Court Opinion

ID: 4437506
Source: CourtListenerOpinion
Date Created: 2019-09-12 07:00:22.763727+00
Date Added: 2024-06-11T14:46:15.927529
License: Public Domain

In the

    United States Court of Appeals
                 For the Seventh Circuit
                     ____________________
No. 18-3291
IN RE: I80 EQUIPMENT, LLC,
                                                             Debtor,

FIRST MIDWEST BANK,
                                                 Plaintiff-Appellant,

                                 v.

JEANA K. REINBOLD, not individually but solely in her capacity
as Chapter 7 Trustee of the Estate of I80 Equipment, LLC,
                                            Defendant-Appellee.
                     ____________________

       Appeal from the United States Bankruptcy Court for the
                      Central District of Illinois.
Nos. 18-08003 & 17-81749 — Thomas L. Perkins, Chief Bankruptcy Judge.
                     ____________________

    ARGUED APRIL 9, 2019 — DECIDED SEPTEMBER 11, 2019
                 ____________________

   Before KANNE, BARRETT, and BRENNAN, Circuit Judges.
   BRENNAN, Circuit Judge. This interlocutory bankruptcy ap-
peal presents a matter of first impression for our court:
whether Illinois’s version of Article 9 of the Uniform Com-
mercial Code requires a financing statement to contain within
2                                                            No. 18-3291

its four corners a specific description of secured collateral, or
if incorporating a description by reference to an unattached
security agreement suﬃciently “indicates” the collateral. The
bankruptcy court ruled that a financing statement fails to
perfect a security interest unless it “contains” a separate and
additional description of the collateral. Given the plain and
ordinary meaning of the Illinois statute, and how courts typi-
cally treat financing statements, we disagree and reverse.
                                     I
    The facts necessary to resolve this appeal are straightfor-
ward. The debtor, I80 Equipment, LLC, is a business in Illinois
that purchased and refurbished trucks for resale. I80 Equip-
ment obtained a commercial loan from First Midwest Bank.
To ensure repayment, the parties executed an agreement on
March 9, 2015, which granted First Midwest a security interest
in substantially all of I80 Equipment’s assets. These were de-
scribed in twenty-six listed categories of collateral, such as ac-
counts, cash, equipment, instruments, goods, inventory, and
all proceeds of any assets.1 To perfect its interest in I80 Equip-
ment’s assets, First Midwest timely filed a financing statement
with the Illinois Secretary of State. The financing statement
purported to cover “[a]ll Collateral described in First
Amended and Restated Security Agreement dated March 9,
2015 between Debtor and Secured Party.”
    Two years later, I80 Equipment defaulted on the loan and
filed a voluntary bankruptcy petition under Chapter 7. The
court appointed a trustee to manage the bankruptcy assets.

    1  See Complaint for Declaratory Judgment, Exh. B at 2–4, In re I80
Equipment, No. 17-81749 (Bankr. C.D. Ill. 2018), ECF No. 1 (full description
of collateral in the security agreement).
No. 18-3291                                                             3

First Midwest sued the trustee, seeking to recover $7.6 million
on the loan. It also filed a declaration that its security interest
in I80 Equipment’s assets was properly perfected and senior
to the interests of all other claimants, including the trustee.
The trustee countered that First Midwest’s security interest
was not properly perfected because its financing statement
did not independently describe the underlying collateral, but
instead incorporated the list of assets by reference to the par-
ties’ security agreement. The trustee also asserted a counter-
claim to avoid First Midwest’s lien pursuant to § 544(a) of the
Bankruptcy Code.2 Both parties moved for judgment on the
pleadings.
    The bankruptcy court agreed with the trustee and ruled
that ”[a] financing statement that fails to contain any descrip-
tion of collateral fails to give the particularized kind of notice”
required by Article 9 of the UCC. With First Midwest’s con-
sent, the trustee sold the estate’s assets for approximately $1.9
million and holds the net proceeds pending resolution of this
dispute. The parties jointly certified under 28 U.S.C.
§ 158(d)(2)(A) that an immediate appeal of the bankruptcy
court’s decision to this court would materially advance the
progress of the case, and this court granted the parties’ peti-
tion.
  On appeal, neither the validity of the loan nor the legiti-
macy of First Midwest’s security interest is in question. The

