Collateral Descriptions in Security Agreements: “All Assets” Insufficient

Securing a debt with a lien against the personal property of your borrower is a fairly straightforward endeavor. The borrower must sign a written instrument, typically a security agreement, containing security interest granting language. The lender then must perfect its security interest, typically by filing a Uniform Commercial Code (“UCC”) financing statement with the Secretary of State of the borrower’s state of incorporation. [1]
Both the security agreement and the financing statement must describe the assets encumbered by the lender’s security interest. If the borrower has granted the lender a security interest in all of the borrower’s assets, the collateral description in the UCC financing statement can simply indicate “all assets” or “all personal property.” [2] Does this mean the security agreement can likewise indicate that the borrower has granted a security interest in “all” of borrower’s assets?
As a lender discovered the hard way in a recent bankruptcy case, the answer is “no.” In In re: Hintze, the lender’s security agreement granted a security interest in “all of [borrowers’] assets.” [3] After the borrowers filed for bankruptcy, the bankruptcy trustee argued that the collateral description in the lender’s security agreement was ineffective and therefore the lender’s debt was unsecured. The bankruptcy court agreed with the trustee. The court found that, while it permits “all assets” as a collateral description for financing statements, the UCC specifically prohibits the use of “all assets” as a collateral description in security agreements. [4] Instead, a security agreement must describe collateral by specific listing, category or type defined in the UCC.
The court concluded that the description of “all of [borrowers’] assets” in the security agreement, without more, was insufficient to create an enforceable security interest. As a result, the lender’s debt was relegated to the pool of unsecured claims, and the lender was likely paid only a fraction of its debt instead of being paid in full.
While the court in Hintze applied the UCC as adopted in Florida, the applicable provision (UCC § 9-108(c)) is identical under Ohio’s version of the UCC. [5] The lesson from Hintze is that lenders must distinguish between the security agreement and the financing statement when taking a security interest in all of its borrower’s assets. The lender should describe the collateral in the security agreement by type, category or a specific listing. A generic “all assets” description is not sufficient for purposes of the security agreement.
If you would like us to help you evaluate debt and collateral issues facing your business, please contact a member of the Frantz Ward Bankruptcy Group.

[1] It should be noted that liens against certain property, such as real estate, are not governed by the UCC. Also, security interests against certain property governed by the UCC are not perfected by the filing of a UCC financing statement.
[2] UCC § 9-504(2).
[3] 525 B.R. 780 (Bankr. N.D. Fla. 2015)
[4] UCC § 9-108(c).
[5] See, In re Eyerman, 517 B.R. 800, 810-11 (Bankr. S.D. Ohio 2014)

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