JAMES S. STARZYNSKI, Bankruptcy Judge.
This matter is before the Court on cross motions
The facts are, generally, not disputed. Debtor proposed forty-one undisputed material facts. HDSB agreed they were not disputed. HDSB proposed two additional facts. Debtor agreed to Fact 42 and part of the Fact 43
The Court finds the following to be undisputed:
1. On or about October 2, 2006, the Debtor, as Borrower, executed a promissory note in favor of HDSB in the original principal amount of $751,000.00 (the "Note"). High Desert State Bank's Proof of Claim, Claim 15-1 ("HDSB Claim"), pp. 3-6.
2. On or about October 2, 2006, the Debtor executed a Line of Credit Mortgage (the "Grants Mortgage") in favor of HDSB on property situated in Grants, New Mexico and described as follows:
(the "Grants Property"). HDSB Claim, 15-1, pp. 7-15; Doc. No. 145-1 (Objection), Exhibit A. The Grants Mortgage also appears at doc 165-2, pp. 5-10 (but missing half the pages, presumably due to one sided copying of a two sided document), and at doc 168-1, pp. 4-14.
3. The Grants Mortgage was recorded on October 5, 2006 at Book 16 p. 5203, as instrument # 200603860 in the records of Cibola County, New Mexico. Doc. No. 145-1 (Objection), Exhibit A.
4. The Grants Mortgage secures K-Ram's obligations to the Bank under the Note, up to a maximum obligation of $1,502,000. Doc. No. 145-1 (Objection), Exhibit A, ¶¶ 3, 4.
5. Pursuant to a Loan Modification Agreement dated as of October 2, 2007 between the Debtor and HDSB, Gilbert and Karen Lovato (the "Lovatos") agreed to provide, as additional collateral for the
HDSB Claim, 15-1, p. 13-17. This property is referred to in this Motion as the "Williams Property."
6. The Lovatos executed a mortgage (the "Williams Mortgage") dated November 2, 2007 in favor of HDSB on the Williams Property, which is also described as 4818 Williams, Albuquerque, New Mexico. Exhibit 1 to this Motion, Affidavit of Gilbert J. Lovato (hereinafter "Lovato Aff.") ¶ 4, Exhibit B.
7. The Williams Mortgage was recorded on November 9, 2007, as instrument # 2007155852, of the records of Bernalillo County, New Mexico. Exhibit 1, Lovato Aff., ¶ 4, Exhibit B.
8. The Williams Mortgage secures the obligations of Debtor and the Lovatos under the Note. Exhibit 1, Lovato Aff., ¶ 4, Exhibit B, page 2, ¶ 4.
9. Pursuant to a Loan Modification Agreement dated March 24, 2008, the principal amount of the Note was increased to $1,250,000.00. HDSB Claim, Doc. 15-1, pp. 16-18.
10. Gilbert and Karen Lovato are guarantors of the Debtor's obligations to HDSB under the Note. Exhibit 1, Lovato Aff., ¶ 3, Exhibit A, page 1.
11. On December 26, 2007, Westar filed a lien against the Grants Property in the amount of $33,495.00 (the "Lien"), and recorded in Cibola County, New Mexico in Book 17 at Page 9476 as Document # 200704241. Adv. Pro 09-1072, Doc. No. 3, pp. 10-25.
12. On May 19,2008, the Debtor and the Lovatos ("Petitioners") filed an action against Westar in the Thirteenth Judicial District Court, Cibola County, numbered CV-2008-0163 to set aside the Lien (the "Westar Litigation"). Adv. Pro. 09-1072, Doc. No. 3, p. 1
13. On or about August 19, 2008, the "Stipulated Order Discharging Lien on Deposit of Funds to Secure Claims" was entered in the Westar Litigation (the "Stipulated Order"). Doc. No. 145-2 (Objection), Exhibit B.
14. The parties to the Stipulated Order are K-Ram and the Lovatos, as Petitioners, and Westar and Barry Lytle, as Respondents. Doc. No. 145-2 (Objection), Exhibit B.
