Sunz Ins. Co. v. Payroll Mgmt., Inc. (In re Payroll Mgmt., Inc.)

630 B.R. 627

IN RE: PAYROLL MANAGEMENT, INC., Debtor.

Sunz Insurance Company, Plaintiff,

v.Payroll Management, Inc., et al., Defendants.

Case No.: 18-30298-KKS

Adv. No.: 19-03005-KKS

United States Bankruptcy Court, N.D. Florida, Pensacola Division.

Signed March 25, 2021

Patrick Cory Barnwell, Barnwell Law Group, P.C., Duluth, GA, for Defendant Vensure Employer Services, Inc.

Steve Butler, US Attorney's Office, Kathryn W. Drey, Pensacola, FL, for Defendant Florida Department of Revenue.

Conor Patrick Desmond, United States Department of Justice, Washington, DC, Elizabeth Barry Parker, Zack Smith, United States Attorney's Office, Pensacola, FL, for Defendant Internal Revenue Service (IRS).

Jane Elizabeth Kerrigan, Hand Arendall Harrison Sale, LLC, Destin, FL, for Defendant Harrison Sale McCloy Chartered, et al.

Teresa M. Dorr, Zalkin Revell, PLLC, Santa Rosa Beach, FL, Kenneth W. Revell, Zalkin Revell, PLLC, Albany, GA, Natasha Z. Revell, Zalkin Revell, PLLC, Santa Rosa Beach, FL, for Defendant Payroll Management, Inc.

Eyal Berger, Catherine Douglas Kretzschmar, Akerman LLP, Fort Lauderdale, FL, Amy Leitch, Akerman LLP, Jacksonville, FL, for Plaintiff Sunz Insurance Company.

ORDER DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT AND GRANTING DEFENDANT IRS' CROSS-MOTION FOR SUMMARY JUDGMENT

KAREN K. SPECIE, Chief U.S. Bankruptcy Judge

THIS MATTER is before the Court on cross-motions for summary judgment filed by Plaintiff, Sunz Insurance Co. ("Sunz") and Defendant, United States Internal Revenue Service ("IRS").¹ Before the Court is the priority of the claims of Sunz, a contractual creditor, and the IRS, a tax lien creditor, to over $1 million in economic damages from the Deepwater Horizon Oil Spill disaster of 2010 that Debtor received post-petition. The issues presented would make an excellent, but difficult, secured transactions final exam.

Having reviewed the pleadings, volumes of case law, some cited by the parties and more the Court researched on its own, statutes and treatises, the Court finds that Sunz does not have a security interest in the BP Claim and the IRS is entitled to summary judgment in its favor.

UNDISPUTED MATERIAL FACTS

History of Debtor's BP Claim

In April 2010, an explosion on an offshore oil drilling rig, the Deepwater Horizon , resulted in the deaths of eleven (11) workers and caused the largest offshore oil spill in U.S. history, resulting in 134 million gallons of oil being released into the Gulf of Mexico over eighty-seven (87) days, "fouling 1,300 miles of shoreline along five states" ("Deepwater Horizon Oil Spill").²

Damages caused by the Deepwater Horizon Oil Spill gave rise to numerous lawsuits against a variety of entities, including British Petroleum Exploration & Production, Inc. (collectively "BP Parties"), that were consolidated in front of the United States District Court for the Eastern District of Louisiana.³ On December 21, 2012, that court certified the "Economic Class" and approved the Economic and Property Damages Settlement Agreement ("BP Settlement Agreement").⁴ The BP Settlement Agreement implemented a court supervised settlement program through which a claims administrator would review and process proper and timely claims for economic damages resulting from the Deepwater Horizon Oil Spill.⁵

Some time prior to April 19, 2012, Debtor, Payroll Management, Inc. ("Debtor"), retained counsel and submitted one or more economic damage claims to the entity then coordinating claims, the Gulf Coast Claims Facility ("GCCF").⁶ On April 19, 2012, the GCCF notified Debtor in writing that it qualified for compensation and issued Debtor a check for $743,712.16, representing its "past losses" for the period after April 20, 2010 and through the last period for which Debtor submitted records showing its income or losses.⁷ In September 2012, Debtor submitted two additional forms, this time to the entity formed to take over handling of economic damage claims, the Deepwater Horizon Claims Center ("DHCC"), in further support of its economic damages claim (inclusive of all claim forms Debtor submitted, the "BP Claim").⁸

The record in this adversary proceeding is devoid of specific information as to what, if any, action was taken on account of the BP Claim between September of 2012 and early in 2017. The law firm that was handling the BP Claim, Harrison Sale McCloy Chartered, et al., represents that in February of 2017 it had "obtained a substantial settlement proposal," but before the deadline to accept or reject the proposal expired Debtor terminated the firm's services.⁹

