Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-90-03139/USCOURTS-ca10-90-03139-0/pdf.json

Nature of Suit Code: 220
Nature of Suit: Foreclosure
Cause of Action: 

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( 

BANK OF KANSAS, 

PUBLISH 

UNITED STATES COURT OF APPEALS 

TENTH CIRCUIT 

Plaintiff-Appellee, 

FILED 

United St.ates Coμrt <?f Appeals Tenth Circuit 

NOV 13 1991 

ROBERT L. HOECKER 

Clerk 

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No. 90-3139 

v. 

NELSON MUSIC COMPANY, INC.,·· ) . CHARLES W. DAVISON, ) 

BRAD C. DAVISON, UNITED ) 

STATES OF AMERICA, and FEDERAL ) 

DEPOSIT INSURANCE CORPORATION, ) 

as successor in interest to Sylvia) 

State Bank, ) 

Defendants-Appellees, 

FIRST NATIONAL BANK OF KINGMAN, 

KANSAS, 

Defendant-Appellant, 

and 

YAMAHA MUSIC FINANCE, INC., 

formerly known as Yamaha Music 

Corporation U.S.A., TURON STATE 

BANK, as successor to Sylvia 

State Bank, EL PASO COUNTY BANK, 

TRANSAMERICA COMMERCIAL FINANCE 

CORPORATION, STEINWAY & SONS, 

WICHITA PIANO AND ORGAN, INC., 

Defendants. 

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Appeal from the United States District Court 

for the District of Kansas 

(D.C. 89-1228-K) 

Appellate Case: 90-3139 Document: 010110096916 Date Filed: 11/13/1991 Page: 1 
Kevin J. Arnel of Foulston & Siefkin, Wichita, Kansas (Terry C. 

Cupps on the brief) for Plaintiff-Appellee. 

Victors. Nelson of Morrison, Hecker, Curtis, Kuder & Parrish, 

Wichita, Kansas for Defendant-Appellee FDIC. 

Theodore C. Geisert of Geisert & Watkins, Kingman, Kansas (Curtis 

E. Watkins on the brief) for Defendant-Appellant. 

Before EBEL and McWILLIAMS, Circuit Judges, and ALLEY,* District 

Judge. 

EBEL, Circuit Judge. 

This appeal involves a dispute between creditors over the 

priorities of security interests and liens in the inventory of 

Nelson Music Company, Inc. The district court granted summary 

judgment in favor of plaintiff-appellee Bank of Kansas. We 

reverse the district court and remand for further proceedings 

consistent with this opinion. 

BACKGROUND 

Wichita Piano and Organ, Inc. ("Wichita") and Nelson Music 

Company, Inc. ("Nelson") are Kansas corporations wholly owned by 

Charles W. Davison. On February 25, 1985, Wichita entered into a 

loan agreement with First National Bank, Kingman, Kansas ("Kingman 

Bank"). In return for the loan, Wichita executed a promissory 

* Honorable Wayne E. Alley, District Judge for the Western 

District of Oklahoma, sitting by designation. 

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Appellate Case: 90-3139 Document: 010110096916 Date Filed: 11/13/1991 Page: 2 
note and security agreement to Kingman Bank. The following day --

February 26, 1985 -- Nelson, through Charles Davison, executed a 

guaranty agreement whereby it guaranteed Wichita's indebtedness to 

Kingman Bank. On February 27, 1985 -- the very next day -- Nelson 

entered into its own loan agreement with Kingman Bank. The 

promissory note for that loan specifically referenced a security 

agreement dated February 27, 1985, which granted Kingman Bank a 

security interest in Nelson's inventory of Gulbransen organs. 1 

That security agreement contained a "dragnet clause" which stated 

the following: "The security interest ... shall secure all 

obligations of the undersigned to the Bank, howsoever created, 

evidenced or arising, whether direct or indirect, absolute or 

contingent, or now or hereafter existing, or due or to become due 

•••• 11 (emphasis added). 2 On February 28, 1985, Kingman Bank 

perfected the security agreement by filing a financing statement 

with the Kansas Secretary of State. 

Almost one year later, on February 13, 1986, Nelson entered 

into a revolving loan agreement with a second bank, the Bank of 

Kansas. Under the terms of that agreement, Nelson granted the 

Bank of Kansas a security interest in "[a]ll inventory and 

accounts receivable ... II The Bank perfected that security 

interest on February 26, 1986. 

1 That promissory note stated that "[t]his loan is secured by 

Security Agreement dated 2-27-85, executed by or for the debtor in 

favor of the holder. This Security Agreement will secure future 

or other indebtedness and will cover after acquired property." 

(emphasis added). 

2 Disbursements were made pursuant to both notes only after all 

of the above referenced documentation had been effected. 

