Can a Financing Statement Describe Collateral Only by
Incorporating a Security Agreement? After Supreme Court’s
Denial of Cert., a Split of Authority Remains
The U.S. Supreme Court’s recent denial of certiorari of a 2019 Seventh Circuit decision has created a split in authority that secured creditors need to be aware of. In In re 180 Equipment, LLC, 938 F.3d 866, 2019 U.S. App. LEXIS 27415 (7th Cir. 2019), a bankruptcy debtor executed a security agreement granting a lender a security interest in 26 categories of collateral. The financing statement filed by the lender purported to cover “all collateral described” in the security agreement. After the debtor’s bankruptcy filing, the chapter 7 trustee sought to avoid the lender’s lien pursuant section 544(a) of the Bankruptcy Code, arguing the lender’s security interest was not properly perfected because the financing statement did not independently describe the collateral. The bankruptcy court agreed, ruling that a financing statement that fails to contain any description of collateral fails to give the particularized kind of notice required by Article 9 of the Uniform Commercial Code (“UCC”).
On interlocutory appeal, the Seventh Circuit Court of Appeals reversed, holding that the financing statement was sufficient to perfect the lender’s security interest. The court analyzed Illinois’ version of UCC § 9-502, which (like Indiana’s version of § 9-502) requires that a financing statement indicate the collateral covered by the financing statement. Section 9-504 of the UCC provides that a financing statement sufficiently indicates the collateral that it covers if the financing statement provides:
(1) a description of the collateral pursuant to Section 9-108; or
(2) an indication that the financing statement covers all assets or all personal property.
Section 9-108 of the UCC sets forth six methods by which a collateral description in a security agreement reasonably identifies the secured property, including any method “if the identity of the collateral is objectively determinable.” The court further analyzed the meaning of “indicate” in UCC § 9-502, concluding that the plain meaning of the text allows a party to indicate collateral in a financing statement by pointing or directing attention to a description in a security agreement.
In February the U.S. Supreme Court denied the trustee’s petition for certiorari, creating a conflict among the federal appellate courts. In another 2019 decision, Altair Global Credit Opportunities Fund (A) LLC v. Financial Oversight and Management Board for Puerto Rico (In re Financial Oversight and Management Board for Puerto Rico), 914 F.3d 694 (1st Cir. 2019), the First Circuit Court of Appeals reached the opposite conclusion, holding that a financing statement is insufficient if it only describes collateral by reference to a document not attached to the financing statement.
Until this conflict is resolved, secured creditors must proceed with caution when preparing financing statements. Financing statements incorporating by reference a collateral description in a security agreement may be acceptable in the Seventh Circuit states (Indiana, Illinois, and Wisconsin), yet this method could be deemed insufficient for perfection elsewhere. Furthermore, the burden on financing statement searchers will vary by jurisdiction. The In Re 180 Equipment holding puts Seventh Circuit searchers at the mercy of creditors who only describe collateral by reference to an unattached security agreement – the searcher must reach out to the filer and request a copy of the security agreement.
 The other five collateral description methods are (1) specific listing, (2) category, (3) a type of collateral defined in the UCC (except as provided in § 9-108(e), (4) quantity, and (5) computational or allocational formula or procedure.