Blanket or "all assets" security interests are among the most common, if not the most common, type of lien required of borrowers by secured lenders in commercial transactions. Describing the collateral for an all assets lien intuitively might seem easy. However, getting collateral descriptions correct under the rules of Article 9 of the Uniform Commercial Code (UCC) has challenged secured lenders for decades, and all assets liens are no exception. Two recent bankruptcy court decisions illustrate these challenges. In particular, they reflect the importance of distinguishing between a blanket lien collateral description in a security agreement and one in a UCC financing statement.
Under Article 9, in order to create and perfect a security interest on most collateral, a secured creditor must provide a collateral description.
UCC §9-203 states that a security interest attaches and becomes enforceable by a secured creditor against a debtor and third parties if: (1) value has been given, (2) the debtor has rights in the collateral or the power to transfer rights in the collateral, and (3) there is evidence of the parties intent to create a security interest. The third condition has been described as an evidentiary requirement in the nature of a Statute of Frauds, seeking to both avoid litigation of claims based on oral agreements and minimize disputes as to what was agreed.1 In most cases, the third requirement is satisfied when the debtor has "authenticated"2 a security agreement containing a description of the collateral.3
But what constitutes a sufficient description of the collateral? UCC §9-108(a) contains the general rule, which is that a description is sufficient if it "reasonably identifies" the collateral. Subsection (b) states that a collateral description reasonably identifies the collateral if it uses any of the following methods: (1) specific listing, (2) category, (3) type of collateral defined in Article 9 (such as "accounts," "goods," "general intangibles" and the like), (4) quantity, (5) computational or allocational formula or procedure, or (6) any other method by which the identity of the collateral is objectively determinable.4
Article 9 specifically rejects a broad, supergeneric "all assets" or "all personal property" security agreement description as insufficient, stating in §9-108(c) that a description such as "all of the debtor's assets" or "all of the debtor's personal property" or words of similar import does not reasonably identify collateral.
In addition, a separate collateral description is required if a UCC financing statement will be filed to "perfect" the security interest on collateral. Under UCC §9-502(a), a UCC financing statement must include the following in order to perfect a security interest: (1) name of the debtor, (2) name of the secured party or a representative of the secured party, and (3) indication of the collateral covered by the UCC financing statement.5
In direct contrast to the rules governing a security agreement collateral description, the rules for the third essential component of a UCC financing statement, the "indication" of the collateral, are simple, limited and liberal. UCC §9-504 states that a financing statement "sufficiently indicates" the collateral if it either describes the collateral in a manner that satisfies UCC §9-108 (in other words, a description that "reasonably identifies" the collateral for purposes of a security agreement will suffice for a financing statement) or indicates it covers "all assets" or "all personal property." UCC §9-506(a) goes even further by stating that a financing statement with errors and omissions is still sufficient, unless those errors and omissions make it seriously misleading.
This more forgiving standard for the indication of collateral in a UCC financing statement derives from the limited nature and different purpose of a UCC financing statement. A UCC financing statement is intended simply to give public notice that a person may have a security interest in the collateral indicated, on the assumption that the searcher can then seek more information from the debtor or secured party.6 As compared to a security agreement, it does not need to satisfy evidentiary requirements as to the intent of the parties.
Accordingly, a collateral description that "reasonably identifies" collateral for purposes of a security agreement will also serve to sufficiently "indicate" the collateral for purposes of a UCC financing statement. The reverse, however, is not true. When counsel is not mindful of these distinctions, there can be negative consequences, as illustrated by the two cases discussed below.
Two recent bankruptcy court decisions emphasize the need for counsel to be aware of the distinctions between the rules for collateral descriptions in security agreements and those for financing statements.
