Konkel v. Golden Plains Credit Union

• Decision Date: 17 July 1989
• Docket Number: No. 88SC218,88SC218
• Citation: 778 P.2d 660
• Parties: 9 UCC Rep.Serv.2d 278 Bud KONKEL, d/b/a Konkel Equipment Company or Konkel Equipment Company, a corporation, Petitioner, v. GOLDEN PLAINS CREDIT UNION, Respondent.
• Court: Colorado Supreme Court

Page 660

778 P.2d 660

9 UCC Rep.Serv.2d 278

Bud KONKEL, d/b/a Konkel Equipment Company or Konkel Equipment Company, a corporation, Petitioner, v. GOLDEN PLAINS CREDIT UNION, Respondent.

No. 88SC218.

Supreme Court of Colorado En Banc.

July 17, 1989.

As Modified on Denial of Rehearing Sept. 18, 1989.

Johnson & McLachlan, George McLachlan, Lamar, for petitioner.

Cogswell & Wehrle, William E. Brayshaw and Russell K. Bean, Denver, for respondent.

VOLLACK, Justice.

Golden Plains Credit Union (Golden Plains) appeals the judgment of the court of appeals in Golden Plains Credit Union v. Konkel, 759 P.2d 788 (Colo.App.1988), holding that the trial court erred in concluding that Golden Plains lost its security interest in a farm combine purchased in Kansas and subsequently moved and sold in Colorado. We affirm in part and reverse in part and remand the case to the court of appeals with directions to remand for further hearings.

I.

Golden Plains is a Kansas credit union. On May 4, 1978, it financed the purchase of two 1978 John Deere combines ¹ by Duane Lewis, a farmer ² and custom cutter. ³ In May 1978, Golden Plains filed a financing statement for the combines with the registrar of deeds in Hamilton County, Kansas, the county in which Lewis resided.

In the latter half of October 1979, Lewis transported the combines from Hamilton County, Kansas, to a farm he had recently purchased in Baca County, Colorado. On February 7, 1980, Lewis sold one of the combines in Colorado to Bud Konkel (Konkel), doing business as Konkel Equipment Company. Konkel made no effort to determine whether a financing statement describing Golden Plains' security interest in the combine was filed, nor did he have actual knowledge of Golden Plains' security interest. Konkel later sold the combine to a Colorado farmer.

In April 1984, Golden Plains filed a complaint in the Baca County District Court against Konkel for conversion of the combine, seeking its return or damages. ⁴ Golden Plains moved for summary judgment against Konkel on the ground that Golden Plains held a security interest in the combine at the time Konkel bought the combine from Lewis. Konkel moved for summary judgment against Golden Plains on the ground that Golden Plains lost its security interest in the combine in 1980 when it failed to file a second financing statement in Colorado within four months of the date Lewis moved the combine to Baca County.

The trial court granted Konkel's motion for summary judgment. It made no attempt to classify the combine under the Kansas version of the Uniform Commercial Code (UCC or Code). Instead, it held that Golden Plains lost its security interest in the combine four months after Lewis moved the combine to Baca County, Colorado, pursuant to section 84-9-103(1)(d) of the law of Kansas.

The court of appeals reversed the judgment of the trial court. It first found that Golden Plains had perfected its security interest in the combine in May 1978 by filing its financing statement in Hamilton County, Kansas. The court of appeals relied on Sequoia Machinery, Inc. v. Jarrett, 410 F.2d 1116 (9th Cir.1969), in concluding the combine was properly classified as "equipment used in farming operations" under section 84-9-401(1)(a) (1983) of the law of Kansas because the combine was "specifically designed to be used for farming functions." Golden Plains Credit Union v. Konkel, 759 P.2d at 790. The court of appeals noted that the proper place for a creditor to file a financing statement and thereby perfect its security interest in a combine is the office of the registrar of deeds in the county in which the debtor resided, a procedure that was followed in this case.

The court of appeals then concluded that the trial court erred in concluding that Golden Plains lost its security interest in the combine under section 84-9-103(1)(d)(i) four months after the combine was "brought into" Colorado. Instead, the court of appeals found that the applicable Kansas statute was section 84-9-103(3) (1983 & 1988 Supp.), governing "mobile goods." It noted that section 84-9-103(3)(a) and the Code commentary listed "commercial harvesting machinery" as an "excellent example" of mobile goods. It concluded that Golden Plains retained its security interest in the combine under section 84-9-103(3)(e) until four months after "a change of the debtor's location to another jurisdiction." The court of appeals remanded the case to the trial court for a factual determination of whether Lewis had "changed his location" within the meaning of section 84-9-103(3)(d) when he moved the combine to Colorado in October 1979.