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Appellate Case: 90-3139 Document: 010110096916 Date Filed: 11/13/1991 Page: 3 
In June of 1986, Nelson paid off the February 27, 1985 

promissory note. However, some time later, Wichita defaulted on 

the February 25, 1985 note. Kingman Barik commenced a suit in 

Kansas court against Wichita (and Davison and Nelson as 

guarantors) and won a judgment to recover the balance of its loan 

to Wichita. Bank of Kansas subsequently brought this suit to 

protect and foreclose its security interest in the Nelson 

inventory. Kingman Bank was joined as a defendant and it argued 

that it had a prior claim over Nelson's Gulbransen organ 

inventory. According to Kingman Bank, Nelson's February 26, 1985 

guaranty was an obligation covered by the "dragnet clause" of the 

February 27, 1985 security agreement. Thus, Kingman Bank asserted 

that the guaranty obligation was secured by the interest in the 

Gulbransen organs. Bank of Kansas countered that the February 27, 

1985 security agreement between Nelson and Kingman Bank secured 

only the promissory note entered into on the same date and that 

Kingman Bank's security interest in Nelson's Gulbransen organ 

inventory expired when the Nelson promissory note was paid off in 

June 1986. 

The case was removed to federal court, where both sides moved 

for summary judgment. The district court granted summary judgment 

for Bank of Kansas, and Kingman Bank now appeals. 

ANALYSIS 

Since this is an appeal of a summary judgment order, we 

review the district court's order de novo. Osgood v. State Farm 

Mut. Auto Ins. Co., 848 F.2d 141, 143 (10th Cir. 1988). The 

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Appellate Case: 90-3139 Document: 010110096916 Date Filed: 11/13/1991 Page: 4 
district court granted Bank of Kansas' summary judgment motion 

after concluding that the terms of the February 27, 1985 security 

agreement were "doubtful and uncertain.,; Memorandum and Order at 

23. Applying Kansas rules of contractual construction and 

interpretation -- most notably Kansas' policy of strictly 

construing dragnet clauses in mortgage contracts3 -- the court 

found that "[s]ince the Kingman Bank prepared the documents in 

question, it should not be permitted to benefit from the 

ambiguities present in such documents." Id. at 24. 

We disagree with the district court's conclusion that the 

security agreement was ambiguous. According to the Uniform 

Commercial Code, incorporated into the Kansas Statutes at K.S.A. 

84-1-101 et seq., 11 a security agreement is effective according to 

its terms between the parties II K.S.A. 84-9-201. Nowhere 

3 A dragnet clause is one which purports to secure all debts -- past, present, and future -- between the parties to a security 

agreement or real estate mortgage. Kansas, like many other 

jurisdictions, has disfavored such clauses in the mortgage 

context. According to the Kansas Supreme Court, "[m]ortgages of 

this character have been denominated 'anaconda mortgages' and are 

well named thus, as by their broad and general terms they enwrap 

the unsuspecting debtor in the folds of indebtedness .... 11 

Emporia State Bank & Trust Co. v. Mounkes, 519 P.2d 618, 621 (Kan. 

1974) (quoting Berger v. Fuller, 21 S.W.2d 419, 421 (Ark. 1929)). 

To protect against such abuses, Kansas courts have held that: 

in the absence of clear, supportive evidence of a contrary 

intention a mortgage containing a dragnet type clause will 

not be extended to cover future advances unless the advances 

are of the same kind and quality or relate to the same 

transaction or series of transactions as the principal 

obligation secured or unless the document evidencing the 

subsequent advance refers to the mortgage as providing 

security therefor. 

Id. at 623. More to the point for our purposes, Kansas has 

expressed a similar antipathy toward dragnet clauses in a 

subsequent mortgage securing a prior debt. Ram Co. v. Estate of 

Kobbeman, 696 P.2d 936, 942 (Kan. 1985). 

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Appellate Case: 90-3139 Document: 010110096916 Date Filed: 11/13/1991 Page: 5 
does the Code require a specific description of the debt 

obligation to be secured. Rather, the security agreement need 

only contain a "broad description of the obligations 

secured •.•• " Kansas Comment 1983 at K.S.A. 84-9-203. The 

February 27, 1985 security agreement met that requirement. It can 

not be doubted that Nelson's guaranty agreement of February 26 was 

an "obligation" of Nelson. And, the security agreement 

specifically pledged to secure "all obligations of the undersigned 

to the Bank, howsoever created, evidenced or arising, whether 

direct or indirect, absolute or contingent, or now or hereafter 

existing, or due or to become due .... " It is difficult to see 

how that language could be interpreted in such a way as not to 

include the February 26, 1985 guaranty between Nelson and the 

bank. 

Moreover, we find that the Kansas u.c.c. contains no general 

policy against the use of dragnet clauses in security agreements. 

