Charles E. Covey v. State Bank of Toulon , 776 F.3d 453 ( 2014 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 14-1561 and 14-1650
IN RE: DAVID L. DUCKWORTH,
Debtor,
STATE BANK OF TOULON,
Plaintiff-Appellee.
v.
CHARLES E. COVEY, Chapter 7 Trustee
for David L. Duckworth,
Defendant-Appellant.
____________________
Appeals from the United States District Court for the
Central District of Illinois.
No. 1:13-cv-01258-JBM—Joe Billy McDade, Judge.
No. 1:13-cv-01087-JES—James E. Shadid, Judge.
____________________
ARGUED SEPTEMBER 9, 2014 — DECIDED NOVEMBER 21, 2014
____________________
Before FLAUM, ROVNER, and HAMILTON, Circuit Judges.
HAMILTON, Circuit Judge. In these appeals we consider
whether a secured lender can use parol evidence against a
bankruptcy trustee to save a security agreement from a mis-
2 Nos. 14-1561 and 14-1650
taken description of the debt to be secured. The security
agreement here said that the collateral secured a promissory
note made on a given date. The date was a mistake. The bor-
rower had executed a promissory note but two days after the
stated date. This is the sort of mistake that can be corrected
as between the original parties to the loan by reforming the
instrument based on parol evidence.
We have previously held, however, that under Illinois’
enactment of the Uniform Commercial Code a secured lend-
er cannot use parol evidence against a bankruptcy trustee to
correct a mistaken description of the collateral in a security
agreement. In re Martin Grinding & Machine Works, Inc., 793
F.2d 592, 595 (7th Cir. 1986). Similarly, the First Circuit has
held that a lender cannot use parol evidence against a bank-
ruptcy trustee to change or add to the debts secured by the
security agreement, relying on the same provisions in Mas-
sachusetts’ enactment of the UCC. Safe Deposit Bank & Trust
Co. v. Berman, 393 F.2d 401, 402–03 (1st Cir. 1968). The rea-
soning of these cases persuades us that the lender in these
appeals was not entitled to use parol evidence against the
bankruptcy trustee to correct the mistaken description of the
debt to be secured. We therefore hold that the security
agreement did not give the lender a security interest in the
specified collateral that could be enforced against the trustee.
We reverse the judgments of the district courts and remand
for further proceedings in the bankruptcy court.
I. Factual and Procedural Background
The parties filed cross‐motions for summary judgment
based on the following undisputed facts. On December 15,
2008, David L. Duckworth borrowed $1,100,000 from the
State Bank of Toulon. The transaction was executed through
Nos. 14-1561 and 14-1650 3
a promissory note that was dated and signed on December
15 and an Agricultural Security Agreement dated two days
earlier, December 13, 2008. The security agreement said that
Duckworth granted the State Bank of Toulon a security in-
terest in crops and farm equipment. The promissory note re-
ferred to the security agreement. The security agreement
identified the debt to be secured, but the identification had a
critical mistake. The security agreement said that it secured a
note “in the principal amount of $_________ dated December
13, 2008.” But there was no promissory note dated December
13. Both the December 15 promissory note and the security
agreement were prepared by the bank’s loan officer.
In 2010, Duckworth filed a petition for bankruptcy pro-
tection under Chapter 7 of the bankruptcy code. Appellant
Charles E. Covey was appointed trustee. The bank filed two
complaints in bankruptcy court to initiate adversary pro-
ceedings. On cross‐motions for summary judgment, the
bankruptcy court held that the mistaken date in the security
interest did not defeat the bank’s security interest and that
the security agreement of December 13, 2008 secured the
note of December 15, 2008. The bankruptcy court issued two
decisions in favor of the bank, one for proceeds from the sale
of Duckworth’s crops and another for proceeds from the sale
of some of his farm equipment. The trustee appealed both
bankruptcy court orders to the district court, where the ap-
peals were assigned to different judges. Both district judges
affirmed, and the trustee has appealed, in No. 14‐1561 re-
garding the crop sale and in No. 14‐1650 regarding the
equipment sale. The issue before us is whether the mistaken
date in the security agreement defeats the banks’ asserted
security interest in the crops and farm equipment.
4 Nos. 14-1561 and 14-1650
II. Analysis
We review de novo a grant of summary judgment, mean-
ing we decide the questions of law without giving deference
to the decisions of the district court or the bankruptcy court.
