In re Vic Supply Company, Inc.

Vic Supply Company, Inc. (Vic) borrowed money from Bank One Illinois, N.A. (Bank One) (defendant). To secure the loan, Vic signed a security agreement giving Bank One a security interest in all of Vic’s assets, including proceeds from Vic’s sales. The agreement stated that it would become effective only if Bank One signed it—but the bank never did. Around the same time, Bank One filed a Uniform Commercial Code (UCC) financing statement with the state, providing notice of its security interest in Vic’s sale proceeds. Four years later, Falconbridge U.S., Inc. (Falconbridge) (plaintiff) sold nickel to Vic on credit, securing the sale with a purchase-money security interest in the nickel inventory and any future resale proceeds. Falconbridge filed its own UCC financing statement, saw Bank One’s statement, and notified Bank One of Falconbridge’s purchase-money security interest in Vic’s new nickel inventory. Vic later went bankrupt while owning several accounts receivable from nickel sales. Bank One and Falconbridge claimed competing security interests in those accounts. Although Falconbridge’s purchase-money security interest would have given it super-priority in cash proceeds from the nickel sales, that super-priority did not extend to the accounts receivable. Thus, priority depended on which creditor had perfected its security interest first. Bank One argued that it had priority because it had filed its financing statement before Falconbridge. Falconbridge argued that Bank One’s financing statement had not perfected its security interest because the underlying security agreement, by its own terms, was ineffective until Bank One signed it. Because Bank One had never signed the agreement, Falconbridge argued that its own security interest was the only perfected interest and had priority. The bankruptcy court ruled that the bank’s security interest had priority, and the federal district court affirmed. Falconbridge appealed to the United States Court of Appeals for the Seventh Circuit.