## Facts

- Mid-State Fertilizer Co. operated a fertilizer business and needed working capital; Lasley and Maxine Kimmel were its sole shareholders and guaranteed its debt.
- Exchange National Bank of Chicago provided Mid-State a revolving credit facility, generally advancing up to 70% of eligible inventory and receivables, with a $2 million cap.
- The financing structure required customer payments to be sent to a bank-controlled lockbox and deposited into a blocked account controlled by the bank; the bank applied funds to the loan and remitted any excess to Mid-State.
- Mid-State remained responsible for repayment, including losses from customer nonpayment; the bank did not assume default risk as a factor would.
- After Mid-State reported significant losses, the bank tightened advance conditions, including limiting the treatment of fertilizer in transit as “inventory” for borrowing-base purposes.
- By May 1986, Mid-State was in default; the bank learned that a purported $135,000 receivable did not exist and that customers had paid about $1 million directly to Mid-State rather than through the lockbox.
- The bank stopped making new advances; Mid-State could not obtain replacement financing and entered Chapter 7 liquidation.
- Mid-State and the Kimmels sued, asserting state-law claims and a federal claim that the lockbox/blocked-account requirements violated the Bank Holding Company Act’s anti-tying provision, 12 U.S.C. § 1972.

## Issues

1. Whether requiring a lockbox and blocked account as part of a revolving credit facility constitutes an unlawful tying arrangement under 12 U.S.C. § 1972, or instead a permissible credit-risk control integral to the loan.
2. Whether, after disposing of the federal claim on summary judgment, the federal court properly dismissed the state-law claims without prejudice.

## Decision

- The Seventh Circuit affirmed summary judgment for the bank on the § 1972 claim.
- The court held the lockbox and blocked-account conditions were not unlawful ties but ordinary, risk-reducing elements of asset-based lending tied to control of collateral.
- The court upheld dismissal of the pendent state-law claims without prejudice following resolution of the federal claim.

## Legal Principles

- 12 U.S.C. § 1972 targets coercive tying that exploits credit power to force customers to take distinct, unwanted products or services, not routine loan-term regulation.
- In asset-based financing, mechanisms that control collateral and cash proceeds (e.g., lockboxes and blocked accounts) may be treated as components of the credit product, not separate “tied” products.
- A § 1972 tying claim is weakened where the borrower is not compelled to obtain unrelated banking services from the lender and may maintain other banking relationships.
- When all federal claims are resolved before trial, a federal court may decline to exercise jurisdiction over remaining state-law claims and dismiss them without prejudice.

## Conclusion

The court held that lockbox and blocked-account requirements used to secure and control receivables in asset-based lending are permissible risk-control terms integral to the loan, not prohibited tying under 12 U.S.C. § 1972, and it approved dismissal without prejudice of the remaining state-law claims once the federal claim failed.


Mid-State Fertilizer Co. v. Exch. Nat’l Bank of Chi., 877 F.2d 1333 (7th Cir. 1989)