Brasher's Cascade Auto Auction v. Valley Auto Sales & Leasing

The Uniform Commercial Code establishes rules that address a variety of situations where losses must be allocated between relatively innocent parties because a third party whose misconduct caused the loss is insolvent or no longer available. That situation is presented here. A middleman who purchased vehicles from an auction company-secured lender and resold the vehicles to a used car dealer failed to apply the proceeds from the resale to pay off the auction company-secured lender. This appeal concerns whether the loss caused by the insolvent middleman should be borne by the auction company-secured lender or by the used car dealer.

The fundamental legal question raised in this appeal is whether, under the former version of the California Uniform Commercial Code, a merchant buyer was required to observe reasonable commercial standards to qualify as a buyer in the ordinary course of business for purposes of section 9307. If the merchant buyer attained buyer in the ordinary course status, then it would have purchased the goods free of any perfected security interest.

We hold that the former version of the California Uniform Commercial Code requires a merchant buyer to…