In re Liddle

608 B.R. 356

IN RE: Jeffrey Lew LIDDLE, Debtor.

Case No. 19-10747 (SHL)

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

Signed September 6, 2019

FOLEY HOAG LLP, Attorneys for Debtor, 1301 Avenue of the Americas, 25th Floor, New York, New York 10019, By: William F. Gray, Jr., Esq., Alison Bauer, Esq., James Fullmer, Esq.

DAVID HUTCHER & CITRON LLP, Attorneys for Counsel Financial II LLP, 605 Third Avenue, New York, New York 10158, By: David H. Wander, Esq., Michael Wexelbaum, Esq., Michael D. Katz, Esq.

MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court is a dispute about the ability of Jeffrey Lew Liddle, the above-captioned debtor ("Liddle"), to use cash collateral over the objection of creditor Counsel Financial II LLC ("CFII"). CFII contends that it has a perfected security interest and lien in cash proceeds from the sale of a real property owned in part by Liddle. Liddle contends that CFII does not have a perfected security interest in the sale proceeds. The question at issue is whether the transfer of the sale proceeds into an escrow account held by Liddle's attorney pursuant to a state court stipulation and order perfected a security interest for CFII under Sections 9-313(a) and (c)(2) of the New York Uniform Commercial Code (the "N.Y. U.C.C."). For the reasons set forth below, the Court finds that it does not.

BACKGROUND

There are no disputes as to the relevant facts. CFII entered into a Security Agreement on August 5, 2016 (the "CFII Security Agreement") with Liddle's law firm, Liddle & Robinson, L.L.P. ("L&R") as borrower. See CFII Security Agreement at 30, attached as Ex. C to Letter of David Wander [ECF No. 55-3];¹ Mem. of Law by Counsel Fin. II LLC in Supp. of its Perfected Security Interest in and Lien on Cash Collateral at 2 ("CFII Brief") [ECF No. 74]. Pursuant to the CFII Security Agreement, Liddle and four other people (collectively, the "Debtors")² granted CFII a security interest in "Collateral", which was defined as follows:

All 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, Letter-of-Credit Rights, Documents and General Intangibles (including payment intangibles), Commercial Tort Claims described in the Questionnaire, Insurance Proceeds and any other personal property (whether or not subject to the UCC), and all interest, dividends and other distributions thereon paid and payable in cash or in property; and all replacements and substitutions for, and all accessions and additions to, and all profits, offspring, Products and other Proceeds of, all of the foregoing.

CFII Security Agreement at 30 (emphasis added). The CFII Security Agreement was executed to secure L&R's performance on a Revolving Promissory Note, dated August 5, 2016 (the "CFII Note"). See CFII Note, attached as Ex. A to Letter of David Wander [ECF No. 55-1]. Liddle and his former law partners also executed a Guaranty of Payment and Performance, dated August 5, 2016 that guaranteed L&R's performance under the CFII Note. See Guaranty of Payment and Performance, attached as Ex. B to Letter of David Wander [ECF No. 55-2].

In 2018, L&R defaulted on the CFII Note. See Aff. of Paul Cody ¶ 3 (the "Cody Affidavit"), attached as Ex. I to Resp. by Counsel Financial II LLC to Debtor's Motion (I) Under 11 U.S.C. §§ 105, 524 and 543 for Turnover of Property by Escrow Agent or Custodian; and (II) Under 11 U.S.C. § 363 for Use of Cash Collateral [ECF No. 24-8]; see also CFII Brief at 10. In September 2018, CFII filed a motion for summary judgment in lieu of a complaint against L&R and Liddle in the Supreme Court of the State of New York, Erie County. See Counsel Financial II LLC v. Liddle & Robinson LLP, Jeffrey L. Liddle, Blaine H. Bortnick and James Ryan Hubbard , Index No. 814703/2018 (the "Lawsuit"). CFII subsequently became aware that Liddle was in the process of selling an apartment he owned jointly with his wife, Tara Liddle, in a cooperative apartment building located at 11 Fifth Avenue, New York, New York (the "N.Y. Co-op"), and CFII sought a temporary restraining order and an order of attachment from the state court. See Cody Aff. ¶¶ 1, 62-76; CFII Brief at 6. On January 14, 2019, the state court issued an order granting CFII a temporary restraining order preventing the disbursement of proceeds from any sale of Liddle's real property. See Second Amended Order to Show Cause (the "TRO"), attached as Ex. P to Letter of David Wander [ECF No. 55-16]. The TRO required that the sale funds from the N.Y. Co-op be held in escrow by Mr. Liddle while the request for an order of attachment was decided. More specifically, the TRO provided that:

pending a hearing and determination on the Motion, defendant Jeffrey Liddle, his designees, and/or any person or entity acting on his behalf, are hereby restrained and prohibited from transferring, dissipating, or otherwise disposing of any proceeds of any sales of Mr. Liddle's residential real properties located at ... 11 Fifth Avenue, Apts. 19M and 19N, New York, New York .... which funds shall be held in escrow by Mr. Liddle pending the determination of this Motion.

