The Two Magic Words that can Legally Save your Security InterestJuly 7, 2020
In life, in lending and in title insurance, it’s the little things that end up being most consequential. Great lawyers and title agents who want to be super heroes to their clients know the “devil is in the details”. A recent case out of New York showed just how important the language is in a UCC financing statement’s collateral description.
Collateral Description Saves Security Interest
A large bank makes a $1 loan that is secured by all the assets of the borrower. In listing the collateral, the bank includes the term all assets, but also goes on to list specifics, such as “any and all equipment, fixtures, inventory located at or related to the operation of the premises at 100 River Rock Road.”
Seven years later, the borrower moves to a new address. While the bank amends box 2c of its financing statement to reflect the change of address, it forgets to change the address in collateral description. So the Debtor’s mailing address is now correct, but the financing statement’s collateral description is out of date.
Shortly thereafter, the borrower files for bankruptcy. Within 90 days, the bank amends its financing statement and updates the collateral description to include “any and all equipment, fixtures, inventory located at or, etc.” at the borrower’s current address — but the bankruptcy trustee claims the security interest became unperfected after the debtor moved.
What did the court decide?
Although the address was incorrect on the financing statement after the borrower moved, it was irrelevant. By including the term “all assets of the debtor,” the collateral description was infallible; it included any and all equipment, fixtures, inventory located at or, etc.” regardless of what address they were located at, so long as they were owned by the borrower.
The lesson for financial institutions and their counsel? Perfecting and maintaining your security interests can be a real challenge unless you have a cost-effective process in place.
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