Even when prepared by outside or in-house counsel, many lenders pay close attention to draft UCC financing statements before they are filed, and rightfully so. A recent case decided shortly before the end of 2016 highlights an important practical lesson about what words should be included in a UCC financing statement’s collateral description and why.
The Second Circuit Court of Appeals (which includes New York courts), recently affirmed that by using the key words “all assets” in a UCC financing statement, a secured creditor can perfect its security interest even if other information that follows the “all assets” language is incorrect.
A national bank made a $1 million loan secured by all assets of the borrower. The bank’s UCC financing statement described the collateral as:
“all asset of the Debtor, including, but not limited to, any and all equipment, fixtures, inventory . . . now owned or hereafter acquired by the Debtor and located at or relating to the operation of the premises at 100 River Rock Road . . . .” [Emphases added.]
When the borrower moved locations seven years later, the bank amended box 2c of its financing statement (the “Debtor’s mailing address” box) to indicate the borrower’s new address as 6030 N. Bailey Ave. However, the bank failed to amend Box 4 as well, the description of the collateral, which continued to say, “and located at or relating to the operation of the premises at 100 River Rock Road,” the original address.
Subsequently, the borrower filed for bankruptcy. Less than 90 days thereafter, the bank filed an amended financing statement describing the collateral in box 4c as “and located at or relating to the operation of the premises at 6030 N. Bailey Ave,” the new address. The bankruptcy trustee sought to set aside the security interest as being unperfected after the debtor moved.
The parties agree that the bank’s UCC financing statement amendment filed within 90 days of the bankruptcy petition, did not and could not have perfected the bank’s security interests because it would have been a voidable preference under Section 547 of the bankruptcy code. The only dispute left before the court was whether the initial collateral description in the initial UCC financing statement was sufficient to continue to perfect the bank’s security interest after the borrower moved.
The Court’s Holding:
The bankruptcy judge ruled in favor of the bank, concluding that the original financing statement sufficiently described the collateral. The district court affirmed, as did the Second Circuit in a non-precedential summary order on December 22, 2016 (In re: Sterling United, Inc.)
Despite the improper address, the Second Circuit held that the collateral description was “sufficient because it unambiguously refers to ‘all assets of the Debtor’ irrespective of their location.” All of the language following the phrase “including, but not limited to” was superfluous. Citing authority, the Second Circuit said that using “including, but not limited to” made the detailed description that followed “illustrative rather than exhaustive.”
A collateral description in box 4 that states “all assets of the Debtor” is bulletproof. Many lenders, attorneys and paralegals may, as a matter of personal preference, like to include a list of types of collateral and other details just like the bank did in this case by starting off that list with “including but not limited to…” Doing so is fine as long as the entire collateral description in box 4 starts by indicating that the collateral is “all assets of the Debtor.” Anything that follows the phrase “including but not limited to…” is seen by the courts as nothing more than a non-exhaustive list of examples.
Jason I. Miller is Of Counsel at Blank Rome LLP. He concentrates his practice in the area of commercial finance, with a particular focus on asset-based and cash-flow financing. He represents major national and international commercial banks, finance subsidiaries of banks, private equity groups, mezzanine lenders and independent factors and finance companies. He can be reached at JMiller@BlankRome.com.