Shelby County State Bank v. Van Diest Supply Co.

Hennings Feed & Crop Care, Inc. (Hennings) was an Iowa company that sold agricultural chemicals and related products. Over the years, some of Hennings’s suppliers entered into security agreements with Hennings to protect their interests. Van Diest Supply Company (Van Diest) (defendant) was one such creditor. Van Diest executed two security agreements with Hennings. A financing statement filed in 1981 gave Van Diest a security interest in all Hennings’s inventory and contained an after-acquired clause. However, the language of a new security agreement, in 1983, was ambiguous. Although the agreement had an after-acquired clause and said it covered all inventory, qualifying language could be read as limiting the security interest to inventory that Van Diest had sold to Hennings. This ambiguity presented a problem for later creditors. Years later, Van Diest filed a civil claim against Hennings. Hennings then filed for Chapter 11 bankruptcy. Another of Hennings’s creditors, Shelby County State Bank (the bank) (plaintiff), filed a claim in bankruptcy court against Van Diest and the bankruptcy trustee to establish its claim. In 1997 the bank had extended Hennings $500,000 in credit and extended that amount to $4,000,000 in 1998. Hennings signed a security agreement giving the bank a secured interest in Hennings’s inventory and its general intangibles. Because the extent of Van Diest’s security interest in inventory affected the bank’s interest, the bank named Van Diest as a defendant along with the bankruptcy trustee. Both parties moved for summary judgment. The bankruptcy court found that the language in Van Diest’s agreement was ambiguous and could be read in the two ways described above. After reviewing the agreement, the bankruptcy court ruled that Van Diest had an interest only in the inventory it sold to Hennings, not in all inventory. Van Diest appealed. A district court determined that the after-acquired clause meant Van Diest’s interest extended to all Hennings’s inventory, and it reversed the bankruptcy court. The bank appealed.