BLTS-9e Case Problem with Sample Answer
Chapter 20: Security Interests in Personal Property
20.6 Case Problem with Sample Answer
In 2002, Michael Sabol, doing business in the recording industry as Sound Farm Productions, applied to Morton Community Bank in Bloomington, Illinois, for a $58,000 loan to expand his business. Besides the loan application, Sabol signed a promissory note that referred to the bank’s rights in “any collateral.” Sabol also signed a letter that stated, “the undersigned does hereby authorize Morton Community Bank to execute, fi le and record all financing statements, amendments, termination statements and all other statements authorized by Article 9 of the Illinois Uniform Commercial Code, as to any security interest.” Sabol did not sign any other documents, including the fi nancing statement, which did, however, contain a description of the collateral. Less than three years later, without having repaid the loan, Sabol fi led a petition in a federal bankruptcy court to declare bankruptcy. The bank claimed a security interest in Sabol’s sound equipment. What are the elements of an enforceable security interest? What are the requirements of each of those elements? Does the bank have a valid security interest in this case? Explain. [In re Sabol, 337 Bankr. 195 (C.D.Ill. 2006)]
Sample Answer:
A security interest is not enforceable unless it attaches to the collateral. For attachment to occur, under UCC 9–203 the debtor must have rights in the collateral, the secured party must give something of value to the debtor, and the creditor must either possess the collateral or there must be a security agreement that contains a description of the collateral and that has been signed or otherwise authenticated by the debtor. The court acknowledged in this case that “[n]o particular words of grant or ‘magic words’ are required to be included in a security agreement,” but “there must be some language reflecting the debtor's intent to grant a security interest. Accordingly, a financing statement which does not contain any grant language by the debtor creating a security interest in the described collateral, but merely identifies the collateral, cannot substitute for a security agreement.” Here, “[n]o language conveying a security interest ... is found in any of the documents” on which the bank attempted to establish a security interest. “The financing statement, containing the only description of collateral, is not signed by the DEBTOR and, in all likelihood, was never seen by him. What is left? Only boilerplate references in the note to the BANK'S rights in ‘any collateral’ and in the authorization to ‘any security interest.’ ... Without a description of the collateral in a signed or authenticated document or in a separate document incorporated by reference into a signed or authenticated document, no security interest can be recognized.”