Sarah Michaels, Inc., a manufacturer of bath products and a customer of a packaging manufacturer named Certified Packaging Corporation, declared bankruptcy together with affiliated corporations unnecessary to discuss separately. The trustee in bankruptcy brought an adversary proceeding against Certified seeking to avoid transfers that Michaels had made to that company to pay for packaging. The trustee obtained a default judgment for some $2 million but in an effort to collect the judgment collided with La-Salle Bank, which, as the assignee of a loan to Certified, claimed a security interest in Certified’s assets. LaSalle in turn assigned its claim to CPC Acquisition, which is the successor to Certified and which has intervened in the bankruptcy proceeding to assert the priority of its lien over the trustee’s judgment lien. For the sake of simplicity we’ll pretend that La-Salle was and remains the lender to Certified and thus the adversary of the trustee in bankruptcy.
In December 2000, after LaSalle had made the loan, a fire broke out at one of Certified’s plants and damaged equipment in it. The plant was shut down for several weeks, and the business losses resulting from the shutdown greatly exceeded the damage to Certified’s property. Certified brought two lawsuits (both in Illinois state courts) in the wake of the fire. One was against its insurance broker, Rothschild, for negligence in having failed to list the plant on a business-losses insurance policy that Rothschild had procured for Certified. That suit was settled for $88,000 after deduction of attorneys’ fees. The trustee contends that the settlement money should belong to the bankrupt estate, LaSalle that the money should belong to it as proceeds of the collateral damaged in the fire. The bankruptcy judge agreed with the trustee but was reversed by the district judge, and the trustee appeals.
Certified’s other suit was against Commonwealth Edison and claimed that the fire had been due to Com Ed’s negligence in maintaining one of its power lines. In that suit, which is pending, Certified seeks damages of $2,000,000 for property damage and business losses, the latter accounting for about 90 percent of the claimed *678 damages. The bankruptcy judge, seconded by the district judge, ruled that the business-losses part of Certified’s claim against Com Ed belongs to the trustee in bankruptcy, not to LaSalle. The cross-appeal challenges that ruling.
So we must decide whether the negligence claim against Rothschild for business losses, and the parallel claim against Certified, or either, or neither, are part of LaSalle’s security interest. The issues are governed by the Uniform Commercial Code, as interpreted by the Illinois courts.
The loan agreement between La-Salle and Certified gave LaSalle a security interest in the equipment damaged in the fire. If a suit against someone who steals or damages collateral eventuates in an award measured by the diminution in the value of the collateral caused by the defendant’s wrongdoing, so that the award restores the original value of the collateral, the award, like an insurance payment for damaged collateral, constitutes “proceeds” of the collateral and is therefore covered by the lender’s security interest. UCC §§ 9 — 102(a)(64)(D) (proceeds include, “to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral”), (E);
McGonigle v. Combs,
If Certified’s suit against Com Ed succeeds, it will be as if Com Ed had converted some $200,000 of the collateral for LaSalle’s loan and was therefore obliged to repay it; and “an action for conversion is a proper remedy for a secured party to bring against a third party when its collateral has been disposed of by the debtor.”
Taylor Rental Corp. v. J.I. Case Co.,
But the claim against Rothschild
was
for failure to obtain business-loss insurance, and we do not see how compensation for that failure can be considered proceeds of collateral. The usual proceeds of collateral are the money obtained from selling it. By a modest extension, as we have just seen, they are money obtained in compensation for a diminution in the value of the collateral. But replacing a business loss is not restoring the value of damaged collateral. There is no necessary relation between the value of collateral and a business loss that results from its being destroyed or damaged — as this case illustrates: the business losses exceeded the
*679
impairment of the value of the collateral ninefold. The claim of a secured creditor to the proceeds of collateral cannot exceed the value of the collateral. UCC § 9-102(a)(64)(D), (E);
In re Tower Air, Inc.,
The district judge was therefore wrong to treat the $88,000 settlement of Certified’s claim against Rothschild for failing to procure business-loss coverage as proceeds of damaged collateral. But La-Salle has another ground for claiming a security interest in Certified’s business-loss claim against Rothschild, as well as against Commonwealth Edison. A provision in LaSalle’s loan agreement with Certified says that the collateral for the loan includes “Commercial Tort Claims listed on Schedule B” of the agreement. Certified’s claims against both Rothschild and Com Ed are commercial tort claims. UCC § 9-102(a)(13)(A). So if, as LaSalle contends, the loan agreement gave it a security interest in any tort claim filed by Certified, it is entitled to enforce that interest against the settlement that Certified made with Rothschild and against any judgment or settlement that Certified may obtain from Com Ed.
