Seventh Circuit Guidance on Collateral Description in Financing Statements

In a previous blogpost, we explained the technical requirements for financing statements and the potential risks of failing to satisfy them, highlighting a case where the court ruled, under a prior version of the Puerto Rico UCC, that a creditor’s financing statement was insufficient to perfect its lien where the collateral was described solely by reference to a document that was not attached to the financing statement.  The Seventh Circuit reached a different conclusion in a recent case argued by a team of Foley & Lardner LLP attorneys, holding that, under the current version of the Illinois UCC, it IS acceptable to describe collateral by reference to a document that is not attached to the financing statement.  The court ruled that a creditor’s lien was properly perfected by a financing statement that described the collateral by reference to an unattached document, and therefore that the creditor’s lien was not subject to avoidance under the Bankruptcy Code on the basis of such collateral description. 

Sufficient Description or Sufficient Indication?

The Seventh Circuit decision reversed a lower court decision decided on summary judgement. In First Midwest Bank v. Reinbold (In re 180 Equip., LLC), 2018 Bankr. LEXIS 2482 Bankr. C.D. Ill. (2018), the district court ruled, as a matter of first impression in Illinois, that a financing statement reference to an unattached security agreement was insufficient to perfect the lender’s security interest and, therefore, the lender’s security interest was avoidable under Section 544(a) of the Bankruptcy Code. The financing statement in question included the following in the collateral description box: “[a]ll Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party.”

On stipulated appeal, Judge Brennan reversed and ruled that the plain and ordinary meaning of the current version of Article 9-502 of the Illinois UCC only requires collateral in a financing statement to be sufficiently indicated – not sufficiently described. In re Equipment, LLC, 938 F.3d 866, 7th Cir.(Ill.) (2019). Rehearing and rehearing en banc was denied. Unlike the prior version of Article 9, which required the financing statement to “contain a statement indicating the types, or describing the items, of collateral”, the current version of Article 9 does not require the description of collateral to be ‘contained’ within the four corners of a financing statement; rather the statement must only “indicate” the collateral. Under the current version of Article 9, as discussed below, collateral may be validly indicated in a number of different ways, including incorporation by reference to the security agreement.

Sufficient Indication of Collateral under Article 9

Despite this decision from the Seventh Circuit and the support in the statutory language in Article 9 (even in UCC adopted in states outside the Seventh Circuit), the description of collateral in financing statements has become a focus of debtors, debtors’ creditors, bankruptcy trustees, and other third parties. Therefore, secured parties will be well served by taking a conservative approach and indicating the collateral description in the filed financing statement.

A financing statement may sufficiently indicate collateral by, among other things, using a specific listing (such as identifying a piece of equipment by model or a vehicle by make and model), designating collateral by category or type as such terms are used in Article 9 (such as all payment intangibles of debtor, all goods, or accounts receivable). If using less conventional methods, such as quantifying collateral or citing a mathematical computation or allocation, secured parties are advised to specify their collateral not just be referring to the quantity or values in the equation. Regardless of the method used to indicate collateral, a valid financing statement must indicate collateral in a way so that it is ‘reasonably identifiable’.

For a security interest encompassing all assets of the debtor, the secured party may rely on the safe harbor section in UCC 9-504 (2) and describe the collateral as ‘all assets of debtor including proceeds and after acquired collateral.’