    2 Section 544(a) of the Bankruptcy Code empowers a trustee to avoid
interests in the debtor’s property that are unperfected as of the petition
date. 11 U.S.C. § 544(a); see also 4 WILLIAM L. NORTON, NORTON
BANKRUPTCY LAW & PRACTICE § 63:2 (3d ed. 2019). This is commonly re-
ferred to as the trustee’s “strong-arm power,” which a debtor in posses-
sion can exercise under § 1107(a). See NORTON, supra, at § 63:4.
4                                                             No. 18-3291

trustee maintains only that First Midwest’s lien is avoidable
because the financing statement failed to properly indicate the
secured collateral, and First Midwest disagrees.
                                     II
    We review de novo questions of statutory interpretation.
In re Robinson, 811 F.3d 267, 269 (7th Cir. 2016); United States
v. Webber, 536 F.3d 584, 593 (7th Cir. 2008). When answering a
novel question of state law, we look to “relevant state prece-
dents, analogous decisions, considered dicta, scholarly
works, and any other reliable data tending convincingly to
show how the highest court in the state would decide the is-
sue at hand.” Pisciotta v. Old Nat’l Bancorp, 499 F.3d 629, 635
(7th Cir. 2007). Here, we apply the UCC as interpreted by
Illinois courts and governed by Illinois law. See In re Blanchard,
819 F.3d 981, 984 (7th Cir. 2016); see also Helms v. Certified
Packaging Corp., 551 F.3d 675, 678 (7th Cir. 2008).
     In Illinois courts, statutory construction starts with the
statutory language itself. People v. Grant, 52 N.E.3d 308, 313
(Ill. 2016). If that language—given its plain and ordinary
meaning3—is clear and unambiguous,4 “the court must give
it eﬀect and should not look to extrinsic aids for construction.”
In re Robinson, 811 F.3d at 269; see also Home Star Bank & Fin.

    3 We assume a word carries its everyday meaning, “unless the context

counsels otherwise.” See Webber, 536 F.3d at 593; see also ANTONIN SCALIA
& BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS
69–70 (2012). Sometimes a word may require a more technical or rare un-
derstanding, but more frequently a term takes on its natural and obvious
use. See SCALIA & GARNER, supra, at 70.
    4 When interpreting the text of a statute, we start with the premise that

laws generally are clear and unambiguous. See generally SCALIA & GARNER,
supra note 3, at 29–40.
No. 18-3291                                                     5

Servs. v. Emergency Care & Health Org., 6 N.E.3d 128, 135 (Ill.
2014) (when construing a statute, “[i]t is improper for a court
to depart from the plain statutory language by reading into
the statute exceptions, limitations, or conditions that conflict”
with the expressed text); LaSalle Bank Nat’l v. Cypress Creek 1,
LP, 950 N.E.2d 1109, 1113 (Ill. 2011) (when plain language is
“clear and unambiguous, we will apply it as written”); Webber,
536 F.3d at 593 (“When the plain wording of the statute is
clear, that is the end of the matter.”).
    We can give statutes their plain and ordinary meaning by
applying contemporaneous dictionary definitions, Landis v.
Marc Realty, LLC, 919 N.E.2d 300, 304 (Ill. 2009), and by read-
ing the statutes in their entirety. Home Star Bank, 6 N.E.3d at
135 (statutory “[w]ords and phrases should not be viewed in
isolation, but should be considered in light of other relevant
provisions of the statute”). As the Illinois Supreme Court has
explained: “A court must view the statute as a whole, constru-
ing words and phrases in light of other relevant statutory pro-
visions and not in isolation. Each word, clause, and sentence
of a statute must be given a reasonable meaning, if possible,
and should not be rendered superfluous.” People v. Perez, 18
N.E.3d 41, 44 (Ill. 2014) (citation omitted); see also In re
Melching, 589 B.R. 846, 848–52 (Bankr. S.D. Ill. 2018) (court
considered “the entire statutory scheme” when interpreting
Illinois exemption statute). We apply these principles of inter-
pretation to the statutes in this case.
                                 A
   At issue here is the text of Article 9 of the UCC, 810 ILL.
COMP. STAT. 5/9-101, et seq. (2001). In relevant part, § 9-502 re-
quires that a financing statement: (1) provide the name of the
6                                                        No. 18-3291