See In re ABC‐Naco, Inc., 483 F.3d 470, 472 (7th Cir. 2007). The
trustee argues that the security agreement unambiguously
identified the debt to be secured, but did so only for a non‐
existent debt and therefore failed to grant a security interest
to secure the note of December 15, 2008. Even if the mistake
in the security agreement might be corrected as between the
original parties to the loan, the trustee argues, parol evi-
dence of such a mistake cannot be used against a bankruptcy
trustee to save the faulty security agreement.
The bank argues that the security agreement is enforcea-
ble against the original borrower and should also be en-
forceable against the trustee. The bank relies on the terms of
the security agreement itself, parol evidence of the original
parties’ intent, and Illinois’ “composite document” rule to
save its security interest. The bank also contends that its
transaction with the debtor satisfied the minimum require-
ments for an enforceable security interest under Illinois’ en-
actment of the Uniform Commercial Code and therefore the
security interest is effective against the trustee.
We first parse the terms of the security agreement and
conclude that it cannot be construed to secure the December
15, 2008 note. We then consider the parol evidence argu-
ment. We conclude that although the evidence could have
supported reformation of the security agreement as between
the original parties, the evidence cannot be used against the
Nos. 14-1561 and 14-1650 5
bankruptcy trustee to reform the security agreement or oth-
erwise to correct the mistaken identification of the debt to be
secured. Nor does the composite document rule save the
bank’s security interest here. Finally, we examine the govern-
ing statute, Article 9 of the Uniform Commercial Code, and
determine that it directs us to enforce the agreement accord-
ing to its terms, which fail to secure the debt to the bank.
A. The Terms of the Security Agreement
The security agreement is governed by Illinois law, ex-
cept where federal law might preempt it. Illinois adopts the
familiar principle that an unambiguous contract is interpret-
ed by the court as a matter of law without use of parol evi-
dence. Air Safety, Inc. v. Teachers Realty Corp., 706 N.E.2d 882,
884 (Ill. 1999).
The relevant provisions of the security agreement are un-
ambiguous as applied to these facts. The security agreement
grants the bank a security interest “to secure the Indebted-
ness,” which is defined as “the indebtedness evidenced by
the Note or Related Documents.” The security agreement
then defines the “Note” as “the Note executed by David L.
Duckworth in the principal amount of $_________ dated De-
cember 13, 2008, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and sub-
stitutions for the note or credit agreement.” In the security
agreement, the dollar amount of the loan was left blank.
The bank faces two textual obstacles in arguing that the
terms of the security agreement secure the debt embodied in
the December 15 promissory note. First, the security agree-
ment refers clearly to a December 13 promissory note that
6 Nos. 14-1561 and 14-1650
the parties agree never existed. 1 The promissory note that
the Bank seeks to secure was signed and dated on December
15.
Second, the Bank cannot rely on the security agreement’s
“Related Documents” provision to incorporate the Decem-
ber 15 promissory note. The relevant definitions in the secu-
rity agreement are essentially circular. The definition of “In-
debtedness” points the reader to “Related Documents,”
which are defined as documents “executed in connection
with the Indebtedness.” The “Indebtedness” is defined in
turn as the debt evidenced by the “Note or Related Docu-
ments,” and the Note again is defined as “the Note executed
. . . dated December 13, 2008.” These circular definitions
thus offer no escape from the mistaken date. On its face, the
security agreement secures only a December 13 promissory
1 These facts illustrate neatly how latent ambiguity depends on context.
For another illustration, see Frigaliment Importing Co. v. B.N.S. Interna-
tional Sales Corp., 190 F. Supp. 116 (S.D.N.Y. 1960) (Friendly, J.), where
the parties contracted for the sale of “chicken,” which seemed clear on its
face. But when the seller shipped stewing chickens instead of young
chickens suitable for broiling and frying, the buyer protested and even-
tually sued. Judge Friendly interpreted the contract’s ambiguous lan-
guage, “chicken,” by looking to the parties’ negotiations, course of per-
formance, and trade usage. See also, e.g., Spencer v. Liberty Mutual Ins.
Corp., 381 F. Supp. 2d 811, 816–21 (S.D. Ind. 2005), where insurance cov-
erage depended on the seemingly clear phrase “using . . . a covered au-
to.” That phrase was ambiguous as applied to a driver who was hurt
after he had gotten out of the covered vehicle after an accident to help
another person injured in that first accident. In this case, there is no such
ambiguity.
Nos. 14-1561 and 14-1650 7
note that never existed. The text of the security agreement
does not incorporate the promissory note dated December
15 or the description of the debt contained therein.
