Aura Systems Inc v. Barovich et al

OCR transcription for search; preserved printed pages are authoritative

Cape 2:06-ap-01277-SB Doc 29 Filed 08/18/06 Entered 08/21/06 16:21:00 Desc
Main Document Page 1 of 11

FILED
WIG 2 1 206 NG | 8 2006
3 So | Fiano os
4
5
6
7
8 UNITED STATES BANKRUPTCY COURT
9 CENTRAL DISTRICT OF CALIFORNIA
10
11 || In re: ) Case No. LAO5-24550-SB
42 || AURA SYSTEMS, INC.,
) CHAPTER 11
13 Debtor, )
14
AURA SYSTEMS, INC., ) Adv. No. 06-10277-SB
° Plaintiff,
16 ) RULING ON SUMMARY
vs. ) JUDGMENT MOTION
" JOHN BAROVICH, et al., DATE: May 23, 2006
18 ) TIME: 2:00 p.m.
9 Defendants. PLACE: Courtroom 1575
20
21
22
23
24
25
26
27
28

10

11

12

13

14

15

16

17

18

19

Case 2:06-ap-01277-SB Doc 29 Filed 08/18/06 Entered 08/21/06 16:21:00 Desc
Main Document Page 2 of 11

|. Introduction

This summary judgment motion raises the issue of whether, after the 2001
amendments to Division 9 of the California Commercial Code (the California version of
the Uniform Commercial Code ("UCC’)), a creditor can create a judicial lien against
personal property’ belonging to a non-California corporation by filing a notice of
judgment lien with the California Secretary of State. The court holds that a judicial lien
on California personal property governed by Division 9 of the Commercial Code
(“California Collateral”) cannot be perfected against a non-California corporation by the
filing of a notice of judgment lien with the California Secretary of State. Instead,
perfection of a lien against such collateral can only be accomplished by an appropriate

filing pursuant to the laws of the state where the corporation is incorporated.

ll. Relevant Facts

Debtor Aura Systems, Inc. (“Aura”), a Delaware corporation, filed a voluntary
petition under chapter 11 of the bankruptcy code” in 2005. In 1995, some ten years
earlier, claimants filed a district court action for alleged violations of federal securities

laws in connection with their purchase of Aura common stock. In 1999, the parties

' Security interests in real property are governed by an altogether different legal regime, not relevant
hereto.

2 Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11
U.S.C. §§ 101-1330 and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9036, as in force
prior to the effective date (October 17, 2005) of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005, Pub. L. 109-8, Apr. 20, 2005, 119 Stat. 23 ((BAPCPA’). See id. § 1501 (providing
that BAPCPA applies (with exceptions not relevant herein) only to cases filed on or after its effective
date).

10

14

12

13

14

15

16

17

18

19

20

21

22

23

Case 2:06-ap-01277-SB Doc 29 Filed 08/18/06 Entered 08/21/06 16:21:00 Desc

Main Document Page 3 of 11

reached a global settlement, which provided for Aura to pay claimants a total of $4
million in installments.

In late 2002, Aura defaulted on the monthly payment due under the settlement.
As a result, the district court entered a final judgment in favor of claimants for the sum of
$923,250, the unpaid remainder of the settlement sum. The claimants filed a “Notice of
Judgment Lien,” using a “Form Ji-1,” with the California Secretary of State on April 10,
2003. Claimants’ proof of claim that states that the claim is secured by accounts
receivable, equipment and inventory pursuant to a lien arising from this judgment.

