Power Generator Company (PGC) supplies generators to Westlake Ace Hardware.  The generators are sold to Westlake’s on credit and covered by a proper security agreement (covering “all of Westlake's inventory purchased from PGC”) and PGC filed a financing statement with the proper filing office.

On September 5, 2012, Roy Contractor purchases a generator from Westlake’s because the one currently in use on his construction site for the re-building of the Regency Hotel Downtown blew up and he need it to continue work immediately. Roy buys the replacement generator on an installment contract, but Westlake’s forgot to have Roy sign a security agreement covering the generator.

On the same day that Roy bought the generator, an unsecured creditor obtained a levy against the generator to satisfy a judgment obtained against Roy. Westlake’s is in default on its credit agreement with PGC.  Who has highest priority in the generator?

1. The judgment creditor, because PGC and Westlake’s no longer have valid security interests in the generator.

2. PGC, because it did not authorize Westlake’s to sell to Roy, and a sale on credit is not considered to be “in the ordinary course of business.”

3. Westlake’s, if it files a financing statement on or before September 26, 2012.

4. Westlake’s, because its purchase money security interest was automatically perfected.