Assignment 15 Maintaining Perfection and Priority (Lapse, Continuation, Termination)

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1 Assignment 15 Maintaining Perfection and Priority (Lapse, Continuation, Termination) After filing, a is effective to perfect a SI for 5 years [ 9-515(a)] After 5 years, it lapses (becomes ineffective) Rationale: this makes the filing system selfclearing, minimizes search period (as compared to searching land titles) Duration of Financing Statement For installment loans, 5 years is usually enough time for Debtor to repay in full Lines of credit, however, may remain outstanding for >>> 5 years If so, Lender wants its to remain effective (and to relate back, for priority purposes, to the original filing date) Duration Secured party can extend effectiveness of a by filing a continuation statement before lapse [ 9-515(c)] If properly filed, a continuation statement extends the effectiveness of the initial for 5 more years (starting from the date the initial would have lapsed) Continuation Statements 1

2 Bank has SI in present and after-acquired equipment of Mel s Diner Bank s SI is perfected by UCC- 1 filed on April 1, 2011 On September 20, 2015, Bank files a new covering the equipment (identical in all respects to the 2011 filing) What s the effect of this new filing? Problem 1 Two problems with Bank s 9/20/2015 filing 1) A continuation can only be filed during the last 6 months before initial would lapse [ 9-515(d)] Window period for filing continuation statement: October 1, 2015 through April 1, 2016; continuation statement filed outside that window is not effective 2) 9/20/2015 filing is not a continuation statement Continuation statement = amendment to original that (a) identifies original by file number [ 9-102(a)(27)(A)] and (b) indicates that it is a continuation statement [ 9-102(a)(27)(B)] Form of continuation statement: 9-521(b) Problem 1 9/20/2015 filing did NOT continue the effectiveness of the April 1, 2011 filing On April 1, 2016, the April 1, 2011 filing will lapse Until April 1, 2016, Bank s SI will be perfected by the April 2011 filing After that date, Bank s SI will be perfected by the Sept. 20, 2015 filing (which is a valid ), but Bank s priority will only date from Sept. 20, 2015 (not April 1, 2011) Problem 1: Problem Scenario April 1, 2011: Bank files covering equipment of Mel s Diner June 1, 2014: Mel s Diner borrows $10,000 from Finance Co., which takes SI in all of Mel s equipment (perfected by filing) Sept. 20, 2015: Bank files new May 1, 2016: Bank vs. Finance Co.? 2

3 9-515(c). [Lapse and continuation of financing statement.] 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 pursuant to subsection (d). Upon lapse, a financing statement ceases to be effective and any security interest or agricultural lien that was perfected by the financing statement becomes unperfected, unless the security interest is perfected otherwise. If the security interest or agricultural lien becomes unperfected upon lapse, it is deemed never to have been perfected as against a purchaser of the collateral for value. Problem Scenario Result On April 1, 2016, Bank s first lapses and is no longer effective (it was not continued) Bank remains perfected by virtue of Sept. 20, 2015 filing, but that is now the only effective filing by Bank, so Finance Co. is perfected by filing of June 1, 2014 Bank is perfected only by filing of Sept. 20, 2015 Thus, Finance Co. has priority under 9-322(a)(1)! Retroactive Loss of Perfection Also, lapse of initial results in retroactive loss of perfection against purchasers for value (even though who purchased prior to lapse) [ 9-515(c), third sentence] June 2010: Bank takes SI in Debtor s printing press, perfected by filing June 2014: Smith buys press from Debtor (no knowledge of Bank s SI) Bank never files continuation statement, so Bank s lapses in June 2015, Bank becomes unperfected When Smith purchased press in June 2014, Smith took it subject to Bank s then-perfected SI [ 9-201, 9-317(b)] After lapse, Bank s SI is deemed NEVER to have been perfected as against Smith; thus, Smith now owns the press free of Bank s SI [ 9-515(c), 9-317(b)] 3

