## Facts

- David L. Duckworth borrowed $1,100,000 from State Bank of Toulon in December 2008.
- Duckworth signed a promissory note dated December 15, 2008.
- Duckworth also signed an agricultural security agreement dated December 13, 2008, granting the Bank a security interest in crops and farm equipment.
- The security agreement stated it secured a promissory note “dated December 13, 2008,” but no promissory note existed with that date.
- Duckworth filed Chapter 7 bankruptcy in 2010, and Charles E. Covey was appointed trustee.
- The Bank filed adversary proceedings seeking a declaration that it held a valid security interest in the collateral and the proceeds from its sale.

## Issues

1. Whether, under Illinois’s enactment of the UCC and in light of the trustee’s strong-arm powers, a secured lender may use parol evidence against a bankruptcy trustee to correct a security agreement’s mistaken description of the debt it secures.
2. Whether a security agreement that identifies a non-existent promissory note by date creates an enforceable security interest against the Chapter 7 trustee in the described collateral and its proceeds.

## Decision

- The Seventh Circuit reversed the judgments for the Bank and remanded for further proceedings.
- The court held the Bank could not use parol evidence against the trustee to correct the security agreement’s erroneous identification of the secured promissory note.
- Because the security agreement referenced a non-existent obligation (a December 13 note), it did not create an enforceable security interest against the trustee in the crops, equipment, or proceeds.

## Legal Principles

- A bankruptcy trustee, using 11 U.S.C. § 544(a), may assert the rights of a hypothetical lien creditor and defeat security interests that are defective as against third parties.
- Under Illinois UCC principles applied by the Seventh Circuit, parol evidence may be available to reform a security agreement between the original parties, but not to expand or correct the agreement’s terms as against a bankruptcy trustee.
- A security agreement must, on its face, identify the secured obligation with enough specificity to be enforceable against third parties; a mistaken reference to a non-existent debt cannot be cured against the trustee by extrinsic evidence.

## Conclusion

The Seventh Circuit held that when a security agreement mistakenly identifies the secured debt, the lender cannot rely on parol evidence to correct the mistake against a Chapter 7 trustee, and the resulting security interest is unenforceable against the trustee despite the parties’ intended transaction.


State Bank of Toulon v. Covey (In re Duckworth), 776 F.3d 453 (7th Cir. 2014)