Matter of Ingersoll

• Decision Date: 09 February 1981
• Docket Number: Bankruptcy No. 80-0162.
• Citation: 8 BR 912
• Parties: In the Matter of Jerald INGERSOLL, Debtor. IXONIA STATE BANK, Plaintiff, v. Jerald INGERSOLL et al., Defendants.
• Court: U.S. Bankruptcy Court — Western District of Wisconsin

8 B.R. 912 (1981)

In the Matter of Jerald INGERSOLL, Debtor.

IXONIA STATE BANK, Plaintiff, v. Jerald INGERSOLL et al., Defendants.

Bankruptcy No. 80-0162.

United States Bankruptcy Court, W.D. Wisconsin.

February 9, 1981.

Johnson, Brendemuehl, Swendson & Georgeson by William A. Swendson, Oconomowoc, Wis., for Ixonia State Bank, plaintiff.

James J. Caldwell of Rummel, Caldwell, Cahill, Daly & McNeil, Oconomowoc, Wis., for Jerald L. Ingersoll, defendant.

Robert Bender of Dirker & Bender, S.C., Watertown, Wis., for Farmers State Bank, defendant.

Bruce W. Freeberg, Jefferson, Wis., for Jefferson County Farmco Cooperative, defendant.

J.M. Slechta of Slechta & D'Aoust Law Offices, Jefferson, Wis., for Jefferson County Bank, defendant.

ROBERT D. MARTIN, Bankruptcy Judge.

While engaged in sod farming and other business, Jerald Ingersoll, obtained loans from the Jefferson County Bank, Jefferson Farmco Cooperative (Co-op), Farmers State Bank (Farmers) and Ixonia State Bank (Ixonia). Ingersoll filed a Chapter 7 petition April 8, 1980. On May 20, the trustee abandoned the Ingersoll farm. On September 3, Ixonia filed a complaint in Jefferson County Circuit Court seeking foreclosure on the farm. Ingersoll removed that action to this Court. Co-op filed a proof of claim for outstanding loans amounting to $113,824.31. Farmers filed a proof of claim for $25,494.31. Ixonia filed no proof of claim but had outstanding loans amounting to $140,390.55 as of November 25, 1980. The Jefferson County Bank holds a recorded first mortgage and is not a party to the pending motions. Ixonia and Ingersoll have moved for summary judgment to determine the validity of Ixonia, Farmers and Co-op's secured claims. Each of the creditors claims a security interest in the Ingersoll farm, which includes Ingersoll's homestead. Ixonia Co-op and Farmers each recorded a Consumer Real Estate Security Agreement signed by Ingersoll. Their claims to secured status are based on the Consumer Real Estate Security Agreements (hereinafter Agreements).

By his motion for summary judgment, Ingersoll has challenged the validity of the secured claims of the plaintiff and all his co-defendants except the Jefferson County Bank on the following grounds:

1. the Agreements are invalid because they include a "dragnet" clause which states that the collateral identified is security for all obligations, whenever incurred, owed or to be owed by the debtor to the creditor;

2. the Agreements cannot create security for antecedent debts, but are limited to securing funds advanced in specific consideration of the Agreements;

3. the Agreements are part of a "consumer credit transaction" therefore remedies are limited to those in the Wisconsin Consumer Act which does not include fore closure;

4. that the Ixonia Agreement secures a maximum of $25,000 as indicated on the face of the document;

5. the Agreements are invalid for lack of consideration; and

6. the creditors failed to disclose to Ingersoll his right to rescind as required by the Truth in Lending Act making the Agreements unenforceable.

These grounds, or their obverse, are the basis for the motion for summary filed by Ixonia as well.

A. Are the Agreements Invalid Because They Contain a "Dragnet" Clause?

Ingersoll argues that the Agreements are invalid because they include a "dragnet" clause. "Dragnet" clauses are enforceable under Wisconsin law. In Capocasa v. First Nat. Bank, 36 Wis.2d 714, 154 N.W.2d 271 (1967). The court stated:

There seems to be no good reason for one who has executed a mortgage with "dragnet" clause to be permitted to escape its consequences for his personal borrowing merely because subjectively it was not within his contemplation (contrary to the words of the written instrument) that an additional obligation to the same creditor would subject his property to the "dragnet" feature of the mortgage. Id. at 724, 154 N.W.2d 271.

In John Miller Supply Co. v. Western State Bank, 55 Wis.2d 385, 199 N.W.2d 161 (1972) the court stated:

In Capocasa v. First Nat. Bank (1967), 36 Wis.2d 714, 154 N.W.2d 271, this court recognized the desirability, in proper circumstances, of security instruments to secure future advances or obligations. We pointed out, however, that such documents would be closely scrutinized and would be enforced only to the extent that the future transactions or liabilities sought to be secured were in clear contemplation of the parties.

