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THE FOUR COUNTY BANK v. TIDEWATER EQUIPMENT CO

GEORGIA COURT OF APPEALS  771 S.E.2D 437 (GA. CT. APP. 2015)

In June 2003 and November 2005, The Four County Bank (“the Bank”) provided financing for the purchase of two different pieces of foresting equipment known as “Tigercats” by Shepherd Brothers Timber Company, LLC (“Shepherd”). The Bank perfected its security interests in both pieces of equipment by filing financing statements. While the Bank’s original financing statements were still effective, Shepherd sold both pieces of equipment to Tidewater Equipment Company (“Tidewater”), which later resold them. In October 2008 and March 2011, more than five years after the filing of each of the original financing statements, the Bank attempted to file continuation statements as to the equipment. After Shepherd declared bankruptcy, the Bank sued Tidewater to recover the equipment or its value. On appeal from the trial court’s grant of summary judgment to Tidewater, the Bank argued that Tidewater was liable for the value of the equipment because Tidewater should have known of the Bank’s perfected security interest at the time Tidewater resold the equipment.

BRANCH, JUDGE
The Bank first asserts that the trial court erred when it granted Tidewater summary judgment because the Bank’s security interests were perfected at the time Tidewater took possession of the equipment. We disagree.
OCGA § 11-9-515, Georgia’s version of Article 9, Section 515 of the Uniform Commercial Code (UCC), provides in relevant part as follows:
(a) Five-year effectiveness. Except as otherwise provided in subsection (d) of this Code section [concerning the effects of filing continuation statements], a filed financing statement is effective for a period of five years after the date of filing or until the twentieth day after any earlier maturity date required to be specified on the filed financing statement.
(b) Lapse and continuation of financing statement. The effectiveness of a filed financing statement lapses on the expiration of the period of its effectiveness unless before the lapse a continuation statement is filed pursuant to subsection (c) of this Code section. Upon lapse, a financing statement ceases to be effective and any security interest or agricultural lien that was perfected by the financing statement becomes unperfected, unless the security interest is perfected otherwise. If the security interest or agricultural lien becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.
(c) When continuation statement may be filed. A continuation statement may be filed only within six months before the expiration of the five-year period specified in subsection (a) of this Code section or the occurrence of any earlier maturity date required to be specified on a filed financing statement.
Here, although the Bank had perfected its security interests in both pieces of equipment by filing financing statements which remained effective at the time Tidewater took possession of the equipment, the Bank failed to file continuation statements in the “six months before the expiration of the five-year period” running from the date of each original financing statement. OCGA § 11-9-515(b) provides, moreover, that once each of the Bank’s security interests had lapsed for failure to file a timely continuation statement, those interests “became unperfected upon lapse,” and were “deemed never to have been perfected as against a purchaser of the collateral for value.” It follows that even though the Bank’s security interests in the equipment were perfected in the first instance by the filing of the original financing statements, and though they remained so throughout Tidewater’s possession and disposition of the equipment, those same security interests were deemed never to have been perfected as against a purchaser for value when the Bank failed to file timely continuation statements.
The only question remaining is thus whether Tidewater was a “purchaser for value” such that it took possession of the equipment free of the Bank’s security interests once they lapsed. The Bank asserts that because Tidewater could have discovered the Bank’s then-perfected security interests on file in the local superior court at the time it purchased each of the Tigercats.
The UCC’s general provisions specify that “[a] person ‘knows’ or has ‘knowledge’ of a fact when the person has actual knowledge of it.” OCGA § 11-1-201(25). The Bank’s arguments for a judicially crafted exception to the UCC’s actual knowledge requirement have no basis in Georgia law. The Bank concedes that neither piece of equipment ever had a motor vehicle title that would have provided Tidewater with actual notice of anyone holding a security interest on the title’s face, and we have been cited no evidence that Tidewater ever had any other “actual knowledge” of the existence of the Bank’s security interest. Rather, with no such evidence, Tidewater accepted both pieces of equipment in exchange for credit toward Shepard’s new purchases, with the result that Tidewater “takes free” of that security interest as a “buyer” who gave value, in the form of credit, for both Tigercats.
The Bank’s last argument against what it perceives as the “harsh” result we have reached is that in light of the UCC’s requirement that all parties to secured transactions like the one at issue here are bound to act in good faith, Tidewater should have performed a search for a financing statement before selling either of the Tigercats. See OCGA § 11-1-203. We disagree, for two reasons. First, as we have already explained, in the absence of any evidence that either piece of equipment at issue was or should have been registered as a motor vehicle, and without any actual knowledge of any existing security interests in the Tigercats, Tidewater had no duty to investigate whether such interests existed. Second, and as other courts have noted as they held security interests to have been deemed unperfected for failure to file a timely continuation statement:
“Although strict adherence to the Code requirements may at times lead to harsh results, efforts by courts to fashion equitable solutions for mitigation of hardships experienced by creditors in the literal application of statutory filing requirements may have the undesirable effect of reducing the degree of reliance the market place should be able to place on the Code provisions. The inevitable harm doubtless would be more serious to commerce than the occasional harshness from strict obedience.”
Sec. Nat’l Bank & Trust Co. of Norman v. Dentsply Professional Plan, 617 P.2d 1340 (Okla. 1980).
For all these reasons, the trial court did not err when it granted Tidewater summary judgment as to the Bank’s claims.

CRITICAL THINKING

Why did the court declare the Bank’s security interest to have lapsed and of no force and effect upon Tidewater? Why did the court excuse Tidewater from conducting a search in order to determine the existence of security interests relating to the Tigercats? Should Tidewater have asked Shepherd about possible security interests when it purchased the Tigercats?

ETHICAL DECISION MAKING

The court refused to excuse the Bank’s failure to renew its security interests despite the harshness of the results. Should such results excuse the Bank’s failure? Do you believe the Bank’s arguments were made in good faith or are simply an effort to excuse its failure to renew? Did Tidewater act in good faith by purchasing the Tigercats without conducting a search for existing security interests? How would you define good faith in these types of transactions?