Chattanooga Ag Assoc v. William F. Sapp, Joy G. Sapp, Tri-County Equipment Inc., Deer and Co., Gary Seals, D/B/A Gary Seals Livestock and Citizens Tri-County Bank

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
May 11, 2004 Session

CHATTANOOGA AGRICULTURAL ASSOCIATION v. WILLIAM F.
SAPP, JOY G. SAPP, TRI-COUNTY EQUIPMENT, INC., DEERE AND
COMPANY, GARY SEALS, d/b/a GARY SEALS LIVESTOCK AND
CITIZENS TRI-COUNTY BANK

Direct Appeal from the Chancery Court for Bledsoe County
No. 2671 Hon. Jeffrey Franklin Stewart, Chancellor

No. E-2003-01984-COA-R3-CV - FILED JUNE 25, 2004

The Trial Court held defendant’s purchase money security interest in cattle had priority over
plaintiffs’ prior security interest. On appeal, we affirm.

Tenn. R. App. P.3 Appeal as of Right; Judgment of the Chancery Court Affirmed.

HERSCHEL PICKENS FRANKS, P.J., delivered the opinion of the court, in which CHARLES D. SUSANO ,
JR., J., and WILLIAM H. INMAN , SR.J., joined.

Jerrold D. Farinash, and Shannon Guinade Scearce, Chattanooga, Tennessee, for Appellant.

L. Thomas Austin and Jennifer Austin Mitchell, Dunlap, Tennessee, for Appellees.

OPINION

This action has devolved into whether defendant Citizen’s Tri-County Bank’s security
interest had priority over plaintiff’s security interest in cattle.

In the original action, plaintiff sued defendants, William and Joy Sapp and Tri-County
Equipment, Inc., alleging that the Sapps had a loan with plaintiff which was in default, and that
plaintiff had a security interest in the Sapp’s farm equipment.

The Sapps filed an Answer, denying that they were past due on the note, and averring
that any transfers of the secured property were made with plaintiff’s consent. At trial, the Court
found that plaintiff had a security agreement which was filed in the Register’s Office, and listed the
secured property, including cattle and farm equipment. The Court found that the first three items
(tractor, loader, and hay baler) had been traded to Tri-County, but reserved any further action on
those items at plaintiff’s request. The Court further held that plaintiff was entitled to immediate
possession of all other items of collateral, and gave plaintiff judgment against the Sapps for the
amount due under the note, less a credit of $1,780.00.

Subsequently, plaintiff moved to amend, seeking to add Gary Seals d/b/a Gary Seals
Livestock and Citizens Tri-County Bank (“Citizens”) as defendants. Plaintiff’s Amended Complaint,
alleged that Seals sold the Sapps 50 head of cattle on March 14, 1999 (some months after plaintiff’s
loan to the Sapps) and that Citizens loaned the Sapps the money to pay for said cattle. A promissory
note was executed between Sapp and Citizens, and co-signed by Seals, and a financing statement
was filed in the Register’s Office, attempting to perfect a security interest in the cattle, but the
statement did not describe the collateral covered by it. Sapp apparently defaulted on the note to
Citizens, and Seals regained possession of the cattle and sold them, using the proceeds from that sale
to pay on the promissory note. Plaintiff claimed to have a perfected security interest in the cattle
pursuant to its security agreement, which covered after acquired property. Plaintiff sought judgment
against Seals and Citizens for the proceeds of the sale of the cattle. Seals and Citizens answered,
admitting that the cattle were sold, but averring that Citizens had a perfected purchase money
security interest in the cattle, which had priority.

At the trial, Greg Johnson, a loan officer and vice president at Citizens, testified that
the Sapps came to the bank and asked about borrowing money to buy cattle, but based upon Sapp’s
credit, the bank would not loan them money without a co-signer. Johnson testified that both Seals
and Sapp signed the promissory note for the loan.

