J: I was just rereading the Dickason case. Do you mind a few questions?
M: No problem, but remind me of the facts first.
J: Sure. A retailer who owed Marine National Bank some money went out of business. At the time, the retailer had in his possession some oriental rugs. A rug company, Dickason, claimed to own the rugs under a consignment agreement. But the bank claimed a prior security interest in the rugs.
M: Got it. I remember the case. So what’s your question?
J: Well, first, exactly how do consignment agreements work?
M: A consignor delivers goods to a dealer or retailer for sale. The retailer—“the consignee”—agrees to sell the goods and remit a portion of the sales price back to the consignor. The consignor retains title to the goods while the retailer has them in his possession.
J: So some portion of the sales price is sent back to the consignor.
M: Right, but the consignor has to file a financing statement with the Secretary of State’s office in order to protect his right to the goods.
M: It’s a technical requirement under Article 9. The purpose is to notify the public and creditors of his ownership claim.
J: OK. But everyone agreed that the consignor’s filing in this case was faulty, right?
M: Right, it misidentified the retailer.
J: So the court looked to see if the bank had any right to the rugs.
M: Right. So, did the bank have any rights?
J: Yeah. Years before the consignment agreement, the bank had loaned $400 000 to the retailer. The bank secured the debt by including a “granting clause” in the promissory note. This clause granted a security interest in all of the retailer’s personal property and specifically referred to the bank’s financing statement. The granting clause also described the bank’s security interest, but in much broader language.
M: Right. The bank’s financing statement—but not the security agreement—included an after-acquired property clause. In that clause, the bank claimed a security interest in all of the retailer’s personal property “whether now owned or hereafter acquired.”
J: So even if the debtor purchased property after the date of the security agreement, the lender would have a security interest in the new property?
J: So after the retailer went out of business, the bank wanted to repossess all of the retailer’s personal property, including the oriental rugs. But the rugs had come into the retailer’s possession long after the bank had made its loan. So the issue was whether the bank had a security interest in the rugs as after-acquired property, right?
J: And in order to claim a security interest in after-acquired property like the rugs, the bank had to show that its security agreement included an after-acquired property clause. Well, the financing statement included one—so why was there a problem?
M: Specifically, the courts look to the security agreement in the note—not the financing statement—to determine if there’s a security interest. Here, the plain language of the note didn’t include an after-acquired property clause. But the financing statement did. So the precise issue was whether the financing statement’s broad description of personal property could be integrated into the note.
J: And the court said yes, so the bank got to repossess the rugs, right?
M: Exactly. Since the note referred to the financing statement, the court said that the language of the financing statement should be read as part of the note.
J: Thanks, Maria! I owe you big time!
M: You’re welcome.