619 B.R. 441 (Bankr. D. Colo. 2020)

From Casetext: Smarter Legal Research

Walters v. Lynch (In re 3PL4PL, LLC)

United States Bankruptcy Court, D. Colorado.

Jun 22, 2020

619 B.R. 441 (Bankr. D. Colo. 2020)

Opinion

Case No. 14-22402 MER Adversary No. 15-1120 MER

2020-06-22

IN RE: 3PL4PL, LLC, Debtor. Jared Walters, Chapter 7 Trustee of 3PL4PL, LLC, et al., Plaintiffs. v. Kevin B. Lynch, et al., Defendants.

James T. Markus, Steven R. Rider, Jennifer M. Salisbury, Markus Williams Young & Hunsicker LLC, Denver, CO, David Wadsworth, Wadsworth Garber Warner Conrardy, P.C., Littleton, CO, for Plaintiffs. Lance Henry, Patrick D. Vellone, Matthew M. Wolf, Allen Vellone Wolf Helfrich & Factor P.C., Charles R. Scheurich, Onsager Fletcher Johnson LLC, Joseph J. Bronesky, Patrick L. Hughes, Eric E. Johnson, Denver, CO, for Defendants.

Michael E. Romero, Chief Judge

James T. Markus, Steven R. Rider, Jennifer M. Salisbury, Markus Williams Young & Hunsicker LLC, Denver, CO, David Wadsworth, Wadsworth Garber Warner Conrardy, P.C., Littleton, CO, for Plaintiffs.

Lance Henry, Patrick D. Vellone, Matthew M. Wolf, Allen Vellone Wolf Helfrich & Factor P.C., Charles R. Scheurich, Onsager Fletcher Johnson LLC, Joseph J. Bronesky, Patrick L. Hughes, Eric E. Johnson, Denver, CO, for Defendants.

ORDER

This an Order rather than a Report and Recommendation because the District Court's order on the parties' motions to withdraw the reference [District Court Case No. 1:15-CV-01403-RM at ECF No. 14] provides "That the automatic reference of this proceeding to the Bankruptcy Court is WITHDRAWN only for the purpose of the Final Trial Preparation Conference, the Trial, and all post-trial matters. The Bankruptcy Judge shall retain jurisdiction over the adversary proceeding for supervision and resolution of all pretrial matters, including scheduling, discovery, non-dispositive motions, dispositive motions, and entry of a final pretrial order[.]") (emphasis in original).

Michael E. Romero, Chief Judge The tripartite relationship between debtors, their lawyers, and their secured creditors is rarely harmonious. Secured creditors are not particularly happy when their collateral becomes a debtor lawyer's war chest. And yet this three-headed Cerberus guards the gates of many commercial bankruptcies, often deciding whether the debtor will rest in Hades or Elysium. This case tests the limits of a debtor's power to fund their strategic litigation plan at the expense of secured creditors.

BACKGROUND

A. The Lenders and the Loans

3PL4PL, LLC ("3PL4PL ") was formed by its parent company, LogisticsFinance, LLC ("LogisticsFinance "), as a special purpose entity to conduct lending programs with other entities. Between 2010 and 2012, BIA Investors, SFHT, LLC and SFCRT, LLC ("Lenders ") made loans ("Primary Loans ") to 3PL4PL, the proceeds of which were intended to be used by 3PL4PL to finance its financial services business. According to its business model, 3PL4PL would profit by re-lending the Lenders' capital on margin.

ECF No. 5 ("Amended Complaint ") at ¶33.

Id. at ¶34.

Specifically, pursuant to the terms of the promissory notes and other loan documents between 3PL4PL and the Lenders (collectively, the "Loan Documents "), 3PL4PL was obligated to use the proceeds of the Primary Loans to lend money to third-party entities ("Borrowers "). In exchange, the Borrowers delivered promissory notes to 3PL4PL ("Third-Party Notes "). 3PL4PL established separate accounts at Union Bank for each of its Borrowers, into which the Third-Party Borrowers deposited payments due under the Third-Party Notes ("Loan Payments ").

Id. at ¶¶ 35-40. In pertinent part, the Loan Documents are attached to the Amended Complaint as Exhs. 2-5.

The Third-Party Borrowers are identified in the record as Oasis Media Access Corp, Orasi Software, Inc., Ocean Commod. and Island Way Sorbet. As set forth in the Loan Documents, not all Lenders were directly funding all the Third-Party Loans, but rather, each Lender made loans to 3PL4PL specifically for one of the Third-Party Borrowers.

Id.

Under the Loan Documents, 3PL4PL was obligated to use the operating income derived from the Loan Payments to pay the Loans from the Lenders before taking profits as net income. Accordingly, the Lenders took security interests in 3PL4PL's assets. The specific grant of 3PL4PL's security interest defines the Lenders' collateral as:

ECF No. 5-2 at p. 2, ECF No. 5-3 at p. 2, ECF No. 5-4 at p. 2 and ECF No. 5-5 at p. 2.

[A]ll of Borrower's right, title and interest in and to all cash and cash investments, investment property, goods, documents, inventory, equipment, general intangibles, accounts, chattel paper, instruments,

contracts, contract rights, and all other tangible and intangible property of Borrower, whether now existing or hereafter coming into existence and all products and proceeds of the foregoing.

Id. (the "Collateral ").

3PL4PL's obligation to pay the Loans before distributing profits is further memorialized by its affirmative covenants in the Loan Documents. It would not:

[D]ispose, sell, lease or transfer any party of the Collateral, incur assume or suffer to exist any lien upon any of the Collateral or file or suffer to be on file or authorize to be filed, in any jurisdiction, any financing statement or like instrument with respect to all or any part of the Collateral, except Borrower may dispose, sell, lease or transfer the Collateral upon indefeasible repayment in full, in cash, of the Secured Obligations

[or]

until all Secured Obligations are indefeasibly repaid in full, in cash, pay any dividends or make any distributions or payment or redeem, retire or purchase any of its membership interests or other equity.

ECF No. 5-2 at p. 3, ECF No. 5-3 at p. 3, ECF No. 5-4 at p. 3 and ECF No. 5-5 at p. 3.

To perfect its lien, BIA Investors, LLC filed its UCC-1 financing statement with the Colorado Secretary of State on June 18, 2014, containing the following collateral description:

All of Debtor's assets, goods, Accounts, Equipment, Inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles, commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, receivables, deposit accounts, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations and financial assets, whether now owned or hereafter acquired, wherever located; and all Debtor's Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.

ECF No. 5-6.

The arrangement began going sideways in the fall of 2013, as 3PL4PL began making transfers to LogisticsFinance from the Borrowers' accounts at Union Bank. Between October 28, 2013, and July 18, 2014, 3PL4PL made seventeen (17) transfers to LogisticsFinance and Kevin Lynch ("Lynch "), the president of LogisticsFinance, totaling $1,873,000 ("Transfers "). The Amended Complaint alleges the Transfers were intended to and in fact enabled Lynch to misappropriate and convert the proceeds of the Third-Party Notes to his own use.

Amended Complaint at ¶ 44.

Id.

Id. at ¶ 49.

B. Transfers to the Law Firm Defendants

Plaintiffs argue Sherman & Howard, LLC ("Sherman "), Haynes & Boone, LLP ("Haynes ") and Allen & Vellone, P.C. ("Allen ") (collectively, "Law Firm Defendants " or "Law Firms ") were all subsequent transferees of the Transfers, as fee payments in their role as counsel to Lynch, 3PL4PL and/or LogisticsFinance. At the heart of this case is the Law Firms' alleged connections to and facilitation of the Transfers through their attorney trust accounts.

1. Attorney Trust Accounts Generally

Naturally, the mechanics of the Law Firms' financial transactions with 3PL4PL and LogisticsFinance implicate the rules governing attorney trust accounting. Colorado Rule of Professional Conduct 1.15(A)(a) expressly provides lawyers must hold "property of clients or third persons that is in the lawyer's possession in connection with a representation separate from the lawyer's own property." In Colorado, this is often accomplished through the lawyer establishing a COLTAF account, which refers to a Colorado lawyer's client trust account maintained pursuant to Colorado's Interest on Lawyer Trust Accounts (IOLTA) program, administered by the Colorado Lawyer Trust Account Foundation ("COLTAF ").

The Law Firm Defendants state, for purposes of the UCC Priority MSJ, "the Law Firms will treat the money at issue as if it had been wired directly from a 3PL4PL account and will refer to the funds as paid by 3PL4PL/LogisticsFinance. Whether the specific transferor was 3PL4PL or LogisticsFinance is immaterial to the Law Firms' argument herein." UCC Priority MSJ at n. 3.

2. Sherman & Howard

Lynch originally retained Sherman on or about November 11, 2013. By agreement dated February 17, 2014, Sherman expanded its representation to include 3PL4PL and LogisticsFinance. Sherman's retention agreement provides any funds advanced to the firm as a deposit would be held in Sherman's COLTAF account, unless otherwise directed by the client. Sherman's agreement further provides "[b]y making such a deposit, you agree that the firm has a possessory security interest in the advance deposit for services it has performed and will perform in the future." The agreement requests an advance deposit in the amount of $20,000.

ECF No. 184-1 at p. 5.

Id. at p. 12. The updated engagement agreement is unsigned and Plaintiff's dispute its authenticity. Lynch, however, substantiated the authenticity of the document through his affidavit. See ECF No. 184-2 at p. 3.

ECF No. 184-1 at pp. 8-9.

Id. at p. 8.

Id. at p. 6.

Between November 14, 2013, and July 11, 2014, LogisticsFinance tendered six such "advance deposits" to Sherman ranging from $20,000 to $50,000, for a grand total of $200,000, or 1000% of the $20,000 advance deposit originally contemplated. Over the same time period, Sherman made seven transfers out of its COLTAF account for LogisticsFinance in the total amount of $20,063.50, in line with its initial $20,000 estimate. However, with LogisticFinance's additional transfers, as of July 11, 2014, or nine months into the representation, the positive balance held for LogisticsFinance in Sherman's COLTAF account was just shy of $180,000. Over the next six months from July 28, 2014 to January 21, 2015, Sherman made five more transfers out of its COLTAF account totaling $144,930. Sherman refunded the remaining balance of $35,000 back to LogisticsFinance through two transfers on December 9, 2014, and December 12, 2014. Thus, the total of all advanced deposits to Sherman that were not returned to LogisticsFinance is $165,000.

Id. at p. 14.

Id.

The transfers out of LogisticsFinance's COLTAF account with Sherman, other than the transfers back to LogisticsFinance, are described in the documentary evidence only as "apply to balance." Betty Martinez-Lane, Controller of Sherman, asserts all of these entries represent ordinary course payment of LogisticsFinance's incurred legal fees, which then became ordinary operating income for Sherman. Plaintiffs dispute this assertion.

Id.

Id. at pp. 3-4.

3. Haynes & Boone

Lynch originally retained Haynes on February 14, 2014. The engagement agreement with Haynes provides for an initial $15,000 retainer, which Haynes agrees would be held in a client trust account absent contrary instruction. The Haynes engagement agreement also provides it would "hold the retainer as security for your payment obligations to us[.]"

ECF No. 184-2 at p. 18.

Id.

Id. at p. 20.

