In Re Filtercorp, Inc.

William J. Murphy, Cairncross & Hempelmann, P.S., Seattle, Washington, for the appellant.

Edwin K. Sato, Bucknell Stehlik, Seattle, Washington, and Sheena R. Aebig and Eric S. Carlson, Williams, Kastner & Gibbs, Seattle, Washington, for the appellees.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Higdon, Meyers and Hagan, Judges, Presiding. BAP No. WW-96-01238-HiMHa.

Before: D.W. NELSON and KOZINSKI, Circuit Judges, and SCHWARZER,* Senior District Judge.

We must decide whether under Washington law a security agreement that grants an interest in "inventory" or "accounts receivable," without more, presumptively includes after-acquired inventory or accounts receivable. The bankruptcy court and Bankruptcy Appellate Panel (BAP) held that to secure after-acquired property, an express after-acquired property clause is required. We reverse, holding that Washington law would presume security interests in "inventory" and "accounts receivable" to include after-acquired property, absent evidence of intent to the contrary. Applying this rule to the security agreement at issue between Henry Paulman and Filtercorp, Inc., we hold that Paulman had a security interest in after-acquired accounts receivable, but not in after-acquired inventory because the security agreement demonstrated an intent to limit the inventory collateral by referencing an attached inventory listing.

We reject Paulman's other claims, in particular that the bankruptcy court's order of sale of Filtercorp, Inc.'s assets is not moot, that the bankruptcy court erred by refusing to subordinate or avoid the claims of other creditors, and that he was improperly denied adequate opportunity for discovery.

I. PAULMAN'S LOANS TO FILTERCORP, INC.

Filtercorp, Inc. was a Washington corporation which developed and distributed carbonated pads used in the food service industry to filter cooking oils. Beginning in November 1991, the company took out a series of loans from Paulman, an individual salesman, to help fund further development and meet large orders. The loans were short term, ranging from two to three months, and memorialized by promissory notes drafted by Paulman's attorney. The final note-the subject of this litigation-was a three-month note, executed on June 30, 1992, and due September 30, 1992.

The June 1992 note provided for the following security:

This note is secured by 75,000 shares of Filter Corp. [sic] stock owned by Robin Bernard, the accounts receivable and inventory of Filter Corp. [sic] (See UCC-1 filing and attached inventory listing.) and John Gardner personally.

The parties never executed a separate security agreement. However, Paulman perfected his security interest by filing a UCC-1 financing statement on October 5, 1992. The UCC-1 statement identified the collateral as (1) accounts receivable and (2) materials inventory. Despite the note's reference to an inventory listing, none was ever attached to the note or the financing statement.

There is no contemporaneous evidence shedding light on whether the parties intended to secure after-acquired inventory or accounts receivable with the June 1992 note. In the course of this litigation, the parties presented conflicting versions of their intent. Paulman claimed that he and Filtercorp, Inc. understood the security interest to attach to future rather than presently-held inventory and accounts receivable so as not to interfere with the company's ability to raise additional capital. Hence, he did not attach the inventory listing. In contrast, Robin Bernard, President of Filtercorp, Inc., stated that in light of the short, three-month term of the loan he did not contemplate an ongoing security interest.

Filtercorp, Inc. defaulted on the June 1992 note and Paulman initiated a suit in state court in early October 1992 to enforce it. Filtercorp defended on the ground that the note was usurious. Paulman ultimately prevailed in November 1995 and obtained judgment in the amount of $710,572.81.

II. GATEWAY LENDERS' LOANS TO FILTERCORP, INC.

In December 1992, while the state court litigation was pending, Filtercorp, Inc. became the general partner in a limited partnership named Filtercorp Partners Limited Partnership (Filtercorp LP), in which several limited partners invested approximately $1.7 million. Filtercorp, Inc. transferred all of its operating assets to Filtercorp LP leaving its interest in the limited partnership as its only significant asset.

In early 1995, Filtercorp LP took out a series of loans that are the basis of Paulman's effort to seek equitable subordination or avoidance of competing creditors' claims. On three separate dates, Filtercorp LP borrowed a total of approximately $355,000 from Gateway Venture Lenders III, Charles Brickman and Donald Eskes (collectively Gateway Lenders), all of whom were either limited partners of Filtercorp LP or "insiders" for other reasons. The last loans were obtained on February 24, 1995. On that date, Filtercorp LP issued promissory notes for all the amounts borrowed and backdated each note according to its respective loan date. At the same time, Filtercorp LP granted Gateway Lenders a blanket security interest in all of its assets, specifically including after-acquired property. Gateway Lenders filed a corresponding financing statement on March 1, 1995, perfecting its security interest.