15. The Order orders Petitioners to deposit the sum of $50,000 with the clerk of the Thirteenth Judicial District Court "as the amount of cash necessary to be deposited by Petitioners for the discharge of the... Lien. ..." and that, upon such deposit, the "Claim of Lien ... is discharged and the Cibola County Clerk is directed to cancel such Claim of Lien. ..." Doc. No. 145-2 (Objection), Exhibit B, pp. 1-2.
16. The Order was recorded on August 21, 2008 in Cibola County, New Mexico at Book 18 p. 5653, as document # 200802260. Exhibit 2 to this Motion, Affidavit of Don Sanchez (hereinafter "Sanchez Aff.") ¶¶ 3, 4, Exhibit B.1.
17. On or about August 20, 2008, K-Ram sold to Valerie and Jeremy Liska and conveyed by Warranty Deed Lot numbered
18. At closing, the "gross amount due to seller" was reduced by settlement charges including the following:
1304. Payoff: High Desert $155,500.00
State Bank
1305. Funds Held: 13th $ 50,000.00
Judicial District Court
Exhibit 2, Sanchez Aff., ¶¶ 6, 7, Exhibit C lines 601, 602, 1304, 1305.
19. The title company that closed the sale disbursed the $50,000 to the Thirteenth Judicial District Court. Exhibit 2, Sanchez Aff., ¶¶ 6, 7, Exhibit C.
20. On August 26, 2008, HDSB executed a Partial Release of Mortgage as to Lot 7 (the "Lot 7 Release") stating that: "High Desert State Bank, mortgagee under [the Grants Mortgage] ... does hereby discharge all of the real estate mentioned in said mortgage from the lien and operation thereof." Exhibit 2, Sanchez Aff., ¶¶ 3, 4, 5, Exhibit B.3.
21. The Lot 7 Release was recorded in Cibola County on August 29, 2008 in Book 18 at page 5807. Exhibit 2, Sanchez Aff., ¶¶ 3, 4, 5, Exhibit B.3.
22. The "Assignment of Any and All Excess Proceeds" (the "Assignment") attached to the Objection is unrecorded. Doc. No. 145 (Objection), Exhibit C.
23. On February 6, 2009, HDSB filed a Complaint for Foreclosure (the "Foreclosure"), in the matter styled High Desert State Bank v. Gilbert J. Lovato, Karen L. Lovato, K-Ram, Inc., et al., No. CV-200901321, in the Second Judicial District Court, seeking foreclosure of the mortgages on the Grants Property and the Williams Property. Doc. No. 51 (Stay Relief Order) ¶ 11; Exhibit 1, Lovato Aff., ¶ 5, Exhibit C.
24. On February 24, 2009, the Debtor filed a chapter 11 petition, commencing this Bankruptcy Case. Doc. No. 1
25. The Debtor listed the $50,000 as an asset. Doc. No. 17, p. 7, Schedule B.35.
26. The Debtor listed HDSB's security for the Note as the Grants Property owned by the Debtor and the Williams Property. Doc. No. 17, pp. 3, 13, Schedule A and D.
27. On April 24, 2009, this Court entered the Stipulated Order Terminating Automatic Stay and Approving Abandonment of Property of the Estate (the "Stay Relief Order"). Doc. No. 51.
28. The Stay Relief Order provides that the "automatic stay is hereby lifted to allow the Bank in the Foreclosure Action... to fully exercise [its] state law rights and remedies in regard to the [Grants] Property, including, but not limited to continuing the Foreclosure Action. ..." and approved an abandonment of the Grants Property. Doc. No. 51, page 3.
29. On May 22, 2009, the Debtor removed the Westar Litigation to this court. Adv. Pro. 09-1072, Doc. 1.
31. On or about May 12, 2009, K-Ram sold to Dolores Vallejos and conveyed by Warranty Deed Lots Five (5) and Six (6) of Block Two (2) of the Grants Property and now known as Lot Numbered 5A of Block Two (2) ("Lot 5A"). Exhibit 2, Sanchez Aff., ¶¶ 3, 4, 5, 8, Exhibit B.4, B.5, Exhibit D.
