EDWARD M. CHEN, District Judge.
Petitioner Richard Stierwalt initiated this matter after obtaining a judgment against Respondents Associated Third Party Administrators ("ATPA") and United Benefits & Pension Services, Inc. ("UBPS") in a New York federal court. The judgment totaled more than $626,000. Mr. Stierwalt asked this Court for, and obtained, a writ of execution so that he could get levy on monies held by ATPA in a bank account held with U.S. Bank within this District. After the U.S. Marshal obtained the funds from the bank, but before the funds could be released to Mr. Stierwalt, third-parties CAMOFI Master LDC and CAMHZN Master LDC (collectively, "CAM") filed a statement, stating that CAM had a security interest in the monies in the bank account.
Currently pending before the Court is a dispute between Mr. Stierwalt and CAM as to whether the monies in the U.S. Bank account should be distributed to Mr. Stierwalt.
Based on submissions in this case and the related case, it appears that ATPA and UBPS are affiliated entities — i.e., ATPA is a wholly owned subsidiary of UBPS. Also, it appears that a third party, Med-Tech Health Solutions, LLC ("Med-Tech"), owns the majority of the stock of ATPA and UBPS. Finally, it appears that Mr. Stierwalt was once the CEO of both ATPA and UBPS,
After Mr. Stierwalt was terminated, he initiated an arbitration against ATPA and UBPS, claiming that he was improperly terminated without cause, which entitled him to relief under the relevant employment agreement. The arbitrator found in favor of Mr. Stierwalt, and a New York district court confirmed the arbitration. ATPA has appealed that ruling to the Second Circuit.
Although an appeal is pending, Mr. Stierwalt obtained a writ of execution from this Court so that it could collect on the judgment (more than $626,000) obtained. Pursuant to that writ of execution, the U.S. Marshal levied on a bank account that ATPA held with U.S. Bank. However, before any funds were released to Mr. Stierwalt, CAM filed a statement, claiming a third-party security interest in the bank account monies.
CAM claims a security interest because, in November 2012, it loaned more than $12 million to ATPA/UBPS in the form of Secured Notes. In connection with the Secured Notes, ATPA/UBPS also signed a Security Agreement in November 2012. Furthermore, after ATPA/UBPS failed to make payments under the Notes, and CAM sued the guarantors of the Notes and prevailed, ATPA/UBPS (among others) signed a Settlement Agreement in which it confessed to judgment.
There does not appear to be any dispute that the Secured Notes provide that they are "senior in right of payment to any and all other indebtedness of the Company [i.e., ATPA/UBPS]." Docket No. 10 (Exhibits 4 and 5) (Secured Notes ¶ 7(j)).
There also does not appear to be any dispute that, under the Security Agreement, CAM has a security interest in ATPA/UBPS's collateral, with collateral being defined as
Docket No. 10 (Exhibit 6) (Security Agreement ¶ 1(a)).
The procedures for this hearing are governed by the California Code of Civil Procedure. See Fed. R. Civ. P. 69(a)(1) (providing that "[a] money judgment is enforced by a writ of execution" and "[t]he procedure on execution — and in proceedings supplementary to and in aid of judgment or execution — must accord with the procedure of the state where the court is located, but a federal statute governs to the extent it applies").
California Code of Civil Procedure § 720.210 provides that, "[w]here personal property has been levied upon under . . . a writ of execution . . ., a third party claiming a security interest in or lien on the personal property may make a third-party claim under this chapter if the security interest or lien claimed is superior to the creditor's lien on the property." Cal. Code Civ. Proc. § 720.210(a).
Section 720.250 provides that, "if a third-party claim is timely filed, the levying officer may not do any of the following with respect to the personal property in which the security interest or lien is claimed" — e.g., "[d]eliver possession of the property to the creditor" or "[p]ay proceeds of collection to the creditor." Id. § 720.250(a).
