Banking and Finance Law Daily Bankruptcy trustee asks court to review whether financing statement was defective
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Friday, January 17, 2020

Bankruptcy trustee asks court to review whether financing statement was defective

By Lisa M. Goolik, J.D.

The bankruptcy trustee is seeking to avoid a $7 million claim against a debtor’s bankruptcy estate.

A bankruptcy trustee has asked the Supreme Court to consider the decision of the U.S. Court of Appeals for the Seventh Circuit that a financing statement that incorporates a description of collateral by reference to an unattached security agreement sufficiently "indicates" the collateral (In re: I80 Equipment, LLCDocket No. 19-870). In its petition, the trustee argues that the financing statement failed to give public notice of the collateral, and the Seventh Circuit’s decision "both misinterprets provisions of the Uniform Commercial Code contrary to the interpretation of another circuit court, and unreasonably departs from the appropriate course for federal court interpretation of state law."

Seventh Circuit holding. To secure a loan, the debtor, I80 Equipment, LLC, executed a security agreement granting the lender, First Midwest Bank, a security interest in substantially all of the debtor’s assets. After I80 Equipment defaulted and filed for Chapter 7 bankruptcy protection, First Midwest sued the bankruptcy trustee to recover $7.6 million of its loan and a declaration that its security interest was senior to that of the trustee. The trustee countered that First Midwest’s security interest was not properly perfected because its financing statement did not independently describe the underlying collateral, but instead incorporated the list of assets by reference to the parties’ security agreement. The bankruptcy court found in favor of the bankruptcy trustee, permitting the trustee to avoid the security interest.

In a matter of first impression, the Seventh Circuit held on appeal that the law does not require a financing statement to contain within its four corners a specific description of secured collateral. Citing the plain language of Section 9-502 of the Illinois UCC, the court noted that the section requires only that a financing statement "indicate the collateral covered by the financing statement." By pointing or directing attention to a description of the collateral in the parties’ separate security agreement, the creditor sufficiently indicated the collateral that was covered by the financing statement. As a result, the court held that the trustee was not entitled to avoid First Midwest’s lien.

Attorneys: William J. McKenna Jr. (Foley & Lardner) for First Midwest Bank, N.A.

Companies: First Midwest Bank, N.A.; I80 Equipment, LLC

MainStory: TopStory IllinoisNews IndianaNews Loans SecuredTransactions SupremeCtNews WisconsinNews

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