32. On June 16, 2009, HDSB executed a Partial Release of Mortgage as to Lot 5A (the "Lot 5A Release") stating that: "High Desert State Bank, mortgagee under [the Grants Mortgage] . . . does hereby discharge all of the real estate mentioned in said mortgage from the lien and operation thereof." Exhibit 2, Sanchez Aff., ¶¶ 3, 4, 5, Exhibit B.6.
33. The Lot 5A Release was recorded in Cibola County on June 24, 2009 in Book 19 at page 2008. Exhibit 2, Sanchez Aff., ¶¶ 3, 5, Exhibit B.6.
34. On July 22, 2009, the $50,000 was transferred from the Thirteenth Judicial District Court, Cibola County, to the registry of this Court. Adv. Pro Docket # 9.
35. On or about January 20, 2010, HDSB, as "Lender," and the Debtor and the Lovatos, as "Borrowers," entered into an Agreement for Deed in Lieu of Foreclosure (the "Deed in Lieu Agreement"). Exhibit 1, Lovato Aff., ¶ 6, Exhibit D.
36. The Deed in Lieu Agreement describes the subject property as the Grants Property Less Lot 7 and Lot 5A and the Williams Property. Exhibit 1, Lovato Aff., ¶ 6, Exhibit D at pages 1-2.
37. The Deed in Lieu Agreement contains the following provisions:
Exhibit 1, Lovato Aff., ¶ 6, Exhibit D.
38. On February 1, 2010, a Special Warranty Deed from K-Ram to HDSB to the Grants Property less Lot 7 and 5A was recorded in Cibola County, New Mexico, in Book 19 at page 6739 as Document No. 201000205. Exhibit 2, Sanchez Aff., ¶¶ 3, 4, 5, Exhibit B.7.
39. On December 30, 2009, a Special Warranty Deed from the Lovatos to HDSB for the Williams Property was recorded in Bernalillo County, New Mexico, as Document #2009140869. Exhibit 1, Lovato Aff., ¶ 7, Exhibit E.
40. By orders entered February 26, 2010 and March 3, 2010, this Court approved a settlement of the Westar Litigation pursuant to which Westar accepted $10,000 in full settlement of its claims to the $50,000, leaving the $40,000 undistributed. Doc. No. 147, Doc. No. 150.
41. HDSB objects to Debtor receiving any of the $40,000, on the following grounds:
42. The funds deposited into the Court Registry pursuant to the Stipulated Order Discharging Lien on Deposit of Funds to Secure Claims (the "Stipulated Order") were deposited with the consent of High Desert State Bank so that the sale of the mortgaged property could occur free and clear of the lien of Westar. Affidavit of Rusty Dillon, attached hereto as Exhibit A, ¶ 3.
43. Consent of HDSB was necessary for the sale to occur, since the bank was allowing $50,000 of the sale proceeds which it would rightly receive to be used to bond around the lien of Westar.
With respect to the second sentence of Fact 43, HDSB alleges, but Debtor disputes, that consent to the use of the proceeds to bond around the lien was only given with the expectation
44. In discussions between Gilbert Lovato and representatives of HDSB including Russell C. Dillon, in connection with the Deed in Lieu Agreement dated January 20, 2010, no bank representative said anything about or made reference to the bank having a continuing claim to the $50,000. Affidavit of Gilbert Lovato, Exhibit 1, ¶¶ 4, 6.
45. Mr. Lovato's understanding was that by entering into the Deed in Lieu Agreement, K-Ram's liability to HDSB under the Note and/or the Mortgages was being satisfied in full by the deeds to the bank of the remaining Grants property and the Williams property. Exhibit 1, Lovato Response Aff. ¶ 5.
46. At the time the Deed in Lieu Agreement was executed, Mr. Lovato understood that the bank had no further claim to the funds. Exhibit 1, Lovato Response Aff. ¶ 7.
47. The appraised value of the properties deed to HDSB pursuant to the Deed in Lieu Agreement was $1,175,600. Exhibit 1, Lovato Response Aff. ¶ Exhibit 1.A and 1.B.