In November 1995, Paulman began efforts to collect on his judgment against Filtercorp, Inc. and Filtercorp LP (collectively, Filtercorp). In response, Filtercorp filed voluntary Chapter 11 petitions and immediately moved for approval to use cash collateral to cover expenses. The court held several cash collateral hearings, the last of which was on January 2, 1996. At that time, Filtercorp informed the court of a pending offer from Gateway Lenders to purchase all of Filtercorp's assets. Approximately one week later, Filtercorp moved to sell most of its assets free and clear of liens. Gateway Lenders' offer consisted of a credit bid of its $380,000 secured debt against all the assets subject to the security interest and $100,000 cash for the unsecured assets. At this point, the proposed sale also included a provision designed to deal with the conflicting liens between Gateway Lenders and Paulman, calling for an escrow of the proceeds from the sale of inventory pending resolution of priority. The next day, January 11, 1996, Filtercorp filed an adversary proceeding to resolve the competing lien claims between Gateway Lenders and Paulman.

Paulman filed his opposition to Filtercorp's motion for approval of the sale on February 5, 1996, claiming that the proposed sale was not an arm's-length transaction because the buyers were insiders of Filtercorp. Alternatively, he asked the court for a sixty-day deferral to analyze fully the proposed transaction. However, he did not serve any formal discovery requests or file a motion for a continuance pursuant to Federal Rule of Civil Procedure 56(f), made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7056.

At a February 9, 1996 hearing, the court scheduled a hearing on Filtercorp's motion to approve the sale proposal for February 27, 1996, to resolve first the adversary proceeding as well as to give Paulman additional time to come up with a competing offer. The court further found at the February 9 hearing that the assets of the company, appraised at between $400,000 and $600,000, were potentially wasting, and therefore directed the parties to file summary judgment motions on their competing liens and to provide each other with any relevant information, including a receivables list with customer names.

The bankruptcy court granted summary judgment to Gateway Lenders, holding that Paulman had no security interest in any of Filtercorp's assets because his liens did not attach to after-acquired property and none of the remaining assets could be traced to the assets in existence at the time that his security interest was created. In particular, the court ruled that there was no security interest in after-acquired inventory or accounts receivable because the note did not expressly grant such an interest. The court also found that it could not determine the intent of the parties when they signed the note because the conflicting declarations of Paulman and Filtercorp, Inc.'s President lacked any evidentiary support. The court went on to find Gateway Lenders' security interest valid and first in priority. It did, however, invalidate as preferential all security interests granted Gateway Lenders for the advances made prior to the signing of the security agreement on February 24, 1995. This left Gateway Lenders with $225,000 of secured debt. Thereafter, Gateway Lenders submitted a credit bid of $225,000 and a cash bid of $225,000. Paulman did not submit a revised bid. The court approved the sale to Gateway Lenders on the terms of its revised bid.

Paulman did not seek a stay of the order of sale. Filtercorp completed the sale and transferred the assets to Gateway Lenders, who subsequently transferred the assets to a newly formed corporation called FiberCarb. According to Gateway Lenders and Filtercorp, they have since taken irreversible actions with the proceeds from the inventory and the receivables, including employment of personnel and signing and cancellation of leases.

Paulman appealed the order of sale and the summary judgment order. The BAP affirmed the bankruptcy court's decisions. It held the absolute mootness rule precluded Paulman's appeal from the order of sale because (1) Paulman failed to obtain a stay, (2) Gateway Lenders was a good faith purchaser, and (3) Paulman suffered no due process violation because he had made no formal discovery requests. The BAP further held that the summary judgment order was not moot because the issue was separate and distinct from the sale of assets and the panel could fashion effective relief since a significant portion of the sale proceeds were undistributed and could be used to pay Paulman's claim if he prevailed.

On the merits, the BAP affirmed the lower court's ruling that parties must include express language in a security agreement in order to attach after-acquired property. The BAP also affirmed the bankruptcy court's rejection of Paulman's arguments that Gateway Lenders' claims should be subordinated or avoided and that he was denied sufficient opportunity to conduct discovery into Filtercorp's business.

Paulman appeals the orders of the BAP. We have jurisdiction pursuant to 28 U.S.C. § 158(d) and affirm in part and reverse in part.

