Describing the Collateral in Secured Transactions: Is “All Business Assets of the Debtor” Sufficient?
Kegler Brown Creditors' Rights + Bankruptcy Alert December 16, 2014
In the hurried rush of closing a loan transaction, lenders frequently want to know the most efficient description they can use to describe the collateral being pledged by the debtor. Often, business loans are secured by "all business assets of the debtor." Is that a sufficient description or must one tediously describe each and every item that a debtor owns?
Secured transactions in Ohio are governed by the Uniform Commercial Code and was enacted by the Ohio General Assembly. Article 9 of the Uniform Commercial Code covers secured transactions of personal property. Ohio's version of Article 9 is codified in Chapter 1309 of the Ohio Revised Code.
Security Documents in a Transaction
There are two sets of documents that comprise the securitizing documents in a secured transaction. The first is the security agreement. It is the formal document between the lender and the debtor by which the debtor pledges collateral in support of a monetary consideration. The second, to perfect the lien created by the security agreement, is the financing statement, which typically is filed with the Ohio Secretary of State.
Is there a distinction to be drawn between the description used in the security agreement and the description used in the financing statement?
Ohio Revised Code Section 1309.108 contains the requirements for the sufficiency of the description in a security agreement. It provides that any description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described. The Section goes on to say that it can identify the collateral by specific listing, category, type of collateral, quantity, computational or allocational formula or procedure, or any other method if the identity of the collateral is objectively determinable. However, Section 1309.108(C) specifically prohibits the description of collateral in the security agreement as "all the debtor's assets" or "all the debtor's personal property, or other words of similar import", which do not reasonably identify the collateral.
It then follows that a security agreement, which does not reasonably describe the collateral, may fail the test of Section 1309.108. Where available, descriptions of each piece of equipment by title, manufacturer, identification or serial number and so on are entirely appropriate. Books, records, sales logs, patents and so on such be described in reasonable detail. Summary descriptions are risky.
Security agreements, however, are not public documents. They are privately held, typically by the lender and not filed in any recording office. The only document that is disclosed to the public is the financing statement.
The financing statement needs to be filed in order to perfect the lien created by the security agreement in most transactions. A financing statement is more or less merely notice to the world of the transaction. Revised Code Section 1309.506 establishes the standard for errors and omissions in financing statements. It provides that a financing statement that substantially satisfies the requirements of Section 1309.501 et seq., is sufficient even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.
What does "seriously misleading" mean?
A financing statement that fails to provide the name of the debtor is seriously misleading. Revised Code Section 1309.506(B). If a search of the records of the filing office under the debtor's correct name, using the filing office's standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with Section 1309.506, the name does not make the financing statement seriously misleading.
Section 1309.504 provides that a financing statement sufficiently indicates the collateral if the financing statement provides a description of the collateral that is consistent with Revised Code Section 1309.108 or an indication that the financing statement covers "all assets" or "all personal property." Accordingly, while the financing statement may repeat all of the detail of the collateral in the security agreement, it can use far more generalized language such as "all business assets of the debtor."
What are the conclusions to be drawn from this? First, the description of the collateral in the security agreement must be far more detailed than simply "all business assets." In the financing statement, a summary description, such as all business assets or all personal property is sufficient. Correctly identifying the name of the debtor is also paramount. Accordingly, a precise check of the name of the debtor as recorded on the records of the filing office (in Ohio, the Ohio Secretary of State) is imperative.
Finally, the description should avoid unnecessary descriptions of the collateral that only serve to confuse, such as identifying collateral that is located at a particular address. Debtors can move locations and thereby create a potential litigation question over the description of the collateral since it no longer is at that stated address.
Lenders and borrowers should be careful to identify the collateral being pledged to a lender in the security agreement. Far less attention to detail is necessary to describe the collateral in the financing statement but precise identification of the name of the debtor is important when filing with the Ohio Secretary of State.