48. At the time the Deed in Lieu Agreement was executed, the indebtedness under the Note was $1,163,118.93. Debtor's Motion, Exhibit 1.D, doc 165-2 at p. 20.
Debtor argues five theories that the funds on deposit belong to Debtor, as follows:
First, Debtor claims that HDSB has no claim to "proceeds" under the Grants Mortgage. Debtor concedes that the remaining funds are part of the $50,000 paid into the Cibola Court Registry from the closing of the sale of Lot 7. But, Debtor points out that the Grants Mortgage's only reference to "proceeds" is in the section dealing with the assignment of leases and rents. It has no reference to the proceeds from a sale. Furthermore, Debtor claims
Second, Debtor argues that HDSB's claim that the Assignment, dated August 21, 2008, entitles it to the funds must fail. Debtor states that, assuming the Assignment validly created a lien on the funds derived from the Lot 7 sale, HDSB had only a security interest in the funds, which would be considered an "account" under the New Mexico Uniform Commercial Code. A security interest in accounts is perfected by filing a financing statement. No financing statement was filed. Therefore, HDSB has no perfected lien on the funds.
Third, Debtor argues that the Stipulated Order entered in the Westar litigation could not and did not create a claim in favor of HDSB. That Order only stated that the $50,000 was deposited so that Westar's lien could be released. The Order does not mention HDSB and HDSB was not a party to that case.
Fourth, Debtor argues that HDSB is time barred from asserting a claim to the funds. The bar date in this case was June 15, 2009. The notice of bar date required a creditor to file a proof of claim if it disagreed with how the Debtor had scheduled its claim. Debtor listed the remaining funds as an unencumbered asset on Schedule B and did not include the remaining funds as collateral for HDSB on Schedule D. HDSB did file a proof of claim and made no claim that the remaining funds were collateral. Therefore, Debtor argues that HDSB cannot at this time claim the funds.
Fifth, and finally, Debtor argues that even if HDSB had a valid claim under the Mortgage, the Assignment, or the Order, it has since released that claim in full. The Deed in Lieu Agreement reflects that Lot 7 and Lot 5A were sold and the legal description omitted those lots. The Deed in Lieu Agreement addressed the entire existing liability under the mortgage including accrued interest. HDSB agreed to accept the Special Warranty Deeds to the remaining Grants property and the Williams property in lieu of foreclosure and released borrowers and guarantors from all further liability, terminating the mortgagor-mortgagee relationship and HDSB would deem the Note to be paid in full. The Agreement also stated it was the entire agreement of the parties. Debtor executed the deeds. The Agreement made no mention of the $50,000. Debtor argues, therefore, that as a matter of law there is no remaining liability against which the funds could be applied.
HDSB also argues five theories that the funds on deposit belong to HDSB, as follows:
First, HDSB denies Debtor's argument that HDSB has no claim to the proceeds because the Grants Mortgage does not specifically provide a lien on proceeds. HDSB claims that the Grants Mortgage does not need to so because it contains the term "statutory mortgage condition"
Second, HDSB argues that the sale proceeds are not property of the Debtor or the estate, and that therefore HDSB did not need to assert a claim to those funds. HDSB argues that when it consented to allow $50,000 of its proceeds to be deposited into the state court registry with the condition that any surplus funds would be paid toward the loan balance when the lien was resolved, it had control over the funds sufficient to establish constructive possession. Consequently, HDSB claims that the funds were not part of the bankruptcy estate. HDSB cites Admin. Comm. of the Wal-Mart Assocs. Health & Welfare Plan v. Willard, 393 F.3d 1119 (10th Cir.2004) as support.
Third, HDSB claims that although the Assignment of Any and All Excess Proceeds was not recorded it is still clear evidence of everyone's intent that the surplus funds should be paid directly to HDSB.
Fourth, HDSB argues that the "Lot 7 Release" did not affect HDSB's claim to the funds. HDSB claims that the document refers only to the real estate being released from its claim, not any proceeds from real estate.
