Shelby County State Bank v. Van Diest Supply Co., 01-2250.

• Decision Date: 17 September 2002
• Docket Number: No. 01-2250.,01-2250.
• Citation: 303 F.3d 832
• Parties: SHELBY COUNTY STATE BANK, an Illinois Banking Corporation, Appellant, v. VAN DIEST SUPPLY COMPANY, Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

303 F.3d 832

SHELBY COUNTY STATE BANK, an Illinois Banking Corporation, Appellant, v. VAN DIEST SUPPLY COMPANY, Appellee.

No. 01-2250.

United States Court of Appeals, Seventh Circuit.

Argued December 5, 2001.

Decided September 17, 2002.

COPYRIGHT MATERIAL OMITTED

Timothy J. Howard (argued), Howard & Howard, Peoria, IL, for appellant.

Jamie L. Ross (argued), Miller, Hall & Triggs, Peoria, IL, Barry M. Barash, Barash & Everett, Galesburg, IL, for appellee.

Jeffrey D. Richardson, Tietz & Richardson, Decatur, IL, for debtor.

Before: COFFEY, RIPPLE, and DIANE P. WOOD, Circuit Judges.

DIANE P. WOOD, Circuit Judge.

Hennings Feed & Crop Care, Inc. (Hennings) filed a voluntary bankruptcy petition under Chapter 11 on August 23, 1999, after Van Diest Supply Co. (Van Diest), one of its creditors, filed a complaint against it in the Central District of Illinois. Shelby County State Bank (the Bank), another creditor of Hennings, brought this action in the bankruptcy proceeding against Van Diest and the Trustee for Hennings to assert the validity of the Bank's security interest in certain assets of Hennings. Van Diest was included as a defendant because the scope of Van Diest's security interest in Henning's assets affects the extent of the Bank's security interest. The Bank and Van Diest cross-moved for summary judgment, and the bankruptcy court granted the Bank's motion, finding that Van Diest's security interest was limited to the inventory it sold to Hennings (as opposed to the whole of Hennings's inventory). Van Diest appealed that order, and the district court reversed, finding that Van Diest's security interest extended to all of the inventory. Other claims that were at issue in those proceedings are not relevant to this appeal. The Bank now appeals. For the reasons set forth in this opinion, we reverse the decision of the district court and remand the case to the bankruptcy court.

I

Hennings, a corporation based in Iowa, was in the business of selling agricultural chemicals and products. As is customary, several of Hennings's suppliers extended credit to it from time to time to finance its business operations, and obtained liens or other security interests in Hennings's property and inventory to safeguard their advances.

The Bank is among Hennings's creditors. In December 1997, the Bank extended credit to Hennings for $500,000. In May 1998, the Bank increased this amount to a revolving line of credit of some $4,000,000. Hennings in return granted the Bank a security interest in certain of its assets, including inventory and general intangibles. Van Diest, also a creditor, entered into several security agreements with Hennings and its predecessor over the years to protect its financing of materials supplied to Hennings. These agreements were covered by the Uniform Commercial Code, which Iowa has adopted (including the revised Article 9), see Iowa Code §§ 554.9101-554.9507 (1999).

A financing statement entered into by Hennings and Van Diest on November 2, 1981, provided for a blanket lien in "[a]ll inventory, notes and accounts receivable, machinery and equipment now owned or hereafter acquired, including all replacements, substitutions and additions thereto." On August 29, 1983, Hennings and Van Diest entered into a new security agreement (the Security Agreement), the language of which is at the core of this dispute. The Security Agreement was based on a preprinted standard "Business Security Agreement" form. In the field for the description of collateral, the parties entered the following language, drafted by Van Diest, describing the security interest as being in

[a]ll inventory, including but not limited to agricultural chemicals, fertilizers, and fertilizer materials sold to Debtor by Van Diest Supply Co. whether now owned or hereafter acquired, including all replacements, substitutions and additions thereto, and the accounts, notes, and any other proceeds therefrom.

The Security Agreement contained a further preprinted clause providing

as additional collateral all additions to and replacements of all such collateral and all accessories, accessions, parts and equipment now or hereafter affixed thereto or used in connection with and the proceeds from all such collateral (including negotiable or non-negotiable warehouse receipts now or hereafter issued for storage of collateral).

The bankruptcy court found that the language of the Security Agreement was ambiguous and susceptible on its face to two interpretations: under one, the security interest extended to all of Hennings's inventory; under the other, it was limited to inventory sold to Hennings by Van Diest. Proceeding under Iowa law, that court applied several canons of contract interpretation to resolve the ambiguity. The upshot was that the court rejected the use of parol evidence and concluded that the Security Agreement extended only to inventory sold to Hennings by Van Diest.

