Banking and Finance Law Daily Reference in UCC filing to security agreement sufficiently described collateral
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Thursday, September 12, 2019

Reference in UCC filing to security agreement sufficiently described collateral

By Lisa M. Goolik, J.D.

Reversing a bankruptcy court’s holding, the Seventh Circuit concluded that a financing statement need not contain a description of the collateral within the four corners of the filing.

In a matter of first impression, the U.S. Court of Appeals for the Seventh Circuit has held that a financing statement that incorporates a description of collateral by reference to an unattached security agreement sufficiently "indicates" the collateral, and a separate and additional description of the collateral is not required. Citing the plain language of the statute, the court concluded that Revised Article 9 of the Illinois Uniform Commercial Code does not require a financing statement to contain within its four corners a specific description of secured collateral. As a result, the court reversed a bankruptcy court’s holding that a bankruptcy trustee could avoid the security interest held by First Midwest Bank in the debtor’s assets. (In re I80 Equipment, LLC, Sept. 11, 2019, Brennan, M.).

Description of collateral. The debtor, I80 Equipment, a refurbished truck dealer, obtained a commercial loan from First Midwest Bank. To secure the loan, I80 Equipment executed a security agreement granting First Midwest a security interest in substantially all of its assets. The agreement described 26 listed categories of collateral, such as accounts, cash, equipment, instruments, goods, inventory, and all proceeds of any assets. To perfect its security interest, First Midwest timely filed a financing statement with the Illinois Secretary of State that purported to cover "[a]ll Collateral described in First Amended and Restated Security Agreement dated March 9, 2015, between Debtor and Secured Party."

I80 Equipment subsequently defaulted and filed for Chapter 7 bankruptcy protection. First Midwest sued the bankruptcy trustee, seeking to recover $7.6 million of its loan and a declaration that its security interest was properly perfected and senior to the interests of all other claimants, including 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 ruled that "[a] financing statement that fails to contain any description of collateral fails to give the particularized kind of notice" required by Article 9 of the UCC. As a result, the trustee sold the estate’s assets for approximately $1.9 million. First Midwest appealed.

Plain language of the UCC. The Seventh Circuit disagreed with the bankruptcy court and reversed, citing the plain and ordinary meaning of the Illinois statute, and how courts typically treat financing statements. Section 9-502 of the Illinois UCC requires that a financing statement "indicate the collateral covered by the financing statement." In accordance with Section 9-504, a financing statement sufficiently indicates the collateral that it covers "if the financing statement provides … a description of the collateral pursuant to Section 9-108." That section states that a description of the secured property does not need to be specific but must "reasonably identif[y]" what is described.

To interpret the meaning of Section 9-502, the court revisited the history of the section, noting that in 2001 the Illinois version of the UCC was revised to no longer require that the financing statement "contain" a description of the collateral; rather, after revision, the statement need only "indicate" collateral. "With this context, the ordinary meaning of ‘indicate; is to serve as a ‘signal’ that ‘point[s] out’ or ‘direct[s] attention to’ an underlying security interest," the court wrote. The court concluded that the plain language of the section permits a party to indicate collateral in a financing statement "by pointing or directing attention to a description of that collateral in the parties’ security agreement."

Further, the court noted that its interpretation reflects how courts have understood the UCC’s notice function—the financing statement puts third parties on notice that a creditor may have an existing security interest in the property and further inquiry may be necessary. "Bankruptcy courts for all three districts in Illinois have recognized this distinction and have noted that incorporation by reference is an available method for describing collateral."

As a result, by incorporating the security agreement by reference, the financing statement sufficiently indicated First Midwest Bank’s collateral.

The case is No. 18-3291.

Attorneys: William J. McKenna, Jr. (Foley & Lardner LLP) for First Midwest Bank. Andrew White Covey (Andrew White Covey, Attorney at Law) for Jeana K. Reinbold.

Companies: First Midwest Bank; I80 Equipment, LLC

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