Can a convoluted and changing description of collateral in a series of UCC filing statements cause a claim to fail because it is “seriously misleading?” That was the question put to the United States Bankruptcy Court for the Western District of New York in Sterling United, Inc. v. First Niagara Bank (Case No. 13-11351 K AP No. 14-1017K).
First Niagara sought to recover more than $300,000 in payments made by Sterling United, as well as more than $300,000 in proceeds from collateral the company had liquidated. Between 2005 and 2007, First Niagara had loaned about $1.2 million to Sterling United, a printing outfit then doing business in Buffalo, N.Y., as United Graphics, Inc. There was no dispute that First Niagara had properly taken a security interest in all of United Graphics’ business assets. First Niagara’s early financing statements described United Graphics’ collateral as:
"All assets of the Debtor including, but not limited to, any and all equipment, fixtures, inventory, accounts, chattel paper, documents, instruments, investment property, general intangibles, letter-of-credit rights and deposit accounts now owned and hereafter acquired by Debtor and located at or relating to the operation of the premises at 100 River Rock Dr., Suite 304, Buffalo, N.Y., together with any products and proceeds thereof including but not limited to, a certain Komori 628 P & L Ten Color Press and Heidelberg B20 Folder and Prism Print Management System." [Emphasis added]
In 2012 United Graphics changed its name to Sterling United, Inc. and moved to Amherst, N.Y. First Niagara duly filed amended financing statements reflecting Sterling United’s new name and address. However, the bank did not initially change the collateral description nor did it note the change in the collateral’s location. In February 2013 First Niagara did ultimately update the collateral description to reflect the new address:
"All assets of the Debtor including, but not limited to, any and all equipment, fixtures, inventory, accounts, chattel paper, documents, instruments, investment property, general intangibles, letter-of-credit rights and deposit accounts now owned and hereafter acquired by Debtor, including but not limited to those located at or used in connection with the business premises at 6030 N. Bailey Avenue, Amherst, N.Y., 14226, together with any and all products and proceeds thereof." [Emphasis added]
Expert linguists parsed the collateral description and came to differing conclusions. The court, citing precedent, found that, "where a description can reasonably be interpreted in one of two ways – one of which may cover the collateral at issue and one of which does not – notice filing has served its purpose."
The court stated that considering the long succession of UCC1s on the public record detailing the name change, the address change and the change in the collateral description, a “reasonable” or “prudent” search by a downstream creditor would reveal all (or many) of the UCCs. The court held that the purpose of notice filing is to indicate that a creditor may have a security interest, thereby providing a prospective creditor a starting point in their due diligence and investigation to determine whether the assets are encumbered.
As a result, the court ruled the financing statements were not seriously misleading.