First National Bank v. First Security Bank of Montana, N.A.

No. 85-567
IN THE SUPREME COURT OF THE STATE OF MONTANA
1986

FIRST NATIONAL BANK OF GLASGOW,
Plaintiff and Respondent,

FIRST SECURITY BANK OF MONTANA,
N.A.,
Defendant and Appellant.

APPEAL FROM: District Court of the Seventeenth Judicial District,
In and for the County of Valley,
The Honorable Leonard Langen, Judge presiding.

COUNSEL OF RECORD:

For Appellant:
Gallather, Archambeault & Knierim; Matthew Knierim,
Glasgow, Montana

For Respondent:
Moulton, Bellingham, Longo & Mather; Sidney R. Thomas,
Billings, Montana

Submitted on Briefs: March 6, 1986
Decided: June 17, 1386

Filed: JU~I J. l ]$@(-j

8
&uClerk #
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Mr. Justice John C. Sheehy delivered the Opinion of the
Court.

First Security Bank appeals from an order of the
District Court, Seventeenth Judicial District, Valley County
granting summary judgment to First National Bank (FNB). We
affirm.
The issue in this case is which bank has a prior
perfected security interest in certain livestock and their
progeny. First Security Bank began lending money to James J.
Murnion, as rancher, in 1976 on an unsecured basis. In
October, 1977, First Security had Murnion execute a security
agreement which took a security interest in:
350 Cows, 3 to 7 years
160 Heifers, 2 years
20 Bulls
400 Calves
140 Cattle Branded: RS (b)
70
together with the young and produce thereof and all
other livestock and poultry now owned or hereafter
at any time acquired by Borrower or in which
Borrower obtains rights; all of which are or will
be located at
20 miles East of Jordan
on premises owned by:
James J. Murnion
A financing statement was filed in Garfield County describing
all livestock branded with the lazy TJ brand and stating they
were located 20 miles east of Jordan. Each year Murnion
executed new security agreements in favor of First Security
Bank.
In April, 1980, Murnion contacted First Security Bank
and asked if the Bank would loan additional funds so that
Murnion and his partner could purchase about 513 heifers.
First Security would not finance the purchase but agreed to
loan $40,000 as a downpayment. Murnion went to First
National Bank. FNB agreed to loan Murnion $152,000 for the
purchase of 513 heifers with the Rafter B brand. On April
30, 1980, Murnion executed a security agreement giving FNB a
security interest in "513 yearling heifers branded: Rafter B
L.R. together with the young, products, and produce thereof
and all similar property whenever acquired, located or to be
located at McCone County on premises belonging to Jack
Rosenwald." FNB mistakenly filed its financing statement in
McCone County where the cattle would be pastured.
In July, 1980, Murnion told the president of First
Security Bank of the loan by FNB. Murnion disclosed the
amount of the loan, that FNB was the lender, and that the
money was used to purchase the Rafter B heifers. He also
told the bank president that he would be selling the heifers
by November, 1980, and that part of the sale proceeds would
go to FNB.
In 1982, First Security began to have concerns about
Murnion's financial condition and informed him that the loan
would be due in full at the maturity date. First Security
also had Murnion execute a new security agreement and
financing statement granting First Security a security
interest in all Murnion's livestock, including the Rafter B
cattle. The new security agreement deleted reference to the
lazy TJ brand and described the collateral as located at
Garfield, Custer, and Valley Counties.
On March 24, 1982, in accordance with his usual
practice, Murnion attempted to deliver a check to FNB from
the proceeds of the sale of the Rafter B-branded cattle.
First Security objected to this and called the purchasers to
tell him that First Security was claiming an interest in all
of the cattle, not just the lazy TJ cattle. First Security's
loan comment sheets of that date indicate that Murnion told
them that this would "put him in a bad light with First
National Bank."
Subsequent cattle sales were lost because First Security
told potential purchasers that they would be sued for
conversion if any of the proceeds were paid to FNB. When
representatives of FNB discovered the situation, they offered
to allow the funds to be placed in a trust account for later
resolution in order to avoid the prospect of a lost sale.
This was done in subsequent sales with the intention of
allowing the sales to proceed without the priority dispute
being litigated each time. Three sales occurred, two
involving Rafter B-branded cattle, prior to Murnion's filing
of a bankruptcy petition. Further sales of the Rafter
B-branded cattle and their progeny occurred following the
bankruptcy petition. The funds from the later sales are
being held in a trust account pending the resolution of this
case.
The bankruptcy judge determined that he did not have
jurisdiction over this matter, and remanded this cause to the
District Court of the Seventeenth Judicial District. The
Honorable Leonard H. Langen, in a thorough opinion and order,
granted summary judgment in favor of FNB. We agree that this
case as presented is a proper subject for summary judgment
since no genuine issues of material fact remain.
We turn to the issue of which bank has a prior perfected
security interest in the cattle. When First Security Bank
took a security interest in Murnion's cattle in 1977, the
security agreement attempted to be at once general and
specific. The specific cattle which secured the loan were
typed on the agreement as:
 350 Cows, 3 to 7 years
160 Heifers, 2 years
20 Bulls
400 Calves Cattle Branded: RS (-1
140
70

