Utility Trailers of Wichita, Inc. v. Citizens Nat. Bank & Trust Co., 58609

• Decision Date: 21 August 1986
• Docket Number: No. 58609,58609
• Citation: 11 Kan.App.2d 421,726 P.2d 282
• Parties: , 2 UCC Rep.Serv.2d 38 UTILITY TRAILERS OF WICHITA, INC., Appellee, v. CITIZENS NATIONAL BANK & TRUST COMPANY, Emporia, Kansas, Appellant.
• Court: Kansas Court of Appeals

Page 282

726 P.2d 282

11 Kan.App.2d 421, 2 UCC Rep.Serv.2d 38

UTILITY TRAILERS OF WICHITA, INC., Appellee, v. CITIZENS NATIONAL BANK & TRUST COMPANY, Emporia, Kansas, Appellant.

No. 58609.

Court of Appeals of Kansas.

Aug. 21, 1986.

Publication Granted Sept. 23, 1986.

Syllabus by the Court

1. In the absence of written notice to the foreclosing creditor from a secured party, a foreclosing creditor has no affirmative duty under K.S.A. 84-9-504(3) to disclose either an impending sale or the name of the buyer after the sale to competing secured parties.

2. A foreclosing creditor has no affirmative duty under K.S.A. 84-9-504(3) to search the UCC files for a record of other secured parties prior to sale of collateral held as security by the creditor.

3. To retain a valid lien under K.S.A. 58-201, a lien holder in possession must file his lien, as provided, within forty-five days after parting with possession of the property. Only strict compliance with the provisions in the statute will give rise to an enforceable lien.

Thomas A. Krueger, of Krueger & Shaw, Emporia, for appellant.

Larry J. Putnam, of Putnam Law Offices, Emporia, for appellee.

Before BRAZIL, P.J., MEYER, J., and WILLIAM F. LYLE, JR., District Judge, assigned.

WILLIAM F. LYLE, Jr., District Judge, Assigned.

Citizens National Bank and Trust Company, Emporia, Kansas, appeals from the judgment of the trial court awarding Utility Trailers of Wichita, Inc., damages for Citizens' failure to provide notice to Utility Trailers prior to the sale of two refrigerated trailers, and for Citizens' subsequent failure to disclose to Utility Trailers the name of the purchaser. Citizens held security interests (K.S.A. 84-9-304) and Utility Trailers held mechanics' liens (K.S.A. 58-201) on the trailers.

The facts will not be repeated except as is necessary to address the issues herein.

The first issue raised on appeal is whether a security interest holder who sells its security has a duty to disclose to a mechanic's lien holder the name of the purchaser of the secured property. Our analysis of this issue will be expanded to encompass whether a foreclosing creditor has a duty to notify other secured parties of an impending sale.

Utility contends there is a duty owed by Citizens, holder of a chattel mortgage on which it foreclosed and sold the collateral, to disclose to Utility, a mechanic's lien holder, the name of the purchaser of the secured property. Citizens contends there is neither a common law nor a statutory duty to make such a disclosure.

A person who makes repairs on any trucks or trailers pursuant to the owner's request has a first and prior lien on that property for the full cost of his labor and materials. K.S.A. 58-201. A mechanic's lien "may be enforced and foreclosed as security agreements are enforced under the provisions of the uniform commercial code." K.S.A. 58-202.

K.S.A. 84-9-310 states the priority of mechanics' liens in relation to perfected security interests:

"When a person in the ordinary course of his business furnishes services or materials with respect to goods subject to a security interest, a lien upon goods in the possession of such person given by statute or rule of law for such materials or services takes priority over a perfected security interest unless the lien is statutory and the statute expressly provides otherwise." (Emphasis added.)

In both the official UCC Comment and the Kansas Comment to that section it is stated that the primary requirement is that the statutory lien holder be in possession of the goods. Under K.S.A. 58-201, however, a statutory lien claimant can retain the rights of a lien holder in possession if, within forty-five days of parting with possession, the lien is properly filed.

