## Facts

- Michael S. Sabol operated a recording-industry business and sought an SBA-guaranteed loan from Morton Community Bank.
- Sabol executed a $58,000 promissory note payable to the Bank.
- Sabol also signed a separate letter authorizing the Bank to execute and file UCC Article 9 financing statements regarding “any security interest” connected to the loan; the letter did not describe any collateral or grant a security interest.
- The Bank filed a UCC-1 financing statement covering “inventory, accounts receivable and equipment,” including sound equipment to be acquired; the UCC-1 was not signed by Sabol.
- No traditional security agreement was signed by Sabol, and the court found no security agreement was discussed with him.
- Sabol used part of the loan proceeds to purchase sound equipment.
- The Sabols later filed a Chapter 7 petition and scheduled the Bank as a secured creditor.
- The Chapter 7 trustee filed an adversary proceeding to determine the validity and avoidability of the Bank’s asserted lien in the sound equipment.

## Issues

1. Whether the Bank established attachment under Illinois UCC § 9-203(b) without a debtor-authenticated security agreement describing the collateral.
2. Whether related loan documents could be combined under the “composite document rule” to supply the required authenticated security agreement and collateral description.
3. Whether the debtor’s understanding and bankruptcy schedules could substitute for Article 9’s objective, authenticated-record requirement as against the trustee.

## Decision

- The bankruptcy court entered judgment for the trustee.
- The court held the Bank did not have a valid, enforceable security interest in the sound equipment because no debtor-authenticated security agreement described the collateral.
- The court rejected the Bank’s reliance on a composite set of documents because none provided an authenticated grant of a security interest with a collateral description.
- As a result, the Bank’s claim was treated as unsecured in the bankruptcy case.

## Legal Principles

- Under Illinois UCC § 9-203(b), a security interest attaches only if value is given, the debtor has rights in the collateral, and there is an authenticated security agreement that provides a description of the collateral (absent possession or control by the secured party).
- The composite document rule may permit multiple related records to function collectively as a security agreement, but it does not eliminate the need for a debtor-authenticated record that objectively evidences an agreement to grant a security interest in described collateral.
- A promissory note that evidences debt, without grant language or a collateral description, does not by itself create a security interest.
- A filing authorization permitting a lender to file financing statements does not, without more, grant a security interest or satisfy the security-agreement requirement.
- A financing statement may serve as a security agreement only in limited circumstances (including debtor authentication and sufficient indicia of an agreement to grant a security interest); an unsigned UCC-1 generally will not satisfy § 9-203(b).
- A debtor’s subjective belief that property is collateral, and a debtor’s characterization of a creditor as “secured” in bankruptcy schedules, cannot replace Article 9’s authenticated, objective documentation requirement as against a bankruptcy trustee.
- If a security interest fails to attach and is unenforceable against the debtor, the trustee may use 11 U.S.C. § 544 to defeat the asserted lien and administer the property for the estate.

## Conclusion

The court held that, despite the parties’ expectations and a filed UCC-1, the Bank lacked an enforceable Article 9 security interest because no debtor-authenticated record granted a security interest in described collateral; the trustee therefore prevailed and the Bank’s claim was unsecured.


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