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"Convoluted" UCC Financing Statement Collateral Description Not "Seriously Misleading"

The United States Bankruptcy Court for the Western District of New York recently held that a collateral description in a UCC financing statement was not "seriously misleading," even though it was "needlessly convoluted." In Ring v. First Niagara Bank, N.A. (In re Sterling United, Inc.), 519 B.R. 586 (Bankr. W.D.N.Y. 2014), First Niagara Bank, N.A. loaned $1.2 million to United Graphics, Inc. To secure the loan, the bank took a security interest in all of United’s assets and filed a UCC financing statement with a collateral description that arguably limited the collateral to assets located at the debtor’s business address. United moved its operations, and, although the UCC financing statement was amended to change the debtor’s address, the collateral description still referred to assets located at the prior address. Just before United’s involuntary bankruptcy petition, First Niagara modified the collateral description to eliminate the limiting language. The Chapter 7 Trustee later initiated an adversary proceeding to avoid the amended financing statement. The Court denied the Chapter 7 Trustee’s request by following the ruling of ProGrowth Bank, Inc. v. Wells Fargo Bank, N.A., 558 F.3d 809 (8th Cir. 2009), in which the Eighth Circuit Court of Appeals ruled that notice filings are sufficient if they alert subsequent creditors of the possibility that a debtor’s assets are covered by the financing statement. The Court disagreed with the idea that a "Court must consider whether a hypothetical creditor could have been misled." Rather, the Court held that it "must presume a certain level of sophistication" of the hypothetical downstream creditor and that there "must be a degree of diligence" employed by that creditor when examining the collateral description, similar to how other courts have held downstream creditors “to a standard of 'reasonableness' or 'prudence'" when searching a debtor’s name. Accordingly, the Court saw "no basis for setting the bar higher for a secured creditor against a bankruptcy trustee" and held that a bankruptcy trustee is not granted "a special status" when it comes to what is a seriously misleading financing statement.

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