Kazmierczak, Matter of

• Decision Date: 23 May 1994
• Docket Number: No. 93-3376,93-3376
• Citation: 24 F.3d 1020
• Parties: 23 UCC Rep.Serv.2d 915 In the Matter of Allen J. KAZMIERCZAK and Carol A. Kazmierczak, Debtors. Appeal of Paul SWANSON, Trustee in Bankruptcy.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1020

24 F.3d 1020

23 UCC Rep.Serv.2d 915

In the Matter of Allen J. KAZMIERCZAK and Carol A. Kazmierczak, Debtors Appeal of Paul SWANSON, Trustee in Bankruptcy.

No. 93-3376.

United States Court of Appeals Seventh Circuit.

Argued April 14, 1994.

Decided May 23, 1994.

Michael G. Trewin (argued), New London, WI, for Paul Swanson, successor to the interest of Allen J. Kazmierczak and Carol A. Kazmierczak.

Francis J. Eustice, Gregory J. Fumelle (argued), Eustice, Albert, Laffey & Fumelle, Sun Prairie, WI, for Terra Intern. Inc.

Before POSNER, Chief Judge, and COFFEY and FLAUM, Circuit Judges.

POSNER, Chief Judge.

In 1990 and 1991, the debtors, a farm couple, had bought fertilizer and chemicals for their farm from Terra International on credit secured by their crops. The debtors executed a new security agreement each year, and each year a financing statement was duly filed to perfect Terra's security interest, and each year the debtors paid off their debt to Terra in full by the end of the year. In 1992 Terra again advanced credit to the debtors to enable them to purchase that year's fertilizer and chemicals and it has been stipulated that the parties intended to execute the usual security agreement, but before they got around to doing so the debtors declared bankruptcy. Terra nevertheless filed a secured claim for the $72,000 that the debtors owed it for the fertilizers and chemicals that they had bought, and applied to the crops, which had already been planted when the debtors declared bankruptcy. Terra based its claim to have a secured interest on the first paragraph in the 1991 security statement, which stated: "The undersigned Debtor grants to the undersigned Secured Party a security interest in [all crops now growing or hereafter grown on the debtors' farm] to secure all Debtor's present and future debts, obligations and liabilities of whatever nature to Secured Party" (emphasis added). The bankruptcy judge disallowed Terra's claim on the ground that the course of dealings between the parties disclosed an intention to execute a new security agreement for each year's advance of credit rather than to enforce the future-advances clause in earlier years' agreements. The district judge reversed, and the trustee in bankruptcy appeals.

A lien securing future as well as current debts, the lien created by a "dragnet" clause such as the one on which Terra relies, is a common device of secured credit. It is frequently confused with the even more common "floating lien." A floating lien extends the creditor's lien to cover property acquired by the debtor after the loan was made. A dragnet lien enlarges the size of the creditor's lien by any credit advanced by him to the debtor after the original loan was made. The lien in this case was (not unusually) both, because the new credit was given for the acquisition of new property, the 1992 crops. But it is only the dragnet feature that is in issue.

Expressly authorized by section 9-204(3) of the Uniform Commercial Code, Wis.Stat. Sec. 409.204(3), a future-advances lien saves the parties the trouble of executing a new security agreement every time there is a further extension of credit. It also backstops the lender against the possibility of an inadvertent failure by the borrower to execute the new agreement, as apparently happened here. The original agreement must make clear its applicability to future debts, but the 1991 agreement signed by the debtors in this case could not have been clearer. The fact emphasized by the bankruptcy judge, that the parties had intended to execute a fresh security agreement every year, has no weight at all. The "future debts" clause was a hedge against their failing to do so. They could of course have canceled it by mutual consent.

Courts have been concerned with a potential for abuse if, as in John Miller Supply Co. v. Western State Bank, 55 Wis.2d 385, 199 N.W.2d 161, 165 (1972), the future debts are unrelated to the current ones. See also Mark Twain Kansas City Bank v. Cates, 248 Kan. 700, 810 P.2d 1154, 1162-63 (1991); Lundgren v. National Bank of Alaska, 756 P.2d 270, 278-79 (Alaska 1987); In re Estate of Simpson, 403 N.W.2d 791 (Iowa 1987). The original basis for their concern was the ingenious but perhaps devious practice of some creditors who, having obtained a future-advances clause from the debtor, would then go around to the debtor's unsecured creditors, purchase their rights, and then argue that the purchases were future advances to the debtor and therefore secured. 2 Grant Gilmore, Security Interests in Personal Property Sec. 35.2, at p. 918 (1965). Not wanting to encumber his property further, or risk losing otherwise exempt property in bankruptcy (a consensual security...