Kenneth Weinberg,
Shareholder,
Baker, Donelson, Bearman, Caldwell & Berkowitz

The core purpose of a UCC financing statement is to give notice to secured parties, lien creditors, purchasers and other third parties that the secured party identified in the financing statement claims an interest in the collateral described in the filing. For this reason, UCC financing statements are sometimes referred to as “notice filings” because they are not intended to provide the full details of the transaction to which they relate, but rather are intended only to put other parties “on notice” that there is a transaction which may impact the collateral covered by the financing statement (1).

Indeed, when the drafters of Article 9 of the UCC substantially rewrote the statute 20 years ago (the 2001 amendments were basically finalized in 1998), the drafters intentionally provided that a collateral description in a UCC financing statement is sufficient if it “indicates” the collateral covered (2). Consistent with the concept of a notice filing, an indication of collateral necessary for a financing statement to perfect a security interest in the applicable collateral is a less stringent standard than an identification of collateral required for the security interest to attach to the collateral and be effective between the secured party and the debtor (3).

All Equipment Leased or Financed

In our industry, financing statements commonly refer to “equipment leased or financed” by the secured party to the debtor. Sometimes this language refers to a specific document, such as “all equipment leased or financed under Schedule 1, dated [X], incorporating that certain Master Lease, dated [Y].” Other times, the language is merely a lead-in to a more specific description, such as “all equipment leased or financed by secured party, including but not limited to [certain listed equipment]”. Of course, many other variations on the theme exist, as some filings reference “equipment” while others filings refer to “goods” or “property” in case the applicable property is being leased or subleased by the debtor to third parties, constituting “inventory” in the hands of the debtor under the UCC (4).

One fundamental question asked with respect to such filings is whether a general description of all equipment leased or financed (or a similar formulation), without more, indicates the collateral sufficiently for the filing to perfect the security interest in the desired collateral. Several years ago, a leading treatise raised potential questions about the related concept of referencing a specific financing agreement without attaching the agreement itself to the filing:

The argument is strong that [a collateral description of “All Assets in the Business Security Agreement between the Parties Dated March 24, 2000”] does not do the job. The financing statement on its face (without reference to an attached exhibit) must indicate the nature of the collateral. The only way a searcher could discover what collateral was covered would be to get the information from an extrinsic document — the security agreement. Doesn’t this put the searcher too much at the mercy of the filer as a source of information? Aren’t there limits on inquiry notice? If this simple cross-reference device were to pass muster, the collateral description in the financing statement would really add nothing to the name of debtor and secured party.

On the other hand, a financing statement description of… “All Personal Property” is clearly acceptable under UCC §9-504(2). So why should the slightly more wordy description…invalidate it? Aren’t both descriptions equally uninformative without further inquiry?

Although there are arguments on both sides, it seems that the stronger argument is against use of a simple-cross reference to the security agreement collateral description [and] a secured lender who wants to avoid litigation will not tempt fate (5).

Only recently was this issue squarely addressed in a case under the new Article 9, which noted that “no published opinion by any court addresses this exact issue (6).” In that case, a secured party described the collateral in a financing statement as “All Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party,” but did not include a copy of the referenced security agreement with the filing (7). The court held that description to be insufficient because “[t]he financing statement, on its face, provides no information whatsoever, and therefore no notice to any third party, as to which of the debtor’s assets [the secured party] is claiming a lien on, which is the primary function of a financing statement (8).”

The Secured Party argued, without success, that referencing the collateral in a specific security agreement provided a sufficient indication of collateral in a financing statement since §9-504(1) of the UCC provides a “financing statement sufficiently indicates the collateral that it covers if the financing statement provides…a description of the collateral pursuant to §9-108”, and §9-108 of the UCC provides “a description of collateral reasonably identifies the collateral if it identifies the collateral by [certain listed methods or] any other method, if the identity of the collateral is objectively determinable (9).” In other words, the financing statement gave notice that the secured party had “obtained a security interest in property of the debtor which, while not identified in any way in the financing statement, may be readily identified, i.e., “objectively determined,” by a further inquiry directed toward the security agreement identified in the financing statement (10).” The court rejected this argument, holding that the phrase “any other method, if the identity of the collateral is objectively determinable” means the identity of the collateral must be “objectively determinable” from the description in the four corners of the financing statement, including any filed attachments (11).

This holding can be criticized for a variety of reasons. For example, consider a situation where a security agreement referenced equipment or other goods which are purchased with proceeds of the loan, as identified in invoices attached to draw requests, but the invoices identifying the specific goods were not attached to the security agreement itself. In such a case, the identity of the goods would be objectively determinable. The requirements of §9-108(b)(6) of the UCC should be considered to be satisfied by this approach for purposes of the granting of the lien. Indeed, in 180 Equipment Leasing, the court appears to agree with a prior holding that allows “a security agreement [to] incorporate by reference a specific description of the collateral contained in a separate document so long as the security agreement contains at least a general description of the collateral (12).” It seems clear from the court’s ultimate holding, however, that it would view a financing statement that describes the collateral as “all personal property described in invoices number [1], dated [X]” to be insufficient for perfecting the lien unless the invoices were attached to the filing. This result is clearly in contrast with fundamental aspects of the UCC, which applies a less stringent standard for perfection than is applied for a grant of a lien.

In any event, this author believes the above case is clearly distinguishable from the types of descriptions used more frequently in the equipment leasing and finance industry. After all, filings referring to goods leased or financed limit the collateral to only select “things that are movable when a security interest attaches (13).” Referring to equipment leased or financed would be even more restrictive since “equipment” is a subset of goods (14). The potential collateral covered by the filing is further limited to a subset of goods or equipment leased or financed by the secured party.

It seems very clear that these types of filings provide an indication of the collateral that is more targeted than the cross-reference in the above case, which referred merely to “collateral” rather than to one of the specific types of collateral listed in the UCC. After all, a “First Amended and Restated Security Agreement” may cover literally any type of collateral. On the contrary, a description of “goods” or “equipment” leased or financed by a secured party contains a specific reference to one of the collateral categories defined by the UCC, and the text of the statute supports an argument that such a reference to a defined collateral category should be a sufficient indication of collateral. In particular, §9-108 of the UCC provides “a description of collateral reasonably identifies the collateral if it identifies the collateral by…category (15).” Any reference to “goods”, “equipment”, “inventory”, or “fixtures” leased or financed is a reference to a specific type of UCC collateral commonly considered a “category” of collateral. For this reason, a description of the collateral as “all equipment” has been viewed as consistent with UCC §9-108(b)(2) and §9-504(1) by at least one court (16).

Conclusion

At the end of the day, describing collateral in financing statements as “equipment leased or financed” by the secured party, or words of similar import, as done with increasing frequency in the equipment leasing and finance industry, can have some benefit. For example, it may cure what could otherwise be a fatal error in the description of certain listed equipment. However, the use of such language should be considered carefully. There is now at least one court imposing a requirement that the financing statement itself must give some kind of indication of the collateral covered, and that merely incorporating by reference a separate security agreement does not work. Secured parties using collateral categories such as “goods”, “equipment”, “inventory” and “fixtures” have a strong argument that such descriptions use a type of Article 9 category and are therefore effective. However, the industry should watch for cases like 180 Equipment Leasing. Adding a list of specific goods to the filing will also decrease the risks as a practical matter by eliminating the incentive for a trustee in bankruptcy to challenge the more broadly worded filing.