PEB commentary casts doubt on incorporation-by-reference approach to UCC-1 collateral descriptions

The Permanent Editorial Board for the Uniform Commercial Code (PEB) recently expressed new guidance on this issue in its PEB Commentary No. 26: Indication of Collateral in a Financing Statement. While not binding, this commentary provides clarity: 

“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).”

This proclamation guides secured creditors on past and future approaches to UCC-1s. Secured creditors should consider amending existing UCC-1s that use only incorporation-by-reference collateral descriptions, and restate such descriptions in a manner that clearly complies with Article 9 of the Uniform Commercial Code (UCC). Secured creditors should be wary that a court may find any such UCC-1 did not perfect the underlying security interest until the amendment was filed.

Going forward, secured creditors can consider two approaches for UCC-1s. §9-504 of the UCC states (with bolded definitions added here for ease of reference): 

“[A] financing statement sufficiently indicate[s] the collateral that it covers if the financing statement provides: (1) a description of the collateral pursuant to Section 9-108 (“Option 1”); or (2) an indication that the financing statement covers all assets or all personal property (“Option 2”).” 

For Option 1, UCC §9-108 sets forth various acceptable approaches to collateral descriptions, including use of specific listings, categories, types, and/or quantities. As §9-108 does not require exact specificity, a collateral description may include a reference to an unattached security agreement. 

The PEB’s view is that a collateral description cannot solely consist of such a reference. PEB Commentary No. 26 clarifies that: 

“[w]hen 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."

Alternatively, Option 2 allows an “all assets” or “all personal property” collateral description in a UCC-1. Option 2 simplifies things for a secured creditor, eliminating any question as to the sufficiency of a collateral description that may be raised when relying on Option 1.

While not binding, PEB Commentary No. 26 provides helpful guidance and will likely influence future court decisions.

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Megan K. Kelly is senior counsel in the Financial Services & Restructuring Group and focuses her practice on litigation financing. Megan frequently advises prominent litigation finance firms, hedge funds, and other investors in litigation finance transactions.