Entrustment Rule. Perez-Medina met Julio Lara at an auction at which they both bid on the same tractor. Perez-Medina purchased the tractor for $66,500. At a second auction, at which Lara was again present, Perez-Medina purchased equipment for

installation on the tractor. Lara and Perez-Medina agreed that Lara would install the equipment for Perez-Medina at Lara's place of business, and the tractor was moved to Lara's shop. About four months later, Perez-Medina paid Lara $10,000 to make the installation. At that time, Perez-Medina thought Lara's business was a repair shop and not a "business dealing in heavy equipment." Lara, however, often purchased and sold heavy equipment at auction, and many people knew that Lara was a dealer. Lara sold the tractor to First Team Auction, Inc, for $54,000, representing to First Team that he was the tractor's true owner. Perez-Medina had no knowledge of the sale and received no payment from the transaction. First Team then sold the tractor to a dealer, who in turn sold it to a consumer. When the truth of Lara's deed became known, the dealer and consumer rescinded their contracts with First Team. Should First Team be required to return possession of the tractor to Perez-Medina? If Lara was a "merchant" and First Team a "buyer in the ordinary course of business," would your answer differ? Explain.

Entrustment rule
The court held that First Team "occup[ied] the status of a good faith buyer in the ordinary course of business." Thus, it was not required to return the tractor. The court pointed out that the "primary rationale behind the entrusting provisions is aimed at protecting the buyer who purchases the entrusted goods in the ordinary course of business. Thus, the owner takes the risk by placing or leaving his chattel with a merchant of his own choosing who could convert or otherwise misdeal it." But "the statute requires, from an objective viewpoint, that the entruster know, or in the exercise of reasonable diligence should know, that he placed the goods with one who might reasonably appear to third persons to be a dealer in the type of goods in question." The court concluded that based on the facts, "as a matter of law, Lara was a merchant dealing in the kind of goods at issue." Further, "First Team Auction, which bought, sold and conducted an auction business in goods of this kind, knew Lara was in the business of buying and selling heavy equipment, and had dealt with Lara on a regular basis. There is no evidence that First Team Auction, as a dealer itself, failed to reasonably inquire into Lara's interest in the tractor, nor do we find any peculiar circumstances about the sale sufficient to raise a question of fact as to whether there was a good faith purchase."