Yes, we believe that you should have both spouses sign the security agreement for the collateral, given the possibility that the wife may have some type of ownership in the untitled farm equipment — whether before or after a potential divorce.

Under the Illinois Uniform Commercial Code (UCC), a security interest generally attaches to collateral when value has been given, the debtor has rights in the collateral, and the debtor has signed a security agreement providing a description of the collateral. If a husband has ownership rights in untitled farm equipment, a security interest would attach “only to whatever rights a debtor [the husband] may have, broad or limited as those rights may be.” If the husband’s rights are limited because his wife has an ownership interest in the equipment, or the wife is granted rights in a divorce, your security interest would not attach to the wife’s rights unless she also signs the security agreement.

There are a few scenarios in which the wife may have rights in the untitled farm equipment that could limit your security interest in the equipment. For example, the wife could have full or joint ownership rights in the equipment that your bank is unaware of. Note that the wife’s rights in the collateral do not necessarily have to be memorialized in a title — for example, an Illinois court has found that possession of an untitled tractor and trailer by the debtor after a transfer from buyer to seller gave the debtor sufficient rights in the collateral allowing for the attachment of a security interest even in the absence of a formal assignment of title.

Even if the wife only has a joint ownership interest in the collateral, obtaining her signature on the security agreement would ensure that your bank’s security interest is fully enforceable. An Illinois court has ruled that a failure by one of two joint owners to sign a security agreement rendered the security interest unenforceable as to the joint owner who did not sign the agreement.

Additionally, it is possible that the collateral is marital property subject to equitable division by a court should the couple ever divorce. A court could then assign a full ownership interest in the collateral to the wife, extinguishing her husband’s interest. While we are not aware of any case law specifically discussing how a judgment in a dissolution of marriage could affect a security interest in marital property, we believe that such a distribution could potentially limit your security interest if the wife has not signed the security agreement.

Additionally, note that Regulation B prohibits creditors from requiring a spouse’s signature on a credit instrument if the applicant independently qualifies for the credit requested. Therefore, as you noted, you should ensure that your debtor’s spouse signs only the security agreement for the collateral, and not any instruments that could make them personally liable for the related debt.

For resources related to our guidance, please see:

• Illinois UCC, 810 ILCS 5/9-203(b) (“Except as otherwise provided in subsections (c) through (i), a security interest is enforceable against the debtor and third parties with respect to the collateral only if:

(1) value has been given;

(2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and

(3) one of the following conditions is met:

• (A) the debtor has authenticated a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned; . . .”)

• In re Reliable Mfg. Corp., 703 F.2d 996, 1000 (7th Cir. 1983) (“A security interest given in consideration for the obligation of a third party clearly effectuates this purpose and fulfills the requirements of the U.C.C. It is enough, in fact, that there be detriment to the secured party even if there is no benefit to the owner of the assets subject to the security interest.”)

• UCC Comments, § 9-203(b), Comment 6 (“Subsection (b)(2) conditions attachment on the debtor’s having ‘rights in the collateral or the power to transfer rights in the collateral to a secured party.’ A debtor’s limited rights in collateral, short of full ownership, are sufficient for a security interest to attach. However, in accordance with basic personal property conveyancing principles, the baseline rule is that a security interest attaches only to whatever rights a debtor may have, broad or limited as those rights may be. . . .”)

• Midwest Decks v. Butler & Baretz Acquisitions, 272 Ill.App.3d 370, 376–77 (1st Dist. 1995) (“The Code does not define the term ‘rights in the collateral’, but it is generally recognized that rights in the collateral may be sufficient if: the debtor has possession and title to the goods, the true owner consents to the debtor’s use of the collateral as security; or if the true owner is estopped from denying the creation of the security interest because ‘he has allowed another to appear as the owner, or as having full power of disposition over the property, so that an innocent person is led into dealing with such apparent owner[]’. . . .”)

• Midwest Decks v. Butler & Baretz Acquisitions, 272 Ill.App.3d 370, 378 (1st Dist.  1995) (“Even if title had not passed, as noted above, under the UCC, a debtor may have sufficient rights in the collateral without all of the technical requisites of ownership.”)