In its motion for summary judgment on its claim objection, Aura contends that a
judicial lien cannot be created against a non-California corporate debtor through the
filing of a notice of judgment tien with the California Secretary of State. Thus, Aura
argues, the claimants’ claims are unsecured. The question for this court is whether a
judicial lien can be created, after the UCC Article 9 amendments adopted in 2001, by
filing a notice of judgment lien with the California Secretary of State against a non-

California corporate debtor with property in California.

lil, Analysis

A. Judgment Lien under California Law

In support of the secured status of their claim, claimants rely on California Code

of Civil Procedure (“CCP”) § 697.510, which provides in relevant part: “A judgment lien

on personal property described in Section 697.530 is created by filing a notice of

=

ho

10

11

12

13

14

15

16

i7

18

19

20

21

22

23

24

25

26

Case 2:06-ap-01277-SB Doc 29 Filed 08/18/06 Entered 08/21/06 16:21:00 Desc
Main Document Page 4of11

judgment lien in the office of the Secretary of State.” CCP § 697.510 (West 2006).
Section 697.530(a) provides in relevant part:

A judgment lien on personal property is a lien on all
interests in the following personal property that are subject to
enforcement of the money judgment against the judgment
debtor . . . at the time the lien is created /f a security interest
in the property could be perfected under the Commercial
Code by filing a financing statement at that time with the
Secretary of State:

(1) Accounts receivable.

(2) Chattel paper.

(3} Equipment.

(4) Farm products

(5) inventory

(6) Negotiable documents of title.

See id. § 697.530 (emphasis added).

Defendants contend that their judgment is secured by property of this description.
The question before the court is whether a security interest in the California collateral
can be perfected under the California Commercial Code by filing a financing statement

with the California Secretary of State.

B. Security Interests in Personal Property

Security interests in persona! property are governed generally by Article 9 of the

UCC, as adopted in each state of the United States. Prior to July 2001, the California

10

11

12

13

14

15

16

17

18

19

20

21

22

23

Case 2:06-ap-01277-SB Doc 29 _ Filed 08/18/06 Entered 08/21/06 16:21:00 Desc
Main Document Page 5of11

Commercial Code provided that, in perfecting a security interest in personal property,
the location of the property and type of property determined which state’s law controlled
the perfection of a security interest thereon. See CAL. Com. Code § 9103 (repealed
2001). However, in 2001, every state in the United States, including California, adopted
substantial amendments to the UCC involving the perfection of security interests in
personal property. These amendments took effect on July 1, 2001 in every state
(except for four states, none relevant hereto, where the amendments took effect later
that year).

California Commercial Code § 9307 (the California version of UCC § 9-307),
effective July 1, 2001, determines the location of a debtor for the purposes of personal
property security interests. Section 9307(e) specifies: “A registered organization that is
organized under the law of a state [such as a corporation] is located in that state.”
Identical provisions were adopted in 2001 in every other state. Thus, for the perfection
of a security interest in personal property, Aura is located in Delaware, because it is a
Delaware corporation.

The consequence of Aura’s location in Delaware is specified in California
Commercial Code § 9301(1), also adopted in 2001, which provides in relevant part:
“while a debtor is located in a jurisdiction, the local law of that jurisdiction governs
perfection . . . of a security interest in collateral.” Again, the law of every other state is
similar. Thus, California law dictates that the perfection of a security interest in Aura’s
California collateral is governed by the internal law of Delaware.

UCC § 9-310, adopted in Delaware as 6 Del. C. 9-310, provides the applicable

Delaware law for perfecting a security interest in collateral. This provision states (with

10

11

12

13

14

15

16

17

18

19

20

21

22

23

Case 2:06-ap-01277-SB Doc 29 Filed 08/18/06 Entered 08/21/06 16:21:00 Desc
Main Document Page 6 of 11

certain exceptions not relevant in this case): ‘a financing statement must be filed to
perfect all security interests... .” Section 9-501(a) of the UCC, codified in Delaware as
6 Del. C. 9-501(a), provides the proper location for such a filing: “if the local law of this
State governs perfection of a security interest . . ., the office in which to file a financing
statement to perfect the security interest... is... the office of the [Delaware] Secretary
of State....”