debtor; (2) provide the name of the secured party or its repre-
sentative; and (3) indicate the collateral covered by the financing
statement (emphasis added).
    According to § 9-504, “[a] financing statement suﬃciently
indicates the collateral that it covers if the financing statement
provides: (1) a description of the collateral pursuant to Section
9-108; or (2) an indication that the financing statement covers
all assets or all personal property.” Section 9-108 further ex-
plains that a description of the secured property does not
need to be specific but must “reasonably identif[y]” what is
described. Section 9-108 gives six distinct methods by which
a description of collateral reasonably identifies the secured
property: (1) specific listing; (2) category; (3) type; (4) quan-
tity; (5) mathematical computation or allocation; or (6) “any
other method, if the identity of the collateral is objectively determi-
nable” (emphasis added).
    A financing statement that substantially satisfies these
requirements is eﬀective, even if it has minor errors or omis-
sions that are not “seriously misleading.” 810 ILL. COMP. STAT.
5/9-506(a). But if a financing statement fails these basic
requirements, the lender’s interests are subject to avoidance
under § 544(a) of the Bankruptcy Code.
    We must decide whether the statutory language of Article
9 requires that the four corners of the financing statement in-
clude a specific description of the secured collateral (either by
type, category, quantity, etc.), or if incorporating such a
description by reference to a security agreement suﬃciently
“indicates” the collateral.
    The text of § 9-108 provides six ways to indicate collateral
in a financing statement—including by “any other method”—
No. 18-3291                                                                  7

so long as the identity of the collateral is “objectively determi-
nable.” This expands the pre-2001 Article 9 requirements un-
der which a financing statement must: (1) give the name of the
debtor or the secured party; (2) be signed by the debtor; (3)
include the secured party’s address; and (4) contain a statement
indicating the types, or describing the items, of collateral. See 810
ILL. COMP. STAT. 5/9-402(1) (2001) (emphasis added).
    In 2001, the Illinois version of the UCC was revised to no
longer require that the financing statement “contain” a de-
scription of the collateral; after revision the statement must
only “indicate” collateral. Under the revisions, “[a]n indica-
tion may satisfy the requirements of Section 9-502(a), even if
it would not have satisfied the requirements of former Section
9-402(1).” 810 ILL. COMP. STAT. Ann. 5/9-504 cmt. 2. This pared-
down approach reflects the notice function of Article 9:
        This section adopts the system of “notice filing.”
        What is required to be filed is not, as under pre-
        UCC chattel mortgage and conditional sales
        acts, the security agreement itself, but only a
        simple record providing a limited amount of in-
        formation (financing statement). … The notice
        itself indicates merely that a person may have a
        security interest in the collateral indicated. Fur-
        ther inquiry from the parties concerned will be
        necessary to disclose the complete state of af-
        fairs.
810 ILL. COMP. STAT. Ann. 5/9-502 cmt. 2 (emphasis added).5
With this context, the ordinary meaning of “indicate” is to

    5  This comment sheds light on the scope of the statute: to provide no-
tice to third parties of any security interest that exists, or may exist in the
8                                                              No. 18-3291

serve as a “signal” that “point[s] out” or “direct[s] attention
to” an underlying security interest.6 That plain reading of the
text allows a party to “indicate” collateral in a financing state-
ment by pointing or directing attention to a description of that
collateral in the parties’ security agreement.
    This interpretation reflects how we and other courts have
understood the UCC’s notice function. For example, we have
recognized that Article 9 ensures “adequate public notice” of
liens and security interests, In re Blanchard, 819 F.3d 981, 988

