Although addressed in the context of a consumer debtor in a Chapter 7 case, this holding would be just as applicable to a commercial debtor in a Chapter 11 case.
A lapsed financing statement may not extinguish a creditor’s secured position in a bankruptcy case, according to a recent decision issued by the Utah Bankruptcy Court styled Thomson v. Short (In re Short), Case No. 19-29471, Adv. No. 22-02004, 2025 WL 1362396 (Bankr. D. Utah May 9, 2025). Secured lenders are nevertheless well advised to monitor and timely file continuation statements under any circumstances, especially in the case of a borrower bankruptcy.
Background
Although blood is said to be thicker than water, on October 17, 2015, Raymond Short perfected a lien against his son, Douglas Short, to secure certain indebtedness Douglas owed to Raymond by filing a Uniform Commercial Code (UCC) financing statement (Form UCC-1) covering all of Douglas’ personal property.
On December 31, 2019, Douglas filed for bankruptcy under Chapter 7 of the Bankruptcy Code. During the proceedings, Raymond filed a secured proof of claim, alleging a security interest in certain funds of Douglas’ estate by virtue of his perfected lien. The Chapter 7 trustee objected to the claim, leading to an adversary proceeding against Raymond. Among other contentions, the Chapter 7 trustee alleged that Raymond did not hold a perfected security interest in estate funds because the financing statement lapsed post-petition.
The Bankruptcy Court’s Ruling
After finding that Raymond’s financing statement sufficiently described the collateral at issue, the court moved to determining whether Raymond actually held a secured interest in the collateral at all. Critical to the Chapter 7 trustee’s argument on this point was the fact that Raymond’s financing statement had lapsed on October 18, 2020—five years and one day after its filing—during the pendency of Douglas’ bankruptcy case. There was no dispute that the lapse occurred and that no continuation statement was ever filed. As a result of that lapse, the Chapter 7 trustee contended that Raymond’s claim was no longer secured.
The controlling UCC provision provides that upon a lapse, a security interest perfected by a financing statement becomes unperfected—however, as against purchasers for value, such interest is deemed to have never been perfected.
The court accordingly acknowledged that, upon the lapse, Raymond’s interest was no longer perfected. But that did not answer the question of whether Raymond’s claim was secured for purposes of Douglas’ bankruptcy case. According to the court, a creditor’s rights are generally fixed as of the petition date. Therefore, there would have to be a statutory provision that would deem the post-petition loss of perfection to retroactively extinguish a creditor’s secured status. Under the controlling UCC provision, the only potential for this to occur is as against purchasers for value, which did not apply in this case. Therefore, Raymond’s interest could not be deemed to have been retroactively extinguished.
Moreover, and perhaps more consequential to the ruling, was the court’s decision to apply the so-called freeze rule. The freeze rule dictates that, in the event of a bankruptcy, security interests are determined as of the petition date. The court noted that the UCC, as adopted in Utah, accommodates such a rule by providing that if a debtor files bankruptcy before the lapse of a financing statement, any provisions of the UCC with respect to such lapse would be of no effect to the extent that bankruptcy law requires a contrary result. This rule, the court noted, has largely been left to the discretion of bankruptcy courts to enforce.
As a result, the court concluded that, because Raymond’s claim was perfected as of the petition date, that status controlled for purposes of allowance of the claim, despite the post-petition lapse of the financing statement. The court ultimately allowed Raymond’s secured claim in a reduced amount.
Impact and Commentary
Although addressed in the context of a consumer debtor in a Chapter 7 case, this holding would be just as applicable to a commercial debtor in a Chapter 11 case. It is important for secured creditors to understand, however, that despite the ruling in this case, the freeze rule is not universally applied. In fact, under the UCC as adopted by the state of New York (the governing law for many commercial loan and security agreements), the freeze rule was specifically removed from its provisions. Instead, comment 4 to Article 9-515 of the New York UCC specifically places the burden of timely continuing financing statements squarely on the shoulders of a secured party, even in the case of a borrower bankruptcy, stating, “The secured party can prevent lapse by filing a continuation statement, even without first obtaining relief from the automatic stay. See Bankruptcy Code Section 362(b)(3).”
A secured party is therefore well advised to watch for any pending financing statement expirations and to timely file continuation statements, especially in the event of a borrower bankruptcy.
For More Information
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