AMERICAN BANK, FSB v. MILLER BROTHERS LUMBER CO. INC.
Filing
8
MEMORANDUM OPINION AND ORDER signed by CHIEF JUDGE WILLIAM L. OSTEEN JR. on 10/23/2013, that the Order of the Bankruptcy Court (Doc. 3 -1) denying Appellant's Motion for Adequate Protection and to Modify the Stay is REVERSED and that this case is REMANDED to the Bankruptcy Court for further proceedings consistent with this Memorandum Opinion and Order. (Daniel, J)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
MILLER BROTHERS LUMBER
CO., INC.,
Debtor,
AMERICAN BANK, FSB,
Appellant,
v.
MILLER BROTHERS LUMBER
CO., INC.,
Appellee.
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1:12CV720
MEMORANDUM OPINION AND ORDER
OSTEEN, JR., District Judge
Presently before this court is the appeal of American Bank,
FSB (“Appellant”) from the Order of the Bankruptcy Court (Doc.
3-1) denying its Motion for Adequate Protection and to Modify
the Stay.
Miller Brothers Lumber Co., Inc. (“Debtor”), the
Chapter 11 debtor in possession (“DIP”), contests the appeal.
The parties have both briefed the issues on appeal (Docs. 4, 5).
This matter is now ripe for resolution, and for the reasons set
forth herein, the Bankruptcy Court‟s Order will be reversed.
I.
BACKGROUND
The facts in this case are undisputed and are taken from
the Bankruptcy Court‟s Memorandum Opinion. (Doc. 6.)
On
October 25, 2006, Debtor entered into a Master Lease, as lessee,
with Appellant.
The Bankruptcy Court found, and the parties
agree, that the lease created a security interest pursuant to
N.C. Gen. Stat. § 25-1-203.
Accordingly, Appellant‟s interests
arising from that lease are governed by Article 9 of the Uniform
Commercial Code (“UCC”), as codified at N.C. Gen. Stat.
§ 25-9-101 et seq.
On October 27, 2006, Appellant filed a UCC-1 Financing
Statement with the North Carolina Secretary of State.
Under
North Carolina law, a financing statement is effective for five
years after the date of filing.
N.C. Gen. Stat. § 25-9-515(a).
A financing statement will lapse after five years unless the
creditor has filed a UCC-3 Continuation Statement within six
months preceding the date the financing statement is set to
expire. N.C. Gen. Stat. § 25-9-515(c)-(e).
As of August 2012,
Appellant had not filed a continuation statement.
On September 9, 2011, Debtor filed a voluntary petition for
bankruptcy protection under Chapter 11.
Appellant‟s financing
statement lapsed approximately seven weeks later.
On
December 19, 2011, Appellant filed a proof of claim as a secured
creditor in the amount of $45,238.15.
On February 10, 2012,
Appellant filed a motion for adequate protection and to modify
the automatic stay so that it could take possession of the
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equipment.
The Bankruptcy Court denied those requests, and this
appeal arises from that Order.
The Bankruptcy Court, relying
upon N.C. Gen. Stat. § 25-9-515(c), held that failure to file a
continuation statement resulted in a lapse post-petition,
therefore permitting the debtor to avoid the security interest
pursuant to its powers arising under 11 U.S.C. § 544.
II.
STANDARD OF REVIEW
This court has jurisdiction pursuant to 28 U.S.C. § 158(a)
and Federal Rule of Bankruptcy Procedure 8001.
On appeal, a
district court reviews a bankruptcy court‟s legal determinations
de novo and factual determinations for clear error.
See Terry
v. Meredith (In re Stephen S. Meredith, CPA, P.C.), 527 F.3d
372, 375 (4th Cir. 2008).
This court “may affirm, modify, or
reverse a bankruptcy judge‟s judgment, order, or decree or
remand with instructions for further proceedings.”
Fed. R.
Bankr. P. 8013.
