Beware of Seller Demands for Pre-Payment in Full
A common term in some sales contracts is to indicate that title to a purchased item will transfer to buyer upon the earlier of buyer's payment or delivery to buyer. It is understandable that a seller would want to collect payment in full for an item before it released possession of the item. However, this situation does not adequately protect the buyer who has paid for the item in full but has not yet taken delivery of the item. In this situation, the buyer's title to the item paid for is at risk of being trumped by the rights of any security interests in the item held by seller's creditor.
A buyer only becomes a buyer in the ordinary course of business (taking free of the buyer's creditor's security interest) when the buyer takes possession of the item. Prepayment for the item does not change the analysis. Therefore, buyers should be hesitant to pay for items in full prior to taking delivery of the item and, similarly, buyers should avoid prepaying for items to be delivered later. In either situation if something happens with the seller prior to the time that the item is delivered, the seller's secured creditor would have a security interest in the item, since the item remains in the seller's inventory until the time that it is delivered to the buyer. If the seller defaults in its obligation to the secured creditor, the secured creditor could take this item and liquidate it, leaving the buyer with nothing but a claim against the seller for money paid for a product never received. Assuming that the secured creditor took possession of the item because the seller was in financial difficulty, it is unlikely that the buyer would be able to recover anything on its claim against the seller. There are other ways for a seller to protect its rights to payment aside from requiring pre-payment, therefore a buyer should be beware of paying in full for an item before it has received delivery. An unwary buyer could end up being both without the item it paid for and the money paid.