At some point Debtor requested reconsideration of the original amount it was awarded by the DHCC in April of 2012. In response, on December 19, 2017, the DHCC sent written notification that Debtor qualified for $1,070,330.23, net of the Interim Payment of $719,322.16 made in 2012.¹⁰

Procedural History Relevant to the BP Claim

Debtor filed its Chapter 11 petition on March 27, 2018.¹¹ On August 16, 2018, the DHCC issued a notice stating that it had previously requested, but had not received, documentation from Debtor that the BP Claim proceeds are not property of the bankruptcy estate or a court order approving the monetary award.¹² The DHCC notice, copied to the U.S. Trustee, set forth a response deadline of October 15, 2018 and stated "[i]f we do not receive the documents identified in Section IV below on or before October 15, 2018, we will close the claim without payment. "¹³

The day after the stated deadline, October 16, 2018, Debtor filed a notice in its Chapter 11 case that it had executed a "Settlement Agreement" with the DHCC.¹⁴ The document attached to that notice includes a "Full and Final Release, Settlement and Covenant Not to Sue " signed by a representative of Debtor on August 14, 2018 ("Release").¹⁵ Also on October 16, 2018, Debtor filed and served a motion via negative notice requesting this Court to approve a settlement of the BP Claim for $1,070,330.23.¹⁶ After no objections were filed, this Court approved that settlement by order dated November 13, 2018.¹⁷ On November 26, 2018, Debtor received a check from the DHCC in the amount of $1,070,330.23, which is being held in trust pending further order of this Court.¹⁸

The Competing Claims of Sunz and the IRS

Sunz claims a prior, perfected security interest in the BP Claim based on a business relationship that began in 2015 when Sunz issued Debtor a large workers' compensation insurance policy and financed the premiums. In September or October of 2015, Sunz and Debtor executed a document entitled "Sunz Large Deductible Program Agreement " ("Program Agreement").¹⁹ On or about October 23, 2015, Debtor, two other parties and Sunz executed a Pledge and Security Agreement ("Security Agreement") to secure payment and performance of the Program Agreement.²⁰ The Security Agreement defines the "Collateral" as follows:

A. Business Assets of Pledgors. All right, title, and interest of Pledgors in and to, but none of the obligations under or with respect to, the assets of the business of Pledgors; .... Except as otherwise provided herein, assets shall include, but not be limited to, all tangible and intangible property which is or may be used in the business of Pledgors; the customer lists, including renewal policy information, related records and compilations of information; the identity, lists or descriptions of any new or potential customers, referral sources or organizations; marketing programs; financial information; contract proposals or bidding information; business plans; training and operations methods and manuals; software programs; reports; premium structures; existing contracts and policies;

B. Proceeds. All additions, substitutes and replacements for and proceeds of the above Collateral (including all income and benefits resulting from any of the above, ....²¹ )

On November 3, 2015, Sunz recorded a UCC-1 Financing Statement ("UCC-1") containing the same collateral description.²² Neither the Security Agreement, the Program Agreement, nor the UCC-1 executed by Debtor mention the BP Claim or any claim in relation to the Deepwater Horizon Oil Spill.

In March of 2017, Debtor defaulted under the Program Agreement.²³ The same month, the IRS filed a "Notice of Federal Tax Lien " against Debtor for $23,186,065.93 in unpaid 941 taxes for the fourth quarter of 2012 through the third quarter of 2016.²⁴ On August 1, 2017, the IRS filed a second "Notice of Federal Tax Lien " against Debtor for an additional $3,673,031.28 in unpaid 940 taxes for 2016 and 941 taxes for the first quarter of 2017.²⁵

Procedural History of this Adversary Proceeding

Sunz filed its initial Complaint on April 29 and its Amended Complaint on June 20, 2019, naming numerous entities, including the IRS, and seeking (1) a declaratory judgment that it holds a "valid, duly perfected, first priority security interest" in the BP Claim, and (2) turnover of the BP Claim proceeds.²⁶ In August of 2019 the Court authorized the parties to attend global mediation.²⁷ The parties did not file a report of the outcome of mediation. Various defendants filed Answers and Sunz filed its Summary Judgment Motion on June 12, 2020.²⁸

On August 26, 2020, the Court entered an order submitted by Debtor and agreed to by Sunz and the IRS limiting the scope of Sunz' Summary Judgment Motion as follows:

The scope of the Summary Judgment Motion filed by Sunz Insurance Company ... shall be limited to the narrow legal question of the interpretation of the collateral descriptions set forth in the UCC-1 Financing Statement recorded by Sunz Insurance Company ... and the language and scope of the tax liens of the Internal Revenue Service ... to determine which should prevail as against the other in priority, based solely on their respective language and applicable law ....²⁹

Sunz and the IRS briefed the issues pertaining to the Summary Judgment Motion, as limited by the Agreed Order. Meanwhile, in February of 2021 the Court entered an order approving...