Most of us are familiar with that old saw “location, location, location”. While location might enhance the value of real estate, including the location as part of the collateral description in the UCC financing statement can limit the protections provided to a secured creditor and may provide a strategy for attack by a bankruptcy trustee.  First Niagara Bank learned this valuable lesson but only after spending substantial legal fees to protect a security interest where perfection should have been routine.

In the case of Ring v. First Niagara Bank, NA (In Re: Sterling United, Inc.),____F.3d ____, 2016 U.S. App. LEXIS 23009 (2d Cir. Dec. 22, 2016) (No. 15-4131-bk.), the Chapter 7 Bankruptcy Trustee for Sterling United, Inc., (“Debtor”) sued First Niagara Bank (“First Niagara”) asserting that First Niagara’s security interests in Debtor’s assets were avoidable under 11 U.S.C. § 547.  Under U.S.C. § 547(b)(4)(A), a trustee may avoid any “transfer of an interest of the debtor in property … made … on or within 90 days before the date of the filing of the petition” for bankruptcy, provided that those interests are not perfected security interests pursuant to 11 U.S.C. § 547(c)(3).

As we all know, U.C.C. § 9-502 provides that a financing statement perfects a security interest if it (a) states the name of the Debtor and the name of the secured party or a representative of the secured party, and (b) indicates the collateral covered by the financing statement. The collateral description requirement may be satisfied by “an indication that the financing statement covers all assets or all personal property” U.C.C. § 9-504.  This is the minimum description necessary to provide notice that a secured party has a security interest in the collateral claimed.

The Trustee argued that First Niagara’s financing statement was inadequate and seriously misleading and thus voidable pursuant to § 547. The Trustee’s argument was based on First Niagara’s inclusion of the collateral’s location as part of the description in the financing statement.  Below is the collateral description as stated in the initial filed financing statement:

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 Drive, Suite 304, Buffalo, New York, 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). After the loan was made, and prior to the filing of the bankruptcy, the Debtor moved its business to a new location.  Hence, Debtor maintained no assets at 100 River Rock Drive, Suite 304, Buffalo, New York.  Within 90 days of the filing of the Chapter 7, First Niagara amended the collateral description in its financing statement to update the description to reflect the Debtor’s new address.  Because this update occurred within 90 days of the filing of the Chapter 7, the Trustee and First Niagara stipulated that the updated filing could not perfect First Niagara’s security interest.  Thus, the issue for resolution by the Court was whether the initial collateral description was sufficient to perfect First Niagara’s security interest, or whether, as the Trustee argued, the security interest was limited to assets located at 100 River Rock Drive, the initial location contained in the initial filing, but a location where no collateral remained at the time of the dispute.  The Court ruled for First Niagara and we think the Court reached the correct result and its rationale is supported by the weight of authority.

The Court concluded that, “the description was sufficient because it unambiguously refer[red] to ‘[a]ll assets of the Debtor’ irrespective of their location. The phrase ‘including, but not limited to’ introduce[d] a subset of, and does not function as a limitation on, ‘[a]ll’ of the Debtor’s assets. See, e.g., Bloate v. United States, 559 U.S. 196, 208 (2010) (construing statutory phrase ‘including but not limited to’ to introduce ‘list of categories’ that was ‘illustrative rather than exhaustive’); Federal Land Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95, 100 (1941) (‘[T]he term ‘including’ is not one of all-embracing definition, but connotes simply an illustrative application of the general principle.’); United States v. Huber, 603 F.2d 387, 394 (2d Cir. 1979) (‘[A] list beginning with the word ‘includes’ . . . is not exhaustive but merely illustrative.’); Pierre v. Providence Wash. Ins. Co., 99 N.Y.2d 222, 236, 754 N.Y.S.2d 179, 188 (2002)(describing phrase ‘includes, but is not limited to,’ as signifying ‘nonexclusive definition’)”.

Accordingly, the Court rejected the Trustee’s arguments, noting that, “[t]he Trustee offer[ed] no reason for departing from this general principle of interpretation. Instead, [the Trustee]  argu[ed] that the inclusion of the address modifie[d] ‘[a]ll assets’ or, at least, made the collateral description ‘seriously misleading’ under N.Y. U.C.C. § 9-506”.

Yes, First Niagara was the winner, but it was also a big loser. First Niagara paid legal fees to defend the preference action in the Bankruptcy Court, then successfully defended the Bankruptcy Court’s decision in Federal District Court, and finally in the Second Circuit Court of Appeals.  Had First Niagara merely described Debtor’s assets as “all assets of the Debtor”, or omitted the Debtor’s location in the initial financing statement’s collateral description, or added a phrase like “all assets now owned or acquired by Debtor at any location, including but not limited to its current location”, there would never have been a need to update the collateral description in the event the Debtor were to relocate.  Thus, good drafting would have avoided the Trustee’s avoidance action and saved First Niagara significant legal fees.