Secured Transactions

Lesson 11: Description of Collateral

In the realm of secured transactions, the description of collateral is a crucial aspect that must be clearly defined to ensure the security interest is enforceable. This lesson will cover the fundamentals of describing collateral effectively.

Note: Properly describing collateral is essential for the attachment and perfection of a security interest.

What is Collateral?

Collateral is property pledged by a borrower to secure a loan or other credit. The borrower risks losing the property if they fail to meet the repayment terms. Collateral can be classified into two main types:

Tangible Collateral: Physical assets such as inventory, equipment, or real estate.
Intangible Collateral: Non-physical assets such as accounts receivable, intellectual property, or chattel paper.

Legal Requirements for Describing Collateral

The description of collateral must meet certain legal requirements to be considered valid under UCC Article 9. Specifically, the description must:

Reasonably identify the collateral.
Be specific enough to distinguish it from other property.

Types of Collateral Descriptions

Descriptions can vary based on the type of collateral and the specificity required. The main types include:

Specific Description: Directly identifies a particular asset. For example, “Office Building located at 123 Main Street.”
Category Description: Identifies the collateral by type. For example, “All inventory of the debtor.”
Generic Description: Broadly identifies assets without specificity. For example, “All assets of the debtor.” Note that generic descriptions may be less favored in some jurisdictions.

Mermaid Diagram: Collateral Description Process

graph TD A["Review Security Agreement"] B["Identify Collateral"] C["Choose Description Type"] D["Ensure Legal Compliance"] E["Include in Filing Statement"] A --> B B --> C C --> D D --> E

Examples of Effective Collateral Descriptions

Here are some examples of collateral descriptions that meet legal standards:

All equipment located at 456 Industrial Park Road, including but not limited to forklifts, conveyor belts, and packaging machines.

All accounts receivable arising from the sale of goods or services.

All personal property of the debtor, whether now owned or hereafter acquired.

Common Pitfalls in Describing Collateral

To avoid issues, steer clear of these common pitfalls:

Overly vague descriptions that fail to distinguish the collateral.
Inconsistent terminology between the security agreement and the financing statement.
Failing to update the description when the collateral changes.

Mermaid Diagram: Collateral Compliance Check

graph LR A["Draft Description"] B["Review Legal Requirements"] C["Match with Security Agreement"] D["Ensure Clarity and Specificity"] E["Final Review and Approval"] A --> B B --> C C --> D D --> E