Official Unsecured Creditors Committee For Qmect, v. Electrochem Funding, LLC et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re No. 04-41044 T
Chapter 11
QMECT, INC.,
Debtor.
________________________________/
THE OFFICIAL UNSECURED CREDITORS A.P. No. 04-4189 AT
COMMITTEE FOR QMECT, INC.,
Plaintiff,
vs.
ELECTROCHEM FUNDING, LLC and
BURLINGAME CAPITAL PARTNERS II,
L.P.,,
Defendants.
________________________________/
MEMORANDUM OF DECISION
In the above-captioned adversary proceeding, the Official
Unsecured Creditors’ Committee (the “Committee”) for Qmect, Inc.
(the “Debtor”), the above-captioned chapter 11 debtor, seeks to
determine the validity, priority, and extent of the liens on the
Debtor’s property asserted by defendants Electrochem Funding, LLC
(“Burlingame Funding”) and Burlingame Capital Partners II, LP
Signed: September 21, 2005
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
September 22, 2005
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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26 1The terms used in this summary of the issues are explained
more fully in the subsection discussing the particular issue.
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(“Burlingame”)(collectively the “Lenders”). In the complaint (the
“Complaint”), the Committee alleges various defects or limitations
on the liens asserted by the Lenders. In February 2005, the
Committee filed a motion for summary adjudication of certain
issues raised by the Complaint (the “Committee’s Motion”). The
Lenders filed an opposition and cross-motion for summary
adjudication (the “Lenders’ Cross-Motion”). The Committee’s
Motion and the Lenders’ Cross-Motion were fully briefed and were
argued to the Court on May 6, 2005. At the end of the hearing,
the Court took the motions under submission. The Court’s
conclusions with respect to the Committee’s Motion are set forth
in Section A below. The Court’s conclusions with respect to the
Lenders’ Cross-Motion are set forth in Section B below.
A. COMMITTEE’S MOTION
The Committee’s Motion asks the Court for a summary
adjudication of the following issues:
1. That the Lost Note and the Revolving Note are not cross-
collateralized by the Comerica Deed of Trust.1
2. That Burlingame Funding has released its lien on certain
equipment essential to the operation of the Debtor’s business.
3. That neither of the Lenders has a lien upon the Debtor’s
bank deposit accounts.
4. That neither of the Lenders has a perfected security
interest in the Debtor’s delivery trucks.
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5. That the liens created on the Debtor’s real property (the
“Real Property”) by the Lenders’ deeds of trust are junior to the
Alameda County real property tax lien (the “Real Property Tax
Lien”).
6. That General Electric Capital Corporation’s (“GECC”)
security interest in the Debtor’s grid flooring and other fixtures
is senior to the Lenders’ liens.
7. That Burlingame Funding does not hold a blanket lien on
the Debtor’s assets.
8. That Burlingame Funding may not enforce the Lost Note
against the Debtor.
9. That Burlingame Funding cannot produce sufficient evidence
to prove its claim pursuant to the Revolving Note.
10. That Burlingame cannot produce sufficient evidence to
prove its claim.
11. That Burlingame’s security interest is undersecured.
Each of these issues and the Court’s rulings with respect to them
are discussed below.
1. Lost Note and Revolving Note Are Not Cross-Collateralized by
Burlingame Funding’s Deed of Trust
On or about December 17, 1998, the Koelling-McNeill
Partnership (the “Partnership”) executed a promissory note in
favor of Comerica Bank-California, now known as Comerica Bank
(“Comerica”). in the principal amount of $937,500. (This is the
note referred to herein as the “Lost Note.”) On or about February
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2The Lenders refer to the Lost Note as the Second Note.
3The Lenders refer to the Revolving Note as the Fourth
Note.
4
5, 2004, Comerica assigned the Lost Note, among other things, to
Burlingame. Shortly thereafter, Burlingame assigned the Lost
Note, among other things, to Burlingame Funding, a newly created
affiliate of Burlingame. The Committee refers to this note as the
Lost Note because Comerica never delivered the original promissory
note to Burlingame, and thus Burlingame was unable deliver the
original to Burlingame Funding. To date, no one has been able to
produce the original promissory note.2
On or about April 24, 2002, the Debtor executed a promissory
note in favor of Comerica in the principal amount of $900,000 (the
“Revolving Note”). Comerica also assigned the Revolving Note to
Burlingame in early 2004, and, shortly thereafter, Burlingame
assigned it to Burlingame Funding.3
The Committee asserts that the Lost Note and the Revolving
Note are not cross-collateralized by the deed of trust in favor of
Comerica, now held by Burlingame Funding (the “Comerica Deed of
Trust”). The Lenders concede this issue. In reply, the Committee
asks the Court to summarily adjudicate this issue. Since this
issue is not in dispute, the Court will grant its request.
2. Burlingame Funding’s Lien Releases
The Committee notes that Burlingame Funding asserts a first
priority “blanket lien” on all of the Debtor’s property. It
observes that Burlingame Funding executed and filed with the
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California Secretary of State’s Office a series of Uniform
Commercial Code (“UCC”) lien releases, releasing any liens in
certain equipment owned or used by the Debtor: i.e., an industrial
air exhaust system, a reverse osmosis water filtration system, a
stainless parts drying assembly, three heat exchangers, an Uplast
ventilator, thirty National Instrument network modules, and
various wall units, base cabinets and cabinet countertops (the
“Released Equipment”). The Committee asserts that the Released
Equipment is essential to the Debtor’s business operations and
that, because Burlingame Funding does not have a lien on them, it
does not have a “blanket lien” on the Debtor’s assets. The
Committee seeks summary adjudication on this issue.
Burlingame Funding concedes that it does not hold a lien on
the Released Equipment but disputes that this deprives it of its
“blanket lien.” It asserts that the Released Equipment is all
leased equipment and thus is not part of the Debtor’s assets.
However, it does assert a security interest in the related leases
as contract rights. Burlingame Funding contends that the Court
has already ruled that it is entitled to a “blanket lien” even if
the lien does not extend to the Debtor’s leased equipment.
Burlingame Funding also notes that the Committee asserts that
some of the leases are not “true leases.” To the extent this
assertion is correct, it concedes that it does not have a lien on
the equipment covered by the leases unless the equipment qualifies
as a “fixture” and thus part of the Real Property, in which
Burlingame Funding does assert a security interest. As the holder
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of a lien on the Real Property, Burlingame Funding contends, it
would have a right to reinstate any default by the Debtor on the
relevant leases or to redeem the equipment by paying the secured
debt in full. In support of these contentions, Burlingame Funding
cites Cal. Civ. Code § 2924c and Cal. Comm. Code § 9623(a).
