Proper Identification of Collateral in a Financing Statement: Is Reference to an Unattached Security Agreement Sufficient?

By: Attorney William E. Wallo– Weld Riley, S.C.

In September, the Seventh Circuit Court of Appeals issued its decision in First Midwest Bank v. Reinbold (In re 180 Equipment, LLC), 938 F.3d 866 (7th Cir. 2019), in which it reversed the lower courts and determined that a financing statement which neither contained nor attached a description of the actual collateral was nonetheless sufficient under the Illinois version of the Uniform Commercial Code. While not directly implicating Wisconsin law, the case raises the question whether, under similar facts, a Wisconsin lender who files a financing statement which asserts a security interest in collateral “described in” a related security agreement is adequate for purposes of perfecting the security interest when the related document is not itself filed as an attachment.

In 180 Equipment, the bank provided a loan to a borrower and received what is typically called a general business security interest – i.e., the borrower signed a security agreement granting a security interest in twenty-six separate categories of collateral. The lender filed a financing statement to perfect its security interest as against third parties. In the financing statement, it asserted a security interest in “[a]ll Collateral described in [the] First Amended and Restated Security Agreement.” The security agreement was not attached.

The borrower subsequently filed bankruptcy, and a chapter 7 trustee sought to avoid the bank’s security interest on the grounds that the financing statement was defective and the security interest was unperfected. The bankruptcy court and district court agreed with the trustee. The Seventh Circuit, however, rejected the notion that the UCC required the “four corners” of the financing statement to include a specific description of the secured collateral. Finding that Article 9 of the UCC adopts a system of “notice filing,” the court found that the “plain reading” of the text allows a party to “indicate” collateral in a financing statement by forcing parties to obtain the underlying security agreement.

This holding is in contrast with the First Circuit’s recent decision in Altair Global Credit Opportunities Fund, LLC v. Financial Oversight and Management Board for Puerto Rico (In re Financial Oversight and Management Board for Puerto Rico), 914 F.3d 694 (1st Cir 2019). In that case, the court held that a financing statement which merely references an unattached security agreement fails to satisfy the requirements of the UCC. Because the lender in that case had subsequently filed an amendment to its financing statement which attached the security agreement, however, the court found that the lender had in fact adequately perfected its interest.

It is potentially possible to treat these cases as illustrating the deviation between the “old” Article 9 (applicable under the facts in Altar Global) and the revised version of it adopted by most states (which was at issue in 180 Equipment). The old version of Article 9 required that a financing statement must contain “a statement indicating the types, or describing the items, of collateral.” The revised Article 9 – which has been adopted by Wisconsin – requires that a financing statement is sufficient if it “indicates the collateral covered by the financing statement.” See Wis. Stat. § 409.502(1)(c).

Indeed, the Seventh Circuit stressed this change in 180 Equipment, noting that a financing statement no longer needs to “contain” a description of the collateral, but simply needs to “indicate” the collateral. Wisconsin law reflects the same change. As in Illinois, under Wis. Stat. § 409.504 a financing statement sufficiently “indicates the collateral” if it provides either (i) a description of the collateral pursuant to § 409.108 or (ii) an indication that it covers all assets or all personal property.

Wis. Stat. § 409.108 in turn provides examples of reasonable identification, which would include identifying the collateral by specific listing, category, type, quantity, “computational or allocational formula or procedure,” or “any other method, if the identity of the collateral is objectively determinable.” The Seventh Circuit concluded incorporation by reference is permissible as “any other method” of identifying collateral, as long as the collateral is objectively determinable from whatever other source third parties are directed to consult.

The challenge to this interpretation is that Wis. Stat. § 409.108(1) provides a description is sufficient, even if it is not specific, if it “reasonably identifies what is described.” In other words, the UCC appears to provide that it is reasonable to put third parties on inquiry notice as to what property has a lien against it. In re Lynch, 313 B.R. 798 (Bankr. W.D. Wis. 2004). Indicating collateral by reference to another document which is not itself in the public records creates a situation in which subsequent creditors are arguably aware of an asserted interest in something, but they are not provided any notice as to what the “thing” actually is.

It is true that a financing statement need not be as specific as the security agreement, and can indicate the collateral consists of “all assets” even when the security agreement may not. See Wis. Stat. § 409.504(2) and § 409.108(3). However, the outcome in 180 Equipment arguably renders all other examples of “reasonable identification” superfluous as it effectively eliminates any requirement to actually describe the collateral in the financing statement itself.

While it is possible Wisconsin courts will ultimately adopt this interpretation of Article 9, prudence dictates that lenders continue to provide an actual description of the collateral in the financing statement itself. To do otherwise could ultimately lead to an adverse determination and a finding that a financing statement failed to adequately indicate the collateral, thus rendering it unperfected as to third parties (or bankruptcy trustees).