In re Oak Rock Fin., LLC

527 B.R. 105

In re : Oak Rock Financial, LLC, Debtor.

Case No. 13–72251–reg

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

Signed March 19, 2015

Melanie A. Fitzgerald, Salvatore Lamonica, Jacqulyn Somers Loftin, Rachel P. Stoian, Adam P. Wofse, Lamonica Herbst & Maniscalco LLP, Wantagh, NY, for Debtor.

MEMORANDUM DECISION

Robert E. Grossman, United States Bankruptcy Judge

Before the Court are cross-motions for summary judgment asking the Court to determine the priority, extent and enforceability of a recorded lien against substantially all of the assets of Oak Rock Financial, LLC (the “Debtor”). To resolve the issues raised in the cross-motions, the Court will be guided in large part by the Delaware Uniform Commercial Code (“UCC”) sections which establish when liens are deemed perfected and the priority status of competing liens. The Delaware UCC applies a strict inquiry notice system, under which parties to commercial transactions bear the risk of failing to discover and analyze the enforceability of a recorded lien. The consequences of failing to undertake these basic steps can and often do create economic hardships. Israel Discount Bank of New York as administrative agent (“IDB as Agent”) for a lending group that includes Israel Discount Bank (“IDB”) and other lending institutions asserts it was granted a lien on substantially all of the Debtor's assets in connection with an original lending facility, which lien was perfected by IDB as of 2001. Although IDB as Agent was not granted a lien on the Debtor's assets until 2006, and again in 2011 and 2012, IDB as Agent claims its lien was perfected as a matter of law as of 2001 upon receiving an assignment of a UCC financing statement from IDB to IDB as Agent in 2006. As the assignee of the 2001 financing statement, IDB as Agent, as distinguished from IDB itself, was first in time to perfect its lien, which perfection never lapsed through the date an involuntary petition was filed against the Debtor. North Mill Capital, LLC (“North Mill”) and Medallion Bank and Medallion Financial Corp (“Medallion,” and collectively with North Mill, the “True Participants”) also cross-move for summary judgment, claiming that IDB as Agent cannot rely on the 2001 UCC financing statement to perfect its lien.

The Court previously determined that the True Participants acquired interests in specific loans made by the Debtor, as well as the corresponding loan receivables and loan proceeds collected by the Debtor. The True Participants assert, inter alia, that the 2001 UCC financing statement does not perfect IDB as Agent's lien because (1) IDB's loan to the Debtor was satisfied in 2006, and thereby as a matter of law the 2001 UCC financing statement was extinguished, (2) the 2001 UCC financing statement became “seriously misleading” when it was assigned from IDB to IDB as Agent, (3) the lien granted by the Debtor to IDB in security agreements executed in 2001 and then in 2004 was never assigned to IDB as Agent, and (4) the Debtor and IDB as Agent relied on a different UCC financing statement filed in 2006 to perfect IDB as Agent's lien on the Debtor's assets, which lapsed in 2011. Medallion also claims that because it is a Utah company, IDB as Agent was required to file a financing statement in Utah to perfect its lien within one year after Medallion purchased its loan participations from the Debtor. Medallion asserts that once it purchased a loan participation from the Debtor, Medallion became a “debtor” under the Utah UCC and due to Medallion's status as a “debtor,” IDB as Agent was required to perfect its lien by filing a financing statement in Utah, which never occurred.

For the following reasons, the Court grants IDB's cross-motion and denies the cross-motion of North Mill and Medallion. Under applicable Delaware UCC law, IDB as Agent's perfected lien status relates back to the date the original financing statement was filed in July 2001, which did not lapse at any point pre-petition. The July 2001 financing statement, which remained of record through the date the involuntary petition was filed in 2013, put the public on notice that a third party may have a security interest in the Debtor's assets, including the assets sold to Medallion and North Mill. Any third party, including Medallion and North Mill, bore the burden of inquiry into the Debtor's true state of financial affairs and so long as the 2001 financing statement remained of record, they are deemed to have assumed the risk of entering into any transaction with the Debtor in the face of such financing statement. The assignment of the 2001 UCC financing statement from IDB to IDB as Agent did not render the 2001 UCC financing statement “seriously misleading” because the collateral description was sufficient to cover the collateral pledged to IDB as Agent. Finally, the fact that IDB as Agent was not granted a security interest in the Debtor's assets until 2006 has no bearing on the date its lien is deemed perfected under the Delaware UCC. As the first to perfect its lien, IDB as Agent holds a first lien position on the Debtor's assets under the applicable provisions of the Delaware UCC. As for Medallion's argument under the Utah UCC, IDB as Agent was not required to take any additional steps to maintain its priority position over Medallion. Medallion's purchase of loan participations from the Debtor did not cause it to fit within the definition of a “debtor” under the relevant Utah UCC provisions; it is a secured creditor with respect to the loans it purchased, along with the corresponding loan receivables and loan proceeds. Because Medallion is not a “debtor,” IDB as Agent's lien status is unaffected by its failure to file any documentation with the Utah Secretary of State.