4 Problem 2 First Bank has $110,000 judgment vs. Bowman Bowman owes Bank $500,000 Bank holds a SI in Bowman s art collection SI is perfected by filing on Oct. 30, 2010 hasn t filed continuation statement First Bank: Do we levy today (Oct. 27, 2015), or do we wait to see if s lapses? Bank takes SI in Bowman s art collection, files 10/30/10 First Bank gets judgment vs. Bowman 3/31/15 Problem 2: Scenario 1 First Bank levies on art collection 10/27/15 Lapses 10/30/15 Bank vs. First Bank? 11/1/15 Effect of Lapse vs. Lien Creditor 9-515(c): after lapse, Bank s SI in the art collection would NOT be retroactively unperfected as against First Bank First Bank is only a lien creditor, not a purchaser under 1-201(b)(29), (30) If First Bank s judgment lien attached Oct. 27 (prior to lapse), Bank s SI still perfected on that date! Thus, Bank s SI would still have priority over First Bank s judgment lien [ 9-317(a)(2)], even if s perfection lapses on Oct. 30! Bank takes SI in Bowman s art collection, files 10/30/10 First Bank gets judgment vs. Bowman 3/31/15 Problem 2: Scenario 2 Lapses 10/30/15 First Bank levies on art collection 11/2/15 Bank vs. First Bank? 11/3/15 4

5 Effect of Lapse vs. Lien Creditor 9-515(c): after lapse, Bank s SI in the art collection is unperfected prospectively against all creditors (including lien creditors) In Scenario 2, First Bank s judgment lien attaches after s lapsed, at which time Bank s SI is no longer perfected Thus, in Scenario 2, First Bank s judgment lien would have priority over Bank s SI [ 9-317(a)(2)] So what do you tell First Bank? Do you tell them to levy today? Or should they wait until October 31 to have the sheriff make the levy? Problem 2 Problem: Until Oct. 30, 2015, Bank can still file a continuation; if it does, will retain its priority going forward for 5 more years If First Bank waits, another creditor could levy on the art first (and get priority over First Bank), or Bowman could hide the art (and it may not be found for a later levy) Answer thus depends on other information Does Bowman have equity in the art (over and above the amount owed to Bank and First Bank)? If so, First Bank should levy now If not, it may make sense for First Bank to take the risk to wait and see if s lapses, then levy Termination Statements Even though a remains effective for 5 years, the loan may be paid off sooner If a remains on file after debt is paid off, it can impact the debtor s ability to obtain future credit Thus, provides a mechanism by which debtor can require filing of a termination statement (to clear up this cloud ) 5

6 Crouch is debtor/obligor on 2 secured loans made or held by First Bank Loan #1: he granted PMSI in TV/appliances bought from Downtown Appliance; contract was paid off in August 2015 Must First Bank file a termination statement? Problem 3 AS TO LOAN #1 A. Yes, but only if Crouch demands one B. Yes, even if he doesn t demand one C. No If TV/appliances were consumer goods, First Bank must file termination once the debt is paid, without being asked first [ 9-513(a)] Must be filed w/in one month (or within 20 days, if Crouch makes authenticated demand) [ 9-513(b)] If not consumer goods, First Bank only has to file termination statement within 20 days after receiving authenticated demand from Crouch [ 9-513(c)] Termination Statement If secured party is obligated to file a termination statement but fails to do so, secured party is liable to debtor for: Any actual damages resulting from secured party s failure to file termination statement [ 9-625(b)], PLUS $500 statutory penalty [ 9-625(e)(4)] Crouch was debtor/obligor on 2 secured loans made or held by First Bank Loan 2: he granted SI in all of his accounts, to secure $5,000 line of credit; current balance on line of credit = $0 Must First Bank file a termination statement of vs. accounts? Problem 3 AS TO LOAN #2 A. Yes, but only if Crouch demands one B. Yes, even if he doesn t demand one C. No 6

7 First Bank does NOT have to terminate as long as the line of credit remains in place, even if it has a zero balance right now [ 9-513(c)(1)] If Crouch can borrow on the line of credit in future, First Bank will expect to continue to have its original priority for such future advances (i.e., paying credit line down to $0 doesn t terminate her right to borrow against it) To compel termination statement, Crouch must both pay off the line of credit AND terminate it (i.e., so he could no longer get future advances); if he does, First Bank would have to provide termination statement within 20 days of demand [ 9-513(c)] 7