In re I80 Equip., LLC, 2019 WL 4296751, 67 BCD 177 (7th Cir. 2019)
In a matter of first impression in the 7th U.S. Circuit Court of Appeals (the “Court”) deciding whether a Chapter 7 trustee could avoid a creditor’s lien on grounds of an insufficient financing statement, the Court reversed and remanded the bankruptcy court’s decision and ruled that the financing statement was proper. The Court found that the reference to the underlying security agreement, describing the collateral by reference, was proper under the Illinois Uniform Commercial Code (the “IUCC”).
In March 2015, First Midwest Bank (“FMB”) and I80 Equipment LLC (“I80”) entered into a commercial loan whereby I80 granted FMB a security interest through a security agreement whereby the collateral was described in 26 certain categories. FMB perfected its security interest by properly filing a financing statement that covered “all collateral described in … security agreement dated March 9, 2015 between debtor and secured party.” I80 failed to make its payment under the commercial loan and defaulted. FMB timely filed a Chapter 7 petition in December 2017 and then sued I80’s trustee, Jeana Reinbold, (“Trustee”) seeking two remedies: (1) the recovery of $7.6 million in outstanding loan amounts and (2) a declaration that FMB’s security interest on I80’s assets was senior to the Trustee’s claims and those of any other creditors. The Trustee counterclaimed relying on Section 544(a) of the Bankruptcy Code (the “Code”) which provides that a trustee has the rights of a lien creditor and is able to “avoid” certain security interests that are not perfected. Section 544(a) goes even further in that where another creditor may have priority over another creditor, the trustee is able to assume the higher position in the chain of claims on the security at issue. Here, the Trustee argued that the security interest was not properly perfected as the financing statement on file with the Illinois Secretary of State contained a reference to certain collateral in a separate document, rather than specific descriptions of each collateral item.
The bankruptcy court ruled in favor of the Trustee stating that the financing statement in question did not satisfy the notice requirement, writing that “[a] financing statement that fails to contain any description of collateral fails to give the particularized kind of notice”. FMB then appealed. The Court took up the case and relied on 810 Ill. Comp. Stat. Ann. 5/9‑502. This statute provides a three‑prong test for determining the sufficiency of a financing statement and provides that a financing statement, to be sufficient, must: (1) state the name of the debtor, (2) state the name or representative of the secured party, and (3) indicate the collateral covered by the financing statement. The degree of whether a piece of collateral has been properly identified is further developed in 810 Ill. Comp. Stat. Ann. 5/9‑108 which provides a six‑prong test. The sixth prong states that a method is acceptable where the “identity of the collateral is objectively determinable”. The Court reviewed additional Illinois precedent and found that it was well established that incorporation by reference was sufficient under the IUCC. Furthermore, the Court established that this practice was an appropriate and permissible method of putting future creditors on notice as to the existence of a security interest by a third‑party. In light of the detailed description of the collateral in the security agreement, the Court held that the collateral was readily determinable and the financing statement sufficient. As such, the Court held that the security interest of FMB in the collateral was valid and perfected and the Trustee was unable to void FMB’s lien interest in the collateral.
Article courtesy of Michael Robson of Greenberg Traurig, LLP
