In re Liddle

613 B.R. 186

IN RE: Jeffrey Lew LIDDLE

19-cv-10279 (JSR)

United States District Court, S.D. New York.

Signed March 6, 2020

David Henry Wander, Davidoff Hutcher & Citron LLP, New York, NY, for Appellant.

Alison Debra Bauer, William Francis Gray, Jr., Foley Hoag LLP, New York, NY, James Samuel Fullmer, Foley Hoag LLP, Boston, MA, for Appellee.

OPINION AND ORDER

JED S. RAKOFF, U.S.D.J.

The question presented in this bankruptcy appeal is whether Counsel Financial II ("CFII"), a creditor to Jeffrey Lew Liddle, had a perfected security interest in the proceeds from the sale of Liddle's Fifth Avenue apartment, funds which the debtor had placed in escrow with his attorney before filing for bankruptcy. For the following reasons, the Court finds that CFII did not have such an interest. The judgment of the bankruptcy court is accordingly affirmed.

BACKGROUND

The relevant facts are undisputed. In 2016, Liddle caused his law firm, Liddle & Robinson ("L&R"), to borrow about $5.6 million from CFII. Liddle and three of his law partners personally guaranteed the loan. Br. by Appellant in Supp. of Its Perfected Security Interest In and Lien Upon Cash Collateral, Dkt. 7 (Dec. 13, 2019).¹ In August of that year, Liddle and L&R signed a security agreement granting CFII a security interest in "collateral" consisting of "[a]ll of each Debtor's right, title and interest in all Goods (including Equipment, Fixtures and Inventory), Money, Instruments (including Promissory notes), Accounts, Deposit Accounts, Chattel Paper, Investment Property ... and any other personal property ...." Mem. of Decision at 2-3, Bankr. Dkt. No. 170 (Sept. 6, 2019) (hereinafter "Mem.").² CFII perfected this security interest by filing a U.C.C. financing statement. Ex. E to Letter of David Wander, Bankr. Dkt. 55-5 (Apr. 22, 2019).

Approximately two years later, L&R defaulted on its obligation to CFII. Mem. at 3. In September 2018, CFII sued L&R, Liddle, and the other guarantors to recover the debt, filing a motion for summary judgment in lieu of complaint in New York state court. Id.

While the state case was pending, CFII became aware that Liddle was planning to sell a Fifth Avenue apartment that he co-owned with his wife, Tara Liddle. Id. CFII accordingly moved the state court for a temporary restraining order ("TRO") and an order of attachment to prevent Liddle from spending the proceeds of this contemplated sale. Id. On January 14, 2019, the state court granted a TRO that required Liddle to hold the sale proceeds in escrow and that prohibited "Liddle, his designees, and/or any person or entity acting on his behalf ... from transferring, dissipating, or otherwise disposing of any proceeds of any sales" of the Fifth Avenue property, pending decision on the motion for summary judgment and the motion for an order of attachment. Id.; Second Amended Order to Show Cause at 2, Ex. P to Letter of David Wander, Bankr. Dkt. 55-16 (hereinafter "TRO").³ The TRO also required CFII to post a $500,000 bond to cover damages incurred by Liddle in the event the court did not rule in CFII's favor on the merits. TRO at 1-2.

On February 4, 2019, the state court entered a stipulation and order (the "Stipulation") that modified the TRO in two material respects. Ex. Q to Letter of David Wander, Bankr. Dkt. 55-17. First, "[i]n order to facilitate the closing of the sale" of the Fifth Avenue apartment, the Stipulation authorized Liddle to make eleven specified payments out of the sale proceeds to parties involved in the transaction (including the broker, the mortgage lender, etc.). Id. ¶ 2. Second, the Stipulation directed Diane C. Nardone, Esq., "the closing attorney for Liddle and Tara Liddle on the sale of the Apartment," rather than Liddle himself, to hold the remaining proceeds in escrow "in her Attorney IOLA Account, subject to the TRO pending the hearing and determination of Plaintiff's motion for an order of attachment and a further order of this Court disposing of that motion for an order of attachment." Id. ¶ 3. The Stipulation also ordered Nardone to notify CFII of the anticipated closing date of the apartment sale and, upon closing, to notify CFII of the amount of proceeds held in escrow and to provide proof that the eleven authorized payments had been made. Id. ¶¶ 4-5.

The state court ultimately ruled in CFII's favor on the merits of the underlying action. On March 5, 2019, the court granted CFII's motion for summary judgment, and on March 7, the court entered an order of attachment directing Nardone to deposit the escrowed funds with the registry of the court. Mem. at 4; Exs. C & D to Letter of David Wander, Bankr. Dkts. 114-4 & 114-5 (July 1, 2019).

