Bank of Danville v. Farmers Nat. Bank of Danville, Ky.

• Decision Date: 24 June 1980
• Citation: 29 UCC Rep. 1020,602 S.W.2d 160
• Parties: 29 UCC Rep.Serv. 1020 BANK OF DANVILLE, Movant, v. FARMERS NATIONAL BANK OF DANVILLE, KENTUCKY, Respondent.
• Court: United States State Supreme Court — District of Kentucky

Page 160

602 S.W.2d 160

29 UCC Rep.Serv. 1020

BANK OF DANVILLE, Movant, v. FARMERS NATIONAL BANK OF DANVILLE, KENTUCKY, Respondent.

Supreme Court of Kentucky.

June 24, 1980.

Rehearing Denied Sept. 2, 1980.

James William Barnett, Sheehan, Barnett & Hays, Danville, for movant.

Nelson D. Rodes, Jr., Danville, for respondent.

STERNBERG, Justice.

This action involves the priority of a security agreement and financing statement of the Bank of Danville and Farmers National Bank of Danville. Hereafter, for brevity, we will refer to the Bank of Danville as the "Bank" and to Farmers National Bank of Danville as "Farmers."

Garnett Baugh and Gertrude Baugh, his wife, throughout a period of several years had executed to the Bank four separate evidences of indebtedness and were in default on each of them. The unpaid balance on the combined indebtedness was $44,275.11. One of the evidences of indebtedness, being the document under consideration, is a security agreement in the original sum of $29,778.72. It was dated February 6, 1975, and was recorded in the office of the County Court Clerk of Boyle County, Kentucky, on February 19, 1975. The property covered by the security agreement consists of cattle, farm machinery, and the 1975 tobacco and barley crops. The collateral was described in general terms. On the security agreement the Baughs' address is stated to be "315 Forrest Avenue, Danville, Kentucky 40422." Numerical paragraph 3 of the security agreement provided that "The Collateral will be kept at the address indicated in the heading, otherwise will be located at: on farm of Dale Wilson on Lancaster Road, 4 miles from Danville, Boyle County, Kentucky. * * * "

On April 8, 1975, the Baughs executed a financing statement and a security agreement to Farmers. The financing statement was taken as evidence of additional collateral for a loan in existence at the time in the principal sum of $9520. On the same date that the financing statement was executed, it was filed in the office of the County Court Clerk of Boyle County, Kentucky. The security agreement was never filed for record. The collateral is described as "one-half interest in 48,900 lb. tobacco to be grown on Kenneth Bailey (formerly Dale Wilson) farm Lancaster Road, Danville, Ky. 40422." Each of the banks is claiming priority to the proceeds of the sale of the 1975 tobacco crop. By certified mail Farmers notified all three of the tobacco warehouses in Danville that it had a mortgage on the tobacco crop and directed that payment for the sale be made by check payable to Garnett Baugh, Dale Wilson and Farmers National Bank. As a matter of fact, there was no mortgage. There was a financing statement and a security agreement, but no mortgage. The Bank did not write a letter to any of the three warehouses notifying them of its recorded lien. The Bank depended on Baugh to receive the money from the proceeds of the sale of his tobacco and, on his own volition, to pay their account. Farmers received four payments from the Burley Tobacco Warehouse for the sale of the subject tobacco crop which totaled the sum of $22,619.77. Disbursement was made by Farmers without checking the records in the county clerk's office to ascertain whether there were any recorded encumbrances and without inquiring of anyone of the existence of any other claim.

Farmers argues that by reason of the failure of the Bank to properly describe in its security agreement the real estate on which the tobacco was to be grown, the security agreement is not enforceable. The statutes on which Farmers predicates its claim are KRS 355.9-203(1)(b) and KRS 355.9-402(1), and so far as applicable, they provide as follows:

"355.9-203. Enforceability of secured interest Proceeds, formal requisites. (1) Subject to the provisions of KRS 355.4-208 on the security interest of a collecting bank and KRS 355.9-113 on a security interest arising under the article on sales, a security interest is not enforceable against the debtor or third parties unless

(b) the debtor has signed a security agreement which contains a description of the collateral and in addition, when the security interest covers crops * * * a description of the land concerned. * * * "