We granted certiorari to determine two issues: first, whether Golden Plains properly perfected its security interest in the combine in May 1978; and second, assuming that Golden Plains had properly perfected its security interest in May 1978, whether Golden Plains lost its security interest in 1980 by failing to file a new financing statement in Colorado within four months of the time the debtor moved the combine to Baca County, Colorado.

II.

A.

Resolution of the first issue requires us to examine the efficacy of the "normal use test" in classifying collateral under the Kansas equivalent of section 9-401(1)(a) of the Code. Konkel argues that Golden Plains never perfected its security interest in the combine in May 1978 because Golden Plains did not file its financing statement in the Office of the Kansas Secretary of State. Implicit in this is the argument that the combine is equipment other than "equipment used in farming operations" within the meaning of section 84-9-401(1)(a) of the law of Kansas. ⁵ Golden Plains contends that this argument should not be addressed because it was raised for the first time before the court of appeals. Golden Plains argues that its security interest was properly perfected in May 1978 because the combine is "equipment used in farming operations" within the meaning of section 84-9-401(1)(a) of the law of Kansas.

While the thrust of the arguments in the district court hearing of October 23, 1985, centered on whether Golden Plains' security interest remained in effect after Lewis brought the combine to Colorado in the latter half of October 1979, Konkel's attorney did raise the issue of whether Golden Plains' security interest was properly perfected in May 1978. The attorney noted that equipment such as a combine may alternately be classified as farm equipment, requiring filing in the county of the debtor's residence, or commercial equipment, requiring filing with the Kansas Secretary of State. He argued that by classifying the combine as commercial equipment requiring filing with the Kansas Secretary of State, Golden Plains' filing in Hamilton County was "an erroneous filing, and [Golden Plains] [hasn't] continued that. That would be by operational [sic] law in '78-'83, five years." The lawyer cited Mountain Credit v. Michiana Lumber & Supply, Inc., 31 Colo.App. 112, 498 P.2d 967 (1972), to support this argument. Mountain Credit concerns whether a creditor failed to perfect its security interest by filing a financing statement in the wrong place. From this, we conclude that the issue of perfection of Golden Plains' security interest in May 1978 was properly raised before the district court. We therefore must consider the merits of this argument.

Under Kansas law, the proper place to file a financing statement and thereby perfect a security interest is generally in the office of the secretary of state. Kan.Stat.Ann. § 84-9-401(1)(c) (1983 & 1988 Supp.). The practice of filing with the secretary of state, known as "central filing," however, is subject to a number of exceptions. ⁶ When the debtor is a resident of the state, the proper place to file a financing statement for collateral properly classified as "equipment used in farming operations," for example, is "in the office of the registrar of deeds in the county of the debtor's residence." ⁷ The practice of filing in the county of the debtor's residence is known as "local filing." If the combine is properly classified as "equipment used in farming operations," then Golden Plains' local filing was sufficient to perfect its security interest in the combine. If the combine is properly classified as equipment other than equipment used in farming operations, however, then central filing would be required to perfect Golden Plains' security interest in the combine. In order to determine whether the court of appeals erred in concluding that central filing was not required to perfect Golden Plains' security interest, we must first classify the collateral. In re Reier, 53 B.R. 395, 396 (Bankr.S.D.Ohio 1985).

In jurisdictions such as Kansas that adopt the second alternative subsection (1) of section 9-401 of the UCC, ⁸ the most difficult problem involving equipment not subject to a certificate of title law "is drawing the line between 'equipment used in farming operations,' which normally requires local filing, and commercial equipment, which normally requires central filing." B. Clark, The Law of Secured Transactions Under the Uniform Commercial Code p 8.3[a], at 8-8 (1980). The problem arises because the UCC does not define the phrase "equipment used in farming operations." See 1 P. Coogan, W. Hogan, D. Vogts & J. McDonnell, Secured Transactions Under the Uniform Commercial Code § 6.03[a], at 6-34 (1989) ("[i]nartful drafting [of the phrase 'equipment used in farming operations'] has unintentionally produced a 'trap for the unwary' ").

As a result of this statutory ambiguity, courts have devised a number of tests to determine whether the collateral is properly classified as equipment used in farming operations. One such test is the "normal use test," which focuses on the inherent qualities of the collateral and the uses to which such collateral would normally be put. The leading case advocating the normal use test is Sequoia Machinery, Inc. v. Jarrett, 410 F.2d 1116 (9th Cir.1969)....