Rex Financial Corp. v. Great Western Bank & Trust
23 Ariz. App. 286, 16 U.C.C. Rep. Serv. (West) 1155, 532 P.2d 558 (1975)
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Rule of Law:
Under UCC § 9-308, a purchaser of chattel paper who gives new value and takes possession of it in the ordinary course of their business has priority over a prior security interest in that chattel paper which is claimed merely as proceeds of inventory, even if the purchaser knows of the prior security interest.
Facts:
- Rex Financial Corporation entered into an agreement with Liberty Mobile Home Centers, Inc., a mobile home dealer, to provide inventory financing.
- To secure the financing, Liberty gave Rex Financial a security interest in its mobile home inventory and delivered the manufacturer's certificates of origin for the vehicles to Rex Financial.
- Liberty sold four mobile homes, which were subject to Rex Financial's security interest, to individual buyers in the ordinary course of business.
- Each of these sales was financed through a security agreement contract, creating what is known as chattel paper.
- Liberty then sold and assigned these four security agreement contracts to Great Western Bank & Trust.
- Great Western gave new value for the chattel paper and took possession of the contracts in the ordinary course of its business.
- Liberty did not use the funds received from Great Western to repay its outstanding inventory loans to Rex Financial.
Procedural Posture:
- Rex Financial Corporation filed a lawsuit against Great Western Bank & Trust in an Arizona trial court.
- Great Western Bank & Trust filed a motion to dismiss.
- The trial court treated the motion as a motion for summary judgment.
- After reviewing the record, the trial court granted summary judgment in favor of Great Western Bank & Trust.
- Rex Financial Corporation (appellant) appealed the trial court's judgment to the Arizona Court of Appeals, an intermediate appellate court.
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Issue:
Does a purchaser of chattel paper, who gives new value and takes possession in the ordinary course of its business, have priority over an inventory financer's perfected security interest in the chattel paper when the financer's claim is merely for proceeds and the purchaser has knowledge of the security interest?
Opinions:
Majority - Donofrio, J.
Yes. A purchaser of chattel paper who meets the requirements of the second sentence of A.R.S. § 44-3129 (UCC § 9-308) has priority over an inventory financer’s security interest claimed merely as proceeds. The court reasoned that Great Western met all the statutory requirements. First, the security agreements purchased by Great Western constituted 'chattel paper' under the statute's definition, while the manufacturer's certificates of origin held by Rex Financial did not. Second, Great Western purchased the paper 'in the ordinary course of his business,' which refers to the purchaser's own practices, not a broader industry standard. Third, Rex Financial's interest was 'merely as proceeds of inventory' because it had not entered into a new transaction to acquire a specific interest in the chattel paper itself; its primary reliance was on the mobile home inventory as collateral. Therefore, even with knowledge of Rex Financial's prior interest, Great Western's claim to the chattel paper has priority.
Analysis:
This decision reinforces the special priority given to purchasers of chattel paper under Article 9 of the Uniform Commercial Code. It clarifies that an inventory financer's general interest in 'proceeds' is subordinate to the interest of a party who specifically purchases and takes possession of the chattel paper generated from the inventory's sale. This promotes the liquidity of chattel paper, allowing it to be easily bought and sold, which is crucial for commercial financing. The ruling places the risk of a dealer's default squarely on the inventory financer, compelling them to implement stricter controls, such as requiring the dealer to immediately turn over all chattel paper, rather than relying on a general proceeds claim.
