## Facts

- Havens Steel Company, a structural steel design-fabricate-erect contractor, filed a Chapter 11 case and initiated an adversary proceeding to determine priority in disputed steel inventory and related proceeds.
- Commerce Bank, N.A. made a $15 million loan to Havens secured by a properly perfected blanket security interest in Havens’s inventory, accounts, and proceeds.
- Havens contracted with The Austin Company/Cypress Media LLC (Kansas City Star project) to furnish, fabricate, and erect structural steel for a printing facility.
- Steel for the project existed as raw or partially fabricated material at Havens’s plant and as fabricated but unerected steel delivered to the job site, all intended exclusively for the project.
- Approximately $732,284 in project steel was in process; Austin had paid $538,502.20 toward that steel.
- To allow ongoing operations while litigating competing claims, the court ordered project payments to be deposited into a segregated account at Commerce, with the cash treated as the legal equivalent of the disputed inventory.
- By trial, other purchaser disputes had settled, leaving only the priority contest between Austin and Commerce as to the segregated funds representing the project steel.

## Issues

1. Whether Commerce’s perfected security interest in Havens’s inventory and proceeds was cut off by Austin’s rights as purchaser of the project steel.
2. Whether identification of goods to Austin’s contract and partial payment gave Austin Article 2 “special property” rights sufficient to defeat Commerce’s inventory lien.
3. Whether Austin qualified as a buyer in ordinary course of business under UCC Article 9 so as to take the steel (and corresponding proceeds) free of Commerce’s security interest.
4. Whether Commerce’s lien, if it continued in the inventory, also attached with priority to the segregated account as proceeds.

## Decision

- Judgment was entered for Commerce Bank on the priority dispute with Austin.
- Commerce’s perfected security interest in Havens’s inventory and proceeds remained effective against the project steel and against the segregated funds representing that steel.
- Austin’s identification/partial-payment claims and asserted purchaser status did not extinguish Commerce’s inventory lien under the circumstances of the design-fabricate-erect subcontract and the status of the goods.

## Legal Principles

- A perfected Article 9 security interest in inventory generally continues until a transaction satisfies the statutory conditions that cut off the lien (commonly, a sale to a qualifying buyer in ordinary course under UCC § 9-320(a)).
- Identification of goods to a contract and resulting Article 2 “special property” interests under UCC § 2-501 do not, by themselves, terminate a secured lender’s inventory lien as against third-party secured-creditor claims.
- Where a court orders disputed inventory proceeds to be placed in a segregated account as the legal equivalent of the inventory, priority in the cash proceeds follows priority rules applicable to the underlying inventory and proceeds.
- In a mixed goods-and-services subcontract involving substantial fabrication and erection obligations, a purchaser’s claim to goods in process may be insufficient to displace a lender’s perfected inventory lien absent satisfaction of Article 9 buyer-protection requirements.

## Conclusion

The bankruptcy court held that the secured lender’s perfected inventory-and-proceeds lien had priority over the project purchaser’s competing claim, because identification of goods and partial payment did not, on these facts, cut off the inventory lien, and the lien therefore extended to the segregated funds standing in place of the steel.


In re Havens Steel Co., 317 B.R. 75 (Bankr. W.D. Mo. 2004)