B. Parol Evidence Against the Trustee?
To cure the mistaken date in the security agreement and
connect it to the December 15 promissory note, the bank re-
lies primarily on parol evidence, from outside the four cor-
ners of the document. The bank relies on the December 15
promissory note itself and testimony regarding the bank’s
and the borrower’s intentions.
The bank offers two related theories for reading the secu-
rity agreement as securing the December 15 note. First, the
bank contends that parol evidence is generally admissible to
assist in interpreting the security agreement, which it asserts
is ambiguous. Second, the bank argues that we should use
the composite document rule to read the security agreement
and the December 15 note together because the two docu-
ments were executed as part of the same transaction. See,
e.g., Tepfer v. Deerfield Savings & Loan Ass’n, 454 N.E.2d 676,
679 (Ill. App. 1983) (documents executed by same parties in
course of same transaction are “construed with reference to
one another because they are, in the eyes of the law, one con-
tract”). Both arguments attempt to justify the use of evidence
external to the security agreement itself. 2
2 It is not at all clear that Illinois courts would apply the composite doc-
ument rule against the trustee. Illinois courts apply this rule in disputes
between the contracting parties: “Accordingly, as between the same parties,
a note may be affected by a separate writing.” Main Bank of Chicago v.
Baker, 427 N.E.2d 94, 99 (Ill. 1981) (emphasis added). The trustee was not
a party to the transaction here. For all the reasons set forth in the text, we
8 Nos. 14-1561 and 14-1650
The testimony of both the bank officer who prepared the
documents and borrower Duckworth makes clear that the
bank made a mistake in preparing the security agreement.
We are confident that the bank would have been able to ob-
tain reformation—even of an unambiguous agreement—
against the original borrower if he had tried to avoid the se-
curity agreement based on the mistaken date. See Fisher v.
State Bank of Annawan, 643 N.E.2d 811, 814 (Ill. 1994) (refor-
mation action available where clear and convincing evidence
shows parties made a mutual mistake); Suburban Bank of
Hoffman‐Schaumburg v. Bousis, 578 N.E.2d 935, 939 (Ill. 1991)
(same); Harley v. Magnolia Petroleum Co., 37 N.E.2d 760, 765
(Ill. 1941) (same).
A bankruptcy trustee is in a different position, however.
A bankruptcy trustee is tasked with maximizing the recov-
ery of unsecured creditors. See In re Vic Supply Co., 227 F.3d
928, 931 (7th Cir. 2000). To assist in this task, trustees may
exercise the so‐called strong‐arm power: the trustee is
deemed to be in the privileged position of a hypothetical
subsequent creditor and can avoid any interests that a hypo-
thetical subsequent creditor could avoid “without regard to
any knowledge of the trustee or of any creditor.” See 11
U.S.C. § 544(a). The strong‐arm power is a “blunt infor-
mation‐generating tool” that encourages lenders to give
public notice of their security interests by harshly penalizing
those who fail to do so. Jonathan C. Lipson, Secrets and Liens:
The End of Notice in Commercial Finance Law, 21 Emory Bankr.
Dev. J. 421, 450‐51 (2005) (criticizing the strong‐arm power,
conclude that the error could not be corrected against the trustee, who
was a stranger to the original loan. We have nothing further to add on
the composite document rule.
Nos. 14-1561 and 14-1650 9
“a necessary evil,” as perhaps “more troublesome for its
over‐ and under‐inclusiveness than for its basic goals”); see
also Barkley Clark & Barbara Clark, The Law of Secured Trans-
actions Under the Uniform Commercial Code § 6.02(1)(a) (3d ed.
2011) (“The strong‐arm clause is the ultimate Article 9 en-
forcer.”); id., § 6.02(1)(b) (“As a matter of public policy, the
[strong‐arm] rules penalize secret liens and encourage lend-
ers to give public notice of their security interests.”).
