What if a lien is mis-filed?

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Question:

My question concerns the filing of a UCC1. We have had a UCC search performed by an attorney in a farmer's county of residence, which doesn't show anything outstanding other than our lien, but the farmer listed another lender as lienholder on some of his equipment on his financial statement. I think the other lender may have filed in the wrong county. UCC law states that a filing made in good faith in an improper place is effective against any person who has knowledge of the contents of such financing statement. Do you know of any court cases that address this issue?

Answer:

The section of the UCC you have referenced is 9-401. Unfortunately the courts are split on the issue.

For example, I am aware of an Oklahoma case that considered a similar fact situation. In First State Bank of Talihina v. United Dollar Stores, 571 P.2d 444 (Okl. 1977), the debtors granted the bank a security interest in inventory, equipment, and other assets located in a retail store located in Talihina, Leflore County, Oklahoma. Underthe Oklahoma version of Article 9, the proper filing office for the filing of the financingstatement was in the central filing office in Oklahoma County, Oklahoma. The bank, however, filed in Leflore County. The debtors subsequently gave United Dollar Stores a security in the same collateral and United Dollar Stores properly filed its financing statement in Oklahoma County. Prior to being granted its security interest, United Dollar Stores was made aware of the fact the debtors had borrowed funds from the bank. The Court held that the knowledge alone of financing was not sufficient to prevent United Dollar Stores from having priority over the bank because it did not have actual knowledge of the contents of the financing statement filed by the bank. The Courtimplied if United Dollar Stores had actual knowledge of the security interest in the collateral claimed by the bank, the provisions of 9-401 would govern.

But the court in Missouri v. Kerr, 509 SW 2.2d 61 (Mo. 1974) held if a lender files centrally when it should have filed locally and a competing creditor discovers the financing statement in a search of the central records, the improper filing is clearly effective against the second creditor.

Another case held mere knowledge of the competing security interest made the improper filing effective even though the competing security interest holder never saw the financing statement. In re Davidoff, 351 F. Supp. 440, 11 UCC Rep. 607 ( SDNY 1972)

The court in In re Mistura, Inc. 705 F.2d 1495 (9th Cir. 1983) held the secured party making the erroneous filing had the burden of proving that the competing creditor had knowledge of the contents of the financing statement.

I suggest you have your attorney check to see if there have been any cases in your jurisdiction which have addressed the issue.

First published on BankersOnline.com 3/5/01