III. ANALYSIS
This appeal presents the narrow legal issue of whether a
post-petition lapse of a financing statement permits a Chapter
11 debtor in possession (“DIP”), with its powers as a lien
creditor under 11 U.S.C. § 544(a)(1), to take priority over a
creditor that had a properly perfected security interest as of
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the petition date.1
The Bankruptcy Court found that it does.
However, this court reads N.C. Gen. Stat. § 25-9-515(c) and the
related provisions in that Chapter differently.
As a result,
this court finds that the order of the Bankruptcy Court should
be reversed.
As of the commencement of a bankruptcy case, a Chapter 11
DIP acquires nearly identical rights to a Chapter 7 trustee.2
11 U.S.C. § 1107(a); Coleman v. Cmty. Trust Bank (In re
Coleman), 426 F.3d 719, 725 (4th Cir. 2005).
A Chapter 7
trustee may, in turn, avoid the transfer of property to the same
extent as a (1) judicial lien creditor at the commencement of
the bankruptcy case or (2) a bona fide purchaser of real
property.
11 U.S.C. § 544(a)(1) & (3); see Ivester v. Miller,
398 B.R. 408, 415 (M.D.N.C. 2008) (“[A] trustee on the date of
the petition enjoys the status of, or may avoid any transfer of
property of the debtor that is avoidable by, a hypothetical
judicial lien creditor and, as to real property, a hypothetical
1
Neither party disputes the findings of the Bankruptcy
Court that: (1) the Master Lease is a disguised security
instrument pursuant to N.C. Gen. Stat. § 25-1-203; (2) American
Bank held a valid, perfected security interest as of the
Petition Date; and (3) the financing statement lapsed postpetition.
2
This case does not implicate the narrow differences in the
respective rights and roles between a trustee and a debtor in
possession. See 11 U.S.C. § 1107(a).
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bona fide purchaser.”).
Of particular significance to this
court‟s analysis is the fact that the DIP‟s powers as a lien
creditor, as set forth in 11 U.S.C. §§ 1107(a) and 544, provide
that the DIP„s powers and the related judicial lien arise “as of
the commencement of the case.” 11 U.S.C. § 544(a) & (a)(1).
In
summary, because the interests do not involve real property, the
DIP acquired the status of a lien creditor as of the date of the
filing of the bankruptcy petition.
Bankruptcy law “establishes the posture of the trustee as a
hypothetical lien claimant.
State law, Article 9, specifies the
significance of the [DIP‟s] posture with respect to conflicting
security interests.”
Eldon H. Reiley, 1 Sec. Interests in Pers.
Prop. § 20:30 (June, 2000); see Crestar Bank v. Neal (In re
Kitchin Equip. Co. of Va.), 960 F.2d 1242, 1245 (4th Cir. 1992).
“Thus, if under applicable state law a judgment lien creditor
would prevail over an adverse claimant, the trustee in
bankruptcy will prevail; if not, he will not.”
Angeles Real
Estate Co. v. Kerxton (In re Constr. Gen., Inc.), 737 F.2d 416,
418 (4th Cir. 1984).
In this case, the parties agree that Appellant held a
valid, perfected security interest as of September 9, 2011, the
petition date.
The parties also agree that the financing
statement lapsed on October 27, 2011, due to Appellant‟s failure
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to file a continuation statement.
Their disagreement arises
over the legal effect of the post-petition lapse and the
priorities resulting from that lapse.
“The validity of a lien is determined by state law.”
Ivester, 398 B.R. at 416; see also Butner v. United States, 440
U.S. 48, 54 (1979) (“Congress has generally left the
determination of property rights in the assets of a bankrupt‟s
estate to state law.”); In re Price, 562 F.3d 618, 624 (4th Cir.
2009); Tidewater Fin. Co. v. Kenney, 531 F.3d 312, 319 (4th Cir.