Factors which have appeared to motivate Kansas' policy disfavoring 

dragnet clauses are not applicable here. Such factors include 

(1) unsophisticated parties with unequal bargaining strength, 4 

(2) application of the dragnet clause to unrelated, dissimilar, 

4 Although acknowledging that "there are judicial limits in 

Kansas on the breadth of 'dragnet clauses,"' the Comment to K.S.A. 

84-9-204 concedes that "[o]f course if the debtor is a commercial 

entity rather than g consumer, the courts might well give a 

broader reading of g dragnet clause, particularly given the clear 

authorization of optional future advances found Jn this 

subsection." (Emphasis added). Thus, the authorization of 

dragnet clauses in the u.c.c., which primarily regulates 

sophisticated commercial actors, appears consistent with Kansas 

law, which may be wary of such clauses in other contexts. 

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and often distant obligations, 5 and (3) existence of the dragnet 

clause in real estate mortgages, which cloud title. 6 Here, the 

parties are all sophisticated commercial entities; the dragnet 

clause applied to a closely related transaction; and it did not 

encumber real estate. Thus, to the extent that the language of 

the dragnet clause were ambiguous -- and, as noted above, we do 

not believe that the clause at issue is ambiguous -- a 

parsimonious reading is not warranted. 7 

Our conclusion finds support in the case of In re Johnson, 

105 B.R. 661 (D. Kan. 1989). There, the district court reversed a 

bankruptcy court's restrictive reading of a dragnet clause in a 

security agreement between sophisticated parties that secured a 

5 See Ram Co. v. Estate of Kobbeman, 696 P.2d 936, 942 (Kari. 

1985) (dragnet clause in subsequent security agreement upheld 

where it secures an antecedent debt "of the same kind or quality, 

or [arising] out of the same transaction or series of transactions 

as the prior loan"). 

6 Many states have disfavored dragnet or anaconda clauses in the 

real estate context, as such clauses can tie up title 

indefinitely. Kansas does not appear to be an exception to this 

rule, as its cases disfavoring dragnet clauses are almost always 

in the context of clause granting a security interest in real 

estate. See Mark Twain Kansas City Bank v. Cates, 810 P.2d 1154 

(Kan. 1991); First Nat'l Bank in Wichita v. Fink, 736 P.2d 909 

(Kan. 1987); First Nat'l Bank & Trust Co. v. Lygrisse, 647 P.2d 

1268 (Kan. 1982); Emporia State Bank & Trust Co. v. Mounkes, 519 

P.2d 618 (Kan. 1974); Stockyards Nat'l Bank v. Capital Steel & 

Iron Co., 441 P.2d 301 (Kan. 1968). The one case that arose in 

the context of a chattel mortgage was Sowder v. Lawrence, 281 P. 

921 (Kan. 1929). However, that case was pre-u.c.c. We can not 

ignore the clear language of the u.c.c. authorizing dragnet 

clauses in the context of the commercial transactions involved in 

this case. 

7 The "underlying purposes and policies of [the Kansas u.c.c. 

include] ... (b) to permit the continued expansion of commercial 

practices through custom, usage and agreements of the parties." 

K.S.A. 84-1-102. A literal, rather than a hostile, reading of 

this dragnet clause will best accomplish this statutory purpose. 

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related loan with non-real collateral. In this context, the court 

observed that: 

[u]nder Article 9, security agreements are effective 

according to the their terms between the parties, and 

there is no requirement that the security agreement 

identify the debt secured. K.S.A. 84-9-201; K.S.A. 84-

9-203(1). The security agreement must only contain a 

"broad description of the obligation secured." K.S.A. 

84-9-203 Kansas comment (1983). 

Id. at 664 (emphasis added). The court held that "[i]f the 

language used by the parties is plain, complete and unambiguous, 

the intention of the parties must be gathered from the language 

and that language alone." Id. at 665. 8 We agree, and on the 

basis of the "plain, complete and unambiguous" language of the 

agreement, we conclude as a matter of law that the parties secured 

all obligations between Nelson and Kingman Bank by the February 27 

security agreement, including the February 26 guarantee. 

CONCLUSION 

For these reasons, we REVERSE the district court's summary 

judgment order and REMAND for proceedings consistent with this 

opinion. 

8 In support of its conclusion, Johnson noted that the Wyoming 

Supreme Court reached a similar conclusion in First Nat'l Bank v. 

First Interstate Bank, 774 P.2d 645, 647-50 (Wyo. 1989) (chattel 

security agreement need not specify the antecedent debt where the 

agreement plainly states that it secured "all amounts I owe to the 

Bank, whether now or later"). See also In re Riss Tanning Corp., 

468 F.2d 1211 (2d Cir. 1972) (holding that, under New York law, a 

dragnet clause in a chattel security agreement covered a 

contemporaneous but not specifically referenced debt). 

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