Section 720.360 provides that, "[a]t a hearing on a third-party claim the third person has the burden of proof." Id. § 720.360.
Section 720.390 provides that, "[a]t the conclusion of the hearing, the court shall give judgment determining the validity of the third-party claim and may order the disposition of the property or its proceeds in accordance with the respective interests of the parties. Subject to Section 720.420 [which allows for an appeal], the judgment is conclusive between the parties to the proceeding." Id. § 720.390.
Section 720.400 provides that "[n]o findings are required in proceedings under this chapter," id. § 720.400, and § 720.410 provides that "[t]here is no right to a jury trial in a proceeding pursuant to this chapter." Id. § 720.410.
In essence, the Court has before it competing claims to ATPA assets. As noted above, CAM maintains that it has a security interest in the U.S. Bank account.
Oxford St. Props., LLC v. Rehab. Assocs., LLC, 206 Cal.App.4th 296, 307-08 (2012).
In the instant case, Mr. Stierwalt does not seem to dispute that CAM has a security interest that has attached (i.e., step one). Nor does he dispute that the security interest is senior to his claim, i.e., in terms of time (i.e., step three). Mr. Stierwalt, however, does contest whether CAM perfected its security interest (i.e., step two). See also Cal. Comm. Code § 9308, UCC Official Comments ¶ 2 (stating that, "in general, after perfection the secured party is protected against creditors and transferees of the debtor").
Security interests and perfection thereof are governed by the California Commercial Code, which in turn is based on the Uniform Commercial Code. California Commercial Code § 9308 provides that "a security interest is perfected if it has attached and all of the applicable requirements for perfection in Sections 9310 to 9316, inclusive have been satisfied." Cal. Comm. Code § 9308(a).
In determining whether the applicable requirements of §§ 9310-16 have been satisfied in the instant case, the Court must first assess what exactly is the claimed security in which CAM asserts an interest. The claimed security is the U.S. Bank account. However, that bank account may be seen as either a direct security or an indirect security — i.e., CAM could assert a direct interest in the bank account because, under the Security Agreement, collateral includes deposit accounts or, alternatively, CAM could assert an indirect interest in the bank account because, under the Security Agreement, collateral includes the proceeds of contract rights. Different provisions in the California Commercial Code are applicable when the bank account is viewed as a direct security compared to when the bank account is viewed as an indirect security.
To the extent CAM claims it has perfected a direct security interest (i.e., the collateral is the bank account itself), that assertion is weak. CAM maintains it has perfected a security interest because "[a] security interest in . . . deposit accounts . . . may be perfected by control of the collateral under Section . . . 9104," Cal. Comm. Code § 9314(a), and, under § 9104, "[a] secured party has control of a deposit account if . . . [t]he secured party becomes the bank's customer with respect to the deposit account." Id. § 9104(a)(3). But, as explained by the UCC Official Comments, "[u]nder subsection (a)(3), a secured party may obtain control by becoming the bank's `customer,' as defined in Section 4-104." Id., UCC Official Comments ¶ 3 (emphasis added); see also Cal. Comm. Code § 9102(b) (providing that the definition of, inter alia, "customer" in § 4104 applies to Division 9 on Secured Transactions). California Commercial Code § 4104 provides that "`[c]ustomer' means a person having an account with a bank or for whom a bank has agreed to collect items." Cal. Comm. Code § 4104(a)(5). CAM has not shown how it has met this definition of "customer."
However, CAM's claim of perfection of an indirect security interest (i.e., the bank account represents proceeds derived from ATPA's contract rights) is stronger. California Commercial Code § 9312 provides that "[a] security interest in chattel paper, negotiable documents, instruments, or investment property may be perfected by filing." Id. § 9312(a); see also id. § 9102(a)(47) (defining "instrument" as "a negotiable instrument or any other writing that evidences a right to the payment of a money obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary endorsement or assignment"). As reflected in its third-party statement, CAM claims that it has filed the necessary UCC financing statements, see Docket No. 10 (St. ¶ 13) (asserting that "Claimants' security interest has been perfected through UCC financing statements and associated documents, copies of which are attached hereto as Exhibits 7, 8, 9, and 10"), and Mr. Stierwalt does not really argue to the contrary.