Between February 18, 2014, and July 8, 2014, LogisticsFinance made eleven transfers to Haynes ranging from $12,305 to $50,000. The grand total of all transfers by LogisticsFinance into Haynes trust account during this five-month period equals $302,110.03. Concomitantly, Haynes issued ten invoices to LogisticsFinance totaling $141,646.33. At the request of its client, Haynes made three transfers back to LogisticsFinance between August 29, 2014, and December 17, 2014, totaling $155,000. Haynes is still holding the balance of $5,738.98 in its trust account for LogisticsFinance.

ECF No. 184-3 at p. 17.

Id.

Crystal J. White, controller of Haynes, asserts all the transfers from Haynes' trust account represent ordinary course payment of LogisticsFinance's incurred legal fees, which then became ordinary operating income for Haynes. Trustee and Lenders dispute this assertion.

Id. at p. 4.

4. Allen Vellone

Lynch, LogisticsFinance and 3PL4PL retained Allen on September 18, 2014. The engagement agreement with Allen provides for an initial $30,000 retainer. The Allen engagement agreement also states "3PL4PL, LLC acknowledges and agrees that the Firm shall have a perfected security interest in all funds held in retainer in order to secure payment of past, present (work in progress) and future fees for services rendered."

ECF No. 187-1 at p. 5.

Id.

Id. at p. 7

On September 23, 2014, and December 18, 2014, 3PL4PL and LogisticsFinance made two transfers to Allen ranging totaling $38,000. Concomitantly, Allen made six withdrawals from its trust account for the representation tolling $38,000.

Id. at p. 15.

Id.

Krystal Bigley, Allen's firm administrator, asserts the transfers from Allen's trust account represent ordinary course payment of 3PL4PL's incurred legal fees, which then became ordinary operating income for Allen. Plaintiffs dispute this assertion.

Id. at pp. 3-4.

C. Procedural History and Pending Matters

On September 9, 2014 ("Petition Date "), an involuntary Chapter 7 petition was filed by the Lenders against 3PL4PL, and an order for relief was entered December 31, 2014. On January 6, 2015, Jared Walters was appointed Chapter 7 Trustee ("Trustee ") for 3PL4PL's bankruptcy estate.

Id. at ¶ 6.

In re 3PL4PL, LLC , Case No. 14-22402, ECF No. 51.

On March 25, 2015, the Trustee and the Lenders (together, the "Plaintiffs "), filed an adversary complaint commencing this case, captioned Jared Walters, Chapter 7 Trustee of 3PL4PL, LLC, et al. v. Brian Turner, et al. , Adversary Proceeding No. 15-01120 ("Adversary "). On April 3, 2015, the Plaintiffs filed the Amended Complaint. The Amended Complaint names twenty-three (23) defendants, including individuals, entities and John Does (collectively, "Defendants "), and includes thirty (30) claims for relief. Below is a breakdown of the various claims for relief against the Defendants contained in the Amended Complaint:

ECF No. 1.

Id.

Count Claim for Relief Defendant One Imposition of Security Interest in All Defendants Favor of Lenders Two Imposition of Constructive Trust All Defendants Three Avoidance of Fraudulent Transfer John Snedegar, Under 11 U.S.C. §§ 548 and 544⁴⁴ and individually and as COLO. REV. STAT. § 38-8-101, et seq. trustee and § 550 Four Avoidance of Fraudulent Transfer John Snedegar, Under §§ 548 and 544 and COLO. REV. individually and as STAT. § 38-8-101, et seq. and § 550 trustee Five Avoidance of Fraudulent Transfer Jerry Greenberg Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550 Six Avoidance of Fraudulent Transfer Charles Walker Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550 Seven Avoidance of Fraudulent Transfer David Klawans Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550

[Editor's Note : The preceding image contains the reference for footnote ].

Unless otherwise specified, all references herein to "Section," "§" and "Code" refer to the U.S. Bankruptcy Code, 11 U.S.C. § 101, et seq.

Eight	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Paul Lubar
Nine	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Gregory Lubar
Ten	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Richard Smith
Eleven	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Tim Walker
Twelve	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Brian Turner
Thirteen	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Lori Schuyler
Fourteen	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Richard Replin and Replin LLC
Fifteen	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Ron Guillot
Sixteen	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Crestco Holdings, LLC
Seventeen	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	LogisticsFinance, Inc.
Eighteen	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Kevin Lynch
Nineteen	Insider Fraud Under COLO. REV. STAT. § 38-8-106	LogisticsFinance, Inc.
Twenty	Conversion Under COLO. REV. STAT. §§ 18-4-401 and 405	All Defendants
Twenty-One	Conspiracy	LogisticsFinance, Inc. and Kevin Lynch
Twenty-Two	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Haynes & Boone, LLP

Twenty-Three	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Sherman & Howard, LLC
Twenty-Four	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	Bertrand Herman Weidberg
Twenty-Five	Avoidance of Post-Petition Transfer Under §§ 549 and 550	Allen & Vellone, PC
Twenty-Six	Avoidance of Preferential Transfer Under §§ 547 and 550 (in the alternative)	Sherman & Howard, LLC
Twenty-Seven	Avoidance of Preferential Transfer Under §§ 547 and 550 (in the alternative)	Haynes & Boone, LLP
Twenty-Eight	Avoidance of Preferential Transfer Under §§ 547 and 550 (in the alternative)	Bertrand Herman Weidberg
Twenty-Nine	Avoidance of Fraudulent Transfer Under §§ 548 and 544 and COLO. REV. STAT. § 38-8-101, et seq. and § 550	John Does 1-3
Thirty	Avoidance of Preferential Transfer Under §§ 547 and 550	John Does 1-3

On June 1, 2015, the Law Firm Defendants filed a motion for withdrawal of the reference of the trial and post-trial matters to the United States District Court for the District of Colorado ("District Court "). On June 1, 2015, the Law Firm Defendants also filed a motion to dismiss Counts One, Two, Twenty through Twenty-Three, and Twenty-Five of the Amended Complaint against them. Defendants Sherman and Haynes filed separate answers to the Amended Complaint.

ECF No. 44.

ECF No. 46.

ECF Nos. 48, 50.

Also on June 1, 2015, defendant Bertrand Herman Weidberg ("Weidberg ") filed a motion to dismiss Counts One, Two, Twenty and Twenty-One, and Twenty-Four of the Amended Complaint against him. Weidberg's motion to dismiss adopts the Law Firm Defendants' motion to dismiss with respect to Counts One, Two, Twenty, Twenty-One, and Twenty-Four of the Amended Complaint. Contemporaneously with his motion to dismiss, Weidberg filed a motion for withdrawal of the reference. Weidberg also filed an answer to the Amended Complaint on June 1, 2015.

ECF No. 53.

Id. at p. 3, ¶¶10-12.

ECF No. 56.

ECF No. 54.

On June 4, 2015, Defendants LogisticsFinance and Lynch filed a motion to dismiss Counts One, Two, Twenty, and Twenty-One of the Amended Complaint against them.

ECF No. 63.

On June 12, 2015, Defendants Crestco Holdings, LLC, Jerry Greenberg, Ron Guillot, John Snedegar, Trustee of the Apollos Company 401(k) Plan, John Snedegar, Trustee of the Apollos Pension and Profit Sharing Plan Trust, David Klawans, Gregory Lubar, Paul T Lubar, Richard Replin, Replin Family LLC, a Colorado limited liability company, Lori Schuyler, Richard G Smith, John Snedegar, Brian Turner, Charles R Walker, and Tim Walker (collectively, the "Noteholder Defendants ") filed a motion to dismiss the claims against them in the Amended Complaint.

ECF No. 71.

On December 9, 2015, the District Court granted the motions for withdrawal of the reference as to the Sherman law firm, the Haynes law firm, and Weidberg, but denied the motion as to the Allen law firm. In its Order, the District Court held "the Bankruptcy Court is not authorized to conduct the jury trial demanded in this case" under 28 U.S.C. § 157(e). Although the Allen firm had jointly sought removal based on a right to a jury trial, the District Court noted the Allen firm did not file a jury demand and therefore was not entitled to withdrawal of the reference. Allen nonetheless received the relief it sought because the District Court's Order granting the motions as to the other Defendants withdrew the case as to all parties.

Walters v. Turner, et al. (In re 3PL4PL, LLC) , 2015 WL 8479974, *2-3 (D. Colo. Dec. 9, 2015).

Id.

Id. at *1-2.

Id. at *2.

On March 31, 2017, the Court entered its proposed findings of fact and conclusions of law on the motions to dismiss [ECF No. 11]. The Court concluded Claims 1 and 2 should be dismissed for lack of subject matter jurisdiction and Claim 20 should be dismissed for failure to state a claim. However, the U.S. District Court ruled that supplemental subject matter jurisdiction exists over Claims 1 and 2 and Claim 20 properly pled a cause of action for conversion or statutory theft against the Law Firms.

In re 3PL4PL, LLC , Case No. 1:15-cv-01403-RM, ECF No. 28 at pp. 15-16, 19 (D. Colo. January 31, 2019).

Subsequently, Plaintiffs agreed to voluntary dismissal of the claims against the Noteholder Defendants and Weidberg. With those parties dismissed, there are presently six matters before the Court which will be addressed in this Order. The relevant pleadings are as follows:

ECF Nos. 223, 224, 226 and 227.

[Editor's Note : The preceding image contains the reference for footnote ].

The UCC Priority MSJ and the Preference MSJ were filed by Sherman and Haynes, but not Allen. However, Allen seeks the same relief concerning Counts 1, 2, and 20 through the Allen MSJ. Allen also seeks relief concerning Count 25. Allen is not named in Counts 26 and 27.

ANALYSIS

A. Summary Judgment Standard

Pursuant to Fed. R. Civ. P. 56, made applicable to adversary proceedings by Fed. R. Bankr. P. 7056, summary judgment is appropriate if the pleadings, answers to interrogatories, admissions, or affidavits show there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. The burden for establishing entitlement to summary judgment rests on the movant. Summary judgment is not appropriate where a dispute exists as to facts which could affect the outcome of the suit under relevant law. A genuine dispute over a material fact exists when the "evidence supporting the claimed factual dispute [is] shown to require a jury or judge to resolve the parties' differing versions of the truth at trial." In applying this standard, the Court is to "examine the factual record and reasonable inferences therefrom in the light most favorable to the party opposing the motion." "All doubts must be resolved in favor of the existence of triable issues of fact."

Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; Stat–Tech Int'l Corp. v. Delutes (In re Stat–Tech Int'l Corp.), 47 F.3d 1054, 1057 (10th Cir.1995).

Celotex, 477 U.S. at 324, 106 S.Ct. 2548.

Carey v. U.S. Postal Service, 812 F.2d 621, 623 (10th Cir.1987).

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (quoting First National Bank of Arizona v. Cities Service Co., 391 U.S. 253, 288–289, 88 S.Ct. 1575, 20 L.Ed.2d 569 (1968) ).

Lopez v. LeMaster, 172 F.3d 756, 759 (10th Cir. 1999).

Novotny v. I.R.S. , 1994 WL 722686, at *1 (D. Colo. Sept. 8, 1994).

