If you pull a UCC search on your own business you might see a financing statement filed by a lender or funder that lists “all assets” as the collateral covered. Or it may say “all personal property.” Or it may say that the collateral is anything described in the security agreement. Most business owners don’t notice these filings until they get behind on payments and start to wonder what the creditor can take. The answer is that “all assets” is a valid description for a financing statement, where appropriate. When the lender has a lien on less than everything, the filing needs to describe what it covers, and two decisions demonstrate what happens when it doesn’t.
Two Documents
There are two documents associated with a lien like this. The security agreement is the contract where the business grants the lender a security interest in its property. The financing statement, also called the UCC-1, is the public notice that the lender gives so others can know the claim exists. Article 9 of the Uniform Commercial Code treats the two documents separately. Section 9-504(2) permits a financing statement to have what lawyers call a “supergeneric” description, which may, for example, describe the property as “all assets” or “all personal property,” to the extent that is appropriate. The security agreement is not permitted to do that. Instead, under Section 9-108(c), it must reasonably identify the property in which the security interest is granted.
In cases of less than all assets, the supergeneric shortcut is unavailable. Sections 9-502(a)(3) and 9-108 say the financing statement must include an adequate description of the collateral, and a description is adequate if it “reasonably identifies what is described.” If the financing statement fails to adequately describe the collateral, it fails to be effective to perfect the lender’s security interest in the collateral. That sounds like a technicality, but two cases make the point.
In that first case, First Midwest Bank made a commercial loan to 180 Equipment, LLC, which executed a security agreement that provided a security interest to the bank in substantially all its property. The bank’s financing statement didn’t list any of that property. Instead, it described the collateral as “All Collateral described in First Amended and Restated Security Agreement dated March 9, 2015 between Debtor and Secured Party,” and the bank failed to attach the security agreement. When 180 Equipment filed for bankruptcy, the trustee contended that the description was inadequate. The bank countered that its collateral was “objectively determinable” by looking to the security agreement and that inquiry notice should be read broadly. The bankruptcy court disagreed. On its face, the court said, the financing statement did not provide any information, and therefore no notice to anyone, about which of the debtor’s assets the bank claimed and that is the primary function of a financing statement. The bank’s security interest was unperfected.
The second case came out of Puerto Rico. In 2008, the Employees Retirement System of Puerto Rico, a government employee pension fund, issued bonds and granted the bondholders a security interest in its “Pledged Property,” which was defined in the separate bond resolution. The UCC-1 filings only described the collateral as “the pledged property described in the Security Agreement attached as Exhibit A,” and the Security Agreement referred back to the resolution. In 2015 and 2016, the Pledged Property was spelled out in detail in amendments. Later, when the pension system requested a court to rule that the bondholders’ security interest was unperfected, the bondholders took the position that the cross-reference directed searchers to look further, and the resolution was available online. The First Circuit Court of Appeals concluded that the original filings were not sufficient, because the purpose of the financing statement was to put third parties on notice. The decision relied heavily on the particular circumstances: the collateral was not described even by type, the filings did not direct the searcher to the resolution, and the resolution was not filed at the filing office. The bondholders prevailed only by virtue of the amendments. The court ruled that the timely 2015 and 2016 filings cured the defect, so the security interest was perfected. Without them, it would have been unperfected.
Who were the parties that brought these suits? In 180 Equipment, the party was the bankruptcy trustee. In ERS, the party was the pension system, a debtor in a proceeding under PROMESA, a federal statute that enables Puerto Rico and some of its agencies to reorganize under a process that is much like bankruptcy. In both, the issue arose after the debtor was in a formal proceeding, and the issue was the sufficiency of the financing statement. The court in 180 Equipment even conceded that courts regularly permit creditors to include security agreements in a financing statement by reference. The bank still lost, because its financing statement said nothing on its face.
Owners of businesses that are headed for bankruptcy may have questions that fall into this category. This is a matter for a lawyer to consider. Delancey Street is not a law firm. When the right thing to do is to take legal action or go into bankruptcy, we refer business owners to a vetted independent lawyer, and the attorney-client relationship is between the owner and that lawyer.
If you happen to uncover an amorphous filing against your own company, don’t automatically assume it is an entirely useless filing. In neither case did the court rule that searchers have no obligation to search further. A financing statement that is not very specific about the collateral might still qualify or the court may later determine that it did.
The principles of law developed in these cases, although addressed to creditors, give an idea of what a properly drafted financing statement ought to look like. Where the collateral truly consists of all or substantially all the borrower’s assets, it may be preferable to use an “all assets” description. In all other cases, however, the description of the collateral ought to be in the financing statement itself and not merely by reference to another document. In the event that the collateral is described in an attached exhibit, it may also be advisable for the creditor to attempt to ensure that the exhibit remains attached once the document is filed with the filing office, since there have been instances where the filing office filed the UCC-1 form without an exhibit. It may also be preferable to identify the collateral in the collateral box itself and refer to an attached exhibit, rather than merely write “See Exhibit A.”
For an owner under debt pressure, the more useful question may not be “can this filing be overturned in court?” but “should I settle?” That’s where a business debt settlement company like ours comes in. Our senior advisors negotiate with merchant cash advance funders and lenders for less than you owe and do not sell you another loan.
So what does “all assets” really mean? In the case of a business that has pledged everything, “all assets” means what it says. And it’s a perfectly good way to alert the world. But trouble can appear with a filing purporting to cover less than all assets but failing to describe what, or purporting to do so by reference to some other document but failing to describe where that other document can be found. Whether a particular filing falls on the wrong side of that line is a legal question, and the answer depends heavily on the facts. What every owner can do is get a copy of each financing statement filed against the business and read the collateral description alongside the security agreement it is supposed to reflect.
If you are behind on an advance or loan and aren’t sure about your status, we recommend that you discuss it with someone before you decide anything. The first call to Delancey Street is free and confidential, and if there’s a cheaper alternative or if you should consult with a bankruptcy lawyer, we’ll let you know on the first call.
