Incorporation by Reference in UCC-1 Filings

How Brevity in Financing Statements Can Lead to Insufficient Collateral Descriptions

Our fast-paced society, coupled with the tendency for people to use shorthand in communications by emails and Twitter, influences everyone to look for ways to save time and be less verbose. When preparing and filing a UCC-1, however, brevity can be the filer’s enemy.

Description of Collateral in Security Agreements

Article 9 of the UCC provides that a security agreement must “provide a description of the collateral.” A description of collateral under Article 9 is usually considered adequate if it “reasonably identifies” the collateral.¹ Descriptions such as “all the debtor’s assets” and “all the debtor’s personal property” are considered to be “supergeneric” and therefore inadequate in a security agreement.²

In order to perfect a security interest, UCC §9-502(a) necessitates that the financing statement include:

• Name of the debtor
• Name of the secured party or a representative of the secured party
• Indication of the collateral covered by the UCC financing statement

Description of Collateral in Financing Statements

Diverging from the esoteric rules that govern collateral descriptions in a security agreement, the requirements for the financing statement’s “indication of collateral” are more flexible. Under UCC Article 9, the description of collateral in the financing statement is “sufficiently indicate[d]” if that description either “reasonably identifies” the collateral or indicates it covers “all assets” or “all personal property” of the debtor.³

The purpose of the UCC financing statement is to provide the public with notice that another party may have a security interest in the subject collateral. This purpose carries an underlying assumption that an interested party can then seek more information from the debtor or secured party or state and county filing offices.⁴

Official Comment No. 1 to UCC §9-504 provides that the requirement for a sufficient indication of collateral is met when a third-party seeking information on the subject collateral has notice that a person may have a security interest in that collateral. Minor errors or omissions do not make the financing statement ineffective as long as they do not result in the financing statement being “seriously misleading.”⁵

Incorporation by Reference in UCC Financing Statements

Occasionally, lenders taking security interests in specific collateral items have described those specific items in the security agreement and then only referred to that description in the UCC financing statement. In other words, the filer took a shortcut by incorporating by reference the collateral descriptions contained in the security agreement that may not be attached and filed with the financing statement.

Though the precedent on these situations is sparse, early cases on security agreement descriptions provide that the threshold for adequate description is minimal. In Newsome v. Rabo Agrifinance, the court held that a sufficient description of collateral “need not enable a stranger to select the property—in other words, it need not be fully self-explanatory.” Instead the court explained that a UCC-1 collateral description is “sufficient if it will enable third parties, aided by inquiries that the instrument [filed financing statement] itself suggests, to identify the property. The court put the burden on “the subsequent lender to seek out what information he needs.”⁶

Further, in Lloyd Credit Corp. v. McClain Heller Ins., the court clarified that under New Jersey’s UCC Article 9, “notice filing was designed to eliminate the requirement that the actual entire security agreement be filed,” and the secured party’s reference to “collateral by ‘type’” was permissible.⁷ The court found that “the financing statement, as recorded, placed Transamerica [an unperfected lender] on notice of the collateral relationship.”

In Lloyd, the financing statement “made specific reference to an agreement between Lloyds Credit and the debtor.” The court found that there was perfected security interest, because an interested party “after making sufficient inquiry, would have learned of the financial relationship between Lloyds and McClain.” Finally, the court summarized that “where a creditor refers to collateral by “type,” as here, “intangibles” and in conjunction therewith refers the searching party to the existence of a specific contractual arrangement, which will enumerate specific “items” of collateral, the intended secured party will have met the statutory descriptive requirements.”

When Incorporation by Reference Goes Wrong

Although the secured party prevailed in Lloyd and Newsome despite filing a financing statement that referred to an unattached document for the collateral description, a couple more decisions highlight the peril of filing a UCC-1 financing statement that refers to an unfiled document for the collateral description.

In First Midwest Bank v. Reinbold, a bankruptcy trustee prevailed over a secured creditor, because the inadequate financing statement did not itself describe the collateral subject to creditor’s security interest. Instead it referred to the collateral description in a security agreement that was not attached or otherwise publicly filed.⁸ Additionally, In re Fin. Oversight and Mgmt. Bd. for Puerto Rico found that “mere reference in the Security Agreement to the definition of ‘Pledged Property’ contained in a separate document, the Resolution” did not constitute a sufficient description.⁹

A commentator was definitive on the current state of case law regarding collateral descriptions in UCC-1 financing statements: “Reference to a separate document that was not attached to the security agreement was insufficient.”¹⁰ This analysis may overstate the certainty of a ruling where a filer has merely used an incorporation by reference. However, “there are now two decisions against secured creditors interpreting a statute that is supposed to be applied uniformly across the country.”¹¹ Therefore, it appears that the best practice is for a filer to avoid filing a UCC financing statement containing a collateral description found solely within a referenced but unattached contract or document.¹²

Best Course of Action? Provide Your Collateral Description in the UCC-1

In many situations, brevity is a virtue. For UCC-1 filings, it is a vice (except in cases where supergeneric descriptions are permitted). A filer must provide adequate notice of the covered collateral to the world. As such, the more detail a filer can include in a UCC-1, the better chance that a court will find that it “reasonably identif(ies)” the subject collateral. U.C.C. §9-108. The best course is for a filer to take the time to provide the collateral description in a UCC-1 instead of merely incorporating by reference that description from an unfiled document.

The author also thanks Amy T. Grace, Partner at L&G Law Group LLP for her assistance in editing. Amy concentrates her practice in banking litigation, banking and financial services, commercial litigation, bankruptcy and creditors’ rights, real estate law and corporate matters.

This communication from L&G Law Group, LLP is solely intended to provide material for informational purposes only. It is not intended to constitute legal advice and should not be relied upon as such. It also is not intended to create an attorney-client relationship between L&G Legal Group LLP and the reader.

Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Negotiating and Drafting Cash Collateral/DIP Financing Orders and Help, My Business is In Trouble!]

©All Rights Reserved. January, 2021.  DailyDAC^TM, LLC

1. U.C.C. §9-203(b)(3)(A); See also U.C.C. §9-108(a)
2. U.C.C. §9-108(c); See Cindy J, Chernuchin, Understanding the Terms Of Security Agreements. The Practical Lawyer
3. UCC §9-108; See Barbara M. Goodstein, Collateral Descriptions and Blanket Liens: Is the Kitchen Sink Enough?. New York Law Journal (2015).
4. U.C.C. §9-502 cmt. 2; See Barbara M. Goodstein, Collateral Descriptions and Blanket Liens: Is the Kitchen Sink Enough?. New York Law Journal (2015).
5. U.C.C. §9-506 cmt. 2
6. Newsom v. Rabo Agrifinance, Inc., 427 S.W.3d 688 (Ark. App. 2013).
7. Lloyd Credit Corp. v. McClain Heller Ins., 620 A.2d 472, 476 (Sup. Ct. N.J. 1992).
8. First Midwest Bank v. Reinbold (In re 180 Equip., LLC), 591 B.R. 353 (Bankr. C.D. Ill. 2018).
9. In re Fin. Oversight and Mgmt. Bd. for Puerto Rico, 914 F.3d 694, 710 (1st Cir. 2019).
10. See Vincent E. Mauer, Collateral Descriptions in UCC Financing Statements, Frost Brown Todd Blog (2019).; Quinn’s UCC Commentary & Law Digest § 9-502[B] (June 2019 update) discussing the Midwest Bank case.
11. Vincent E. Mauer, Collateral Descriptions in UCC Financing Statements, Frost Brown Todd Blog (2019).
12. Id.