In re Roth, Bankruptcy No. 93-40460. Adv. No. 94-4006.

• Court: U.S. Bankruptcy Court — District of South Dakota
• Writing for the Court: PEDER K. ECKER
• Citation: In re Roth, 171 B.R. 357 (Bankr. S.D. 1994)
• Decision Date: 04 August 1994
• Docket Number: Bankruptcy No. 93-40460. Adv. No. 94-4006.
• Parties: In re William Matthew ROTH, Social Security No. XXX-XX-XXXX, and Bernice Marina Roth, Social Security No. XXX-XX-XXXX, Debtors. FARM CREDIT SERVICES, Plaintiff, v. William Matthew ROTH and Bernice Marina Roth, Defendants.

171 B.R. 357 (1994)

In re William Matthew ROTH, Social Security No. XXX-XX-XXXX, and Bernice Marina Roth, Social Security No. XXX-XX-XXXX, Debtors FARM CREDIT SERVICES, Plaintiff, v. William Matthew ROTH and Bernice Marina Roth, Defendants.

Bankruptcy No. 93-40460. Adv. No. 94-4006.

United States Bankruptcy Court, D. South Dakota, Southern Division.

August 4, 1994.

Douglas R. Kettering, Kabeiseman, Hosmer & Kettering, Yankton, SD, for plaintiff.

John Harmelink, Harmelink & Fox Law Office, Yankton, SD, for defendants/debtors.

MEMORANDUM DECISION

PEDER K. ECKER, Bankruptcy Judge.

The matter before the Court is a Complaint to Determine the Validity, Priority and Extent of Lien filed by Yankton, South Dakota, Attorney Douglas R. Kettering on behalf of Plaintiff Farm Credit Services hereinafter "FCS" and answered by Yankton, South Dakota, Attorney John Harmelink on behalf of Defendant Debtors hereinafter "Debtors". The underlying issue is whether the automatic stay tolls the time permitted under South Dakota law for filing an addendum to a collateral real estate mortgage¹ in order to continue the mortgagee's existing mortgage lien. This Memorandum Decision shall constitute Findings of Fact and Conclusions of Law as required by Federal Rule of Bankruptcy Procedure 7052. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(1).

I.

On January 9, 1985, Debtors filed a voluntary Chapter 11 bankruptcy petition. A plan of reorganization was confirmed February 12, 1986, and an order of discharge entered the same date. The confirmed plan incorporated a stipulated settlement agreement wherein Debtors agreed to amortize the claim of Mitchell-Huron Production Credit Association over a 240-month period and pay a balloon payment, consisting of the remaining balance, principal, and interest, after 84 months (seven years). Due to unforeseeable changes in circumstances, Debtors were unable to pay the remaining balance of approximately $571,798 when it became due, and on July 27, 1993, Debtors filed a Chapter 12 bankruptcy petition.²

As successor in interest to Mitchell-Huron Production Credit Association, FCS filed a $557,034.95 proof of claim in this Chapter 12 proceeding. Debtors objected to the proof of claim, stating that a collateral real estate mortgage they executed is now void. This adversary action was filed to determine the secured status of FCS as it relates to Debtors' chattels and real estate. In its complaint, FCS alleges it is secured in Debtors' chattels and real estate by virtue of notes, mortgages, and security agreements and a collateral real estate mortgage which is still perfected, since an addendum, required by state law, was timely filed "in light of the 362 Stay in effect during the Debtors Chapter 11 Bankruptcy file." Debtors answered the complaint, contending FCS does not have any security interest or mortgage lien interest in Debtors' personal or real property.

The Court issued a scheduling order to permit written argument and authorities, wherein the parties debate: a) the effect and timeliness of filed Uniform Commercial Code hereinafter "U.C.C." financing statements; b) the timeliness of the addendum filed to the collateral real estate mortgage; and c) the effect of the stipulation incorporated into Debtors' Chapter 11 bankruptcy plan.

II. A.U.C.C. Financing Statements

Before, during, and after Debtors' Chapter 11 bankruptcy proceeding, Mitchell-Huron Production Credit Association and/or its successors, including FCS, filed several financing statements and continuation statements covering Debtors' farm machinery, livestock, and crops. One of the key financing statements, # 19248, was filed December 3, 1979, to perfect a security interest in Debtors' equipment, livestock, feed, grain, and general farm products. Debtors argue the effectiveness of this pre-petition filing has since expired, along with the security interest it perfected. Believing financing statement # 19248 was "last continued" August 21, 1984, Debtors calculate its expiration date as follows:

The security interest claimed by FCS pursuant to financing statement # 19248 expired five (5) years and sixty (60) days after December 3, 1979, or sixty (60) days following confirmation of debtors\' Chapter 11 Plan on February 12, 1986. Pursuant to SDCL 57A-9-403(2), the security interest in Roths\' chattel property expired on or about April 14, 1986.