From these statutory provisions, it follows that, under both California and
Delaware law, there is a single place to perfect a security interest in collateral owned by
a Delaware corporation, wherever the collateral may be located. That location is the
office of the Delaware Secretary of State. It also follows that there is no place in
California to file a financing statement that would accomplish such perfection of a
security interest in such collateral, including California collateral, belonging to a
Delaware corporation.

There are strong policy considerations behind this result. One of the principal
purposes of the 2001 changes in Article 9 of the UCC was to require that all UCC
security interest filings for a given corporation be made in the corporation's state of
incorporation.

Previous law provided that the state where the property was located was usually
the proper location for perfecting a security interest. See Former U.C.C. § 9-103(1)(b).
This law was unsatisfactory, for two reasons. First, a lender seeking a security interest
in a corporation’s collateral would have to examine the filings in all states where the
corporation had collateral to make sure that there was no outstanding encumbrance in

such collateral. In addition, such a lender was required to file its financing statement in

10

VW

12

13

14

15

16

17

18

19

20

21

22

Case 2:06-ap-01277-SB Doc 29 _ Filed 08/18/06 Entered 08/21/06 16:21:00 Desc
Main Document Page 7 of 11

every state where such collateral was located. This was a burdensome and duplicative
process if the borrower was a large corporation.

Second, personal property is frequently moved from state to state. In
consequence, a secured creditor could lose its security interest if it did not adequately
keep track of the location of its collateral and take appropriate subsequent steps, within
an appropriate time frame, to maintain its secured status by filing in the new state or
states where the collateral came to rest. See UCC § 9-103 (1972) (amended effective
July 1, 2001). In addition, a secured creditor would have to investigate the provenance
of collateral to find out if it was subject to a prior perfected security interest in another
state.

The goal was to make a UCC security interest filing permanent and easy to find.
For a Delaware corporation, it is now necessary to examine only the UCC filings in
Delaware to determine whether there is a perfected security interest for any collateral
belonging to the corporation anywhere in the United States. This is far more efficient

and less prone to error than the previous system.°

C. Application of UCC Law to California Judgment Liens

We come now to consider the application of the foregoing law to obtaining a
judgment lien on California collateral. Under CCP § 697.530, a judgment lien on such
property can be created only by filing the requisite notice in the office of the Secretary of

State. However, the statute provides that this procedure is effective to create a

3 Similarly, a creditor needs to examine only the filings in the office of the California Secretary of State to
determine if a California corporation's collateral, wherever it may be located in the United States, is
subject to a prior lien.

-T-

10

"i

12

13

14

15

16

17

18

19

20

21

22

23

Case 2:06-ap-01277-SB Doc 29 _ Filed 08/18/06 Entered 08/21/06 16:21:00 Desc
Main Document Page 8 of 11

judgment lien only if the Commercial Code permits the perfection of a security interest in
such collateral by a filing in the same office.

The parties devote much space to discussing which state’s Secretary of State’s
office is specified by the statute. The court need not resolve this dispute. If the statute
is interpreted to apply only to the California Secretary of State, the statute does not
apply in this case, because the California Commercial Code does not permit the
perfection of a security interest in collateral belonging to a Delaware corporation by filing
a notice of judgment in California. On the other hand, if we take the California statute to
create a judgment lien upon the filing of a notice of judgment lien in the Secretary of
State’s office in the appropriate state, claimants must lose because they filed their
notice of judgment in the wrong state. They should have filed their notice in Delaware
instead of in California.

We leave for another day the issue of whether a filing of a notice of judgment lien
in Delaware, based on a California judgment with no domestication of the judgment in
Delaware, is sufficient to create a judgment lien. In this case, there is no judgment lien
because the claimants failed to file their notice of judgment lien in the proper state.

