The 11th circuit is becoming easier on lenders who forget to continue financing statements post-bankruptcy, thanks to a recent Middle District of Florida Bankruptcy Court ruling in March in the Colony Resort bankruptcy. In re Colony Beach & Tennis Club Association, Inc., Case No. 13-00348, Bankr. M.D. Fla. (March 21, 2014). Colony Resort is a development in Longboat Key on the Gulf of Mexico, built in 1973. The resort had fallen on hard times, due in large part to condominium owner refusals to pay assessments, which in turn prevented needed renovations. The resort closed in 2010, followed by the bankruptcy filings of the resort’s related entities.

The entity that ran the resort was Colony Beach and Tennis Club, Ltd (the “Club”). The Club’s primary asset is a potential recovery in a pending lawsuit against the home owners’ association (the “Association”) for refusing to pay assessments. The Club’s primary secured creditor is Colony Lender, LLC (“Colony”), which acquired the debt (now in the form of a foreclosure judgment) from Bank of America in 2010. Colony’s debt is secured by a lien on substantially all of the Club’s assets; it was perfected by a financing statement filed in 2005. Colony filed an amendment to the financing statement in 2010, but failed to continue the financing statement and so it lapsed in 2010.

The Association, as a creditor and interested party, was granted derivative standing to file a separate suit to determine the validity and extent of Colony’s secured claim in the Club’s bankruptcy case. In this suit, the Association contended that, by operation of 11 § U.S.C. 544(a), the post-petition lapse of Colony’s financing statement rendered Colony’s claim unsecured. The Association argued that the 2001 change in Article 9 of the Uniform Commercial Code in 2001 – the removal of the provision tolling the five year period of effectiveness of a financing statement during a bankruptcy case – rendered Colony’s claim unsecured. Colony argued that, as a general tenet of bankruptcy, the priority of liens is frozen in time as of the petition date.

The Court ruled that Colony’s lien was not extinguished upon lapse of the financing statement. The Court reasoned that while Section 679.515(3) of the Florida Statutes provides that a financing statement (and thus perfection) cease to be effective after lapse of the financing statement, “nowhere in the UCC is there a provision stating that upon lapse, the [underlying] lien is extinguished.” The court noted that “the cessation of perfection is a priorities issue – meaning that the security interest becomes vulnerable, from then on, to a loss of priority . . . [but] the automatic stay . . . will prevent holders of unperfected security interests and general unsecured creditors from filing or recording anything to jump ahead in priority.” Therefore, while Colony appears to have temporarily dodged a bullet here, the validity of its security interest is still subject to avoidance under 11 U.S.C. § 506(d) and is still vulnerable to later perfected junior security interests and judicial liens that don’t arise while the automatic stay is in place. Even though lenders may have been relieved by this ruling (at least somewhat), it is and always will be the best practice to timely continue financing statements post-petition. But if you forget, keep a copy of Colony Resort around the office, just in case.

…to be continued