2008) (“[S]tate law creates and defines security interests at
issue in bankruptcy proceedings if no federal law requires a
different result.”); In re Franklin Equip. Co., 418 B.R. 176,
210-11 (Bankr. E.D. Va. 2009) (“The legal requirements of a
lien, the priority of a lien, and the extent of property
interests encumbered by a lien are determined by state law.”).
Appellant contends that a creditor‟s rights are determined
and affixed at the time the petition is filed.
Thus, according
to Appellant, state lien law has little, if any, role to play
once the bankruptcy estate has been created. Substantial support
for this position exists in the case law.
See, e.g., Isaacs v.
Hobbs Tie & Timber Co., 282 U.S. 734, 738 (1931); Flebotte v.
Northen (In re Fletcher Woods, Inc.), 887 F.2d 1079, 1989 WL
117728, at *3 (4th Cir. Oct. 2, 1989) (unpublished table
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decision) (per curiam); In re Chaseley‟s Foods, Inc., 726 F.2d
303, 304-06 (7th Cir. 1983); Lockhart v. Garden City Bank &
Trust Co., 116 F.2d 658, 661 (2d Cir. 1940); In re Miller, 444
B.R. 177, 179 (Bankr. E.D. Ark. 2011); In re Paul, 67 B.R. 342,
345 (Bankr. D. Mass. 1986); Robinson v. U.S. Small Bus. Admin.
(In re Catamount Dyers, Inc.), 50 B.R. 788, 790 (Bankr. D. Vt.
1985) (collecting cases).
On the other hand, Debtor contends
there is no universal requirement that the secured status of a
creditor be determined as of the petition date, pointing to a
number of provisions in the Bankruptcy Code which may affect
secured claims at various times during bankruptcy proceedings.
“The Bankruptcy Code is not explicit on when the secured nature
of a claim is evaluated although the general scheme appears to
favor evaluation at the commencement of the case.”
In re
Highland Constr. Mgmt. Servs., LP, Case No. 11-11413-RGM, 2013
WL 3957504, at *7 (Bankr. E.D. Va. July 30, 2013).
The Bankruptcy Court, in reaching its decision, did not
reach the question of when the status of a claim had to be
decided or when the status of the parties may become “frozen” or
“fixed.”
Instead, the court rested its decision on the DIP‟s
powers under § 544 and the plain language of the first sentence
of N.C. Gen. Stat. § 25-9-515(c).
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This court does not believe it necessary to determine the
applicable time during which the creditors‟ rights are
determined.
Nor does this court find it necessary to resolve
whether a junior secured creditor would take priority over a
senior creditor whose financing statement lapsed post-petition.3
Instead, under North Carolina law, Appellant‟s security interest
has priority over the DIP‟s powers as a lien creditor acquired
as of the date of the commencement of the action and while the
security interest was perfected.4
3
In re Wilkinson, No. 10-62223, 2012 WL 1192780 (Bankr.
N.D.N.Y. Apr. 10, 2012), did address the effect of a
post-petition lapse in a financing statement on the relative
priority of two secured creditors. Although the junior secured
creditor would have taken priority under state law, the
bankruptcy court found “itself in agreement with the majority
position, which freezes the parties‟ position as of the date of
filing, believing that to conclude otherwise would upset a
fundamental tenet of bankruptcy that property interests are
determined as of the petition date.” Id. at *4. But see In re
Chattanooga Choo-Choo Co., 98 B.R. 792, 799 (Bankr. E.D. Tenn.
1989) (“The court agrees that the better rule is to make a
lapsed financing statement ineffective against other financing
statements filed before the lapse.”).
4
At least two other courts have reached the same conclusion
in considering the UCC as codified by their respective states.
