## Facts

- A creditor loaned the debtor more than $1 million beginning in 2005.
- The loans were secured by the debtor’s membership interests in two Virginia limited liability companies.
- The creditor filed a UCC-1 financing statement on October 11, 2006, perfecting the security interest.
- The debtor filed a Chapter 11 petition on February 28, 2011; the financing statement remained effective as of that date.
- The creditor did not file a continuation statement; the financing statement lapsed on October 10, 2011 under Virginia’s five-year effectiveness rule.
- There were no other liens on the collateral.
- The debtor-in-possession objected to the creditor’s secured proof of claim based on the post-petition lapse; the court initially sustained the objection.
- The creditor moved for reconsideration of the order disallowing secured status.

## Issues

1. Whether a post-petition lapse of a UCC financing statement renders a previously perfected security interest unperfected as against a debtor-in-possession so that the claim must be treated as unsecured.
2. Whether the “deemed never to have been perfected” language in Virginia UCC § 8.9A-515 retroactively defeats the estate’s rights when perfection existed on the petition date and no third party obtained intervening rights.

## Decision

- The court granted reconsideration.
- The court vacated its prior order that had denied secured status.
- The court allowed the creditor’s proof of claim as a secured claim.
- The court held that the post-petition lapse of the financing statement did not, by itself, convert the claim to unsecured in the bankruptcy case.

## Legal Principles

- A debtor-in-possession’s avoidance rights under Bankruptcy Code § 544(a) are determined as of the petition date; if a security interest is perfected at filing, the estate generally takes the collateral subject to that perfected lien.
- Virginia UCC § 8.9A-515 provides that upon lapse a financing statement ceases to be effective and the security interest becomes unperfected, and if it becomes unperfected it is “deemed never to have been perfected” as against specified third parties (including purchasers for value).
- The “deemed never perfected” clause functions as a priority rule for later-acquired third-party rights, not as an automatic retroactive divestiture of a lien against the existing bankruptcy estate.
- In the absence of an intervening competing lienor or purchaser, a post-petition lapse does not improve the estate’s priority position over a creditor whose lien was perfected when the case commenced.

## Conclusion

The court held that because the creditor’s security interest was perfected when the Chapter 11 case began and no competing interests intervened, the later lapse of the financing statement under Virginia law did not eliminate the creditor’s secured status in the bankruptcy case.


In re Highland Construction Mgmt. Servs., LP, 497 B.R. 829 (Bankr. E.D. Va. 2013)