We review decisions of the BAP de novo. See Fulkrod v. Savage (In re Fulkrod), 973 F.2d 801, 802 (9th Cir.1992). The bankruptcy court's findings of fact are reviewed for clear error and conclusions of law are reviewed de novo. See id.

Mootness is a jurisdictional issue reviewed de novo. See Baker & Drake, Inc. v. Public Serv. Comm'n (In re Baker & Drake, Inc.), 35 F.3d 1348, 1351 (9th Cir.1994).

Filtercorp contends that Paulman's challenge of the bankruptcy court's order of sale of assets is moot. We agree. When a sale of assets is made to a good faith purchaser, it may not be modified or set aside unless the sale was stayed pending appeal. See 11 U.S.C. § 363(m) (1994);1 see also Onouli-Kona Land Co. v. Estate of Richards (In re Onouli-Kona Land Co.), 846 F.2d 1170, 1172 (9th Cir.1988) ("Finality in bankruptcy has become the dominant rationale for our decisions; the trend is towards an absolute rule that requires appellants to obtain a stay before appealing a sale of assets."). Because Paulman did not obtain a stay, he cannot challenge the order of sale.

Nevertheless, Paulman argues the absolute mootness rule should not apply because (1) this court can fashion effective relief, (2) Gateway Lenders was not a good faith purchaser, and (3) the sale order is void because he was denied due process. These claims are without merit.

First, whether we can fashion effective relief is immaterial. "[F]or [sale of assets] cases in which a court is able to fashion relief, the exception has operated in only one situation: 'where real property is sold to a creditor who is a party to the appeal.' " Onouli-Kona, 846 F.2d at 1172 (quoting Sun Valley Ranches, Inc. v. Equitable Life Assurance Soc'y of the United States (In re Sun Valley Ranches, Inc.), 823 F.2d 1373, 1375 (9th Cir.1987)). Because the Filtercorp assets sold were business assets, not real property, this sale does not fall within the exception.

Furthermore, even if "effective relief" were a valid exception to the absolute mootness rule, it would not be feasible here. Undoing the sale would adversely affect entities and individuals not party to the appeal. The physical assets have been moved and transferred to a new corporation. Leases have been signed, employees hired and new liabilities have been incurred in reliance upon the finality of the sale. Marketing rights and inventory have been sold to third parties. Paulman argues that equitable relief would be possible by implementing Gateway Lenders' escrow plan initially proposed when Filtercorp LP sought approval of the sale of its assets. The plan, however, is unavailing now because no escrow was created for the proceeds of the sold inventory, once the bankruptcy court's summary judgment order determined priority.

Second, the bankruptcy court found that Gateway Lenders was a purchaser in good faith for all purposes including 11 U.S.C. § 363(m). This finding is not clearly erroneous. A good faith buyer "is one who buys 'in good faith' and 'for value.' " Ewell v. Diebert (In re Ewell), 958 F.2d 276, 281 (9th Cir.1992) (citing In re Abbotts Dairies of Pennsylvania, Inc., 788 F.2d 143, 147 (3d Cir.1986)). "[L]ack of good faith is [typically] shown by 'fraud, collusion between the purchaser and other bidders or the trustee, or an attempt to take grossly unfair advantage of other bidders.' " Id. (quoting Community Thrift & Loan v. Suchy (In re Suchy), 786 F.2d 900, 902 (9th Cir.1985)). Although Gateway Lenders comprised insiders, Paulman's allegations of bad faith are unsupported by the record. There is no evidence of collusion between Filtercorp LP and Gateway Lenders to deny him access to information. Furthermore, Paulman was subsequently provided with a receivables report that included the customer names he sought. Paulman was given time and opportunity to construct his own bid and was limited only because the summary judgment ruling denied him priority. Finally, Gateway Lenders' revised bid of approximately $450,000 was for value, given that Filtercorp LP's assets were worth between $400,000 and $600,000 and were wasting.

Paulman's claim that he was denied due process because the court did not permit him adequate discovery is belied by his own failure to serve discovery requests and to seek a continuance pursuant to Federal Rule of Civil Procedure 56(f), which is incorporated into Federal Rule of Bankruptcy Procedure 7056.

In sum, the sale not having been stayed, Paulman's challenge of the order is moot.