The bank argues that constructive notice may still be im-
puted to a trustee using the strong‐arm power. The concept
of constructive notice comes from state real property law
and defines the property rights of good faith purchasers. See
In re Crane, 742 F.3d 702, 706–07 (7th Cir. 2013). A good faith
purchaser cannot avoid the claims of creditors who have
complied with state recording laws that provide public no-
tice of the ownership of and liens on property. For that rea-
son, constructive notice constrains a trustee who seeks to use
the specific strong‐arm power of a good faith purchaser of
property. See 11 U.S.C. § 544(a)(3); In re Sandy Ridge Oil Co.,
807 F.2d 1332, 1336 (7th Cir. 1986).
But the trustee here does not need to assume the role of a
good faith purchaser to avoid the lender’s interest. The trus-
tee can use other strong‐arm provisions and stand in the
shoes of other subsequent creditors, to which the limitations
of constructive notice do not apply. The trustee may avoid
the bank’s security interest by acting as a hypothetical judi-
cial lien creditor. 11 U.S.C. § 544(a)(1). Such a trustee, uncon-
strained by constructive notice, may “void a security interest
because of defects that need not have misled, or even have
been capable of misleading, anyone.” In re Vic Supply Co., 227
F.3d at 931.
10 Nos. 14-1561 and 14-1650
We therefore must treat the trustee as if he were a hypo-
thetical later lien creditor and ask if the bank has a valid se-
curity interest that could be asserted against such a creditor.
We conclude that the bank’s asserted security interest is not
valid against such a later creditor. Such a creditor would be
entitled to rely on the text of a security agreement, despite
extrinsic evidence that could be used between the original
parties to correct the mistaken identification of the debt to be
secured.
We find guidance principally from our prior decision in
Martin Grinding and the First Circuit’s decision in Safe Depos-
it Bank and Trust Co. v. Berman. Those decisions emphasize
the importance of third parties’ ability to rely on unambigu-
ous documents—even if the original parties can show they
contain mistakes—to determine the validity and priority of
security interests.
In Martin Grinding, we held that parol evidence about the
original parties’ intentions could not be used to correct a
mistake in a security agreement by adding, over a bankrupt-
cy trustee’s objection, to the agreement’s written list of the
collateral securing a loan. The lender had failed to list inven-
tory and accounts receivable as collateral in the security
agreement. We enforced the unambiguous security agree-
ment according to its terms:
That the security agreement omits any mention
of inventory and accounts receivable is unfor-
tunate for the Bank, but does not make the
agreement ambiguous. Since the security
agreement is unambiguous on its face, neither
the financing statement, nor the other loan
documents can expand the Bank’s security in-
Nos. 14-1561 and 14-1650 11
terest beyond that stated in the security agree-
ment.
793 F.2d at 595. We recognized that the result was contrary to
the intentions of the original parties. We explained, though,
that the result should promote economy and certainty in se-
cured transactions more generally, a central goal of Article 9
of the Uniform Commercial Code. Id. at 596 (Article 9 was
intended to enable “‘the immense variety of present-day se-
cured financing transactions … [to] go forward with less cost
and with greater certainty.’”), quoting Ill. Rev. Stat. ch. 26, ¶
9‐101 Uniform Commercial Code Comment (comment to
version of UCC in effect in 1986).
The rigid rule allows later lenders to rely on the face of
an unambiguous security agreement, without having to
worry that a prior lender might offer parol evidence (which
would ordinarily be unknown to the later lender) to under-
mine the later lender’s security interest. Martin Grinding, 793
F.2d at 596–97. On the other hand,
if parol evidence could enlarge an unambigu-
ous security agreement, then a subsequent
creditor could not rely upon the face of an un-
ambiguous security agreement to determine
whether the property described in the financ-
ing statement, but not the security agreement,
is subject to a prior security interest. Instead, it
would have to consult the underlying loan
documents to attempt to ascertain the property
in which the prior secured party had taken a
security interest. The examination of additional
documents, which the admission of parol evi-
dence would require, would increase the cost
12 Nos. 14-1561 and 14-1650
of, and inject uncertainty as to the scope of pri-
or security interests, into secured transactions.
See California Pump & Manufacturing Co., 588
F.2d [717, 720 (9th Cir. 1978)]; H & I Pipe & Sup-
ply Co., 44 B.R. [949, 951 (Bankr. M.D. Tenn.
1984)]. Therefore, although the rule excluding
parol evidence works results contrary to the
parties’ intentions in particular cases, it reduces
the cost and uncertainty of secured transac-
tions generally.
Id. at 597 (footnote omitted).
In these appeals, the bank would have us limit Martin
Grinding to prohibit use of parol evidence to correct mistakes
only in identifying collateral but to allow its use to correct
mistakes in identifying the debt to be secured. The bank
notes that such identification of collateral is expressly re-
quired by the Illinois enactment of the Uniform Commercial
Code, see 810 Ill. Comp. Stat. 5/9‐203(b)(3)(A), while the
statute does not similarly require identification of the debt to
be secured.
