The UCC has two standards for collateral description. Section 9-108 provides that the security agreement’s “description of personal … property is sufficient, whether or not it is specific, if it reasonably identifies what is described.” It goes on to give examples (not requirements) of reasonable identification. However, it specifically prohibits super-generic description:
On the other hand, the UCC permits super generic descriptions of collateral on the financing statement. Section 9-504 provides:
So the standard for a security agreement is specific while the standard for a financing statement is generic. No problem when you get a UCC search, which shows a prior lien on “all assets.”
Now comes a decision from the U.S. Court of Appeals for the 7th Circuit, which is in Chicago, a significant commercial center. Yes, the situation in this decision is different from what I described above but the issue is not. The court indicated that the issue was
When FMB brought an action against the trustee to recover almost $8 million it claimed to be the proceeds of collateral in which it held a properly perfected and senior interest, the trustee asserted a counterclaim under §544(a) of the bankruptcy code, that, as a statutory lienholder, the trustee’s lien was superior to the interest of FMB because FMB did not properly perfect its interest due to its failure to provide a sufficient collateral description. The bankruptcy court ruled in favor of the trustee, and the appeal was certified directly to the 7th Circuit.
A court must view the statute as a whole, construing words and phrases in light of other relevant statutory provisions and not in isolation. Each word, clause, and sentence of a statute must be given a reasonable meaning, if possible, and should not be rendered superfluous.
1) provide the name of the debtor, 2) provide the name of the secured party or its representative and 3) indicate the collateral covered by the financing statement.
A financing statement that substantially satisfies these requirements is effective, even if it has minor errors or omissions that are not “seriously misleading.” … But if a financing statement fails these basic requirements, the lender’s interests are subject to avoidance under §544(a) of the bankruptcy code.
This section adopts the system of ‘notice filing.’ What is required to be filed is not, as under pre-UCC chattel mortgage and conditional sales acts, the security agreement itself, but only a simple record providing a limited amount of information (financing statement)… The notice itself indicates merely that a person may have a security interest in the collateral indicated. Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs.
The approach … to financing statements supports the conclusion that incorporation by reference is permissible in Illinois as “any other method” under § 9-108, so long as the identity of the collateral is objectively determinable. That requirement is met here by the security agreement’s detailed list of the collateral.
The more significant issue, referring back to the situation described above, is that lenders must exercise caution when intending to lend against collateral that is represented not to be part of a prior lender’s collateral package. In such a case, and when the prior lender’s financing statement does not clearly enumerate the collateral description (as the 7th Circuit stated), “Further inquiry from the parties concerned will be necessary to disclose the complete state of affairs.”
All of this said, I have found that financing statements filed by equipment leasing companies to give notice of their interest in their leased equipment may describe collateral by reference to the lease agreement. In examining these leases I have, on occasion, found broad granting clauses securing the lessee’s obligations. Without that review, lenders would have found themselves subordinate to the prior filed lessor.
