Schultz v. Bank of the West, C.B.C.
32 U.C.C. Rep. Serv. 2d (West) 379, 934 P.2d 421, 325 Or. 81 (1997)
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Rule of Law:
Under the Uniform Commercial Code, a buyer in the ordinary course of business who purchases goods from a merchant dealer takes the goods free of a security interest created by the merchant's consignor.
Facts:
- In 1987, the Muirs purchased a motor home.
- In 1988, the Muirs gave Bank of the West a security interest in the motor home, which the Bank perfected.
- In 1992, the Muirs entered into a consignment agreement with Gateleys' Fairway Motors (Gateleys), a dealer in the business of selling motor homes, to sell the vehicle.
- Gateleys sold the motor home to the Schultzes.
- The Schultzes were unaware that the motor home was being sold on consignment or that it was subject to the Bank's security interest.
- Gateleys failed to remit the proceeds of the sale to the Muirs and subsequently filed for bankruptcy.
Procedural Posture:
- The Schultzes filed an action in the trial court seeking a declaratory judgment that they owned the motor home free of the Bank of the West's security interest.
- The trial court granted summary judgment in favor of the Schultzes.
- Bank of the West (appellant) appealed to the Court of Appeals.
- The Court of Appeals reversed the trial court's judgment, holding that the Bank's security interest remained in effect.
- The Schultzes (petitioners) petitioned for review by the Supreme Court of Oregon, which the court granted.
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Issue:
Does a buyer in the ordinary course of business who purchases a motor home from a consignment dealer take the vehicle free of a prior perfected security interest created by the consignor under ORS 79.3070(1)?
Opinions:
Majority - Gillette, J.
Yes. A buyer in the ordinary course of business who purchases goods from a consignment dealer takes those goods free of a security interest created by the consignor. The court employs a two-part analysis. First, under ORS 71.2010(9), the Schultzes qualify as 'buyers in ordinary course' because they bought the motor home from Gateleys, a 'person in the business of selling goods of that kind.' The statute's use of 'person' rather than 'seller' indicates that the entity selling the goods does not need to hold title. Second, under ORS 79.3070(1), a buyer in ordinary course takes free of a security interest 'created by the seller.' The court defines 'seller' for the purposes of this section as the party with legal title, which, according to the UCC definition of 'sale,' is the party that passes title. In this consignment arrangement, the Muirs held and passed title, making them the 'seller.' Since the Muirs (the seller) created the security interest, the Schultzes took the motor home free of that interest.
Dissenting - Graber, J.
No. A buyer in this situation does not take the goods free of the security interest because the statutory requirements are not met. The dissent argues that the terms 'seller' and 'person...selling' should be interpreted consistently. The UCC defines 'sale' as the passing of title from the 'seller,' making the Muirs the seller. However, to be a 'buyer in ordinary course' under ORS 71.2010(9), one must buy from a person 'in the business of selling goods of that kind.' The Muirs, as private individuals, were not in that business, so the Schultzes cannot qualify as buyers in ordinary course. Alternatively, if Gateleys is considered the 'person...selling,' they did not create the security interest, which is also a requirement of ORS 79.3070(1). The majority's bifurcated interpretation creates an anomaly and contravenes the UCC's purpose of protecting buyers only from security interests created by their immediate seller in an inventory context.
Analysis:
This decision significantly clarifies the rights of consumers in consignment sales under the UCC, prioritizing consumer protection over the interests of secured creditors. By adopting a flexible, two-part interpretation of 'person' and 'seller' across different UCC provisions, the court shields good-faith purchasers from upstream liens of which they are unaware. This ruling places the risk of a dealer's default or insolvency on the consignor and their secured party, who are in a better position to vet the dealer, rather than on the innocent consumer. The case establishes a precedent that strengthens the finality of commercial transactions from established merchants.
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