Guy M. Turner Inc. v. Klo Acquisition LLC

869 S.E.2d 755

GUY M. TURNER INCORPORATED, Plaintiff,

v. KLO ACQUISITION LLC, separately and doing business as KL Outdoor LLC, Defendant,andJPMorgan Chase Bank, N.A., Garnishee.

No. COA21-118

Court of Appeals of North Carolina.

Filed February 1, 2022

Keziah Gates, LLP, High Point, by Andrew S. Lasine, for Plaintiff-Appellee.

Womble Bond Dickinson (US) LLP, Raleigh, by Jonathon D. Townsend, for Garnishee-Appellant.

CARPENTER, Judge.

¶ 1 Garnishee JPMorgan Chase Bank, N.A. ("Chase Bank") appeals from the trial court's entry of summary judgment (the "Order") in favor of Plaintiff Guy M. Turner Incorporated ("GMT") as to GMT's right to recover from Chase Bank as garnishee. After careful review, we reverse and remand the Order.

I. Factual & Procedural Background

¶ 2 In January 2019, GMT and Defendant KLO Acquisition, LLC ("KLO")¹ entered into a contract pursuant to which GMT would "provide labor, equipment, and materials to rig or remove KLO's manufacturing equipment from a KLO facility in Georgia, transport the equipment to KLO's vendor in Michigan for repairs, and then transport the equipment back to KLO's facility in Georgia and reinstall it in KLO's manufacturing line." On 16 October 2019, GMT filed suit against KLO in Guilford County Superior Court for breach of contract and quantum meruit. A few days later, on 29 October 2019, GMT served an order of attachment, summons to garnishee, and notice of levy on Chase Bank, with which KLO maintained two deposit accounts: the "Cash Collateral Account," and the "Operating Account" (together, the "Deposit Accounts"). Prior to the institution of GMT's suit, Chase Bank made substantial loans to KLO on which KLO defaulted, owing Chase Bank over twelve million dollars. That same day, Chase Bank exercised its right of setoff against the funds in the garnished accounts and debited the entire balance of the Cash Collateral Account, a total of $328,243.14. However, Chase Bank did not debit any funds from the garnished Operating Account and continued to allow KLO to actively draw upon the account after Chase Bank's receipt of the garnishment summons and notice of levy. By 28 February 2020, the Operating Account had a balance of $115,897.60, with significant activity by KLO during February 2020, including an opening balance of $8,357.73, deposits and credits of $1,163,724.90, and withdrawals and debits of $1,056,185.03.

¶ 3 On 12 October 2020, GMT moved for entry of default against KLO, which the clerk entered the same day. GMT also moved for summary judgment against KLO as the defendant in the contract action and against Chase Bank as garnishee.

¶ 4 GMT's motion for summary judgment came on for hearing on 2 November 2020 before the Honorable John O. Craig, III in Guilford County Superior Court. On 3 November 2020, Chase Bank moved for leave to amend its answer to the garnishment summons and notice of levy in order to assert that it had a perfected security interest in both of the Deposit Accounts.

¶ 5 On 10 November 2020, the trial court entered its summary judgment Order granting, inter alia , Chase Bank's motion for leave to amend its answer, GMT's motion for summary judgment as to GMT's right to recovery from Chase Bank pursuant to the garnishment summons and notice of levy, and GMT's motion for summary judgment as to its breach of contract claim against KLO. The trial court entered judgment against KLO in the amount of $168,712.59 plus interest and attorneys’ fees, and it entered judgment against Chase Bank in the amount of $209,614.47 to satisfy GMT's demand as of the date of issuance of the garnishment summons and notice of levy directed to Chase Bank. Chase Bank gave timely notice of appeal.

II. Jurisdiction

¶ 6 This Court has jurisdiction to address Chase Bank's appeal from the order of summary judgment as a final judgment pursuant to N.C. Gen. Stat. § 7A-27(b)(1) (2019).

III. Issues

¶ 7 The issues before this Court are whether: (1) Chase Bank waived or undermined its security interest by allowing KLO access to its deposit accounts held at Chase Bank, and (2) the trial court erred by granting summary judgment in favor of GMT and against Chase Bank.

IV. Standard of Review

¶ 8 "Our standard of review of an appeal from summary judgment is de novo ; such judgment is appropriate only when the record shows that there is no genuine issue as to any material fact and that any party is entitled to a judgment as a matter of law." In re Will of Jones , 362 N.C. 569, 573, 669 S.E.2d 572, 576 (2008) (citation and internal quotation marks omitted) (emphasis added).

