In a surprising development, on September 11, 2019 the Seventh Circuit Court of Appeals issued a ruling on appeal reversing a lower bankruptcy court decision and found that a UCC financing statement that contained no collateral information whatsoever, but simply cross-referenced a security agreement, sufficiently "indicated" the collateral for purposes of UCC Article 9. In so doing, it put itself directly at odds with a January 2019 decision by the U.S. Court of Appeals for the First Circuit (In re Financial Oversight & Management Board)" in connection with the insolvency proceeding for Puerto Rico.

The Seventh Circuit case, In re I80 Equipment, LLC (2019 WL 4296751), was a matter of first impression in Illinois. In that case, the debtor, I80 Equipment, LLC, had granted an "all assets" lien to First Midwest Bank to secure repayment of a loan. The security agreement covered 26 different categories of collateral. But the UCC financing statement simply said "[a]ll Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party." Moreover, the security agreement was not attached to the filing. So there was no way a creditor, by looking at the UCC, had any information regarding the collateral.

Under UCC §9-502(a), a properly filed UCC financing statement must indicate the collateral covered by the financing statement. UCC §9-504 then provides two alternative safe harbors for a financing statement that "sufficiently indicates" the collateral, those being:

1. a description of the collateral pursuant to UCC §9-108; or

2. an indication that the financing statement covers all assets or all personal property.

UCC §9-108 list six ways of describing the collateral, the last of which is "any other method by which the identity of the collateral is objectively determinable." This last option is what the court cited in deciding that no description within the four corners of the UCC was needed, but rather that a bare cross-reference to another unattached document (without any information as to how a copy could be obtained) would suffice.

The court's ruling could make one question whether a collateral description box in a financing statement serves any purpose at all if the court is willing to bless a filing such as the one in the I80 case. For secured parties, our recommendation would be to continue to follow the more common approach of including within the financing statement some modicum of information, whether it be asset type or category, regarding the collateral. If any incorporation by reference to another document is used, we also recommend including in the financing statement a statement on how the searcher can obtain a copy of that document.

Originally published October 11, 2019

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