A properly filed statutory mechanic's lien may seriously decrease the value of a code security interest if, as in Kansas, the lien has priority over earlier perfected security interests. K.S.A. 58-201; K.S.A. 84-9-310. The rationale supporting this priority of interests is that the work of the mechanic's lien holder will enhance or preserve the value of the collateral of the secured party. Hockaday Auto Supply Co. v. Huff, 121 Kan. 113, 115, 245 Pac. 1013 (1926); Official UCC Comment to K.S.A. 84-9-310.

Utility analogizes its position as a mechanic's lien holder to that of a secured party with an interest superior to that of Citizens. K.S.A. 84-9-504 governs a secured party's right to dispose of collateral after default. K.S.A. 84-9-504(3) states the collateral may be disposed of in cases of non-consumer goods after proper notice to both the debtor and "to any other secured party from whom the secured party has received (before sending his notification to the debtor or before the debtor's renunciation of his rights) written notice of a claim of an interest in the collateral." (Emphasis added.)

Citizens does not contest this analogy but argues only that no notice was required to be given Utility pursuant to the statute since Utility failed to give Citizens written notice of its interest. Utility argues that the filing of its mechanic's lien fulfilled the requirement of written notice to the foreclosing creditor under the statute. Utility contends it was therefore entitled to notice of the impending sale of the collateral and that Citizens' failure to comply with this provision made it liable under K.S.A. 84-9-507(1) for the amount of Utility's lien.

K.S.A. 84-9-507(1) specifies the damage a party will incur for failure to give a prior lien holder notice: "If the disposition has occurred the debtor or any person entitled to notification or whose security interest has been made known to the secured party prior to the disposition has a right to recover from the secured party any loss caused by a failure to comply with the provisions of this part." Citizens admitted it failed to check the records for a prior interest in the collateral and failed to give Utility notice of the foreclosure sale.

The major issue in this case turns on whether the trial court's construction of K.S.A. 84-9-504(3) was correct. In ruling on the meaning and requirements of that statute, the lower court was stating a conclusion of law; appellate review of conclusions of law is unlimited. Baker v. R.D. Andersen Constr. Co., 7 Kan.App.2d 568, 571, 644 P.2d 1354, rev. denied 231 Kan. 799 (1982).

Utility's argument must fail. The 1976 amendment to K.S.A. 84-9-504(3) (Weeks) expedited foreclosure proceedings by shifting the burden of notice of a claim of an interest in the collateral to the competing secured parties.

"Under the old Code, the notice must be sent to both the debtor and 'except in the case of consumer goods to any other person who has a security interest in the collateral and who has duly filed a financing statement ... or who is known by the secured party to have a security interest in the collateral.' Failure to send notification of the sale to a competing secured party who has filed a financing statement subjects the foreclosing creditor to damages under § 9-507(1). And even if the competitor has not filed a financing statement, the foreclosing creditor violates § 9-504(3) by failing to send him notification if he has actual knowledge of the competitor's unperfected security interest. The burden of searching the files prior to foreclosure, as well as the danger that actual knowledge of a competitor may be imputed in a variety of ways, gives a bit of a chill to foreclosure under the old version of § 9-504(3). The 1976 amendments greatly aid the foreclosing creditor by requiring only that notification 'be sent to any other secured party from whom the secured party has received ... written notice of a claim of an interest in the collateral.' In other words, the burden is shifted to the competing secured party (junior or senior) to inform the foreclosing creditor of his interest. There is not [an] affirmative duty to search the UCC files prior to sale; nor need the foreclosing creditor fret about the danger of imputed knowledge." (Emphasis added.) Clark, The Law of Secured Transactions Under the Uniform Commercial Code, p 4.8[d] (1980).

Under K.S.A. 84-9-504(3), Citizens had no duty to search the file to locate even a senior secured party before proceeding to sell the collateral. Citizens' failure to give notice to Utility could not be construed to be bad faith...