IN RE: DUCKWORTH
Timing is Everything
Occasionally, lenders insert erroneous dates in loan documents. Sometimes closing dates change and a reference to the wrong date of a promissory note in a security agreement makes its way into the executed document. This is most likely when using form documents.
In a 2014 Seventh Circuit (Illinois’ Federal Circuit) decision, the appellate court considered the bankruptcy case In Re: Duckworth. In Duckworth the facts are simple. The security agreement for the loan referenced a note dated December 13 when the note was actually dated December 15.
The question before the court was whether it could review evidence relative to the proper date from facts existing outside the loan documents. For example, could the court consider commitment letters or emails or bank financial records to determine whether it was intended for the note to actually be secured by the security agreement?
Indeed, the court held it could not!
The court concluded that it could only consider what is actually written in the signed loan documents. The basis for the finding was the protection of lenders who subsequently purchase the initial lender’s rights in the paper. A future purchaser of the debt should be able to understand the story of the loan relying on the deal documents alone. Otherwise, the salability of loans might be impacted negatively because there would be less certainty surrounding regarding the enforceability of the documents.
Accordingly, always be careful to properly date loan documents. It is not uncommon for dates to be hidden in the body of a document (instead of at the front or back). This is also true for other items that may change as you get closer to closing such as dollar amounts and financial covenants.