When we were kids, we simply called “Dibs!” or “Shotgun!” to stake a claim on what we felt was ours. Secured creditors don’t have it so easy. Instead, secured creditors must properly perfect their security interests in order to protect themselves from future creditors who may claim an interest in the same property. At the end of August, a group known as the Permanent Editorial Board for the Uniform Commercial Code (“PEB”), responsible for drafting and addressing novel questions arising under the UCC, issued commentary which serves as a great reminder of the requirements for the description of collateral in a security agreement and financing statement.
Both a security agreement and a financing statement must properly describe the collateral. For the purposes of each, a creditor can describe its collateral by either UCC category or specific listing. Additionally, in a financing statement, a creditor is permitted to use a supergeneric description such as “all assets” or “all personal property of the debtor” to describe its collateral so long as the description in the underlying security agreement is broad enough to include all of the debtor’s assets or all personal property of the debtor. Notably, however, a creditor is not permitted to use such language in a security agreement. Yet, while the limits of a collateral’s description is broader in a financing statement than in a security agreement, the PEB has provided that these limits are not boundless.
Recently, Courts have had to determine whether creditors who described collateral in a financing statement solely by reference to the underlying security agreement, or other record not attached to the financing statement, properly perfected their security interest. In the discussion within PEB Commentary No. 26, the PEB ultimately concluded that this practice does not sufficiently indicate the collateral as required under Article 9 of the UCC. In fact, the PEB explained that this practice frustrates one of the main purposes of the public filing of financing statements. Specifically, the PEB notes that the system allows for third parties to efficiently determine whether another has (or has not) claimed an interest in a certain piece of property. The PEB emphasized that this practice creates inefficiencies as it requires third party searchers to make overly burdensome inquiries outside of the financing statement in order to determine what property may be covered.
As such, the PEB commentary concluded that a creditor will not perfect its security interest if it describes collateral in a financing statement solely by reference to the underlying security agreement or other record not attached to the financing statement. While such commentary is not law or case precedent, it is frequently relied upon by courts considering UCC issues.
In sum, it is important to remember the requirements for the description of collateral. In regard to a financing statement, a creditor can meet these requirements in a number of ways. First, a creditor could describe the property by UCC category (accounts, inventory, equipment, etc.) or by specific listing (“John Deere 8320 tractor Serial #1234”). Second, a creditor could describe the property by using a supergeneric description such as “all assets” or “all personal property of the debtor” so long as the description of the collateral in the underlying security agreement is broad enough to include all of the debtor’s assets or all personal property of the debtor. Or third, a creditor could simply repeat the description of the collateral from the security agreement in the financing statement. Any of these will satisfy the collateral description requirements of Article 9 of the UCC.
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