In Full Throttle Films v. National Mobile Television, (— Cal.Rptr.3d —-, Cal.App. 2 Dist., December 22, 2009), a California Court of Appeal considered whether a trial court erred when it granted a third-party lender’s application to release a levy held on deposit accounts by a plaintiff in a lawsuit against an alleged debtor. The Court of Appeal held the trial court erred because the third party lender failed to show that it had perfected its security interest before the plaintiff became a lien creditor or that it had filed a Uniform Commercial Code (“UCC”) statement in the correct state.
Full Throttle Films, Inc. (“Full Throttle”) brought a lawsuit against National Mobile Television, Inc. (“National Mobile”) to recover $416,399.48, which Full Throttle alleged was due under a rental agreement. Full Throttle filed an application for a right to attach order and an order for issuance of a writ of attachment. The trial court granted the application and on August 26, 2008, “a writ of attachment issued ‘for any property of a defendant who is not a natural person for which a method of levy is provided.'”
On September 10, 2008, Wachovia Capital Finance Corporation (“Wachovia Capital”) filed an application for release of levied property. Wachovia Capital submitted evidence in support of its application that Full Throttle had levied $429,110.79 in National Mobile’s deposit account at Wachovia Bank, which is a distinct entity from Wachovia Capital. Wachovia Capital submitted a loan agreement between National Mobile and Wachovia Capital, which provides “Wachovia Capital holds ‘a continuing security interest in . . . all personal and real property and fixtures and interests in property and fixtures’ of National Mobile, including ‘all deposit accounts.'” Wachovia Capital further provided “control agreements” for two National Mobile accounts at Wachovia Banks which state “‘the arrangements established under this [a]greement constitute ‘control’ of each [identified deposit account]’ within the meaning of ‘Article 9 of the [UCC] as adopted by the State of California.'” Wachovia Capital also submitted copies of several UCC financing statements it “had filed with the Delaware Department of State, stating that Wachovia Capital held a security interest in all ‘property and assets’ of National Mobile, including ‘all deposit accounts.'”
The trial court granted Wachovia Capital’s application for release of levied property and quashed the levy on Wachovia Bank. Full Throttle appealed the trial court’s decision.
The Court of Appeal reversed the decision of the trial court because its decision was not supported by substantial evidence. Full Throttle became a lien creditor within the meaning of the California Commercial Code after it obtained a writ of attachment and right to attach order and then levied on National Mobile’s deposit accounts.
Subject to an exception that is not applicable in this case, California Commercial Code section 9317 subdivision (a)(2) “provides that a security interest . . . is subordinate to the rights of . . . a person that becomes a lien creditor before the earlier of the time the security interest . . . is perfected, or one of the conditions specified in paragraph (3) of subdivision (b) of [s]ection 9204 is met and a financing statement covering the collateral is filed.” For Wachovia Capital to prevail on its third-party claim, it had to show that it “(1) perfected its security interest in the deposit account (or deposit accounts) on which Full Throttle levied, or (2) met one of the conditions specified in subdivision (b)(3) of section 9203 and filed a financing statement covering the deposit accounts on which Full Throttle levied. The court found “[t]he record contains no evidence proving either of those alternatives.”
California Commercial Code section 9312 provides, “A security interest in a deposit account may be perfected only by control under [s]ection 9314.” Section 9314 subdivision (b) “provides that a ‘security interest in deposit accounts . . . is perfected by control under’ section 9104.” Section 9104 subdivision (a) provides, “A secured party has control of a deposit account if any of the following conditions is satisfied: (1) The secured party is the bank with which the deposit account is maintained. (2) The debtor, secured party, and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor. (3) The secured party becomes the bank’s customer with respect to the deposit account.” The court found that it is undisputed that neither (a)(1) nor (a)(3) apply here because Wachovia Capital is not the bank where the deposit account is held and Wachovia Capital has not become Wachovia Bank’s customer for the deposit account.
In order for Wachovia Capital to prove its claim it had to show “National Mobile, Wachovia Capital, and Wachovia Bank had agreed in an authenticated record that Wachovia Bank would comply with Wachovia Capital’s instructions directing disposition of the funds in the deposit accounts on which Full Throttle levied without further consent by National Mobile.” The court found the record contained no evidence of any agreement that fulfilled these requirements “because the record contains no evidence identifying the deposit account or deposit accounts on which Full Throttle levied.”
The court further found that there was no evidence of a UCC financing statement filed in the correct state. If the collateral is located in California, California law governs perfection of the security interest claimed by Wachovia Capital. If California law governs, Wachovia Capital was required to file a financing statement in the office of the Secretary of State of California.
The court found, however, the record did not contain any evidence of where the deposit accounts on which Full Throttle levied were located. The record did not contain any evidence that Wachovia Capital “properly filed a financing statement covering the deposit accounts on which Full Throttle levied.” The evidence revealed Wachovia Capital only “filed financing statements with the Delaware Department of State, but the record contains no evidence that the deposit accounts on which Full Throttle levied are located in Delaware.”
If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.
Bruce A. Scheidt | 916.321.4500