But Schedule B is a blank piece of paper except for its title (“SCHEDULE B: Commercial Tort Claims”). The agreement was amended after the fire yet states that Certified “has no Commercial Tort Claims pending other than those set forth on Schedule B hereto as Schedule B may be amended from time to time. [Certified] shall notify [LaSalle] promptly upon becoming aware of any Commercial Tort Claims of [Certified] which may arise, which notice shall constitute [Certified’s] authorization to amend Schedule B to add such Commercial Tort Claim.” Schedule B was never amended to add any claims.
No matter, argues LaSalle. Its UCC financing statement claimed collateral in
all
of Certified’s assets, expressly including “Commercial Tort Claims,” and anyway the purpose of providing notice of liens is to protect subsequent creditors, and there were none. “[T]he purpose of the financing statement is to put third parties on notice that the secured party who filed it may have a perfected security interest in the collateral described, and that further inquiry into the extent of the security interest is prudent.”
Magna First National Bank & Trust Co. v. Bank of Illinois,
Because the loan agreement authorized LaSalle to amend Schedule B to add any commercial tort claims that it might acquire, its failure to do so after Certified had notified LaSalle of both commercial tort claims was, LaSalle argues, an innocent mistake that harmed no one, and such mistakes, even when unilateral (that is, made by only one of the parties to the contract), are forgivable; that at least is the standard response of contract law.
Donovan v. RRL Corp.,
Well, that is not true. A prudent potential creditor would have requested a copy of the security agreement because that, and not what an employee of an existing creditor might tell the potential creditor over the phone, is the security interest that the parties to the security agreement had agreed to create. The prudent potential creditor would have read the relevant portion of the agreement, seen that Schedule B was blank, and concluded — and would have been reasonable in concluding- — -that LaSalle had no security interest in Certified’s tort claims.
Furthermore, section 9-203(b)(3)(A) of the UCC provides that a security interest is enforceable against a subsequent creditor (or, as in this case, a trustee in bankruptcy accorded the status of a hypothetical secured creditor) only if “the debtor has authenticated a security agreement
that provides a description of the collateral
” (emphasis added). The purpose of the financing statement is to place would-be subsequent creditors on notice that a creditor has a security interest in the debtor’s property; it is the security agreement, which in this case is the part of the loan contract that contains the grant to the lender of a security interest, that defines that interest and by defining limits it. UCC § 9-102(a)(73);
Signal Capital Corp. v. Lake Shore National Bank,
“The security agreement embodies the intention of the parties and is the document which creates the security interest. ‘It is the primary source to which a creditor’s or potential creditor’s inquiry is directed and must be reasonably specific.’
In re Laminated Veneers Co.,
For many kinds of collateral, the description in the security agreement need only name the type of collateral. See UCC § 9 — 108(b)(3); Reiley, supra, §§ 10:14, 10:18, pp. 10-17, 10-20 to 10-21, such as accounts, equipment, and negotiable instruments, UCC §§ 9-102(a)(2), (33), (47). But that is not true of commercial tort claims. Id., § 9-108(e). Had the security agreement between LaSalle and Certified been amended to define the collateral as including “all commercial tort claims relating to the fire at Certified’s facility,” that would have sufficed, § 9-108, for all that the section requires is that the description of a commercial tort claim “contain[ ] a descriptive component beyond the ‘type’ alone,” id., comment 5, such as: “All of debtor’s rights to damages or compensation, including insurance proceeds, arising out of destruction of business property located at_[and/or which claims are currently pending as Cause No. 123 in the Superior Court of_County, State of_] or Debtor’s claim for [identify tort] against [identify defendant].” Reiley, supra, § 10.18, pp. 10-25 to 10-26. But nowhere in the loan agreement is there even an allusion to Certified’s two tort claims. The agreement does not mention them and while it purports to grant La-Salle a security interest in after-acquired property, such a grant is ineffective when the property is a commercial tort claim. UCC § 9-204 and comment 4. That is a corollary of the requirement that such claims be described with greater than usual specificity; a claim that has not yet come into being when the security agreement is drafted cannot be described at all.
LaSalle’s reliance on
In re Vic Supply Co., supra,
is unavailing, despite the superficial resemblance of that case to this one. By what was obviously just an oversight the lender had failed to sign the loan agreement, though he continued to extend credit to the borrower in accordance with the agreement’s terms. A subsequent lender wanted to knock out the previous lender’s security interest on the basis of the defect. We ruled that he could not do that. The agreement adequately described the collateral and was signed by the borrower. It was thus in full compliance with what section 9-203(b)(3)(A) now requires for a security interest to trump a subsequent creditor,
In re Vic Supply Co., supra,
LaSalle invokes the “composite document” line of cases, see, e.g.,
Gibson County Farm Bureau Cooperative Ass’n v. Greer,
The district court’s decision is affirmed insofar as the claim against Com Ed that seeks damages in excess of the damaged collateral is concerned, but is reversed with respect to the $88,000 claim against Rothschild. In short, the decision of the bankruptcy court, denying all business-loss relief to LaSalle’s successor, CPC Acquisition, is reinstated.