First-Citizens Bank & Trust Co. v. Four Oaks Bank & Trust Co.

Jimmie and Valerie Beaty borrowed $92,000 from Four Oaks Bank & Trust Co. (Four Oaks) (defendant) in 1996. As collateral, the Beatys gave Four Oaks a security interest in a drill machine that consisted of a 10-wheel truck with a drill rig on the back that had its own engine. In 1997, the Beatys borrowed $13,466 from First-Citizens Bank & Trust Co. (First-Citizens) (plaintiff) to purchase a replacement engine for the drill rig. The Beatys executed a security agreement that gave First-Citizens a security interest in the purchased engine. Five days later, First-Citizens perfected its interest by filing financing statements with state authorities. Jimmie installed the new engine on the drill rig. The installation did not damage the broader drill machine, and the engine could have been easily removed from the machine without causing any damage. When the Beatys filed for Chapter 13 bankruptcy, their schedule of creditors listed both Four Oaks and First-Citizens as having an interest in the drill rig. The filing triggered an automatic stay that prevented creditors from collecting on debts. However, without notice to First-Citizens, Four Oaks petitioned the federal bankruptcy court to lift the stay to allow Four Oaks to sell the drill machine. The bankruptcy court authorized the Beatys to sell the drill machine, including the new drill-rig engine, to a third party for $50,000. The court ordered that all sale proceeds be given to Four Oaks. First-Citizens subsequently sued Four Oaks in state court, seeking to recover the amount of the Beatys’ outstanding debt for the engine. First-Citizens argued that its security interest in the engine was superior to Four Oaks’ interest and that Four Oaks’ sale of the engine and retention of the associated proceeds was improper. The trial court granted summary judgment in Four Oaks’ favor. First-Citizens appealed.