mary judgment seeking to dismiss 1st Source’s complaint. The
lower court granted summary judgment in favor of defendants,
holding that, under Tennessee law, 1st Source did not have a
perfected security interest in the debtors’ accounts receivable
because 1st Source’s financing statements were insufficient to
put the defendants on notice that 1st Source’s security interest
extended to accounts receivable. In particular, the term “proceeds,” as used in 1st Source’s financing statements, could not
be construed to include the debtors’ accounts receivable.
identified the only items that were subject to the security
interest,” which did not include the debtors’ “accounts” or its
“accounts receivable.” The defendants were not put on notice
that 1st Source was claiming a security interest in the debtors’
accounts receivable, as the term was not referenced in the
financing statements. Consequently, the defendants’ security
interest in the debtors’ accounts receivable was superior to
that of 1st Source by virtue of the defendants’ UCC financing
statement identifying accounts as collateral.
The Sixth Circuit’s Holding and Analysis
The Sixth Circuit also rejected 1st Source’s argument that the
phrase “all proceeds thereof ” included in the financing statements was sufficient to put third parties on notice that 1st
Source had a properly perfected security interest in the debtors’ accounts receivable. Although the court recognized the
very broad definition of “proceeds” included in the Tennessee
UCC1, 1st Source’s interpretation of the term “proceeds”
would render meaningless the term “accounts” (which is separately defined in § 47-9-102(a)(2) of the Tennessee UCC).
The court was hesitant to expand the definition of the general
term “proceeds” in a manner that would subsume the more
specific term “accounts.”
The Sixth Circuit upheld the lower court’s decision. The court
emphasized the importance of notice of a creditor’s security
interest in its collateral that its UCC financing statement is
supposed to provide.
While minor mistakes in a UCC
financing statement are excusable,
a financing statement must be
“sufficiently accurate such that third
parties are put on notice.”
The priority of 1st Source’s and the defendants’ security interests in the debtors’ accounts is governed by Chapter 9 of Tennessee’s Commercial Code. Section 47-9-203 of the Tennessee
UCC makes clear that 1st Source’s security interest attached to
the debtors’ “accounts” when the parties had entered into the
security agreements. However, the issue was not whether 1st
Source had a valid security interest in the debtors’ accounts,
but, instead, whether 1st Source had a properly perfected security interest in the debtors’ accounts that had priority over the
defendants’ later perfected security interest in the accounts.
According to § 47-9-502(a)(3) of the Tennessee UCC, 1st
Source was required to file a UCC financing statement that
properly described the collateral (which 1st Source asserted
included the Debtors’ accounts) as a condition to properly
perfecting its security interest in the debtors’ accounts.
The Sixth Circuit recognized that the filing of a UCC financing statement is required to notify third parties “that a person
may have a security interest in the collateral indicated” in the
financing statement. While minor mistakes in a UCC financing statement are excusable, a financing statement must be
“sufficiently accurate such that third parties are put on notice.”
In addition, “only collateral that is adequately described in the
financing statement will be perfected—even where the security
agreement confers a security interest in other collateral”
(emphasis added). In other words, if the collateral description
contained in a publicly filed UCC financing statement is narrower than the collateral description contained in a security
agreement, a subsequent secured creditor and/or bankruptcy
trustee is only bound by the narrower (publicly ascertainable)
collateral description included in a UCC financing statement.
The Sixth Circuit applied these principles observing that the
“limiting language in 1st Source’s financing statements
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The Sixth Circuit also focused on how the Tennessee UCC’s
drafters sought to limit the definition of the term “proceeds”
by relying on the Tennessee UCC’s commentary that the term
“proceeds” does not include “income generated from the
debtor’s own use and possession of goods,” where there was
“no disposition of the goods by the security lease.” Further,
relying on the lower court’s decision2 and other precedent, the
Sixth Circuit held that in order for rights to “arise out of collateral,” those rights “must have been obtained as a result of
some loss or disposition of the party’s interest in that collateral, not simply by its use” as “revenues earned through the
use of collateral are not