Opinion ID: 322428
Heading Depth: 2
Heading Rank: 2

Heading: Adequacy of Description of the Collateral

Text: 41 'The trustee urges a second ground for sustaining the Order of the Referee complained of here, namely the inadequacy of the description of the collateral in the promissory note and hence the failure to comply with Cal.Com.C. 9203(1) (b), supra. Cal.Com.C. 9110 provides: 42 For the purposes of this division any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described. Personal Property may be referred to by general kind or class if the property can be reasonably identified as falling within such kind or class or if it can be so identified when acquired by the debtor.    43 'Although the promissory note does not describe the collateral within the four corners of the document such description is provided (1) through incorporation by reference of the subject invoices, as well as (2) through reference to the more specific description of the collateral contained in the financing statement. 44 'The use of such extrinsic aids is clearly permissible to identify the collateral: 45 Under the Uniform Commercial Code there is no reason why parol evidence may not be admitted in aid of the description of the collateral, even where the collateral has been reasonably and sufficiently identified in the security agreement. In many instances, a description in a security agreement may be in general terms; parol evidence should therefore be admissible to explain or supplement the general description, or to resolve ambiguities. 44 Cal.Jur.2d Rev. Secured Transactions 107 at 386. 46 'The doctrine of incorporation by reference is likewise available in this area: 47 There is nothing in the Uniform Commercial Code to prevent reference in the security agreement to another writing for particular terms and conditions of the transaction. There is also nothing in the Uniform Commercial Code to prevent reference in the Security Agreement to another writing for a description of the collateral, so long as the reference in the security agreement is sufficient to identify reasonably what it described. In other words, it will at times be expedient to give a general description of the collateral in the security agreement and refer to a list or other writing for more exact description. In addition, the security agreement could itself consist of separate parts, one a general description of the obligation secured and the rights and duties of the parties, and the other a description of the collateral, both such writings being signed by the debtor and stated to comprise a single security agreement or referring to each other. Id. 109 at 387-388. 48 ' Thus there is no requirement that the description of the collateral be complete within the four corners of the security agreement or other single document. The description in the security agreement is sufficient, however, if it provides such information as would lead a reasonable inquirer to the identity of the collateral. See In re Drane, 202 F.Supp. 221, 223 (W.D.Ky.1962), citing Sparks v. Deposit Bank of Paris, 115 Ky. 461, 74 S.W. 185, 78 S.W. 171, and cited with approval in In re Anselm, 344 F.Supp. 544, 546 (W.D.Ky.1972). As summarized by one commentator: 49 A description need not be so comprehensive that it enables an interested party to determine exactly what the specific collateral is, from a reading of the security agreement or financing statement alone. It is enough if the description allows a third party, aided by information which the security agreement suggests, to identify the property. D. Lee, 'Perfection and Priorities Under the Uniform Commercial Code,' 17 Wyo.L.J. 5-6 (1962). 50 Instructive here is the decision in In re Nickerson & Nickerson, Inc., 329 F.Supp. 93 (D.Neb.1971), affirmed, 452 F.2d 56 (8th Cir. 1971) on the issue of adequacy of description of the collateral. A security agreement in Nickerson described the collateral therein as: 51 All gifts, novelties, souvenirs, and other merchandise inventory held for resale including but not limited to the following: See attached schedules for a list of property covered by this Security Agreement. 52 The financing statement filed in connection with the security agreement described the collateral in different terms: 53 . . . gifts, novelties, souvenirs, and other merchandise inventory held for resale and situated in debtor's stores located in (each particular) state. 54 The appellate court held that the description of the collateral in the security agreement was adequate: 55 As we have noted, the evidence establishes that the parties, by attaching the financing statements to the security agreement, incorporated the clarifying language of the financing statement into the security agreement, and clearly created a lien in Lugene's (the secured party's) favor upon the inventory in all of Nickerson's (the debtor's) stores. 452 F.2d 57. 56 'A similar conclusion was reached in In re Center Auto Parts, supra, at 399-400, wherein the court upheld the adequacy of the description of the collateral in a security agreement through reference to a financing statement by incorporation and the resulting suggestion of inquiry or the means of identification. 57 ' The trustee properly cites Mitchell v. Shepherd Mall State Bank,324 F.Supp. 1029, 1032 (W.D.Okl.1971), affirmed, 458 F.2d 700 (10th Cir. 1972) for the proposition that the description of collateral contained in a financing statement may have the effect of restricting the security interest created in a security agreement but cannot enlarge it. In the instant case a reference to the more specific description contained in the financing statement does operate to restrict, rather than to enlarge, the security interest between the parties. 58 'A case relied upon by the trustee, Rusch Factors, Inc. v. Passport Fashion Ltd., 1 U.C.C. 507 (N.Y.Sup.Ct.1971), may be readily distinguished. There the parties executed a security agreement (trust receipt) whereby the trustee acknowledged receipt of: 59 the documents listed on the obverse hereof representing the goods therein specified (which, together with all improvements or additions to or accessories to or products of such goods, are all hereinafter called 'collateral') and . . . the existence of . . . a security interest in favor of (itoh) in the 'collateral.' Id. at 507-508. 60 The parties stipulated as to the nature of the subject documents, but in fact no such documents had been listed or attached to the security agreement. The court concluded that because of the absence of the documents, a reasonable inquirer, upon reviewing the security agreement with or without the financing statement, would not have discovered sufficient information to provide an adequate description of the collateral. Id. at 510. 61 'Rusch is pertinent here because it approves the policy of looking beyond the security agreement to the financing statement in order to ascertain the description of the collateral, but it is distinguishable on its holding because there the court found an absence of documentation. Here, however, the invoices were available but were not claimed to be physically attached to the security agreement; only if no invoices existed or could be found would the instant case be analogous to Rusch. 62 'This last conclusion is bolstered by J. K. Gill Company v. Fireside Realty, Inc., 262 Or. 486, 499 P.2d 813 (1972), a case similar to Rusch which cited and relied upon Rusch as authority for a similar conclusion. A security agreement executed therein described the collateral as 'furniture as per attached listing.' No listing was in fact attached. The financing statement made the same description of the collateral; again no listing was attached. The court noted, however, that had the subject invoices which evidenced the furniture been attached to the security agreement, the description of the collateral would have been adequate, thus supporting the theory of description through incorporation by reference. 63 ' It is manifest that the reference to the invoices in the subject promissory note, coupled with the existence of a financing statement containing a more specific description, satisfies the requirements of Cal.Com.C. 9203(1)(b) and 9110.