"355.9-402. Formal requisites of financing statement Amendments. (1) A financing statement is sufficient if it is signed by the debtor and the secured party, gives an address of the secured party from which information concerning the security interest may be obtained, gives a mailing address of the debtor and contains a statement indicating the types, or describing the items, of collateral. A financing statement may be filed before a security agreement is made or a security interest otherwise attaches. When the financing statement covers crops growing or to be grown * * * the statement must also contain a description of the real estate concerned. * * * "

On May 3, 1977, the trial court entered an "Opinion and Order" in which, among other issues, it decided that (1) the security agreement held by the Bank on the 1975 tobacco crop of Garnett Baugh did not properly describe the land concerned, therefore was not valid, and (2) Farmers had no authority to distribute the proceeds of the sale which exceeded that which it paid to itself in satisfaction of Baugh's indebtedness to it. On March 28, 1978, the trial court entered a new "Opinion and Order" in which it changed its former holding and held that (1) the security interest of the Bank was adequate with respect to the crops and location of the farm on which they were to be grown, and (2) Farmers had no authority to distribute the proceeds of the sale which exceeded that which it paid to itself in satisfaction of Baugh's indebtedness to it. This part of the court's new "Opinion and Order" is the same as its counterpart in the May 3, 1977, "Opinion and Order."

On appeal to the Court of Appeals of Kentucky, the judgment of the trial court was reversed. On February 7, 1980, this court granted discretionary review. Three issues are presented on this appeal.

I

Did the security agreement, dated February 6, 1975, from Garnett Baugh and Gertrude Baugh to Bank of Danville, which was filed on February 19, 1975, in the office of the Clerk of the Boyle County Court, create a valid and perfected security interest in Garnett Baugh's interest in the 1975 tobacco crop grown on the farm of Dale Wilson on the Lancaster Road, four miles from Danville, in Boyle County, Kentucky?

The first issue challenges the sufficiency of the description of the real estate concerned. The res is the crops. The security agreement must contain a description of the land on which they are grown. The challenged security agreement describes the collateral as: "Also the 1975 tobacco crop and 80 acres of Barley." The collateral will be kept at Baugh's mailing address, heretofore set out, or it will be located on what is known as the Dale Wilson farm. For what purpose is the filing of a security agreement made? This inquiry, even to a first-year law student, would be an embarrassment. It gives notice to the world that the Bank claims an interest in Baugh's 1975 tobacco crop, which is located at and grown on the Dale Wilson farm. Not only a Dale Wilson farm that may be located at some point and on some road in Boyle County, Kentucky, other than Lancaster Road, but it refers to the Dale Wilson farm located on Lancaster Road, four miles from Danville, Kentucky. It is not stated nor argued to be nor inferred that Dale Wilson was at the time the security agreement or financing statement was executed the owner of the farm, merely that for some reason or other the property had become known as the Dale Wilson farm. It may have been, and the record seems to reflect, that at one time Dale Wilson did own the subject land but had sold it prior to the growing of the 1975 crops.

We gather from the brief submitted by Farmers that only a "metes and bounds" description is adequate to satisfy the statutory requirements. A statement in such words that will enable anyone searching the records in the county court clerk's office to locate the whereabouts of the farm where the crops are to be grown is sufficient. Lancaster Road 4 miles from Danville, Kentucky known as Dale Wilson farm is such a description. How could anyone not locate the subject property? As to a description of the land concerned, or as to a description of the land on which the collateral would be kept, or as to a description of the land where the collateral may be located permits a liberal construction to meet the language of the statute.

Farmers' conduct in this proceeding is best described as the pot calling the kettle black. In the security agreement executed by Baugh to Farmers on April 8, 1975, the collateral is described as "one-half interest in 48,900 lb. tobacco to be grown on Kenneth Bailey (formerly Dale Wilson) farm, Lancaster Road, Danville, Ky. 40422." In the financing statement executed by Baugh to Farmers, the property is described as "One-half (1/2) interest in 48,900 lb. tobacco grown on the Kenneth Bailey farm (formerly Dale Wilson farm, and also known as the John C. Robinson farm) Lancaster Road, Danville, Boyle County, Kentucky." Even the letter of notification dated November 21, 1975, from Farmers to the Burley Tobacco Warehouse refers to "under contract with Dale...