Prior to 2001, the controlling law governing perfection of security interests in
California was mostly based on the location of the property rather than the location of
the debtor. See CAL. Com. Cope § 9103 (West 1982) (repealed 2001). While the
procedure regarding the perfection of security interest substantially changed after the
amendments made to the California Commercial Code, the legislative comments
regarding § 697.530 did not. Because the legislative comments to § 697.530 did not

substantially change, the absence of comments regarding the problem of a nonresident

10

11

12

13

414

15

16

17

18

19

20

21

22

23

Case 2:06-ap-01277-SB Doc 29 _ Filed 08/18/06 Entered 08/21/06 16:21:00 Desc
Main Document Page 9 of 11

debtor does not support the claimants’ conclusion that Aura’s location has no bearing

on where to file a notice of judgment lien.

Aura’s position is further supported by the fact that, in California, creating a

judicial lien by filing a notice of judgment lien is not the only way to create a judicial lien

on a debtor’s property. If a debtor corporation is incorporated in another state, then,

under CCP § 697.520, creating a judicial lien by filing a notice of judgment lien with the
Secretary of State is an “alternative or in addition to a lien created by levy under a writ
of execution” or other enforcement procedures. ld. Thus, creditors generally have
other enforcement remedies to obtain a judgment lien in California against a non-
California resident.

Moreover, along with the other available remedies under Califomia law, creditors
seeking to impose a judgment lien on a non-California corporation may utilize the

procedures in the state where the corporation is incorporated.

IV. Conclusion

In California, the filing of a notice of judgment lien with the California Secretary of

State is no longer a valid means to create a judicial lien against the California collateral

of a non-California corporation. After the 2001 revisions to the California Commercial

Code, the location of the debtor, not the property, controls where a security interest can
be perfected. Thus, a corporate judgment debtor must be incorporated in California to

permit the creation of a judicial lien through the filing of a notice of judgment lien with

the California Secretary of State. Because Aura is incorporated under the laws of

wo Oo

*

Case 2:06-ap-01277-SB Doc 29 _ Filed 08/18/06 Entered 08/21/06 16:21:00 Desc
Main Document Page 10 of 11

Delaware, the claimants did not obtain a judgment lien on its California collateral
through the filing of a notice of judgment lien with the California Secretary of State.
Therefore, claimants’ judgment against Aura only supports an unsecured claim in this
case.

Summary judgment is granted to Aura.

/

DATED: August 18, 2006 i
SAMUEL L. BUFFORD
ED STATES BANKRUPTCY JUDGE

-10-

Cdke 2:06-ap-01277-SB Doc 29 Filed 08/18/06 Entered 08/21/06 16:21:00 Desc

oT Oo ON DD oO fF WBS NH =

NS PB BS? PM NH NY NH NH NY | | 2 = =| = = = = =
on om om F&F WwW Hw |=§ Oo O WAN DD oO FF WO HW =

Main Document Page 11 of 11

CERTIFICATE OF MAILING
| certify that a true copy of this RULING ON SUMMARY JUDGMENT MOTION was
mailed on AUG 9 } 2006 to the parties listed below:
U.S. Trustee’s Office Alice Chiau
725 So. Figueroa St., Suite 2600 860 Polaris Ave.
Los Angeles, CA 90017 Foster City, CA 94404
John W. Allured Dwight Chao
Law Offices of John W. Allured 17220 Newhope St., Unit 105
One Maritime Plaza, Suite 1040 Fountain Valley, CA 92708
San Francisco, CA 94111
Gary J. Ceriani
Michael A. Oswald Michael P. Cillo
Oswald & Yap Davis & Ceriani, P.C.
16148 Sand Canyon Ave. 1350 17" St., Suite 400
Irvine, CA 92618 Denver, CO 80202
John Barovich
Victor Chiau 910 Poly Drive, #C
860 Polaris Ave. Billings, MT 59102
Foster City, CA 94404
Linna Chao
17220 Newhope St., Unit 105
Fountain Valley, CA 92708
Ron Bender
Monica Y. Kim
Levene, Neale, Bender, Rankin & Brill,
LLP
10250 Constellation Blvd., Suite 1700
Los Angeles, CA 90067
« ay «
“TEPUTY CLERK