V. Order of Summary Judgment

¶ 9 On appeal, Chase Bank argues the trial court erred in granting summary judgment for GMT because: (1) Chase Bank's perfected security interest in the Deposit Accounts shielded the funds from garnishment, and (2) Chase Bank did not waive or undermine its security interest by allowing KLO access to the Deposit Accounts. We agree.

A. Security Interest

¶ 10 Chase Bank argues it had a perfected security interest in KLO's deposit account before 29 October 2019, the date on which the garnishment summons was served on Chase Bank, and interest superseded any interest held by GMT. GMT does not dispute Chase Bank had a security interest in the Deposit Accounts. For the reasons set forth below, we agree Chase Bank had a perfected security interest in KLO's Deposit Accounts.

¶ 11 Since the parties do not dispute Chase Bank had an enforceable security interest in KLO's Deposit Accounts, we need not consider whether Chase Bank's security interest attached. Therefore, we discuss perfection and priority of Chase Bank's security interest in the Deposit Accounts.

¶ 12 Section 25-9-304(a) of the North Carolina Uniform Commercial Code provides that "[t]he local law of a bank's jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in a deposit account maintained with that bank." N.C. Gen. Stat. § 25-9-304(a) (2019). A bank and its customer may dictate by agreement which jurisdiction's law will govern. N.C. Gen. Stat. § 25-9-304(b)(1).

¶ 13 Chase Bank argues that "[b]ecause [Chase Bank and KLO's Amended and Restated] Credit Agreement specifies that New York law governs, New York is the ‘local law’ for purposes of determining the perfection of Chase's security interest in the deposit accounts." GMT makes no argument with respect to which law governs perfection, the effect of perfection or nonperfection, nor the priority of Chase Bank's security interests in the Deposit Accounts maintained by Chase Bank. There is no other evidence in the record to indicate the law of a state other than New York governs. Because the Amended and Restated Credit Agreement (the "Agreement") between KLO and Chase Bank indicates that New York is the "bank's jurisdiction," we turn to New York law to determine whether Chase Bank has a perfected security interest in the Deposit Accounts and the priority of such interest.

¶ 14 Under New York's version of the Uniform Commercial Code, "a security interest in a deposit account may be perfected only by control ...." N.Y. U.C.C. Law § 9-312(b)(1) (McKinney 2021); see N.Y. U.C.C. Law § 9-314 (McKinney 2021). A secured party may exercise control over a deposit account as "the bank with which the deposit account is maintained ...." N.Y. U.C.C. Law § 9-104(a)(1) (McKinney 2021).

¶ 15 Here, Chase is a secured party with respect to KLO as evidenced by the Agreement, and Chase Bank exercised control over KLO's Deposit Accounts as "the bank with which the [Deposit Accounts are] maintained." See N.Y. U.C.C. Law § 9-104(a)(1). Thus, Chase Bank had a perfected security interest in KLO's Deposit Accounts pursuant to N.Y. U.C.C. Law § 9-312.

¶ 16 We next consider the priority dispute between Chase Bank and GMT with respect to the funds in KLO's Deposit Accounts. New York's Uniform Commercial Code provides: "[a] security interest held by a secured party having control of the deposit account under Section 9-104 has priority over a conflicting security interest held by a secured party that does not have control." N.Y. U.C.C. Law § 9-327(a) (McKinney 2021). Additionally, a lien creditor would only have superior rights over a secured party if the lien creditor acquired its lien before the security interest of the secured party was perfected. N.Y. U.C.C. Law § 9-317(a)(2)(A) (McKinney 2021). "A security interest in deposit accounts ... is perfected by control under Section [9-104] when the secured party obtains control and remains perfected by control only while the secured party retains control." N.Y. U.C.C. Law § 9-314(b). Upon default, a secured party may enforce the obligations of an account debtor by "apply[ing] the balance of the deposit account to the obligation secured by the deposit account" if the secured party "holds a security interest in a deposit account perfected by control under Section 9-104(a)(1)." N.Y. U.C.C. Law § 9-607(a)(4) (McKinney 2021).

¶ 17 In addition, Chase Bank and KLO's Agreement expressly contemplated that Chase Bank would have the right of setoff of mutual debts:

SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) ... at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of any Loan Party against any of and all the due and payable Secured Obligations held by such Lender. The applicable Lender shall notify the Borrower Representative and the Administrative Agent of such set-off or application, provided that any failure to give or any delay in giving such notice shall not affect the validity of any such set-off or application under this Section. The rights of each Lender under this Section are in addition to

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