In reply, the Committee limits its summary adjudication
request to a ruling that Burlingame Funding does not have a
security interest in the leased equipment if the leases are “true
leases” although it does have a lien on the leases as contract
rights. The Court will grant this request.
3. Debtor’s Bank Deposit Accounts
The Committee also contends that the Lenders do not have a
“blanket lien” on the Debtor’s assets because they do not have
perfected liens on the Debtor’s bank accounts. It notes that, to
perfect a security interest in a deposit account, a secured
creditor must have a “control agreement” with respect to the
account. See Cal. Comm. Code §§ 9312(b)(1) and 9314.
The Lenders concede that they do not have a lien on the
Debtor’s bank accounts. However, they note that they do assert
liens on the funds held in those accounts as the proceeds of their
security interests in the Debtor’s other assets. For this reason,
they contend that their lack of a lien on the deposit accounts
does not deprive them of their claim to a blanket lien. In reply,
the Committee asks the Court to summarily adjudicate only that the
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4The Committee notes that it disputes the Lenders’
contention that they have a security interest in the funds in
the Debtor’s deposit accounts as the proceeds of their other
collateral. They note that Cal. Comm. Code §§ 9315(b)(2) and
9315(d)(1) require the Lenders to trace the fund in the accounts
back to their collateral. They have not done so to date.
Moreover, even if they are able to do so, their security
interests may be avoidable under 11 U.S.C.
§ 544. The Committee also notes that Cal. Comm. Code § 9315
makes the Lenders’ claim junior to the rights of a transferee of
money or funds from the account. According to the Committee,
under 11 U.S.C. § 544, the Debtor has the same rights as a
hypothetical transferee. The Court makes no ruling with respect
to these contentions.
7
Lenders do not have a security interest in the Debtor’s deposit
accounts. The Court will grant this request.4
4. Debtor’s Delivery Trucks
The Committee asserts that, on the petition date, the Debtor
owned two delivery trucks. Both vehicles were being driven, and
thus certificates of title had been issued by the California
Department of Motor Vehicles (the “DMV”). The Committee notes
that filing a UCC-1 financing statement is not sufficient to
perfect a security interest in a vehicle covered by a certificate
of title. The lien can only be perfected by having the lien noted
on the original certificate of title. See Cal. Comm. Code § 9337.
It contends that neither of the Lenders is noted as a lienholder
on the certificates of title for the two vehicles.
The Lenders concede that they do not have a perfected security
interest in the Debtor’s two delivery trucks. In reply, the
Committee asks the Court to summarily adjudicate that the Lenders
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do not have a security interest in the Debtor’s two delivery
trucks. The Court will grant this request.
5. Priority of Lenders’ Deeds of Trust Vis-a-Vis Real Property
Tax Lien
The Committee notes that, in California, real property taxes
are automatically secured by a lien on the real property that is
senior to any deeds of trust, no matter when the deeds of trust
were recorded. It notes that, on the petition date, the Real
Property was subject to a real property tax lien in the
approximate amount of $114,439.
The Lenders challenge this contention on the ground that the
Committee has failed to cite the relevant statute. However, the
Lenders contend that, regardless of any senior real property tax
liens, their deed of trust liens are still valid and give them a
right of reinstatement and redemption. See Cal. Civ. Code §
2924c; Cal. Comm. Code § 9623(a).
In reply, the Committee cites Cal. Rev. & Tax. Code § 2187.
It contends that it is entitled to summary adjudication of this
issue which goes to priority only and does not assert that the
existence of the Real Property Tax Lien renders the Lenders’ liens
invalid. The Court will grant the Commmittee’s request for a
summary adjudication that the Real Property Tax Lien is senior to
any liens on the Real Property asserted by the Lenders.
6. Relative Priority of GECC’s and Lenders’ Liens on Debtor’s
Grid Flooring and Other Fixtures
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The Committee notes that GECC, as successor in interest to
Phoenixcor, Inc., asserts a secured claim of $155,805.25, secured
by a first priority security interest in certain fixtures: i.e.,
the components in the grid flooring in the Debtor’s electroplating
facility, one HYDRO-MYSER Chiller, two W.W. Grainger Regenerative
Blowers, two Tri-Mar Exhaust Blowers, and one Hydromatrix 786 IX
40 GPM System. This security interest was perfected by filing
UCC-1 financing statements with the California Secretary of
State’s Office. The Committee contends that the Lenders’ liens on
these fixtures are junior to GECC’s lien. The Committee contends
that the grid flooring is essential to the operation of the
Debtor’s business. Thus, without a senior lien on these items,
the Lenders do not have a “blanket lien” on the Debtor’s assets.
In response, the Lenders concede that GECC’s lien on certain
fixtures is senior to the liens created by the recordation of
their deeds of trust. However, they contend that the Committee’s
comments concerning the necessity of the grid flooring to the
Debtor’s business are unsupported by any evidence submitted in
support of the Committee’s Motion. In reply, the Committee asks
the Court to summarily adjudicate only that GECC’s lien on the
grid flooring and other fixtures is senior to the Lenders’ liens.
The Court will grant this request.
7. Burlingame Funding’s Assertion of a “Blanket Lien”
The Committee notes that the Lenders have continually asserted
that they hold “blanket liens” on the Debtor’s assets. The
Lenders now admit that they do not have a perfected lien on the
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Debtor’s bank accounts and delivery vehicles. In addition,
Burlingame Funding admits that it has filed lien releases with
respect to the Released Equipment. The Committee contends that
the Debtor’s business may not be operated without these items so
that the Court should summarily adjudicate that the Lenders do not
hold a “blanket lien” on the Debtor’s assets.
The Lenders respond that the Court has already held that
Burlingame Funding has a “blanket lien” on the Debtor’s assets.
They contend that the Court previously held that, even if the
Lenders do not have a lien on the Released Equipment, this would
only require a reduction in the value of Burlingame Funding’s
interest. In reply, the Committee describes in some detail the
nature and function of the Released Equipment and its necessity to
the business operations.
The Committee’s request for summary adjudication of this issue
is denied. The issue of whether the Lenders have a “blanket lien”
on the Debtor’s property is really an issue of whether the value
of the Lenders’ liens may be based on the Debtor’s going concern
business value. Thus, the issue is whether the Lenders’ liens are
sufficient to permit it, when foreclosing, to maintain the
business operations without a significant break.
The Court previously made a ruling on this issue. However,
it cannot recall the specifics of the ruling. The ruling may have
been made orally on the record but the Court cannot locate it on
the docket. There does not appear to have been a written
memorandum of decision addressing this issue. The Court’s best
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recollection is that, in that context, the Lenders cited a Ninth
Circuit Court of Appeals case compelling the conclusion that the
Lenders hold “blanket liens” provided the liens reach all
essential assets of the Debtor. Based on that authority, the
Court believes that it ruled that assets that could easily be
replaced, such as delivery trucks, would not disqualify the
Lenders’ liens as “blanket liens.” The Court would include in the
category of easily replaceable assets the funds in the Debtor’s
deposit accounts (assuming the Lenders cannot trace those funds
back to their collateral).