Mr. Stierwalt, however, makes other arguments in his opposition. For example, Mr. Stierwalt argues that the monies in the bank account are not "proceeds" because there is insufficient evidence that any contract rights gave rise to those payments of money to ATPA. Mr. Stierwalt also argues that, even assuming ATPA had contract rights which gave rise to proceeds, the bank account contains commingled funds, i.e., both proceeds and nonproceeds, and CAM has failed to identify which monies are the proceeds.
Neither of these arguments is especially convincing. As to the first argument, CAM has submitted a declaration from ATPA's CEO (Henry Ritter) which states that "ATPA performs its services on behalf of its trust clients pursuant to written service agreements" and that "[t]he revenue that ATPA generates is governed exclusively by the service agreements." Ritter Decl. ¶ 7. A sample written service agreement is attached to the Ritter declaration as Exhibit 1. Mr. Ritter's declaration continues that, consistent with the service agreements, "ATPA routinely charges its clients fees on a monthly basis and bills those fees in a written `Statement of Administrative Services' or `Statement of Administrative Fees.'" Ritter Decl. ¶ 9. "Once a billing statement is sent out, it is booked as an account receivable (`AR')." Ritter Decl. ¶ 10. When a client payment is actually made, ATPA then deposits the client payment into the bank account. See Ritter Decl. ¶ 12.
In light of the sample service agreement and Mr. Ritter's declaration, it does appear that ATPA had contract rights which gave rise to payments from its clients.
To the extent Mr. Stierwalt tries to characterize the payments made by clients into the bank account as "advances" (i.e., nonproceeds) rather than proceeds, he fares no better. In his declaration, Mr. Stierwalt states that "ATPA is generally paid in advance for its services. Only a small fraction of ATPA's clients pay ATPA following ATPA's provision of services to them. Payments received by ATPA prior to its delivery of associated services comprise approximately ninety-five percent (95%) of ATPA's revenues." Stierwalt Decl. ¶ 10. However, there is nothing to corroborate these statements made by Mr. Stierwalt.
More important, even if the Court were to credit Mr. Stierwalt's statements, that would not necessarily result in a decision in his favor. Mr. Stierwalt relies on a case, Imperial NH3 v. Central Valley Feed Yards, Inc., 70 Cal.App.3d 513 (1977), where a state court explained that, because "[t]here are no `proceeds' without a sale," payments advanced prior to a sale were not proceeds. Id. at 520. Mr. Stierwalt contends that, based on Imperial, when ATPA clients made payments in advance of ATPA providing any services, those were not proceeds as no services had been rendered yet. Rather, those payments were just "unsecured debt." Id. The problem for Mr. Stierwalt is that the Imperial court stated that, "until delivery [of the goods], the advance payments were not `proceeds' but only an unsecured debt." Id. (emphasis added). Therefore, once ATPA provided services (and presumably it did), then any advance payments thereby became proceeds.
Finally, Mr. Stierwalt contends that, even if the monies are deemed proceeds, there remain obstacles to CAM claiming a security interest. For example, Mr. Stierwalt notes that there are more than just client payments that go into the bank account. While this is true, Mr. Ritter's declaration explains that the funds in the bank account "are comprised almost entirely of revenue generated from ATPA AR [accounts receivable], with the exception of a few very small amounts such as the occasional $10 employee payment for a lost security badge and the like." Ritter Decl. ¶ 12. Thus, any commingling is negligible at best. Mr. Stierwalt also contends that any perfected security interest in the proceeds became unperfected pursuant to California Commercial Code § 9315, see Cal. Comm. Code § 9315(d) (providing that "[a] perfected security interest in proceeds becomes unperfected on the 21st day after the security interest attaches to the proceeds unless any of the following conditions is satisfied"), but, as CAM points out, that rule does not apply where "[t]he proceeds are identifiable cash proceeds." Id. § 9315(d)(2).
