People often enter into agreements through which a person or entity borrows money in exchange for a security interest on property that he or it owns. However, in drafting an agreement which establishes a security interest, it is important to make sure that the document is legally enforceable. The bankruptcy court’s order granting summary judgment in Theresa Bender v. Christopher James, Case No. 14-01001-KKS, ECF No. 50 (Bankr. N.D. Fla. Feb. 11, 2015) demonstrates the importance of making sure that such an agreement contains an adequate description of the collateral. Specifically, such an instrument must contain a description of property or real property whether or not it is specific, that reasonably identifies what is described for it to be enforceable under Florida law.

In Hintze tutoring center, TutoringZone, Matthew Hintze and his wife Larina, filed bankruptcy on November, 2012.  Before filing bankruptcy, Hintze and his wife delivered a $375,000 promissory note to Christopher James.  The promissory note granted James a “security interest on all of [Hintze’s] assets.”

After the Hintzes filed bankruptcy, James sought to enforce the promissory note. However, the bankruptcy trustee objected to James’ secured claim, alleging that the promissory note was legally insufficient to establish a security interest under Florida law and sought to invalidate the promissory note.

Ultimately, the Court disallowed James’ claim and invalidated the promissory note because the promissory note did not reasonably identify the collateral.  In disallowing James’ claim, the Court noted that Fla. Stats. §§ 679.108(3) and 679.2031 explicitly prohibit security interests that consist of “all the debtor’s assets or other words of similar import.”

James tried to save the promissory note by arguing that he was entitled to introduce evidence to demonstrate that he had a valid security interest.  But the judge rejected the argument because the terms of the promissory note were not ambiguous, so extrinsic evidence could not be used to correct legal deficiencies in the promissory note after it was executed and delivered.  The court also disregarded James’ argument that filing an unsigned financing statement a year and a half later could salvage the promissory note, because of the delay in the execution of the financing statement.

The Hintze opinion demonstrates the importance of being careful when seeking to secure an obligation or debt with another’s property as collateral.  The instrument establishing a security interest must describe the collateral so it can be identified. It must contain language that allows an objective third party to have knowledge of the collateral, and it must be executed at around the same time as any other related documents such as a UCC filing or recording.  More importantly, no security interest should ever describe the collateral as being “all of the Debtor’s assets or any similar language.”