Id. at 2 (emphasis added). Less than a month later, the state court signed a Stipulation and Order to allow the closing of the sale of the N.Y. Co-op notwithstanding the parties' existing legal dispute. See Stipulation and Order (the "Stipulated Order"), attached as Ex. Q to Letter of David Wander [ECF No. 55-17]. Consistent with the spirit of the TRO, the Stipulated Order instructed that:

the net proceeds of sale (i.e., the sales price of $6,600,000.00 less the eleven authorized payments listed in Paragraph 2 hereof) shall be held in escrow by Diane C. Nardone, Esq. ("Nardone"), the closing attorney for Liddle and Tara Liddle on the sale of the Apartment, 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 (emphasis added). It further provided, "Nardone shall confirm her agreement to serve as Escrow Agent pursuant hereto and shall signify her acknowledgement of and agreement to be bound by the escrow provisions of this Stipulation and Order by signing where indicated below." Id. ¶ 6. The Stipulated Order was signed by Diane C. Nardone, Esq. "[a]s Escrow Agent for Jeffrey Liddle and Tara Liddle." Id. at 4.

An order of attachment ultimately was entered in CFII's benefit on March 7, 2019 (the "Order of Attachment"), as to sale proceeds from the N.Y. Co-op that were "currently held in escrow by ... Nardone ..., counsel for Liddle in connection with the sale ...."; the Order of Attachment required Nardone to transfer into and deposit the funds with the Registry of the Court. Order of Attachment at 3, attached as Ex. D to Letter of David Wander [ECF No. 114-4]. Before the sale proceeds could be transferred to the state court, Liddle filed a Chapter 11 petition in this Court. See Chapter 11 Voluntary Petition for Individual, filed March 11, 2019 [ECF No. 1]. The Order of Attachment was not served on the county sheriff before the filing of this bankruptcy.³

After the filing of this bankruptcy, the Debtor filed a motion for use of the cash collateral, which identified the cash collateral as Liddle's fifty percent ownership in the sale proceeds from the N.Y. Co-op. See Debtors' Mot. for Entry of Interim and Final Orders (I) Authorizing the Debtors to Use Cash Collateral, (II) Scheduling a Final Hearing and (III) Granting Related Relief at 2 (the "Cash Collateral Motion") [ECF No. 37]. The Cash Collateral Motion does not name CFII as a secured party. See id. ¶ 4.⁴ CFII filed an objection to the use of cash collateral based on CFII's purported security interest in the sale proceeds. See Obj. by Counsel Financial II LLC to Debtor's Second Cash Collateral Motion [ECF No. 47].

Liddle argues that CFII did not perfect a security interest in the sale proceeds because CFII never served the state court Order of Attachment on the county sheriff. See Debtor's Resp. and Mem. of Law in Opp. to Counsel Financial II LLC's Claim of a Perfected Security Interest In and Lien on Certain Cash Collateral at 9 (the "Response") [ECF No. 84]. CFII contends that it is not relying on the order of attachment but instead upon the placement of the escrow funds with Nardone pursuant to the Stipulated Order as constituting possession of the funds by CFII under the N.Y. U.C.C. More specifically, CFII contends that the Stipulated Order made Nardone an agent of CFII for purposes of Section 9-313(a). See CFII Brief at 11-15; see also Reply Mem. of Law by Counsel Financial II LLC in Further Support of its Perfected Security Interest in and Lien Upon the Cash Collateral at 12-13 (the "Reply") [ECF No. 95]. In the alternative, CFII contends that—even if the funds remained outside CFII's possession—the requirements for perfection by recording under Section 9-313(c) of the N.Y. U.C.C. were satisfied. See id.⁵

DISCUSSION

A. Security Interest Under N.Y. U.C.C. Section 313(a)

Under the N.Y. U.C.C., a party may perfect a security interest in money by taking possession of it. More specifically, Section 9-313(a) provides for perfection by possession or delivery, whereby "a secured party may perfect a security interest in tangible negotiable documents, goods, instruments, money, or tangible chattel paper by taking possession of the collateral." N.Y. U.C.C. § 9-313(a) ; see also N.Y. U.C.C. § 9-312(b)(3) ("Except as otherwise provided in Section 9-315 (c) and (d) for proceeds ... a security interest in money may be perfected only by the secured party's taking possession under Section 9-313.").

Possession is not defined in Article 9. The Official Comments note that the Section "adopts the general concept as it developed under...