Helms v. Certified Packaging Corp.
551 F.3d 675 (2008)
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Rule of Law:
Under the Uniform Commercial Code (UCC), a security interest in a commercial tort claim is only enforceable if the security agreement contains a specific description of that claim. A generic reference to a category of collateral or to a blank, unamended schedule is insufficient to satisfy the UCC's heightened description requirement for this type of collateral.
Facts:
- LaSalle Bank extended a loan to Certified Packaging Corporation, taking a security interest in Certified's assets, including its equipment.
- In December 2000, a fire at one of Certified's plants damaged equipment that served as collateral for LaSalle's loan.
- The fire also caused significant business interruption losses, which were substantially greater than the value of the physical property damage.
- Certified initiated a lawsuit against its insurance broker, Rothschild, for negligence in failing to procure business-loss insurance.
- Certified also sued Commonwealth Edison (Com Ed), alleging its negligence caused the fire and seeking damages for both property damage and business losses.
- The lawsuit against Rothschild was eventually settled for $88,000.
- The security agreement between LaSalle and Certified stated that collateral included 'Commercial Tort Claims listed on Schedule B'.
- Schedule B was attached to the agreement but was left entirely blank and was never amended to list the specific claims against Rothschild or Com Ed.
Procedural Posture:
- The trustee for the bankrupt Sarah Michaels, Inc. obtained a default judgment against Certified Packaging Corporation in an adversary proceeding.
- CPC Acquisition Corp. (as successor to Certified and assignee of LaSalle Bank's security interest) intervened in the bankruptcy proceeding to assert the priority of its lien over the trustee's judgment.
- The bankruptcy court ruled that both the Rothschild settlement funds and the business-loss portion of the Com Ed claim belonged to the bankruptcy trustee, not the secured creditor.
- The secured creditor appealed to the U.S. District Court.
- The district judge reversed the bankruptcy court as to the Rothschild settlement (awarding it to the creditor) but affirmed as to the Com Ed business-loss claim (awarding it to the trustee).
- The trustee appealed the district court's ruling on the Rothschild settlement, and the secured creditor cross-appealed the ruling on the Com Ed claim, bringing the case before the U.S. Court of Appeals for the Seventh Circuit.
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Issue:
Under the Uniform Commercial Code, does a security agreement that purports to cover 'Commercial Tort Claims listed on Schedule B' create an enforceable security interest in such claims when Schedule B is left blank and never amended to describe the specific claims?
Opinions:
Majority - Posner, Circuit Judge
No. A security agreement referencing a blank, unamended schedule for commercial tort claims does not create an enforceable security interest in those claims. First, compensation for business losses does not constitute 'proceeds' of damaged collateral under UCC § 9-102(a)(64). Proceeds are limited to the value of the collateral itself, such as compensation for diminution in its value, whereas business losses bear no necessary relation to the collateral's value. Second, and more importantly, the UCC imposes a heightened specificity requirement for descriptions of commercial tort claims in a security agreement under § 9-108(e). A generic categorization is insufficient; the security agreement itself, not the financing statement, must describe the claim with enough particularity to identify it. Because the security agreement here failed to describe the claims—by leaving Schedule B blank—it did not create an enforceable security interest in them against a third party like the bankruptcy trustee. After-acquired property clauses are also ineffective for commercial tort claims under § 9-204, reinforcing the need for specific identification as claims arise.
Analysis:
This decision strictly construes the UCC's specific description requirement for commercial tort claims, emphasizing that creditors cannot rely on broad language in financing statements to cure defects in the security agreement. It serves as a significant warning to lenders about the necessity of administrative diligence in amending security agreements to specifically identify commercial tort claims as they arise. The ruling solidifies the principle that the security agreement is the definitive document defining the scope of collateral, protecting subsequent creditors and bankruptcy trustees from unlisted or vaguely described security interests. It also clarifies the distinction between proceeds of collateral and unrelated economic damages, limiting a secured creditor's reach to value directly related to the collateral itself.
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