The Seventh Circuit held that a financing statement under the Uniform Commercial Code sufficiently describes collateral by referring to an unattached security agreement. In other words, no description of the collateral need be contained within the four corners of the financing statement.
Prof. Bruce Markell told ABI that the opinion “neuters the collateral description requirement in Article 9 financing.” Markell is now the Professor of Bankruptcy Law and Practice at the Northwestern Univ. Pritzker School of Law. Before returning to teaching, Prof. Markell was a bankruptcy judge in Nevada and a member of the Ninth Circuit Bankruptcy Appellate Panel.
The Security Interest in All Assets
The lender had taken a security interest in all of the debtor’s assets. There was no dispute about the adequacy of the security agreement, which granted a security interest in 26 categories of collateral.
The timely filed financing statement described the collateral, in substance, as “all collateral described in the security agreement,” which was not attached to the financing statement. Two years later, the chapter 7 trustee contended that the security interest was unenforceable because the financing statement lacked a sufficient description of the collateral.
The bankruptcy judge agreed with the trustee and ruled that the security interest was voidable because the financing statement itself contained no description of the collateral. The Seventh Circuit accepted a direct appeal.
Reversal Based on ‘Plain Language’
Circuit Judge Michael B. Brennan reversed the bankruptcy court based on the “plain and ordinary meaning” of Illinois’s version of the UCC.
In his September 11 opinion, Judge Brennan laid out the UCC’s requirements regarding the sufficiency of a financing statement. In pertinent part, Section 9-502 requires the financing statement to “indicate the collateral covered by the financing statement.”
Next, Section 9-504 lists six ways in which a financing statement can “sufficiently indicate[]” the collateral. The sixth, catchall provision allows “any other method, if the identity of the collateral is objectively determinable.”
Judge Brennan said that the current version of the Illinois UCC no longer requires “the financing statement [to] ‘contain’ a description of the collateral; after revision [in 2001] the statement must only ‘indicate’ the collateral.”
According to Judge Brennan, the “plain reading of the text” leads to the conclusion that a financing statement may “indicate” the collateral by “pointing or directing attention to a description of that collateral in the parties’ security agreement.”
To buttress his conclusion that incorporation by reference is sufficient, Judge Brennan cited Seventh Circuit authority for the proposition that Article 9 of the UCC is neither a “minefield” for lenders nor a “windfall” for trustees. He also cited decisions by three bankruptcy judges in Illinois that he interpreted as allowing incorporation by reference.
To Judge Brennan’s way of thinking, a financing statement is sufficient if it “puts third parties on notice that a creditor may have an existing security interest.”
In short, Judge Brennan held that the “plain and ordinary meaning” of the revised Illinois UCC “allows a financing statement to indicate collateral by reference to the description in the underlying security agreement.”
Observations
Judge Brennan did not cite or discuss contrary decisions from other states, notably the First Circuit’s decision in Altair Global Credit Opportunities Fund (A) LLC v. Financial Oversight and Management Board for Puerto Rico (In re Financial Oversight and Management Board for Puerto Rico), 914 F.3d 694, 711-712 (1st Cir. Jan. 30, 2019). There, the First Circuit said that a financing statement is insufficient if it describes collateral by reference to a document not found in the filing office. To read ABI’s report on the Puerto Rico decision, click here.
“The [Seventh Circuit’s] failure to cite, let alone discuss or distinguish, recent similar cases such as the First Circuit’s recent Puerto Rico case underscores the frailty of its analysis,” Prof. Markell said.
Although the Seventh Circuit is typically not prone to relying on authorities from elsewhere, law under the UCC should be an exception because Section 1-103(a)(3) says it “must be liberally construed and applied . . . to make uniform the law among the various jurisdictions.”
Prof. Markell observed, “Under the [Seventh Circuit’s] reasoning, wouldn’t the mere fact of filing a financing statement ‘indicate’ that there is collateral described somewhere? Otherwise, why file the financing statement in the first place?”
If there is a motion for rehearing, and if possible in Illinois, it might be wise if the circuit were to certify the question for consideration by the Illinois Supreme Court. Otherwise, lenders may begin referring to collateral by reference and thus expose themselves to the danger that an Illinois state court will later rule the description to be inadequate.
The Seventh Circuit held that a financing statement under the Uniform Commercial Code sufficiently describes collateral by referring to an unattached security agreement. In other words, no description of the collateral need be contained within the four corners of the financing statement.
Prof. Bruce Markell told ABI that the opinion “neuters the collateral description requirement in Article 9 financing.” Markell is now the Professor of Bankruptcy Law and Practice at the Northwestern Univ. Pritzker School of Law. Before returning to teaching, Prof. Markell was a bankruptcy judge in Nevada and a member of the Ninth Circuit Bankruptcy Appellate Panel.
The Security Interest in All Assets
The lender had taken a security interest in all of the debtor’s assets. There was no dispute about the adequacy of the security agreement, which granted a security interest in 26 categories of collateral.
The timely filed financing statement described the collateral, in substance, as “all collateral described in the security agreement,” which was not attached to the financing statement. Two years later, the chapter 7 trustee contended that the security interest was unenforceable because the financing statement lacked a sufficient description of the collateral.
The bankruptcy judge agreed with the trustee and ruled that the security interest was voidable because the financing statement itself contained no description of the collateral. The Seventh Circuit accepted a direct appeal.