Opinion ID: 1149701
Heading Depth: 1
Heading Rank: 1

Heading: priority of the security interests

Text: Dentsply contends that equity should reinstate its security interest to the priority lost by the release of its financing statement in ignorance of the Bank's security interest. It relies on pre-Code case law [1] and on the terms of § 1-103. [2] That code section provides that unless displaced by the particular provisions of this Act the principles of pre-existing law and equity shall supplement the Code provisions. With narrowly-prescribed exceptions, the Code provides that a security interest is not perfected unless a financing statement is filed. [3] The filing requirements are mandatory. Our case law has given strict obedience to those commands. [4] A situation similar to that in the case at bar occurs when a perfected security interest has lapsed due to creditor's failure to comply with the Code's continued-perfection requirements. [5] When a lapse occurs the security interest  by uniform holdings  becomes unperfected as against all other interests. This results in the holder of a perfected security interest being advanced in priority, even though before the lapse that interest was junior. In these cases  it is reasoned  the prior secured party could have protected its rank of priority by complying with Code requirements for continued perfection. For purposes of determining priorities between competing interests the lapsed perfection is simply likened to a release made in ignorance of another security interest in the same res. Applying the rationale of lapsed perfection cases to the question at bar the security interest of Dentsply became unperfected when the release was effected. The Bank, as holder of a perfected security interest in the same res, eo instante advanced in priority thus defeating Dentsply's former superiority. Although strict adherence to the Code requirements may at times lead to harsh results, efforts by courts to fashion equitable solutions for mitigation of hardships experienced by creditors in the literal application of statutory filing requirements may have the undesirable effect of reducing the degree of reliance the market place should be able to place on the Code provisions. The inevitable harm doubtless would be more serious to commerce than the occasional harshness from strict obedience. [6] The proper place to file a security interest in collateral classified as business property, e.g. equipment and inventory, is in the office of the county clerk of Oklahoma County. [7] Dentsply contends that its filing in Cleveland County  though improper  should nonetheless be effective to give it priority under the terms of § 9-401(2). That code section provides that a filing which is made in good faith in an improper place is nevertheless effective against any person who has knowledge of the contents of such financing statement. The good-faith reference in the section requires that an attempt be made to file. But no amount of good faith can give effect to an entirely improper filing of a financing statement of which no one has knowledge. [8] For purposes of § 9-401(2) knowledge means actual knowledge or reason to have actual knowledge, and not constructive knowledge in any broader sense. [9] The Bank perfected its security interest after Dentsply's proper original filing in Oklahoma County but before the later improper Cleveland County filing. The financing statement that was improperly filed was not of record at the time Bank loaned money to the Debtor. Although Bank could not have had knowledge of the contents of that particular document at the time it made the loan, it could have had knowledge of the contents of the financing statement which was properly filed at that point in time. The two financing statements have the same contents. Would knowledge of the contents of the properly-filed  but later released  financing statement be knowledge of the contents of the subsequent improperly-filed financing statement within the meaning of § 9-401(2)? Other jurisdictions are not in accord as to the meaning of the code phrase in § 9-401(2) knowledge of the contents of such financing statement. Some courts have held knowledge of a creditor's prior security interest to be knowledge of the contents of such financing statement, [10] whereas others have reached the opposite conclusion. [11] Although the specific question here has not been settled, we have stated that when a subsequent lien claimant has notice of a prior lien, the priority of the earlier lien is not defeated because it was imperfectly filed. [12] According to the position taken by some scholars, the history of § 9-401(2) indicates that code section was intended to deal mainly with those situations in which a searcher actually stumbles across a improperly-filed financing statement. This school of thought regards assumptions that knowledge of the prior security interest equals to knowledge of the contents of the financing statement as overly broad. [13] The UCC comments to § 9-401(2) [14] state that by this provision the code rejects the view that an improperly-filed record is ineffective to impart notice to a person who knows of it. The pure race aspect of § 9-312(5) thus tends to be undermined when by an expanded reading of § 9-401(2) knowledge of a security agreement is deemed equivalent to knowledge of the contents of the financing statement. [15] Priority between two competing security interests is determined (1) by the order of filing, if both are perfected by filing or (2) if both do not perfect by filing, by the order of perfection irrespective of knowledge of a prior competing security interest. [16] Under a very broad construction of § 9-401(2), knowledge of a prior security interest would always result in subordination to that interest. A far more reasonable construction of the phrase knowledge of the contents of such financing statement might well be something more than mere knowledge of the prior security interest but less than a requirement that the subsequent creditor actually have seen the improperly-filed financing statement. In the instant appeal, it is not necessary to settle this precise point of law. Even though Dentsply seems to argue otherwise, the record clearly shows a stipulation of the parties that the Bank, at the time it made the loan to the Debtor, did not have the requisite actual knowledge of Dentsply's security interest and that the Bank did not later become familiar with the contents of Dentsply's financing statement. We hence need not decide here what information is necessary to meet the Code's requirement of knowledge of the contents of such financing statement. The benefit of the § 9-401(2) exception is clearly unavailable to Dentsply and the question must be saved for another day.