Appeal from the Circuit Court of Champaign County; the Hon.
Harold L. Jensen, Judge, presiding.
JUSTICE GREEN DELIVERED THE OPINION OF THE COURT:
This case concerns the application of sections 9-306(2) and 9-307(1) of the Uniform Commercial Code (UCC) (Ill. Rev. Stat. 1983, ch. 26, pars. 9-306(2), 9-307(1)). Section 9-306(2) states:
"(2) Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor." (Ill. Rev. Stat. 1983, ch. 26, par. 9-306(2).)
"(1) Except as provided in subsection (4), a buyer in the ordinary course of business, as defined in subsection (9) of Section 1-201, takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence." Ill. Rev. Stat. 1983, ch. 26, par. 9-307(1).
• 1 The controlling question raised here is whether a security interest granted to defendant, the Bank of Illinois, under a security agreement which only authorized its debtor McGrath Auto Sales to sell collateral "in the ordinary course of business" was impaired by a purported sale to Gordon McGrath, who was not a "buyer in the ordinary course of business" and the sale was not one made "in the ordinary course of business." We hold that defendant's security interest was not impaired. Thus, because defendant's security interest was first in time of perfection, it must be given priority over one subsequently given plaintiff, Central Finance Corporation, by Gordon McGrath to secure a loan. (Ill. Rev. Stat. 1983, ch. 26, par. 9-312(5)(a).) This is so even though plaintiff gave value in good faith for its security interest. We reverse the judgment of the circuit court of Champaign County, which ruled that plaintiff's rights were superior.
On February 19, 1986, plaintiff filed a three-count complaint in the circuit court of Champaign County against defendant alleging that plaintiff was entitled to the possession of an automobile then in the possession of defendant. After a bench trial, the court entered an order on April 2, 1986, which found in favor of plaintiff as to count III of the complaint and recited that the other counts of the complaint had been withdrawn by plaintiff. As we have stated, the record indicates that the substance of the order is that plaintiff has a valid prior lien upon the vehicle and is entitled to its possession. Defendant has appealed.
Much of the evidence was received by stipulation. On July 13, 1984, defendant entered into a security agreement with an entity described as "McGrath Auto Sales." The agreement created a continuing security interest in property held by McGrath Auto Sales, whether presently existing or to be acquired in the future, including inventory, accounts and contract rights, chattel paper, tools and equipment, and all products and proceeds of any such property. The agreement further provided that McGrath Auto Sales could, "in the ordinary course of business," sell any inventory normally held for that purpose. (Emphasis added.) On July 16, 1984, a financing statement recording this transaction was filed with the Secretary of State under section 9-302 of the UCC (Ill. Rev. Stat. 1983, ch. 26, par. 9-302).
On April 5, 1985, McGrath Auto Sales, acting through Gordon McGrath, purchased a Mercedes-Benz automobile from Walter Thurman, who endorsed the assignment portion of the certificate of title, leaving blank the space for designation of the assignee. Thurman also executed an application for issuance of a duplicate certificate of title which untruthfully stated that the original certificate had been lost. On July 2, 1985, the original certificate of title to the Mercedes-Benz was delivered to defendant with a transfer of security interest and a trust receipt instrument which was executed by McGrath Auto Sales. That document stated that McGrath Auto Sales conveyed to defendant a security interest in the automobile and that defendant had loaned McGrath Auto Sales $10,000. Defendant still possessed the original certificate of title at the time of trial.
Sometime after acquiring the vehicle from Thurman, Gordon McGrath, acting on behalf of McGrath Auto Sales, made an application for a new certificate of title for the Mercedes-Benz based upon the fraudulent contention that the original certificate of title had been lost. The Secretary of State issued a new certificate of title to McGrath Auto Sales on July 17, 1985. On August 5, 1985, Gordon McGrath and plaintiff entered into a security agreement which provided that a debt of $18,895.22 owed by Gordon McGrath to plaintiff would be secured by an interest in various items of collateral, including the Mercedes-Benz which McGrath Auto Sales had purchased from Walter Thurman.
On August 10, 1985, the "first assignment of title by dealer" section of the new certificate of title was filled out to indicate that the vehicle had been transferred to Gordon McGrath and that a lien existed in favor of plaintiff. A form indicating that Gordon McGrath was the new owner of the car was executed and filed with the Secretary of State. H.L. McGrath signed the portion of the document which required the signature of the dealer from whom the vehicle was purchased.
In its brief, defendant disputes that any sale was ever made to Gordon McGrath. However, the record seems to indicate that defendant earlier stipulated that a sale had taken place. The evidence also indicated that Gordon McGrath had paid some sales tax on a purchase of the Mercedes-Benz from McGrath Auto Sales, and other documents indicated that a sale had taken place. The trial court made no finding as to whether a sale had taken place and indicated that even if it had not taken place, the security interest of plaintiff should prevail because of the innocent nature of its position and the statement of its lien in the duplicate certificate of title. We need not consider the matter further because we conclude that, even if a sale did take place, the security interest of defendant remained in force and it was not estopped to enforce it.
Accordingly, we must consider the nature of the sale if one did take place. If such a sale was "in the ordinary course of business," then, clearly, Gordon McGrath and plaintiff, taking an interest from him, would have done so free of defendant's interest by the express terms of section 9-306(2) of the UCC. Another aspect of the sale of which we must take note is that defendant did nothing to perfect its lien pursuant to the requirements of section 3-202 of the Illinois Vehicle Code (Ill. Rev. Stat. 1983, ch. 95 1/2, par. 3-202). However, by the terms of section 3-201(c) of the Illinois Vehicle Code, because defendant's lien was obtained from a dealer, McGrath Auto Sales, defendant was not required to comply with section 3-202 in order to preserve its lien except as against "buyer[s] in the ordinary course of trade" from that dealer. Ill. Rev. Stat. 1983, ch. 95 1/2, par. 3-201(c).
• 2 The questions of whether a sale is made "in the ordinary course of business" and whether it is made to a buyer "in the ordinary course of business" are, at least, ...