## Facts

- Value-Added Communications, Inc. (VAC) operated inmate telephone systems at five Minnesota state correctional facilities under contracts with the State of Minnesota (the “Site Leases”).
- On March 14, 1994, VAC entered into an Equipment Lease Agreement with CLC Equipment Company (CLC) for an inmate call processing system, including coin-operated pay telephones, used to perform the Site Leases.
- VAC and CLC also executed a security agreement in which VAC granted CLC a security interest not only in the leased equipment and related personal property, but also in VAC’s rights and profits under the Site Leases, including contract rights, rights to receipts, and related proceeds and products.
- To perfect its security interest, CLC filed UCC financing statements with the Texas Secretary of State (April 18, 1994) and the Minnesota Secretary of State (April 20, 1994).
- The financing statements described the collateral as all equipment and other personal property covered by the March 14, 1994 Equipment Lease (and related schedules), and stated that proceeds of the collateral were also covered; the filings did not refer to the Site Leases or VAC’s contract rights and revenues under those contracts.
- Minnesota prison officials collected payments from inmates for use of the phone system. About $181,000 in such collections became the focus of the dispute.
- VAC filed a voluntary Chapter 11 bankruptcy petition in 1995.
- CLC asserted a secured claim in the approximately $181,000, relying on the security agreement. The bankruptcy trustee objected, arguing that the financing statements did not perfect any lien in the Site Lease revenues.
- The bankruptcy court agreed with the trustee, finding the $181,000 represented revenues and proceeds of the Site Leases (intangible contract-based rights), not proceeds of the equipment described in the financing statements; the district court affirmed.

## Issues

1. Under Minnesota UCC Article 9, did CLC’s financing statements—describing only the equipment covered by the Equipment Lease and “proceeds of collateral,” without mentioning the Site Leases—reasonably identify and perfect a security interest in VAC’s Site Lease revenues and receipts?
2. If CLC’s interest in the Site Lease revenues was unperfected, could the bankruptcy trustee avoid CLC’s asserted lien in the approximately $181,000 collected from inmate phone use?

## Decision

- The Fifth Circuit affirmed the district court’s judgment affirming the bankruptcy court.
- The court held that CLC’s financing statements did not reasonably describe the Site Leases or revenues and receipts arising from them and therefore did not perfect a security interest in the disputed $181,000.
- The court accepted the bankruptcy court’s characterization of the funds as revenues from the Site Leases, rather than proceeds of the leased equipment as described in the UCC filings.
- Because the interest in the Site Lease revenues was unperfected, the trustee could avoid it in bankruptcy.

## Legal Principles

- A financing statement must reasonably describe the collateral so that third parties receive inquiry notice of the type of property subject to the claimed security interest.
- Collateral descriptions are construed liberally, but a filing must still indicate the relevant collateral category; a complete omission of the claimed type of collateral fails the notice function.
- A financing statement that identifies equipment (even with “proceeds of collateral”) does not, without additional language, provide notice of a claimed interest in separate contract rights, accounts, or revenue streams arising from service or government contracts.
- Perfection as against the trustee depends on the filed financing statement’s description; a broader collateral grant in the security agreement does not cure an inadequate financing statement.

## Conclusion

Although VAC granted CLC a security interest that included VAC’s rights and profits under the Minnesota Site Leases, CLC’s UCC financing statements described only the equipment covered by the Equipment Lease (and proceeds of that equipment) and never mentioned the Site Leases or related revenues; under Minnesota law, that description did not give sufficient notice of a lien in the approximately $181,000 of Site Lease revenues, leaving CLC unperfected as to those funds and subject to avoidance by the bankruptcy trustee.


CLC Equipment Co. v. Brewer (In re Value-Added Communications, Inc.), 139 F.3d 543 (1998)