In late 2018, we wrote to remind you about the importance of complying with the UCC in preparing collateral descriptions for financing statements. In that article, we discussed a 2018 District Bankruptcy Court decision finding that a secured creditor did not have a properly perfected security interest because its financing statement contained an insufficient description of the collateral. The offending statement read “all collateral described in [the security agreement]…between Debtor and Secured Party.” According to the Bankruptcy Court, simply referring to the security agreement was not enough to satisfy the description of collateral requirements under § 9-108. The result? The secured creditor was deemed to not have perfected its security interest.
Unsurprisingly, the secured creditor appealed to the Seventh Circuit Court of Appeals. In September, the Seventh Circuit reversed the bankruptcy court’s decision, holding that the financing statement in question did, in fact, comply with the UCC and therefore the secured creditor’s security interest was perfected. (In re I80 Equipment, LLC, 2019 WL 4296751, 7th Cir. Sept. 11, 2019).
Why the reversal? In reaching its decision, the Seventh Circuit looked at Illinois UCC § 9-502. The court focused on a language change made when Illinois adopted revised Article 9 in 2001. Pre-revision Article 9 required a financing statement to contain a description of the collateral. Under the revised Article 9, a financing statement need only indicate the collateral it covers. The court felt the change meant a plain reading of § 9-502 would allow a secured party to indicate collateral in a financing statement “by pointing or directing attention to a description of that collateral in the parties’ security agreement.”
From there, the court looked at Illinois UCC § 9-108. Section 9-108(6) provides that, for purposes of a financing statement, collateral can be reasonably identified by any method “if the identity of the collateral is objectively determinable.” Here, because the financing statement was otherwise complete and because the referenced security agreement contained a detailed list of the collateral (making it “objectively determinable”), the court found incorporating the description of collateral by reference to the security agreement was permissible under the Illinois UCC.
The Seventh Circuit’s decision might hint at some breathing room for secured creditors, but it is still important that parties be careful when preparing financing statements.