Fifth, and finally, HDSB argues that the Deed in Lieu Agreement did not affect HDSB's claim to the funds. HDSB argues that this results from the fact that Debtor had no interest in the funds and that HDSB had constructive possession.
HDSB's second and fifth arguments focus on HDSB's claim of ownership of the fund. The Court finds that neither argument should prevail.
The state court lawsuit filed by Debtor was for slander of title to a lot it was developing. Adv. Pro. 09-1072, doc. 3, p. 1. Under New Mexico law, slander of title is a tort. Den-Gar Enter. v. Romero, 94 N.M. 425, 430, 611 P.2d 1119, 1124 (Ct.App.), cert. denied, 94 N.M. 628, 614 P.2d 545 (1980). See also Restatement (Second) of Torts § 624 (1977).
The Uniform Commercial Code was revised in 2001. N.M. Stat. Ann.1978 § 55-9-101, et seq. Before the Revision all tort claims were excluded from the scope of Article 9. Hillman, Documenting Secured Transactions § 3:11.10 (2010). The Revision created a new category of collateral, "commercial tort claims
Filing of a financing statement is required to perfect an interest in a commercial tort claim. N.M. Stat. Ann.1978 § 55-9-310(a)
When a bankruptcy is filed, the "strong arm" powers of 11 U.S.C. § 544(a)(1) grant the trustee
HDSB claims that it is not merely a creditor holding an unperfected security interest. It claims to be the owner of the asset by way of the Assignment. Black's Law Dictionary (9th ed. 2009) defines an "absolute assignment" as "an assignment that leaves the assignor no interest in the assigned property or right." And, it defines a "collateral assignment" as "an assignment of property as collateral security for a loan."
Revised Article 9 on its face does not distinguish between an absolute assignment and a collateral assignment of commercial tort claims. This is likely intentional. Article 9 requires filing to perfect a buyer's or assignee's interest in accounts, chattel paper, payment intangibles, or promissory notes, whether they were transferred outright or assigned as collateral. Compare Ta Chong Bank Ltd. v. Hitachi High Technologies America, Inc., 610 F.3d 1063, 1066 (9th Cir.2010) ("In order to perfect its interest in the CyberHome accounts assigned to the Bank, the Bank was required to file a financing statement. Cal. Com.Code § 9310(a).") See also Octagon Gas Systems, Inc. v. Rimmer (In re Meridian Reserve, Inc.), 995 F.2d 948, 954 (10th Cir.), cert denied, 510 U.S. 993, 114 S.Ct. 554, 126 L.Ed.2d 455 (1993) ("Although Article 9 applies mainly to transactions intended to create security interests, it also applies to sales of accounts because sales of wholly intangible interests in accounts create the same risks of secret liens inherent in secured transactions.") (Citations omitted.) (Decided under former law.) Likewise, the Court finds that there exists the same dangers in assignments of commercial tort claims.
N.M. Stat. Ann.1978, § 55-1-201(b)(35). Uniform Commercial Code Comment 3(b) to N.M. Stat. Ann.1978, § 55-9-102 provides:
As noted above, assignments of commercial tort claims are subject to Article 9. HDSB's and Debtor's intent to create a security interest in the tort claim were irrelevant. The issue is whether the transaction falls within the definition of security interest. The Court finds that it does. HDSB did not file a financing statement and was therefore not perfected when Debtor filed its bankruptcy. In consequence, the funds became an asset of the Debtor's estate.
However, even if Article 9 does not apply to "absolute" assignments of commercial tort claims, the Court finds that the assignment in this case was not absolute. New Mexico has few cases regarding assignments. However, the theories have been fully developed in the common law of other jurisdictions. Basically,
Benton v. Albuquerque Nat'l Bank, 103 N.M. 5, 10-11, 701 P.2d 1025, 1030-31 (Ct.App.1985).