An appeal from a bankruptcy court's summary judgment order is moot if the appealing party failed to obtain a stay, unless the court can "fashion effective relief." Baker & Drake, 35 F.3d at 1351. If a "practical and equitable" solution is feasible, the appeal is not moot. Id. at 1352.

Filtercorp and Gateway Lenders argue that the summary judgment order determining the priority of Paulman's and Gateway Lenders' security interests is so intertwined with the order of sale that it too should be subject to the absolute mootness rule. However, the BAP determined that effective relief was possible without undoing the sale because a substantial portion of the proceeds from the sale of Filtercorp's assets were undistributed. At oral argument before this court, counsel for Filtercorp confirmed that approximately $107,000 remained in the bankruptcy estate. If Paulman were held to be the first secured creditor, "practical and equitable" (albeit incomplete) relief is possible, without affecting the sale of assets, by resort to the funds in the estate. Thus, the appeal from the summary judgment is not moot.

III. SUMMARY JUDGMENT RULING ON PAULMAN'S SECURITY INTEREST

A bankruptcy court's grant of summary judgment is reviewed de novo. See Danning v. Miller (In re Bullion Reserve), 922 F.2d 544, 546 (9th Cir.1991).

Paulman challenges the summary judgment ruling that he did not acquire a security interest in after-acquired property, and is therefore an unsecured creditor of Filtercorp. On this appeal, we must "determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the [bankruptcy] court correctly applied the relevant substantive law." Grimmett v. Brown, 75 F.3d 506, 510 (9th Cir.1996).

A. Principles Governing Security Interests in Inventory and

Whether a security agreement creates a lien on particular assets is a question of state law. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Because no reported decisions of Washington courts or federal courts interpreting Washington law have answered the question whether a security agreement that grants an interest in "inventory" or "accounts receivable," without more, extends to after-acquired property, we must determine how Washington's highest court would resolve the issue. See Dimidowich v. Bell & Howell, 803 F.2d 1473, 1482 (9th Cir.1986) ("Where the state's highest court has not decided an issue, the task of the federal courts is to predict how the state high court would resolve it."), modified on denial of reh'g, 810 F.2d 1517 (9th Cir.1987).

Whether security interests in "inventory" presumptively include after-acquired property under Washington law came before us in Stoumbos v. Kilimnik, 988 F.2d 949, 954-56 (9th Cir.1993). We acknowledged the existence of a split of authority on whether a security interest in inventory or receivables automatically extended to after-acquired inventory or receivables despite the absence of an after-acquired property clause, but, on the facts of the case, did not have to decide the issue. See id. at 955-56. We now hold that if the issue came before the Washington Supreme Court, it would hold that security interests in "inventory" and "accounts receivable" presumptively include after-acquired inventory and receivables, subject to rebuttal by evidence that the parties intended otherwise.

Courts disagree over what terms are required in a security agreement to cover after-acquired inventory and accounts receivable.2 A minority of jurisdictions require express language evidencing the parties' intent to cover after-acquired inventory or accounts receivable. See, e.g., In re Middle Atl. Stud Welding Co., 503 F.2d 1133, 1135-36 (3d Cir.1974) (applying Delaware law); Covey v. First Nat'l Bank (In re Balcain Equip. Co.), 80 B.R. 461, 462 (Bankr.C.D.Ill.1987) (applying Illinois law); In re Taylored Prods., Inc., 5 U.C.C. Rep. Serv. 286, 289-91 (Bankr.W.D.Mich.1968) (applying Michigan law). These courts view the Uniform Commercial Code provision concerning after-acquired property, U.C.C. § 9-204 (codified at Revised Code of Washington section 62A.9204),3 as contemplating express after-acquired property clauses. See Middle Atlantic, 503 F.2d at 1135-36; Balcain Equip., 80 B.R. at 462. They reason that it is "neither onerous nor unreasonable to require a security agreement to make clear its intended collateral." Middle Atlantic, 503 F.2d at 1136. To do so simplifies the interpretation of security agreements and provides more precise notice to third parties of the extent of a perfected security interest in the debtor's property. See id. (noting that a "subsequent lender might expect the parties to make explicit an intention to include this kind of property, both for precision and because of the [pre-U.C.C.] law's historic hostility" to floating liens). In these jurisdictions, a grant of a security interest in "inventory" or "accounts receivable," without more, is insufficient to include after-acquired property.