However, the Released Equipment presents a more complicated
question. To the extent the Released Equipment is leased
equipment covered by “true leases” subject to the Lenders’ liens,
the Lenders’ failure to hold liens against the Released Equipment
would not disqualify their liens from being characterized as
“blanket liens.” To the extent any of the Released Equipment not
covered by “true leases” has become a “fixture” and thus part of
the Real Property, in which the Lenders hold a security interest,
the Lenders’ failure to hold liens against the Released Equipment
would also not disqualify their liens from being characterized as
“blanket liens.”
However, if any of the Released Equipment that is essential
to the Debtor’s business and is not easily replaced is not the
subject of a “true lease” and has not become a fixture and thus
part of the Real Property, the Lenders’ failure to hold liens on
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5In their reply, the Committee contended for the first time
that the Lenders could not create a “blanket lien” by combining
their liens. Because this argument was raised first in the
Committee’s reply, the Lenders have not had an opportunity to
respond to it. Therefore, the Court will not consider it at
this time.
6Section 3309(a) of the California Commercial Code provides
that: “A person not in possession of an instrument is entitled
to enforce the instrument if (1) the person was in possession of
the instrument and entitled to enforce it when loss of
possession occurred, (2) the loss of possession was not the
result of a transfer by the person or a lawful seizure, and (3)
the person cannot reasonably obtain possession of the instrument
because the instrument was destroyed, its whereabouts cannot be
determined, or it is in the wrongful possession of an unknown
person or a person that cannot be found or is not amenable to
service of process.”
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that equipment may deprive them of their claim to a “blanket
lien.”5
8. Is Lost Note Unenforceable?
The Committee seeks a summary adjudication, declaring that
Burlingame Funding cannot enforce the Lost Note. The Court
declines to grant this request due to several issues which have
not been adequately addressed, as noted below.
The Committee bases its request primarily on Cal. Comm. Code
§ 3309(a) which provides that, if the original promissory note
has been lost, only a person who had possession of the note when
it was lost can enforce it.6 It is undisputed that neither of the
Lenders ever received the Lost Note from Comerica. In addition to
the plain language of § 3309(a), Committee cites Dennis Joslin
Co., L.L.C. v. Robinson Broadcasting Corp., 977 F. Supp. 491
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7Contra Nat’l Loan Investors, L.P. v. Joymar Assocs., 767
So. 2d 549 (Fla. Dist. Ct. App. 2000) and YYY Corp. v. Gazda,
761 A.2d 395 (N.H. 2000). The Committee acknowledges that there
are other cases that do not follow Joslin. However, the
Committee contends that these cases are “readily
distinguishable.” The Committee also cites Cadle Co. of Conn.
v. Messick, 2001 Conn. Super. LEXIS 1752, 45 U.C.C. Rep. Serv.
2d (CBC) 563 (Conn. Super. Ct. 2001), an unpublished case, the
subsequent history of which the Committee ackowledges cannot be
verified.
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(D.D.C. 1997) and State St. Bank & Trust Co. v. Lord, 851 So. 2d
790 (Fla. Dist. Ct. App. 4th Dist. 2003).7
In Joslin, the plaintiff was the assignee of a note by a
holder that had lost the note prior to the assignment. The Joslin
court held that, under the plain language of the statute, the
plaintiff did not qualify as a person who could enforce the note.
In Lord, the plaintiff was the assignee of a mortgagee that was
unable to establish that either it or the assignor mortgagee had
ever had possession of the original promissory note. Following
Joslin, the Lord court held that the plaintiff could not enforce
the note.
Burlingame Funding responds that Cal. Comm. Code § 3309 only
applies to negotiable instruments and that the Lost Note was not
a negotiable instrument. Cal. Comm. Code § 3104 defines a
“negotiable instrument” as one that makes an unconditional promise
to pay a fixed amount of money on demand or at a definite time
and, with limited exceptions, does not require the obligor to do
anything other than pay the amount specified. Burlingame Funding
contends that the Lost Note is “tied” to a “matrix of ...
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8From what the Court has been able to read, however, it
appears likely that the Lost Note is a negotiable instrument and
thus subject to § 3309.
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covenants ... and undertakings” such that the Lost Note cannot
qualify as a negotiable instrument. For example, the Lost Note
provides that the Debtor’s breach of any other agreement with
Comerica triggers a default and the right to accelerate the debt.
Thus, according to Burlingame Funding, the Lost Note is not a
negotiable instrument and thus not subject to Cal. Comm. Code §
3309.
The Court is willing to summarily adjudicate that Article 3
of the California Commercial Code, including § 3309, only applies
to negotiable instruments. However, it is unable to summarily
adjudicate that the Lost Note is a negotiable instrument because
the copy of the Lost Note that has been provided to the Court is
illegible.8
Next, Burlingame Funding contends that, even if the Lost Note
is a negotiable instrument, it is entitled to enforce the note.
Burlingame Funding argues that the Court should disregard the
plain language of the statute and the case authority cited by the
Committee. It asserts that other courts have construed § 3309(a)
to permit an assignee to enforce a promissory note that was lost
prior to its assignment. In support of this contention,
Burlingame Funding cites, among other cases, In re Caddo Parish-
Villas South, Ltd., 250 F.3d 300 (5th Cir. 2001).
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In Caddo Parish-Villas, the debtor objected to a secured claim
by Beal Bank made pursuant to a mortgage note acquired from the
Department of Housing and Urban Development (“HUD”). The original
of the note had been lost by HUD prior to the assignment. Like
the Committee, the debtor relied on the plain language of the
Louisiana version of UCC § 3309(a), which was identical to the
Cal. Comm. Code § 3309(a). The Caddo Parish-Villas court affirmed
the lower court’s order, overruling the objection. It noted that
§ 1-103 of the Louisiana UCC stated that, in the absence of a
specific provision, the other laws of the state apply. (Section
1103 of the California Commercial Code contains the same
provision.)
The Caddo Parish-Villas court noted that Louisiana law
provides that all rights may be assigned, except those that are
strictly personal, and that a failure by the assignor to deliver
all documents in its possession evidencing the assigned rights
does not affect the validity of the assignment. Caddo Parish-
Villas, 250 F.3d at 301-2. As a result, the court concluded that
the assignee could enforce the assigned note as long as it
presented sufficient evidence to establish that HUD was in
possession of the note when the loss occurred. Id. at 302.