However in boilerplate language the agreement also referred
to "all other livestock and poultry now owned or hereafter at
any time acquired . . . all of which are or will be located
2 0 miles east of Jordan."

In interpreting this security agreement we begin with
the standard set out in 5 30-9-110, MCA, which states:
For the purposes of this chapter any description of
personal property or real estate is sufficient
whether or not it is specific if it reasonably
identifies what is described.
We also note that the purpose for the requirement of a
written description of collateral in the security agreement
is different than that in the financing statement. The
purpose of the description of collateral in the financing
statement is to put third parties on inquiry notice of the
existence of a security interest. The purpose of the
description of collateral in the security agreement is to act
as a statute of frauds. It allows discovery by creditors of
the debtors affairs, and names the collateral securing the
loan so as to prevent later disputes over what secured the
loan. White and Summers, Uniform Commercial Code pp. 7 8 7 - 8 8
(1972). As such, the description of the collateral in the
security agreement must reasonably lead the impartial
observer to the collateral in question. -
Id.
While the language of this security agreement is not a
model of clarity in drafting, we hold that the security
agreement creates a general lien on all livestock located on
the Murnion ranches 2 0 miles east of Jordan. The agreement
refers to specific cattle which were branded with the lazy TJ
brand and takes a security interest in their produce and
young. The next line is an after-acquired property clause
which refers to "all livestock now owned or hereafter
acquired." It is substantially similar to this description
which has been held sufficient to create a general lien on
all cattle:
all livestock ...
now owned or hereafter acquired
by Debtor, together with all increases,
replacements, substitutions, and additions thereto,
including but not limited to the following:
U.S. v. S.E. Mississippi Livestock Farmers Ass'n (5th Cir.
1980), 619 F.2d 435; U.S. v. Mid-States Sales Co. (D.c. ~ e b .

