In the recent case of In re Hintze, 2015 Bankr. Lexis 450 (Bankr. N.D. Fla. 2015), the Bankruptcy Court for the Northern District of Florida held that a creditor did not adequately describe its security interest in certain collateral by including the phrase “all assets” in the security agreement.
In addition to the Bankruptcy Code, a creditor’s claim is often governed by the applicable state’s Uniform Commercial Code (“UCC”). Generally, secured parties have a lot of flexibility in how they describe the collateral on a financing statement because the description only needs to reasonably identify the assets subject to the security interest. However, as is shown in the instant case, the sufficiency of the collateral description in a security agreement can determine the nature and extent of a secured creditor’s claim in bankruptcy.
In this case, two individuals (the “Debtors”) borrowed money and executed a promissory note in favor of the lender. Importantly, the promissory note included the following language: “[M]aker hereby grants to Holder [Lender] a security interest in all of Maker’s assets.” Unwisely, the Lender waited more than 18 months before filing the UCC-1 financing statement with the appropriate agency. While the promissory note contained a vague description of the collateral, the Lender included a more detailed description of the collateral on the UCC-1 financing statement: “[A]ll personal property owned by the Debtors, including cash or cash equivalents, stocks, bonds, mutual funds, certificates of deposit, household goods and furnishings, automobiles, and water craft.”
Subsequently, the Debtors filed a Chapter 7 bankruptcy petition and listed the Lender in their schedules as a secured creditor with a security interest in “all personal property of the Debtors,” including a 100-percent interest in an entity owned by one of the Debtors. The trustee filed a notice of intent to sell the entity and the Lender objected on the grounds that it had a perfected security interest in the asset.
The court reviewed the relevant statutory language and determined that an “all assets” blanket description of collateral does not sufficiently identify the collateral for purposes of a security agreement. Therefore, no valid security interest was ever created that the lender could enforce.
The important take-away from this case is that a secured party must determine whether the collateral description is being used for a security agreement or financing statement. While a security agreement requires a specific description of the collateral – i.e. by type or category – a financing statement is a notice filing that allows for a generic collateral description such as “all assets.”