See In re Highland Constr. Mgmt. Servs., LP, Case No. 11-11413RGM, 2013 WL 3957504 (Bankr. E.D. Va. July 30, 2013); Mostoller
v. Citicapital Commercial Corp. (In re Stetson & Assocs., Inc.),
330 B.R. 613, 623-24 (Bankr. E.D. Tenn. 2005) (“Because trustees
in bankruptcy are armed with the rights of lien creditors under
§ 544(a) and are not purchasers for value, the fact that three
of the [secured creditor‟s] UCC-1 Financing Statements lapsed
during the pendency of the bankruptcy case does not change the
priority scheme as between [the Chapter 7 trustee] and the
[secured creditor].” (footnote omitted)).
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N.C. Gen. Stat. § 25-9-201 provides:
“Except as otherwise
provided in this Chapter, a security agreement is effective
according to its terms between the parties, against purchasers
of the collateral, and against creditors.”
Other provisions in
the Chapter, including § 25-9-317 and § 25-9-515, modify the
general rule set out in § 25-9-201 through rules regarding
perfection, failure to perfect, and lapse.
N.C. Gen. Stat.
§ 25-9-317(a)(2) alters the general scheme by subordinating an
unperfected secured creditor to a judicial lien creditor if the
judicial lien arises before the security interest is perfected.
As a corollary, a judicial lien creditor arising after the
perfection of a security interest is subordinate to the secured
party unless the applicable statutory provisions provide
otherwise.
Central to this court‟s analysis is N.C. Gen. Stat.
§ 25-9-515(c) which addresses the effect of a lapsed financing
statement.
“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.”
Stat. § 25-9-515(c).
N.C. Gen.
While that sentence is clear, the last
sentence of subsection (c) further provides, “If the security
interest . . . becomes unperfected upon lapse, it is deemed
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never to have been perfected as against a purchaser of the
collateral for value.”
Id.
Notably, the express language of
the statute only addresses the fact that the security interest
is deemed never to have been perfected as against a purchaser
for value.
It does not specifically address, in any fashion,
the possible change in priority as to the lapsed perfection of a
security interest relative to any junior lien interests.
This
court finds both the changes made to the statute in 2001 and the
Official Comments to N.C. Gen. Stat. § 25-9-515 helpful in
interpreting and applying subsection (c).
Statutory language provides the basis for statutory
construction.
Smith Chapel Baptist Church v. City of Durham,
350 N.C. 805, 810, 517 S.E.2d 874, 878 (1999). “„When the
language of a statute is clear and unambiguous, there is no room
for judicial construction, and the courts must give it its plain
and definite meaning.‟”
Id. (quoting Lemons v. Old Hickory
Council, BSA, 322 N.C. 271, 276, 367 S.E.2d 655, 658 (1988)).
However, “[w]here doubt as to the meaning of the statutory
language exists, our courts will then resort to judicial
construction.”
Rhyne v. K-Mart Corp., 149 N.C. App. 672, 685,
562 S.E.2d 82, 92 (2002).
“Portions of the same statute dealing
with the same subject matter are „to be considered and
interpreted as a whole, and in such case is the accepted
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principle of statutory construction that every part of the law
shall be given effect if this can be done by any fair and
reasonable intendment . . . .‟”
Huntington Props., LLC v.
Currituck Cnty., 153 N.C. App. 218, 224, 569 S.E.2d 695, 701
(2002) (quoting In re Hickerson, 235 N.C. 716, 721, 71 S.E.2d
129, 132 (1952)).
“A statute should be construed so that effect
is given to all its provisions, so that no part will be
inoperative or superfluous, void, or insignificant . . .” Hibbs
v. Winn, 542 U.S. 88, 101 (2004); Burgess v. Your House of
Raleigh, Inc., 326 N.C. 205, 216, 388 S.E.2d 134, 140 (1990)
(“[The] statute must be construed, if possible, so as to give
effect to every provision, it being presumed that the
Legislature did not intend any of the statute‟s provisions to be
surplusage.” (internal quotations omitted)).