B. Defining the Lenders' Original Collateral

The Law Firm Defendants argue the Lenders' security interests terminated when the Loan Payments were transferred from 3PL4PL's Borrower accounts to LogisticsFinance's account, and then to the Law Firms' COLTAF accounts, because the Lenders did not perfect a security interest in the accounts at Union Bank where the Borrowers initially deposited the Loan Payments. Alternatively, even if the Lenders' security interest survived the Transfers, the Law Firm Defendants argue they acquired security interests that were perfected by possession of the property in their trust accounts pursuant to their engagement agreements, thereby elevating the Law Firm Defendants' possessory security interests to superior priority over the Lenders' non-possessory liens.

As will be seen, resolution of these issues turns on the characterization of the Lender's collateral within one or more highly technical terms for describing different types of personal property within Article 9 of the Uniform Commercial Code. Accordingly, as a threshold issue, the Court begins by addressing the parties' disagreement over the description of the Collateral, namely, whether the Lenders acquired a so-called "blanket lien" or, more specifically, whether the Lenders acquired a lien on 3PL4PL's "deposit account" with Union Bank.

Pursuant to C.R.S. § 4-9-108(b) and (c), "a description of collateral reasonably identifies said collateral if (1) the collateral is ‘objectively determinable,’ and (2) the collateral is not referenced as merely ‘all the debtor's assets’ or ‘all the debtor's personal property....’ " In addressing this issue, Colorado law requires the Court to "be flexible when determining whether a security agreement provides a sufficient description of the collateral such that the property described may be reasonably identified."

References to "C.R.S. § X-X-XXX" or "§ X-X-XXX" refer to the Colorado Revised Statutes for its enactment of the Uniform Commercial Code. References to "§ X-XXX" refer to the Uniform Commercial Code generically. References to another state's enactment of the Uniform Commercial Code will be cited in the ordinary manner. All other references to "Section," "§" and "Code" refer to the U.S. Bankruptcy Code, 11 U.S.C. § 101, et seq.

In re Estate of Wheeler , 410 P.3d 483, 485 (Colo. App. 2013) (internal citations omitted).

Id. (citing UCC § 9–108, official comment 2 ("The test of sufficiency of a description under this section ... is that the description do the job assigned to it: make possible the identification of the collateral described. This section rejects any requirement that a description is insufficient unless it is exact and detailed...."); In re Bakersfield Westar Ambulance, Inc., 123 F.3d 1243, 1247 (9th Cir.1997) ("[A] security agreement ‘must contain at least a general description which an objective observer would find to include the collateral in question.’ ") (quoting In re Cal. Pump & Mfg. Co., 588 F.2d 717, 720 (9th Cir.1978) ); In re Amex–Protein Dev. Corp., 504 F.2d 1056, 1061 (9th Cir. 1974) ("A description need not be so comprehensive that it enables an interested party to determine exactly what the specific collateral is, from a reading of the security agreement or financing statement alone. It is enough if the description allows a third party, aided by information which the security agreement suggests, to identify the property.") (quoting D. Lee, Perfection and Priorities Under the Uniform Commercial Code, 17 Wyo. L.J. 5–6 (1962))).

Here, the collateral description in the Loan Documents can be separated into two components. First, the Loan Documents define the Collateral to include all 3PL4PL's "cash and cash investments, investment property, goods, documents, inventory, equipment, general intangibles, accounts, chattel paper, instruments, contracts, and contract rights." Second, the Loan Documents include as Collateral "all other tangible and intangible property of Borrower, whether now existing or hereafter coming into existence and all products and proceeds of the foregoing."

In the first instance, each of the terms "investment property, goods, documents, inventory, equipment, general intangibles, accounts, chattel paper [and] instruments" are defined terms in C.R.S. § 4-9-102. Accordingly, these terms are sufficient to describe those items of collateral pursuant to C.R.S. § 4-9-108(b)(3).

C.R.S. § 4-9-108(b)(2) provides "a description of collateral reasonably identifies the collateral if it identifies the collateral by ... a type of collateral defined in this title...."

Additionally, the combination of the defined collateral terms used as descriptions, preceding the grant of a lien in all personal property now owned or thereafter acquired, is sufficient under Colorado law to create a blanket lien notwithstanding C.R.S. § 4-9-108(c). Indeed, the language used in the Loan Documents is quite similar to language approved by the Colorado Court of Appeals in Vance v. Casebolt . In Vance , the approved language described the collateral as "all of Debtor's tangible personal property including, without limitation, all present and future inventory, goods, merchandise, furniture, fixtures, office supplies, motor vehicles, equipment, machinery, now owned or hereafter acquired, including, without limitation, the tangible personal property used in the operation of the Debtor's processing facility." In the Wheeler case, decided 21 years after Vance , the Colorado Court of Appeals again approved of this approach. The Wheeler court reasoned this analysis "advances the purposes of the UCC, which is to ‘facilitate credit transactions by making commercial documents enforceable according to their stated terms and, therefore, reliable.’ "

C.R.S. § 4-9-108(c) provides "a description of collateral as ‘all the debtor's assets’ or ‘all the debtor's personal property’ or using words of similar import does not reasonably identify the collateral."

Vance v. Casebolt , 841 P.2d 394, 397 (Colo. App. 1992) (emphasis omitted).

Id.

Wheeler , 410 P.3d at 485 ("Courts, including a division of this court, have upheld collateral descriptions even when they were broad in scope and did not specifically identify the property.") (citing Vance, 841 P.2d at 397 (Colo.App.1992), In re Amex–Protein Dev. Corp., 504 F.2d at 1061 (upholding a collateral description in a security agreement even when it did not identify the property, because it referenced a financing statement that identified the property), and In re Ziluck, 139 B.R. 44, 46 (S.D.Fla.1992) (upholding a collateral description in a credit card agreement that granted a security interest in "all merchandise charged to your account" because it reasonably identified what it described)).

Id. at 486-487 (quoting Childers & Venters, Inc. v. Sowards , 460 S.W. 2d 343, 345 (Ky. 1970) ).

Thus, even if characterized as a "blanket" lien, the lien in this case is enforceable notwithstanding C.R.S. § 4-9-108(c) only because the Collateral description also includes statutorily defined terms as expressly permitted in § 4-9-108(b)(3). Accordingly, in choosing to rely on C.R.S. § 4-9-108(b)(3), rather than listing the collateral in the Loan Documents specifically or categorically as contemplated by § 4-9-108(b)(1) and (2), the lenders subjected themselves to the limitations set forth in § 4-9-108(e)(2). This section provides "a description only by type of collateral defined in this title is an insufficient description of ... [a] deposit account."

The word "deposit account" does not appear in the Collateral description. There is no information to identify any bank or other institution where a deposit account is held. By the express terms of C.R.S. § 4-9-108(e)(2), 3PL4PL did not grant an enforceable security interest in 3PL4PL's deposit accounts as original Collateral. The continuity of Lenders' security interest after the Transfers must arise, if at all, only because the transferred funds remained proceeds of the original Collateral.

Having determined 3PL4PL's "deposit account" was not part of Lenders' original Collateral, the Court must yet determine what property was originally attached. At the genesis, 3PL4PL borrowed funds from Lenders through the Primary Loans. The Lenders performed their obligations thereunder by depositing funds into 3PL4PL's deposit account at Schwab, or sometimes Union Bank.

See ECF No. 190-1 at pp. 56-57 (transcript of Kevin Lynch's testimony before the Colorado District Court on August 14, 2014).

"In Colorado, when funds are deposited into a general account, title to the funds passes to the bank. The relationship that is created between the bank and the depositor is generally described as debtor-creditor. In this relationship the depositor retains a right to withdraw funds, which right is held to be a chose in action." Accordingly, at origination, 3PL4PL's "ownership" of the borrowed funds was merely a right to demand payment from Schwab or Union Bank in an amount equal to or less than the amount Lenders' credited into those bank accounts. Pursuant to C.R.S. § 4-9 102(a)(29), a deposit account is a "demand" account with a bank, i.e. , the right to receive payment on demand from a bank. Under common-usage definitions, a chose in action, such as a right to receive payment on demand from a bank, may be characterized as both a "general intangible" and an "account." Under the technical UCC definition, however, a deposit account is neither a general intangible nor an account. C.R.S. § 4-9-102(a)(42) expressly excludes deposit accounts from the definition of general intangibles. C.R.S. § 4-9-102(a)(2) defines an account as the "right to payment of a monetary obligation," but specifically excludes deposit accounts. Furthermore, as explained in Comment 5a to C.R.S. § 4-9-102 :

In re Weninger , 119 B.R. 238, 240-41 (Bankr. D. Colo. 1990) (internal citations omitted).

See C.R.S. § 4-9-102(a)(29).

Among the types of property that are expressly excluded from the definition [of account] is "a right to payment for money or funds advanced or sold." As defined in Section 1-201, "money" is limited essentially to currency. As used in the exclusion from the definition of "account," however, "funds" is a broader concept (although the term is not defined). For example, when a banklender credits a borrower's deposit account for the amount of a loan, the bank's advance of funds is not a transaction giving rise to an account.

Because the Lenders never had a security interest in 3PL4PL's deposit account, they were at risk of 3PL4PL breaching its contractual representation by using its deposit account for an improper purpose under the Loan Documents. At least as to BIA, however, the Lender was apparently protected during this time period by being jointly named on 3PL4PL's Schwab account.

ECF No. 190-1 at pp. 57-58 ("It was set up at Schwab where they [BIA] have an account, and they're listed on the account.").

When 3PL4PL subsequently debited its deposit accounts and credited the Third-Party Borrowers, it essentially exchanged the property borrowed from the Lenders for a right to receive payment from the Borrowers pursuant to the Third-Party Notes. 3PL4PL's right to payments from the Borrowers is clearly not a deposit account, because it is not a demand account with a bank. Rather, the Third-Party Notes represent a right to payment evidenced by an instrument, as defined by C.R.S. § 4-9-102(a)(47) and (65).

Further, C.R.S. § 4-9-102(a)(29) expressly excludes from the definition of deposit accounts "accounts evidenced by an instrument."

The description of the Collateral in the Loan Documents includes the statutorily defined term "instrument." As discussed, such a description is sufficient pursuant to C.R.S. § 4-9-108(b)(3). Although 3PL4PL did not own any instruments at the time it executed the Loan Documents, C.R.S. § 4-9-204(a) validates the after-acquired property clause in the Loan Documents' description of the Collateral. C.R.S. § 4-9-204(a) "makes clear that a security interest arising by virtue of an after-acquired property clause is no less valid than a security interest in collateral in which debtor has rights at the time value is given." "It validates a security interest in the debtor's existing and (upon acquisition) future assets, even though the debtor has liberty to use or dispose of collateral without being required to account for proceeds or substitute new collateral."

Comment 2 to C.R.S. § 4-9-204.

Id.

Based on the foregoing, 3PL4PL's instruments, i.e. , the Third-Party Notes, represent the Lenders' original collateral, not 3PL4PL's deposit accounts. The security interests in the Third-Party Notes were valid as if the Notes existed on the day Lenders credited the loans to 3PL4PL's deposit accounts.

C. Characterizing the Proceeds of Lenders' Collateral

The heart of this matter lies in the mechanics of transforming 3PL4PL's encumbered interest in instruments into other forms of collateral through Article 9's provisions governing disposition and proceeds of security interests. Pursuant to C.R.S. § 4-9-203, the attachment of a security interest in collateral gives the secured party the rights to proceeds of the collateral. Pursuant to C.R.S. § 4-9-315(a), the security interest continues through any disposition of the collateral and attaches to any identifiable proceeds of the collateral.

