IBA Compliance Connection

Your go to source for compliance!

We have a commercial line of credit secured by equipment, farm products, government payments, and livestock. We filed a UCC financing statement regarding our security interest in the collateral. If we execute a change in terms to increase the loan amount, will the entire new loan amount be covered by the original security agreement, or will the amount of the increase be unsecured? The language in our original security agreement and change in terms agreement is not clear.

—

by

admin

We recommend consulting with an attorney to determine whether either your original security agreement or your change in terms agreement extend your original security interest to the new loan amount. The Uniform Commercial Code (UCC) expressly permits security agreements to secure future advances, and Illinois courts generally have upheld “cross-collateralization” clauses in security agreements to secure future debts, so long as the clause is “clear and unambiguous.” However, interpreting your agreements to determine if either clearly and unambiguously secures the new loan amount constitutes legal advice, which we cannot provide.

For resources related to our guidance, please see:

  • Uniform Commercial Code, 810 ILCS 5/9-204(c) (“A security agreement may provide that collateral secures, or that accounts, chattel paper, payment intangibles, or promissory notes are sold in connection with, future advances or other value, whether or not the advances or value are given pursuant to commitment.”)

  • Universal Guar. Life Ins. Co. v. Coughlin, 481 F.3d 458, 463 (7th Cir. 2007) (“Dragnet clauses are not favored in Illinois, but they are enforceable if they are clear and unambiguous.”) (Cross-collateral provisions often are referred to as a “dragnet clause” or “anaconda clause.”)