Further, while the
Official Comments do not equate to law, “the commentary to a
statutory provision can be helpful in some cases in discerning
legislative intent.” Parsons v. Jefferson–Pilot Corp., 333 N.C.
420, 425, 426 S.E.2d 685, 689 (1993); see Miller v. First Bank,
206 N.C. App. 166, 171, 696 S.E.2d 824, 827-28 (2010).
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Here, since the statutory language is arguably not
unambiguous5, Compare In re Miller Bros. Lumber Co., Inc., No.
B-11-51405, 2012 WL 1601316, at *1-3 (Bankr. M.D.N.C. May 8,
2012) (holding a debtor in possession could avoid a security
interest after a financing statement lapsed post-petition) with
Mostoller, 330 B.R. at 623-24 (reaching the opposite conclusion
under Tennessee‟s codification of the UCC), this court will
interpret the statute in its entirety and in light of the
Official Comments accompanying it.
Viewing the statutory provision as a whole, the key inquiry
becomes the effect of the lapse set forth in the first sentence
of N.C. Gen. Stat. § 25-9-515(c) and its relationship to the
same provision‟s second sentence and to other provisions
establishing priorities.
In this case, the Bankruptcy Court‟s
opinion applied the straightforward language of the second
sentence in subsection (c), ultimately concluding that the
post-petition lapse of the financing statement caused the
concomitant loss of the lien‟s perfection.
5
The Bankruptcy Court
Although this court will address the issues in light of
some possible ambiguity in § 25-9-515(c) and the related
statutory provisions, this court is not convinced that resort to
construction of an ambiguous statute is entirely necessary. In
large part, this case appears to be controlled by the respective
priorities of the DIP‟s strong-arm position as a lien creditor
and that of a secured party under circumstances where the DIP
acquired its position while the secured party held a perfected
security interest that subsequently lapsed.
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held that “parties which fail to file UCC-3 continuation
statements will lose their secured status, even when the lapse
occurs post-petition.”
6
(Doc. 6 at 5.)
The court went on to
explain the changes to the UCC and Bankruptcy laws permitting
the filing of continuation statements and the requirements for a
secured creditor to maintain perfection during a bankruptcy.
(Id. at 5-6.)
However, the Bankruptcy Court‟s analysis, while applying a
clear interpretation of the first part of § 25-9-515(c), did not
take into consideration the priorities as provided by the UCC
with respect to a secured party with a lapsed perfection and a
lien creditor whose interest arose while the secured party held
a perfected security interest.
When viewed in conjunction with
the last sentence of § 25-9-515(c), this court finds that the
loss of perfected status does not necessarily affect the
respective priorities when a lien creditor‟s interest is
evaluated.
For the reasons that follow, this court finds it
significant that the statutory language does not provide a lien
creditor with the benefit of the “deemed never to have been
perfected” language of § 25-9-515(c).
6
This court has been unable to find any authority to
support this finding. N.C. Gen. Stat. § 25-9-515(c) addresses
the effectiveness of a financing statement and perfection of the
security interest; it does not mandate a complete loss of
secured status.
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Under former N.C. Gen. Stat. § 25-9-403(2), which was in
effect until July 1, 2001, a security interest that became
unperfected upon lapse would be “deemed to have been unperfected
as against a person who became a purchaser or lien creditor
before lapse.”
Revised Article 9 removed lien creditors from
the list of those against whom the security interest would be
“deemed never to have been perfected.”
See In re Highland
Constr. Mgmt. Servs., 2013 WL 3957504, at *5 (“The deletion of
lien creditors from the last sentence must have meaning and that
was to remove them from the deemed never perfected status of
secured parties.”).
Trustees in bankruptcy are included within
the definition of “lien creditor.”
§ 25-9-102(a)(52).
N.C. Gen. Stat.
Accordingly, under the last sentence of N.C.
Gen. Stat. § 25-9-515(c), a lapsed financing statement does not
prevent a secured creditor from retaining priority over a junior
lien creditor and, by definition, a bankruptcy trustee or DIP.
