United Novelty Co. v. ...

Louisiana Court of Appeal · Torts

TortsChattel mortgagesRecordationActual noticeAssumption of indebtednesschattel mortgagerecordationthird parties

Facts

Defendants bought six automatic music machines from Kirksey for $1,700 cash plus an assumption of chattel mortgage indebtedness stated in the act of sale as an approximate $2,000. Before the sale, defendants' attorney examined the East Carroll Parish records and found only two recorded chattel mortgages totaling about $1,912.64; he then asked plaintiff for a payoff statement. Plaintiff replied that it held three chattel mortgages and one open account totaling $3,444.78, but the third mortgage had not been recorded in the parish and the open account was not shown in the records. Defendants consistently admitted liability for $1,912.64 but denied liability for the unrecorded mortgage and open-account balance, claiming they were purchasers without notice of those encumbrances.

Issue

Whether defendants, as purchasers who assumed indebtedness on the machines, were liable for an unrecorded chattel mortgage and an open-account claim exceeding the approximately $2,000 stated in the sale instrument. Also, whether plaintiff proved defendants had actual knowledge of those additional unrecorded encumbrances so as to bind them as third persons.

Rule

Chattel mortgages are stricti juris and the statutory requirements for their execution and recordation must be strictly followed. As to third persons, a chattel mortgage is effective only from filing in the proper office, and in the absence of proper recordation a third person is bound only if the mortgage holder proves actual knowledge of the mortgage's existence. Ambiguous assumption language does not itself establish actual knowledge of unrecorded encumbrances beyond the approximate amount stated.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Monroe, Louisiana, Dana Ortiz bought four used arcade machines from Leo Brant for $6,000 cash plus an agreement to assume "approximately $4,500" in chattel mortgage debt. The Ouachita Parish records showed one properly filed chattel mortgage for $4,420, but a finance company later sued Dana on a second mortgage covering the same machines that had never been filed in the parish before the sale.

Is Dana most likely liable on the unfiled second mortgage?

Explanation. As to third persons, a chattel mortgage is effective only from filing in the proper office, and absent proper recordation the mortgage holder must prove the third person had actual knowledge of the mortgage's existence. An assumption of approximately a stated amount does not automatically establish knowledge of a separate undisclosed mortgage. The unfiled mortgage may still bind the original parties, but not a third person without proven actual knowledge. (Derived from United Novelty Co. v. ... (n.d.).)