The parties have not addressed the issue of whether California
law would permit the assignment of a right to enforce a lost
negotiable instrument. However, even if California law would
permit the assignment of the right to enforce a lost note,
evidence must be presented that Comerica qualified as a person
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9Section 9109 is part of Article 9 of the California
Commercial Code which deals with secured transactions. It
describes the types of transactions to which Article 9 applies.
Included in the list is the sale of promissory notes. See Cal.
Comm. Code § 9109(a)(3).
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entitled to enforce the Lost Note pursuant to Cal. Comm. Code §
3309(a) when the note was lost. This evidence has not yet been
provided.
Burlingame Funding also notes that the Official Comment to UCC
§ 9-109 contains the following statement, repudiating Joslin:
[T]he right under Section 3-309 to enforce a
lost, destroyed or stolen negotiable
promissory note may be sold to a purchaser who
could enforce that right by causing the seller
to provide the proof required under that
section. This Article rejects decisions reach
a contrary result, e.g. Dennis Joslin Co. v.
Robinson Broadcasting, 977 F. Supp. 491
(D.D.C. 1997).
The significance of this comment is unclear. It is puzzling why
this comment is placed in Article 9, rather than Article 3.9
The Court is not certain that the comment is relevant at all.
It has been unable to determine when the comment was written.
Section 3-309(a) of the Uniform Commercial Code was amended in
2002 to state that a person not in possession of an instrument is
entitled to enforce it if the person acquired the instrument,
either directly or indirectly, from a person who was entitled to
enforce the instrument when loss of possession occurred....”
However, California has not adopted the amended form of UCC § 3-
309(a). Although the comment quoted above is included in the
annotated California Code, it may have been referring to UCC § 3-
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10The introduction of a promissory note in evidence relieves
the plaintiff of this burden, at least as an initial matter,
because it establishes a prima facie right to recover according
to the terms of the note. Saks v. Charity Mission Baptist
Church, 90 Cal. App. 4th 1116, 1133 (2001). This issue has not
been addressed by the parties.
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309(a), as amended but not adopted by California. The Court seeks
further guidance from the parties on this issue.
In any event, the Court is not certain that the necessary
result of the conclusion that Burlingame Funding is not entitled
to enforce the Lost Note is that Burlingame Funding is not
entitled to payment of its claim. The result may simply be that
Burlingame Funding is required to present evidence to prove its
claim.10
9. Will Burlingame Funding Be Unable To Establish the
Amount of its Claim Under Revolving Note?
The Committee notes that Burlingame Funding filed a proof of
claim on or about April 30, 2004 (the “Burlingame Funding Proof of
Claim”), alleging a secured claim against the Debtor on the
petition date in the principal amount of $2,520,054.18 plus unpaid
interest of $32,194.82. It observes that the Burlingame Funding
Proof of Claim does not specify the amounts owed under each of the
four promissory notes acquired from Comerica (via Burlingame).
Neither does it specify which claims are secured by personal
property and which by real property. In addition, although it
includes a claim for attorneys’ fees and costs, it does not
identify the amount of attorneys’ fees and costs incurred as of
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the petition date, either in the aggregate or on a note-by-note
basis.
The Committee points out that Rule 3001(c) of the Federal
Rules of Bankruptcy Procedure requires either the original or a
duplicate of any writing upon which the claim is based to be filed
with the proof of claim. If the writing has been lost or
destroyed, a statement of the circumstances of the loss or
destruction must be filed with the claim in instead. Rule 3001(d)
provides that, if a security interest is claimed, the proof of
claim must be accompanied by evidence of perfection of the
security interest.
The Committee contends that Burlingame Funding has failed to
comply with either of these provisions. As a result, it contends,
the Burlingame Funding Proof of Claim is not entitled to be
considered prima facie evidence of Burlingame Funding’s claim. As
a consequence, Burlingame Funding must come forward with
sufficient evidence to prove its claim. Remington Investments,
Inc. v. Moussa Nikbakht Hamedani, 55 Cal. App. 4th 1033, 1041
(1997).
The Committee notes that one of the principals of Burlingame
Funding, Robert Judson (“Judson”), recently signed a declaration
stating the amounts purportedly owed under the four notes
previously held by Comerica and now held by Burlingame Funding.
Although the principal amount was the same as the amount set forth
in the Burlingame Funding Proof of Claim, the interest figure was
different. There is no explanation for the variance. Moreover,
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the declaration does not break down the amounts owed on a note by
note basis either. The Committee asserts that it does not
appear that Judson has sufficient personal knowledge of the
amounts due under the notes to provide the required evidence.
Burlingame Funding has been unable to provide the Committee with
any business records demonstrating the advances or payments under
the Lost Note or Revolving Note. The Committee also contends that
Burlingame Funding cannot rely on the Debtor’s books and records
to establish the amount of the debt. Burlingame Funding has
alleged that those books and records are inaccurate, and the
Debtor has admitted that they are.
In response, Burlingame Funding acknowledges that it is
required to establish the amount of its claim. It expresses the
belief that Comerica has the necessary records and claims to have
recently subpoenaed them. However, it expresses doubt that the
Debtor’s records are so inaccurate that they would be insufficient
to establish the amounts owed if Comerica no longer has the
necessary records. It opposes summary adjudication of this issue
until it has a chance to complete its discovery.
In another adversary proceeding in this case, the Court has
already concluded that the form of the Burlingame Funding Proof of
Claim is inadequate to establish a prima facie case in support of
its claim. Consequently, consistent with that ruling, the Court
grants the Committee’s request to summarily adjudicate that
Burlingame Funding has both the burden of producing sufficient
evidence to establish its claim against the estate and the
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collateral securing it as well as the burden of persuasion on
those issues.
10. Will Burlingame Be Unable To Establish Amount of Its Claim?
The Committee notes that Burlingame also filed a proof of
claim on or about April 30, 2004 (the “Burlingame Proof of
Claim”). The Burlingame Proof of Claim asserted an amount due of
$3,047,836.215 plus attorneys’ fees and costs. Like the
Burlingame Funding Proof of Claim, the Burlingame Proof of Claim
failed to comply with Rule 3001(c) & (d) by attaching a copy of
the writing upon which the claim was based and proof of perfection
of the security interest. Thus, according to the Committee, the
Burlingame Proof of Claim is not entitled to be treated as prima
facie evidence of the claim’s validity either. In re Consolidated
Pioneer Mortgage, 178 B.R. 222, 226-27 (Bankr. 9th Cir. 1995). The
Committee contends that, like Burlingame Funding, Burlingame must
come forward with its own evidence establishing the amount of its
claim and, as discussed above, cannot rely on the Debtor’s books
and records to do so.
