Summary of a Recent
Judicial Development in
Secured Transactions

Litigation Does Not Toll Five-Year Period of
Effectiveness of Financing Statements

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Thermal Supply, Inc. v. Big Sky Beef, LLC, 346 Mont. 341 (Mont. 2008), the Montana Supreme Court held that litigation does not extend the five-year effectiveness period for financing statements, and because a creditor had not timely filed a continuation statement, any perfected security interest it held had lapsed and become as though it had never been perfected.

Background

Thermal Supply, a refrigeration equipment supplier, filed this action in March 2004 against Big Sky Beef, a meat packing plant, after Big Sky defaulted on payments for equipment that Thermal Supply had sold to it. Id. at 342-43. Thermal Supply had filed its original financing statement in June 2001 and never filed a continuation statement. Id. at 342. Saulsbury, another creditor who had a perfected security interest in the collateral, intervened and argued that Thermal Supply did not have a valid security interest. Id. at 343.

Arguments

Saulsbury argued that Thermal Supply's security interest lapsed when it failed to file a continuation statement. Id. at 344.

Thermal argued that any need to file a continuation statement was tolled when it initiated a suit to enforce its security interest. Id.

Analysis and Holdings

Generally, a financing statement is effective for five years from the date of filing and will lapse, causing the secured party to become unperfected, unless a continuation statement is filed before the end of the five-year period. Id. If a continuation statement is not filed within five years, the perfection lapses and the security interest "is deemed never to have been perfected." Id. at 344-45. The court noted that no provision under UCC Revised Article 9 expressly tolls or extends the period of effectiveness of a financing statement during litigation, and held that Thermal Supply's perfected security interest had lapsed due to its failure to timely file a continuation statement, and was therefore deemed never to have been perfected. Id. at 347.

The case was decided on October 21, 2008.