1. The Deposit Account

The Third-Party Borrowers performed their obligations under the Third-Party Notes by crediting 3PL4PL's deposit accounts at Union Bank. Upon each Third-Party Borrowers' payment, 3PL4PL lost part of its rights in instruments ( i.e. , the right to demand payment under the Third-Party Notes), but concomitantly acquired a right to demand payment from Union Bank in an equal amount. The right to payment from a bank on demand is a deposit account. As such, 3PL4PL exchanged the original Collateral for a deposit account. Even though the Lenders failed to acquire a lien on 3PL4PL's deposit accounts as their original collateral, the Lenders nonetheless obtained such a lien as proceeds of the instruments which served as their original collateral.

C.R.S. § 4-9-102(a)(29).

See Marathon Petroleum Co., LLC v. Cohen (In re Delco Oil, Inc.) , 599 F.3d 1255, 1260 (11th Cir. 2010) ("Marathon also argues that the deposit account funds that Debtor transferred to it did not constitute cash collateral because CapitalSource did not perfect an interest in Debtor's deposit account by filing a deposit control agreement. But this argument is equally unpersuasive. Florida law provides "a security interest attaches to any identifiable proceeds of collateral" and "a security interest in proceeds is a perfected security interest if the security interest in the original collateral was perfected." Fla. Stat. § 679.3151(1)(b) and (3). No one disputes CapitalSource had a perfected security interest in all of Debtor's personal property. Thus, if the cash transferred constituted the proceeds of CapitalSource's collateral, CapitalSource need not have had a deposit account control agreement to perfect its security interest in the cash transferred.").

2. The Wire Transfers

The transfers to the Law Firms followed. Lenders and the Trustee argue the Law Firms did not receive "money" because there was no hard currency involved. They characterize the transferred property as a "deposit account" and not "money."

Mechanically, the transfers out of the Union Bank deposit account were accomplished through wire transfers to the Law Firms' COLTAF accounts. It is abundantly clear a wire transfer is a transfer of money. Lenders and Trustee are conflating the mechanism of the transfer with the proceeds of the collateral. As will be seen, the separateness of these two constructs has practical implications on the outcome of this dispute.

12 U.S.C. § 4002(a)(1) and 12 C.F.R. § 229.2(11). See also Richards v. Platte Valley Bank , 866 F.2d 1576, 1581 (10th Cir. 1989) ("The sender of money on a wire transfer tells its bank to send instructions to the Federal Reserve System ... to make money or credit available through still another bank.")

For the time being, it is enough to find there were wire transfers from Union Bank deposit accounts to COLTAF accounts, and such wire transfers were transfers of money. The implications of those findings cannot be considered without first addressing the nature of a property interest in funds advanced to a lawyer in trust.

3. The General Intangible

COLTAF accounts or other attorney trust accounts require all withdrawals be made by an attorney, and only "by authorized bank or wire transfer or by check payable to a named payee." Although the trust account is maintained in the lawyer's name, unless and until there is an authorized withdrawal, the property in the trust account remains the separate property of the client, and the attorney's misappropriation of those funds not only violates the rules of professional conduct, but also constitutes conversion. Further, "[t]hird parties, such as a client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client."

Col. R. Prof. Cond. 1.15(C).

Col. R. Prof. Cond. 1.15(B)(a).

Matter of Kleinsmith , 409 P.3d 305, 308 (Col. 2017) ("Knowing conversion or misappropriation occurs when a lawyer takes money that has been entrusted to him or her by a client or third party, knowing that it is the client or third party's money and that the client or third party has not authorized the taking, regardless of whether the attorney intended to deprive the client or third party of that money permanently.")

Col. R. Prof. Cond. 1.15(A), Comment 4.

By making the Transfers from 3PL4PL's bank account, to LogisticsFinance's bank account, and then into the Law Firms' COLTAF accounts, 3PL4PL exchanged its right to payment on demand from Union Bank for an equally valuable right to force the Law Firms to return the property advanced in trust. This is different from the Law Firms' perspective, because as to them, the COLTAF account is a deposit account as it is a right to demand payment from a bank, albeit subject to the attorneys' professional duties to the client.

The client's right to return of property advanced to an attorney in trust is not a "deposit account" merely because the Rules of Professional Conduct require lawyers to hold client property in a segregated account at a bank.

Importantly, the professional rules relating to COLTAF accounts regulate the lawyer's behavior with respect to the client's property, not the client's behavior with respect to his own property. Because only the attorney can withdraw from a COLTAF account, the client's property interest is the right to demand payment from the law firm, not from a bank. Pursuant to C.R.S. § 4-9-102(a)(29), this right to payment cannot be a "deposit account" because the demand goes from the client to the lawyer, rather than to a bank. As discussed, however, the statutory distinction between an "account" and a "deposit account" is a technical one, and the right to payment of property from a law firm may be an account even if it is not a deposit account.

Pursuant to C.R.S. § 4-9-102(a)(2), an "account" includes "a right to payment of a monetary obligation, whether or not earned by performance ... for services rendered or to be rendered." In an attorney-client relationship, the client advances funds to the lawyer to be held in trust in contemplation of services to be rendered by the lawyer. The relationship does not contemplate services to be rendered by the client. Thus, the lawyer has a monetary and professional obligation to return the client's property on demand, but this obligation does not arise "from services rendered or to be rendered" by the client. Rather, the obligation is a "right[ ] to payment for money or funds advanced or sold" unrelated to the use of a credit or charge card. Such rights are specifically excluded from the definition of "account" in C.R.S. § 4-9-102(a). Accordingly, a client's interest in property held in trust by a lawyer is not an "account" under C.R.S. § 4-9-102(a)(2).

Instead, the right to demand return of property advanced to a lawyer to be held in trust is simply a chose in action not otherwise fitting a defined term under Article 9. If the lawyer does not return the client's property, the client has a cognizable legal claim against the lawyer to recover its property. This would make the right a "general intangible" pursuant to C.R.S. § 4-9-102(a)(42).

A "chose in action" is " ‘[a] right to receive or recover a debt, or money, or damages for breach of contract, or for a tort connected with contract, but which cannot be enforced without action.’ " Ford v. Summertree Lane Ltd. Liab. Co. , 56 P.3d 1206, 1209 (Colo. App. 2002) (quoting City & Cnty. Of Denver v. Jones , 85 Colo. 212, 274 P. 924, 925 (1929) ).

In Millennium Bank v. UPS Capital Business Credit , the Colorado Court of Appeals analyzed the Article 9 distinction between accounts and general intangibles and reached the same conclusion. In Millennium Bank , two secured creditors with blanket liens entered into an inter-creditor agreement whereby one creditor agreed to take first priority on the borrower's accounts, and the other took first priority on the borrower's general intangibles. In the course of its business, the borrower obtained an arbitration award to recover funds from a supplier of defective paint. To determine which secured creditor had first priority, the Colorado Court of Appeals was required to analyze whether the arbitration award was proceeds of an account or a general intangible.

327 P.3d 335 (Colo. App. 2014).

Id. at 336-37.

Id. at 337.

Id.

The Millennium court initially noted "the ‘general intangible’ category of assets has traditionally encompassed proceeds from the right to pursue many types of lawsuits between a debtor and a party other than the interested creditor." Using the technical definitions of Article 9 the court explained that "because, as noted above, the ‘general intangibles’ category does not include ‘accounts,’ it would not include a ‘thing in action’ to recover proceeds from ‘accounts.’ " However, the borrower's right to payment from a supplier on a breach of warranty claim "was not based on a right to payment of a monetary obligation ... for services rendered or to be rendered" for purposes of C.R.S. § 4-9-102(a)(2) because the borrower "had not rendered, or offered to render, services" for the supplier. Thus, the right to payment was not an account. Accordingly, the Millennium court held the arbitration award on the warranty claim was proceeds of general intangibles, not accounts. The court reasoned "it is not the measure of damages, but the nature of the claim for which damages are awarded, that determines whether recovery from a lawsuit is categorized as proceeds of a ‘general intangible’ or of an ‘account.’ "

Id. at 338 (citations omitted).

Id. at 339.

Id.

Here, a chose in action arising from 3PL4PL's right to the return of property advanced to the Law Firms in trust exists without regard to any services to be rendered by 3PL4PL, because no such services were contemplated. The Law Firms may have a right to defend such a suit having earned fees for services payable from the property advanced, but this would go to the measure of damages rather than the nature of the claim. The client's claim is for conversion, not breach of a services contract. Thus, when LogisticsFinance transferred property from the Union Bank deposit account to the Law Firms, it acquired a general intangible as proceeds, and it is this general intangible to which the Lenders' proceeds liens attached.

See n. 88, supra .

4. General Intangibles as "Cash Proceeds "

The next question is whether such a general intangible constitutes "cash proceeds." C.R.S. § 4-9-102(a)(9) defines cash proceeds to include proceeds that are "money, checks, deposit accounts or the like." A chose in action is not a check, and as thoroughly discussed, is not a deposit account. The narrow question then is whether this chose in action is money, or otherwise falls within the "and the like" language.

Money is defined in C.R.S. § 4-1-201(23) as "a medium of exchange currently authorized or adopted by a domestic or foreign government." The comments to this sub-section add "the test is that of sanction of government, whether by authorization before issue or adoption afterward, which recognizes the circulating medium as part of the official currency of that government. The narrow view that money is limited to legal tender is rejected." The Lenders and Trustee argue this definition does little to expand money beyond hard currency, despite the commentary, relying primarily on Frank v. ITT Commer. Fin. Corp. (In re Thomson Boat Co.) . In Frank , the court took a narrow reading of the comment to § 1-201(23) holding:

Frank v. ITT Commer. Fin. Corp. (In re Thompson Boat Co.), 230 B.R 815, 819-20 (Bankr. E.D. Mich. 1995).

Colloquially, the term "legal tender" is understood to mean currency – i.e. , a lawful medium of exchange. Thus, the highlighted text from the UCC comment, read in isolation, would indicate that ‘money’ can include things other than currency. Read in its entirety, however, it is obvious that the comment in no way detracts from or modifies the statutory definition of money as a government-approved medium of exchange.

Id.

Having already characterized the right to payment from a law firm of property advanced as a general intangible, it is evident such a right is not "money." As in Thomson Boat Co. , the COLTAF account "never was cold hard cash; from its inception, it was simply a bookkeeping abstraction which by no stretch of the imagination could be characterized as an officially recognized exchange medium." Instead, as also acknowledged by Thompson Boat Co. , the rights are either an account or a general intangible.

Id. at 822.

Id. ("The trustee contends that the reserve account is an ‘account’ or a ‘general intangible.’ ... I agree with the trustee that the collateral fits under one of these rubrics.").

Critically, some relevant authorities carefully distinguish between the right to receive money through a chose in action and the money itself. In In re Vienna Park Properties , the court explained the distinction as follows:

There is no question that the funds held in the escrow account, United States dollars, are ‘money’ within [§ 1-201]. However, Vienna Park did not have an unencumbered present right to these funds at the time it granted the security interest. Rather, it merely possessed a contractual right to receive any funds remaining in the Escrow Account upon fulfilment of its obligations to VPA. The most Vienna Park could transfer at the time of the security agreement was a contingent right to receive an uncertain amount of money. A contractual right to obtain money at some future time is not the same thing as the money itself.

