## Facts

- Clarence Foos, a farmer, had a long lending relationship with Bazine State Bank, which maintained a filed security interest covering after-acquired farm equipment.
- In May 1980, Foos bought a Case tractor and a Noble undercutter under a secured installment contract; the seller took and perfected a purchase-money security interest (PMSI) and later assigned the contract to J.I. Case Credit Corporation.
- Foos became delinquent; in 1982, Case demanded the account be brought current or the collateral surrendered.
- Before the Bank advanced payoff funds in September 1982, its loan officer spoke with a Case representative and learned the balance due and that annual installments remained.
- After receiving the delinquent payment, Case’s internal billing error caused it to stamp the contract “paid,” send Foos a payoff letter, and file a termination statement ending its recorded security interest.
- In December 1982, Foos showed the “paid” contract and payoff letter to the Bank; the Bank relied on those documents and the termination filing, loaned more money, took a security interest in the tractor and undercutter, and filed its financing statement.
- In February 1983, Case discovered the mistake, notified Foos of the remaining debt, and filed a new financing statement; Foos made no further payments.
- Case repossessed the equipment and sued to determine the validity and priority of the parties’ competing security interests.

## Issues

1. Whether Case or the Bank had priority in the tractor and undercutter after Case mistakenly filed a termination statement and the Bank later took and filed a security interest.
2. Whether the Bank’s conduct in taking its later security interest and making the December 1982 loan satisfied the UCC requirement of good faith, given its prior knowledge of the remaining debt owed to Case.

## Decision

- The Kansas Court of Appeals affirmed judgment for Case.
- The court held Case’s security interest had priority over the Bank’s interest despite Case’s mistaken termination filing.
- The court upheld the finding that the Bank did not act in good faith because it had actual knowledge, from Case, that installments remained unpaid when it later took the equipment as collateral.

## Legal Principles

- UCC “good faith” requires honesty in fact in the conduct or transaction concerned.
- A later secured creditor may be denied the benefit of filing-based priority rules when it takes a security interest with actual knowledge inconsistent with the record and proceeds without honest regard for that knowledge.
- A mistakenly filed termination statement does not necessarily shift priority where the subsequent creditor is not an innocent reliance party because it possessed contrary, reliable information about an existing secured obligation.
- In disputes caused by filing or clerical errors, courts may allocate the resulting loss against the party better positioned to prevent harm when that party’s conduct fails the UCC good-faith standard.

## Conclusion

The court held that the Bank’s actual knowledge of Foos’s remaining obligations to Case made its reliance on the “paid” documents and termination filing not in good faith, so the Bank could not obtain priority by its later filing; Case retained the superior security interest in the equipment.


J.I. Case Credit Corp. v. Foos, 717 P.2d 1064 (Kan. Ct. App. 1986)