## Facts

- Randy and Kimberly Davis (debtors) filed a Chapter 7 bankruptcy case in Arkansas.
- Frederick S. Wetzel III (trustee), the Chapter 7 trustee, brought an adversary proceeding against Equipment Dealers Credit Company (Equipment Dealers) concerning the validity and priority of Equipment Dealers’ claimed lien.
- In May 1999, the Davises applied for a loan from Equipment Dealers and granted a security interest in a tractor and a front-end loader (farm equipment).
- In the loan application, the Davises stated that they lived in Clark County, Arkansas.
- The Davises in fact lived in Hot Spring County, Arkansas (sometimes described in secondary sources as “Hot Springs County”).
- Under Arkansas law then in effect for farm equipment, a financing statement had to be filed in the county of the debtor’s residence to perfect the security interest.
- Equipment Dealers filed a financing statement in Clark County but did not file one in Hot Spring County.
- The trustee asserted that the security interest was unperfected and avoidable under 11 U.S.C. § 544(a).
- Equipment Dealers argued it acted in good faith by filing where the debtors said they lived and that it should retain priority.

## Issues

1. Whether a financing statement filed in a county other than the debtor’s actual county of residence perfects a security interest in farm equipment under Arkansas law.
2. Whether the Chapter 7 trustee may avoid the creditor’s unperfected security interest under 11 U.S.C. § 544(a) even if the creditor filed in the wrong county based on the debtor’s misstatement of residence.

## Decision

- The court held that Arkansas filing rules required filing in the county of the debtor’s actual residence to perfect a security interest in farm equipment.
- Because Equipment Dealers filed only in Clark County and not in Hot Spring County, its security interest was not perfected as of the bankruptcy petition date.
- The trustee, using the strong-arm power in 11 U.S.C. § 544(a), had the status of a hypothetical lien creditor and took priority over an unperfected security interest.
- Equipment Dealers’ good-faith reliance on the debtors’ incorrect residence information did not make the misfiled financing statement effective against third parties and did not defeat the trustee’s § 544(a) rights.
- The court ruled for the trustee, allowing avoidance of Equipment Dealers’ lien for the benefit of the estate.

## Legal Principles

- Perfection and priority of a security interest are determined by state law filing requirements in effect at the relevant time.
- When state law requires filing in a specific place to perfect a security interest, filing in the wrong location generally leaves the interest unperfected against third parties.
- Under 11 U.S.C. § 544(a), a Chapter 7 trustee is treated as a hypothetical judicial lien creditor as of the petition date, without regard to actual knowledge, and can avoid unperfected security interests.
- A secured creditor bears the risk of an ineffective filing; equitable arguments based on good faith or debtor misstatements do not change statutory perfection rules as applied to the trustee.

## Conclusion

The bankruptcy court concluded that Equipment Dealers’ security interest in the tractor and front-end loader was unperfected because its financing statement was filed in Clark County rather than the Davises’ actual county of residence, Hot Spring County, and the Chapter 7 trustee could therefore avoid the lien under § 544(a) despite the creditor’s good-faith mistake.


Wetzel v. Equipment Dealers Credit Co., 274 B.R. 825 (2002)