A Bankruptcy Horror Story - State Bank of Toulon v. Covey (In re Duckworth)

In an opinion issued in late 2014, the United States Court of Appeals for the Seventh Circuit voided a $1.1 million security interest because of a small mistake. State Bank of Toulon v. Covey (In re Duckworth), 776 F.3d 453 (7th Cir. 2014).The security agreement referred to a note dated December 13, 2008 when it was actually dated December 15, 2008. The borrower filed a Chapter 7 bankruptcy and the Trustee successfully voided the interest because of the defect. Seeid. at 455.The Seventh Circuit held that against the borrower the Bank could reform the agreement. But the Trustee was in a different position of a judicial lien creditor who could void a security interest that need not have misled or even been capable of misleading anyone.  Although the Bank could have fixed this particular problem by including a “dragnet” clause that secured all indebtedness between the parties, the takeaway is to double check all dates in documents or at least just the agreements you want enforced.  Id. at 462-63 (“Accordingly, we hold that the mistaken identification of the debt to be secured cannot be corrected, against the bankruptcy trustee, by using parol evidence to show the intent of the parties to the original loan. Nor do the other loan documents themselves provide a basis for correcting the error against the trustee. Later creditors and bankruptcy trustees are entitled to treat an unambiguous security agreement as meaning what it says, even if the original parties have made a mistake in expressing their intentions.”).By Mitchell E. Ayer and Joseph E. Bain