Accordingly, for the foregoing reasons, the Court finds that, in all likelihood, CAM had a perfected security interest because the money in the U.S. Bank account represents proceeds of contract rights. Even assuming such, however, CAM cannot prevail for the reasons discussed below.
Even if CAM had a perfected security interest, that would not dictate a result in CAM's favor because Mr. Stierwalt argues that there are still other reasons why he, and not CAM, should be able to get the money — (1) based on California Commercial Code § 9332(b) and (2) based on equitable subordination. The Court need not entertain the equitable subordination argument because it finds in Mr. Stierwalt's favor on the § 9332(b) argument.
Section 9332(b) provides as follows: "A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party." Cal. Comm. Code § 9332(b). The UCC Official Comments for § 9332 explain that the "section affords broad protection to transferees who take funds from a deposit account and to those who take money." Cal. Comm. Code § 9332, UCC Official Comments ¶ 2. The Comments further explain that
Id., UCC Official Comments ¶ 3.
As an initial matter, the Court takes note that an argument could be raised that a judgment creditor who gets funds from a deposit account pursuant to a writ of execution is not a "transferee of funds" for purposes of § 9332(b). However, Mr. Stierwalt points out that there is a case in which a court found the opposite — i.e., that a judgment creditor is a transferee of funds for purposes of the statute. That case is Orix Financial Services, Inc. v. Kovacs, 167 Cal.App.4th 242 (2008).
In Orix, the plaintiff-company, Orix, had a security interest in the goods, chattels, and property of another company, ADA. Separately, the defendants obtained a judgment against ADA. The defendants obtained a writ of execution against ADA's deposit accounts. All of the funds in the accounts were derived from the proceeds of the sale of ADA's inventory and collection of its accounts receivable. See id. at 246. The defendants successfully levied on the deposit accounts. Orix subsequently sued defendants for unjust enrichment and imposition of constructive trust. See id. at 245. The defendants' "satisfaction of [their] judgment from [the deposit account] funds [was] the basis of Orix's complaint." Id. at 246. The defendants argued that Orix's complaint should be dismissed based on § 9332(b).
The state court began its analysis by taking note of the UCC Official Comments to § 9332. It then pointed out that § 9332(b) stemmed from an earlier version of the UCC —
Id. at 247.
With respect to transfer in the "ordinary course" (as used in comment 2(c) to former § 9-306), the state court took note of then-Circuit Judge Breyer's comments (from Harley-Davidson Motor Co. v. Bank of New England, 897 F.2d 611 (1st Cir. 1990)) that that phrase should not be construed too narrowly:
Id. at 248 (internal quotation marks omitted; emphasis in original).
The state court also took note that comment 2(c) to former § 9-306, which used the language of "operation of the debtor's business" and "ordinary course," did not make its way into § 9332, when enacted (as part of a revision to the UCC). "[O]nly the language regarding `collusion' did so. . . . [T]he `collusion' standard is the standard most protective of transferees and is, thus, consistent with that suggested by [now] Justice Breyer." Id. at 249. "Thus, the history of the code and its amendments suggests that only transferees who act in collusion with the debtor are excepted from the broad protections of section 9-332(b)." Id. at 249.
Orix, of course, did not argue that the defendants colluded with ADA to defeat Orix's interest; instead, Orix argued that "a judgment creditor is not the kind of transferee contemplated by section 9-332(b)." Id. On this point, the state court disagreed, stating as follows:
Id. at 250.
The court also disagreed with Orix's assertion that § 9332(b) "should not extend to a lien creditor who took possession of the funds by garnishment rather than any activity or payment by the debtor." Id. In response to this argument, the court stated that the defendants' "status as a creditor is irrelevant, and there is no requirement that the debtor actively or even voluntarily make a payment." Id. A transfer "indisputedly [sic] occurred." Id.
