Summary of a Recent
Judicial Development in
Secured Transactions

To Have Constructive Possession of Fungible Commodities, Purchasers Must Take
Visible Steps to Notify World of a Change in Possession

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Western Iowa Limestone, Inc., 375 B.R. 518 (8th Cir. B.A.P. 2007), the Eighth Circuit Bankruptcy Appellate Panel held that dealers did not have "constructive possession" of lime they purchased but did not pick up, because they did not take visible steps to notify the world of a change in possession.

Background

Western Iowa Lime (Debtor) sold processed lime to certain dealers in 2005. Id. at 519. At the time the Debtor filed for bankruptcy, the Dealers had only picked up a small portion of the lime they had purchased. Id. at 520. Their lime had never been segregated from the Debtor's stockpiles, but there was sufficient lime on the Debtor's premises at all times to fulfill their contracts. Id. The Debtor moved to sell all its assets free and clear of liens, with the liens to attach to the proceeds. Id. The Dealers objected to the proposed distribution of the sale proceeds and argued that as "buyers in the ordinary course of business" (BIOC), their interests in the lime were superior to other creditors, but the bankruptcy court overruled their objection and held that to qualify as a BIOC, one must have physical possession of the goods, the goods must have been identified and the seller must have been insolvent at the time of purchase, or the buyers must have been entitled to specific performance of the contract. Id. at 520-21. The court found that the Dealers met none of the criteria. Id. at 521. The Dealers appealed the decision, and after a new hearing the bankruptcy court reversed and held that constructive possession would satisfy the BIOC possession requirement, and found that the Dealers did have constructive possession and thus awarded them the proceeds from the sale of the lime. Id. at 521. United Bank of Iowa, another secured creditor, appealed the ruling. Id.

Arguments

The Dealers argued that their interests in the proceeds from the sale of lime were superior to the Bank's interest because they qualified as "buyers in the ordinary course of business" who purchased the lime free and clear of Bank's security interest under Iowa law, and that constructive possession satisfied the BIOC "possession requirement." Id. at 520, 523.

Analysis and Holdings

The Bankruptcy Appellate Panel considered Iowa Code § 554.9320, which provides that "a buyer in 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. at 522. Under Iowa statute, only a buyer that takes possession of the goods or has a right to recover the goods from the seller under Article 2 may be a buyer in ordinary course of business. Id. at 523. A buyer has a right to recover goods under Article 2 if the goods to the contract have been identified (referred to in the contract) and the seller becomes insolvent within ten days of the sale, or if the buyer has a right of specific performance. Id.

The panel held that the dealers never had constructive possession, because for fungible goods such as lime, they would have had to "take some visible and apparent step to inform the world of the change in possession," but they left the lime in undifferentiated stockpiles on the Debtor's premises for about a year, apparently available for sale to any other buyers. Id. at 525. Upon reaching that conclusion, the court found it unnecessary to further determine whether constructive possession would satisfy the BIOC possession requirement. Id. at 526.

The case was decided on March 19, 2007.