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7th Cir. Holds UCC Financing Statement May Incorporate List of Collateral by Reference

The U.S. Court of Appeals for the Seventh Circuit recently reversed a bankruptcy court’s ruling that a lender failed to perfect its security interest because its UCC financing statement failed to provide sufficient indication of the secured collateral under Article 9 of the Uniform Commercial Code.

In so doing, the Seventh Circuit concluded that under the Illinois version of the UCC, a financing statement’s reference to an unattached security agreement sufficiently “indicates” the secured collateral as required by Article 9, and need not “contain” a specific description of the collateral within its four corners.

A copy of the opinion in In re I80 Equipment, LLC is available at:  Link to Opinion.

An Illinois business that purchased and refurbished trucks for resale (“debtor”) obtained a commercial loan from a retail banking lender.  As collateral for the loan, the lender was granted a security interest in substantially all of the debtor’s assets, including accounts, cash, equipment, inventory and proceeds.

The lender sought to perfect its interest by timely filing a financing statement with the Illinois Secretary of State, which purported to cover “[a]ll Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party.”

Two years later, the debtor defaulted on the loan and filed a bankruptcy petition under Chapter 7.  The lender sought recovery of $7.6 million on the loan.  The trustee argued that the lender’s security interest was not properly perfected because its financing statement did not independently describe the underlying collateral, instead referencing the security agreement.  As such, the trustee sought to avoid the lender’s interests in the debtor’s property under the agreement.

In ruling upon the parties’ motions for judgment on the pleadings, the bankruptcy court entered judgment in the trustee’s favor, holding that the loan’s financing statement failed to contain any description of collateral with the particularized kind of notice required by Article 9 of Illinois’ UCC, 810 ILCS 5/9-101, et seq.  The parties jointly certified an immediate appeal of the bankruptcy court’s decision, which was granted by the Seventh Circuit, leading to the instant appeal.

As the parties did not dispute the validity of the loan nor the legitimacy of the lender’s security interest, the sole issue on appeal was whether Illinois’s version of Article 9 of the Uniform Commercial Code requires a financing statement to contain a specific description of the secured collateral, or if incorporating a description by reference to an unattached security agreement, sufficiently “indicates” the collateral.

To review this issue, the appellate court looked to relevant state precedent, analogous decisions and dicta to apply the UCC as interpreted by Illinois courts and governed by Illinois law.  Pisciotta v. Old Nat’l Bancorp, 499 F.3d 629, 635 (7th Cir. 2007); In re Blanchard, 819 F.3d 981, 984 (7th Cir. 2016).  In applying the Illinois courts’ application and interpretation of the UCC, statutory construction starts with a review of the statutory language itself, to be given its plain and ordinary meaning if clear and unambiguous, and must be viewed in light of the statute as a whole.

As you may recall, Article 9 of Illinois’ UCC provides in relevant part that a financing statement must: (1) provide the name of the debtor; (2) provide the name of the secured party or its representative; and (3) indicate the collateral covered by the financing statement.  810 Ill. Comp. Stat. 5/9-502(a).  Section 9-504 further provides that a financing statement sufficiently indicates the collateral that it covers if the financing statement states: (1) a description of the collateral pursuant to Section 9-108; or (2) an indication that the financing statement covers all assets or all personal property.” 810 ILCS 5/9-504.

Here, the Seventh Circuit was tasked with deciding whether Article 9’s language required that the four corners of the financing statement include a specific description of the secured collateral, or if a description by reference, such as the agreement at issue here, adequately “indicates” the collateral.

The Seventh Circuit’s analysis initially focused on the text of section 9-108, which provides six examples to “reasonably identify” secured property in a financing statement, including “any other method, if the identity of the collateral is objectively determinable.” 810 ILCS 5/9-108(b)(6).  Notably, this language was expanded as part of Illinois’ revisions to its versions of the UCC in 2001 to adopt the system of “notice filing” and no longer require financing statements to “contain” a description of the secured collateral, but must only “indicate” the secured collateral. 810 ILCS 5/9-502, cmt. 2; 5/9-504 cmt. 2.

Interpreting the word “indicate” in this context and by its ordinary meaning, the Seventh Circuit reasoned that Article 9 “allows a party to ‘indicate’ collateral in a financing statement by pointing or directing attention to a description of that collateral in the parties’ security agreement.”

The Court further noted that this interpretation is consistent with prior rulings and other courts’ construction of Article 9’s purpose to ensure “adequate public notice” of liens and security interests to avoid “creat[ing] a windfall for a bankruptcy estate or a minefield for lenders.” In re Blanchard, 819 F.3d 981, 988–89 (7th Cir. 2016) (internal and additional citations omitted).

Next, the Seventh Circuit considered the distinction between: (i) a security agreement, which defines and limits the collateral, and; (ii) a financing statement, which puts third parties on notice that a creditor may have an existing security interest in the property and further inquiry may be necessary and requires less detail.  In re Grabowski, 277 B.R. 388, 391 (Bankr. S.D. Ill. 2002); Helms v. Certified Packaging Corp., 551 F.3d 675, 680 (7th Cir. 2008).

Citing approaches from all three Illinois bankruptcy courts, the Seventh Circuit concluded that a financing statement’s incorporation by reference is permissible in Illinois as “any other method” under § 9-108, so long as the identity of the collateral is objectively determinable.  See In re Grabowski, 277 B.R. 388 (Bankr. S.D. Ill. 2002); In re Duesterhaus Fertilizer, 347 B.R. 646 (Bankr. C.D. Ill. 2006); In re Macronet Group, Ltd., 2004 WL 2958447 (Bankr. N.D. Ill. 2004).

As the financing statement at issue adequately described the security interest by referencing “[a]ll [c]ollateral” as described in the underlying security agreement between the parties in compliance with Article 9, the Seventh Circuit held that the trustee was not entitled to avoid the lender’s lien under the Bankruptcy Code, and reversed and remanded for further proceedings in the bankruptcy court.

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Christopher P. Hahn practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Insurance Recovery and Advisory groups. Prior to joining Maurice Wutscher LLP, he served under the General Counsel at the Florida Office of Financial Regulation. He also obtained extensive experience litigating property insurance claims through all phases of discovery, motion practice and other pre-trial activities. Christopher obtained his Bachelor of Science degree in Business Administration from the University of Southern California, followed by his Juris Doctorate degree from the University of Miami School of Law. He is also a graduate of the University of Miami’s Masters of Business Administration program, completing his degree with an emphasis on finance and mergers and acquisitions.

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