As indicated by the above, Orix clearly supports Mr. Stierwalt's position. Moreover, CAM's attempt to distinguish the case falls short. According to CAM, Orix is distinguishable because the case
Docket No. 18 (Br. at 17). While CAM is correct that Orix involved a different procedural posture, there is no material difference. The bottom line is that Orix was claiming as a secured party against a transfer of funds from a bank account, just as CAM is doing in the case at bar.
CAM protests that,
Docket No. 18 (Br. at 17). But this argument presented by CAM is too far reaching. Section 9332(b) has applicability to transfers made from deposit accounts only. See Cal. Comm. Code § 9332(b) ("A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party."). The California legislature placed deposit accounts on special footing in order to safeguard against the potential disruption to commerce that would occur if payments from such accounts were subjected to the uncertainty of third-party claims.
The Court thus concludes that there was a transfer pursuant to § 9332(b) when the U.S. Marshal levied upon the bank account, such that Mr. Stierwalt "takes the funds free of a security interest in the deposit account." Cal. Comm. Code § 9332(b).
CAM contends that, even if § 9332(b) is generally applicable to the instant case, CAM — and not Mr. Stierwalt — should still prevail because the exception provided for in the statute, i.e., the exception for collusion, is applicable. That is, CAM takes the position that Mr. Stierwalt acted in collusion with ATPA in violating CAM's rights as a secured party. CAM argues that, necessarily, there was collusion between Mr. Stierwalt and ATPA because Mr. Stierwalt was acting as ATPA's CEO when he, e.g., "wrongfully extracted over $290,000 from the Company for personal uses" (as alleged in the related case), all to the detriment of CAM as a secured party. Docket No. 18 (Br. at 18).
CAM's agency-based argument seems problematic as a legal proposition. Cf. United States ex rel. Campie v. Gilead Scis., Inc., No. C-11-0941 EMC, 2015 U.S. Dist. LEXIS 1635, at *50-51 (N.D. Cal. Jan. 7, 2015) (taking note of the doctrine that a corporation cannot conspire with its own employees or agents because "`it is not possible for a single legal entity consisting of the corporation and its agents to conspire with itself, just as it is not possible for an individual person to conspire with himself'"). But putting that problem aside, there is a more fundamental problem with CAM's position. That is, § 9332(b) is directed at a fraudulent transfer between the debtor and the transferee. The "bad acts" on which CAM relies have nothing to do with the transfer of money from the U.S. Bank account to Mr. Stierwalt at issue here. Rather, they concern acts which predated the transfer. Consistent with this point, Mr. Stierwalt points out that collusion could hardly be said to have happened given that he had to sue ATPA for wrongful termination and, only after prevailing, seek to execute on funds held by ATPA. In any event, there is insufficient evidence that challenged transfer of funds here was the result of collusion.
The Court therefore concludes that the collusion exception provided for in § 9332(b) is not applicable.
For the foregoing reasons, CAM appears to have a perfected security interest in the U.S. Bank account. However, as a matter of law, Mr. Stierwalt can take the "transferred" funds (i.e., from the bank to him) clear of the asserted security interest pursuant to § 9332(b).
The Court therefore orders that that the Clerk of the Court enter a judgment in favor of Mr. Stierwalt with respect to CAM's third-party claim of a security interest. The U.S. Marshal is authorized to release the disputed funds to Mr. Stierwalt.
The hearing on the third-party claim of security interest is hereby
But Mr. Stierwalt's argument ignores the fact that the sample agreement provided by CAM is a representative agreement between ATPA and its customers. Moreover, even the absence of any written contract would not necessarily be damning. Nothing suggests that contract rights as collateral only arise where there is a written contract. Presumably, there was a contract (i.e., agreement) of some kind (oral or written) with the clients, or the clients would not be paying ATPA at all.
