Kenneth P. Weinberg,
Shareholder ,
Rimon, P.C.

It is fairly common in the equipment leasing and finance industry for financing statements to describe the equipment, inventory or other goods being leased or financed by referring to an unattached master lease, lease schedule or other document. Some of these filings refer to a specific agreement (described by document number or date), some refer to “goods,” “equipment” or other collateral categories defined in the Uniform Commercial Code (UCC) and some list specific goods as well. Even when specific goods are referenced, the secured party sometimes relies on the more general language describing everything leased or financed to establish the date the lien is perfected for the purpose of analyzing the availability of purchase money priority.

This issue of Dispatches from the Trenches addresses recent case law and new commentary from the Permanent Editorial Board for the UCC (the PEB) addressing the adequacy of such filings.

Cases Directly on Point

A flurry of cases starting in 2018 focused on whether a financing statement referencing a separate unattached agreement sufficiently indicated the collateral covered.¹ In these cases, the collateral descriptions in the financing statements referred to “all collateral described in [a specified security agreement]” or “the pledged property described in [a specified security agreement].”

Referencing an unattached agreement appears to comply with the plain meaning of the statutory text of the UCC, which provides that a “financing statement sufficiently indicates the collateral that it covers if the financing statement provides … a description of the collateral pursuant to [the section of the UCC setting forth the type of description required for the grant of the security interest]” and that a description of collateral satisfies that test “if it identifies the collateral by [certain listed methods or] any other method, if the identity of the collateral is objectively determinable.”² After all, if the referenced security agreement lists specific collateral, it is objectively determinable. The 7th Circuit Court of Appeals therefore held such filings to be effective.³

However, many scholars and practitioners were outraged, as the descriptions used on the financing statements in these cases provide third party searchers with no details at all about the collateral. Such a result is contrary to the purpose of such filings, which is to provide notice that the secured party may have a security interest in the indicated collateral. A group of scholars and practitioners even filed an amicus brief with the U.S. Supreme Court hoping to overturn the 7th Circuit’s holding.⁴ The Supreme Court denied certiorari, refusing to hear the case.

Since the only other case holding such a broad collateral description to be ineffective addressed the older version of Article 9 in effect in Puerto Rico at the time, the law of the land (much to the dismay of searchers) appeared to have been that such filings were effective.

The PEB Perspective

The UCC is a joint project of the Uniform Law Commission (ULC) and the American Law Institute (ALI). In addition to promulgating the actual text of the UCC, these groups provide the “official comments” accompanying the statutory text and are generally given significant weight by those attempting to better understand nuanced issues and their related legal solutions offered by the UCC.

The PEB, which is composed of members of both the ULC and ALI, further supplements the official comments to the UCC by offering separate “PEB Commentary,” where the PEB deems necessary, including where the PEB believes it desirable “to state a preferred resolution of an issue on which judicial opinion or scholarly writing diverges.”⁵

Given the importance of the sufficiency of a collateral description on filings and the outcry from scholars and practitioners, the PEB issued a draft commentary regarding this issue on Dec. 16, 2021. That commentary ultimately recommended adding the following statement to the official comments:

A financing statement that provides an indication of collateral that does not itself meet the standard of section 9-504 but refers solely to a record not attached to the financing statement for the collateral indication, does not satisfy the requirement of section 9-504.⁶
As will be explained below in more detail, broader filings describing the collateral as all “goods” leased or financed can still be effective, but secured parties should carefully review the language in such filings.

The PEB commentary first focuses on the statutory text of the UCC relating to the adequacy of the description of collateral on a financing statement. This area of the commentary focuses on the fact that the financing statement must provide a description of the collateral sufficient for the grant of the lien or an indication that it covers all assets or all personal property. According to the PEB, “[w]hen Article 9 requires a record such as a financing statement to ‘provide’ certain information and sets out standards for sufficiency of that information, the plain meaning of the text, and context and purposes, of Article 9 require the information to be in that record.”⁷

In support of this conclusion, the PEB provides two discrete examples of where a financing statement must provide other information within the four corners of the document. First, a financing statement must provide the name of the debtor, and the PEB notes that a financing statement which used the tradename of the debtor but referenced an unattached security agreement for the correct, legal name would be insufficient.⁸ Second, a fixture filing must provide a description of the related real property sufficient to give constructive notice of a mortgage under the laws of the applicable state if the description were contained in a record of the mortgage of the real property.⁹ Again, the PEB notes the real property description cannot be in a separate unattached agreement.

