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Shelby Cty. State Bank v. Van Diest Supply Co. - 303 F.3d 832 (7th Cir. 2002)

Rule:

Under Iowa law, other canons of interpretation should be used to resolve an ambiguity before parol evidence may be introduced. Other rules of contract interpretation include: a contract must be construed as a whole; a court requires a fair and reasonable construction; the contract should avoid illegality; the interpretation must account for surrounding circumstances; and the parties' own practical construction is relevant. Iowa also applies the rule requiring the court to construe terms against the drafter of the instrument (contra proferentem); it favors specific terms over general terms; and it favors handwriting to typing and typing to printing. 

Facts:

The supplier extended nearly $3 million in credit pursuant to its security agreement to the debtor. The controlling agreement contained an after-acquired clause. The bank also extended over $1 million under a later recorded security agreement. Both creditors of the debtor were governed by Article 9 of the Uniform Commercial Code. When the bankrupt debtor could no longer pay its debts, both creditors claimed the limited inventory of the debtor was secured by their respective agreements. The supplier claimed its collateral included all inventory, whether provided by the supplier or not. The bank disagreed. The bankruptcy court found that the supplier's after-acquired clause was ambiguous, because of an unclear double modifier, and construed the agreement in favor of the bank. On appeal, however, the district court reversed the order of the bankruptcy court. The district court found that the supplier, another secured creditor, held a prior security interest in all of debtor's inventory, whether acquired from that creditor or not. The bank appealed, claiming the supplier's security agreement was ambiguous.

Issue:

Was the supplier's security agreement was ambiguous?

Answer:

Yes.

Conclusion:

The judgment of the district court was reversed, and the case was remanded to the bankruptcy court. The court of appeals agreed with the bankruptcy court's interpretation. The security agreement drafted by the supplier should be construed against it under Iowa law. The agreement as written and supplemented by a letter, did not give notice to subsequent creditors that the supplier's collateral extended beyond its own products.

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