Secured parties tend to be cautious about filing any UCC records after a debtor files for bankruptcy. Violations of the automatic stay or discharge injunction can have serious consequences for the offending secured party. However, secured parties may file certain UCC records after the filing of a bankruptcy petition, as a court recently found in the case of Botson v. Citizens Banking Company, 2015 WL 3486616 (Bankr. N.D. Ohio June 1, 2015).

The Botsons (the “Debtors”) owned a small insurance agency in Ohio. In 2009, the Debtors entered into a loan and security agreement with Citizens Banking Company (“CBC”). To perfect its security interest, CBC filed a financing statement with the Ohio Secretary of State that named the Debtors individually as debtors. The financing statement described the collateral as “accounts receivable and all business assets, whether now owned or hereafter acquired…”

In December 2011, the Debtors filed a Chapter 7 bankruptcy petition. However, the Debtors failed to list CBC as a secured creditor on the petition. Consequently, CBC did not learn of the bankruptcy filing until two months later, when it was discussing a possible settlement with the Debtors for the outstanding balance on the loan. Upon learning of the bankruptcy, CBC immediately discontinued all contact with the Debtors.

The Debtors later amended their bankruptcy schedules to add CBC, but listed the lender as an unsecured creditor. On August 2, 2012, the court granted the Debtors a discharge under Chapter 7. CBC received only $325 on its $50,000 claim.

At some point after the discharge, the Debtors asked CBC to terminate its financing statement because the underlying obligation had been discharged. CBC refused and informed the Debtors that the financing statement would remain in place until the Debtors surrendered the full amount demanded by CBC.

CBC did not stop at refusing to terminate the financing statement. In January 2014, CBC filed a continuation statement to extend the effectiveness of the record for another five years.

In May 2014, the Debtors filed suit against CBC. The complaint alleged that CBC’s actions violated the discharge injunction. The Debtors asked the court to order CBC to terminate the financing statement and requested punitive damages, along with legal fees. The Debtors and CBC then brought cross-motions for summary judgment on these claims.

The court first addressed whether either CBC’s refusal to terminate the financing statement or its later filing of a continuation statement was a contemptuous act that violated the discharge injunction.

The granting of a discharge under the Bankruptcy Code gives rise to an injunction against any act to collect, recover, or offset a discharged debt as a personal liability of the debtor.  The Debtors claimed that CBC’s continuation statement violated the discharge injunction because the financing statement included after-acquired collateral. Because property acquired by the debtor after the commencement of the case was not subject to a security agreement entered into before commencement of the case, the Debtors alleged that CBC’s refusal to terminate and the act of renewing the financing statement with an after-acquired property clause violated the discharge injunction as a matter of law.

The court, however, framed the issue as whether CBC’s actions were taken against the Debtors in personam, violating the discharge injunction by trying to collect the debt against the debtors personally. Instead, the court noted that a number of cases have found that the renewal of a pre-petition lien, securing a debt where the underlying personal liability was discharged, was not a violation of the discharge injunction because these were in rem actions proceeding against the property subject to the lien.

The court was not persuaded by the Debtors’ focus on the after-acquired property clause. The Bankruptcy Code cuts off the application of the after-acquired property clause to assets acquired by the Debtors after the commencement of the bankruptcy case. While this fact may create confusion regarding the extent of CBC’s lien, it does not make renewal of the lien a violation of the discharge injunction. The Bankruptcy Code protects the after-acquired assets because the lien only attached to pre-petition property.

There was no assertion that CBC’s actions were actually a pretext to coerce or harass the Debtors. Consequently, the court held that CBC’s refusal to terminate the financing statement and later continuation of the record was not a violation of the discharge injunction and that CBC was entitled to summary judgment in its favor.

The takeaway from this case is that a secured creditor may take actions to preserve and continue financing statements filed before the commencement of a bankruptcy action. However, a secured party should proceed carefully to ensure that its actions are not construed as a pretext to collect a discharged personal obligation from the debtor. It is always a good idea to consult with legal counsel before filing UCC records related to a discharged obligation.


Paul Hodnefield is Associate General Counsel for CSC and a frequent speaker/writer on UCC due diligence issues. Please feel free to contact him with questions or comments at paul.hodnefield@cscglobal.com or 800-927-9801, ext. 61730.

UCC Expert’s Corner: Terminations, Continuations, and Bankruptcy