Worthen Bank & Trust Co., N.A. v. Hilyard Drilling Co.

Hilyard Drilling Company (Hilyard) (defendant) granted a security interest in all of its accounts receivable and the resulting proceeds to the National Bank of Commerce of El Dorado (NBC) (defendant). NBC perfected the security interest by filing a financing statement on April 26, 1979, which had an expiration date of April 25, 1984. Thereafter, Worthen Bank & Trust Company (Worthen) (plaintiff) approved a loan to Hilyard in exchange for a lien on Hilyard’s accounts receivable. In a letter referencing the transaction, Worthen acknowledged that NBC had a first lien on the accounts. Worthen also agreed to confirm in writing, if requested, that NBC’s lien took priority. However, NBC never requested the offered acknowledgment. Worthen perfected its security interest on June 14, 1983, by filing financing statements. These statements did not acknowledge that Worthen’s interest was second to NBC’s interest. On July 8, 1983, NBC restructured Hilyard’s loans and filed a second financing statement in connection with NBC’s interest in Hilyard’s accounts. However, NBC did not file a continuation statement within six months before the expiration date of its initial 1979 financing statement, and NBC’s second filing statement did not reference the initial statement. Hilyard filed for Chapter 11 bankruptcy on January 25, 1985. At the time, the amount that Hilyard owed to NBC and Worthen was larger than Hilyard’s accounts receivable. Worthen filed a motion requesting a determination of the priority of the security interests in Hilyard’s accounts. The bankruptcy court concluded that Worthen’s interest took priority over NBC’s interest. The district court affirmed. NBC appealed.