In re S. Ill. Rail Car Co. - 301 B.R. 305 (Bankr. S.D. Ill. 2002)

Rule:

A description of the property for purposes of attachment of a security interest is adequate if it reasonably identifies the collateral. 810 Ill. Comp. Stat. 5/9-203(b)(1-3), N.Y. U.C.C. § 9-203(b)(1-3). Collateral is reasonably identified as long as the identity of the collateral is objectively determinable. 810 Ill. Comp. Stat., 5/9-108(b)(6), N.Y. U.C.C. § 9-108(b)(6). Property is reasonably identified in a security agreement if a third party could determine what items of the debtor's collateral are subject to the creditor's security interest.

Facts:

Wells Fargo loaned Southern Illinois Rail Car Co. the funds to finance its acquisition of railroad cars. However, the latter had to eventually file for bankruptcy. Wells Fargo moved to lift the automatic stay and for adequate protection of its security interest in railroad cars pursuant to 11 U.S.C.S. § 362(d) and the debtor filed objections.  

Issue:

Does Wells Fargo have a security interest in certain railcars (the “Equipment”) and is thus entitled to relief from the automatic stay on the collateral?

Answer:

No.

Conclusion:

Wells Fargo's security agreements fail to include an adequate description of its Equipment collateral. Loan # 3711 purports to secure payment and performance with a lien in favor of the creditor on "Equipment as more fully described on Schedule A." However, no Schedule A is attached to the Loan and Security Agreement. This description is inadequate because it fails to identify which of the Debtor's thousands of railcars would be subject to Wells Fargo's lien such that any execution could occur. As a result, under case law interpreting the description requirement of the UCC, Wells Fargo did not obtain any enforceable security interest. Neither the Rental Rider, the July Rider, the Assignment Agreement, nor the Substitution Agreement cure the defect in Loan # 3711's description of the Equipment. The Rental Rider permits SIRC to rent equipment and assigns the proceeds from the rental of "Equipment described in the Agreement and any other documents annexed hereto." The Rental Rider defines "the Agreement" as Loan # 3711. However, as stated above, Loan # 3711 does not describe any equipment. Moreover, no listing of equipment is attached to the Rental Rider. This omission clearly does not cure Loan # 3711's defective description of the collateral. A reading of the July Rider, Assignment Agreement, and the Amendment of Loan and Security Agreement to Partially Substitute Equipment executed between the parties would also show a lack of adequate description of the Equipment.

Thus, Wells Fargo failed to include an adequate description of the Equipment in its security agreement/s because of Well Fargo's failure to include descriptions of the Equipment in Loan # 3711, and the ambiguities contained in the documents amending Loan # 3711. As a result, Wells Fargo could not gain a security interest in the Equipment, and, thus, is not entitled to relief from the automatic stay on that collateral. Only Loan # 3711, the Rental Rider, the July Rider, the Assignment Agreement, and the Substitution Agreement can be reviewed to determine the scope of Wells Fargo's collateral. The collateral's description cannot be construed based upon reference to the memoranda filed by the parties with the Surface Transportation Board ("STB"), the body with which secured creditors file memoranda to perfect liens regarding railcar and related collateral, for the purpose of perfecting Wells Fargo's purported security interest in the Collateral, by reference to later documents not prepared in conjunction with Loan # 3711, or by reference to any other documents outside of the security agreements. Law interpreting the UCC clearly holds that parol evidence in the form of an additional loan document cannot be used to broaden the reach or cure defects in the collateral description in an otherwise clear security agreement. As a result, Loan # 3711, the Rental Rider, the July Rider, and the Assignment Agreement actually limit the scope of any purported security interest in favor of Wells Fargo to collateral described in those documents. It simply is not possible to identify the Equipment purportedly subject to a security interest in favor of Wells Fargo by reviewing those documents, because of the omission of any schedule of Equipment from Loan # 3711, the ambiguities created by the documents that purport to modify and amend Loan # 3711, and the inadmissibility of parol evidence to prove otherwise. Therefore, because Loan # 3711 does not contain a description of the Equipment sufficient to permit a third party reasonably to identify the Equipment, there is no authenticated security agreement sufficient for a security interest to have attached to the Equipment.