reinforces the strict, rule-based nature of the UCC's priority system, emphasizing that subjective knowledge cannot override clear statutory requirements for perfection. It serves as a strong caution to consignors, making it clear that they must comply with the UCC's public notice provisions (like filing a UCC-1) to protect their interests against the consignee's creditors. The court's refusal to apply equitable principles highlights the importance of predictability and uniformity in commercial law, establishing that sympathetic facts cannot excuse non-compliance with the Code's formal requirements. This precedent solidifies the power of a perfected security interest and places the burden of protection squarely on consignors to follow statutory procedures.
