Opinion
Case No. 03-24716, (administratively and substantively consolidated).
April 24, 2005
Via ECF, Arnold M. Willig, Elizabeth H. Shea, Hacker Willig, Inc., P.S., Seattle, WA.
Bruce J. Borrus, Maria Ann Milano, Riddell Williams P.S., Seattle, WA.
Dear Counsel:
On February 11, 2005, I heard oral argument on Northrim Bank's Motion for Relief from Stay re: all inventory, chattel paper, accounts, equipment, general intangibles fixtures, 43 boats motors, 9 spare motors, 10 powerheads. I requested that the parties provide supplemental briefing on the narrow legal issue of the effect of a lapsed UCC Financing Statement under the newly revised Uniform Commercial Code, particularly section 9-515, adopted in Washington as RCW 62A.9A-515 (effective June 30, 2001). Subsequent to the original hearing, I granted the Trustee's request to sell the personal property of this estate, including the collateral that was the subject of Northrim's motion. See Order Granting Trustee's Motion For an Order Authorizing Him to Sell Property Free and Clear of Liens, etc., entered on March 11, 2005. Accordingly, relief from stay is no longer available to Northrim and the motion is moot to that extent. However, the validity of Northrim's secured position is still relevant because the Trustee's sale was free and clear of liens, with liens to attach to the sale proceeds. Accordingly, the issue of the validity of Northrim's security interest is still before me. As set forth below, I conclude that Northrim's status as a secured creditor was established as of the petition date for Katmai Lodge, herein December 5, 2003, and that Northrim's failure to file a timely continuation statement post-petition does not negate that status. Factual Background
On December 30, 1994, Citibank filed a UCC-1 Financing Statement perfecting its security interest in, among other things, equipment, boats, motors and proceeds thereof. On February 23, 1998, Citibank filed a UCC-3 change statement indicating a name change by the debtor. On November 29, 1999, Citibank filed a UCC-3 Continuation Statement, continuing its perfection of the original 1994 filing referenced above.
On June 23, 2003, Citibank filed a UCC-3 Amendment, reflecting the assignment of its interest under the November 29, 1999 statement to Northrim Bank. On September 22, 2003, Northrim filed a UCC-1 Financing Statement to perfect an interest in, among other things, all inventory, chattel paper, accounts, equipment and general intangibles. These documents are all in evidence and there appears to be no factual dispute about them. Accordingly, I may decide this issue as a matter of law.
Legal Analysis
The issue before me is the validity of Northrim Bank's security interest. The trustee argues that Northrim's security interest has expired because it did not file a timely continuation statement post-petition. Northrim contends that its rights were established as of the filing date and the failure to file a continuation statement does not invalidate its security interest. The issue is complicated in that it requires this Court to interpret, as a matter of first impression, the effect of the newly revised Uniform Commercial Code, section 9-515, as adopted in Washington at RCW 62A.9A-515.
Prior to July 1, 2001, Article 9 of the UCC provided that a financing statement would be effective for a period of 5 years unless a continuation statement was filed prior to the lapse. RCW 62A.9-403(2). The statute went on to state that a security interest perfected by filing that exists as of the commencement of insolvency proceedings remains perfected until the termination of those proceedings. Id.
The Bankruptcy Code also had provisions relating to the perfection of a security interest against an insolvent debtor. Prior to 1994, a secured party had to seek relief from the automatic stay to file a UCC-3 continuation statement. The Bankruptcy Reform Act of 1994 amended Section 362(b)(3) to specifically state that an act to perfect or continue the perfection of a security interest was not stayed by the filing of a bankruptcy petition.
On July 1, 2001, the newly revised Uniform Commercial Code became effective. Section 9-403(2), which provided for continuous perfection during an insolvency proceeding, was replaced with Section 9-515, which provides:
(a) Five-year effectiveness. Except as otherwise provided in subsections (b), (e), (f), and (g), a filed financing statement is effective for a period of five years after the date of filing.
. . .
(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.
Revised UCC § 9-515 (a) and (c), adopted in Washington at RCW 62A.9A.515(a) and (c).
The Trustee relies heavily on the Reporter's Explanatory Notes to the UCC Revised Article 9 which state that the tolling provision of 9-403(2) is specifically deleted from the Revised Article and that a "new burden" was being imposed on secured parties "to be sure that a financing statement does not lapse during the debtor's bankruptcy." Reporter's Explanatory Notes, February 10, 1995, Draft, UCC Revised Article 9, cited at page 6 of Trustee's Supplemental Brief. However, the Official Comments to the UCC with respect to § 9-515, state:
4. Effect of Debtor's Bankruptcy. Under former Section 9-403(2), lapse was tolled if the debtor entered bankruptcy or another insolvency proceeding. Nevertheless, being unaware that insolvency proceedings had been commenced, filing offices routinely removed records from the files as if lapse had not been tolled. Subsection (c) deletes the former tolling provision and thereby imposes a new burden on the secured party: to be sure that the financing statement does not lapse during the debtor's bankruptcy . 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). Of course, if the debtor enters bankruptcy before lapse, the provisions of this Article with respect to lapse would be of no effect to the extent that federal bankruptcy law dictates a contrary result (e.g., to the extent that the Bankruptcy Code determines rights as of the date of the filing of the bankruptcy petition.).
UCC § 9-515, Official Comment 4 (emphasis supplied).
I find the final sentence in the Official Comment to have direct bearing on the issue at hand. In this case, Katmai Lodge entered into bankruptcy on December 5, 2003, before Northrim's security interest lapsed. It is a long standing tenant of bankruptcy law that substantive rights are fixed as of the petition date. See In re Combs, 101 BR 609 (9th Cir. 1989) (Court must use facts as of the petition date to determine dischargeability because substantive rights are fixed as of that date, citing Ohio v. Kovacs, 469 U.S. 274 (1985); White v. Stump, 266 U.S. 310 (1924)). See, also, In re Catamount Dyers, Inc. v. U.S. Small Business Admin., 50 B.R. 788 (Bankr. D. Vt 1985) ( citing Issacs v. Hobs Tie and Timber Co., 282 U.S. 734 (1931); Lockhart v. Garden State Bank and Trust Co, 116 F.2d 658 (2nd Cir. 1940)). I believe Official Comment 4 is referring to this long standing line of case law in stating that federal bankruptcy law, not the provisions of the Revised Article, governs secured parties' rights once the debtor enters bankruptcy. The Revised UCC and the Bankruptcy Reform Act of 1994 make it much easier for a secured creditor to continue perfection post-petition. However, under existing bankruptcy law, a party that has a valid security interest against the debtor as of the petition date does not become unsecured for purposes of bankruptcy administration if the prepetition security interest lapses during the bankruptcy.
In the event the bankruptcy case is dismissed, however, I express no opinion as to whether the creditor's security interest would be deemed perfected.
Therefore, as to matters in these proceedings in which Northrim's status as a secured creditor would be governed by the petition date, I find that as of December 5, 2003, Northrim held a valid security interest in all equipment, boats, motors and proceeds thereof, etc. pursuant to Citibank's December 12, 1994 UCC-1 financing statement, which was continued on November 29, 1999, and assigned to Northrim on June 23, 2003. As to the validity of Northrim's security interest filed on September 22, 2003, that matter is the subject of a pending adversary proceeding and not properly before the Court on the instant motion.
Counsel for Northrim should prepare an order consistent with this letter ruling.