Secured parties generally have a lot of flexibility in how they describe the collateral on a UCC financing statement. The financing statement only needs to reasonably identify the assets subject to the security interest. The secured party may describe the collateral by a variety of different methods ranging from a specific description up to a supergeneric statement of “all assets.”
The “all assets” collateral description, however, is not sufficient for all purposes, such as the security agreement. A secured party recently learned the consequences of using the supergeneric description for purposes of a security agreement in the case of In re: Hintze, 2015 Bankr. LEXIS 450 (Bankr. N.D. Fla. Feb. 11, 2015).
In Hintze, two individuals (the “Debtors”) borrowed money from another individual (the “Lender”) in late 2010. The Debtors executed a promissory note that included a provision whereby the “Maker,” the Debtors in this case, granted “a security interest in all the Maker’s assets” to the Lender.
The Lender did not perfect his security interest right away. For some unknown reason, the Lender waited more than 18 months before filing a UCC1 financing statement with the Florida Secured Transactions Registry, in June 2012.
The Lender’s financing statement described the collateral in a bit more detail than in the promissory note that served as the security agreement. The filed record indicated that the collateral covered “All personal property owned by the Debtors, including cash or cash equivalents, stocks, bonds, mutual funds, certificates of deposit, household goods and furnishings, automobiles, and water craft.”
On November 1, 2012, the Debtors filed a Chapter 7 bankruptcy petition. One of the assets listed on the petition was 100% of the membership interest in TutoringZone, LC (“TZ”). The petition also listed the Lender as a secured creditor holding a security interest in all personal property of the Debtors.
The Trustee filed and served notice of its intent to sell the TZ membership interest. However, the Lender objected, claiming that it held a perfected security interest in the asset. The Trustee brought an adversary action against the Lender, alleging that the “all of Maker’s assets” collateral description was legally insufficient to create a security interest. The Trustee then brought a motion for summary judgment in its favor.
The Lender opposed the motion, claiming that the intent of the parties governed whether the supergeneric “all assets” description was sufficient to create the security interest. Therefore, the Lender argued, the court should take more evidence on the meaning of the collateral description. Moreover, the Lender claimed that the Trustee stepped into the shoes of the Debtors and thereby waived its right to challenge the validity of the security interest.
The court reviewed the express language of the relevant statute, which clearly states that an “all assets” description does not reasonably identify the collateral for purposes of the security agreement. Without a sufficient description of the collateral, no valid security interest was ever created, and therefore, the Lender had no security interest to enforce. The Lender’s other arguments, all of which depended on the existence of an otherwise enforceable security interest, failed as a result. Consequently, the court granted summary judgment to the Trustee.
The most important take away from this case is that secured parties must distinguish between the security agreement and the financing statement when describing collateral that constitutes substantially all the debtor’s assets. The secured party should describe the collateral in the security agreement by type, category or even by a specific listing. As demonstrated in Hintze, the supergeneric “all assets” description is not sufficient to create an enforceable security interest.
Nevertheless, once an enforceable security interest in substantially all the debtor’s assets has been created, the secured party can safely use the supergeneric term “all assets” or similar language on the financing statement. A financing statement is, after all, a notice filing. “All assets” is sufficient under UCC § 9-504 to put an interested party on notice that the claim covers all of the debtors personal property.
By Paul Hodnefield, Esq.
Paul Hodnefield is Associate General Counsel for CSC and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at email@example.com or 800-927-9801, ext. 62375.