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Any number of things could be used to describe collateral and satisfy O.C.G.A. § 11-9-108(a). A physical description of the collateral, including or excluding a serial number, could be used so long as it "reasonably identifies what is described." O.C.G.A. § 11-9-108(a). The description merely needs to raise a red flag to a third party indicating that more investigation may be necessary to determine whether or not an item is subject to a security agreement. A party does not lose its secured status just because the description includes an inaccurate serial number. However, if the serial number is inaccurate, there must be additional information that provides a "key" to the collateral's identity.
Pickle Logging, Inc. (“Debtor”) refinanced eight pieces of equipment with Deere Credit, Inc. (“Creditor”). The debtor filed for Chapter 11 bankruptcy protection. Because there were multiple security interests in the eight pieces of equipment, Debtor filed motions to determine the secured status of a number of different creditors. After the original hearing, the court held that the creditor did not have a perfected security interest in one piece of equipment (the equipment) in issue because of mislabeling. Therefore, the creditor was an unsecured creditor with respect to the equipment. The creditor filed a motion seeking to obtain adequate protection and secured status regarding the equipment. The creditor contended that the mislabeling was not seriously misleading because it was off by only one digit. On the other hand, the debtor claimed that the equipment was not listed in the security agreement or the financing statement, and the creditor did not have a security interest in the equipment. The court denied the creditor’s motion for adequate protection. The creditor filed a motion for reconsideration of the court’s order.
Did the district court err in denying the creditor’s motion for adequate protection?
The court declined to change its earlier order, noting that pursuant to O.C.G.A. § 11-9-203(b)(3)(A), a security interest in collateral was not enforceable against the debtor or third parties unless the debtor has signed, executed, or otherwise adopted a security agreement that contained a description of the collateral. The description of the collateral in the security agreement and the financing statement, if required, must comport with O.C.G.A. § 11-9-108(a). The description of collateral was sufficient if it reasonably identified what was described. A physical description of the collateral, including or excluding a serial number, could be used so long as it reasonably identified what was described. The description merely needed to raise a red flag to a third party indicating that more investigation may be necessary to determine whether or not an item was subject to a security agreement. In this case, the description in the security agreement and the financing statement were identical. Both documents listed the equipment with the same serial number. There was nothing obviously wrong with the model number or the serial number. There was nothing in either the financing statement or the security agreement that raised a red flag to a third party. Therefore, the court’s order will not be changed. The equipment was misdescribed in both the security agreement and the financing statement. The rights of the debtor, as a hypothetical lien creditor, were superior to the rights of the creditor.