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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

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.

1.      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.

2.     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.

3.    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.

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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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