Summary of a Recent
Judicial Development in
Finance and Credit

Creditor's Good Faith Reliance on
Address Provided by Debtor
Leaves Credor Unperfected

Harrison M. Pittman
Staff Attorney

The United States Bankruptcy Court for the Western District of Arkansas held that a creditor's filing of a financing statement in the county where the debtor conducted business, instead of the county in which the debtor actually resided, caused the creditor's security interest in certain farm equipment to become unperfected despite the creditor's good faith reliance on the address provided to the creditor. In re Davis, 274 B.R. 825 (Bankr. W.D. Ark. 2002).

On May 22, 1999 Davis submitted a loan application to Equipment Dealers Credit Company for the purchase of a New Holland TS110 Tractor and Bush Hog Front-End Loader. Id. at 826-27. He indicated on the application his address was located in Clark County, Arkansas. Id. The Clark County address was actually the location of his place of business. Id. at 828. Davis and his wife, who was a co-debtor in this action, resided in Hot Springs County, Arkansas, and had resided there for a number of years. Id.

At the time this case was filed, Arkansas Code Annotated Sec. 4-9-401(1)(a) mandated that financing statements on farm equipment were to be filed with the circuit clerk in the "county of the debtor's residence." Id. Therefore, in order to properly perfect its lien, it was necessary for the creditor to file the financing statement in Hot Springs County, Arkansas where the debtors resided.

The Arkansas General Assembly adopted substantial revisions to Article 9 of the Uniform Commercial Code after this case was filed. Id., n.1. However, because the Article 9 revisions are not retroactive, this case was decided under prior secured transaction law, and all citations to the Arkansas Code in this case were to the prior version of Article 9. Id.

In defense of its claim that it held a perfected security interest, Equipment Dealers contended that they should be able to maintain their perfected security interests in the tractor and bush hog because they relied in good faith on the debtors' assertion. Id. at 828. The trustee argued that the operation of 11 U.S.C. Sec. 544 shielded a trustee in bankruptcy from good faith defenses. Id.

Because the parties did not cite and the court did not find any cases in the bankruptcy court's jurisdiction analyzing this issue, the court relied upon a case from the U.S. Bankruptcy Court for the Western District of Kentucky stating that a bankruptcy trustee is "'insulated against the good faith exception and would easily prevail against an improperly perfected creditor.'" Id. (quoting In re Towery, 53 B.R. 76, 78 (Bankr. W.D. Ky. 1985)). The bankruptcy court also stated that the "Towery holding is consistent with the principle that 'the whole point of granting the trustee the rights of a hypothetical creditor is to avoid binding the trustee by particular representations that may have been made by debtor.'" Id. at 828-29 (quoting In re Sport Enterprises, Inc., 38 B.R. 282, 283 (Bankr. D.N.H. 1984)).

This case summary was prepared July, 2002.