“Take some more tea,” the March Hare said to Alice, very earnestly.
“I’ve had nothing yet,” Alice replied in an offended tone, “so I can’t take more.”
“You mean you can’t take less,” said the Hatter: “it’s very easy to take more than nothing.”¹

Many “all assets” UCC financing statements contain language in the collateral description which expands upon, illustrates or explains that “all assets” means all of a debtor’s assets. Although intended to clarify that “all assets” means all, some explanatory language in an “all assets” collateral description may actually result in a debate, similar to Alice’s debate with the Mad Hatter above, whether “more” or “less” was correct.

The Second Circuit Court of Appeals recently issued a summary order addressing the scope of an “all assets” UCC filing that included explanatory language. In this case, the added language in the collateral description included an incorrect address of the debtor. Based on the manner in which the collateral description was drafted, the court held that the incorrect address in the financing statement’s collateral description did not limit the “all assets” UCC filing. See Ring v. First Niagara Bank, N.A. (In re Sterling United, Inc.), No. 15-4131-bk, 2016 WL 7436608 (2d Cir. Dec 22, 2016).

Background

First Niagara Bank (the Bank) made a loan to Sterling United, Inc. (the Debtor) and obtained a security interest in all of the Debtor’s assets to secure the loan. In connection with the loan, the parties filed a UCC financing statement to perfect the Bank’s security interest. The financing statement described the collateral as follows:

All assets of the Debtor including, but not limited to, any and all equipment, fixtures, inventory, accounts, chattel paper, documents, instruments, investment property, general intangibles, letter-of-credit rights and deposit accounts now owned and hereafter acquired by Debtor and located at or relating to the operation of the premises at 100 River Rock Drive, Suite 304, Buffalo, New York, together with any products and proceeds thereof including, but not limited to, a certain Komori 628 P & L Ten Color Press and Heidelberg B20 Folder and Prism Print Management System.

Id. at *1. The Debtor later changed its address and, in connection therewith, the Bank’s financing statement was amended to reflect the Debtor’s new address in the address box of the UCC financing statement form, but this amendment did not correct the reference to the Debtor’s former (and now incorrect) address set forth in the collateral description. On February 19, 2013, the Bank’s financing statement was subsequently amended a second time to change the Debtor’s address in the collateral description to the correct address.

The Debtor filed bankruptcy within 90 days of the Bank’s February 19, 2013 amendment to the financing statement. As described in the Sterling United decision, the parties agreed that the February 19, 2013 financing statement amendment could be avoided as a preferential transfer of the Debtor under Section 547 of the United States Bankruptcy Code, as a transfer made within the 90-day period prior to the Debtor’s bankruptcy filing. However, the parties disputed whether the Bank’s initial UCC filing, which referenced the Debtor’s incorrect address in the collateral description, remained effective as an “all assets” filing under the UCC to perfect the Bank’s security interest in all of the Debtor’s assets.²

The bankruptcy trustee appointed in the Debtor’s bankruptcy case sought to recover payments made by the Debtor to the Bank before the Debtor’s bankruptcy filing as preferential transfers under Section 547 of the Bankruptcy Code. The bankruptcy trustee asserted that the Bank was an unsecured creditor at the time of the payments because the collateral description in the Bank’s initial financing statement, as quoted above, was not effective to perfect the Bank’s security interest. Specifically, the bankruptcy trustee argued that the address contained in such collateral description modified and limited the “all assets” filing to only collateral located at or relating to the address therein. The bankruptcy trustee further asserted that even if the collateral description in the initial financing statement was sufficient when it was filed, the financing statement became “seriously misleading” after the Debtor changed its address and should be considered ineffective.³

Ruling

The Second Circuit disagreed with the bankruptcy trustee and held that the Bank’s initial UCC filing, which referenced the Debtor’s incorrect address in the collateral description, remained effective as an “all assets” filing and perfected the Bank’s security interest in all of the Debtor’s assets. The court reasoned: “We conclude that the description is sufficient because it unambiguously refers to all assets of the Debtor’ irrespective of their location. The phrase “including, but not limited to” introduces a subset of, and does not function as a limitation on, ‘[a]ll’ of the debtor’s assets.”

Id. at *2. The court also distinguished the collateral description in the Bank’s initial financing statement from financing statements in other cases expressly limiting the collateral to personal property at a specific location of the debtor such as property described in a mortgage. Instead, the court concluded that “because the geographic reference in the initial collateral indication was merely illustrative and because the indication clearly reaches all assets of the debtor . . . the trustee’s § 547 claim against [the Bank] is properly dismissed.” Id. at *3.

Conclusion

Based on the Sterling United ruling, lenders and other creditors should consider whether to include language in an “all assets” collateral description which could be interpreted as modifying or limiting the “all assets” designation or which could render the financing statement seriously misleading. If additional language is included which follows or relates to an “all assets” collateral description, lenders and other creditors should ensure that such additional language does not limit the nature of the “all assets” description or otherwise render the filing seriously misleading.

In addition, it is important to recognize that the additional language included in the Bank’s financing statement in Sterling United not only could have provided a basis for a court to rule against the Bank, but also resulted in lengthy and expensive litigation which included the retention of experts to interpret the language.⁴ Thus, unless an “all assets” UCC filing is clear, it could result in a debate concerning the meaning of the collateral description, possibly expensive litigation to defend the filing or provide the debtor or its bankruptcy trustee with leverage to obtain concessions from the related creditor.

As referenced above, Alice and the Mad Hatter debated whether “more” or “less” was correct. Based on the Sterling United case, and given the risks and costs of litigation, the best result would be to avoid the debate entirely, if possible, and the potential that a court reviewing an “all assets” filing would be called upon to opine whether more or less was correct. After all, Alice was able to cut short the above-referenced debate with the Mad Hatter with the following retort: “‘Nobody asked your opinion,’ said Alice.”

Additional Information

For additional information, please contact your Kutak Rock LLP attorney, a member of our Bankruptcy group, or the author of this client alert. 

¹ Lewis Carroll, Alice’s Adventures in Wonderland (1865). 

² Section 9-504(2) of the UCC permits a UCC-1 financing statement to contain a supergeneric collateral description such as “all assets” of the debtor. However, UCC Sections 9-108 and 9-203(b)(3)(A) require the applicable security agreement to reasonably identify the collateral in which a security interest is granted and, as stated in Section 9-108, a supergeneric collateral description in a security agreement such as “all the debtor’s assets” or “all the debtor’s personal property” is not permitted. See also In re Hintze, 2015 Bankr. LEXIS 450 (Bankr. N.D. Fla. Feb. 11, 2015) (security agreement failed to sufficiently identify collateral). Thus, while a financing statement may designate “all assets” as the collateral subject to the filing (assuming the secured party has a lien in all of the debtor’s assets or the debtor otherwise authorized the filing), a security agreement must reasonably identify the collateral in which a security interest is granted. Based on the facts as discussed in the Sterling United case, the parties did not dispute the sufficiency of the collateral description in the Bank’s security agreement. In addition, it does not appear that the bankruptcy trustee for the Debtor asserted that the Bank’s initial UCC financing statement should be considered superseded and rendered ineffective by the February 19, 2013 amendment. 

³ Based on UCC Section 9-506(a), a UCC financing statement is effective despite minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading. 

⁴ Although the bankruptcy court from which the Sterling United decision was appealed also ruled in favor of the Bank, such court nevertheless found the collateral description “needlessly convoluted.” See In re Sterling United, Inc., 519 B.R. 586, 589 (Bankr. W.D.N.Y. 2014).