Mid-State Fertilizer Co. v. Exchange National Bank of Chicago

Mid-State Fertilizer Co. (Mid-State) (plaintiff) sold fertilizer in Illinois. Mid-State arranged for revolving credit from the Exchange National Bank of Chicago (Exchange) (defendant). Exchange promised to lend Mid-State 70 percent of its inventory and receivables to a maximum of $2 million, and Mid-Bank promised to direct its customers to make all payments to a postal box controlled by Exchange (the lock box). Exchange would retrieve the payments and deposit them into an account only Exchange could withdraw from (the blocked account). Exchange would apply the money to amounts due on Mid-State’s loan and deposit the surplus to Mid-State’s operating account. Exchange would also deposit advances to Mid-State’s account when notified by Mid-State that new inventory would be available to purchase. In 1985, Mid-State gave Exchange a financial statement indicating a loss of between $200,000 to $300,000 in the preceding year. Exchange limited the amount of fertilizer in transit that would count as inventory for future advancements and, by 1986, Mid-State was in default. After discovering Mid-State had lied about the existence of a receivable worth $135,000, Exchange stopped making new advancements to Mid-State altogether and directed Mid-State’s customers to send payments to the lock box. Mid-State crumpled and was in liquidation under Chapter 7 of the Bankruptcy Code. Mid-State subsequently brought suit in district court and claimed that Exchange violated the anti-tying provisions of the Bank Holding Company Act (BHCA) 12 U.S.C. § 1972. Mid-State claimed the lock box and blocked account were banking services impermissibly tied to the loan. Exchange moved for summary judgment. The district court granted Exchange’s motion, finding that there was no tying because linking the lock box to the loan was what a prudent bank would do to control its risk and Mid-State was free to withdraw sums from the blocked account and use a different bank for daily business. Mid-State appealed.