A fundamental principle of the Uniform Commercial Code (“UCC”) is that a creditor must perfect her security interest by filing a financing statement in the appropriate jurisdiction. In the financing statement, the creditor must describe the collateral that she has an interest in. If the debtor defaults, the description becomes very important because a financing statement which does not contain a sufficient description of the collateral will be considered invalid by a court, leaving the creditor with an unperfected security interest.
The question many creditors struggle with is: What do courts consider a sufficient or valid description of collateral? This can be a tricky question. Courts differ in their interpretation of what constitutes a “sufficient description” and statutes vary from state to state. Yet, consistently, the underlying purpose of perfection is to give others notice of the secured creditor’s interest in the collateral.
Under South Dakota law, a creditor may validly describe collateral in a financing statement by identifying the (1) specific listing; (2) category; (3) type of collateral as defined by the Uniform Commercial Code*; (4) quantity; (5) computational or allocational formula or procedure; or (6) by some other method, so long as the collateral could be objectively determined. SDCL § 57a-9-108. A financing statement which describes the collateral as “all assets” or “all personal property” belonging to the debtor is also valid under South Dakota law. SDCL § 57a-9-504.
In lieu of a specific description of collateral, creditors occasionally attempt to reference additional documents in a financing statement. For example, in a recent case from Illinois, a creditor described collateral in its financing statement simply as “[a]ll Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party.” The referenced security agreement was not filed with the financing statement or made available publicly. In that case, the debtor’s bankruptcy trustee argued that the creditor had failed to perfect its security interest, because the financing statement did not sufficiently describe the collateral. Yet, the Seventh Circuit disagreed with the bankruptcy trustee and held that, under Illinois’ UCC statutes, a financing statement need not specifically describe collateral, if it referenced an extrinsic document which contained a sufficient description. In re 180 Equipment LLC, 938 F.3d 866, 874 (7th Cir. 2019).
However, some circuits disagree with the Seventh Circuit’s ruling, and many others have not ruled on whether a collateral description referencing a non-public document is valid. Although neither the South Dakota courts nor the Eighth Circuit have ruled on the issue, we would caution creditors against describing collateral in such a manner. A court could find that describing collateral by reference of a non-public document fails the underlying rationale of perfection: to give the world notice of the secured creditor’s interest in the collateral. See In re Fin. Oversight and Mgmt. Bd. for P.R., 914 F.3d 964 (1st 2019).
*The type of collateral is not a sufficient description in all cases. SDCL § 57a-9-108(e).
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