There is Such a Thing as Being "Too Specific" in UCC Filings

March 26, 2015

An important part of business and commercial law is drafting security agreements and UCC filings. These sorts of documents require a certain degree of specificity to be valid. However, just as with anything, too much specificity can be too much of a good thing. Being too specific in these documents can lead to ambiguities that can lead to protracted litigation.

Court Discusses Whether UCC Financing Statements Adequately Perfected a Security Interest

A federal court in New York recently addressed the issue of specificity in Ring v. First Niagra Bank, N.A. It all started because of a Chapter 7 bankruptcy filing. The trustee started an adversary proceeding alleging avoidable preferential transfers to First Niagra. The issue before the Court was whether what it termed a "needlessly convoluted description of collateral" in a succession of U.C.C. Financing statements caused a claim of security to fail as "seriously misleading" under the U.C.C. as adopted by New York.

Language Used in UCC Filings

The UCC requires some level of specificity when describing the collateral in a security agreement. Since 2001 it has been allowed to be fairly broad. It is allowed to use the language"all assets" of the debtor, but it typically cannot be that simple. The UCC specifically states that "a description of collateral as all the debtor's assets' or all the debtor's personal property' or using words of similar import does not reasonably identify the collateral." The description in Ring included the "all assets" language but then went on to list a variety of examples. It also used the language "now owned and hereafter acquired by debtor and located at or relating to the operation of the premises at [the relevant address at the time of the first financing statement.]" In 2012 the debtor moved and the bank amended the financing statement to reflect the debtor's new address. Then in 2013 it changed the description from "now owned and hereafter acquired by Debtor and located at or relating to the operation of the premises" to "now owned and hereafter acquired by Debtor including but not limited to those located at or used in connection with the business premises[.]"

The Court's Decision

Ultimately the Court decided that the UCC financing statements were not seriously misleading. As a result they were effective to perfect the bank's security interest. This meant that the payments to the bank were not avoidable so the Trustee could not prevail. The decision was based on the very limited facts of the case, however. For example, the Court relied on the fact that there was a series of UCC filings that included various changes that would put a searcher on notice that there could be an issue. Also, on these facts the Court decided that it "must presume a certain level of sophistication or a certain level of intelligence and diligence in reading the collateral description." However, it was clear that under different facts it may have reached a different result. For example, had there been only one filing it make have reached a different result.