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Covey v. Morton Comty. Bank (In re Sabol) - 337 B.R. 195 (Bankr. C.D. Ill. 2006)


Notwithstanding the lenity of the Composite Document Rule, there must be documentary language reflecting a debtor's intent to grant a security interest. A financing statement which does not contain any grant language by the debtor creating a security interest in the described collateral, but merely identifies the collateral, cannot substitute for a security agreement.


Michael Sabol, one of the debtors, doing business in the recording industry as Sound Farm Productions, completed an application for a Small Business Administration (SBA) guaranteed loan to expand his business, requesting approval of a loan from Morton Community Bank (Bank), as Lender, in the principal amount of $58,000. The Bank’s application for the SBA guarantee, comprised of a separate page completed and signed by its loan officers dated June 3, 2002, contains a section entitled "Loan Terms," which includes a subsection for collateral, requesting information as to description, market value and existing liens. Among the assets listed on the application were assets the debtor presently owned and pledged to BankPlus, in addition to two items he intended to acquire using a portion of the proceeds of the loan. The debtor filed a petition for bankruptcy. The Bank filed a proof of claim, asserting a secured claim in the amount of $36,967.34. Plaintiff Chapter 7 trustee brought an adversary complaint to determine the validity of a security interest held by defendant Bank in several items of sound equipment owned by one of the debtors. The Trustee asserted that the Bank lacked an enforceable valid security agreement.


Was defendant Bank 's loan secured by the sound equipment?




The bankruptcy court found no other documents established a security agreement in the sound equipment. Specifically, the debtor's promissory note did not identify the collateral and contemplated a separate security agreement;  the financing statement listed collateral but, as allowed by the revised Uniform Commercial Code, was not signed by the debtor, and was not filed by the bank until almost two weeks after the loan was closed, so it was not contemporaneous with the loan. The court ruled that the bank's claim was not secured. Judgment was entered on the complaint in favor of the trustee, and against the bank, which was allowed an unsecured claim only.

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