Lien creditors and, by definition, DIPs, no longer receive the
benefit of the “deemed never to have been perfected” position
set out in § 25-9-515(c).
This conclusion is supported by the Official Comments.
Although they are not binding, the Supreme Court of North
Carolina has often relied on the UCC‟s Official Comments to help
elucidate the statutory language.
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See, e.g., In re Bass, ____
N.C. ____, ____, 738 S.E.2d 173, 176-77 (2013); Alberti v.
Manufactured Homes, Inc., 329 N.C. 727, 736, 407 S.E.2d 819, 825
(1991); Boudreau v. Baughman, 322 N.C. 331, 338, 368 S.E.2d 849,
855 (1988); see also In re Price, 562 F.3d at 626 (“We treat the
UCC‟s official comments as instructive.”).
Official Comment 3
to N.C. Gen. Stat. § 25-9-515 states that, upon expiration, “the
effectiveness of the financing statement lapses.”
According to
that comment, however, the “deemed retroactive unperfection” set
out in the final sentence of subsection (c) “applies only with
respect to purchasers for value,” and not “with respect to lien
creditors.”
N.C. Gen. Stat. § 25-9-515 Official Cmt. 3
(emphasis added).
Official Comment 3‟s second example is
particularly instructive:
Example 2: [Secured Party] holds a security interest
perfected by filing. On July 1, [Lien Creditor]
acquires a judicial lien on the collateral. Two weeks
later, the effectiveness of the financing statement
lapses. Although the security interest becomes
unperfected upon lapse, it was perfected when [Lien
Creditor] acquired its lien. Accordingly,
notwithstanding the lapse, the perfected security
interest has priority over the rights of [Lien
Creditor], who is not a purchaser. See Section
9-317(a)(2).
Likewise, here, the post-petition lapse does not result in
a “deemed never to have been perfected” status as between a
secured party and a lien creditor.
Upon the lapse of a
financing statement, Section 25-9-515(c) provides that the
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security interest “is deemed never to have been perfected as
against a purchaser of the collateral for value.”
Stat. § 25-9-515(c).
N.C. Gen.
N.C. Gen. Stat. § 25-9-515(c) modifies
the position of a purchaser of the collateral for value by
placing it in a position as though there had never been
perfection, but does not provide the same modification as to
judicial lien creditors.
Priorities between competing creditors are determined by
N.C. Gen. Stat. § 25-9-317 as referenced by Note 2.
By failing
to file a UCC-3 continuation statement, perfection lapses under
§ 25-9-515(c).
See N.C. Gen. Stat. § 25-9-515(c).
Although
American Bank FSB did lose its perfected status, N.C. Gen. Stat.
§ 25-9-317(a)(2) provides priority to a judicial lien creditor
only if it acquires its interest prior to perfection of the
security interest, and nothing in the Chapter provides otherwise
in the event of a lapse.
The Bankruptcy Court relied on Note 4 to the Official
Comments in § 25-9-515 which specifically discusses the effect
of bankruptcy on lapse.
Note 4‟s statement that Subsection (c)
“imposes a new burden on the secured party: to be sure that a
financing statement does not lapse during the debtor‟s
bankruptcy” is a clear interpretation of the rules, particularly
as to a purchaser for value.
The Note goes on to provide,
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however, that “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 . . . .”
In this case, the elevation of the
Debtor‟s status to a DIP under 11 U.S.C. § 544 and the
application of bankruptcy law7 do not dictate a different result
than that provided for by statute as between the DIP and
Appellant.
Because a lien creditor is not provided the benefit
of the statutory provision that the security interest “is deemed
never to have been perfected,” Note 2 most closely applies in
this case.
7
A trustee‟s avoidance powers pursuant to § 544(a) fail to
alter the result dictated by state law. A debtor in possession
holds the same avoidance powers as a trustee. 11 U.S.C.