In re Vienna Park Properties, Inc. , 976 F.2d 106, 116 (2d Cir. 1992).

The Vienna Park court contrasted the facts before it with the escrow account at issue in an earlier case from the Southern District of New York, In re O.P.M. Leasing Services, Inc:

The Banks direct us to In re O.P.M. Leasing Services, Inc., 46 B.R. 661 (Bkrtcy.S.D.N.Y.1985), in support of their contention that the collateral here is money. In O.P.M., the debtor's predecessor in interest had entered into a lease agreement with Blue Cross and Blue Shield of New York (BCBS). Under that agreement, the debtor, under certain circumstances, would be required to make certain payments to BCBS. In order to ensure that those payments were made, the parties set up an escrow account containing $100,000 of the debtor's funds. The obligation to pay arose and the debtor did not make the payment. The escrow agent, in accordance with the terms of the escrow agreement, handed over the escrow funds to BCBS. The debtor attempted to void the transfer, claiming that the collateral in that case was a "general intangible" and thus that the security interest was unperfected in the absence of filing. The bankruptcy court rejected this argument, noting that "[s]ince the escrow account is, for all intents and purposes, money, it is not a general intangible." Id. at 670 n. 5 (citation omitted).

This case differs from O.P.M. in several important respects. The escrow agreement at issue in O.P.M. was itself a security arrangement between the debtor and the secured creditor. The O.P.M. escrow agreement was the vehicle by which the collateral, money, was placed in the hands of a third party and by which BCBS's security interest was perfected under section 9–304(1) of the UCC. In contrast, the Banks in our case were not direct parties to the escrow agreement but rather obtained a security interest in the rights of one of the parties to the escrow agreement. Cf. In re Nichols, 88 B.R. 871, 876 (Bkrtcy.C.D.Ill.1988) ("The case at bar is distinguishable from ... O.P.M. Leasing in that the creditors in this case were not parties to the escrow agreement."). The escrow account here was established to allow the seller of the Properties, VPA, to manage the Properties using the buyer's funds; it was intended primarily for the benefit of VPA.

The collateral in O.P.M. was the $100,000. That money became payable to the creditor upon default by the debtor. In this case, the collateral was the debtor's right to receive funds in the Escrow Account. The creditors here, the Banks, could receive the money, if any, in the Escrow Account only on the occurrence both of a default by the debtor and conditions precedent to the debtor's receiving the funds under the escrow agreement.

Moreover, the escrow account at issue here differs substantially from the account at issue in O.P.M. In that case, there was a sum certain in money in the escrow account deposited in a bank. In this case, the Escrow Account was in reality an operating fund and it was possible that all the money would have been depleted from the Escrow Account before the happening of the conditions necessary for any payment to Vienna Park.

The collateral in this case therefore was not "money" as that term is used in section 8.9–305.

Here, the facts are more like Thompson Boat and Vienna Park than O.P.M. Leasing . 3PL4PL and LogisticsFinance exchanged a deposit account for a right to demand money from a Law Firm. The Lenders were not direct parties to the Law Firms' retention agreements, but rather obtained a security interest in 3PL4PL's or LogisticsFinance's rights under those retention agreements. The mechanism of the exchange of the deposit account for the general intangible was the transfer of money, but the Lenders would receive that money, if at all, only on the occurrence of both a default under the Loan Documents and conditions precedent to 3PL4PL or LogisticsFinance receiving the funds under the Law Firms' retention agreements. Accordingly, 3PL4PL's general intangible was not "money" or "the like."

To summarize, the Lenders' original collateral consisted of instruments in the form of the Third-Party Notes. The liens attached to the Union Bank deposit account upon each Third-Party Payment as proceeds of the Third-Party Notes. Wire transfers from the Union Bank deposit account to the COLTAF accounts were transfers of money. However, the proceeds of the deposit account were a general intangible, not money, and therefore non-cash proceeds. This meandering path of the transferred property can be summarized as follows:

D. Perfection of the Lenders' Proceeds Lien

Having characterized the Lenders' collateral in the codified terminology through each component step of the Transfers, the Court next addresses the continuity of perfection of those security interests.

Pursuant to C.R.S. § 4-9-312(a), the Lenders' lien on the original collateral, the Third-Party Notes, was perfected by the filing of the June 8, 2014 UCC-1 Financing Statement describing "instruments." After disposition, the lien on the Union Bank deposit accounts was perfected as proceeds of the perfected lien in the original collateral pursuant to C.R.S. § 4-9-315(c).

C.R.S. § 4-9-312(a) provides for perfection of liens in instruments by filing a financing statement.

However, C.R.S. § 4-9-315(d) provides for automatic termination of perfected status in proceeds after twenty-one days unless certain conditions are met. Pursuant to C.R.S. § 4-9-315(d)(1), a proceeds lien survives automatic de-perfection if a filed financing statement covers the original collateral, the proceeds are subject to perfection by filing a financing statement, and the proceeds are not acquired with cash proceeds. Liens on deposit accounts as original collateral must be perfected by control and cannot be perfected by filing a financing statement. As a result, C.R.S. § 4-9-315(d)(1)(B) cannot be satisfied, and § 4-9-315(d)(1) does not abate automatic de-perfection of the proceeds lien in the Union Bank deposit account.

For the avoidance of doubt, as used herein the phrase "automatic de-perfection" refers to the loss of perfected status by operation of C.R.S. § 4-9-315(d).

C.R.S. § § 4-9-312(b)(1) and 4-9-314(a). These perfection rules carve-out a deposit account proceeds lien, as opposed to a deposit account lien as original collateral, referring to perfection pursuant to C.R.S. § 4-9-315(c) and (d). See also n. 139, infra .

However, C.R.S. § 4-9-315(d)(2) separately provides for continued perfection in proceeds which are "identifiable cash proceeds." Pursuant to C.R.S. § 4-9-102(a)(9), deposit accounts are cash proceeds. In this case, the identifiability of the Union Bank deposit accounts through tracing is not in genuine dispute because 3PL4PL had no material operating income other than the Third-Party Payments. There are no facts which would suggest there were any funds deposited into the Union Bank account other than by the Third-Party Borrowers. Accordingly, the Union Bank deposit account consists of "identifiable cash proceeds" of the Third-Party Note instruments. The Lenders' proceeds lien remained therein survived automatic de-perfection pursuant to C.R.S. § 4-9-315(d)(2).

See Marathon Petroleum , 599 F.3d at 1262 ("[W]e fail to see where else Debtor's cash could have come from other than the proceeds of its inventory, cash payments, or collections, in all of which CapitalSource had a security interest. Thus, Marathon's suggestion that there might have been some unidentified source of the deposit account funds that was beyond the ambit of CapitalSource's blanket lien is pure speculation and does not create a genuine issue of material fact.").

As discussed, by virtue of the Transfers to the Law Firms, the right to payment on demand from Union Bank was exchanged for a right to payment from the Law Firms. The general intangible with the Law Firms was initially perfected as proceeds, but potentially subject to automatic de-perfection under C.R.S. § 4-9-315(d). Automatic de-perfection could not be avoided pursuant to either C.R.S. § 4-9-315(d)(1)(C), because the Law Firm accounts were proceeds acquired with cash proceeds, or § 4-9-315(d)(2), because the Law Firm accounts were not cash proceeds.

Rather, C.R.S. § 4-9-315(d)(3) extends perfection past the twenty-one day period where the means of acquiring and perfecting the original security interest is also intrinsically sufficient to acquire and perfect a lien in the type of collateral acquired as proceeds. Here, the Loan Documents and the June 18, 2014 Financing Statement both describe the collateral to include general intangibles, which are subject to perfection through filing alone. Thus, C.R.S. § 4-9-315(d)(3) prevents automatic de-perfection of the Lenders' proceeds lien in 3PL4PL's or LogisticFinance's right to demand return of their property from the Law Firms because the proceeds are a type of collateral covered by the initial security agreement and financing statement. This is the scenario and the result contemplated by Example 2 to Comment 5 to C.R.S. § 4-9-315.

C.R.S. § 4-9-310(a).

Example 2 to Comment 5 states: Lender perfects a security interest in Debtor's inventory by filing a financing statement covering "all debtor's property." As in Example 1, Debtor sells the inventory, deposits the buyer's check into a deposit account, draws a check on the deposit account, and uses the check to pay for equipment. Under the "lowest intermediate balance rule," which is a permitted method of tracing in the relevant jurisdiction, see Comment 3, the funds used to pay for the equipment were identifiable proceeds of the inventory. Because the proceeds (equipment) were acquired with cash proceeds (deposit account), subsection (d)(1) does not extend perfection beyond the 20-day automatic period. However, because the financing statement is sufficient to perfect a security interest in debtor's equipment, under subsection (d)(3) the security interest in the equipment proceeds remains perfected beyond the 20-day period.

In sum, the Lenders had a perfected lien in the Third-Party Notes as its original collateral pursuant to C.R.S. § 4-9-312(a). The Lenders then had a perfected proceeds lien in the Union Bank deposit account, which was excepted from automatic de-perfection pursuant to C.R.S. § 4-9-315(d)(2). Finally, the Lenders had a perfected proceeds lien in a general intangible, which was excepted from automatic de-perfection pursuant to C.R.S. § 4-9-315(d)(3).

E. Priority of Lenders' Security Interests

The Court has now framed the key issue in this case – does the Lenders' perfected lien on general intangibles take priority over the Law Firms' interest in money held in a COLTAF account? Stated differently, did the Law Firms' retention agreements give them the ability to take money from the COLTAF account, thereby reducing the value of its client's general intangible, free of the Lenders' security interest in that general intangible?

In the first instance, and as discussed, the Lenders had a perfected proceeds lien in a deposit account, and then in a general intangible, but never acquired a proceeds lien on "money." 3PL4PL had the right to receive money, but was never in possession of money. More specifically, 3PL4PL's deposit account was a right to receive money from Union Bank, and its general intangible was a right to receive money from one of the Law Firms. Union Bank had "money," which the Law Firms received via wire transfers of "money," but 3PL4PL only ever had the right to receive money. From 3PL4PL's perspective, money was merely the mechanism through which proceeds of the Instruments were transferred first into a deposit account, then out of the deposit account and into a general intangible.

1. Applicability of § 9-332

From this lengthy examination of Article 9, finally the Court arrives at C.R.S. § 4-9-332. The section has two parts. Section 4-9-332(a) applies to situations where money is transferred to a third party: "A transferee of money takes the money free of a security interest unless the transferee acts in collusion with the debtor in violating the rights of the secured party." On its face, C.R.S. § 4-9-332(a) only addresses situations where a transferee takes "money" free of a security interest in "money." Here, Lenders never had a security interest attach in money, only instruments, deposit accounts and general intangibles. Instead, this is the scenario contemplated by C.R.S. § 4-9-332(b), which provides: "A transferee of funds in a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party."

Trustee and Lenders first argue this sub-section does not apply because the lien was in proceeds, rather than a deposit account. They cite Madisonville State Bank for the proposition that where the secured party claims a lien in the proceeds of an account, but not a security interest "over the account itself," the rule in § 9-332 does not apply. However, Madisonville State Bank relied on the lack of evidence showing Madisonville had perfected their lien on the deposit account through control; the court did not address the fact the deposit accounts were identifiable cash proceeds subject to continued perfection pursuant to the Texas enactment of § 315(d)(2).

