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Article 9 of the Uniform Commercial Code (UCC) requires a financing statement to "indicate" the collateral covered in order to be effective to perfect a lien.1 It is a well established and accepted practice to provide the required collateral description on an attached schedule or exhibit rather than on the financing statement. However, is it sufficient for a secured party to file a financing statement that contains no collateral description whatsoever and simply incorporates by reference an unattached security agreement?
The U.S. Court of Appeals for the Seventh Circuit thought so and held that a separate description of the collateral in the financing statement itself was not required to perfect the lender's security interest. The ruling is at odds with another recent decision from the U.S. Court of Appeals for the First Circuit, which found that a financing statement describing collateral only by reference to an extrinsic document located outside the public filing office, and providing no detail as to the location of the document, is insufficient.
Background
In In re 180 Equipment LLC,2 the lender filed a UCC-1 financing statement in connection with a loan, describing its collateral as "All Collateral described in First Amended and Restated Security Agreement dated March 9, 2015, between [the] Debtor and Secured Party."3 The security agreement was not attached to the financing statement. As filed with the secretary of state's office, there was simply no way that the public, by looking at the financing statement, had any information about the collateral.
The debtor defaulted and a bankruptcy case ensued, with the lender being owed more than $7.6 million. The chapter 7 trustee sought to avoid the lender's security interest under § 544 of the Bankruptcy Code. The trustee contended that the lien was not perfected because the financing statement failed to independently describe the collateral but instead incorporated the list of assets by simple reference to the parties' security agreement. The lender countered by asserting that although the agreement was not attached, in a notice-filing system the mere reference to the agreement would put subsequent creditors on notice that some or all of the debtor's property was subject to a prior security interest.
The Bankruptcy Court's Decision
Article 9 Requires Description of Collateral
The bankruptcy court held that...