Mid-Atlantic Case Report (Ring v. First Niagara Bank, N.A.)

             Second Circuit Court of Appeals Reminds Lenders that Less Can Be More When Drafting Collateral Descriptions in UCC Financing Statements Ring v. First Niagara Bank, N.A. (In re Sterling United, Inc.), 2016 WL 7436608 (2d Cir. 2016). 

            After protracted litigation, on December 22, 2016, the Second Circuit Court of Appeals issued a summary order holding that a detailed description of collateral in a financing statement filed by a secured party, and later amended less than 90 days before a debtor’s bankruptcy filing, did not result in an avoidable preference under the Bankruptcy Code.

            Years earlier, First Niagara Bank made a loan of over one million dollars to Sterling United, Inc., for which the Bank was granted a blanket security interest in all of Sterling’s assets.  The Bank subsequently filed financing statements to perfect those interests, in which the collateral was described as “All assets of the Debtor, including, but not limited to” various items such as equipment, fixtures, inventory, accounts and others “located at or relating to the operation of the premises at 100 River Rock Drive, Suite 304, Buffalo, New York”.  Sterling changed its address thereafter, and the Bank filed an amended financing statement on February 19, 2013 indicating the new address in the description of collateral.  Within 90 days, Sterling filed for bankruptcy protection.

            The bankruptcy trustee for Sterling’s estate alleged that the initial financing statement was insufficient to perfect the Bank’s security interest in Sterling’s assets once they were moved to its new address.  According to the trustee, the address in the initial financing statement modified “all assets”.  Because the February 19, 2013 financing statement was filed within 90 days of Sterling’s bankruptcy petition and could not itself have perfected the Bank’s security interest in Sterling’s assets, the trustee asserted that it was therefore entitled to avoid the Bank’s security interest.

            The court looked to the text of the New York Uniform Commercial Code, which provides that the collateral requirement may be satisfied by an indication that the financing statement “covers all assets or all personal property, which is the minimum necessary to provide notice that a person may have a security interest in the collateral claimed.”  The court rejected the trustee’s arguments, concluding that the description in the Bank’s initial financing statement was sufficient because it unambiguously referred to all of Sterling’s assets, irrespective of their location.  The court reasoned that the phrase “including, but not limited to” plainly specified a subset of “all assets” of Sterling.  The geographical reference in the initial financing statement “was merely illustrative,” and therefore did not serve to limit the Bank’s security interest only to assets at the address listed therein.

            Because the initial financing statement contained unnecessary language detailing the location of certain of Sterling’s assets covered by the Bank’s all-assets lien, the Bank was forced to engage in litigation over the perfection of its security interest for several years.  Had the initial financing statement simply stated that it covered “all assets” of Sterling, the financing statement would not have been susceptible to the trustee’s particular line of attack in this case once Sterling moved its assets.  In drafting and approving financing statements, lenders should describe collateral carefully so as to avoid unnecessary details that might create litigation risks down the road.