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

FIRST NATIONAL BANK OF GLASGOW, Plaintiffand Respondent,

FIRST SECURITYBANK OF MONTANA, N.A., Defendant and Appellant.

APPEAL FROM: DistrictCourt of the Seventeenth JudicialDistrict, In and for the County ofValley, The Honorable LeonardLangen, Judgepresiding.

COUNSEL OF RECORD:

ForAppellant: Gallather,Archambeault & Knierim; Matthew Knierim, Glasgow, Montana

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

Submitted onBriefs: March 6, 1986 Decided: June 17,1386

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

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# *#L 8 ClerkMr. 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 JamesJ. 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 160Heifers, 2years

20 Bulls 400 Calves 140 Cattle Branded: RS (b)

70 together with theyoungandproduce 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 20miles East of Jordan onpremises owned by: JamesJ. Murnion A financing statementwas filed in Garfield County describing all livestock branded with the lazyTJbrand 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 FirstNational 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 "513yearling heifersbranded: Rafter B L.R. together with the young,products, and produce thereof and all similarproperty 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 cattlewould 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 thathe would be selling the heifers by November, 1980, and that part of the saleproceeds 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 agreementdeleted reference to the lazy TJ brand and described the collateral as located at Garfield, Custer,andValley 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 Securitywas claiming an interest in all of the cattle,not just the lazyTJ cattle. First Security'sloan 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 saleswere lost because First Security told potential purchasers that they would be sued for conversion if any of the proceeds were paid to FNB. When representativesof FNBdiscovered the situation,they offered to allow the funds tobe 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 accountpending 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 sinceno genuine issues ofmaterial fact remain. We turn to the issueofwhichbank has aprior 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 agreementas:350 Cows, 3 to 7years 160Heifers, 2years

20 Bulls 400 Calves CattleBranded: RS 

### (-1 140 70 However in boilerplate language the agreement also referred to "allother livestock and poultry now owned orhereafter at any time acquired

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# ..all of which are or will be located 20miles east of Jordan." In interpreting this security agreement we begin with the standard set out in 

### 5 30-9-110, MCA, which states: For thepurposes of this chapter any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifieswhat isdescribed. 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 descriptionof collateral in the security agreement is to act as a statuteof frauds. It allows discovery by creditorsof 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 CommercialCode pp. 787-88 (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 20 miles east of Jordan. The agreement refers to specific cattlewhich werebranded with the lazy TJbrand 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

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# ..now owned orhereafter 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. ~eb.

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 coveredby the agreement "areorwillbe 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 CaliforniaPump andManufacturingCo.

(9thCir. 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 locatedwithin thegeographicarea described. First Security argues the location should not be a limiting factor, but should be taken as a promise by the debtor tokeep the collateral at that location,and as an aidin describing the collateralrelyingon In reLee (E.D. Tenn. 1981), 32 U.C.C. Rep. 580. Even if thiswere so,we fail to

see how a security interest covering cattle located 20 miles east of Jordan onpremises 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 casewhere,had First Security foreseen this circumstance they would have drafted their security agreement to cover these cattle,but theydid not,and it doesnot. 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 heifersbranded Rafter B located atMcCone County onpremises 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 accordancewith 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 ingood faith in an improper place or not in all of the places requiredby this section is nevertheless effective with regard to any collateralas to which the filing compliedwith the requirements of this chapter and is alsoeffective with regard to collateral coveredby 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)

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was testimony adduced at the depositions that itwas "common bankingpractice" 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"isdefined as actual knowledge in S 30-1-201(25). There is no requirement that a party actually see the financing statement in order tohave 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 thepurchase 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 Fjeldheimwas financed at FNBwhich is located about one-half block away from First Security in Glasgow. In the financial statement Murnion told Tvedt tha.tFNB had loaned him the money to purchase the calves, and the amount of theloan. 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 thatwere financedby 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 willmarket. Here, First Securityknewnot 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 fromFNB as secured. This situation is clearly distinguishable from the situation in Taylor Rental Corp. v. FirstCitizens Bank (D.C. Mont. 1982), 539 F.Supp. 228, inwhich a computerized journal entry made by an accounting service in a confidential report provided by a parent company to a franchiser showed a bank loanby an unidentified bank. JudgeRattinheld 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 otherbank. Last, First Security argues that even if FNB has a purchasemoney security interest in the Rafter B heifers, the purchase money security interest does not extend to the progeny of theheifers. The security interestof FNB clearlydoes extend to the progeny of the heifers because the security agreement listsas collateral: 513yearlingheifersbranded: Rafter B LR together withyoung,products, and produce thereof and all similar property whenever acquired, located or to be located at McCone County onpremises 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 knowledgeof FNB's security interest.

We Concur: