Pursuant to Uniform Commercial Code (UCC) § 9-515(c), a UCC-1 financing statement filed to perfect a secured party’s lien on personal property collateral lapses five years from the filing date unless the secured creditor files a continuation statement within six months before the initial UCC-1 filing’s lapse date. However, bankruptcy courts disagree on the impact of a senior secured creditor’s failure to timely file a continuation statement post-petition.
Freeze Rule Background
Several bankruptcy courts have adopted the judicial doctrine known as the “freeze rule,” which provides that a secured party’s lien position is “frozen” as of the petition date, such that a lapse in that secured creditor’s financing statement during the pendency of a bankruptcy case will have no effect on that creditor’s rights vis-à-vis the debtor and estate property. Other courts follow state interpretations of the UCC which allow a junior secured creditor to take priority over a senior secured creditor whose financing statement expires post-petition.
Utah Court’s Decision
In Thomson v. Short (In re Short), the Utah bankruptcy court recently adopted the majority position and applied the freeze rule to preserve a secured creditor’s lien priority despite the lapse of that creditor’s financing statement post-petition. In Short, the chapter 7 trustee objected to the allowance of the senior secured claim asserted against the estate by the attorney-debtor’s father, who had loaned the debtor funds to post a supersedeas bond pre-petition and filed a UCC-1 financing statement that covered essentially all of the debtor’s personal property to secure the repayment of that loan. Among other objections, the trustee asserted that the senior secured creditor did not have a perfected security interest because his financing statement lapsed post-petition and a continuation statement was not timely filed.
Rejecting the trustee’s position, the court noted that bankruptcy courts have the discretion to decide whether a creditor’s security interest should be determined as of the petition date or the date of lapse. The court then reasoned that, where the secured creditor’s lien was perfected as of the petition date, such that the trustee could have readily discovered the father’s lien through a standard UCC search, fairness dictated that the post-petition lapse of the properly filed UCC-1 should not render that creditor’s security interest unperfected for purposes of its treatment as a secured claim in the bankruptcy case.
Priority Dispute Implications
In priority disputes between secured creditors where a financial statement lapses post-petition, many (but not all) courts have applied the freeze rule to prevent a senior secured creditor from losing its lien priority to a junior secured creditor, or losing its secured status entirely. Secured creditors should file continuation statements in a timely manner to avoid any fight over the application of the freeze rule in the first place. When mistakes happen, however, the freeze rule may apply to save the day.
If you have any questions about this case or strategies for navigating similar situations, please contact Monique Jewett-Brewster, or your regular Lathrop GPM attorney.
*Nia Dumas, a Summer Associate for Lathrop GPM, contributed significantly to this content.