Summary of a Recent
Judicial
Development in
Bankruptcy
General Description of Collateral Adequate
Under Revised Article 9
E. John Edwards IIINational AgLaw Center Graduate Fellow
In an action brought by two debtors to determine the validity, priority, and extent of the liens held in certain farm equipment, the United States Bankruptcy Court for the Southern District of Illinois has ruled that a creditor's financing statement containing only a general description of the farm equipment was sufficient to protect that creditor's security interest. In re Grabowski, 277 B.R. 388, 392 (Bankr. S.D. Ill. 2002). The court further ruled that the financing statement's listing of the debtors' address as their business address, as opposed to their home address where the collateral was located, did not render the financing statement misleading or otherwise invalid. See id.
This action involved a dispute between two creditors, Bank of America ("BOA") and South Pointe Bank ("South Pointe"), over the priority of their security interests in three items of farm equipment owned by the debtors, Ronald and Trenna Grabowski. See id. at 389. Both banks had filed financing statements to perfect their interests. See id. BOA was the first to file and its financing statement described the collateral as "All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles." Id. (italics in original removed). While BOA's financing statement described the identity of the debtors as "Ronald and Trenna Grabowski," it listed their former business address, rather than their home address where the collateral was located. See id. By contrast, South Pointe's later filed financing statement described the collateral as "JD 925 FLEX PLATFORM, JD 4630 TRACTOR, JD 630 DISK 28' 1998," and listed the debtors' home address. Id. (italics in original removed).
South Pointe conceded that BOA's financing statement was first in time. See id. at 390. South Pointe argued, however, that BOA's financing statement was insufficient to vest priority because the statement "contained the address of the debtors' farm equipment business rather than that of the debtors' home where their farming operation is located and . . . it failed to mention any specific items of equipment or even make reference to 'farm equipment' or 'farm machinery.'" Id. at 390. South Pointe argued that "a subsequent lender would reasonably conclude that Bank of America's intended security was the personal property of the debtors' business rather than equipment used in the debtors' farming operation." Id.
The plain language of revised Article 9 of the UCC provides that the revised article "applies to all transactions or liens within its scope, 'even if the transaction or lien was entered into or created before [the statute's] effective date[.]'" Id. (quoting 810 Ill.Comp.Stat. 5/9-702 (2001)). The bankruptcy court stated that it would apply the provisions of the revised article even though the transactions at issue preceded the July 1, 2001, effective date of the revised article in Illinois. See id.
The court examined the language of several sections of Article 9 of the UCC to support its ruling. See id. The court explained that § 9-203 "governs the attachment and enforcement of security interests through the parties' execution of the security agreement, while § 9-502 relates to the requisites of a financing statement filed to perfect the creditors' interest against the interests of third parties." Id. The court also explained that although both § 9-203 and § 9-502 call for a description of the debtor's property, "the degree of specificity required of such description depends on the nature of the document involved-whether it is a security agreement or financing statement-and the purpose to be fulfilled by such document." Id. at 390-91 (citing 9A Hawkland, Uniform Commercial Code Series, [Rev] § 9-108:2, at 291-92; [Rev] § 9-108:2, at 294-96 (2001)). The court explained that the reason for this difference lies in the differing purposes of the two documents, to-wit: "[w]hile a security agreement defines and limits the collateral subject to the creditor's security interest, a financing statement puts third parties on notice that the creditor may have a lien on the property described and that further inquiry into the extent of the security interest is prudent." Id. (citing Signal Capital Corp. v. Lake Shore Nat'l Bank, 652 N.E.2d 1364, 1371 (Ill. App.1995)).
The court also explained that § 9-108 establishes the test for sufficiency of a description under the UCC. See id. Section 9-108 provides that ". . . a description of personal . . . property is sufficient, whether or not it is specific, if it reasonably identifies what is described." Id. (citing 810 Ill. Comp. Stat. 5/9-108(a) (2001) (emphasis supplied)). The court stated that "[e]xamples of descriptions that meet this 'reasonable identification' test include identification by 'category' or by 'type of collateral defined in the UCC.'" Id. (citing § 9-108(b)(2), (3)). The court added that "[o]nly a super-generic [description] such as 'all the debtor's assets' or 'all the debtor's personal property' is insufficient under the 'reasonable identification' test of § 9-108." Id. (citing Ill. Comp. Stat. 5/9-108(c)).
The court stated that although "§ 9-108 provides a flexible standard for determining sufficiency of a description in a security agreement, § 9-504 provides an even broader standard with regard to a financing statement." Id. Section 9-504 provides that a financing statement sufficiently describes the collateral if it provides: "(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." Id. (citing 810 Ill. Comp. Stat. 5/9-504 (2001) (emphasis supplied)). The court stated that "[t]hus, in the case of a financing statement, a creditor may either describe its collateral by 'type' or 'category' as set forth in § 9-108 or may simply indicate its lien on 'all assets' of the debtor." Id.
The court reiterated that BOA's financing statement indicated that it had a lien "on the debtor's property consisting of 'all inventory, chattel paper, accounts, equipment, and general intangibles.'" Id. at 391-92. The court stated that, "[d]espite the generality of [BOA's] description, it was sufficient to notify subsequent creditors, including South Pointe, that a lien existed on the debtors' property and that further inquiry was necessary to determine the extent of [BOA's] lien." Id. The court concluded that it found "no merit in South Pointe's argument that the description of [BOA's] collateral was too general to fulfill the notice function of a financing statement under the UCC." Id.
The court also rejected South Pointe's argument that it had been "misled by the incorrect address contained in Bank of America's financing statement and 'reasonably concluded' that the only equipment subject to the Bank's lien was that located at the debtors' farm equipment dealership." Id. Noting that BOA's financing statement identified the debtors by their individual names and not the name of their business, the court ruled that the "debtors' business address was not part of the . . . description of its collateral and, thus, did not serve to limit the collateral subject to [its] lien." Id. According to the court, "[r]ather than serving to describe [BOA's] collateral, therefore, the debtors' address merely provided a means by which subsequent lenders could contact the debtors to inquire concerning [its] lien." Id.
This case was decided on April 24, 2002; this summary was prepared December, 2002.