Madisonville State Bank v. Canterbury, Stuber, Elder, Gooch & Surratt, P.C. , 209 S.W.3d 254, 258 (Tex. App. 2006).

Tex. Bus. & Com. Code § 9.312 is identical to C.R.S. § 4-9-312. Both statutes track U.C.C. § 9-312.

Here, while it is true the deposit account lien was a proceeds lien because the Third-Party Notes were the original collateral, the distinction is only relevant because C.R.S. § 4-9-312(b) expressly refers to §§ 4-9-315(c) and (d) as exceptions to the requirement of perfection by possession. C.R.S. § 4-9-332(b) requires the existence of a security interest in a deposit account, without making any reference to the way the security interest is attached or perfected.

Trustee and Lenders also argue C.R.S. § 4-9-332(b) is inapplicable because 3PL4PL's transfers into an attorney trust account were transfers to itself, preventing the Law Firms from being "transferees" for purposes of the sub-section. Trustee and Lenders rely on the distinction between a COLTAF account being titled in the attorneys' name and the property within the account remaining the separate property of the client. While this is true, the argument misses the fact the client has no power to directly access anything the lawyer holds in trust. Only the attorney is signatory on the COLTAF account and only the attorney can access the property therein. Whatever rights the client has in the property can only be realized through action by the lawyer. If the lawyer breaches his professional and contractual obligations to his client, the client is left with only with a chose in action. As discussed, this is precisely the same reason the client's right to receive property from his lawyer's trust account is a chose in action and not money.

The cases cited by Plaintiffs do not detract from this reasoning. In Heartland , the accounts receivable placed into the attorney trust account were not transfers of either money or funds from a deposit account, but rather, direct deposits of endorsed checks from the client's customers representing his accounts receivable. The client effectively instructed the drawee, i.e. , his customers' banks, to pay the client's lawyer rather than the client himself. The transfer was from the drawee bank to the attorneys' account. The underlying collateral, the receivable, was never transferred, but simply received through an agent. In Banner Bank v. First Community Bank , the borrowers liquidated equipment encumbered by Banner Bank's lien, deposited the proceeds in an account with First Community Bank, and then transferred the funds to pay down a personal loan account, also with First Community Bank. The deposit account and the loan account at First Community Bank were both in the same name. Because of this fact, Banner Bank's reasoning is limited to situations where one person has multiple accounts at a single bank, and there are transfers between those accounts. Critically, whatever rights the borrower has in two such accounts can be exercised freely and directly without the involvement of any other person's intervening interests, such as the signatory rights of an attorney over his trust account.

Heartland Bank and Trust v. The Leiter Group , 385 Ill.Dec. 297, 18 N.E.3d 558, 561 (Ill. App. 2014).

854 F. Supp. 2d 846, 856 (D. Mont. 2012).

Id.

Limor v. First National Bank of Woodbury , merely acknowledges a bankruptcy trustee steps into the shoes of the debtor. "[A]t the time the Debtor delivered a check to the Trustee postpetition, the Funds in the Account were already property of the Debtor's estate. In this situation, a chapter 7 trustee is not a ‘transferee.’ "

431 B.R. 718, 724 (B.A.P. 6th Cir. 2010).

Id.

Zimmerling v. Affinity Financial Corp. dealt with a transfer of funds into an escrow mandated by a court's order. There, Affinity Financial received a loan from BHC secured by a perfected blanket lien. Zimmerling obtained an arbitration award against Affinity for breach of an employment contract. Zimmerling brought a collateral action to reach Affinity's assets held by a third-party, AARP Financial. The court entered a preliminary injunction directing AARP Financial to pay money it would otherwise pay to Affinity into an escrow, pending its determination of the relative rights in the money between Zimmerling, Affinity and BHC. Zimmerling then argued that while BHC had a fully perfected lien in Affinity's funds in AARP's possession, BHC's lien was lost when the funds were sent by wire transfer from AARP's deposit account to the court registry pursuant to § 9-332. The Court rejected this argument, holding the transfer into the court registry was not a transfer of money or funds, but rather a transfer of a contingent interest, which is not the type of transfer covered by § 9-332.

86 Mass.App.Ct. 136, 14 N.E.3d 325 (2014).

Id. at 327.

Id.

The Zimmerling court's discussion of the retention of title by a transferor into escrow should be read narrowly within the context of the court's intent in establishing the escrow. The escrow was established for no purpose other than to preserve Zimmerling's and BHC's contingent interests in obtaining a favorable ruling. Indeed, the court expressly reasoned the interim nature of the court ordered escrow materially deviated from the policy underlying § 9-332 which is to "place ... a premium on the ‘finality’ of commercial transactions by protecting ‘completed’ transactions from being placed in ‘jeopardy.’ In layman's terms, the purpose of the provision is to keep the wheels of commerce moving forward...."

Id. at 331.

Unlike the court-ordered escrow in Zimmerling , an attorney trust account carries with it concerns of the finality of commercial transactions. An attorney relies on the funds in the trust account in agreeing to render valuable services. Without some assurance money taken from a client will be free and clear, the finality of the payment terms in the attorney-client relationship will be in placed in jeopardy. The holding of Zimmerling is limited to situations involving court-ordered escrow accounts pending litigation.

Plaintiffs' citation to Garner v. Knoll (In re Tusa-Expo Holdings, Inc.) does not change this conclusion. In Tusa , Tusa and its affiliates were the largest retail dealer in new furniture manufactured by Knoll. Under their payment agreement, Tusa sold and delivered furniture manufactured by Knoll on credit, with Knoll taking a first priority security interest in all of Tusa's assets. Separately, Tusa obtained a loan from Textron, and granted it a first priority security interest in all of Tusa's assets. Tusa also agreed to have its customers make payments into a lockbox account controlled by Textron. Textron would then make payments out of the lockbox to Tusa's operating account, and Tusa would make payments from the operating account to Knoll. Textron and Tusa entered an intercreditor agreement whereby Knoll retained a first-priority security interest in specified accounts receivable of Tusa and a second-priority security interest in all other assets. Otherwise, Textron held the first-priority security interest.

811 F.3d 786 (5th Cir. 2016).

Id. at 789.

Id.

Id. at 790.

Id.

Following Tusa's bankruptcy filing, its trustee sued Knoll to recover the payments that Tusa made to it during the 90-day preference period. The bankruptcy court and district court ruled against the trustee, finding Knoll had been paid by proceeds in which it had a security interest, and that the transfer of funds from the lockbox to Textron and back to Tusa did not free the funds from this lien.

Id.

Id. at 791.

The Fifth Circuit affirmed. As to the transfers from Tusa's customers into the lockbox, it found § 9-332(a) inapplicable because "Tusa Office, not Textron, owned the lockbox .... Therefore, Knoll's first-priority security interest in the proceeds of Tusa Office's receivable survived the deposit into the lockbox." In other words, the exchange of Tusa's accounts receivable for a lockbox Tusa owned was a transfer to itself, outside the purview of § 9-332(a). The ownership of the lockbox account in Tusa created a distinction the court found material between the funds in the deposit account and the deposit account itself. Thus, the Court rejects Plaintiffs' argument there was no transfer for purposes of § 9-332 because 3PL4PL's transfers into the COLTAF accounts were transfers to itself. This case is distinguishable from the facts in Banner Bank , Zimmerling , and Tusa , in that 3PL4PL certainly did not own the COLTAF accounts. 3PL4PL transferred funds from a deposit account it owned into a COLTAF account it did not. This is a transfer for purposes of § 9-332.

Id. at 795.

The Tusa court's reasoning for making this distinction is inapplicable herein because, as in Madisonville State Bank , the Tusa court did not address the language of § 9-312(b). If the Tusa court's reasoning were applied in this case, there could never be a perfected security interest in proceeds in the form of a deposit account without control. This would render superfluous the express reference to proceeds perfected under §§ 4-9-315(c) and (d) as an exception to the requirement of perfection by control. Rather, the inclusion of the exception to perfection by control shows the drafters contemplated a security interest could attach to and continue to be perfected in a deposit account as proceeds of other collateral transferred into the deposit account. Indeed, comment 5 to C.R.S. § 4-9-312 states "the only method of perfecting a security interest in a deposit account as original collateral is by control. Filing is ineffective, except as provided in Section 9-315 with respect to proceeds ." The exception from § 9-332 for transfers of deposit accounts referenced in the comment to § 9-332, and relied on by the Tusa court, address an entirely different situation, where the deposit account is original collateral and is itself transferred.

2. Effect of § 9-332

As to the relative priority of the Law Firms' interest in the COLTAF accounts and the Lender's security interest in the funds transferred, the parties frame the issue as a dispute over the applicability of C.R.S. § 4-9-327 governing conflicting security interests in the same deposit account. However, there were no conflicting security interests in a single deposit account in this case. The Lenders had a security interest in the Union Bank deposit account, as to which the Law Firms never had a security interest. Conversely, the Law Firms had a possessory security interest in the funds in its COLTAF account, as to which the Lenders never had a security interest. Simply put, in the absence of collusion, the Lenders never had a property right in the funds transferred to the Law Firms.

Alternatively, the Court would agree with the reasoning of the Tuscany court, infra , that any interest of the Lenders in the funds transferred to the Law Firms was inferior to the Law Firms' rights in those funds under their retention agreements. Tuscany analyzed the facts and determined the result would be the same under either hypothetical. The Court agrees.

The last piece of the puzzle, then, is to reconcile this analysis with the Law Firm's right to impair the value of 3PL4PL's general intangibles by drawing on the funds in the COLTAF accounts. As discussed, in the absence of collusion, the Lenders retained their lien in 3PL4PL's right to demand return of its property from the Law Firms as a general intangible. But that right was always defined by the Law Firm's retention agreements. There is no dispute regarding 3PL4PL's power to enter into contracts. The retention agreements gave the Law Firms power to take money from the COLTAF account, without consideration of 3PL4PL's general intangibles. The resulting diminution in the value of the Lender's security interest in 3PL4PL's general intangibles comes from the Law Firms' contractual rights under the retention agreements, not from a superior security interest.

This is not an unfair result because the Lenders were always protected by the anti-collusion provisions of C.R.S. § 4-9-332. In the absence of collusion, 3PL4PL's and LogisticsFinance's transactions with the Law Firms were simple commercial exchanges whereby the companies purchased legal services from a vendor. The Law Firms, like any other commercial vendor, are entitled to the benefit of the policy underlying § 4-9-332, which is to place a premium on the finality of commercial transactions by protecting completed transactions from being placed in jeopardy, thereby moving forward the wheels of commerce. Of course, this is the result unless the Law Firms colluded to frustrate the Lenders' rights.

See n. 126, supra .

A relatively recent decision by a sister bankruptcy court not only reaches the same result, but highlights the policy considerations underlying the function of § 4-9-332. In Tuscany , the debtor paid a pre-petition retainer to its counsel. Armstrong Bank brought an adversary complaint alleging, inter alia , the law firm converted funds to which Armstrong held a security interest by taking the retainer. The court rejected this argument, reasoning:

In re Tuscany Energy , 581 B.R. 681 (Bankr. S.D. Fla. 2018).

Id. at 685.

Id.

