## Facts

- Western Iowa Limestone, Inc. (WIL) operated limestone quarries and sold processed agricultural lime through fertilizer/chemical dealers.
- United Bank of Iowa held a perfected security interest in all WIL assets, including inventory.
- In early 2005, several dealers prepaid for large quantities of ag lime (Independent Inputs: 5,000 tons; Leinen-related buyers: 6,700 tons each) and received bills of sale.
- The bills of sale stated the lime could remain at WIL’s quarry until the dealers resold it to their customers.
- The lime was stored on WIL’s premises in a single fungible pile; dealers’ purchased quantities remained commingled until drawn down for customer deliveries.
- WIL filed for Chapter 11 on December 12, 2005; by then, only a portion of the prepaid lime had been removed, leaving most still at the quarry.
- A dispute arose over whether the remaining lime (or its proceeds) belonged to the dealers or to the bank as inventory collateral.

## Issues

1. Whether, under Iowa Code § 554.1201(9), the requirement that a buyer in the ordinary course of business “takes possession” can be met by constructive possession rather than physical custody.
2. Whether the dealers, who prepaid and left fungible goods commingled on the seller’s premises under an agreed storage arrangement, had constructive possession sufficient to qualify as buyers in the ordinary course.
3. If the dealers were buyers in the ordinary course, whether they took free of the bank’s perfected security interest in WIL’s inventory under Iowa Code § 554.9320(1).

## Decision

- The Eighth Circuit reversed the Bankruptcy Appellate Panel and reinstated the bankruptcy court’s amended judgment for the dealers.
- The court held that “possession” in Iowa’s buyer-in-the-ordinary-course definition is ambiguous and includes constructive possession under Iowa law.
- The court held the dealers had constructive possession because they paid in full for identified quantities, WIL held the lime for them pursuant to the bills of sale, and the dealers had the power and intent to control disposition by directing removal/delivery for resale.
- The court rejected the argument that constructive possession must be accompanied by public or visible notice to be effective for buyer-in-the-ordinary-course status.
- Because the dealers qualified as buyers in the ordinary course, they took the lime and its proceeds free of the bank’s security interest created by WIL.

## Legal Principles

- When a UCC term is undefined and ambiguous in context, courts may apply relevant state-law concepts to supply meaning consistent with commercial practice.
- Under Iowa law, constructive possession exists when a party has the power and intent to exercise control over property, even without physical custody.
- For Iowa buyer-in-the-ordinary-course purposes, “takes possession” may be satisfied by constructive possession where goods are held for the buyer under an arrangement functionally equivalent to bailment.
- A buyer in the ordinary course takes free of a security interest created by the seller in inventory, even if the secured party’s interest is perfected, as provided by Iowa Code § 554.9320(1).

## Conclusion

The court concluded that dealers who prepaid for fungible ag lime and left it at the quarry under bills of sale had constructive possession and therefore were buyers in the ordinary course, taking free of the secured lender’s perfected inventory lien.


In re W. Iowa Limestone, Inc., 538 F.3d 858 (8th Cir. 2008)