§ 1107(a). Under § 544(a)(1), a trustee can avoid a security
interest to the same extent a lien creditor could at the
commencement of the bankruptcy case. 11 U.S.C. § 544(a)(1)(“The
trustee shall have, as of the commencement of the case, . . .
the rights and powers of, or may avoid any transfer of property
of the debtor or any obligation incurred by the debtor that is
voidable by – (1) a creditor that extends credit to the debtor
at the time of the commencement of the case, and that obtains,
at such time and with respect to such credit, a judicial lien on
all property on which a creditor on a simple contract could have
obtained such a judicial lien . . .”). Appellant American Bank
was properly perfected at the time of filing when the DIP‟s
judicial lien powers arose. Moreover, although under § 544(a)(3)
a trustee can avoid a security interest to the same extent as a
bona fide purchaser of real property, the present case does not
involve real property and thus this section is inapplicable.
Accordingly, notwithstanding the lapse, Appellant‟s security
interest remained effective as to existing lien creditors,
including Debtor.
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Because section 25-9-515(c) does not modify the priority
scheme for judicial lien holders by its “deemed” language,
Appellant American Bank‟s security interest, even upon lapse,
still retains priority over the DIP‟s judicial lien.
See In re
Highland Constr. Mgmt. Servs., 2013 WL 3957504; Mostoller, 330
B.R. at 623-24 (“Because trustees in bankruptcy are armed with
the rights of lien creditors under § 544(a) and are not
purchasers for value, the fact that three of the [secured
creditor‟s] UCC-1 Financing Statements lapsed during the
pendency of the bankruptcy case does not change the priority
scheme as between [the Chapter 7 trustee] and the [secured
creditor].” (footnotes omitted)).
Based on the analysis set forth above, this court will only
briefly address Debtor‟s arguments regarding the “Freeze Rule”
and the historical interplay between the Bankruptcy Code and the
UCC.
It is true that the automatic stay no longer enjoins
creditors from filing continuation statements during a
bankruptcy case, see 11 U.S.C. § 362(b)(3), and that North
Carolina‟s UCC no longer tolls the time for filing a
continuation statement during a debtor‟s insolvency proceeding.
N.C. Gen. Stat. § 25-9-515 Official Cmt. 4.
Revised Article 9
“imposes a new burden on the secured party: to be sure that a
financing statement does not lapse during the debtor‟s
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bankruptcy.”
Id.
If the debtor enters bankruptcy before lapse,
however, “the provisions of [Article 9] 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).”
Id.
Under North Carolina law,
Appellant‟s failure to file a continuation statement did not
result in its loss of priority as against the DIP‟s lien arising
under 11 U.S.C. § 544(a)(1), and neither party nor this court
has identified any bankruptcy law requiring a contrary result,
regardless of the date upon which the status of the respective
parties is determined.
IV.
CONCLUSION
In summary, this court holds that under N.C. Gen. Stat.
§§ 25-9-515(c) and 317(a)(2), American Bank FSB‟s security
interest has priority over the debtor in possession‟s interest
even though perfection of the security interest lapsed following
the filing of the Bankruptcy Petition.
For the reasons stated above, IT IS HEREBY ORDERED that the
Order of the Bankruptcy Court (Doc. 3-1) denying Appellant‟s
Motion for Adequate Protection and to Modify the Stay is
REVERSED and that this case is REMANDED to the Bankruptcy Court
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for further proceedings consistent with this Memorandum Opinion
and Order.8
This the 23rd day of October, 2013.
________________________________________
United States District Judge
8
The Bankruptcy Court, and this court, have only addressed
the relationship between the DIP and American Bank FSB. The
record before this court does not address or establish the
status, relationship, or possible priorities between any other
creditors or parties and American Bank FSB. Therefore, this
order is limited in scope and the case is remanded for further
proceedings consistent with this opinion.
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