Professor Margit Livingston on Bankruptcy and Lapse of Perfection under U.C.C. Article 9

Professor Margit Livingston on Bankruptcy and Lapse of Perfection under U.C.C. Article 9

 It is incumbent upon secured parties to file continuation statements within the six-month period before the expiration of their financing statements to ensure continued perfection. In a recent bankruptcy case, a secured creditor narrowly averted disaster when it let its financing statement lapse after the debtor had filed a petition in bankruptcy.

Excerpt:

The most important objective for Article 9 secured parties is to maintain perfection of their security interests at all times. Perfection ensures priority over other claimants and survival of the security interest in bankruptcy. See U.C.C. §§ 9-317 (Official Text 2013) (giving perfected security interests priority over lien creditors and certain buyers); 9-322 (a) (according senior perfected secured parties priority over later secured parties). See also 11 U.S.C. § 544 (a) (2013) (allowing the trustee in bankruptcy to set aside unperfected security interests). Secured parties most commonly perfect their security interests by filing a financing statement in the appropriate public office. U.C. C. § 9-310 (a). But, unfortunately for secured parties, financing statements do not last forever: they expire after five years resulting in lapse of perfection. U.C.C. § 9-515 (a). Thus, it is incumbent upon secured parties to file continuation statements within the six-month period before the expiration of their financing statements to ensure continued perfection. U.C.C. § 9-515 (d). In a recent bankruptcy case, a secured creditor narrowly averted disaster when it let its financing statement lapse after the debtor had filed a petition in bankruptcy. Highland Construction Management Services v. Wells Fargo, N.A. (In re Highland Construction Management Services), 497 B.R. 829 (Bankr. E.D. Va. 2013) ("Highland") [an enhanced version of this opinion is available to lexis.com subscribers].

In Highland, the creditor Guyant had lent the debtor Highland over one million dollars beginning on December 22, 2005 secured by the debtor's interest in two limited liability companies. 497 B.R. at 831. Guyant filed a financing statement on October 11, 2006. Highland filed for Chapter 11 bankruptcy reorganization on February 28, 2011. After Guyant failed to file a continuation statement, its financing statement lapsed on October 10, 2011. The debtor Highland, operating as the debtor-in-possession (DIP) under Chapter 11, sought to nullify Guyant's security interest as unperfected and thus avoidable under the strong arm clause of the federal Bankruptcy Code. 497 B.R. at 831-32.

Noting the split among the bankruptcy courts regarding this issue, the court in Highland began by observing that, initially, state law governs the status of the secured party's security interest versus the DIP as a lien creditor under the Bankruptcy Code. 497 B.R. at 833-34. Like the trustee in bankruptcy, the DIP has lien creditor status with respect to all of the debtor's property on the date of the filing of the bankruptcy petition. 11 U.S.C. §§ 544 (a), 1107 (a). Because lien creditors have priority over unperfected secured parties under U.C.C. Article 9, the DIP has the power to avoid unperfected security interests. U.C.C. § 9-317 (a)(2)(A). Thus the court proceeded to examine whether Guyant's security interest had lost its perfected status and, if so, as to whom. Highland, 497 B.R. at 834-38.

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