We reject the bank’s suggested limitation, finding persua-
sive guidance from our colleagues in the First Circuit in Safe
Deposit Bank and Trust Co. v. Berman, 393 F.2d 401, which ad-
dressed a mistake in identifying the debts to be secured. In
that case the borrower took out a series of loans over several
years. All the promissory notes referred to the same original
security agreement for collateral. The problem was that the
original security agreement itself identified only a single
promissory note as the debt to be secured. By the time the
borrower declared bankruptcy, that single promissory note
had been paid off. By the terms of the security agreement
Nos. 14-1561 and 14-1650 13
itself, therefore, there was no debt to be secured and thus no
security interest.
Like the bank here, the lender argued that the notes
showed that the parties intended to create a security interest
securing all the later loans. The bankruptcy and district
courts had agreed with the trustee, however, that the lender
could not use parol evidence against the trustee to show that
it had a security interest in the collateral to assure payment
of the later loans.
The First Circuit affirmed, albeit “reluctantly because the
result is commanded not by fireside equities but by the nec-
essary technicalities inherent in any law governing commer-
cial transactions.” 393 F.2d at 402. The First Circuit noted
that collateral could be used to secure future debts if the se-
curity agreement provided as much. (A so‐called “dragnet”
clause in a security agreement can include such later loans to
the borrower, see UCC § 9‐204(c) (security agreement may
provide that collateral secures “future advances or other
value”), but the intent to secure later loans must be explicit
in the security agreement.) The First Circuit held that the ab-
sence of such language could not be cured by parol evi-
dence, at least as against the bankruptcy trustee. This was so
even if the evidence showed that the original parties had in-
tended to include such language. In other words, parol evi-
dence could not be used to add a dragnet clause where the
original security agreement did not include one.
Recognizing that its decision was contrary to the evident
intent of the original parties to the loans, the First Circuit
concluded that the more general effects of the lender’s pro-
posed cure would be worse than sticking to the text of the
security agreement:
14 Nos. 14-1561 and 14-1650
In a commercial world dependent upon the ne-
cessity to rely upon documents meaning what
they say, the explicit recitals on forms, without
requiring for their correct interpretation other
documents not referred to, would seem to be a
dominant consideration. If security agreements
which on their face served as collateral for spe-
cific loans could be converted into open-ended
security arrangements for future liabilities by
recitals in subsequent notes, much needless
uncertainty would be introduced into modern
commercial law.
393 F.2d at 404; accord, Texas Kenworth Co. v. First Nat’l Bank
of Bethany, 564 P.2d 222, 226 (Okla. 1977) (refusing to inter-
pret security agreement as securing future advances of cred-
it; “potential creditors who do inquire should be able to rely
upon the security agreement itself in determining what obli-
gations are secured”).
In both Safe Deposit Bank and Trust and the case before us,
the lender made a mistake and failed to ensure that the secu-
rity agreement properly identified the debt to be secured.
We do not see a sound basis for distinguishing between the
mistaken identification of the debt in our case and the mis-
taken failure to add a “dragnet” clause in Safe Deposit Bank
and Trust.
The bank points out that even a hypothetical later lender
who finds the recorded financing statement has a duty to
inquire further to see the security agreement itself. That is
certainly correct, as far as it goes. But the bank argues that
the later lender would be obliged to inquire still further. We
see no basis for imposing on the later lender a legal duty to
Nos. 14-1561 and 14-1650 15
inquire beyond the face of an unambiguous security agree-
ment, at the risk of losing the priority of its lien based on pa-
rol evidence concerning the dealings between the original
parties.
The bank argues, though, that if it had been asked for the
security agreement, it surely would have shown the later
lender both the security agreement and the promissory note
of December 15, despite the erroneous date in the security
agreement. That reasoning is not consistent with Martin
Grinding or Safe Deposit Bank and Trust. We also rejected the
same argument in Helms v. Certified Packaging Corp., 551 F.3d
675, 680 (7th Cir. 2008), where we reaffirmed that a subse-
quent creditor is justified in relying on the security agree-
ment alone. In that case, the publicly filed financing state-
ment listed collateral that was not specified in the security
agreement itself. We held that the security agreement con-
trolled. A creditor need look no further than the security
agreement: “A prudent potential creditor would have re-
quested a copy of the security agreement because that, and
not what an employee of an existing creditor might tell the
potential creditor over the phone, is the security interest that
the parties to the security agreement had agreed to create.”
Id.
