Adequacy of Collateral Descriptions

kjewell — Fri, 26 Feb 2010 14:22:09 +0000

Under current and prior versions of Article 9, the adequacy of the description of collateral has been a highly litigated issue. Generally speaking, the description in the security agreement must be specific enough to allow the collateral to be clearly identified from that description. The description in a financing statement can be somewhat more general as it is intended only to place parties on notice of the need to make a contact with the secured creditor to determine the precise extent of the security interest. As Courts have interpreted these various rules, conflicting results have occurred in various jurisdictions.

Revised Article 9 makes it clear that it is permissible, except in some consumer transactions and in the case of commercial tort claims, to describe collateral by UCC collateral type in the security agreement. This validates a description such as “accounts receivable” or “equipment” which has been ruled, by some courts, to be too general. However, the fact that the predefined categories in the code may be used does not mean that it is always appropriate to use them. Particularly in the case of specific equipment financing, it will still be appropriate to describe just the equipment being financed rather than using the broad category.

In the case of financing statements, a much more generic description is now authorized. If accurate, a description such as “all assets” or “all personal property” is permissible on the financing statement after the effective date of the adoption of Revised Article 9. It is not, however, permissible in the security agreement.

Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com

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Adequacy of Collateral Descriptions