future, in the described collateral. The statute does not state whether a se-
curity agreement should be attached to a filed financing statement, but it
does note that the security agreement itself need not be filed, and that the
financing statement is only a simple record of the security agreement with
a limited amount of information. Under § 9-210(a)(3), the debtor may pro-
vide its lender with a list of what the debtor believes to be the collateral
securing the lender’s interest and request that the lender approve or cor-
rect it within 14 days. The lender is neither required nor precluded from
sending the underlying security agreement, as the purpose of the request
is merely to provide “information” to the debtor about his secured obliga-
tions. See 810 ILL. COMP. STAT. Ann. 5/9-210 cmt. 2.
    6  Webster’s defines indicate as: (1) “to direct attention to; point to or
point out; show”; (2) “to be or give a sign, token, or indication of; signify;
betoken”; (3) “to show the need for; call for; make necessary”; (4) “to point
to as the required treatment”; (5) “to express briefly or generally.” Indicate,
WEBSTER’S NEW WORLD COLLEGE DICTIONARY (4th ed. 2001). American
Heritage Dictionary defines the term as: (1) “[t]o show the way to or the
direction of; point out”; (2) “[t]o serve as a sign, symptom, or token of;
signify”; (3) “[t]o suggest or demonstrate the necessity, expedience, or ad-
visability of”; (4) “[t]o state or express briefly.” Indicate, THE AMERICAN
HERITAGE DICTIONARY (4th ed. 2000). And Merriam-Webster’s defines in-
dicate as: (a) “to point out or point to”; (b) “to be a sign, symptom, or index
of”; (c) “to demonstrate or suggest the necessity or advisability of”; (d) “to
state or express briefly.” Indicate, MERRIAM-WEBSTER’S COLLEGIATE
DICTIONARY (11th ed. 2003).
No. 18-3291                                                      9

(7th Cir. 2016), and that “the goal of the filing system is to
make known to the public whatever outstanding security in-
terests exist in the property of debtors.” Id. at 986 (citing In re
Hoeppner, 49 B.R. 124 (Bankr. E.D. Wis. 1985)); see also Helms v.
Certified Packaging Corp., 551 F.3d 675, 679 (7th Cir. 2008) (“The
purpose of the financing statement is to put third parties on
notice that the secured party who filed it may have a perfected
security interest in the collateral described, and that further
inquiry into the extent of the security interest is prudent.”)
(citations and quotations omitted); In re Grabowski, 277 B.R.
388, 391 (Bankr. S.D. Ill. 2002) (holding the same). This is so
Article 9 does not “create a windfall for a bankruptcy estate
or a minefield for lenders.” In re Blanchard, 819 F.3d at 988–89
(citation omitted).
    The financing statement itself is an “abbreviation of the se-
curity agreement.” Helms, 551 F.3d at 679. “It is a streamlined
paper to be filed for the purpose of giving notice to third par-
ties of the essential contents of the security agreement.” Id. (ci-
tation omitted); see also Grabowski, 277 B.R. at 391 (financing
statement not required to share same level of detail as security
agreement).
    The security agreement defines and limits the collateral,
while the financing statement puts third parties on notice that
a creditor may have an existing security interest in the prop-
erty and further inquiry may be necessary. In re Grabowski, 277
B.R. at 391. In recognizing this distinction between financing
statements and security agreements, this court has said:
       The purpose of the financing statement is to
       place would-be subsequent creditors on notice
       that a creditor has a security interest in the
       debtor’s property; it is the security agreement …
10                                                   No. 18-3291

       that defines that interest and by defining limits
       it. … The security agreement embodies the in-
       tention of the parties and is the document which
       creates the security interest. … The financing
       statement on the other hand need not particu-
       larize in detail the collateral secured under the
       security agreement because in accordance with
       the “notice filing” concept adopted under the
       [UCC] a financing statement serves to give no-
       tice that the secured party who filed may have a
       security interest in the collateral and that further
       inquiry with respect to the security agreement
       will be necessary to disclose the complete state
       of aﬀairs.
Helms, 551 F.3d at 680 (citations and quotations omitted).
“Hence less detail is required in the financing statement.” Id.
    While financing statements and security agreements both
must describe the collateral, “the degree of specificity
required of such description depends on the nature of the doc-
ument involved—whether it is a security agreement or a fi-
nancing statement … .” In re Grabowski, 277 B.R. at 390–91. The
“prudent potential creditor would [] request[] a copy of the
security agreement,” Helms, 551 F.3d at 680, and “need look
no further than the security agreement” to resolve questions
about the adequacy of the collateral description. Id. at 681. The
diﬀerent treatment of these two documents highlights the dis-
tinct function each serves under Article 9: the financing state-
ment provides notice of an underlying security interest, while
the security agreement creates and specifically defines that in-
terest.
No. 18-3291                                                      11