In re Hintze. In the February 2015 Florida bankruptcy case of In re Hintze,7 the debtors, Matthew and Larina Hintze, had delivered a promissory note to creditor Christopher James containing a security interest grant. The grant read as follows: "As security for payment of the principal, interest and other sums due under this note, Maker hereby grants to Holder a security interest in all of Maker's assets." (In the Note, "Maker" meant the debtors.) About 19 months after the note was signed, a UCC-1 financing statement was filed with the Florida Secretary of State against the debtors describing the collateral as "All personal property owned by the Debtors, including cash or cash equivalents, stocks, bonds, mutual funds, certificates of deposit, household goods and furnishings, automobiles and water craft."8
The creditor had objected to the proposed sale of certain membership interests by the debtors' trustee in bankruptcy, claiming, among other things, that he had the right to credit bid based on his lien on such assets.
The trustee asserted that the collateral description was legally insufficient and that therefore the creditor was unsecured. The creditor, in turn, argued that summary judgment was not appropriate because the intent of the parties governed, and insisted that the court take parol evidence on the meaning of the collateral description.
Judge Karen K. Specie granted a motion for summary judgment by the trustee, finding that the collateral description in a security agreement of "all of Maker's assets" was insufficient as a matter of law to create a security interest.
The judge rejected the creditor's argument that a supergeneric collateral description was permissible by virtue of Official Comment 2 to UCC §9-108, which states that the "purpose of requiring a description of collateral in a security agreement under §9-203 is evidentiary." Not surprisingly, the judge found that argument unpersuasive given the express statement in 9-108(c) that an all assets description is not sufficient to reasonably identify collateral. The court also rejected the creditor's attempt to introduce parol evidence, stating that reliance on parol evidence is contrary to the "purpose and effect of the UCC" and that the UCC in fact discourages parol evidence.9
The creditor also invoked the somewhat less supergeneric collateral description that appeared in the related UCC filing. The creditor argued that the court should apply a composite documents approach that some courts have used to look to both the collateral description in the security interest grant and the collateral description in the UCC filing, to remedy the defect in the security interest grant collateral description.10 But the court declined to do so here, noting that there is no support for combining the language in the note with a UCC financing statement filed 19 months later.11
Ring v. First Niagara Bank, N.A. (In re Sterling United). The more relaxed standard for UCC financing statement collateral descriptions was applied in Ring v. First Niagara Bank, N.A. (In re Sterling United),12 to uphold the creditor's perfected security interest against a challenge by the bankruptcy trustee.
In the Western District of New York Sterling United bankruptcy case, again in the context of a motion for summary judgment, Judge Michael J. Kaplan considered the rules for collateral descriptions in UCC financing statements. At issue in that case was what Kaplan characterized as a "needlessly convoluted" description of collateral in a succession of UCC financing statement filings.13
In that case, it was undisputed that First Niagara Bank had been granted an all assets security interest by the debtor, a printing business, under the security agreement.14 The bank's early financing statements in 2005, 2006 and 2007 described the collateral as:
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 (emphasis added).
The debtor subsequently changed its name and moved to Amherst, New York. While the bank amended the UCC filing to reflect the name change and change of address, it did not amend the UCC collateral description (which continued to refer to the old address) until February 2013, when it amended the collateral description to read as follows:
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, including but not limited to those located at or relating to the operation of the premises at 6030 N. Bailey Avenue, Amherst, New York 14226, together with any products and proceeds thereof (emphasis added).
Unfortunately for the bank, an involuntary Chapter 7 petition was filed against the debtor in May 2013, within 90 days of the filing of that amended collateral description. Accordingly, the bankruptcy trustee sought to avoid the bank's security interest as unperfected due to a defective collateral description.
The trustee in bankruptcy in this case claimed not that the description didn't sufficiently indicate the collateral, but rather that the description was "seriously misleading" under 9-506. Kaplan rejected the assertion that the appropriate standard in assessing the adequacy of the collateral description, given the ambiguity, was whether any hypothetical creditor could have been misled. Instead he found that a standard of "reasonableness" or "prudence" on the part of a searcher is appropriate.15 Kaplan emphasized that, under existing case law, when the collateral description is ambiguous (which he assumed to be the case here), the purpose of a notice filing (i.e., UCC financing statement filing) is to indicate the creditor may have a security interest in the collateral, and merely is the starting point for investigation by another creditor.16
The above cases illustrate what can happen when practitioners act almost in counterpoint to the requirements of the collateral description rules. The succinct "all of Maker's assets" language in Hintze could easily have provided sufficient notice for a financing statement description; unfortunately it was used for a security interest grant. On the other hand, the Sterling United description added verbosity where it was clearly not needed, the result being it gave rise to uncertainty and needless litigation.
