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Shelby County State Bank v. Van Diest Supply Company

September 17, 2002

SHELBY COUNTY STATE BANK, AN ILLINOIS BANKING CORPORATION, APPELLANT,
v.
VAN DIEST SUPPLY COMPANY, APPELLEE.



Appeal from the United States District Court for the Central District of Illinois. No. 00-C-3326--Jeanne E. Scott, Judge.

Before Coffey, Ripple, and Diane P. Wood, Circuit Judges.

The opinion of the court was delivered by: Diane P. Wood, Circuit Judge

ARGUED DECEMBER 5, 2001

Hennings Feed & Crop Care, Inc. (Hennings) filed a voluntary bankruptcy petition under Chapter 11 on August 23, 1999, after Van Diest Supply Co. (Van Diest), one of its creditors, filed a complaint against it in the Central District of Illinois. Shelby County State Bank (the Bank), another creditor of Hennings, brought this action in the bankruptcy proceeding against Van Diest and the Trustee for Hennings to assert the validity of the Bank's security interest in certain assets of Hennings. Van Diest was included as a defendant because the scope of Van Diest's security interest in Henning's assets affects the extent of the Bank's security interest. The Bank and Van Diest cross-moved for summary judgment, and the bankruptcy court granted the Bank's motion, finding that Van Diest's security interest was limited to the inventory it sold to Hennings (as opposed to the whole of Hennings's inventory). Van Diest appealed that order, and the district court reversed, finding that Van Diest's security interest extended to all of the inventory. Other claims that were at issue in those proceedings are not relevant to this appeal. The Bank now appeals. For the reasons set forth in this opinion, we reverse the decision of the district court and remand the case to the bankruptcy court.

I.

Hennings, a corporation based in Iowa, was in the business of selling agricultural chemicals and products. As is customary, several of Hennings's suppliers extended credit to it from time to time to finance its business operations, and obtained liens or other security interests in Hennings's property and inventory to safeguard their advances.

The Bank is among Hennings's creditors. In December 1997, the Bank extended credit to Hennings for $500,000. In May 1998, the Bank increased this amount to a revolving line of credit of some $4,000,000. Hennings in return granted the Bank a security interest in certain of its assets, including inventory and general intangibles. Van Diest, also a creditor, entered into several security agreements with Hennings and its predecessor over the years to protect its financing of materials supplied to Hennings. These agreements were covered by the Uniform Commercial Code, which Iowa has adopted (including the revised Article 9), see Iowa Code §§ 554.9101-554.9507 (1999).

A financing statement entered into by Hennings and Van Diest on November 2, 1981, provided for a blanket lien in "[a]ll inventory, notes and accounts receivable, machinery and equipment now owned or hereafter acquired, including all replacements, substitutions and additions thereto." On August 29, 1983, Hennings and Van Diest entered into a new security agreement (the Security Agreement), the language of which is at the core of this dispute. The Security Agreement was based on a preprinted standard "Business Security Agreement" form. In the field for the description of collateral, the parties entered the following language, drafted by Van Diest, describing the security interest as being in

[a]ll inventory, including but not limited to agricultural chemicals, fertilizers, and fertilizer materials sold to Debtor by Van Diest Supply Co. whether now owned or hereafter acquired, including all replacements, substitutions and additions thereto, and the accounts, notes, and any other proceeds therefrom. The Security Agreement contained a further preprinted clause providing

as additional collateral all additions to and replacements of all such collateral and all accessories, accessions, parts and equipment now or hereafter affixed thereto or used in connection with and the proceeds from all such collateral (including negotiable or nonnegotiable warehouse receipts now or hereafter issued for storage of collateral).

The bankruptcy court found that the language of the Security Agreement was ambiguous and susceptible on its face to two interpretations: under one, the security interest extended to all of Hennings's inventory; under the other, it was limited to inventory sold to Hennings by Van Diest. Proceeding under Iowa law, that court applied several canons of contract interpretation to resolve the ambiguity. The upshot was that the court rejected the use of parol evidence and concluded that the Security Agreement extended only to inventory sold to Hennings by Van Diest.

The district court disagreed. It found that the bankruptcy court had created an ambiguity out of thin air and that the language of the Security Agreement supported only the view that the collateral included all inventory. It relied on the presence of the "after-acquired clause," which provides for future inventory to be deemed part of the collateral. Such a clause ensures that an entity having an interest in inventory retains the interest even when the original goods have been sold and replaced in the course of business, given the natural turnaround of inventory. See, e.g., Larsen v. Warrington, 348 N.W.2d 637, 639 (Iowa 1984). To reach this conclusion, the district court found that the qualifier phrase mentioning specific items found in the first paragraph quoted above, while it concededly modified the term "inventory," was mere surplusage. Accordingly, it found that the description of "collateral" must have extended to "[a]ll inventory," and reversed the bankruptcy court's findings.

II.

As this case requires the interpretation of a contract, which is a question of law, we review the district court's decision de novo. In re Frain, 230 F.3d 1014, 1017 (7th Cir. 2000); In re: Virtual Network Servs. Corp., 902 F.2d 1246, 1247 (7th Cir. 1990). The facts ...


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