Burlingame responds that it has produced sufficient evidence
of its advances to the Debtor and of the payments received from
the Debtor. If more evidence is required, it intends to obtain
that evidence from the Debtor. In reply, the Committee states
that there is no competent evidence to establish the amount of
Burlingame’s claim. Moreover, the Debtor has made over $100,000
in post-petition payments to Burlingame for which no credit has
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11In its opposition to the Lenders’ cross-motion, the
Committee asks the Court to summarily adjudicate that Burlingame
Funding’s secured claim is also undersecured. This request is
procedurally improper and, on that basis, the Court declines to
grant it. Moreover, the Court does not believe that there is a
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been applied. As noted above, the Debtor’s pre-petition records
are unreliable, and the Lenders have said as much in documents
filed with the Court.
The Court grants the Committee’s request to summarily
adjudicate that Burlingame is required to prove its claim and may
not rely on the Burlingame Proof of Claim to establish a prima
facie case in support of its claim. The Court denies the
Committee’s request to summarily adjudicate that Burlingame is
unable to prove its claim. Burlingame does not appear to seek
summary adjudication of the amount of its claim. However, if it
had, the Court would deny that request as well. The Court is
unable to determine from what has been filed to date the validity
and amount of Burlingame’s claim as a matter of law.
11. Whether Burlingame’s Secured Claim Is Undersecured.
Finally, the Committee contends that, based on the value of
the Debtor’s assets and the amount of Burlingame Funding’s likely
claim, Burlingame’s claim is undersecured. As a result,
Burlingame is not entitled to recover its post-petition interest,
costs, or attorneys’ fees. In its response, Burlingame concedes
that its claim is undersecured. In reply, the Committee asks the
Court to summarily adjudicate this issue. The Court will grant
this request.11
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sufficient evidentiary basis at present for it to make such a
determination.
12The Lenders note that many of the Committee’s allegations
with respect to alleged defects in Burlingame Funding’s security
documents are also made with respect to Burlingame’s security
documents. Although in their arguments, for the most part, they
only refer to the claims against Burlingame Funding, they note
that the same arguments apply to Burlingame and thus are not
repeated. To the extent the issues are identical, the Court’s
rulings are also identical.
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B. LENDERS’ CROSS-MOTION
The Lenders’ Cross-Motion seeks summary adjudication of the
following additional issues:12
1. Whether the Comerica Deed of Trust’s designation of the
Debtor’s predecessor in interest as the debtor prevents Burlingame
Funding from enforcing the lien against the Debtor.
2. Whether Burlingame Funding’s failure to record the
assignment of the Comerica Deed of Trust until after the petition
date prevents Burlingame Funding from enforcing it.
3. Whether the form of the Debtor’s name on the UCC-1
financing statements renders them unenforceable.
4. Whether the Debtor’s failure to sign an amendment to the
UCC-1 financing statement renders it unenforceable.
5. Whether the failure to check the box in Item 9 of the UCC-
1 financing statement amendment invalidates the amendment.
6. Whether Fred Koelling’s signature was sufficient to bind
the Partnership.
7. Whether Fred Koelling’s signature was sufficient to bind
the Debtor.
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13The Debtor is a separate entity from the Partnership, not
simply a change in its form. The Debtor acquired its assets
from the Partnership.
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8. Whether there is any evidence to support the Committee’s
allegation that the Burlingame Deed of Trust was altered after it
was executed by the Debtor.
9. Whether the interest rate on the Burlingame Deed of Trust
was usurious.
1. Comerica Deed of Trust’s Designation of the Partnership as
Debtor
In paragraph 17 of the Complaint, the Committee contends that
Burlingame Funding’s security interest in the fixtures located on
the Real Property (the “Fixtures”) is unperfected and thus
avoidable under 11 U.S.C. § 544(a)(1). It bases this argument on
the fact that the Comerica Deed of Trust, upon which Burlingame
Funding relies for its security interest in the Fixtures (the
“Fixture Deed of Trust”), names the Partnership, rather than the
Debtor, as the debtor.13 Burlingame Funding seeks a
summary adjudication that this claim has no merit. It notes that,
when the Comerica Deed of Trust was executed and recorded, the
Partnership owned the Fixtures and the recordation of the Comerica
Deed of Trust perfected Comerica’s security interest in the
Fixtures. It contends that the transfer of the Fixtures by the
Partnership to the Debtor did not require any additional filing,
naming the Debtor as debtor, to maintain the perfected status of
the security interest, at least as to those fixtures existing at
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the time of the transfer or acquired by the Debtor within four
months. The Court agrees.
Section 9502 of the California Commercial Code provides, in
pertinent part, as follows:
(a) Subject to subdivision (b), a
financing statement is sufficient only if it
satisfies all of the following conditions:
(1) It provides the name
of the debtor. (2) It provides the
name of the secured party or a representative
of the secured party. (3) It indicates
the collateral covered by the financing
statement.
(b) Except as otherwise provided in
subdivision (b) of Section 9501, to be
sufficient, a financing statement ... which is
filed as a fixture filing and covers goods
that are or are to become fixtures, must
satisfy subdivision (a) and also satisfy all
of the following conditions:
(1) Indicate that it covers this type of
collateral.
(2) Indicate that it is to be recorded in
the real property records.
(3) Provide a description of the real
property to which the collateral is related
sufficient to give constructive notice of a
mortgage under the law of this state if the
description were contained in a record of the
mortgage of the real property.
(4) If the debtor does not have an
interest in the real property, provide the
name of the record owner.
(c) A record of a mortgage is effective, from
the date of recording, as a financing
statement filed as a fixture filing ... only
if all of the following conditions are
satisfied:
(1) The record indicates the goods or
accounts that it covers.
(2) The goods are or are to become
fixtures related to the real property
described in the record.... (3) The record
satisfies the requirements for a financing
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14The Committee does not appear to contend, at least in this
context, that Comerica’s transfer of its security interest to
Burlingame and Burlingame’s transfer to Burlingame Funding
caused the security interest, if perfected, to become
unperfected. See also Cal. Comm. Code § 9310(c)(no additional
filing is required to continue the perfected status of a
security interest if a secured party assigns a perfected
security interest). Moreover, because the fixture financing
statement is contained in a deed of trust, Comerica was not
required to file a continuation statement to continue the
perfected status of its security interest. See Cal. Comm. Code
§ 9515(g).
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statement in this section other than an
indication that it is to be filed in the real
property records.
(4) The record is duly recorded.
Pursuant to these provisions, the Comerica Deed of Trust qualified
as a “fixture filing” financing statement at the time it was
recorded. The Committee does not appear to contend otherwise.
Thus, the only question is whether anything was required to be
filed when the Real Property and Fixtures were transferred by the
Partnership to the Debtor to maintain the perfected status of
Comerica’s security interest.14
Burlingame Funding contends that nothing further had to be
filed to maintain Comerica’s perfected security interest after the
Real Property and Fixtures were transferred to the Debtor,
including as to fixtures acquired by the Debtor within four months
after the transfer. In support of this position, it cites Cal.
