SO ORDERED. SIGNED this 12 day of May, 2005. |
|
____________________________________________________________
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In re:) JERRY JOEL CRUZ and) TERRI ANN CRUZ,) Debtors.) ____________________________________) |
Case No. 04-43119-13 |
MEMORANDUM ORDER AND OPINION GRANTING DEBTORS' OBJECTION TO
CLAIM OF FARMERS STATE BANK AND OVERRULING DEBTORS'
OBJECTION TO CLAIM OF KAW VALLEY STATE BANK
This matter is before the Court on Debtors' Objection to Claim Number 8, filed by Farmers
State Bank, and Debtors' Objection to Claim Number 11 filed by Kaw Valley State Bank & Trust.1
The Court heard evidence on this matter, and finds that Kaw Valley's lien in the John Deere tractor is
superior to that of Farmers.
1Docs. 34 and 68.
FINDINGS OF FACT
On June 13, 2002, Debtors entered into a Commercial Security Agreement (“Kaw Valley
Agreement”) withKaw ValleyState Bank & Trust Company(“Kaw Valley”),inexchange fora loanfrom
Kaw Valley. The Kaw Valley Agreement listed the “Debtor” as:
JERRY CRUZ JR. AND TERRI A. CRUZ
DBA ONE OF A KIND
Debtors signed the Kaw Valley Agreement in their own names, however, and not in any representative
capacity for the entity “One of a Kind,” which the Court understands was a sole proprietorship.
In the Kaw Valley Agreement, Debtors gave Kaw Valley a security interest in all their accounts,
inventory, equipment, instruments and chattel paper,documents,farmproducts and supplies, government
payments and programs, investment property and deposit accounts. The Kaw Valley Agreement also
containedan after-acquired property clause, giving Kaw Valley asecurityinterestnotonlyinthe property
Debtors owned as of June 13, 2002, but also any property described in the security agreement that
Debtors obtained at any time in the future.2
Kaw Valley properly filed afinancingstatement withthe Kansas Secretary of State in connection
with the Kaw Valley Agreement. A records search with the Secretary ofState would have revealed that
(1) Kaw Valleyfiled the financing statement on June 18, 2002; (2) the borrowers in the transaction were
2The Kaw Valley Security Agreement indicates that “Debtor gives [Kaw Valley] a security interest in all of the Property described in this Agreement that Debtor owns or has sufficient rights in which to transfer an interest, now or in the future, wherever the Property is or will be located, and all proceeds and products of the Property.” (Emphasis added)
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Jerry J. Cruz, Jr. and Terri Ann Cruz; and (3) that Kaw Valley was claiming a security interest in “All
inventory, chattel paper, accounts, contract rights, inventory, equipment, general intangibles, furniture,
fixtures, machinery and all other business assets; whether any of the foregoing is owned now or acquired
later; all accessions, additions.”3 The financing statement filed with the Secretary of State's office makes
no mention of Debtors' trade name.
In August or September 2004, Jerry Cruz received a 1968 John Deere tractor as a gift from his
mother. After receiving the tractor, the Debtors took out a loan with Farmers State Bank (“Farmers”) and
gave Farmers a security interest in the tractor as collateral for that loan. Debtors informed Farmers that
the tractor was unencumbered. Farmers did not verify with the Kansas Secretary of State whether the
tractor was encumbered; it instead decided the search wasunnecessary given the relatively small amount
of the loan. Farmers thus simply relied upon Debtors' assertion that the tractor was unencumbered.
At the time Debtors entered into the Kaw Valley Agreement, they were engaged in a custom
furnituremakingbusinessknownas “One ofa Kind.” The furniture business was abandoned based on lack
of profitability, and Debtors began a new business, a milling operation under the name of “Log N Logs.”
The JohnDeere tractor was neverused byDebtors in the operation ofthe furniturebusiness,but was used
in the milling operation. The fact that the tractor was used for business purposes is supported by the
security agreement with Farmers, which states that “Borrower will use Collateral listed in this Security
Agreement for: Business purposes.”
3The Court takes judicial notice that the cost for
conducting such a search is $20 per debtor
name.
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DebtorsfiledtheirChapter 13 bankruptcypetitiononNovember 5, 2004. Both Farmers and Kaw
Valley filed proofs of claim, and both claimed a security interest in the John Deeretractor. Debtors have
objected to bothcreditors' claims inaneffortto determine whichcreditor holds the superior lien. Debtors
do not contest the fact that both creditors' validly perfected a security interest, but understandably, wish
to pay the value of the tractor to only one creditor through their Chapter 13 plan.
Neither Farmers nor Kaw Valley challenge that the other properly perfected their respective
securityinterests. Thus, the only issue before the Court is whether the Kaw Valley Agreement entered into
onJune 13, 2002 created a security interest in the after-acquired 1968 John Deeretractor. If it did, Kaw
Valley's interest is superior to that of Farmers, because it was filed first.