At this point, CFII would ordinarily have perfected its security interest in the sale proceeds by serving the order of attachment on the relevant county sheriff. See C.P.L.R. § 6203. Before CFII did so, however, Liddle filed for Chapter 11 protection. Mem. at 4-5. Accordingly, Nardone's obligation to deliver the sale proceeds to the court registry was automatically stayed under 11 U.S.C. § 362(a). Instead, shortly after Liddle's filing, the bankruptcy court ordered Nardone to turn over the sale proceeds from her attorney IOLA account to Liddle's debtor-in-possession account. Bankr. Dkt. 27 (Apr. 1, 2019).

Liddle then filed a motion before the bankruptcy court for use of the cash collateral, a motion which, in effect, would allow Liddle to spend the proceeds of the apartment sale. Bankr. Dkt. 37 (Apr. 8, 2019). CFII objected on the ground that it had a perfected security interest in the funds. Bankr. Dkt. 47 (Apr. 10, 2019). In September 2019, the bankruptcy court entered an order denying CFII's claim of a perfected security interest and granting Liddle's cash collateral motion. Bankr. Dkt. 185 (Sept. 26, 2019); Mem. at 1-2. CFII now appeals from this decision.

DISCUSSION

The only issue on appeal is whether CFII had a perfected security interest in the sale proceeds from Liddle's apartment. Because this is a mixed question of law and fact, this Court reviews the bankruptcy court's analysis de novo. In re Republic Airways Holdings Inc., 582 B.R. 278, 281 (S.D.N.Y. 2018).

New York's Uniform Commercial Code allows a secured party to perfect its security interest in money by taking possession of it. N.Y. U.C.C. § 9-313. The rationale for this provision, which is derived from the common law, is that "the debtor's lack of possession coupled with actual possession by the creditor [or] the creditor's agent ... serves to provide notice to prospective third party creditors that the debtor no longer has unfettered use of [its] collateral." Hassett v. Blue Cross & Blue Shield of Greater N.Y. (In re O.P.M. Leasing Servs., Inc.), 46 B.R. 661, 670 (Bankr. S.D.N.Y 1985) (internal quotation marks omitted); see also In re Singer Prod. Co., 102 B.R. 912, 925 (Bankr. E.D.N.Y. 1989).

Here, CFII argues that it perfected its security interest in the sale proceeds as soon as Nardone deposited the funds into the escrow account. This is because, in CFII's view, the escrow arrangement was tantamount to possession of the funds by CFII itself, thereby accomplishing perfection under section 9-313 of New York's Uniform Commercial Code.⁴ Specifically, CFII argues that it had possession of the escrowed funds either because Nardone was acting as CFII's agent, N.Y. U.C.C. § 9-313(a), or, alternatively, because Nardone took possession of the funds "after having authenticated a record acknowledging that [she would] hold possession of the collateral for [CFII's] benefit," Id. § 9-313(c)(2). The Court finds both arguments unpersuasive.

I. Nardone Was Not Acting as CFII's Agent.

CFII first argues that it possessed the escrowed funds via Nardone, who was acting as the agent of both Liddle and CFII.

A secured party perfects an interest in money by possessing it. N.Y. U.C.C. § 9-313(a). But the possessor need not be the secured creditor itself; possession by an agent of the creditor generally also suffices. Id. Cmt. 3; see also N.Y. U.C.C. § 1-103(b) (providing that ordinary legal principles, including the law of principal and agent, apply unless explicitly displaced). Accordingly, if Nardone had held the sale proceeds in escrow as CFII's agent, then CFII would have had a perfected security interest in the funds.

The question, then, is whether Nardone was in fact CFII's agent. A principal-agent relationship arises "when one person (a ‘principal’) manifests assent to another person (an ‘agent’) that the agent shall act on the principal's behalf and subject to the principal's control, and the agent manifests assent or otherwise consents so to act." Restatement (Third) of Agency § 1.01. Here, there is no dispute that Nardone was Liddle's agent, as she was his lawyer. This fact does not necessarily preclude a finding that Nardone was also CFII's agent, though courts are hesitant to conclude that a party was acting as a "dual agent" on behalf of two adverse parties. See Sotheby's Int'l Realty, Inc. v. Black, 06-CV-1725 (GEL), 2007 WL 4438145, at *2 (S.D.N.Y. Dec. 17, 2007) ("[P]roof of consent by a principal to dual agency must be exacting.") (internal quotation marks omitted).

But here, the facts are not nearly sufficient to support a finding that Nardone was CFII's agent. Nothing in the Stipulation – the only document that creates any kind of relationship between Nardone and CFII – manifests Nardone's assent to act under CFII's control. See 1A Secured Transactions Under the U.C.C. § 6A.04[l][b] ("[T]here must be some mutual assent between the parties to create an agency relationship."). Rather, the Stipulation required Nardone to take only limited, specific actions with respect to CFII: (1) to notify CFII of the closing of the apartment sale and the amount of proceeds resulting therefrom, (2) to hold these proceeds, less the eleven authorized payments, in escrow in her attorney IOLA account, and (3) to provide proof that the eleven authorized payments had been made. Stipulation...