Perfectly Imperfect Collateral Descriptions within Your UCC Financing Statement: It’s a Delicate Balance.
A properly perfected security interest is nothing without a collateral description. In fact, it’s not properly perfected at all – it’s unperfected. A properly perfected security interest requires compliance with Article 9, which includes a Security Agreement and the subsequent filing of the UCC-1 Financing Statement.
Contents of a Security Agreement
What information should the Security Agreement contain? A Security Agreement should include the following:
- The name & address of the debtor
- The name for an organization must be the name as it appears in the public organic record
- The name for an individual, depending on the state, should be the name as it appears on the unexpired driver’s license
- A granting clause
- A collateral description
- Reference to governing law
- The date of the agreement
- Signatures from authorized individuals
Contents of the UCC Financing Statement
Article 9-502 clearly identifies the information that is to appear in the Financing Statement: the name of the debtor, the name of the secured party and the collateral description.
(a) [Sufficiency of financing statement.] Subject to subsection (b), a financing statement is sufficient only if it:
(1) provides the name of the debtor;
(2) provides the name of the secured party or a representative of the secured party; and
(3) indicates the collateral covered by the financing statement.
What Constitutes a Sufficient Collateral Description?
Article 9-108 provides the following:
(a) Except as otherwise provided… a description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.”
(b) [Examples of reasonable identification.]
Except as otherwise provided in subsection (d), a description of collateral reasonably identifies the collateral if it identifies the collateral by:
(1) specific listing;
(3) except as otherwise provided in subsection (e), a type of collateral defined in [the Uniform Commercial Code];
(5) computational or allocational formula or procedure; or
(6) except as otherwise provided in subsection (c), any other method, if the identity of the collateral is objectively determinable.
Be careful, there’s a fine line between being too specific and too generic.
Can I Attach My Collateral Description as an Exhibit to the UCC Filing?
Yes, you could attach an exhibit to your filing. But… just because you can, doesn’t mean you should. Authors from Troutman Sanders LLP explained in their recent article UCC Incorporation by Reference: An Imperfect Way to Perfect: “Generally, a UCC-1 financing statement’s collateral description is sufficiently descriptive when it refers to details provided in an attachment.” And, they further stated “a collateral description that refers to an unattached, lapsed financing statement may be sufficient when the UCC-1 includes the financing statement’s filing number.”
However, a bankruptcy court recently deemed a security interest unperfected, because the document which identified the collateral was not available at the local clerk’s office (interestingly, it was available on other websites – just not the local clerk’s). According to the authors, the court “held that a UCC-1 financing statement is ineffective to perfect a security interest if the public document to which its collateral description referred is not available at the local clerk’s office where UCC records are maintained.”
A Bit of Background
The debtor issued bonds pursuant to a “pension funding bond resolution.” The debtor & secured parties executed Security Agreements accordingly. The resolution was posted publicly online and provided the pledged property in detail, but did not provide a description of the collateral.
The bond holders filed UCC-1s to properly perfect their security interest, and within the UCC-1 they described the collateral as the “pledged property described in the Security Agreement attached as Exhibit A hereto and by this reference made part hereof.” The UCC was then filed with a copy of the Security Agreement, although, it did not include the separate resolution that identified the collateral.
So, what’s the problem? Without the resolution document, “an interested third party reading the financing statement and the attached security agreement would know to look for the resolution to find a detailed description of the collateral but would not be able to find the resolution at… the applicable financing statement filing office.” The court further noted it would be out of scope to have an interested third party tracking down a document — even if it is just a matter of going to a different website.
Be Careful, Because Perfect Can Quickly Be Imperfect
UCC filings can be quite precarious. Again, there is a fine line between a collateral description that is too specific or one that is too generic. Just as it is debatable whether a court will uphold a security interest as perfected if the collateral is identified within an exhibit. Be careful, be thorough, don’t take short cuts and always review.
Parting thoughts from Troutman Sanders LLP:
“Although this bright-line rule tightens court oversight of the incorporation by reference doctrine, it provides needed clarity moving forward for practitioners — particularly those looking to save a bit of work or time by not including a full collateral description on the financing statement itself. Lenders should refrain from drafting collateral descriptions that rely on extrinsic documents, especially when the referenced document is not attached as an exhibit to the financing statement. Lenders should take particular care when using collateral descriptions that contain terms that are defined in nonpublicly available documents, such as credit agreements and security agreements, if those documents are not attached to the financing statement, and this decision suggests that financing statements may be insufficient to perfect if not all applicable defined terms are specifically included on the financing statement itself or on an exhibit annexed to the financing statement. Lenders should ensure that interested third parties can sufficiently identify the covered collateral without having to take additional steps in the search process. If further sleuthing is needed, the UCC-1, and the drafting skills of its scribe, may be deemed imperfect.”