This Commentary answers the question, does a financing statement that indicates the collateral solely by reference in the financing statement to the security agreement or other record not attached to the financing statement “indicate” the collateral that it covers, as required for the sufficiency of a financing statement under Section 9-502(a)(3) of the Uniform Commercial Code?
The Permanent Editorial Board for the Uniform Commercial Code (PEB) acts under the authority of the American Law Institute and the Uniform Law Commission (also known as the National Conference of Commissioners on Uniform State Laws). The PEB has resolved to issue supplemental commentary on the Uniform Commercial Code (UCC) from time to time. The supplemental commentary of the PEB generally will be known as a PEB Commentary, to distinguish it from the Official Comments to the UCC. A PEB Commentary may be denominated a commentary, a report, or otherwise as determined by the PEB.
The Resolution states that:
The underlying purposes and policies of the PEB Commentary are those specified in Section 1-103(a). A PEB Commentary should come within one or more of the following specific purposes, which should be made apparent at the beginning of the Commentary: (1) to resolve an ambiguity in the UCC by restating more clearly what the PEB considers to be the legal rule; (2) to state a preferred resolution of an issue on which judicial opinion or scholarly writing diverges; (3) to elaborate on the application of the UCC where the statute and/or the Official Comment leaves doubt as to the inclusion or exclusion of, or application to, particular circumstances or transactions; (4) consistent with Section 1-103(a)(2), to apply the principles of the UCC to new or changed circumstances; (5) to clarify or elaborate upon the operation of the UCC as it relates to other statutes (such as the Bankruptcy Code and federal and state consumer protection statutes) and general principles of law and equity pursuant to Section 1-103(b); or (6) to otherwise improve the operation of the UCC.
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Does a financing statement that indicates the collateral solely by reference in the financing statement to the security agreement or other record not attached to the financing statement “indicate” the collateral that it covers, as required for the sufficiency of a financing statement under Section 9-502(a)(3) of the Uniform Commercial Code?
Introduction. Sections 9-308 to 9-316 of the UCC set forth the methods by which security interests can be perfected. Section 9-310(a) establishes the default rule: unless otherwise provided in Section 9-310(b) or 9-312(b), a financing statement must be filed to perfect a security interest. Under Section 9-502(a)(3), a financing statement is sufficient only if, among other things, it “indicates the collateral covered by the financing statement.” Section 9-504 states that a financing statement is sufficient if it “provides” a “description” of the collateral pursuant to Section 9-108 or “provides” an “indication” that the financing statement covers all assets or all personal property of the debtor.
This Commentary concludes that a financing statement does not satisfy Section 9-504 when the financing statement does not itself (including any attachments) contain a collateral description sufficient under Section 9-108 or an indication that the security interest covers “all assets” or “all personal property.” The financing statement does not satisfy the requirement if the financing statement indicates the collateral covered by the financing statement solely by referring to a record not attached to the financing statement (even if that record contains information that, if it were contained in the financing statement or an attachment, would satisfy the statutory standard).
This conclusion follows both from the text of the UCC and its underlying purposes and policies.
The text of the UCC. Section 9-502(a)(3) states that a financing statement is sufficient only if it indicates the collateral covered by the financing statement. That requirement is satisfied, according to Section 9-504, if the financing statement “provides” either a description of the collateral that would be sufficient under Section 9-108 or an indication that the financing statement covers “all assets” or “all personal property” of the debtor. Section 9-504 is one of several sections in which Article 9 refers to a record “providing” certain information to be sufficient. Section 9-502(a)(1) states that a financing statement is sufficient only if it “provides” the name of the debtor. When Article 9 requires a record such as a financing statement to “provide” certain information and states what is a sufficient provision of that information, the plain meaning of the text, and context and purposes of Article 9, requires the information to be in that record.
The purposes and policy of the UCC. Article 9 is but one article of the UCC. Article 1 (General Provisions) “applies to a transaction to the extent that it is governed by another article.” Section 1-103 provides as follows:
As stated, among the purposes and policies of the UCC are simplicity, clarity, and uniformity in the law as enacted in various jurisdictions.