Commentators have puzzled over the reasoning behind the UCC Article 9 prohibition on supergeneric collateral descriptions in security interest grants.17 The Official Comments say simply that this follows prevailing case law.18 However, the evidentiary purpose of a security agreement grant, as compared to the broad and basic notice function of a UCC financing statement, would seem to provide significant justification for the differences in approach.
As noted above, drafting an effective "all personal property" collateral description for a security interest grant requires close attention to UCC §9-108(b), which provides safe harbors for what constitutes a reasonable, and therefore sufficient, description of most items of collateral.For example, §9-108(b)(3) sanctions descriptions using UCC-defined "types" of collateral. But, as with many Article 9 provisions, there are exceptions to even that safe harbor. Notably, a security interest grant in a commercial tort claim must contain a "descriptive component beyond the 'type' alone"19 and requires commercial tort claims to be described in a security agreement with "greater specificity" than is required for most other types of collateral.20 Similarly, a description of collateral by type alone is insufficient for a grant of a security interest in a consumer transaction on consumer goods, a security entitlement, security account or commodity account.21
All of the above underscores the need for practitioners to be familiar with and sensitive to the differences in the rules governing collateral descriptions, and mindful as to whether such description is being relied upon in order to create, or instead to perfect, a security interest.
1. See In re Numeric, 485 F.2d 1328, 1331 (1st Cir. 1973); see also U.C.C. §9-108, cmt. 2 and U.C.C. §9-203, cmt. 3.
2. U.C.C.§9-102(a)(7) for the definition of "authenticate."
3. See U.C.C. §9-203(b)(3)(A). Note that for certain types of assets, such as deposit accounts, investment property and electronic chattel paper, possession or "control" is sufficient to evidence the parties' agreement without the need for a collateral description. See U.C.C. §§9-203(b)(3)(B), (C) and (D).
4. While a specific listing is one way to reasonably identify the collateral, the other methods make it clear that reasonable identification of the collateral does not mean that the description must be detailed. See U.C.C. §9-108, cmt. 2.
5. U.C.C. §9-502(a). To be effective, a UCC financing statement also needs to be authorized by the debtor. U.C.C. §§9-509 and 9-510(a). For certain special types of UCC financing statements, other items need to be included as well, such as information about related real property in the case of a fixture filing. U.C.C. §9-502(b).
6. See U.C.C. §9-502 cmt. 2.
7. 525 B.R. 780 (Bankr. N.D. Fla. Feb. 11, 2015).
8. Id. at 782.
9. Id. at 788. However, note that White and Summers support the use of parol evidence in interpreting collateral descriptions in security interest grants. See their discussion of the collateral description rules in their treatise, Uniform Commercial Code, 6th ed., 2010, v.4, §31-3.b.
11. Id. at 791.
12. Ring v. First Niagara Bank, N.A. (In re Sterling United), 519 B.R. 586 (Bankr. W.D.N.Y. 2014).
13. Id. at 588.
14. Id. The decision does not describe the collateral description in the documents granting the security interest to the bank, but states that it was not disputed that the bank properly took a security interest in all assets of the debtor.
15. Id. at 591.
17. See, e.g., White & Summers, supra note 9 at 122-23.
18. See U.C.C. §9-108, cmt. 2.
19. U.C.C. §9-108(e). For a more general discussion of security interests on commercial tort claims, see Alan M. Christenfeld & Barbara M. Goodstein, "Protecting Liens on Debtors' Commercial Tort Claims," 247 N.Y.L.J. No. 22 (Feb. 2, 2012).
20. U.C.C. §9-108, cmt. 5.
21. U.C.C. §9-108(e). The New York U.C.C. also provides that a description by type is insufficient for a cooperative interest. See N.Y.U.C.C. Law §9-108(e)(3) (McKinney 2001).
Reprinted with permission from the June 4, 2015 edition of New York Law Journal © 2015 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.