Most importantly for purposes of this case, even if Armstrong Bank still had a security interest in the SunTrust Bank account by control, when the retainer was paid to debtor's counsel Armstrong Bank lost any and all interest it held in the funds used to pay the retainer [pursuant to § 9-332(2) ]. Thus, unless debtor's counsel acted in collusion with the debtor in violating the rights of Armstrong Bank, upon payment of the retainer to debtor's counsel Armstrong Bank lost its security interest in such funds.

Florida's enactment of § 9-332 uses numerical identifiers for the sub-sections, not letters. The statute referenced in Tuscany , § 679.332(2), Fla. Stat., is identical to C.R.S. § 4-9-332(b).

Id. at 689-90.

In reaching this conclusion, the Tuscany court reconciled the policy underlying § 9-332 with the specific example of an attorney taking a fee retainer prior to filing a Chapter 11 case:

Experienced bankruptcy lawyers rarely undertake representation of a debtor-in-possession without a retainer. Indeed, the Court might doubt the competence of a bankruptcy lawyer who accepts an engagement to represent a chapter 11 debtor without a retainer or similar assurance of payment. To do so would put counsel completely at risk for counsel's fees based on the success or failure of the case as a whole.... It is not surprising, then, that almost no secured creditor claims that its pre-bankruptcy security interest continues to attach to the retainer paid to debtor's counsel and that there are almost no reported decisions on the issue.

Id. at 686.

3. Example 2 to Comment 2 to § 9-332

The Court's application of the law to these facts places this case in close proximity to Example 2 to Comment 2 to C.R.S. § 4-9-332. The facts differ from Example 2 only in that the lien on the deposit account arose as a proceeds lien, and the right to payment from the Law Firms is a general intangible. Based on the foregoing analysis, neither distinction is material, but simply reflects the technical definitions of Article 9. Substituting the facts of this case with the language of Example 2 yields the following:

3PL4PL maintains a deposit account with Union Bank. The deposit account is subject to a perfected security interest

in favor of Lenders because it is identifiable cash proceeds of their original collateral. At the Law Firm's suggestion, 3PL4PL moves funds from the deposit account at Union Bank to the Law Firms' COLTAF accounts. As to the Law Firms the COLTAF account is a deposit account, but 3PL4PL only retained a general intangible. Unless the Law Firms acted in collusion with 3PL4PL in violating the Lender's rights, the Law Firms takes the funds (the credit from the Union Bank deposit account running in its favor to the COLTAF account) free from Lender's security interest. However, inasmuch as 3PL4PL's general intangibles constitute the proceeds of the deposit account at Union Bank, Lender's security interest attached to the general intangible as proceeds.

Based on the foregoing, the Court concludes the Law Firms were transferees of funds from a deposit account and therefore took those funds free of the Lenders' lien on the deposit account provided they did not collude. In the absence of collusion, the Law Firms are left with unencumbered funds in their COLTAF accounts, and the Lenders are left with a lien on 3PL4PL's general intangibles.

F. Collusion

The only remaining question to be decided is the issue of collusion under § 4-9-332. However, collusion in this case is not ripe for determination as a matter of law. As movants, the Law Firm's bear the burden of showing the inapplicability of the anti-collusion provision of C.R.S. § 4-9-332. The only evidence cited by the Law Firms to support the lack of collusion are self-serving declarations from Lynch without the benefit of specific discovery on this issue in this case. This evidence is insufficient to carry the Law Firms' burden.

To guide the parties in navigating this issue going forward, the Court agrees with the principles identified by the Tuscany court on collusion by a law firm. Specifically, Armstrong Bank alleged debtor's counsel knew debtor was in default of its loan to Armstrong Bank, and knew Armstrong Bank had a blanket lien on debtor's assets. "Armstrong Bank argues that having such knowledge, and then asking for and receiving the retainer, is sufficient to constitute collusion within the meaning of U.C.C. section 9-332.... [T]his is nevertheless Armstrong Bank's entire argument that debtor's counsel colluded with the debtor to violate the rights of Armstrong Bank."

Id. at 690.

Id.

The Tuscany court found this position insufficient to carry Armstrong Bank's burden to show the lack of collusion to be entitled to summary disposition: "To prove it has any interest at all in the retainer, Armstrong Bank has the burden of showing that there was collusion within the meaning of the statute." The Tuscany court framed the burden by discussing the comments to section 9-332 :

Id.

The official comment to U.C.C. section 9–332 (as adopted by the State of Florida) sheds light on what is meant by the term "collusion" in this context. The U.C.C. favors the finality of payments, severely limiting the ability to pursue a transferee such as debtor's counsel. The recipient of transferred funds need not give value to the debtor to be protected by section 9–332. Indeed, the recipient need not act in reliance on the transfer in any way. The only exception is where

the recipient is itself a "bad actor." The official comment to section 9–332 draws a parallel to the collusion provisions in U.C.C. sections 8–115 and 8–503(e). As the official comments to those provisions explain, collusion involves being complicit in a wrongdoing, and is explicitly compared to aiding and abetting an intentional tort. To be found in collusion, the recipient of the transfer must have "affirmatively engaged in wrongful conduct." U.C.C. § 8–503(e) cmt. 3 ( Fla. Stat. § 678.5031 ). Mere knowledge of the rights of others and that the transferor's act is wrongful is not sufficient to support a claim of collusion. Id. ; U.C.C. § 8–115 cmt. 5 ( Fla. Stat. § 678.1151 ).

Id. at 690.

This Court agrees with the collusion analysis in Tuscany . The Court will permit discovery on the limited issue of collusion, but such discovery should be confined to the scope of the collusion analysis set forth above.

G. Resolving the UCC Priority MSJ and the Preference MSJ

Counts 1 and 2 of the Amended Complaint seek a declaratory judgment the funds were wrongfully transferred, and imposition of a constructive trust and an equitable lien on the funds as they sat in the COLTAF account. This relief depends on Lenders retaining a security interest in the property transferred to the Law Firms. Count 20 seeks recovery on the theory the Law Firms' payment of their fees from the funds in the COLTAF account constituted civil theft or conversion. The Lenders succeed on these theories only if the Law Firms had no right to take the money in the COLTAF account at the time its fees were paid by virtue of a superior security interest held by Lenders. "For a security interest to support a claim of conversion, the secured creditor must have a present right to possession of the collateral." Here, the Lenders did not own the funds in the Union Bank deposit account, did not have control over those funds, and only had a proceeds lien on the deposit account. The Lenders may only assert a right to Transferred funds, if at all, if their proceeds lien survives C.R.S. § 4-9-332(b), which depends on proving the Law Firms colluded with 3PL4PL and its affiliates.

Id. at 691.

Similarly, Counts 26 and 27 seek to recover payments to the Law Firms as preferences under § 547. Pursuant to § 547(b)(5), a trustee may avoid any payment by the debtor that conferred upon the recipient a greater benefit than a similarly situated creditor would receive in a hypothetical chapter 7 liquidation. In such a hypothetical liquidation, a fully secured creditor would receive a distribution in the full amount of the secured claim before any unsecured creditor. Thus, Counts 26 and 27 fail because the Law Firms would have received full payment of their fees to the extent of the funds in the COLTAF account as the only creditors with any type of lien thereon. Based on its analysis, the Court could only reach a different conclusion if the Lenders' security interest in the funds survived C.R.S. § 4-9-332(b), and such a finding could only be based on collusion by the Law Firms.

Because the only remaining fact issue is collusion, the UCC Priority MSJ and the Preference MSJ should be denied in part as to the issue of collusion but granted in part as to all other issues.

H. Resolving the Allen MSJ

The theories of liability underlying the claims at issue in the Allen MSJ and the Sanctions Motion warrant separate discussion. Insofar as the Allen MSJ covers Counts 1, 2 and 20, the result will be the same to Allen as it is to the other Law Firms. However, Allen is the only Law Firm against whom relief is sought in Count 25.

Allen made its first appearance in 3PL4PL's bankruptcy case by filing a Motion for Extension of Time to respond to the involuntary petition. On October 14, 2014, Allen filed a Motion to Dismiss the involuntary petition. On October 22, 2014, the Court held a preliminary non-evidentiary hearing on the Motion to Dismiss. Before the Court could hold a trial on the involuntary petition and the Motion to Dismiss, Allen withdrew the Motion to Dismiss. The Order for Relief followed the next day.

Case No. 14-22402 MER at ECF No. 9.

Id. at ECF No. 22.

Id. at ECF No. 25.

Id. at ECF No. 45.

Id. at ECF No. 46.

Count 25 is a claim for relief solely by the Trustee for return of fees paid to Allen for legal services performed on behalf of 3PL4PL pursuant to § 549. Specifically, Count 25 alleged Allen received a total of $38,000 in transfers during the gap period between the filing of 3PL4PL's involuntary petition on September 9, 2014, and the Court's Order for Relief entered December 31, 2014 ("Gap Period "). Trustee alleges these transfers were made for less than reasonably equivalent value, because the legal services performed by Allen did not benefit the estate.

Pursuant to § 549(a), the Trustee may recover certain unauthorized transfers by 3PL4PL after the Petition Date. However, this right is significantly limited in involuntary cases by § 549(b), which provides:

In an involuntary case, the trustee may not avoid under subsection (a) of this section a transfer made after the commencement of such case but before the order for relief to the extent any value, including services, but not including satisfaction or securing of a debt that arose before the commencement of the case, is given after the commencement of the case in exchange for such transfer, notwithstanding any notice or knowledge of the case that the transferee has.

Trustee's position relies on its reading of the language referring to "any value" given in exchange for Allen's services. Arguably, "any value" means if a kernel of value is given, the entire transaction is insulated from § 549 avoidance. According to Trustee, however, the "any value" language nonetheless allows § 549 recovery for disproportionate value acquired, in an amount equal to the difference between the value provided and the payments made.

Trustee first cites Marathon Petroleum Co., LLC v. Cohen (In re Delco Oil, Inc.) for the proposition that even when the creditor provides undisputed services having equivalent value to its payments, the trustee may recover under Section 549 where the Debtor used a creditor's cash collateral to make the payments to the service provider. At the outset, the Court notes Marathon reached the same conclusion this Court has reached on the secured creditor having no interest in the funds from a secured deposit account after they are transferred out pursuant to § 9-332(b). The key analysis on the § 549 issue by the Marathon Petroleum court was its finding the secured creditor had a perfected proceeds lien on the deposit account from which the transfers were made. Marathon Petroleum characterized this account as a cash collateral account, and held the transfers were unauthorized and avoidable under § 549(a) because they were made in violation of § 363(c)(2).

Marathon Petroleum Co., 599 F.3d at 1260 ("Marathon correctly notes that under Fla. Stat. § 679.332(2) after Debtor transferred the funds to it, the funds in its hands were no longer subject to the CapitalSource's security interest.... We agree with Marathon that under Florida law, CapitalSource did not have a security interest in the funds after Debtor transferred them to Marathon. But that is beside the point.") (emphasis in original).

Id.

However, Marathon was commenced upon a voluntary petition, and the court expressly recognized the exception in § 549(b) was inapplicable. Although dicta , there is a reasonable reading of Marathon which suggests the Court would not have found an avoidable transfer if the payments were made during a gap period where § 549(b) applied. In any event, the fact Marathon did not discuss § 549(b) renders it immaterial to the analysis in this case.

