In re Product Design and Fabrication, Inc. (Terpstra v. Michelosen)

182 B.R. 803 (1994)

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In re Product Design and Fabrication, Inc. (Terpstra v. Michelosen)

United States Bankruptcy Court for the Northern District of Iowa
182 B.R. 803 (1994)

  • Written by Sheryl McGrath, JD

Facts

In 1991, Product Design and Fabrication, Inc. (PDF) (debtor) needed financing to continue its business manufacturing machines for farming. PDF obtained an appraisal of PDF’s existing equipment and machinery. The written appraisal indicated that PDF’s equipment and machinery had a value of $314,434. None of PDF’s inventory was included in the appraisal. In mid-1992, PDF’s president and another PDF officer met with a potential investor named John Michelosen (creditor). At the meeting, Michelosen agreed to lend PDF $100,000. PDF and Michelosen signed a financing agreement confirming the loan. The financing agreement stated that the funds would be secured by the machinery and equipment listed in the appraisal. The financing agreement also stated that the total appraisal value was $314,434. PDF sent the financing statement to PDF’s attorney, who used a bar-association form to prepare a security agreement. In the form, the attorney indicated that PDF had granted a security interest to Michelosen “in the property described in the paragraphs checked below.” In the subsequent paragraphs, the attorney checked the paragraph labeled “inventory.” The attorney added the words, “an inventory of which is attached hereto as Exhibit ‘A’ and by this reference made a part hereof.” Exhibit A was the appraisal. Subsequently, PDF and Michelosen executed two more financing agreements. After that, in August 1992, an agent for Michelosen recorded a financing statement covering PDF’s equipment. A week after the financing statement was recorded, PDF filed for bankruptcy. The bankruptcy trustee sold PDF’s machinery, equipment, and inventory. Michelosen claimed entitlement to the proceeds of the machinery and equipment on the ground that he had a security interest in those items. The bankruptcy trustee filed a complaint to negate Michelosen’s alleged security interest. In the complaint, the bankruptcy trustee argued that Michelosen never established a valid security interest in the machinery and equipment. The bankruptcy court held a trial on the bankruptcy trustee’s complaint. At trial, PDF’s president testified that PDF intended to give Michelosen a security interest in the machinery and equipment listed in the appraisal.

Rule of Law

Issue

Holding and Reasoning (Edmonds, C.J.)

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