Summary of a Recent
Judicial Development in
Secured Transactions

"Buyers in the Ordinary Course of Business" Take Title
Free and Clear of All Other Security Interests

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Fordyce Bank & Trust Co. v. Bean Timberland, Inc., 251 S.W.3d 267 (Ark. 2007) the Arkansas Supreme Court held that lumber mills had no duty to conduct a lien search prior to purchasing timber "in the ordinary course of business," and dismissed the lienholder's negligence complaint.

Background

Bean Timberland obtained several loans from Fordyce Bank & Trust to purchase timber, and granted the bank security interests in the timber. Id. at 269. The proceeds from the sale of the timber were intended to repay the loans. Id. When Bean sold the timber to Potlatch and Idaho lumber mills, it failed to remit the sales proceeds to the Bank. Id. The Bank brought suit against Bean, Potlatch, and Idaho, alleging that Bean had known that the Bank had a valid first lien on the timber, and that Potlatch and Idaho had "negligently entered into contracts" with Bean and had "failed to exercise good faith" in those transactions. Id. The Bank also argued that Potlatch and Idaho had been negligent in failing to conduct a lien search, and had they done so, they would have discovered the Bank's financing statement. Id. The trial court found that Potlatch and Idaho were buyers in the ordinary course of business, and as such were not required to perform a lien search, and the Bank appealed. Id. at 270.

Arguments

The Bank argued that Potlatch and Idaho were negligent in failing to perform a lien search before purchasing Bean's timber, and that they were not "buyers in the ordinary course of business" because the timber, once cut, was not "inventory." Id. at 270- 73.

Analysis and Holdings

"Under Arkansas law, in order to prevail on a claim of negligence, the plaintiff must prove that the defendant owed a duty to the plaintiff, that the defendant breached the duty, and that the breach was the proximate cause of the plaintiff's injuries." Id. at 270-71. The issue before the court was whether Potlatch and Idaho owed a duty to the Bank, which depended on whether they were "buyers in the ordinary course of business." Id. at 271. Pursuant to Ark. Code Ann. § 4-9-320(a), a buyer in the ordinary course of business "takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence." Id. The court found that the evidence clearly showed that Potlatch and Idaho's practices were "usual or customary" in the timber business (specifically, that purchasing gatewood without performing a lien search was the standard practice in the timber industry). Id. at 272-73.

The court also rejected the Bank's argument that the timber was not "inventory" because the Bank had failed to offer any authority to that effect. Id. at 274. There are four mutually exclusive classes of goods: consumer goods, equipment, farm products, and inventory. Id. at 273. "Inventory" means "goods, other than farm products, which are held by a person for sale or lease or to be furnished under a contract of service, or consist of raw materials, work in process, or materials used or consumed in a business." Id. at 274. The court concluded that the timber clearly met the definition of "inventory," and therefore held that Potlatch and Idaho, as "buyers in the ordinary course of business," owed no duty to perform a lien search prior to purchasing the timber. Id.

The case was decided on March 1, 2007.