Id. at 1262 n. 3 ("As this is a voluntary bankruptcy involving the transfer of cash in exchange for personal property, neither exception [under § 549(b) or (c) ] provided by Congress applies.").

The second authority cited by Trustee is Still v. S. Rasnick Co. (In re Jorges Carpet Mills, Inc. ), for the proposition a trustee can recover the difference between the value provided and payments made by the debtor. The Court agrees Jorges Carpet Mills stands for this proposition. The challenge for Trustee's reliance on Jorges Carpet Mills is that it is a 36 year old opinion decided during the infancy of the Bankruptcy Code. Subsequent cases suggest a different result. For example, in In re Rainbow Music, Inc. , the court's analysis of § 549(b) was totally inapposite:

Still v. S. Rasnick Co. (In re Jorges Carpet Mills, Inc.) , 41 B.R. 60, 61 (Bankr. E.D. Tenn. 1984).

Read literally, this provision is incomprehensible. Language appears to have been inadvertently omitted. This Court will assume that the following phrase should be inserted at the beginning of the provision: "The trustee may not avoid under subsection (a) of this section ...". This language parallels the text of subsection (c), a defense provided to good faith purchasers of real property. Thus, the trustee may not avoid transfers made during the involuntary gap period to the extent any post-petition value is given in exchange for the transfer.

In re Rainbow Music, Inc. , 154 B.R. 559, 562 (Bankr. N.D. Cal. 1993).

The Rainbow Music court found § 549(b) inapplicable, but only because it found no value was given in exchange for the gap period transfers.

Id. at 563.

Allen maintains there is per se no claim under § 549(b) where any value is given in exchange for the transfer. Allen further argues, if the extent of value is relevant, it must be determined "from the ‘giver's’ perspective." Relying on Oakwood Markets , Allen argues:

In re Oakwood Markets, Inc. , 203 F.3d 406, 410 (6th Cir. 2000).

[F]or purposes of determining that value was given under § 549(b), it is the subjective perspective of the giver that the Court should consider. Thus, in determining if Allen Vellone provided value to its client, 3PL4PL, the Court should determine

whether Allen Vellone had reason to believe believed [sic ] that services were valuable, then transfers made to Allen Vellone before the order for relief entered, which the entire $38,000 were, are not recoverable by the Plaintiffs under § 549.

ECF No. 205 at p. 6.

Allen concludes this argument by asserting the standard for determining value under § 549(b) is a different proposition from the separate determination Allen's fees were reasonable as would be determined in a fee application.

In In re Oakwood Markets, Inc. , Oakwood Properties had leases with debtor Oakwood Markets to rent property and equipment. Three unsecured creditors filed an involuntary petition against Oakwood Markets. During the gap period, the bankruptcy court lifted the automatic stay to permit the assignment of the leases with Oakwood Properties covering the real property where Oakwood Markets' stores were located. One such lease on property referred to as the Weber City premises were among those sold and assigned during the gap period, with Oakwood Properties' consent to the assignment to and assumption by the purchaser. The debtor occupied the Weber city premises for only two days during the gap period.

Oakwood Markets , 203 F.3d at 408.

Id.

Before the involuntary petition was filed, Oakwood Properties received two checks from the debtor, but both checks were honored after the involuntary petition was filed. The trustee filed an adversary proceeding against Oakwood Properties seeking to recover the value of the two checks as unauthorized post-petition transfers. The bankruptcy court ruled the transfers met the requirements of § 549(a), but were excepted from avoidance by § 549(b). The bankruptcy court found the value provided by Oakwood Properties in exchange for the March 1996 payments was the provision of rental space for the operation of the debtor's business in March 1996, rather than the satisfaction of a pre-petition debt; the value of the transfers was to be measured from the perspective of Oakwood Properties, and the value given to the debtor was the right to occupy the premises during the month of March 1996.

Id.

The bankruptcy court initially held Oakwood Properties did not meet its burden of proving the extent of the value, and first denied Oakwood's motion and scheduled trial on the sole issue of value. After the parties stipulated that the March 1996 rental value of the Weber City premises and equipment was $11,625 and $1,200, respectively, Oakwood Properties again moved for summary judgment. The bankruptcy court granted summary judgment to Oakwood Properties for check No. 061184 ($12,825) because value was given for that transfer, and to the trustee for check No. 061199 because value was not provided for that transfer.

Id. at 408-9.

Id. at 409.

Id.

The Sixth Circuit Court of Appeals affirmed. On the issue of value, it found the provision of rental space during the gap period constituted value given after the commencement of the case for purposes of § 549(b). Although the court agreed with the bankruptcy court's finding "the extent of value given must be determined from the ‘giver's’ perspective," this was not a decision point in the case. As the Court of Appeals explained:

Id. at 410.

Id.

Even if viewed from the debtor's perspective, the result is the same in this case. It is undisputed that in exchange for payment of the March rent, the debtor had the right to possess the Weber City premises and equipment for that month. It is also undisputed that the monthly rental value of the premises and equipment totaled $12,825. Therefore, Oakwood Properties gave and the debtor received $12,825 in value in exchange for the $12,825 transfer. As such, the transfer was properly excepted from avoidance under 11 U.S.C. § 549(b).

Id.

This context of the Oakwood decision shows that while the court agreed value should be considered from the giver's perspective, it also determined the value given would be the same in that case even if viewed from the debtor's perspective. This leaves the key questions wide open.

The Court believes this question should be answered narrowly within the context of the administration of this particular case. Specifically, on February 11, 2015, Allen filed a motion to withdraw as counsel for 3PL4PL. On March 12, 2015, the Court entered an Order finding "issues remain as to the compensation paid to counsel for representation of the Debtor[.]" The Court held Allen's motion to withdraw in abeyance pending a determination of the reasonableness of its fees through consideration of a fee application.

Case No. 14-22402 MER at ECF No. 80.

Id. at ECF No. 102.

Id.

On April 2, 2015, Allen filed its application for compensation under § 330 as directed by the Court. The Lenders timely objected to the fee application, arguing Allen's services did not benefit the estate and were a continuation of 3PL4PL's alleged practice to hinder, delay and defraud creditors. The Lenders specifically referenced the pending avoidance claim against Allen under § 549 in its objection. The wherefore clause of the Lenders' objection specifically requests the Court deny Allen's fees and order the return of the $38,000 returned to them in its entirety. Trustee filed a joinder to the Lenders' objection.

Id. at ECF No. 117.

Id. at ECF No. 119.

Id.

Id. at ECF No. 120.

The Court has scoured the docket of Case No. 14-22402 and can find no subsequent history on Allen's fee application or the objections thereto. Pursuant to L.B.R. 9013-1(c)(1), Allen should have promptly filed a certificate of contested matter on its fee application. While L.B.R. 9013-1(c) also permits the objectors to file a certificate of contested matter, the rule clearly states "the movant bears the burden of timely filing a Certificate of Contested Matter."

It is undisputed Allen did not satisfy its obligation under L.B.R. 9013-1(c) to continue prosecuting its fee application by filing a certificate of contested matter. Allen's motion to withdraw remains held in abeyance because there was never a determination of the reasonableness of Allen's fees. Curiously, Allen's failure to prosecute the fee application resulted in Allen remaining counsel of record for over five years after seeking to withdraw.

In any event, the Court's review of the record makes two things abundantly clear. First, Judge Brooks must have had concerns with the reasonableness of Allen's fees during the gap period when he entered the order holding Allen's motion to withdraw in abeyance, noting "issues remain as to the compensation paid to counsel for representation of the Debtor." Second, over this entire five-year period, Lenders and Trustee have preserved their objections to the reasonableness of Allen's fees, including their argument Allen provided no value at all.

Perhaps Allen could have significantly improved its arguments for summary disposition of Count 25 by prevailing on its fee application. Allen chose not to pursue this path, and this choice will preclude summary judgment at this juncture. The Court finds the outstanding issues with Allen's fees in 3PL4PL's main bankruptcy case create genuine issues of material fact preventing the Court from granting summary judgment on Count 25. The Court also need not rule on the legal issue regarding the "to the extent" language in § 549(b) at this time, because the objections to the reasonableness of Allen's fees include objections to the allowance of fees in their entirety.

CONCLUSION

For the foregoing reasons, it is ORDERED as follows:

1. The UCC Priority MSJ [ECF No. 184] is DENIED IN PART on the issue of collusion under C.R.S. § 4-9-332 and GRANTED IN PART on all other issues consistent with this Order.

2. The Preference MSJ [ECF No. 185] is DENIED IN PART on the issue of collusion under C.R.S. § 4-9-332 and GRANTED IN PART on all other issues consistent with this Order.

3. The Discovery Objection [ECF No. 197] is OVERRULED on the issue of collusion under C.R.S. § 4-9-332 and SUSTAINED on all other issues consistent with this Order.

4. The Brant Objection [ECF No. 198] is OVERRULED as moot.

5. As to Counts 1, 2 and 20, the Allen MSJ [ECF No. 187] is DENIED IN PART on the issue of collusion under C.R.S. § 4-9-332 and GRANTED IN PART on all other issues consistent with this Order.

6. As to Count 25, the Allen MSJ [ECF No. 187] is DENIED.

7. The Allen Sanctions Motion [ECF No. 186] is DENIED.

Walters v. Lynch (In re 3PL4PL, LLC)

Opinion

BACKGROUND

A. The Lenders and the Loans

B. Transfers to the Law Firm Defendants

1. Attorney Trust Accounts Generally

2. Sherman & Howard

3. Haynes & Boone

4. Allen Vellone

C. Procedural History and Pending Matters

ANALYSIS

A. Summary Judgment Standard

B. Defining the Lenders' Original Collateral

C. Characterizing the Proceeds of Lenders' Collateral

1. The Deposit Account

2. The Wire Transfers

3. The General Intangible

D. Perfection of the Lenders' Proceeds Lien

E. Priority of Lenders' Security Interests

1. Applicability of § 9-332

2. Effect of § 9-332

3. Example 2 to Comment 2 to § 9-332

F. Collusion

G. Resolving the UCC Priority MSJ and the Preference MSJ

H. Resolving the Allen MSJ

CONCLUSION

Walters v. Lynch (In re 3PL4PL, LLC)

Walters v. Lynch (In re 3PL4PL, LLC)

Case Details

Citations

Walters v. Lynch (In re 3PL4PL, LLC)

Opinion

BACKGROUND

A. The Lenders and the Loans

B. Transfers to the Law Firm Defendants

1. Attorney Trust Accounts Generally

2. Sherman & Howard

3. Haynes & Boone

4. Allen Vellone

C. Procedural History and Pending Matters

ANALYSIS

A. Summary Judgment Standard

B. Defining the Lenders' Original Collateral

C. Characterizing the Proceeds of Lenders' Collateral

1. The Deposit Account

2. The Wire Transfers

3. The General Intangible

D. Perfection of the Lenders' Proceeds Lien

E. Priority of Lenders' Security Interests

1. Applicability of § 9-332

2. Effect of § 9-332

3. Example 2 to Comment 2 to § 9-332

F. Collusion

G. Resolving the UCC Priority MSJ and the Preference MSJ

H. Resolving the Allen MSJ

CONCLUSION

Walters v. Lynch (In re 3PL4PL, LLC)

Walters v. Lynch (In re 3PL4PL, LLC)

Case Details

CitationsCopy Citation

Citations