Using Supergeneric Collateral Descriptions

Return with us now to those thrilling days of yesteryear.  Err, that is prior to July 1, 2001, when the “old” Article 9 of the UCC reigned.  Under “old” Article 9 (Section 9-203) a security interest was enforceable when it attached but it did not attach until “…the debtor has signed a security agreement which contains a description of the collateral…,” value has been given and the debtor has rights in the collateral.

“New” Article 9 (also Section 9-203) treats this in a similar manner.  Again the security interest becomes enforceable when it attaches and is enforceable only when value has been given,  the debtor has rights in the collateral and the power to transfer such rights and “the debtor has authenticated a security agreement that provides a description of the collateral….”

Note that the collateral description requirements for the security agreement resembled the requirements for the collateral description in the financing statement.

“Old” 9-110 provided that the collateral description of personal property in a financing statement was sufficient if it reasonably identified the collateral even if the description was not specific.  The Official Uniform Comment to that section specifically did away with prior holdings “that descriptions are insufficient unless they are of the most exact and detailed nature…”  Clearly the intent was to assure that the collateral description was clear while not making descriptions unduly burdensome.

“New” Article 9 broke this out differently.  A financing statement sufficiently indicates collateral it covers if the statement provides “(1) a description of the collateral pursuant to section 9–108 [relating to sufficiency of description]; or (2) an indication that the financing statement covers all assets or all personal property.”  9–504(1)–(2)  Remember the financing statement perfects the security interest but the security agreement is part of the attachment of the security interest.

Those of us who practiced under “old” Article 9 recall filing financing statements with pages of addenda describing the collateral.  It was not uncommon for the filing officer to misplace the attachments when saving the financing statements to microfiche. Some careless drafters included in the collateral description a statement such as “see attachments”.  Thus, when the attachments were lost problems arose.  The “all assets” description on financing statements cured this nightmare.

“New” Article 9, however, provides that a description of personal property in the security agreement is considered sufficient whether or not it is specific, if “it reasonably identifies what is described.”  9–108(a) Examples of reasonable identification include identification by specific listing, category, quantity, or any other method which makes the identity of the collateral objectively determinable. 9–108(b)(1)–(6) Super generic phrases such as “all assets” or “all personal property” are not sufficient to describe collateral in a security agreement.  9–108(c), comment 2.

In order to assure that the collateral description is sufficient I advise my clients to start with the UCC definition of “general intangible” which means “any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.”  Count them – thirteen collateral types that are sufficiently described.

In a recent decision from the Bankruptcy Court for the Eastern District of Pennsylvania, Judge Chan followed this logic in considering whether M&T Bank held a valid lien on a debtor’s liquor license.

Initially Judge Chan considered whether a liquor license is property or a personal privilege under Pennsylvania law.  In doing so, she cited a 1986 (e.g. “old” Article 9) decision from the Third Circuit Court of Appeals, which held that:

although a liquor license is not property subject to attachment under Pennsylvania law, it is property that may be subject to a federal tax lien.

However, Judge Chan noted that in 1987 the Pennsylvania Legislature amended its laws adding a section stating that:

[t]he license shall constitute a privilege between the board and the licensee. As between the licensee and third parties, the license shall constitute property.

Accordingly, she ruled that the liquor license was property under Pennsylvania law.

Next, she needed to consider whether the collateral description contained in the security agreement sufficiently covered the liquor license.  She noted that

[t]he Security Agreement describe[d] the collateral as general intangibles limited to Liquor License …. Therefore, M & T’s security interest did attach to the Liquor License because the Security Agreement met all three requirements to make it enforceable against the Debtor and third parties.

The Bankruptcy Trustee (challenging M&T’s security interest), relying on a 1975 ruling of the Pennsylvania Supreme Court, argued that the collateral description contained in the UCC-1 Financing Statement did not sufficiently describe the collateral.    The Court, however, noted that:

M & T’s UCC–1 indicates that “the financing statement covers the following collateral: All assets of the debtor, whether now existing or hereafter acquired or arising, wherever located.

The Court went on to state:

Since the revised Article 9 superseded the former Article 9 under which [the 1976 case] was decided and M & T’s UCC–1 was filed after Article 9 was revised, it is clear that [the 1976] does not control the disposition of this case and M & T properly perfected its lien in the Liquor License by using a super generic description to describe its collateral.

Thus the Court concluded that Pennsylvania law clearly allows third parties to create security interests in Liquor Licenses and that M & T followed all the requirements to create and perfect a lien on the Liquor License and is entitled to proceeds from its sale in the amount of its secured claim.

The lesson?  Collateral descriptions in security agreements reasonably describe the collateral but the collateral description in a UCC-1 financing statement may be supergeneric.  Just as the UCC says!


In Re B & M Hospitality LLC, 2018 WL 1635228, Bankr. E. D. PA. April 3, 2018.


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