While the above language would have made the security
agreement in question clearer, it is nonetheless sufficient
to create a general lien on all cattle owned by Murnion.
However, the security agreement states that all the
livestock covered by the agreement "are or will be located at
20 miles east of Jordan on premises owned by: James J.
Murnion." We note that it is not necessary to set out the
location of livestock in a security agreement or financing
statement. Section 30-9-203, MCA; § 30-9-402(1), MCA.
FNB argues that since the location was included, we
should follow Matter of California Pump and Manufacturing Co.
(9th Cir. 1978), 588 F.2d 717 and 8 Anderson, UCC (3rd ed.
1985), 9-110:9 p. 606 in holding that a statement of
location in a security agreement acts to limits the
description of the collateral to the property located within
the geographic area described.
First Security argues the location should not be a
limiting factor, but should be taken as a promise by the
debtor to keep the collateral at that location, and as an aid
in describing the collateral relying on In re Lee (E.D. Tenn.
1981), 32 U.C.C. Rep. 580. Even if this were so, we fail to
see how a security interest covering cattle located 20 miles
east of Jordan on premises owned. by James J. Murnion can aid
in describing cattle located in McCone County on premises
owned by Jack Rosenwald. We think this is a case where, had
First Security foreseen this circumstance they would have
drafted their security agreement to cover these cattle, but
they did not, and it does not.
We hold First Security's security agreement is limited
to cattle located 20 miles east of Jordan on premises
belonging to James J. Murnion.
FNB, on the other hand, took a security interest in 513
heifers branded Rafter B located at McCone County on premises
belonging to Jack Rosenwald. It had a purchase money
security interest in the cattle under $ 30-9-107, MCA. In
order to perfect the purchase money security interest FNB
should have filed the financing statement in accordance with
5 30-9-401. The official comments to $ 30-9-109, MCA, state
that cattle are farm products, thus the financing statement
should have been filed in Garfield County, the county of the
debtor's residence, pursuant to 5 30-9-401 (1) (a) . However,
FNB mistakenly filed in McCone County where the cattle were
to be pastured. Thus FNB does not have a perfected security
interest in the Rafter B cattle. However, FNB contends it
should take precedence over First Security because of the
good faith filing exception in $ 30-9-401(2), MCA, which
states:
A filing which is made in good faith in an improper
place or not in all of the places required by this
section is nevertheless effective with regard to
any collateral as to which the filing complied with
the requirements of this chapter and is also
 effective with regard to collateral covered by the
financing statement against any person who has
knowledge of the contents of such financing
statement.
Good faith is defined as honesty in fact by § 30-1-201 (19),
which is incorporated in Article 9 by S 30-9-105 (4) . There
was testimony adduced at the depositions that it was "common
banking practice" to file a financing statement in the county
where the collateral was located. While we note that this
will soon be moot under the 1985 code which adopted central
filing effective July 1, 1986, we hold this filing in the
wrong county by the purchase money lender did constitute a
good faith attempt to comply with the code requirements. A
good faith filing is effective against any person who has
knowledge of the contents of such financing statement.
"Knowledge" is defined as actual knowledge in S 30-1-201(25).
There is no requirement that a party actually see the
financing statement in order to have actual knowledge of its
contents. However, the party must know the names of the
parties, their addresses, and a description of the
collateral. Section 30-9-402(l), MCA; 8 Anderson UCC S
9-401:47 p. 419; 47 U of Colo L.Rev. 467 (1976). In this
case, Conrad Tvedt, president of First Security Bank, states
in an affidavit that Murnion approached him about loaning
funds to finance the purchase of the Rafter B cattle. Tvedt
stated First Security would only loan $40,000. Murnion
indicated that other parties, Glasgow Livestock and
Fjeldheim, would help in the transaction. Tvedt stated that
he knew Fjeldheim was financed at FNB which is located about
one-half block away from First Security in Glasgow. In the
financial statement Murnion told Tvedt tha.t FNB had loaned
him the money to purchase the calves, and the amount of the
loan. In the financial statement Murnion filled out for
First Security on July 3, 1980, he listed under the category
"Loans to Purchase Machinery & Equipment" a loan from FNB of
Glasgow for $152,000 due 11-1-80. Also noted is the heifers
Rafter B brand. The loan comment file states:
He purchased 508 yearling heifers through the
Glasgow Livestock Sales Yard that were financed by
the First National Bank and is making a reduction
there including interest of $60,000, leaving a
balance owing of $152,000 due November 1, 1980,
which are branded seperately [sic] and which he
will market.
Here, First Security knew not only of the names and addresses
of the parties, and the collateral in question, but also the
exact amount of the loan. On appeal, First Security argues
that Murnion did not tell them if or how the loan was
secured. Yet the 1982 agricultural financing statement of
Murnion lists the loan from FNB as secured.
This situation is clearly distinguishable from the
situation in Taylor Rental Corp. v. First Citizens Bank (D.C.
Mont. 1982), 539 F.Supp. 228, in which a computerized journal
entry made by an accounting service in a confidential report
provided by a parent company to a franchiser showed a bank
loan by an unidentified bank. Judge Rattin held in that case
that the journal entry was not knowledge of the security
interest held by a specific bank. But that situation is
wholly different than the one at hand where one bank
president had full knowledge of the security interest of the
other bank.
Last, First Security argues that even if FNB has a
purchase money security interest in the Rafter B heifers, the
purchase money security interest does not extend to the
progeny of the heifers. The security interest of FNB clearly
does extend to the progeny of the heifers because the
security agreement lists as collateral:
513 yearling heifers branded: Rafter B LR
together with young, products, and produce thereof
and all similar property whenever acquired, located
or to be located at McCone County on premises belonging
to Jack Rosenwald:
We affirm that FNB does not have a perfected purchase
money security interest in the Rafter B heifers and their
young but that its security interest in the cattle and their
young is valid against First Security because First Security
had actual knowledge of FNB's security interest.

We Concur: