Zartman v. First National Bank of Waterloo

Waterloo Organ Company (Waterloo) was a manufacturing corporation that made and sold musical instruments. As security for negotiable bonds, Waterloo gave a mortgage to First National Bank of Waterloo (Bank) (defendant) covering all of Waterloo’s property, including after-acquired personal property. Under the mortgage, Waterloo retained the power to sell all materials and products for its own benefit until the mortgage trustee took possession of the property after default. The mortgage did not limit Waterloo’s use of proceeds realized from selling stock and materials. The mortgage was recorded. Waterloo filed for bankruptcy. One day after Waterloo defaulted on the mortgage and three days before bankruptcy proceedings began, the Bank took possession of Waterloo’s stock and material on hand. Zartman (plaintiff) was subsequently appointed as the bankruptcy trustee. The bankruptcy court sold all of Waterloo’s property pursuant to an order by the United States District Court. Zartman was awarded the after-acquired property proceeds. The Bank appealed, arguing that the mortgage covering after-acquired personal property entitled it to the proceeds derived from the sale of after-acquired stock, musical instruments, and materials. Specifically, the Bank argued that the mortgage was an executory contract that placed the after-acquired property in question under the umbrella of the mortgage lien after Waterloo’s default. Moreover, although the Bank conceded that the property in question was subject to Waterloo’s unsecured creditors’ claims until the mortgage trustee took possession of it, the Bank argued that it perfected its interest by taking possession of the property.