Johnson testified that Sapp executed a security agreement, which describes the
collateral as “29 head of cattle and 29 calves to be located on the Buddy Kelly farm” and states that
it will include their natural increase. Johnson said that Sapp also signed a financing agreement, and
it was sent to the Register’s Office in Bledsoe County. Johnson testified that the bank also sent a
copy to be stamped and sent back to the bank, and that this copy was received back from the
Register’s Office. Johnson testified that the document represented a true copy of what was sent to
the Register’s Office, which was the UCC-1 and its exhibit which describes the collateral. He
further testified that the copy was placed in Sapp’s file, and had never been removed/changed.

Johnson testified that the bank then issued a check to Seals for the purchase of the
cattle, and that this loan was paid off when Seals brought checks from Plateau Auction, as well as
his own personal check for the remaining balance.

At the time the loan was made, Johnson testified that the bank did not do a UCC
search, because it was a purchase money transaction, but they were aware that when Citizens made
the loan that the plaintiff had a loan outstanding with Sapp, as well, because Sapp had informed

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them.

Following trial, the Court found that Citizens had a perfected purchase money security
agreement and that the Amended Complaint against Seals and Citizens should be dismissed. The
Court said in its Memorandum Opinion, that Citizens had filed its Financing Statement and an
Exhibit detailing the collateral covered, and that Citizens had received a stamped copy of these
documents back from the Register’s Office, but somehow the Exhibit was never recorded in the
Register’s records. The Court found that any mistake in the recording of the security interest was
not the fault of Citizens, and therefore Citizen’s interest had been perfected. The Court also noted
that plaintiff contacted Citizens at some point indicating that they had searched in the Register’s
Office and found the record that Citizens claimed an interest in some property belonging to Sapp,
and thus any requirements regarding notice were met.

On appeal, plaintiff insists the Trial Court erred in finding that Citizens had a
perfected purchase money security interest in the cattle which took priority over plaintiff’s prior
security interest.

Both parties agree that pursuant to Tenn. Code Ann. §47-9-312(4), a purchase money
security interest in collateral of this type has priority over a conflicting security interest, so long as
the purchase money security interest is perfected at the time the debtor receives possession of the
collateral or within 20 days thereafter.

Pursuant to Tenn. Code Ann. §47-9-303, a security interest is perfected when it has
attached and when all the applicable steps for perfection have been taken according to the statute.
Attachment occurs when the debtor signs the security agreement, value is given, and the debtor
obtains rights in the collateral. In this case, attachment occurred prior to the filing, as Sapp had
executed the security agreement, received the money to purchase the cattle, and obtained possession.
See Tenn. Code Ann. §47-9-203.

The only other step for perfection which must be completed for collateral is for the
financing statement to be filed in the Register’s Office of the appropriate county. Tenn. Code
Ann.§47-9-302 and §47-9-401. In this case, the financing statement sent to the Register’s Office met
the requisites of Tenn. §47-9-402(1).

Regarding what constitutes proper “filing”, Tenn. Code Ann. §47-9-403 states:

Presentation for filing of a financing statement containing the name and address of
the debtor and tender of the filing fee (unless the filing officer properly refuses to
accept the statement because of a failure to pay any tax imposed on the filing by § 67-
4-409(b), based on the representation of indebtedness required thereunder), or
acceptance of the statement by the filing officer, constitutes filing.

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The undisputed proof shows Johnson on behalf of Citizens presented an appropriate and proper
financing statement with attachment to the Register’s Office along with the filing fee, and it was
accepted by the filing officer, and stamped copies of the UCC-1 and attachment were returned by
the filing officer and placed in Sapp’s file at the bank. The evidence establishes that the purchase
money security interest was properly filed, and thus perfected, pursuant to the statute.

