## Facts

- Hennings Feed & Crop Care, Inc., an Iowa agricultural products seller, financed its operations through trade credit and bank loans secured by interests in its assets.
- Van Diest Supply Co., a chemical supplier, entered security agreements with Hennings governed by Iowa’s U.C.C. Article 9.
- A 1981 financing statement referenced a broad lien on “all inventory” and other categories, including after-acquired property.
- In 1983, Van Diest and Hennings executed a new security agreement describing collateral with global “inventory” language and an after-acquired property clause, but also using phrasing that tied the collateral to inventory “sold” by Van Diest, creating uncertainty about scope.
- Shelby County State Bank later extended major credit to Hennings (including a $500,000 loan and a roughly $4,000,000 revolving line) and took a security interest including inventory and general intangibles.
- After Hennings filed Chapter 11, the Bank brought an adversary proceeding against Van Diest and the trustee to determine the extent and priority implications of Van Diest’s security interest.
- On cross-motions for summary judgment, the bankruptcy court found the 1983 security agreement ambiguous and construed it as limited to inventory Van Diest sold to Hennings.
- The district court reversed, holding the 1983 agreement created a security interest in all of Hennings’s inventory, and the Bank appealed.

## Issues

1. Whether the 1983 security agreement granted Van Diest a blanket security interest in all of Hennings’s inventory or only in inventory supplied by Van Diest.
2. Whether the collateral description in the 1983 security agreement “reasonably identif[ied]” the collateral as required by U.C.C. § 9-110 (as adopted in Iowa), particularly as to notice to subsequent creditors.

## Decision

- The Seventh Circuit reversed the district court and reinstated the bankruptcy court’s construction of the 1983 security agreement.
- The court held Van Diest’s 1983 security interest was limited to inventory Van Diest sold to Hennings (and related proceeds), not all of Hennings’s inventory.
- The case was remanded to the bankruptcy court for further proceedings consistent with this interpretation.

## Legal Principles

- A security agreement must contain a collateral description that “reasonably identifies” what is encumbered; the description must be adequate to inform later creditors of the scope of the lien.
- A financing statement’s broad, notice-style language does not control the scope of the operative security agreement; the security agreement is interpreted as a contract under U.C.C. principles.
- Where a security agreement’s text is materially ambiguous, courts should not expand a secured party’s interest beyond what the language and context reasonably support, especially when third-party creditor notice is affected.
- Drafting risk falls on the secured party: if a party intends a blanket lien on all inventory, the agreement should state that clearly rather than rely on language that can be read as limited to the secured party’s own goods.

## Conclusion

The Seventh Circuit construed the ambiguous 1983 collateral description under U.C.C. Article 9 to protect predictable notice to later creditors, holding that Van Diest held a security interest only in inventory it supplied to the debtor (and proceeds), not a blanket lien on all inventory.


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