This decision resolves only the subject cross-motions and does not address any other claims by the parties in this case and the related adversary proceedings including, inter alia, whether the enforcement of IDB as Agent's lien is subject to equitable subordination and whether transfers made by the Debtor to IDB as Agent are avoidable, nor does it address the extent to which the lien subordination obtained and recorded by Summa Capital Corp, North Mill's predecessor, affects the status of North Mill's lien position with respect to IDB as Agent.

PROCEDURAL HISTORY

The Debtor is a failed asset-based lending company which operated out of offices located in Bohemia, New York. On April 29, 2013 (the “Petition Date”), IDB, along with Bank Leumi USA (“Bank Leumi”) and Bank Hapoaim B.M., filed a petition for involuntary relief under chapter 7 of the United States Bankruptcy Code (the “Bankruptcy Code”) against the Debtor. On April 29, 2013, by corporate resolution, Clifford Zucker was appointed as the Debtor's CRO, and the Debtor retained CohnReznick, LLP as financial advisors in this chapter 11 proceeding. On May 6, 2013, upon the Debtor's motion, the case was converted to a case under chapter 11. By order dated March 6, 2014, the case was reassigned from Hon. Dorothy Eisenberg to Hon. Robert E. Grossman. On May 27, 2014, the United States Trustee filed a Notice of Appointment of Creditors' Committee (“Committee”), and on June 19, 2014, the United States Trustee filed an Amended Notice of Appointment of the Committee. On July 1, 2013, an order was entered approving the sale of the Debtor's interest in a 2005 loan agreement with Merchants Advance LLC (the “Merchants Loan”) to BasePoint Merchant Lending Trust Series SPL–1 (“Basepoint”) for $26 million. On September 30, 2013, Medallion filed an objection (“Lien Objection”) asserting certain defects in, failure to attach to, and lapses of, the security interest and liens allegedly held by IDB as Agent under certain loan facilities entered into by and among the Debtor, IDB as Agent and certain lender parties. On that same day, various parties in interest, including North Mill, filed joinders to the Lien Objection. On April 10, 2014, the Court entered Supplemental Findings of Fact and Conclusions of Law in certain adversary proceedings filed in this case finding, inter alia, that North Mill and Medallion hold true participation interests in loans purchased from the Debtor. However, the Court would not permit the release of funds held by the Debtor from the sale of the Merchants Loan to Basepoint, or funds collected by the Debtor on the underlying loans in which the true Participants purchased interests until a final determination was made as to the priority and enforceability of IDB as Agent's lien rights.¹ On September 19, 2014, the Court entered a Stipulation and Order (“Briefing Order”) Regarding Briefing, Hearing, Discovery and Related Scheduling Matters Pertaining to Perfection Issues. Pursuant to the Briefing Order, IDB, IDB as Agent and the True Participants were authorized to address perfection issues concerning IDB as Agent's claimed lien by filing motions for summary judgment.

On October 8, 2014, IDB and IDB as Agent, and the True Participants filed cross-motions for summary judgment pursuant to the Briefing Order. On October 28, 2014, IDB and IDB as Agent filed opposition to the True Participants' cross-motion for summary judgment, and the True Participants filed opposition to IDB and IDB as Agent's cross-motion for summary judgment. Also on October 28, 2014, the Committee filed an Objection to the cross-motion filed by IDB and IDB as Agent. On November 10, 2014, replies were filed by IDB and IDB as Agent, and the True Participants, and on November 20, 2014, a hearing on both cross-motions was held. Thereafter, the cross-motions for summary judgment were marked submitted.

FACTS

On July 19, 2001, the Debtor entered into a security agreement (“2001 Security Agreement”) with IDB, in which the Debtor granted IDB a security interest in “the following properties, assets and rights of the [Debtor], wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof (all of the same...