The Vanishing Inventory and the Perfected Creditor
Prairie Metal Works Ltd. borrows $400,000 from Northgate Bank and grants Northgate a security interest in 'all present and after-acquired inventory.' Northgate registers a financing statement under the PPSA on March 1 and perfects by registration. On May 15, Prairie sells its entire finished-goods inventory to a distributor, Delta Supply Co., for $180,000 cash in the ordinary course of business. Delta has no knowledge of Northgate's registration. On June 1, Prairie grants a second security interest in the same collateral to Corvus Capital, which registers on June 2. Prairie defaults on June 20. Northgate claims the inventory and the $180,000 proceeds held in Prairie's operating account; Corvus claims priority over Northgate on the theory that its registration describes the collateral more narrowly and specifically. Delta resists any claim to the goods it purchased.
1. Does Northgate have an enforceable claim against Delta Supply Co. for the inventory Delta purchased?
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No. The governing principle is the buyer-in-the-ordinary-course rule: a buyer who purchases goods in the ordinary course of the seller's business, in good faith and without knowledge that the sale violates a security agreement, takes free of a security interest created by the seller, even if the security interest is perfected and even if the buyer knows of its existence. Delta bought finished goods from a manufacturer-dealer in the ordinary course of Prairie's business, paid value, and had no knowledge of Northgate's interest. That is precisely the fact pattern the rule protects.
The exception to watch is a buyer who knows the sale is in violation of the security agreement. Delta's lack of knowledge is stated, so the exception does not apply. Northgate's remedy is therefore not against the goods but against the proceeds and against Prairie personally. The exam point is that perfection does not defeat an ordinary-course buyer; it defeats a competing secured party and a trustee in bankruptcy.
2. Between Northgate and Corvus, who has priority, and does the specificity of the collateral description matter?
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Northgate has priority. Under the first-to-register-or-perfect rule, priority between competing perfected security interests in the same collateral goes to the party that perfected first. Northgate registered March 1; Corvus registered June 2. Both are perfected by registration, so the earlier registration controls.
Corvus's specificity argument fails. A financing statement need not describe collateral narrowly; a super-generic description such as 'all present and after-acquired personal property' is sufficient to perfect, and a broader registration is not defeated by a later, more precise one. The description in the security agreement may be broader or narrower than the financing statement, but the financing statement only needs to be sufficient to put a searcher on notice. Corvus searched (or should have searched) and would have found Northgate's registration. A later creditor takes subject to prior registered interests; it cannot improve its position by drafting a tighter description.
Practical consequence: Corvus's $X loan is effectively unsecured or subordinated as to this collateral, and its remedy is against Prairie for misrepresentation if Prairie warranted clean title.
3. What is the status of the $180,000 in Prairie's operating account, and what must Northgate show to capture it?
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The cash is identifiable proceeds of inventory, and Northgate's security interest continues in proceeds automatically. A security interest in collateral attaches to identifiable proceeds, and the proceeds are perfected if the original collateral was perfected, subject to the same priority rules. Northgate's inventory interest was perfected, so its interest in the proceeds is perfected without a new registration, provided the proceeds are identifiable.
Identifiability is the battleground. If the $180,000 is commingled in an operating account with other funds, Northgate must trace it, typically using the lowest intermediate balance rule: the claim is limited to the lowest balance the account reached between receipt of the proceeds and the claim, on the theory that withdrawals are presumed to come first from non-proceeds funds. If the account dropped to $20,000 after deposit, Northgate's proceeds claim is capped at $20,000 unless the proceeds were deposited into a segregated account.
Northgate should also consider whether it holds a control-based priority over the deposit account. Control (for example, by agreement with the bank) gives a superior interest against a competing secured party that lacks control, but a bank with a deposit-account security interest and control may leapfrog Northgate. The exam answer should flag both tracing and control.