However, we find more persuasive the contrary position, adopted by the majority of jurisdictions, that a security interest in inventory or accounts receivables presumptively includes an interest in after-acquired inventory or accounts receivables, respectively. See, e.g., National Bank v. West Tex. Wholesale Supply Co. (In re McBee), 714 F.2d 1316, 1330-31 (5th Cir.1983) (applying Texas law); Claytor v. Shenandoah Warehouse Co. (In re Shenandoah Warehouse Co.), 202 B.R. 871, 875 (Bankr.W.D.Va.1996) (applying Virginia law); In re American Family Marketing Corp., 92 B.R. 952, 954 (Bankr.M.D.Fla.1988) (applying Florida law); Provident Hosp. & Training Ass'n v. GMAC Mortgage Co. (In re Provident Hosp. & Training Ass'n), 79 B.R. 374, 380 (Bankr.N.D.Ill.1987) (applying Illinois law);4 In re Nickerson & Nickerson, Inc., 329 F.Supp. 93, 96 (D.Neb.) (applying Missouri law), aff'd, 452 F.2d 56 (8th Cir.1971); Frankel v. Associates Fin. Servs. Co., 281 Md. 172, 377 A.2d 1166, 1168 (Md.Ct.App.1977) (applying Maryland law); Kuemmerle v. United N.M. Bank at Roswell, N.A., 113 N.M. 677, 831 P.2d 976, 979-80 (N.M.1992) (applying New Mexico law); see also Sims Office Supply, Inc. v. Ka-D-Ka, Inc. (In re Sims Office Supply, Inc.), 83 B.R. 69, 72-73 (Bankr.M.D.Fla.1988) (applying Florida law); In re Fibre Glass Boat Corp., 324 F.Supp. 1054, 1056 (S.D.Fla.) (applying Florida law), aff'd, 448 F.2d 781 (5th Cir.1971). The rationale for this position rests on the unique nature of inventory and accounts receivable as "cyclically depleted and replenished assets." Stoumbos, 988 F.2d at 956; see also Shenandoah Warehouse, 202 B.R. at 875 (noting "revolving nature of receivables in most businesses"); Nickerson & Nickerson, 329 F.Supp. at 96 ("Inventory is like a river, the water in which continually flows, rises and falls, but which always constitutes a river.") (citing Ray D. Henson, "Proceeds" Under the Uniform Commercial Code, 65 Colum. L.Rev. 232 (1965)). Because inventory and accounts receivable are constantly turning over, "no creditor could reasonably agree to be secured by an asset that would vanish in a short time in the normal course of business." Stoumbos, 988 F.2d at 955 (citing American Employers Ins. Co. v. American Sec. Bank, 747 F.2d 1493, 1501 (D.C.Cir.1984)); see also Fibre Glass Boat, 324 F.Supp. at 1056 ("Surely the creditor would not enter into a financing arrangement secured by collateral fixed on a particular date, when the collateral by its nature would be constantly changing."). Essentially, a floating lien on inventory and accounts receivable is presumed because the collateral is viewed in aggregate as a shifting body of assets. See Nickerson & Nickerson, 329 F.Supp. at 96 ("[I]nventory subject to a security agreement should be looked upon as a single entity and not as [a] collection of individual items.").

Commentators support the majority position. See, e.g., 8A Ronald A. Anderson, Anderson on the Uniform Commercial Code § 9-204:11 at 896 (3d ed. 1996) ("When the collateral is of such nature that it is continually changing, a security interest in the collateral covers after-acquired property even though there is no express after-acquired property clause."); Barkley Clark, The Law Of Secured Transactions Under The Uniform Commercial Code p 2.09 [b] at 2-98 n. 338 (1993) ("The best rule for the courts is to excuse any reference to after-acquired property in the financing statement, but to draw the line in the security agreement according to real expectations in the commercial world; inventory, accounts, and farm products should not require inclusion of after-acquired property clauses in the security agreement, while equipment or general intangibles should."); Ray D. Henson, Secured Transactions Under the Uniform Commercial Code 281 n. 57 (2d ed. 1979) ("Where collateral, such as inventory or accounts, is constantly changing, the collateral can be analogized to [a][r]iver.... When the collateral changes, we trace the original security interest into the proceeds back into the substituted collateral, and so on, so that the security interest is continuous and continuously perfected.") (citations omitted).