Comm. Code § 9508. Section 9508 provides, in pertinent part,
as follows:
(a) Except as otherwise provided in this
section, a filed financing statement naming an
original debtor is effective to perfect a
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15The term “new debtor” is defined as “a person that becomes bound
as debtor under subdivision (d) of Section 9203 by a security agreemen
previously entered into by another person. See Cal. Comm. Code §
9102(a)(56). At or about the time the Real Property and Fixtures were
transferred to the Debtor, the Debtor executed an agreement pursuant t
which it assumed the Partnership’s obligations to Comerica (the
“Assumption Agreement”). The Assumption Agreement was recorded in
November 2001. Thus, the Debtor qualifies as a “new debtor” for
purposes of Cal. Comm. Code § 9508(a).
16For purposes of Division 9 of the California Commercial
Code, the name of a new debtor is seriously misleading if a
search of the records of the filing office under the original
debtor’s name, using the filing office’s standard search logic,
if any, would not disclose the financing statement. See Cal.
Comm. Code § 9506(c).
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security interest in collateral in which a new
debtor15 has or acquires rights to the extent
that the financing statement would have been
effective had the original debtor acquired
rights in the collateral.
(b) If the difference between the name of the
original debtor and that of the new debtor
causes a filed financing statement that is
effective under subdivision (a) to be
seriously misleading16 under Section 9506, the
following rules apply:
(1) The financing statement is effective
to perfect a security interest in collateral
acquired by the new debtor before, and within
four months after, the new debtor becomes
bound under subdivision (d) of Section 9203.
(2) The financing statement is not
effective to perfect a security interest in
collateral acquired by the new debtor more
than four months after the new debtor becomes
bound under subdivision (d) of Section 9203
unless an initial financing statement
providing the name of the new debtor is filed
before the expiration of that time.
The Court agrees with Burlingame Funding that the effect of Cal.
Comm. Code § 9508 is that the security interest in the Fixtures
perfected by Comerica by recording the Comerica Deed of Trust
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17Burlingame Funding implicitly concedes that the Fixture
Deed of Trust would not give it a perfected security interest in
fixtures acquired by the Debtor more than four months after
Koelling-McNeill’s transfer of the Real Property and Fixtures to
the Debtor. There is no evidence that the Debtor acquired any
fixtures more than four months after the Real Property and
Fixtures were transferred to it. Absent such evidence, the
Court declines to address whether Burlingame Funding would have
a perfected security interest in any such fixtures.
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continued after the Real Property and Fixtures were transferred to
the Debtor as to any fixtures on the Real Property prior to the
transfer or acquired by the Debtor within four months after the
transfer.17
Finally, the priorities established by Cal. Comm. Code §
9334(e) prevent a trustee or debtor-in-possession to avoid
Burlingame Funding’s security interest in the Fixtures, exercising
the rights of a hypothetical judicial lien creditor whose lien
attached as of the bankruptcy petition date. Section 9334(e)
provides as follows:
(e) A perfected security interest in
fixtures has priority over a conflicting
interest of an encumbrancer...of the real
property if:
(1) The debtor has an interest of record
in the real property...and both of the
following conditions are satisfied:
(A) The security interest is
perfected by a fixture filing before the
interest of the encumbrancer...is of record.
(B) The security
interest has priority over any conflicting
interest of a predecessor in title of the
encumbrancer....
The security interest asserted by Burlingame Funding was perfected
before the Debtor’s bankruptcy petition date and would have
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priority over any conflicting interest of a predecessor to the
judicial lien creditor. Thus, Burlingame Funding is entitled to
a summary adjudication that it has a perfected security interest
in the Fixtures to the extent the Fixtures were acquired before or
within four months of the transfer of the Real Property to the
Debtor.
2. Burlingame Funding’s Failure To Record Assignment of Comerica
Deed of Trust
Paragraph 19 of the Complaint alleges that Burlingame
Funding’s security interest in the Fixtures and in the Debtor’s
personal property is unperfected because no assignment of the
security interest was filed or recorded before the Debtor’s
bankruptcy petition was filed. Burlingame Funding seeks a summary
adjudication, declaring that these claims are without merit. It
contends that it was not required to file or record an assignment
of Comerica’s Deed of Trust or UCC-1 financing statements to
continue the perfection of the security interest in the Fixtures
and the Debtor’s personal property. The Court concludes that
Burlingame Funding is entitled to the requested summary
adjudication.
In support of its contention that the security interest in the
Fixtures and the Debtor’s personal property remained perfected
notwithstanding Burlingame’s failure to record assignments of the
security interest prior to the bankruptcy petition date,
Burlingame Funding cites Cal. Civ. Code §§ 2934 and 2936 and Cal.
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Comm. Code § 9310(c). Cal. Civ. Code § 2934 provides, in
pertinent part, as follows:
Any assignment of ... the beneficial interest
under a deed of trust may be recorded, and
from the time the same is filed for record
operates as constructive notice of the
contents thereof to all persons....
Cal. Civ. Code § 2936 provides that “[t]he assignment of a debt
secured by mortgage carries with it the security.” Cal. Comm.
Code § 9310(c) provides that:
If a secured party assigns a perfected
security interest..., a filing under this
division is not required to continue the
perfected status of the security interest
against creditors of and transferees from the
original debtor.
Burlingame Funding contends that there is no dispute that the
Debtor’s debt to Comerica was assigned to Burlingame, that
Burlingame assigned it to Burlingame Funding, or that Comerica’s
security interest in the Fixtures and the Debtor’s personal
property was properly perfected before the debt was assigned.
Therefore, according to Burlingame Funding, as a result of the
assignment of the debt, it holds a perfected security interest in
the Fixtures and in the Debtor’s personal property notwithstanding
its failure to file or recorded an assignment of the security
interest. It notes that Cal. Civ. Code § 2934 uses the word
“may.” Thus, recording an assignment of the beneficial interest
of a deed of trust is optional, not mandatory.
The Committee reads Cal. Civ. Code § 2934 as implying, if not
expressly stating, that recordation of an assignment of a deed of
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trust is required to perfect the security interest of the
assignee. This argument would have merit if the dispute were with
another purported assignee of Comerica who recorded its assignment
first. As noted above, Cal. Civ. Code § 2934 states that, if the
assignment is recorded, it operates as constructive notice to all
persons of its contents from the date of recordation. However, a
transferee of the Real Property (as opposed to a subsequent
assignee of Comerica’s security interest) would still have
constructive notice of Comerica’s perfected security interest in
the Real Property. The fact that the transferee would not have
constructive notice that Comerica had assigned that security
interest to a third party would not render the security interest
unperfected.
