in the UCC financing statement. As 1st Source Bank learned
from the Sixth Circuit’s decision, an inaccurate description of
the collateral in 1st Source’s UCC financing statements was
detrimental to its ability to recover on its security interest in
all the collateral identified in the security agreement.
The Facts of the Sixth Circuit Case
In 2004, 1st Source sold or leased certain tractors and trailers
to two trucking companies, K&K Trucking and J.E.A. Leasing
(the debtors). The parties’ security agreements granted 1st
Source a security interest in the debtors’ “tractors and/or trailers, accounts and in the proceeds from the agreed upon collateral” (emphasis added). On the other hand, the UCC
financing statements, properly filed pursuant to Tennessee
state law, contained a narrower description of 1st Source’s collateral, identifying the collateral as tractors and/or trailers
“together with all present and future attachments, accessories,
replacement parts, repairs, additions and exchanges thereto
and therefore, documents and certificates of title, ownership
or origin, with respect to the equipment and all proceeds
thereof, including rental and/or lease receipts” (emphasis
added). Significantly, 1st Source’s financing statements, unlike
the security agreements, did not include “accounts,” “accounts
receivable,” or any other similar descriptive terms.
Thereafter, Wilson Bank & Trust, Pinnacle Bank, and TransCapital Leasing, Inc. (the defendants) lent money to the
debtors. The debtors granted the defendants a security interest
in the debtors’ “accounts receivable now outstanding or hereafter arising.” This security interest was reflected in a security
agreement that the debtors had executed. In addition, the
defendants properly filed their UCC financing statements
that, unlike 1st Source’s UCC financing statements, specifically and correctly described the collateral as “all accounts
receivable now outstanding or hereafter arising.”
In particular, the term “proceeds,”
as used in 1st Source’s financing
statements, could not be construed to
include the debtors’ accounts receivable.
The debtors defaulted on their loans in late 2009. 1st Source
repossessed its collateral consisting of the debtors’ tractors and
trailers. The defendants collected the debtors’ accounts receivable in which they claimed a first priority security interest.
1st Source sued the defendants alleging that 1st Source had a
first priority security interest in the debtors’ accounts receivable because the language “and all proceeds hereof ”, included
in 1st Source’s financing statements, was sufficient to put third
parties on notice of 1st Source’s security interest in the debtors