## Facts

- Larry Neal operated a tire business in Benson, Arizona, and bought tools from Snap-On Tools Corporation (Snap-On) on credit.
- The purchases were made under purchase-money security agreements granting Snap-On a security interest in the tools, including an air compressor and a wheel/tire balancer.
- Snap-On did not perfect its security interest by filing a financing statement (it commonly did not file on contracts under $7,500).
- Randy Rice worked for Neal and later agreed to buy Neal’s tire business.
- The sale of the business was for a lump-sum price and included the compressor and balancer as part of the business assets.
- After the sale, Neal tried to transfer the Snap-On account to Rice, but Snap-On rejected Rice’s credit application, so the account remained in Neal’s name.
- Neal kept most of the Snap-On tools subject to the security interest, but left Rice with the compressor and balancer because they were needed to operate the business.
- Rice knew Neal owed money to Snap-On, but Rice testified he did not know Snap-On claimed a security interest in the compressor and balancer, and Rice believed Neal would pay the Snap-On balance.
- Neal did not pay and soon filed for bankruptcy.
- Snap-On tried to recover the compressor and balancer from Rice, then sued Rice and sought a provisional remedy of replevin without notice; the sheriff seized the items.
- Rice requested a hearing under A.R.S. § 12-2402. After the hearing, the trial court quashed the provisional remedy, ordered the items returned to Rice, and awarded Rice costs and attorneys’ fees.
- Snap-On appealed.

## Issues

1. Whether the trial court’s order quashing the provisional remedy of replevin, ordering return of the collateral, and awarding fees was an appealable judgment.
2. Whether Snap-On’s unperfected purchase money security interest in the compressor and wheel balancer had priority over Rice’s rights as a buyer not in the ordinary course who gave value and received delivery without actual knowledge of the security interest.

## Decision

- The Court of Appeals held it had jurisdiction because the order was a written, signed, and filed judgment and included Rule 54(b) certification language.
- The court affirmed the trial court’s order quashing the provisional remedy and requiring return of the compressor and balancer to Rice.
- Applying A.R.S. § 47-9301(A)(3), the court held Snap-On’s unperfected security interest was subordinate to Rice’s rights because Rice gave value, took delivery, and lacked actual knowledge of the security interest.
- The court upheld the trial court’s factual findings on “knowledge” and “value” under a substantial-evidence standard of review.
- The court affirmed the award of costs and attorneys’ fees to Rice, and awarded fees on appeal subject to compliance with the appellate rules, with the amount to be determined on remand.

## Legal Principles

- An unperfected security interest is generally effective between debtor and secured party, but it may be subordinate to certain third-party claimants under Article 9 priority rules.
- Under A.R.S. § 47-9301(A)(3), an unperfected security interest in goods is subordinate to the rights of a buyer not in the ordinary course to the extent the buyer gives value, receives delivery, and takes without knowledge of the security interest.
- “Knowledge” for this priority rule means actual knowledge of the security interest, as defined by A.R.S. § 47-1201(25)(c); awareness that the seller owes a debt to the creditor is not, by itself, actual knowledge that the goods are encumbered.
- Whether a buyer had actual knowledge of a security interest, and whether the buyer gave value for the collateral, are factual questions reviewed on appeal for substantial evidence.
- A secured party that does not file to perfect bears the risk that a later buyer who gives value and takes delivery without actual knowledge will obtain superior rights in the collateral.

## Conclusion

The Arizona Court of Appeals affirmed an order quashing Snap-On’s provisional replevin and returning the compressor and wheel balancer to Rice because Snap-On never perfected its purchase money security interest, and substantial evidence supported the trial court’s findings that Rice paid value as part of the business purchase and took delivery without actual knowledge that Snap-On held a security interest in those specific items.


Snap-On Tools Corporation v. Rice, 781 P.2d 76 (1989)