The district court disagreed. It found that the bankruptcy court had created an ambiguity out of thin air and that the language of the Security Agreement supported only the view that the collateral included all inventory. It relied on the presence of the "after-acquired clause," which provides for future inventory to be deemed part of the collateral. Such a clause ensures that an entity having an interest in inventory retains the interest even when the original goods have been sold and replaced in the course of business, given the natural turnaround of inventory. See, e.g., Larsen v. Warrington, 348 N.W.2d 637, 639 (1984). To reach this conclusion, the district court found that the qualifier phrase mentioning specific items found in the first paragraph quoted above, while it concededly modified the term "inventory," was mere surplusage. Accordingly, it found that the description of "collateral" must have extended to "[a]ll inventory," and reversed the bankruptcy court's findings.

II

As this case requires the interpretation of a contract, which is a question of law, we review the district court's decision de novo. In re Frain, 230 F.3d 1014, 1017 (7th Cir.2000); In re: Virtual Network Servs. Corp., 902 F.2d 1246, 1247 (7th Cir. 1990). The facts underlying the contract interpretation are not disputed in this case.

In accordance with the Security Agreement's undisputed choice of law provision, we apply Iowa law.

A. Ambiguity of the "After-Acquired" Clause

In the process of divining the meaning of a contractual clause, a court must first establish whether the language in dispute supports more than one interpretation. The existence of such an ambiguity is a question of law, and under Iowa law, "[t]he test for ambiguity is objective: whether the language is fairly susceptible to two interpretations." DeJong v. Sioux Ctr., Iowa, 168 F.3d 1115, 1119 (8th Cir. 1999).

The description of the security interest in this case is a textbook example of ambiguous language: a term (all inventory) is followed by a qualifier (including all...) and then another (sold to Debtor by Van Diest). It is a basic rule of English syntax (of all syntax, in fact) that a modifier should be placed directly next to the element it aims to modify: placing two modifiers in a row leads to the question whether the latter one modifies only the first modifier, or modifies the entire term. In the first edition of his book on statutory interpretation, Sutherland described the "doctrine of the last antecedent" as providing that "[r]elative and qualifying phrases, grammatically and legally, where no contrary intention appears, refer solely to the last antecedent." J.G. Sutherland, Statutes and Statutory Construction § 267, at 349 (1st ed. 1891).

The Supreme Court recognized the existence of the "last antecedent" rule as early as 1799 in Sims' Lessee v. Irvine, 3 U.S. (3 Dall.) 425, 444, 1 L.Ed. 665 n.a (1799) ("The rule is, that `such' applies to the last antecedent, unless the sense of the passage requires a different construction."). The Supreme Court of Iowa has also often endorsed resort to the doctrine in an attempt to resolve problems caused by ambiguously placed modifiers. See, e.g., State v. Lohr, 266 N.W.2d 1, 3 (Iowa 1978) (recognizing grammatical as well as legal origins of the rule); In re Peterson's Will, 166 N.W. 168, 170-71 (Iowa 1918). The rule is now thought to extend generally to the placement of all modifiers next to the term to be modified. See, e.g., Bryan A. Garner, Guidelines for Drafting and Editing Court Rules, 169 F.R.D. 176, 195 (1997) ("To avoid ambiguity, place a modifier next to the word or phrase it modifies.").

B. Canons of Interpretation and Extrinsic Evidence

As a linguistic matter, therefore, the sentence is ambiguous. As both the Supreme Court and Iowa courts have recognized (and, indeed, as Sutherland himself pointed out) the rule is helpful in determining the existence of the ambiguity, but not in solving the puzzle when both readings are plausible. See, e.g., Nobelman v. American Sav. Bank, 508 U.S. 324, 330, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993); In re: Kruse's Estate, 250 N.W.2d 432, 433-34 (Iowa 1977). Unless one always followed a rigid formalistic approach, the rule would not cast light on which of the two interpretations should prevail. Instead, courts (including those in Iowa) turn to other canons of interpretation. Under Iowa law, those other canons should be used to resolve an ambiguity before parol evidence may be introduced. See Kibbee v. State Farm & Cas. Co., 525 N.W.2d 866, 868 (Iowa 1994). The rules in Iowa are the familiar ones used in contract interpretation in United States courts: the contract must be construed as a whole; the court requires a fair and reasonable construction; 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 (still known to those fond of...