Recently in In Re: 180 Equipment, LLC, a case of first impression, the United States Court of Appeals for the Seventh Circuit determined that the Illinois version of Article 9 of the Uniform Commercial Code (Illinois UCC) does not require a financing statement to contain a specific description of secured collateral. Instead, the Illinois UCC allows a financing statement to indicate collateral by reference to the description in the underlying security agreement, provided the identity of such collateral is objectively determinable.
In 180 Equipment, LLC, 180 Equipment, LLC (the Debtor) granted a security interest to First Midwest Bank (the Lender) in substantially all the Debtor’s assets pursuant to a security agreement. The security agreement further set forth twenty-six (26) categories of collateral, including accounts, cash, equipment, instruments, goods, inventory and proceeds thereof. To perfect its interest, the Lender timely filed a financing statement that covered all collateral described in such security agreement. Specifically, the financing statement indicated the collateral as “[a]ll Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party.” Thereafter, the Debtor filed for Chapter 7 bankruptcy protection, wherein the Lender commenced an adversary proceeding seeking, among other things, a declaration that its security interest in the Debtor’s assets was properly perfected and senior to the interests of all other claimants. The Bankruptcy Court found that the failure of the financing statement to contain a description of collateral meant that the financing statement failed to provide particularized notice as required by the Illinois UCC. On appeal, the Seventh Circuit Court of Appeals held that the Illinois UCC allows a financing statement to indicate collateral by reference to the description in the underlying security agreement.
In making its determination the Seventh Circuit Court of Appeals considered whether the Illinois UCC requires the four corners of the financing statement to include a specific description of the secured collateral or whether incorporating a description by reference to a security agreement is sufficient to indicate collateral. The security agreement creates and specifically defines the interest as compared to the financing statement which merely provides notice of such interest. Given the distinct functions served by the financing statement and the security agreement, the Seventh Circuit Court of Appeals noted that while each document must describe the collateral, the degree of specificity required turns on the nature of the document involved. Further, while a subsequent creditor need not be a “super-detective” in investigating prior secured transactions, incorporation of a collateral description by reference was enough to notify such creditor to the existence of a lien and that additional inquiry was necessary.