#22 - Lapse and Maintaining Perfection

Question 1

Lapse

Answer 1

This is Art 9’s term for ending the security interest. Art 9 allows perfection to last for 5 years from the date of filing the financing statement. If not renewed, it lapses.

The Art 9 system is self-purging. Statements are destroyed after 6 years (because it’s good for 5 years and there is a year it just remains in the system).

The renewal period is between 4.5-5 years but it doesn’t get wiped from the system for a full year because of the problem of basket time in processing the renewals entered during that 4.5-5year window.

Question 2

How to Renew a Financing Statement

Answer 2

File a continuation statement between 4.5 - 5 years after the date of the initial financing statement filing. The continuation statement must be filed within that 6 month period before the date that termination will occur (date of lapse).

If filed too early, it has no effect.

If filed too late, no effect.

Effect of Renewal: You get another 5 years of perfection from the date of when the lapse would have occurred. So perfection periods are always in increments of 5 years.

Question 3

Failure to Continue and Other Important Rules

Answer 3

Failure to continue: financing statement lapses and ceases to be effective with differing effects on different claimants:
- Bankruptcy trustee: “lien perfected” up to time of lapse; deemed never to have been perfected as against consensual secured creditors

Duty to file continuances continues even if debtor files for bankruptcy. 362b3, 546b1B
- The automatic stay doesn’t stop you from filing continuation statement

If requested by debtor, secured party must file termination statement within 20 days of request, 9-513c, with penalties in 9-625
- But unless in parties’ agreement, secured party not required to file amendment to release particular items of collateral

Question 4

Termination of Financing Statements

Answer 4

A debtor may seek to terminate the financing statement clouding its property by requesting that the creditor file a termination statement.

Once the debtor fulfills its obligations (by paying all the debt as obligor) it sends an authenticated demand requesting that the creditor make a termination statement or send it to the debtor so the debtor can handle it. The creditor has ONLY 20 DAYS TO COMPLY!!!

How to release collateral from the F/S?
- Requires amending the F/S.
Secured creditor is obligated to do so w/ full payment.
unless K say otherwise, not obligated to file amendment on partial payment.

What must be included in the termination statement?
- initial relating F/S by number.
indicate the the identified F/S is no longer effective.
NOTE: errors can render the termination statement seriously misleading and thereby ineffective.

Question 5

Lapse & Bankruptcy

Answer 5

If F/S lapses, it’s considered unperfected + never perfected against purchasers of the collateral for value (I.e., creditors w/ an interest in the collateral). thus:
-> not unperfected against non-consensual lien holders (e.g., lien creditor or trustees in bankruptcy).

Example: A’s F/S lapses a week after B files for bankruptcy.
= A > B’s trustee and other lien holders.
= A < secured parties who’s F/S not lapsed