Comment 1 to Section 1-103 elaborates:
The Uniform Commercial Code should be construed in accordance with its underlying purposes and policies. The text of each section should be read in the light of the purpose and policy of the rule or principle in question, as also of the Uniform Commercial Code as a whole, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved.
Publicly searchable financing statements efficiently, reliably, and inexpensively provide to third parties the information necessary for assessment of the risk that others have certain rights in the personal property indicated in the financing statement. The Comments to Sections 9-502 and 9-504 state the purpose served by use of a financing statement;
The notice itself indicates merely that a person may have a security interest in the collateral indicated… .
… However, even in the case of filings that do not necessarily involve a series of transactions (e.g., a loan secured by a single item of equipment), a financing statement is effective to encompass transactions under a security agreement not in existence and not contemplated at the time the notice was filed, if the indication of collateral in the financing statement is sufficient to cover the collateral concerned.
A financing statement sufficiently indicates collateral claimed to be covered by the financing statement if it satisfies the purpose of conditioning perfection on the filing of a financing statement, i.e., if it provides notice that a person may have a security interest in the collateral claimed.
The purposes of the UCC § 9-502(a)(3) requirement that a financing statement indicate the collateral, like the purposes of the UCC § 9-504(1) provision that a financing statement “provide” an indication of the collateral, are best served if those provisions are interpreted to mean that an adequate collateral description appears in the record or records that are attached to the financing statement, not solely in a record that is not “attached” to the financing statement. If the collateral description is not in the records comprising the financing statement, a searcher would need to make inquiries outside of the records of the filing office to obtain even the most basic information about the collateral covered. Such inquiries are inherently inefficient. Moreover, those inquiries might not yield the needed information. The court in In re Financial Oversight and Management Board for Puerto Rico, considering the comparable rule in former Article 9, adopted this analysis:
[K]ey goals of the UCC and its filing system … include fair notice to other creditors and the public of a security interest… .
… Requiring interested parties to contact debtors at their own expense about encumbered collateral, with no guarantee of a timely or accurate answer, would run counter to the notice purpose of the UCC.
The court held that a financing statement did not provide a sufficient indication of collateral where the only indication was in a document not attached to the financing statement.
However, any concern about a searcher needing to make inquiries outside of the records of the filing office goes only so far. The inquiry burden on the searcher is balanced against the burden on the filer of providing a sufficient collateral indication in or attached to the financing statement. That balance is evident in that a financing statement with a collateral description on its face providing sufficient information to “reasonably identify” the collateral or an “all assets” indication, which indication in either case also refers to information not attached to the financing statement for additional information, may be sufficient. When a financing statement that provides information that meets the standard for sufficient indication under Section 9-504(1) also refers to additional information in an unattached record, this does not cause the financing statement to fail the standards for sufficient indication.
For example, consider a financing statement that describes the collateral as “all inventory supplied by secured party to debtor under a supply agreement between debtor and secured party.” This description of the collateral would be sufficient because the description of the collateral as inventory alone would be sufficient under Sections 9-108 and 9-504(1). This language puts the searcher on notice that a security interest may be claimed in certain inventory even though a determination of the particular inventory encumbered may require further due diligence by the searcher, or even the implementation of intercreditor arrangements, if the searcher is considering extending credit against inventory or its proceeds. The searcher may decide not to inquire further if the searcher is considering extending credit only against non-inventory collateral.
A financing statement that supplies information about the collateral that it covers solely by reference to a record not attached to the financing statement is not sufficient because it does not indicate the collateral that it covers as required by UCC § 9-502(a)(3). To the extent that In re I80 Equipment, LLC is inconsistent with this conclusion, this Commentary is to the contrary.
Official Comment 2 to Section 9-504 is hereby amended to add the following at the end of the first paragraph thereof:
A financing statement (including any attachments) that does not itself supply information satisfying Section 9-502(a)(3) or Section 9-504(a), but, rather, refers solely to a record not attached to the financing statement for information seeking to satisfy those provisions, does not satisfy the sufficiency requirement of Section 9-502(a)(3) that the financing statement indicate the collateral that it covers. See PEB Commentary No. 26, dated August 12, 2022. The Commentary is available at https://www.ali.org/peb-ucc.