What was contemplated by the parties is, of course, to be determined initially from a reasonable reading of the language of the agreement . . . Id. at 392, 199 N.W.2d 161.

The language in paragraph (2) of the Ixonia Agreement explicitly refers to securing "debts, obligations and liabilities of any Customer to Lender arising out of . . . credit granted in the future by Lender to any Customer . . ." The Farmers and Co-op Agreements state: "to secure Customer's debts, obligations and liabilities to Lender arising out of existing or future credit granted by Lender to Customer . . ." Ingersoll makes no argument and presents no evidence that would rebut the inference drawn from the Agreements' language that the parties intended the Agreements to secure future loans. Ingersoll's deposition also supports this view as to the Ixonia Agreement (Exhibit 4 at the deposition).

Q: Is it fair to say that you executed this Exhibit Number 4, because you were requested to by the Ixonia State Bank, and for that reason only?

A: That I did it because of their request?

Q: Yes.

A: That was one of the reasons, yes.

Q: What other reasons were there that you signed that?

A: Well, it was just, I suppose, to beef up my line of credit. The bank said that the bank examiners were putting pressure on.

Q: Are there any other reasons why you signed it?

A: So I could keep going with my credit at the bank, I guess was the main reason. For myself.

Q: Were there any other reasons besides that?

A: Well, I told you before, Mr. Buelter said it would protect the farm. They were doing it for protection.

Q: Were there any other reasons besides those two or three?

A: Not that I know of, no.

(Ingersoll deposition, pages 25 and 26.)

Ingersoll signed the Ixonia Agreement for the purpose of maintaining his credit line. It is reasonable to believe he understood and intended that his property would secure future credit extended to him. Following the test adopted by the Wisconsin courts, the "dragnet" clauses of the Agreements are enforceable in this case. The unambiguous language of the Agreements shows the parties intended the loans to be secured, and the only evidence of Ingersoll's intent supports the same conclusion.

B. Do the Agreements Secure Antecedent Debts?

Ingersoll argues that the Agreements do not secure antecedent debts. The Ixonia Agreement, paragraph 2, states:

Grants Lender a continuing lien on the Property to secure all debts, obligations and liabilities of any Customer to Lender arising out of credit previously granted, credit contemporaneously granted or credit granted in the future by Lender to any Customer, to any Customer and another, or to another guaranteed or endorsed by any Customer, except credit in an original amount of less than $1,000.00, the granting of which is subject to the Wisconsin Consumer Act ("Obligations").

Paragraph 2 on the Co-op and Farmers Agreement is similar, stating:

Grant Lender a continuing lien on the Property to secure Customer\'s debts, obligations and liabilities to Lender arising out of existing or future credit granted by Lender to Customer, to Customer and another, or to another guaranteed or endorsed by Customer, except credit in an original amount of less than $1,000.00, the granting of which is subject to the Wisconsin Consumer Act ("Obligations").

The language of all the Agreements explicitly includes a lien for antecedent debts. Ingersoll's argument has no merit, unless that language is for some reason invalid.

There is nothing in Wisconsin law that prohibits acquiring a security interest for antecedent debts. In Evenson v. Bates, 58 Wis. 24, 15 N.W. 837 (1883), Bates had given a note to Evenson for $1,500. Sometime later he executed a mortgage to Evenson for $5,000 to secure the $1,500 prior note and future advances. Bates argued the mortgage did not secure the $1,500 note given prior to the mortgage. Both the trial court and the Supreme Court rejected that argument and found the mortgage secured the prior $1,500 note. The Agreements secure antecedent debts.

C. Are the Agreements Part of a Consumer Credit Transaction and Therefore Limited to the Remedies of the Wisconsin Consumer Act?

"Consumer credit transactions" means a consumer transaction between a merchant and a customer in which real or personal property, services, or money is acquired on credit and the customer\'s obligation is payable in instalments or for which credit a finance charge is or may be imposed, whether such transaction is pursuant to an open-end credit plan or is a transaction involving other than open-end credit. The term includes consumer credit sales, consumer loans, consumer leases and transactions pursuant to open-end credit plans. Wis.Stats. § 421.301(10).

"Customer" means a person other than an organization (s. 421.301(28)) who seeks or acquires real or personal property, services, money or credit for personal, family, household or agricultural purposes. . . . Wis.Stats. § 421.301(17).

Ingersoll obtained the loans as an individual, not as the agent for an organization. The Ixonia and Co-op loans were for agricultural purposes, so as to them Ingersoll was a "customer" and the loans are "consumer credit transactions" within the meaning of the Wisconsin Consumer Act (WCA). There is a dispute as to the nature of Farmers' loans, some of which may have been for commercial or business purposes. As to loans Ingersoll procured for business purposes, he would not be a "customer" under the WCA's definition and the loans therefore could not be "consumer credit...