In South Dakota, a financing statement is effective five years plus sixty days. S.D.C.L. § 57A-9-403(2).³ The effectiveness will lapse on that expiration date unless a continuation statement is filed prior to the lapse. Id. If an appropriate continuation statement is filed, "the effectiveness of the original statement is continued for five years after the last date to which the filing was effective whereupon it lapses . . . unless another continuation statement is filed prior to such lapse." S.D.C.L. § 57A-9-403(3). Each new five-year period under a continuation statement begins from the expiration of the preceding period, and there is no limit to the number of continuation statements that may be filed. Reiley, Guidebook to Security Interests in Personal Property § 3.073, at 3-27 (2d ed., 1992). When a security interest, perfected by filing, exists at the time insolvency proceedings are commenced, "the security interest remains perfected until termination of the insolvency proceedings and thereafter for a period of sixty days or until expiration of the five year and sixty-day period, whichever occurs later." S.D.C.L. § 57A-9-403(2).⁴

Based on a December 3, 1979, filing date, financing statement # 19248 was effective through February 1, 1985. A continuation statement was filed August 21, 1984, to extend the expiration of the preceding period another five years, or until February 1, 1990. Because a security interest, perfected by filing, existed when Debtors filed their January 9, 1985, Chapter 11 bankruptcy petition, the security interest remained perfected until the later of these two dates:

• the termination of Debtors\' Chapter 11 bankruptcy proceeding on February 12, 1986, plus sixty days, which was April 13, 1986; or

• the expiration of the five year and sixty-day period, which was February 1, 1990.

Without a second continuation filing prior to February 1, 1990, the security interest would have lapsed, however, on December 22, 1989, FCS did, in fact, file a second continuation statement to extend the effective period another five years, or until February 1, 1995. Financing statement # 19248 is still valid, and the related security interest still perfected.⁵

B. Addendum to Collateral Real Estate Mortgage

On December 2, 1980, Debtors gave Production Credit Association of the Midlands hereinafter "PCAM" a standard form real estate mortgage and a Collateral Real Estate Mortgage pursuant to S.D.C.L. § 44-8-26.⁶ On February 16, 1984, Debtors gave PCAM an "Additional Collateral Real Estate Mortgage" to secure a demand payment of $160,000. South Dakota's collateral real estate mortgage provision provides:

When payable on demand, collateral real estate mortgages are effective for five years and sixty days from the date of filing. The security interest of the mortgagee can be extended only by filing an addendum . . . before five years and sixty days expire. If an addendum is not timely filed, the lien created by the collateral real estate mortgage shall lapse.

S.D.C.L. § 44-8-26. Based on a February 16, 1984, filing date, this additional collateral real estate mortgage was effective through April 18, 1989, yet FCS did not file its Addendum to Mortgage/Collateral Real Estate Mortgage until January 17, 1990. The question now raised is whether Debtors' intervening Chapter 11 bankruptcy proceeding, which existed from January 9, 1985, until February 12, 1986, extended the time in which to file the addendum an additional thirteen months.

Debtors conclude tolling is not apropos. First, PCAM had ample time to comply with S.D.C.L. § 44-8-26 — it could have filed the addendum any time between the February 12, 1986, discharge and the April 18, 1989, expiration date. Second, there is no justification for tolling, since the collateral real estate mortgage did not lapse during the bankruptcy; in fact, the filing was still in effect for more than three years after bankruptcy discharge was granted. Third, no case law supports FCS's argument — it appears PCAM simply forgot or neglected to timely file the addendum; therefore, FCS's liens upon the real estate and chattel property lapsed by operation of law. Finally, since an untimely addendum does not resurrect expired liens, the Court should declare the liens void.

FCS argues tolling is pertinent because 11 U.S.C. § 362(a) prevents "any act to create, perfect, or enforce any lien," and filing an addendum is tantamount to an act of perfection. Based on this contention, Debtors' Chapter 11 proceeding would have added thirteen months to the effective period of the collateral real estate mortgage, making it valid until May 17, 1990, meaning the January 17, 1990, addendum was timely filed. Further, FCS believes tolling is a necessary remedy to an existing problem:

A mortgagee under a collateral real estate mortgage does not receive the same protection during and immediately after insolvency proceedings as that afforded a U.C.C. secured party through SDCL A-9-403 sic.

. . . .

Without the protection of SDCL A-9-403 sic, mortgagees under a collateral real estate mortgage find themselves in the same predicament that U.C.C. secured parties were in before the enactment of the 1972 Revision, as discussed above. Unless it is determined that the automatic stay provisions of 11 U.S.C. 362 toll the running of the effective time period for collateral real estate mortgages, the mortgagees will be faced with situations where their lien will lapse during insolvency proceedings.

Urging a similar result, FCS cites various Article 9 cases decided before the 1972...