In re Kazmierczak

The Kazmierczaks (debtors) owned a farm. In 1990 and 1991, Terra International (Terra) (creditor) loaned money to the Kazmierczaks so the Kazmierczaks could purchase fertilizer and chemicals for their farm. Both years, the Kazmierczaks executed a security agreement and pledged their crops as collateral. Terra properly filed financing statements covering its security interests. The Kazmierczaks paid Terra in full by the end of each year. Terra loaned the Kazmierczaks money again in 1992. The Kazmierczaks intended to execute a new security agreement but failed to do so before they filed for bankruptcy. During bankruptcy proceedings, Terra asserted a claim against the Kazmierczaks regarding the 1992 loan. Specifically, Terra argued that the 1991 security agreement contained a dragnet clause covering all the Kazmierczaks’ present and future debts of any kind to Terra, including the 1992 loan. The bankruptcy court found that the parties’ course of dealing showed an intent that the Kazmierczaks must execute a new security agreement each year rather than use the prior security agreement to cover future debts. Accordingly, the bankruptcy court found that Terra’s interest was unsecured and denied Terra’s claim. The district court reversed. The bankruptcy trustee appealed and argued that the court should allow parol evidence showing that the parties intended for the 1992 debt to be unsecured.