Plaintiff relies upon cases from other jurisdictions where similar issues have been
addressed and decided differently. In these cases, however, there was no proof presented to the court
that the missing attachment was actually filed or presented for filing by the secured party. See In re
Antekeier, 1969 WL 11086 (Bankr. W.D. Mich. 1969)(Secretary of State’s Office stated that no
attachment was filed, and the filing officer noted this on the receipt - copy sent back to secured party
also did not contain attachment); First Nat’l Bank of St. Charles v. Chemical Products, Inc., 637
S.W.2d 373 (Mo. Ct. App. 1982)(court stated that attachment was not filed with financing statement
- apparently no proof presented that it had been attached at time of filing); In re Bailey, 228 B.R. 267
(Bankr. D. Kan. 1998)(secured party could not even produce referenced attachment, and the court
found that it had not been filed).

In this case, Johnson testified that the attachment was filed with the UCC-1, and his
testimony was bolstered by the fact that the copies which were accepted, stamped, and returned by
the Register’s Office had the necessary attachments describing the collateral. The Court obviously
credited Johnson’s testimony, and there was no proof to the contrary, except that the UCC-1 on file
at the Register’s Office inexplicably had no attachment. There was no proof, as in Antekeier, that
the Register’s Office did not receive the attachment at the time of filing.

In this case, the evidence does not preponderate against the Trial Court’s finding that
Citizens properly filed a complete financing statement which met all of the statutory requirements,
and that the purchase money security interest had been perfected. Tenn. R. App. P. 13(d).

This issue is addressed in general by the official comments to the statutory section
dealing with the filing officer’s duties, wherein it is stated:

Subsection (1) requires the filing officer upon request to return to the secured party
a copy of the financing statement on which the material data concerning the filing are
noted. Receipt of such a copy will assure the secured party that the mechanics of
filing have been complied with. Note, however, that under Section 9-403(1) the
secured party does not bear the risk that the filing officer will not properly perform
his duties: under that section the secured party has complied with the filing
requirements when he presents his financing statement for filing and the filing fee has
been tendered or the statement accepted by the filing officer.

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Tenn. Code Ann. §47-9-407, Comments to Official Text (note 1).

Similarly, in the case of In re Williams, 112 B.R. 913 (Bankr. E.D. Tenn. 1990), the
court was faced with the question of whether an improperly indexed financing statement would still
be considered perfected, since the secured party included an extra name on same, and this is the
name it was indexed under. The court held that:

A failure on the part of the filing officer to index an otherwise properly executed and
filed financing statement is a mistake by the filing officer, not the secured creditor.
When the filing officer makes the mistake in indexing a financing statement, the
secured creditor, who has filed the financing statement that substantially complies
with the statutory requirements and that is not seriously misleading, is not penalized.
Id. at 915.

The Court based its conclusion on the express language of the statute, relying on
Tenn. Code Ann. §47-9-403 regarding what constitutes proper filing, and which also requires the
filing officer to properly mark the document, hold it for public inspection, and index it according to
the name of the debtor. The Court also relied upon the note referenced above in the comments to
Tenn. Code Ann. §47-9-407. Id.

Our conclusion upholds the intent of the drafters that wanted to adopt a system of
“notice filing” such that all that is required is a “simple notice” sufficient to indicate that a security
interest exists. Tenn. Code Ann. §47-9-402, Comments to Official Text (note 2). These comments
also state that “Further inquiry from the parties concerned will be necessary to disclose the complete
state of affairs.” Id. This intent is further evidenced by the language of the statute which expressly
states that a financing statement which substantially complies with the statutory requirements is
effective even if it contains “minor errors which are not seriously misleading.” Tenn. Code Ann.
§47-9-402 (8).

Based on the statutory provisions and the undisputed facts, the Trial Court properly
found that Citizens had a perfected purchase money security interest in the cattle which took priority
over plaintiff’s conflicting security interest. Accordingly, we affirm the Judgment of the Trial Court
and remand, with the cost of the appeal assessed to Chattanooga Agricultural Association.

______________________________
HERSCHEL PICKENS FRANKS, P.J.

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