The Uniform Commercial Code also provides support. The Official Comment to U.C.C. section 9-204 explains that the code accepts the validity of floating liens.5 Nothing in the comments mandates a specific statement to secure after-acquired property. Moreover, U.C.C. section 9-110 provides that a security agreement need not make a specific description of the covered collateral so long as it "reasonably identifies what is described." Wash. Rev.Code § 62A.9-110 (1995). Finally, the presumption of a floating lien on inventory and accounts receivable is consistent with the mandate that the U.C.C. be "liberally construed and applied to promote its underlying purposes and policies." Wash. Rev.Code § 62A.1-102(1) (1995); see also 8 William D. Hawkland et al., Uniform Commercial Code Series § 9-204:1, at Art. 9-1118 (1997) ("The intent of the drafters was to recognize and liberalize the rules surrounding after-acquired property clauses....").

The BAP rejected the presumption that security interests in inventory and accounts receivable automatically include after-acquired property, in part on the ground that the cases adopting this position involved language in the security agreement demonstrating that the parties intended to cover a broad class of collateral, such as "all inventory" or "all accounts." While parties have often signaled their intent through use of the word "all" in the security agreement, this is not true of every case endorsing the presumption. Compare Sims Office Supply, 83 B.R. at 70 (security agreement granting security interest in "all inventory"), and Fibre Glass Boat, 324 F.Supp. at 1055 (security agreement granting security interest in "all inventory used in the production of boats"), with Shenandoah Warehouse, 202 B.R. at 872, 875 (security agreement granting security interest in "accounts receivable" included after-acquired receivables despite fact that it did not say "all"), and American Family Mktg., 92 B.R. at 953-54 (security agreement granting security interest in "65% of the value of the inventory" included after-acquired inventory).

More importantly, the majority of courts and commentators reason that the presumption of a floating lien on inventory and accounts receivable is not created by particular language but rather springs from an appreciation of the cyclical nature of the collateral itself. This is confirmed by the decision on which the BAP placed its principal reliance, American Employers Ins. Co. v. American Sec. Bank, 747 F.2d 1493 (D.C.Cir.1984) (applying Maryland law). The American Employers court acknowledged that inventory and accounts receivable are unique types of collateral, describing them as "constantly turning over, and ... usually conceived of as a single entity." Id. at 1500. Drawing on cases considering financing statements lacking explicit after-acquired property clauses, the court noted that "the description of the collateral as 'accounts receivable' sufficiently identifie[s] the collateral as to put a prospective creditor on notice of the probability that the security agreement did embrace present and future accounts receivable. Any other view would ignore the realities of the world of financing." Id. (quoting South County Sand & Gravel Co. v. Bituminous Pavers Co., 106 R.I. 178, 256 A.2d 514, 517 (R.I.1969) (internal quotation marks omitted)). Further, the American Employers court reasoned that "[t]he addition of the word 'future' to 'accounts receivable and inventory' would not seem to help an interested party in determining the status of the debtor." Id. (quoting In re Platt, 257 F.Supp. 478, 481 (E.D.Pa.1966) (internal quotation marks omitted)). Turning to the security agreement at issue, the American Employers court held that "[i]t is reasonable to read a security agreement granting an interest in all inventory or receivables to include after-acquired inventory or receivables." Id. at 1501. And although the court also looked to evidence of the parties' subjective intent to include after-acquired collateral, the rationale of the decision is consistent with a presumption favoring inclusion of after-acquired collateral. Indeed, some jurisdictions have interpreted American Employers as endorsing the presumption. See Sims Office Supply, 83 B.R. at 72 (citing American Employers for the proposition that "[t]he modern trend suggests that a security interest in after-acquired property is to be automatically presumed when the collateral is described in such generic terms as 'accounts receivable,' ... or 'inventory' "); Kuemmerle, 831 P.2d at 979-80 (citing American Employers for the proposition that "[a] majority of the courts addressing this issue have concluded that a security interest in inventory also includes after-acquired inventory unless the security agreement clearly indicates the contrary result is intended").

Some courts have approached the issue of after-acquired property by asking whether a reasonable person viewing the security agreement "would recognize that the parties intended to secure after acquired inventory" or accounts receivable. In re Gary & Connie Jones Drugs, Inc., 35 B.R. 608, 611 (Bankr.D.Kan.1983) (applying Kansas law); see also Kubota Tractor Corp. v. Citizens & S. Nat'l Bank, 198 Ga.App. 830, 403 S.E.2d 218, 224 (Ga.Ct.App.1991) (applying Georgia law). Yet courts applying the reasonable person test "invariably find that the parties intended to secure after acquired inventory [or accounts receivable] despite the absence of an after acquired clause" because the