Advanced Testing Technologies, Inc. v. Desmond (In re Computer Engineering Associates, Inc.), 337 F.3d 38, 46 (1st Cir. 2003) (citations and footnotes omitted.) ("CEA") (Applying both New York and Massachusetts law, which were the same). In the CEA case, the First Circuit examined the actions the parties took both before and after the challenged assignment of a contract. It found that all actions taken supported the contention that the transaction was irrevocable and had divested CEA of its ability to receive any proceeds from the contract directly. Id. at 47. Specifically, CEA executed an agreement and "irrevocable assignment," set up a joint bank account, transferred to plaintiff the responsibility for preparing invoices and requests for progress payments, provided plaintiff with full access to its computer system, instructed the bank to provide copies of all notices and actions concerning a related loan account and obtained authorization from CEA to make inquiries of the account. Id. The court found that CEA had given up all right, title and interest and that therefore the assignment was absolute. Id. at 50. Accord Christmas v. Russell, 81 U.S. 69, 84, 14 Wall. 69, 20 L.Ed. 762 (1871)
See also TPZ Corp. v. Dabbs, 25 A.D.3d 787, 789, 808 N.Y.S.2d 746, 749 (2006) ("In order for an assignment to be valid, the assignor must be divested of all control over the thing assigned." Court reversed summary judgment due to question of fact whether assignor "continued to act as if it owned the note.")
In determining whether an assignment is for security, a court may also look at the business activities of the parties, their relationship, the objective of the purported assignment, and whether the evidence suggests that there was a total divestment of all control by assignor over the thing assigned. In re Tyson Metal Products, Inc., 117 B.R. 181, 184-85 (Bankr.W.D.Pa.1990). If the debtor is left with access to the asset or if the assignee fails to notify the obligor of the assignment, this is evidence that the parties intended a security interest and not an absolute assignment. Id. at 185.
In this case, HDSB and Debtor had an ongoing banking relationship through
If one makes an absolute assignment of a cause of action, that person loses standing to pursue, continue, or settle it because they are no longer the real party in interest. See Wright, Miller, Kane and Marcus, 6A Federal Practice & Procedure § 1545 (3d ed.) ("Under present law an assignment passes the title to the assignee so that the assignee is the owner of any claim arising from the chose and should be treated as the real party in interest under Rule 17(a)."). Debtor instituted the state court tort action, pursued it, removed it to bankruptcy court, and settled it. If Debtor had truly absolutely assigned the asset to HDSB, it would have lost its standing to remain in the case after August 21, 2008. HDSB should not be allowed to claim it owned the lawsuit after allowing Debtor to pursue it to completion. This suggests the Assignment was for security.
HDSB did not intervene in the lawsuit either before or after it was removed from state court. There is no indication in the record that anyone other than Debtor and HDSB knew that HDSB was claiming ownership or a lien on the asset. The only parties to the lawsuit were Debtor and Westar. Anyone examining the court files would have assumed that Debtor had a claim to the funds. This is the situation Article 9 is designed to prevent. This suggests the Assignment was for security.
HDSB had no control over the lawsuit. It filed no claim of lien or transfer of ownership in the lawsuit. It was not a party. In other words, the "obligor" (the state district court holding the funds) had no notice of the assignment. Compare Computer One, Inc. v. Grisham & Lawless, P.A., 144 N.M. 424, 429, 188 P.3d 1175, 1180 (2008):
The Court is not suggesting that HDSB should have taken all these steps; rather, if it had taken any step it might demonstrate that it attempted to retain some
In summary, the Court finds that the Assignment was one for security. As such, it was governed by Article 9 of the Uniform Commercial Code. HDSB did not perfect its interest, which falls to the Debtor's strong arm powers.
The Court finds that the Deed in Lieu Agreement is clear and unambiguous. And, neither party claims otherwise. It was duly executed by the Debtor, by Gilbert J. Lovato its President and attested to by Debtor's Corporate Secretary Karen L. Lovato, by the Lovatos individually as guarantors, and by HDSB by its executive vice president. "When a contract or agreement is unambiguous, we interpret the meaning of the document and the intent of the parties according to the clear language of the document, and we enforce the contract or agreement as written." Espinosa v. United of Omaha Life Ins. Co., 139 N.M. 691, 699, 137 P.3d 631, 639, 2006-NMCA-075, {26} (Ct.App.), cert. denied, 140 N.M. 225, 141 P.3d 1279, 2006-NMCERT-6 (2006).
