State Sav. Bank of Hornick v. Onawa State Bank of Onawa
| Decision Date | 22 May 1985 |
| Docket Number | No. 84-380,84-380 |
| Citation | 40 UCC Rep. 1906,368 N.W.2d 161 |
| Parties | 40 UCC Rep.Serv. 1906 STATE SAVINGS BANK OF HORNICK, Iowa, Appellant, v. ONAWA STATE BANK OF ONAWA, Iowa, Appellee. |
| Court | Iowa Supreme Court |
Craig A. Raby and Daryl L. Hecht of Crary, Huff, Clem, Raby & Inkster, P.C., Sioux City, for appellant.
Donald H. Capotosto of Morrow, Allen and Capotosto, Onawa, for appellee.
Considered by McCORMICK, P.J., and McGIVERIN, SCHULTZ, CARTER and WOLLE, JJ.
This appeal presents two banks dueling over the proceeds from the sale of construction equipment of a mutual debtor, each claiming priority with respect to this collateral through its respective security agreement and financing statement. The State Savings Bank of Hornick, Iowa, (Hornick Bank) brought this action against the Onawa State Bank of Onawa, Iowa, (Onawa Bank) for an accounting of the funds it received from the sale of the collateral of the mutual debtor, Roy B. Johnston. After trial to the court the district court dismissed the Hornick Bank's action. On appeal we transferred this case to the court of appeals which affirmed the trial court ruling. We granted further review and vacate the decision of the court of appeals. We reverse and remand to the district court.
At this stage of the action the facts are largely undisputed. In May 1972 Johnston borrowed money from the Onawa Bank which took a security interest in his business equipment. Although the financing statement should have been filed with the Secretary of State, the Onawa Bank filed it with the Woodbury County Recorder. In 1976 the Hornick Bank loaned Johnston money; it also took a security interest in his business equipment. On March 29, 1976, the Hornick Bank filed its financing statement with the Secretary of State. The Hornick Bank was aware that Johnston had used his business equipment as collateral for a loan from the Onawa Bank.
Both banks continued to do business and rely upon their respective security interests. The Onawa Bank filed a continuation statement with the Woodbury County Recorder in April 1977. The Hornick Bank filed a continuation statement with the Secretary of State in February 1981. On May 21, 1981, the Onawa Bank filed a financing statement dated May 14, 1981, with the Secretary of State.
Johnston ceased business as a construction contractor at the end of 1981. He sold his equipment at public auction in the summer of 1982 and applied the proceeds of the sale to his loan with the Onawa Bank. The proceeds of the sale were insufficient to satisfy the secured loan of either bank.
In the action that led to this appeal, the Hornick Bank claimed priority over the proceeds from the sale of the collateral by virtue of its perfected security interest, properly filed with the Secretary of State. The trial court rejected this contention, finding that although the Onawa Bank's prior financing statement was filed in the wrong office, it was effective against the Hornick Bank pursuant to Iowa Code section 554.9401(2) (1983) because the Hornick Bank had knowledge of its contents.
On appeal the Hornick Bank challenged the trial court's fact-finding that it had knowledge of the contents of the Onawa Bank's financing statement and the trial court's failure to hold that the Onawa Bank's security interest lapsed pursuant to Iowa Code section 554.9403(2) (1983). On further review before this court the Hornick Bank abandoned its first argument, relying solely on the issue of the effectiveness of the five-year lapse provision contained in subsection 554.9403(2). Before addressing the merits of this contention, we shall examine the Onawa Bank's claim concerning error preservation. The Onawa Bank contends that the issue of the alleged lapse of its financing statement was neither pleaded nor raised in the trial court. We find no merit in this contention.
We agree with the statements of both parties that matters not raised in the trial court cannot be raised for the first time on appeal. This situation does not exist in the present case, however. Although the Hornick Bank's petition did not refer specifically to a lapse pursuant to subsection 554.9403(2), it did refer to the Hornick Bank's continuation statement, asserting that the Hornick Bank has a superior position concerning the proceeds from the sale of the collateral. Under notice pleading, Iowa R.Civ.P. 69(a), a petition is not required to identify a specific legal theory; "it is sufficient if the petition apprises a defendant of the incident giving rise to the claim and of the general nature of the action." Soike v. Evan Matthews and Co., 302 N.W.2d 841, 842 (Iowa 1981). Not only did the petition give the defendant fair notice of the claim, but we also note that both parties address the issue of lapse under subsection 554.9403(2) in their trial briefs. The contention that error was not preserved is without merit.
In order to discuss whether the Onawa Bank's financing statement lapsed, we will briefly review our statutory scheme concerning priority among conflicting security interests and the perfection of a security interest. We limit this discussion to rights between creditors rather than rights between the creditor and the debtor.
Our present statutory scheme allocates priority among conflicting security interests in the same collateral, such as the non-purchase money security interest in equipment we have here, according to the time of filing or perfection. Iowa Code § 554.9312(5)(a)(b) (1983). Prior to the adoption of the Uniform Commercial Code in 1965, presently chapter 554, an unrecorded or improperly recorded security instrument was only invalid against a party without notice. Zacharia v. M.C. Cohen Co., 140 Iowa 682, 685, 119 N.W. 136, 137 (1909). Following the statutory change the time of perfection became the key element in priority.
Perfection may be accomplished by filing a financing statement in the proper place; a financing statement also is effective against any person who has knowledge of the contents if there has been a good faith filing in an improper place. § 554.9401. As we have indicated, the Onawa Bank filed its financing statement in an improper place; nevertheless, its filing was effective against the Hornick Bank due to the Hornick Bank's knowledge of the contents.
With these principles in mind, we now address the issue of whether a lapse occurred causing a perfected security interest to become unperfected. The Hornick Bank claims that the effectiveness of the Onawa Bank's security interest lapsed when the Onawa Bank failed to properly file a continuation statement with the Secretary of State pursuant to Iowa Code section 554.9403(2). The Onawa Bank, on the other hand, maintains that it filed a continuation statement with the Woodbury County Recorder which prevented lapse. These contentions require our examination of subsection 554.9403(2) which provides in pertinent part as follows:
Except ..., a filed financing statement is effective for a period of five years from the date of filing. The effectiveness of a filed financing statement lapses on the expiration of the five-year period unless a continuation statement is filed prior to the lapse.... Upon lapse the security interest becomes unperfected, unless it is perfected without filing. If the security interest becomes unperfected upon lapse, it is deemed to have been unperfected as against a person who became a purchaser or lien creditor before lapse.
Subsection 554.9403(2) clearly limits the effectiveness of a perfected financing statement to a period of five years from the filing date. The security interest then lapses and is deemed to be unperfected unless a continuation statement is filed prior to the expiration of the five-year period. Unlike section 554.9401 which specifies the proper place to file a financing statement to perfect a security interest, section 554.9403 does not designate the proper place to file a continuation statement. The Hornick Bank asserts that the proper place to file a continuation statement would be the place designated in section 554.9401 for filing a financing statement, the office of the Secretary of State. The Onawa Bank contends that the only place it could file a continuation statement was the place where the financing statement was filed, the Woodbury County Recorder's Office. The court of appeals held that...
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