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State Bank of Toulon v. Covey (In re Duckworth) - 776 F.3d 453, 586 F. App'x 672 (7th Cir. 2014)

Rule:

Illinois adopts the familiar principle that an unambiguous contract is interpreted by the court as a matter of law without use of parol evidence.

Uniform Commercial Code § 9-203 sets out minimum requirements that must be satisfied to enforce a security interest. It does not provide a mechanism for rescuing a lender from its mistakes in drafting a security agreement. A security interest that satisfies § 9-203's requirements may be enforced, but only according to the terms of the security agreement. Section 9-203 provides no gap-filling terms for when a security agreement fails.

Facts:

On December 15, 2008, David L. Duckworth borrowed $1,100,000 from the State Bank of Toulon. The transaction was executed through a promissory note that was dated and signed on December 15 and an Agricultural Security Agreement dated two days earlier, December 13, 2008. The security agreement said that Duckworth granted the State Bank of Toulon a security interest in crops and farm equipment. The promissory note referred to the security agreement. The security agreement identified the debt to be secured, but the identification had a critical mistake. The security agreement said that it secured a note "in the principal amount of $__ dated December 13, 2008." But there was no promissory note dated December 13. Both the December 15 promissory note and the security agreement were prepared by the bank's loan officer.

In 2010, Duckworth filed a petition for bankruptcy protection under Chapter 7 of the bankruptcy code. Appellant Charles E. Covey was appointed trustee. The bank filed two complaints in bankruptcy court to initiate adversary proceedings. On cross-motions for summary judgment, the bankruptcy court held that the mistaken date in the security interest did not defeat the bank's security interest and that the security agreement of December 13, 2008 secured the note of December 15, 2008. The bankruptcy court issued two decisions in favor of the bank, one for proceeds from the sale of Duckworth's crops and another for proceeds from the sale of some of his farm equipment. The trustee appealed both bankruptcy court orders to the district court, where the appeals were assigned to different judges. Both district judges affirmed, and the trustee appealed, in No. 14-1561 regarding the crop sale and in No. 14-1650 regarding the equipment sale.

Issue:

Did the mistaken date in the security agreement defeat the banks' asserted security interest in the crops and farm equipment?

Answer:

Yes

Conclusion:

The court held that where a security agreement said that the collateral secured a promissory note dated December 13, but the date was a mistake because the intended promissory note was dated December 15, the security agreement did not give the bank a security interest in the specified collateral that could be enforced against the bankruptcy trustee, because the bank was not entitled to use parol evidence against the bankruptcy trustee to correct the mistaken description of the debt to be secured since parol evidence, contemporaneously executed or not, cannot be used to undermine the ability of later lenders or bankruptcy trustees to rely on unambiguous security agreements. The composite document rule did not save the bank's security interest. Article 9 of the Uniform Commercial Code directed the court to enforce the agreement according to its terms, which failed to secure the debt to the bank.

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