A recent 7th Circuit Court of Appeals decision emphasizes for lenders and creditors the importance of accurate descriptions of the property in which the creditor claims a security interest. Hennings Feed & Crop Care, Inc. (“Hennings”), an Iowa farm products retailer, was a regular customer of Van Diest Supply Co. (“Van Diest”), a seller of agricultural chemicals and products. Van Diest extended credit to Hennings for its purchases of inventory from Van Diest. To secure the amount owed Hennings by Van Diest, Hennings filed financing statements in accordance with the Uniform Commercial Code. The collateral description on the financing statement was “all 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.
When Hennings defaulted on its payments, Van Diest sued for the monies owed. Hennings then filed a petition under Chapter 11 of the Bankruptcy Code. Hennings’ bank, which also claimed a security interest in Hennings’ assets, filed an action in the bankruptcy court against Van Diest and the bankruptcy trustee seeking to assert the bank’s own security interest in the same assets in which Van Diest claimed a security interest. Van Diest claimed a security interest in all inventory of Hennings, while the bank took the position that Van Diest was entitled to a security interest in only the goods it sold to Hennings.
The bankruptcy court found that the collateral description in Van Diest’s financing statement was ambiguous, and, after applying rules of grammatical interpretation, determined that Van Diest’s security interest applied only to inventory sold by Van Diest to Hennings. The federal district court, however, reviewing the bankruptcy court holding, decided there was no ambiguity in the language used on the financing statement and held Hennings’ collateral included all inventory of Hennings.
The bank, of course, appealed the district court’s decision. In an analysis for which any high school English teacher would give an A+, the Court of Appeals applied several rules of grammatical construction, including the doctrine of the antecedent modifier, and contra profentem, and the legal doctrine that holds an ambiguity in the language of a document will be strictly construed against the party that drafted it. While the use of the doctrine of contra profentem is generally not followed as strictly these days, the Court of Appeals found it to be alive and well under Iowa law.
The court also stated that a prospective creditor of Hennings should have been able to look at Van Diest’s financing statement to determine the extent of the collateral interests claimed by Van Diest. “For the notice requirement to be a valid instrument of protection for potential creditors, that notice must be clearly expressed . . . .” The Court of Appeals reversed the decision of the district court, and held that Van Diest’s security interest extended only to the inventory it sold to Hennings. Representation of lenders and borrowers is a regular part of our practice. Please do not hesitate to telephone us if you need any assistance in drafting or reviewing loan and security documents, including the descriptions of collateral.