Those of you who remember the pre-2001 UCC will remember those long lists of collateral descriptions that usually appeared as attachments to the financing statements filed with the state and local filing offices. Remember that? And do you remember how those attachments were often lost by the filing office?
The 2001 changes simplified this, not only by eliminating the local filing, but also by allowing the term “all assets” or similar language to be used on the financing statement in order to do away with those extra pages of collateral descriptions.
Keep in mind, however, that while the UCC allows use of the term “all assets” on financing statements the security agreement must reasonably identify the collateral and supergeneric descriptions, while allowed for use in financing statements, are expressly deemed insufficient for the security agreement.
Use of the supergeneric description on a financing statement is strongly recommended. A November 1, 2017, well-crafted decision from the Bankruptcy Court for the Eastern District of Kentucky highlights the risk of being specific when generic would have been better.
The issue at hand was in the context of disputed use of cash collateral between a Chapter 11 debtor, Lexington Hospitality Group, LLC, and its lender, PCG Credit Partners, LLC (PCG), and whether hotel room charges were personal property or proceeds of real property.
The Court determined that “room revenue” was personal property and not subject to the mortgage. The Debtor conceded (and the Court agreed) that PCG was secured in the room revenue but argued that PCG’s position was not perfected in the room revenue. The Court examined the UCC financing statement which was properly filed and noted that:
The Security Agreement grants a lien on “all right, title and interest” of the Debtor in the “Collateral.” [Security Agreement, Art. III.] “Collateral” in the Security Agreement is broadly defined to include all assets of the Debtor, including accounts, general intangibles and payment intangibles…
The Court addressed the collateral descriptions contained in the financing statement which included:
goods, inventory, accounts, deposits, contracts…tangible personal property…The Financing Statement thereafter becomes more specific…[but] [it] does not identify “general intangibles” or “payment intangibles” in its description of the Collateral
The Court ultimately concluded that the room revenues were “payment intangibles”. The specific description contained in the financing statement neglected to include intangibles (or even payment intangibles) although they were included in the granting clause contained in the security agreement.
It does not matter what the parties intended by the security agreement. Keep in mind that the security agreement is a private writing between the lender and the borrower but the financing statement is a recorded document that puts the world on notice what collateral is encumbered.
Back in the “old days” we would cut and paste the language from the granting clause and attach it to the UCC-1 financing statement. Since 2001 that became unnecessary when the use of supergeneric descriptions were authorized by the UCC.
Why anyone would not take advantage of using a supergeneric description is beyond me!
I suspect that PCG has learned a costly lesson.