The Committee agrees that, pursuant to Cal. Comm. Code
§ 9310(c), an assignment of a perfected security interest by the
“original debtor” need not be filed to continue the perfection of
a security interest in personal property. However, it asserts
that this provision only protects the assignment by Comerica to
Burlingame. According to the Committee, § 9310(c) does not
protect the assignment by Burlingame to Burlingame Funding
because, according to the Committee, the Debtor does not qualify
as an “original debtor.” At least with respect to the first
financing statement, according to the Committee, the Partnership
was the “original debtor.”
This contention has no merit. Section 9102(a)(60) of the
California Commercial Code defines a “new debtor” as a “person
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that, as debtor, entered into a security agreement to which a new
debtor has become bound under subdivision (d) of Section 9203."
However, it expressly states that this definition does not apply
to the use of the phrase “new debtor” in Section 9310(c).
As discussed above, Cal. Comm. Code § 9508(a) provides that
a perfected security interest in personal property remains
perfected when a new debtor acquires rights in the collateral.
Section 9508(b)(1) provides that, even if the new debtor becomes
bound by the security agreement, the perfected security interest
attaches to collateral acquired for four months after the
transfer. Thereafter, a new financing statement naming the new
debtor is required. In fact, after the Partnership transferred
its assets to the Debtor and the Debtor assumed the Partnership’s
debts to Comerica, on December 6, 2001, Comerica filed an
amendment to the first financing statement, changing the debtor’s
name from the Koelling-McNeill Partnership to Qmect, Inc.
The Committee also contends that when, in 2003, Comerica Bank-
California, a California banking corporation, the “original
debtor,” merged into Comerica Bank, a Michigan corporation, it was
required to record an assignment of the security interest
reflected in any UCC-1 financing statements previously filed with
respect to the Debtor’s personal property. In support of this
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18The Committee also asserts that, although the failure to
record an assignment of the deed of trust after the merger and
resulting name change did not render Comerica’s security
interest in the Fixtures and Real Property unperfected, it did
prevent Comerica and its successors in interest from foreclosing
on its collateral nonjudicially. See Miller & Starr, California
Real Estate, 3rd ed., Deeds of Trust, 10:39, citing Cal. Civ.
Code § 2932.5 (assignee of debt secured by deed of trust
acquires power to sell nonjudicially only if assigment is duly
acknowledged and recorded). Burlingame Funding responds that it
is not seeking a determination that it is entitled to foreclose
on its collateral nonjudicially.
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contention, it cites In re Copper King Inn, Inc., 918 F.2d 1404,
1407-09 (9th Cir. 1990). No such assignment was recorded.18
The Court finds Copper King distinguishable. In Copper King,
the secured creditor was not listed on the financing statement at
all. The parties listed as the secured creditors were officers,
directors, and shareholders of the debtor. Id., at 1405. The
Copper King court rejected the argument that inquiries could have
been made to these individuals who would have clarified who was
the true secured creditor. It noted that there was no guarantee
that these insiders would have provided accurate information given
their incentive to provide misinformation. Id. at 1408.
The Copper King court distinguished In re Wilco Forest
Machinery, Inc., 491 F.2d 1041 (5th Cir. 1974), in which the
validity of a financing statement was upheld although the secured
creditor had merged into a separate corporation prior to the
bankruptcy of the debtor and the financing statement had not been
amended to reflect the change. The merger of Comerica Bank-
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California into Comerica Bank falls within the holding of Wilco
Forest rather than that of Copper King.
Finally, the Committee acknowledges that Burlingame Funding
filed an assignment of the Comerica Deed of Trust one week after
the Debtor’s bankruptcy petition was filed. However, the
Committee contends that this post-petition recordation of the
assignment violated the automatic stay and was thus void.
Burlingame Funding responds that the Committee cites no authority
for its contention that the post-petition recordation of the
assignment of the Comerica Deed of Trust violated the automatic
stay.
The Court concludes that the Committee is in error in its
assertion that the recordation of the assignment post-petition
violated the automatic stay. The recordation of the assignment
was not attempt to create, perfect, or enforce a lien against the
Real Property. It did not diminish the estate in any way; it
simply substituted one secured party for another. See In re
Patton, 314 B.R. 826, 834 (Bankr. D. Kan. 2004); In re Citicorp
Park Assocs., 173 B.R. 823 (Bankr. D. Me. 1994).
3. Form of Debtor’s Name on UCC-1 Financing Statements
Paragraphs 20 and 22 of the Complaint allege that Burlingame
Funding’s security interest in the the Debtor’s personal property
is unperfected because, as of the petition date, the UCC-1
financing statements on file with the California Secretary of
State’s Office named the Partnership, rather than the Debtor, as
the debtor. Thus, according to the Committee, they were seriously
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misleading. In its motion for summary adjudication, Burlingame
Funding seeks a determination that this claim has no merit.
Burlingame Funding notes that amendments to the financing
statements were filed changing the debtor’s name to Qmect, Inc.
Copies of the amendments are attached as Exhibit U7 to the Request
for Judicial Notice in support of its motion.
In any event, Burlingame Funding argues, because the security
interest was perfected prior to the sale of the Debtor’s personal
property by the Partnership to the Debtor, the security interest
remained perfected notwithstanding the sale. In support of this
contention, it cites Cal. Comm. Code §§ 9507(a) and 9315(a)(1).
Section 9507(a) provides that:
A filed financing statement remains effective
with respect to collateral that is sold,
exchanged, leased, licensed, or otherwise
disposed of and in which a security interest
... continues, even if the secured party knows
of or consents to the disposition.
Section 9315(a)(1) provides that:
Except as otherwise provided in this division
and in subdivision (2) of Section 2403, ...
(1) A security interest ... continues in
collateral notwithstanding sale ... or other
disposition thereof unless the secured party
authorized the disposition free of the
security interest ....
In addition, Burlingame Funding contends, the financing
statements were sufficient to perfect a security interest in
personal property acquired by the Debtor to the same extent they
would have been effective if the Partnership had acquired the
personal property. In support of this contention, Burlingame
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Funding cites Cal. Comm. Code § 9508(a). Section 9508(a) provides
that:
Except as otherwise provided in this section,
a filed financing statement naming an original
debtor is effective to perfect a security
interest in collateral in which a new debtor
has or acquires rights to the extent that the
financing statement would have been effective
had the original debtor acquired rights in the
collateral.
If a creditor could not identify the new debtor as the owner of
the collateral using the standard search logic of the recording
office, the secured creditor’s rights are limited to collateral
obtained by the new debtor within four months after its
acquisition of the original debtor’s personal property collateral.
