Charles E. Covey v. State Bank of Toulon
776 F.3d 453
7th Cir.2014Background
- On December 15, 2008 David L. Duckworth signed a $1,100,000 promissory note; the bank-prepared Agricultural Security Agreement was dated December 13, 2008 and mistakenly described the note as dated December 13.
- The security agreement identified the debt by that incorrect date and left the loan amount blank in the form definition; the parties agree the promissory note was actually December 15.
- Duckworth filed Chapter 7 in 2010; trustee Covey sued to avoid the bank’s asserted security interests in proceeds from sales of crops and farm equipment.
- Bankruptcy court and two district courts ruled for the bank, holding the security agreement secured the December 15 note despite the erroneous date; trustee appealed to the Seventh Circuit.
- The Seventh Circuit considered whether parol evidence (and related doctrines) may be used against a bankruptcy trustee to reform or otherwise correct a security agreement that mistakenly describes the debt to be secured.
Issues
| Issue | Plaintiff's Argument (Bank) | Defendant's Argument (Trustee) | Held |
|---|---|---|---|
| Whether parol evidence may be used against a bankruptcy trustee to reform a security agreement that mistakenly identifies the debt by date | Parol evidence and the parties’ notes show mutual intent to secure the December 15 note; composite-document rule allows reading note and security agreement together | Trustee: parol evidence cannot be used to alter unambiguous security agreements as to third parties/a trustee; trustee stands in shoes of hypothetical later creditor | Parol evidence cannot be used against the trustee to reform or expand the security agreement; trustee wins |
| Whether the composite-document rule or contemporaneous loan documents let the bank incorporate the December 15 note into the security agreement | Documents were part of one transaction; the note would show intent to secure the December 15 note | Trustee: composite-rule does not bind strangers to the transaction; later creditors/trustees may rely on the security agreement alone | Composite-document theory does not save the bank; an unambiguous security agreement controls against the trustee |
| Whether satisfying UCC §9-203(b) (value, debtor rights, authenticated security agreement describing collateral) makes the bank’s interest enforceable against the trustee despite the mistaken debt identification | The transaction met §9-203(b) requirements so the security interest is enforceable against third parties including the trustee | Trustee: UCC §9-201 requires enforcement according to the agreement’s terms; §9-203 is a minimum requirement and cannot rewrite an agreement’s terms | §9-203 does not cure a security agreement’s failure to identify the debt properly; enforceability is limited by the written terms under §9-201 |
Key Cases Cited
- In re Martin Grinding & Machine Works, Inc., 793 F.2d 592 (7th Cir. 1986) (parol evidence cannot add collateral to an unambiguous security agreement against a bankruptcy trustee)
- Safe Deposit Bank & Trust Co. v. Berman, 393 F.2d 401 (1st Cir. 1968) (parol evidence cannot be used against a trustee to expand or change debts secured by a security agreement)
- Helms v. Certified Packaging Corp., 551 F.3d 675 (7th Cir. 2008) (creditors justified in relying on the security agreement rather than extrinsic statements by existing creditors)
- In re Vic Supply Co., 227 F.3d 928 (7th Cir. 2000) (discussion of trustee’s strong-arm powers and interplay of UCC §§9-201 and 9-203)
- Caterpillar Fin. Servs. Corp. v. Peoples Nat’l Bank, N.A., 710 F.3d 691 (7th Cir. 2013) (security agreement controls between conflicting descriptions of collateral)