Relevant paragraphs of the Agreement are as follows:
Facts 38 and 39 demonstrate that the Special Warranty Deeds referenced in the Agreement were delivered, accepted, and recorded by HDSB. The Borrower and guarantors were released from all liability and HDSB was deemed to be paid in full. The Agreement states that it is the entire agreement of the parties. The Agreement included property other than the real estate in paragraph 16 but made no reference to the funds on deposit with the Court. The Court must interpret this to mean that the funds were specifically excluded from the Agreement (i.e., their turnover to HDSB was not a condition of release) and the debt is now paid in full.
HDSB had a valid lien on the real estate but the Court finds that this lien did not extend to the funds HDSB allowed to be deposited into the Cibola County Court Registry. HDSB argues that its mortgage includes the term "statutory mortgage condition" and that this term automatically creates a lien on proceeds. The Court disagrees. Section 47-1-41 applies only "in the event any of the following terms, conditions or obligations are broken by the mortgagor, . . ." The undisputed facts do not establish that Debtor had broken any terms, conditions or obligations when Lot 7 was sold on August 20, 2008. The only evidence before the Court is that HDSB filed its foreclosure on February 6, 2009. The Court cannot find that the statutory mortgage condition was relevant to the sale of Lot 7.
Therefore, if HDSB were to have a lien on these funds, it would have to be established by other statutes or by case law. HDSB cited neither, and the Court has found none. Cf. Uniform Commercial Code § 9-315(a), N.M. Stat. Ann. § 55-9-315(a):
But Article 9 of the Uniform Commercial Code does not apply to "the creation or transfer of an interest in or lien on real property . . ." N.M. Stat. Ann. § 55-9-109(d)(11). Accord Lin v. Ehrle (In re Ehrle), 189 B.R. 771, 774-75 (9th Cir. BAP 1995) (Under California law, seller under a recorded deed of trust has no security in proceeds of sale. Under the UCC a security interest extends to cash proceeds of personal property but the UCC excludes real estate transactions.) Compare In re Zych, 379 B.R. 857, 861 (Bankr.D.Minn. 2007) (A perfected interest in cattle does not perfect an interest in a lawsuit for conversion of the cattle.)
Furthermore, under the facts of this case, it appears that HDSB waived its security interest in the proceeds when it released those funds to the state court. Clovis Nat'l Bank v. Thomas, 77 N.M. 554, 561, 425 P.2d 726, 730 (1967). (When a creditor allowed sale of collateral and did not collect the proceeds directly, it lost its security interest and must look to the debtor personally for payment.) (Personal property case.) Accord Charterbank Butler v. Central Cooperatives, Inc., 667 S.W.2d 463, 466 (Mo.App.1984) (Same.).
It is clear to the Court that the lien on proceeds that HDSB had after the sale of Lot 7, if any, was not secured by real estate. The mortgage was released on Lot 7 and it was sold. Therefore, any collateral must be personal property or some right in action. HDSB did not file a financing statement.
HDSB argues that when it transferred the funds to the state court and obtained an Assignment of Any and All Excess Proceeds it retained ownership of the funds to the exclusion of Debtor. It also argues that after the transfer of funds it remained in constant control and constructive possession. And, it argues that the Assignment demonstrates that all parties intended that Debtor would obtain no interest in the funds.
First, factually, HDSB transferred funds into a court registry fund associated with a case between Debtor and Westar; HDSB did not intervene. The Assignment was not filed in that case. Fact 22. To the world, it would appear that the funds belonged either to Debtor or to Westar. Nothing in the record showed otherwise. And, the very existence of the Assignment demonstrates that the parties contemplated that funds might fall into Debtor's hands and, if they did, Debtor had a duty to pay them to HDSB. This looks like a loan of money to the Debtor, to be used for a specific purpose, and a retained security interest in any amount left over after satisfying that purpose. And, HDSB would have an unliquidated claim for a refund of any money that Westar did not receive. Pre-bankruptcy there may have been no equity in the funds, but this is still property.
