Summary of a Recent
Judicial Development in
Secured Transactions

Perfected Purchase Money Security Interest
Trumps Competing Security Interests

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Chattanooga Agricultural Association v. Sapp, No. E-2003-01984-COA-R3-CV, 2004 WL 1434504 (Tenn. Ct. App. June 25, 2004), the Tennessee Court of Appeals held that a creditor's purchase money order security interest had been properly perfected, and thus took priority over competing security interests.

Background

The plaintiff, Chattanooga Agricultural Association, brought a complaint against the debtors and their other lender, Citizens Bank, to determine the extent and validity of the plaintiff's security interest in certain collateral. Id. at *1. When Citizens Bank lent money to the debtors, it did not conduct a UCC search because the loan was a purchase money transaction, but the debtors had informed Citizens Bank of their outstanding loan with the plaintiff. Id. at *2. The trial court found that Citizens Bank had a perfected purchase money security agreement and dismissed the plaintiff's complaint, and the plaintiff appealed. Id.

Arguments

The plaintiff argued that Citizens Bank's security interest was not properly perfected. Id.

Analysis and Holdings

Both parties agreed that pursuant to Tenn. Code Ann. § 47-9-312(4), "a purchase money security interest . . . has priority over a conflicting security interest, so long as the purchase money security interest was perfected at the time the debtor receives possession of the collateral or within 20 days thereafter." Id. The evidence showed that Citizens Bank had filed a financing statement detailing the collateral covered, and that it had received a stamped copy of these documents back from the Register's Office, but somehow the exhibit was never recorded. Id. at *3. The appellate court agreed with the trial court's determination that any mistake in the recording of the security interest was not Citizens Bank's fault, and therefore Citizens Bank's interest had been perfected. Id. Moreover, the trial court had determined from the record that the plaintiff had contacted Citizens Bank indicating that they had searched in the Register's Office and found the record that Citizens Bank claimed an interest in some property belonging to the debtors, and thus any requirements regarding notice were met. Id. at *2. The appellate court therefore affirmed the ruling of the trial court and held that Citizens Bank had a perfected purchase money security interest in the cattle which took priority over the plaintiff's conflicting security interest. Id. at *4.

The case was decided on June 25, 2004.