• Midwest Decks v. Butler & Baretz Acquisitions, 272 Ill.App.3d 370, 378 (1st Dist. 1995) (“[I[i][/i]]n Andrews v. Mid-America Bank & Trust Co., we found that the plaintiff debtor had sufficient rights in the collateral to create an enforceable security interest even though he did not have title to the collateral. The plaintiff had purchased a tractor and trailer from the defendant and they had executed a security agreement whereby the defendant obtained a security interest in the tractor and trailer and other property. The plaintiff failed to make scheduled monthly payments and the defendant repossessed the tractor and trailer. The plaintiff argued that the consideration for the security agreement failed because he never obtained title to the collateral and that, therefore, the agreement never attached and was unenforceable. We disagreed, finding that since the plaintiff had possession of the property, he had acquired rights in it despite the absence of formal written title.”)

• Central Nat’l Bank v. Worden-Martin, Inc., 90 Ill.App.3d 601, 603–04 (4th Dist. 1980) (“We are of the opinion that Smith acquired sufficient rights in the Lincoln to meet requirement (c). Illinois does not require, as between the parties, a formal assignment of title. . . the requirement is not title to, but only rights in, the collateral. By giving Smith possession of the collateral with title thereto, as between the parties, the Auction vested him with sufficient rights to sustain a security agreement. Even one with a voidable title possesses power to transfer it as good.”)

• Motz v. Central Nat’l Bank, 119 Ill.App.3d 601, 608 (1st Dist. 1983) (“Furthermore, we note that in the case of joint tenants, other courts have held that the signing of a security agreement by only one of the joint tenants without the authorization or consent of the co-tenant, affects only the interest of the signing tenant, and that the ownership rights of the nonsigning co-tenant are superior to those of the secured party. We believe that the same reasoning is applicable under the Illinois Code, since the rules of law stated by the above jurisdictions are identical to the rules of law which obtain in this State; namely, that an assignor can convey no greater title or interest than he possesses and that ‘an act or contract by one joint tenant respecting the joint property without the authority or consent of his co-tenants cannot bind or prejudicially affect the latter.’”)

• Illinois Marriage and Dissolution of Marriage Act, 750 ILCS 5/503(a) (“For purposes of this Act, ‘marital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage, except the following, which is known as ‘non-marital property’: . . .”)

• Illinois Marriage and Dissolution of Marriage Act, 750 ILCS 5/503(b)(1) (“For purposes of distribution of property, all property acquired by either spouse after the marriage and before a judgment of dissolution of marriage or declaration of invalidity of marriage is presumed marital property. . .”)

• Illinois Marriage and Dissolution of Marriage Act, 750 ILCS 5/503(d) (“In a proceeding for dissolution of marriage or declaration of invalidity of marriage, . . . the court shall assign each spouse’s non-marital property to that spouse. It also shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors, including: . . .”)

• Illinois Marriage and Dissolution of Marriage Act, 750 ILCS 5/503(e) (“Each spouse has a species of common ownership in the marital property which vests at the time dissolution proceedings are commenced and continues only during the pendency of the action. Any such interest in marital property shall not encumber that property so as to restrict its transfer, assignment or conveyance by the title holder unless such title holder is specifically enjoined from making such transfer, assignment or conveyance.”)

• Reinbold v. Thorpe (In re Thorpe), 569 B.R. 310, 316–17 (C.D. Ill. 2017) (“‘Each spouse has a species of common ownership in the marital property which vests at the time dissolution proceedings are commenced and continues only during the pendency of the action.’ . . .  ‘[T]he filing of a petition for dissolution of marriage creates and vests a contingent interest of each spouse in all property of either spouse constituting ‘marital property.’ . . . ‘This contingent interest ripens into a full ownership interest for any property distributed to such spouse when the divorce court enters an order of distribution or final judgment.’ When this happens, the party to whom the property is not transferred sees his interest extinguished entirely.”)

• Regulation B, 12 CFR 1002.7(d)(1) (“Except as provided in this paragraph, a creditor shall not require the signature of an applicant’s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor’s standards of creditworthiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit.”)

• Regulation B, 12 CFR 1002.7(d)(4) (“If an applicant requests secured credit, a creditor may require the signature of the applicant’s spouse or other person on any instrument necessary, or reasonably believed by the creditor to be necessary, under applicable state law to make the property being offered as security available to satisfy the debt in the event of default, for example, an instrument to create a valid lien, pass clear title, waive inchoate rights, or assign earnings.”)

• Regulation B, Official Interpretations, Paragraph 7(d)(4), Comment 2 (“Generally, a signature to make the secured property available will only be needed on a security agreement. A creditor’s reasonable belief that, to ensure access to the property, the spouse’s signature is needed on an instrument that imposes personal liability should be supported by a thorough review of pertinent statutory and decisional law or an opinion of the state attorney general.”)