Secured Creditors Who Do Not File Continuation Statements Will Lose Their Secured Status, Despite a Bankruptcy

UCC-1 financing statements are effective for five years.  Before the five years has run, the creditor must renew the financing statement by filing what’s called a continuation statement.  This is essentially a UCC-1 with a check next to the box labeled “continuation statement.”  The only caveat is any continuation statement must be filed no sooner than six months before the five year period has expired.  Assuming a continuation statement is filed, the five year period is expanded by five years from when the original would have expired.  This can be done indefinitely.

What if the Debtor filed bankruptcy?

The automatic stay will apply as this is an act to perfect a lien. See § 362(a)(4).

Old school practitioners will turn to the Uniform Commercial Code (“UCC”) § 9-403(2) which states, in pertinent part:

“… If a security interest perfected by filing exists at the time insolvency proceedings are commenced by or against the debtor, the security interest remains perfected until termination of the insolvency proceedings and thereafter for a period of sixty days or until expiration of the five year period, whichever occurs later.”

Mystery solved.  A continuation statement is unnecessary as the creditor’s interest will be perfected until the bankruptcy is over and for at least 60 days thereafter.

The problem is the UCC was revised and the insolvency language was removed. See e.g. California Commercial Code (“CCC”) § 9515:

“(c) The effectiveness of a filed financing statement lapses on the expiration of the period of its effectiveness unless before the lapse a continuation statement is filed …. Upon lapse, a financing statement ceases to be effective…. If the security interest … becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.”

One may be tempted to conclude that creditors must seek relief from the stay to file a continuation statement.  However, this is unnecessary as Congress has added an exception to the automatic stay in § 362(b)(3):

“(3) [the automatic stay does not apply to] any act to perfect, or to maintain or continue the perfection of, an interest in property …”

In summary, a continuation statement is mandatory for a creditor to preserve its lien.  The filing of a continuation statement is not prohibited or stayed by the filing of a bankruptcy petition; consequently, it must be filed.

Author’s final words:

There are important issues that remain. For example, what about language under 9515(3) which states: “If the security interest … becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value.” Is a Trustee a purchaser for value or just a lien creditor? So what happens when the lien lapses? Most courts find that a lost lien is just that, gone so the creditor becomes unsecured. There are some courts that fix a creditor’s rights as of the petition date. What happens to a lien which is “fixed” but then lapses? The trend seems to be a lapsed lien makes the creditor an unsecured creditor…