It is fair to question the emphasis on the word “provide” in the aforementioned examples. After all, they relate to the ability to index financing statements in public records, and there are separate statutory provisions and official comments addressing both issues. For example, when focusing on the adequacy of the debtor’s name, the UCC ties sufficiency to whether a search under the correct name would reveal the filing.¹⁰ Similarly, the UCC makes clear, when considering the adequacy of a real property description on fixture filings, “[t]he proper test is that a description of real property must be sufficient so that the financing statement will fit into the real property search system and be found by a real property searcher.”¹¹

Of course, the question of whether the filings can be found is somewhat distinguishable from, although similar in some respects to, the question of how helpful the records are once found. The most compelling portion of the PEB commentary focuses on the usefulness of the record. Here, the PEB notes:

Publicly searchable financing statements efficiently, reliably and inexpensively provide to third parties the information necessary for assessment of the risk that others have certain rights in the personal property indicated in the financing statement … These purposes are best served if the requirement in UCC § 9-504(1) that the financing statement “provide” an indication of the collateral is interpreted to require that an adequate indication appear in the record or records that are attached to the financing statement, not solely in a record that is not “attached” to the financing statement.¹²

The PEB is careful not to go too far, preserving the “notice filing” nature of the system pursuant to which third party searches must only be put on notice the secured party may claim a security interest in the collateral indicated. In particular, the PEB Commentary uses an example of a financing that describes the collateral as “all inventory supplied by secured party to debtor under a supply agreement between debtor and secured party.”¹³ Here, the PEB concludes that the description of the collateral is sufficient because the description of the collateral as inventory alone would be sufficient.¹⁴ This result flows from Section 9-108(b)(3) of the UCC, which expressly approves any description of collateral by a type of category set forth in the UCC other than commercial tort claims or certain properties pledged in a consumer transaction. According to the PEB, “[t]he searcher is on notice that a security interest may be claimed in certain inventory even though a determination of the inventory affected may require further due diligence by the searcher, or even the implementation of intercreditor arrangements, if the searcher is considering extending credit against inventory or its proceeds.”¹⁵

The Details Matter

Those in the equipment leasing and finance community relying on broader filings should pay special attention to the PEB commentary. Although filings referencing all “collateral” pledged under or described in an unattached agreement would be rendered ineffective, the techniques used by most equipment leasing and finance companies should still work. Careful consideration should, however, be given to the collateral description on the filings to make sure they do not rely solely on the unattached document. In particular, something like “all property leased or financed under an agreement between secured party and debtor” may not work, since “property” is not a collateral category under the UCC.

Since the PEB commentary blesses a description of the collateral as inventory subject to a separate agreement, it seems safest for equipment leasing and finance companies to use a similar approach. For this reason, it is best to refer to particular UCC categories specifically approved in UCC section 9-108(b)(3), such as “goods,” “accessions” and “software” in addition to referencing the separate agreement. In any event, we should be happy to have the further guidance from the PEB on this issue.

¹See I80 Equipment, LLC, 591 B.R. 353 (Bankr. C.D.III, 2018) which was overturned on appeal in 180 Equipment Leasing, LLC, 938 F.3d 866 (7th Cir. (III), 2019) and The Financial Oversight and Management Board for Puerto Rico, 914 F.3d 694 (1st Cir. (Puerto Rico), 2019.
²See UCC §9-504(1) (description sufficient for a financing statement) and UCC §9-108(b)(6) (description sufficient for grant of the security interest).
³In 180 Equipment Leasing, LLC, 938 F.3d at 874 (“The plain and ordinary meaning of Illinois’s revised version of the UCC allows a financing statement to indicate collateral by reference to the description in the underlying security agreement.)”
⁴2020 WL 749231 (U.S.) (Appellate Brief)
⁵Draft of PEB Commentary, dated December 16. 2021, regarding Indication of Collateral in Financing Statement, Preface (available at https://www.ali.org/about-ali/governance/committees/joint-committees/).
⁶Id. at 5. Official Comment proposed for addition to in Section 9-504 of the UCC, which addresses the sufficiency of an indication of collateral on a financing statement.
⁷Id. at 2.
⁸Id. at 2, noting the debtor name requirements pursuant to UCC §9-503.
⁹Id. at 2, noting the real property description requirements of UCC §9-502(b)(3).
¹⁰UCC 9-506.
¹¹UCC 9-502, Official Comment 5.
¹²Draft of PEB Commentary, dated December 16. 2021, regarding Indication of Collateral in Financing Statement, at 3 (available at https://www.ali.org/about-ali/governance/committees/joint-committees/).
¹³Id. at 5.
¹⁴Id.
¹⁵Id.

About the author: Kenneth P. Weinberg is a shareholder at Rimon, P.C. and practices in the area of commercial finance, focusing on equipment leasing, equipment finance and renewable energy project finance. He has penned Dispatches from the Trenches since 2002.