CONCLUSIONS OF LAW
Farmersmakestwo arguments why Kaw Valley'sAgreement did notprovideita securityinterest
inthe John Deere tractor. First, Farmers argues that the Kaw Valley Agreement did not the cover after-
acquiredproperty, since it wasundisputedthatDebtors did notownthe tractor at the time the Kaw Valley
Agreement was signed. Although Kaw Valley's witness attrialwas unable to point to the after-acquired
property clause in its own Agreement, the security agreement was introduced as evidence. It clearly
contains an after-acquired property clause. The inability of the witness to find the appropriate language
containingthe after-acquiredpropertyclausedoes notnegate the clearevidencethatsucha clauseexisted.
The second argument raised by Farmers is that there is no evidence the tractor was used for
businesspurposes, and thereforethe Kaw ValleyAgreement did notapplytothatpieceofequipment. The
Court disagrees. The testimony from Ms. Cruz clearly established that the tractor was used in their
business, ratherthanat their home,to move logs forthe milling business. At the time Debtors entered into
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the Kaw Valley Agreement, they were operating under the trade name ofOne ofa Kind, rather than Log
N Logs, the trade name they used after acquiring the tractor. However, the Court finds that the change
of trade names does not render the security agreement between Kaw Valley and Debtors ineffective.
The Kaw ValleyAgreement was betweenKaw Valleyand Debtors as individuals,as One ofKind
was not a formal business entity. In addition, the financing statement filed by Kaw Valley listed each of
Debtors' names, not One of a Kind, so Farmers could not have been misled, in any way, as to Kaw
Valley's security agreement based upon the UCC filing with the Kansas Secretary of State. In fact, the
use of Debtors' trade name in the financing statement filed by Kaw Valley was neither necessary, nor
would ithave beensufficient iffiled without including Debtors' individual names.4 In addition, the security
agreement between Farmers and Debtors also indicates that the tractor was to be used for business
purposes. The evidence presented at trial clearly demonstrates that this tractor was used in the business
and that it was covered by the Kaw Valley Agreement.
Farmers also contends that because they relied upon Debtors' assertions that the tractor was
unencumbered, it should prevail in this matter. The Court need not make a finding at this time whether
Debtors were simply mistakenwhentheyinformedFarmersthatthe tractor was unencumbered, or if they
intentionallymisledFarmers, because thatfindingisimmaterialindeterminingthe relative prioritiesbetween
Kaw Valley and Farmers. What is relevant is that Kaw Valley did nothing to mislead Farmers.
Kaw Valleyproperlyfileda financingstatement withthe Kansas SecretaryofState. That financing
statement clearlyinformedFarmersofKaw Valley'sinterest. Unfortunately for Farmers, it chose to simply
4See K.S.A. 84-9-503.
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accept Debtors' expressed belief regarding the tractor's status rather than pay the small fee required to
have the SecretaryofState conduct a records check. A major purpose for centralized filing is to allow a
potential lender to determine for itself if another lender claims an interest, without having to rely on an
unsophisticated, misinformed or dishonest debtor.5 Farmers'decisionnot to avail itself of this procedure
is now fatal to its claim.
CONCLUSION
For the reasons stated above, the Court finds that Kaw Valley's perfected security interest in
Debtors' 1968 JohnDeere tractor haspriorityover Farmers'claiminthattractor. Furthermore, the Court
ruled from the bench, after the trial, that the tractor is valued at $7,000 and that the remainder of Kaw
Valley'scollateralisworthlessthanitsdebt.6 As a result, Farmers' claim is thus totally unsecured, as there
is no equity available for its claim. Debtors' objection to Farmers' claim is thus sustained on that basis.
Because the Court has found that Kaw Valley does have a secured interest in the tractor, the Court
overrules Debtors' objection to Kaw Valley's claim to that extent. Kaw Valley's claim is allowed as
secured to the value of all its collateral, and is allowed as unsecured for any remaining balance.
5Cf. Kruckenberg v. First National Bank of Medicine Lodge (In re Kruckenberg), 160 B.R. 663, 671 (D. Kan. 1993). It is entirely conceivable that an unsophisticated borrower would not understand that a loan document entered into two years before his or her acquisition of property could result in that later acquired property being encumbered. The only Debtor who testified, Ms. Cruz, impressed the Court as such an unsophisticated borrower; the Court did not get the impression that she and her husband knew the property was encumbered and simply tried to fool Farmers. Debtors knew they had just acquired the tractor at the time they approached Farmers for the loan, and Ms. Cruz's testimony that she did not realize the legal implication of an after-acquired clause was credible.
6At the trial, the Court announced its finding regarding valuation and requested Debtors'
counsel submit the order. As of the date of this opinion, that order has not been submitted to the Court for review.
6
IT IS, THEREFORE, BY THIS COURT ORDERED that Debtors' Objection to Claim
Number 8 filed by Farmers State Bank (Doc. 34) is sustained, and that Debtors' Objection to Claim
Number 11 filed by Kaw Valley State Bank & Trust (Doc. 68) is denied to the extent it objected to
Kaw Valley State Bank & Trust's claim to a security interest in the Debtor's 1968 John Deere tractor.
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