                                   B
     Bankruptcy courts for all three districts in Illinois have rec-
ognized this distinction and have noted that incorporation by
reference is an available method for describing collateral. The
Southern District of Illinois bankruptcy court has held that a
financing statement was suﬃcient to perfect a bank lender’s
interest “[d]espite the generality of the Bank’s description” of
collateral. In re Grabowski, 277 B.R. at 392. In Grabowski, Bank
of America filed a financing statement indicating it had a lien
on the debtor’s property consisting of “all inventory, chattel
paper, accounts, equipment, and general intangibles.” Id. at
391-92. The court rejected the subsequent creditor’s argument
that the description was “too general,” finding it still “ful-
fill[ed] the notice function of a financing statement under the
UCC,” even though the financing statement misstated the
debtor’s property address and did not otherwise specifically
identify the security interest. Id. at 392. The court noted that
“only a super-generic” description—such as “all the debtor’s
assets” or “all the debtor’s personal property” without any
limiting factor—is insuﬃcient under the reasonable identifi-
cation standard of § 9-108. Id. at 391. The court found “[t]his
exceedingly general standard for describing collateral in a fi-
nancing statement” reflects the traditional notice function a
financing statement was designed to serve. Id.
    The Central District of Illinois bankruptcy court in In re
Duesterhaus Fertilizer ruled that a financing statement with a
collateral description incorporated by reference to the previ-
ous financing statement was insuﬃcient under Article 9 be-
cause the previous statement had lapsed. 347 B.R. 646 (Bankr.
C.D. Ill. 2006). The new financing statement included “no in-
dication of collateral whatsoever,” and even the reference to
12                                                   No. 18-3291

the previous, lapsed statement did not specify that a descrip-
tion of the collateral subject to the security interest could be
found there. Id. at 650. Even so, the court embraced incorpo-
ration by reference as an available method for indicating col-
lateral, at least in new or “continuing” financing statements:
“Absent an express state law requirement that the continua-
tion statement contain a description of collateral, reference to
another document in the same public record would appear to
meet the notice requirements.” Id. at 651.
    Two years before In re Duesterhaus, the bankruptcy court
for the Northern District of Illinois suggested incorporation
by reference may satisfy the UCC’s collateral description re-
quirements for financing statements. In re Macronet Group,
Ltd., 2004 WL 2958447 (Bankr. N.D. Ill. 2004). Ultimately the
court held that the lender’s security interest failed to attach to
the debtor’s collateral. Id. at *5. But that decision was based on
the absence of an authenticated underlying security
agreement from which the identity of the collateral could be
objectively determined, not the lender’s choice to indicate the
collateral by reference to the agreement. Id. (“[I]t may be true
that incorporating a collateral description in a separate docu-
ment, such as a form financing statement, by reference into a
security agreement could qualify as ‘any other method’ of
identification pursuant to UCC section 9-108 … .”).
    The approach of these courts to financing statements sup-
ports the conclusion that incorporation by reference is per-
missible in Illinois as “any other method” under § 9-108, so
long as the identity of the collateral is objectively determina-
ble. That requirement is met here by the security agreement’s
detailed list of the collateral. The financing statement covers:
No. 18-3291                                                    13

“All Collateral described in First Amended and Restated Se-
curity Agreement dated March 9, 2015 between Debtor and
Secured Party.” There is no dispute that the financing state-
ment names (as terms defined earlier in the document) both
the debtor (I80 Equipment) and the secured party (First
Midwest). The statement has not lapsed and includes the date
and precise title of the underlying document. It describes the
security interest by referencing “[a]ll [c]ollateral” as described
in the underlying security agreement between the parties. For
its part, the security agreement references twenty-six inde-
pendent categories of collateral covered by the agreement, in-
cluding accounts, cash, equipment, goods, financial assets,
deposits, investments, instruments, inventory, and all
proceeds of any assets. Although a subsequent creditor is not
expected to be a “super-detective” while investigating prior
secured transactions, In re Grabowski, 277 B.R. at 392, the
financing statement in this case “notif[ied] subsequent
creditors that a lien may exist and that further inquiry [was]
necessary to disclose the complete state of aﬀairs.” Id. at 391
(quotations omitted).
                                 III
    The plain and ordinary meaning of Illinois’s revised
version of the UCC allows a financing statement to indicate
collateral by reference to the description in the underlying se-
curity agreement. This interpretation is reinforced by how
Illinois bankruptcy courts construe these statutes. For these
reasons, we hold that the trustee is not entitled to avoid First
Midwest’s lien under the Bankruptcy Code.
   We REVERSE and REMAND for further proceedings in the
bankruptcy court.