The only other way these funds would not be property is if the Debtor held them in a constructive trust. See 11 U.S.C. § 541(d)
Courts addressing the constructive trust issue find that property claimed to be held in constructive trust actually is bankruptcy estate property unless or until the creditor proves the existence of the constructive trust. United States v. Brimberry, 779 F.2d 1339, 1348 (8th Cir.1985) ("Until a court grants the victim such a constructive trust remedy, however, the victim merely has a right to seek such a remedy . . . but the existence of such a right does not establish an interest in the specific property.") The burden of establishing the trust is on the creditor. Kinzler, 275 F.3d at
In this case, the Court does not find that imposing a constructive trust on the Registry Funds would be equitable. HDSB, a bank, finds itself as an unsecured creditor
Furthermore, it is doubtful that on the evidence before the Court a constructive trust would be imposed. Under New Mexico law,
Aragon v. Rio Costilla Co-op. Livestock Ass'n, 112 N.M. 152, 156, 812 P.2d 1300, 1304 (1991). In some situations, the mere existence of a fiduciary or confidential relationship may be sufficient to impose a constructive trust. Homes by Marilynn v. Robinson (Estate of McKim), 111 N.M. 517, 522, 807 P.2d 215, 220 (1991). But, the facts in this case do not suggest any improper behavior by Debtor or anything except a debtor-creditor relationship between the parties. The subject funds will be paid to the unsecured creditors of K-Ram. It is difficult to find unjust enrichment when the disposition of these funds results from the operation of a bankruptcy statute.
HDSB's citation to Admin. Comm. of the Wal-Mart Assocs. Health & Welfare Plan is not persuasive. In that case, the Court of Appeals for the Tenth Circuit discussed the differences between "legal" and "equitable" relief. 393 F.3d at 1121. The Employee Retirement Income Security Act of 1974 ("ERISA") allows only "appropriate equitable relief" in certain circumstances. Id. The Tenth Circuit referred to Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 213, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002) for the proposition that a plaintiff could seek restitution in equity, in the form of a constructive trust or equitable lien, only when money or property could be identified as belonging in good conscience to plaintiff and when it could clearly be traced to defendant's possession. Wal-Mart Assoc., 393 F.3d at 1121.
In our case, the funds are traceable. But, the Court cannot say that in "good conscience" the funds belong to HDSB. The Court found above that HDSB had only a lien on the funds, and that the lien
Wal-Mart Assoc. is further distinguishable because it was basically a two-party case governed by equitable principles. The bankruptcy case, on the other hand, is governed by statute and involves all of the creditors. Bankruptcy laws have always struck down "secret liens", see Butner v. United States, 440 U.S. 48, 54 n. 8, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (Citing § 110(c) of the Bankruptcy Act as allowing a trustee to strike down secret liens), in furtherance of the policy of equal treatment of similarly situated creditors, see Howard Delivery Service, Inc. v. Zurich American Ins. Co., 547 U.S. 651, 655, 126 S.Ct. 2105, 165 L.Ed.2d 110 (2006) ("[W]e are mindful that the Bankruptcy Code aims, in the main, to secure equal distribution among creditors.") See also In re Foster, 275 F.3d at 926 (Stating that Court should first consider whether circumstances of case allow applying equity to elevate one class of creditors above another.)
Finally, HDSB's contention that the funds were under its control or constructive possession is irrelevant. Control and possession are not relevant to perfection of security interests in commercial tort claims. Perfection by possession applies only to tangible negotiable documents, goods, instruments, money or tangible chattel paper. N.M. Stat. Ann.1978 § 55-9-313
For all the reasons stated, the Court will enter an Order granting Debtor's Motion for summary judgment and denying HDSB's Cross Motion.
A commercial tort claim is not a "general intangible." Id. at (a)(42). It is also not an "account." Id. at (a)(2)(c)(ii).
