UCC Collateral Description: More May Not Be Better

Ring v. First Niagara Bank, N.A. (In re Sterling United, Inc.), 519 B.R. 586 (Bankr. W.D.N.Y. 2014) –

A chapter 7 trustee sought to recover as preferences payments made by the debtor to a lender and proceeds of collateral liquidation received by the lender based on arguments regarding whether UCC financing statements adequately perfected the lender’s security interests.

Although the Uniform Commercial Code (UCC) requires at least some level of specificity in describing collateral in a security agreement, since 2001 the description in a UCC financing statement filed to perfect a security interest can be as broad as “all assets” of the debtor.  In this case the initial UCC financing statements filed by the lender beginning in 2005 included the following collateral description (emphasis in original):

All assets of the Debtor including, but not limited to, any and all equipment, fixtures, inventory, accounts, chattel paper, documents, instruments, investment property, general intangibles, letter-of-credit rights and deposit accounts now owned and hereafter acquired by Debtor and located at or relating to the operation of the premises at 100 River Rock Drive, Suite 304, Buffalo, New York, together with any products and proceeds thereof including but not limited to a certain Komori 628 P & L Ten Color Press and Heidelberg B20 Folder and Prism Print Management System.

In 2012 the debtor changed its name and moved to Amherst, New York.  The bank initially amended its financing statement to reflect the new name and address.  It later changed the collateral description in 2013 from “…now owned and hereafter acquired by Debtor and located at or relating to the operation of the premises [in Buffalo, New York]” to “now owned and hereafter acquired by Debtor including but not limited to those located at or used in connection with the business premises at [Amherst, New York]” (emphasis added).

The trustee argued that the UCC financing statement failed ab initio as being seriously misleading.  And even if the UCC filings were initially sufficient, they became seriously misleading after the move to Amherst.  Although the parties acknowledged that the 2013 UCC filing was sufficient, it was apparently filed within the preference period.

As an initial point, the court noted that even if a UCC financing statement could be avoided as a preference or otherwise, the lack of perfection did not affect a valid grant of a security interest.  So the ability to avoid a UCC financing statement would be relevant only with respect to payments received within the 90-day period prior to bankruptcy (i.e., if the security interest was unperfected, then payments within the 90 days might allow the lender to receive more than it would in a chapter 7 liquidation – which might cause the payments to be preferences).

With respect to the impact of the debtor’s move and the references to location in the UCC financing statements, the trustee relied on an expert linguist’s testimony that the original description could be interpreted in two different ways – the issue being whether the reference to “and located at or relating to” the identified premises qualified “all assets” or only the enumerated assets.  The testimony identified the two interpretations as possible based on a verbatim review of the language, without considering the context or how a specific reader would interpret the text.

However, even accepting that the description was ambiguous and regardless of whether the relevant test was an actual or hypothetical creditor is, the court concluded that it “must presume a certain level of sophistication or a certain level of intelligence and diligence in reading the collateral description.”

The court acknowledged that it might have had a different view under different facts.  For example, if there was only one UCC filing with the outdated address, it might have been more inclined to consider whether the collateral description was “seriously misleading” under the UCC (and thus whether the updated UCC filing in 2013 served to perfect the lender’s security interests and could be avoided).

However, the court pointed out that there were a series of UCCs filed that included the name change, the address change, and the change in collateral description.  This was sufficient to put a searcher on notice that there might be an issue.  In the court’s view if a description can be reasonably interpreted in two ways, one of which may cover the collateral, that is sufficient to provide inquiry notice.

Consequently, the court found that the UCC financing statements were not seriously misleading, and therefore were effective to perfect the lender’s security interest.  As a further consequence, the debtor’s payments to the bank and the proceeds from liquidation of the collateral were not avoidable as preferences.

It is interesting that the court described the collateral description several times as “needlessly convoluted.”  This description is certainly a lot less convoluted than many and probably reflects the categories of collateral identified in the security agreement.

As a technical drafting point:

  • Under UCC § 9-108 a description of collateral in a security agreement is not sufficient if it merely states “all the debtor’s assets,” “all the debtor’s personal property” or other similar language. Instead, there must be more detail, for example identifying the types of collateral defined in the Uniform Commercial Code.
  • Now that UCC financing statements are no longer signed by the debtor, the usual source for authorization is the security agreement. Under UCC 9‑509 a debtor is deemed to authorize filing a financing statement covering collateral as described in the security agreement, although the debtor can also can specifically authorize a UCC financing statement.
  • Given the discrepancy in the requirements for collateral descriptions in a security agreement as opposed to a UCC financing statement, when the intent is to cover all of a debtor’s assets, it is a good idea to include an explicit statement in the security agreement that the secured party is authorized to file a UCC financing statement describing the collateral as “all assets.” Otherwise, the secured party may be required to use a “needlessly convoluted” description from the security agreement in order to be authorized to file the UCC, which in turn may introduce unnecessary ambiguity.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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