That argument applies with even more force where the
parol evidence that a party seeks to use to enlarge the securi-
ty interest consists of a separate and private document (the
note of December 15) that is not identified in the security
agreement, rather than a publicly available financing state-
ment as in Helms. See also Caterpillar Financial Services Corp.
v. Peoples Nat’l Bank, N.A., 710 F.3d 691, 696 (7th Cir. 2013)
16 Nos. 14-1561 and 14-1650
(explaining that between two conflicting descriptions of the
collateral, the “security agreement is controlling”).
The bank also argues that we should overlook the erro-
neous date in the security agreement because it was just a
small error that would have been easy to discover. We disa-
gree. We find no limiting principle that would allow the
courts or parties to distinguish reliably between small errors
and big ones. Under the reasoning of Martin Grinding, Helms,
and Safe Deposit Bank and Trust, parol evidence cannot be
used to correct even the seemingly minor clerical error in the
security agreement. We must hew to the “necessary techni-
calities inherent in any law governing commercial transac-
tions,” even when the result is harsh. Safe Deposit Bank &
Trust Co., 393 F.2d at 402. We therefore do not think that pa-
rol evidence, contemporaneously executed or not, can be
used to undermine the ability of later lenders (or bankruptcy
trustees) to rely on unambiguous security agreements.
C. The Bank’s Statutory Argument
Seeking to steer clear of the parol evidence problem, the
bank also contends that it has a security interest enforceable
against the trustee because the transaction satisfies the statu-
tory requirements for enforcing a security interest. The bank
relies on Illinois’ enactment of UCC § 9‐203(b), which pro-
vides in relevant part, and subject to exceptions that do not
apply here:
[A] security interest is enforceable against a
debtor and third parties . . . only if:
(1) value has been given;
(2) the debtor has rights in the collateral … ;
and
Nos. 14-1561 and 14-1650 17
(3) … the debtor has authenticated a securi-
ty agreement that provides a description
of the collateral … .
810 Ill. Comp. Stat. 5/9‐203(b). (Paragraph (b)(3) offers three
alternative ways to satisfy its requirements by giving the se-
cured party possession or control of the collateral, but they
do not apply here.) The bank asserts that its security interest
is enforceable against the trustee because the bank gave val-
ue, borrower Duckworth had rights in the crops and farm
equipment, and the parties authenticated a security agree-
ment that described the collateral.
The trustee responds that another provision in the UCC,
section 9‐201, provides that the terms of a security agree-
ment must be enforced as written: “Except as otherwise pro-
vided in the Uniform Commercial Code, a security agree-
ment is effective according to its terms between the parties,
against purchasers of the collateral, and against creditors.”
810 Ill. Comp. Stat. 5/9‐201(a). The trustee argues that the
UCC thus points us to the terms of the agreement, and the
bank must lose because those terms fail to secure the debt
the bank relies upon.
The trustee has the better reading of the UCC. Section 9‐
203 cannot cure the security agreement’s failure to identify
correctly Duckworth’s debt to the bank, at least against a lat-
er lender or the trustee. We have previously read these two
sections of the UCC together, concluding that section 9‐203’s
requirements for enforcing a security interest are an excep-
tion to section 9‐201’s general rule that a security agreement
is effective according to its terms: “An agreement that vio-
lates section 9‐203 may not be effective according to its
terms.” In re Vic Supply Co., 227 F.3d at 932; see also UCC § 9‐
18 Nos. 14-1561 and 14-1650
201, official comment 2 (“It follows that subsection (a) does
not provide that every term or provision contained in a rec-
ord that contains a security agreement or that is so labeled is
effective.”).
Section 9‐203 sets out minimum requirements that must
be satisfied to enforce a security interest. It does not provide
a mechanism for rescuing a lender from its mistakes in draft-
ing a security agreement. A security interest that satisfies
section 9‐203’s requirements may be enforced, but only ac-
cording to the terms of the security agreement. The bank’s
argument to the contrary is puzzling. It urges that its interest
must be “enforceable” under section 9‐203. But enforceable
how, if not according to the agreement’s terms? Section 9‐203
provides no gap‐filling terms for when a security agreement
fails. We see no reason to invent them merely because the
bank made a mistake in preparing its security agreement.
* * *
Accordingly, we hold that the mistaken identification of
the debt to be secured cannot be corrected, against the bank-
ruptcy trustee, by using parol evidence to show the intent of
the parties to the original loan. Nor do the other loan docu-
ments 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. The judgments of
the district courts are REVERSED and the cases are
REMANDED for proceedings consistent with this opinion.