A drafting error in a security instrument rendered the security interest invalid, according to the Seventh Circuit Court of Appeals. In re Duckworth, Nos. 14-1561, 14-1650, slip op. (7th Cir., Nov. 21, 2014). Specifically, the date of the security instrument did not match the date of the promissory note. The bank argued, in part, that it should be allowed to reform the security agreement using parol evidence, which is evidence of the parties’ intent that is not found in the language of the document itself. The court held that the bank could not correct the error in this manner. The ruling ought to be good news for debtors, since it places the burden firmly on banks and other lenders to draft loan documents correctly and removes nearly all room for error on their part.
The debtor borrowed $1.1 million from the bank on December 15, 2008. On that date, he signed a promissory note for that amount and delivered it to the bank. Two days earlier, he had signed a security instrument that granted the bank a security interest in most of the debtor’s personal property, which included crops and farm equipment. The security instrument stated that it was securing a note “in the principal amount of $_______ dated December 13, 2008.” Duckworth, slip op. at 3 [emphasis in original].
Two years later, the debtor filed a Chapter 7 bankruptcy petition. The trustee’s position was that the bank’s claimed security interest was defective and therefore voidable under 11 U.S.C. § 544(a)(1). The bank filed two adversary complaints seeking to correct the drafting error and preserve its security interests. One proceeding claimed a security interest in the debtor’s crops, and the other in his farm equipment. The bankruptcy court ruled for the bank in both proceedings, holding that the mistaken date did not invalidate the security instrument. Different district judges heard the trustee’s appeals of the two rulings, and both affirmed the bankruptcy court. Continue reading