See Cal. Comm. Code §§ 9506 & 9508(b). However, Burlingame
Funding argues that, because it filed an amended financing
statement less than four months after the Debtor obtained the
collateral from the Partnership, changing the name of the debtor
from Koelling-McNeill Partnership to Qmect, Inc., its security
interest is not limited to personal property acquired by the
Debtor within four months of the transfer.
The Committee responds that Burlingame Funding has misread its
allegations. It contends that the Complaint does not allege that
Burlingame Funding’s security interest in the Debtor’s personal
property is unperfected because the Debtor’s name on the financing
statements is incorrect. The Complaint alleges that certain of
the financing statements did not state the correct name and
address of the secured party or the correct address of the Debtor
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and that the names and addresses that were stated on those
financing statements were seriously misleading.
As a result, the Complaint claims, Burlingame Funding’s
security interest in the Debtor’s personal property is unperfected
and avoidable under 11 U.S.C. § 544(a)(1). Since Burlingame
Funding has failed to address these allegations, according to the
Commmittee, its request for summary adjudication with respect to
the allegations contained in paragraphs 20 and 22 should be
denied.
Burlingame Funding responds that, if the allegations are that
its security interest in the Debtor’s personal property is
unperfected because, as of the bankruptcy petition date, the
financing statement failed to name Burlingame as the secured party
or to provide Burlingame’s address, the claim should still be
summarily adjudicated as having no merit. It bases this argument
on Cal. Comm. Code § 9310. As noted above, § 9310(c) provides
that:
If a secured party assigns a perfected
security interest..., a filing under this
division is not required to continue the
perfected status of the security interest
against creditors of and transferees from the
original debtor.
Regardless of the merits of this response, because it was
raised for the first time in Burlingame Funding’s reply, the Court
will not consider it at this time. The Committee is correct that
Burlingame Funding’s original argument mischaracterizes the
allegations of paragraphs 20 and 22. By addressing the true
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allegations of those paragraphs for the first time in its reply,
Burlingame Funding has deprived the Committee of its opportunity
to respond to its only relevant argument.
4. Debtor’s Failure To Sign Amendments to UCC-1 Financing
Statements Paragraph 21 of the Complaint alleges, among other
things, that Financing Statement Amendment No. 01341C0773
(“Amendment to Financing Statement 177"), which purports to amend
Financing Statement No. 9703160177 (“Financing Statement 177"), is
invalid because it is not signed by the Debtor. Similarly,
paragraph 23 of the Complaint alleges, among other things, that
Financing Statement Amendment No. 02161C0287 (“Amendment to
Financing Statement 476"), which purports to amend Financing
Statement No. 9430760476 (“Financing Statement 476"), is invalid
because it is not signed by the Debtor.
Burlingame Funding seeks a summary adjudication, declaring
that this claim has no merit. It asserts that a debtor’s
signature is no longer required on either the original financing
statement or an amendment thereto. In support of this
proposition, it cites Cal. Comm. Code §§ 9502(a) and 9509(b).
Section 9502(a) provides, in pertinent part, that:
... a financing statement is sufficient only
if it satisfies all of the following
conditions: (1) It provides the name of
the debtor. (2) It provides the name
of the secured party ....
(3) It indicates the
collateral covered by the financing statement.
Section 9509(b) provides that:
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19This financing statement was filed on January 28, 1997,
before the Debtor was formed. It names the Partnership as the
debtor.
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By authenticating or becoming bound as debtor
by a security agreement, a debtor or new
debtor authorizes the filing of an initial
financing statement, and an amendment,
covering both of the following:
(1) The collateral
described in the security agreement.
(2) Property
that becomes collateral under paragraph (2) of
subdivision (a) of Section 9315, whether or
not the security agreement expressly covers
proceeds.
Burlingame Funding notes that there is not even a signature line
for the debtor on the official amendment form.
The Committee responds that it does not contend that the
Debtor had to sign the financing statements or amendments thereto.
This is not precisely true. As noted above, one of the defects
alleged by the Committee in paragraph 21 and 23 is the Debtor’s
failure to sign the amendments. However, apparently, the
Committee has abandoned this allegation. Therefore, Burlingame
Funding is entitled to a summary adjudication of this issue.
5. Failure To Check Box or To Provide Name and Address of New
Debtor in Item 9 of the Amendments
Paragraph 21 of the Complaint also alleges that Financing
Statement 177 is invalid because it does not name the Debtor as
the debtor19 and that the Amendment to Financing Statement 177,
which purports to add the name of the Debtor in place of the name
of the Partnership, contains Comerica’s name instead of the
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Debtor’s in Item 9a. It alleges that Financing Statement 177 is
also invalid because the box in Item 9a is not checked indicating
that the amendment reflects the addition of a debtor or the
addition or deletion of collateral rather than the assignment of
the security interest. Paragraph 23 of the Complaint alleges that
the Amendment to Financing Statement 476 is invalid for the same
reasons as the Amendment to Financing Statement 177.
Burlingame Funding seeks a summary adjudication that the
amendments are valid and effective to perfect its security
interest in the described collateral, including personal property
acquired thereafter by the Debtor. First, it contends that it was
not required to check the box in Item 9a or to enter the Debtor’s
name in Item 9a. It asserts that this box only applies to
amendments filed solely under the authority of the Debtor. In
support of this argument, it relies on a paragraph from the
Instructions for National UCC Financing Statement AMENDMENT (Form
UCC3) (the “UCC Form Instructions”). It contends that the
amendments at issue here were not filed solely under the authority
of the Debtor. This argument has no merit. The language quoted
from the UCC Form Instructions does not use the word “solely,”
only the word “authorized.” Burlingame Funding does not contend
that the Debtor did not authorize the filing of the amendments.
Next, Burlingame Funding contends that it properly completed
the two amendments. It notes that the purpose of the Amendment to
Financing Statement 177 was to change the name the debtor: i.e.,
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from the Koelling-McNeill Partnership to Qmect, Inc. It states
that the UCC Form Instructions advise the person completing an
amendment form for this purpose to: (1) check the box in Item 5 to
indicate that the amendment amends information relating to the
debtor, (2) check the box in Item 5 to indicate that the amendment
is a name change, (3) enter in Item 6 the prior name of the
debtor, and (4) enter in Item 7 the new name of the debtor. It
states that it complied with these instructions.
Similarly, the purpose of the Amendment to Financing Statement
476 was to add collateral. The UCC Form Instructions advise the
person completing an amendment for this purpose to describe the
change in Item 8, either by describing the collateral to be added
or deleted or by setting forth in full the collateral as amended,
and to check the appropriate box indicating the method of
description chosen. Burlingame Funding contends that it also
complied with these instructions. Therefore, it seeks a summary
adjudication that the amendments were valid and effective to
perfect and to continue the perfection of its perfected security
interest in the Debtor’s personal property.
The Committee disagrees with this contention. It argues that
the instructions for an amendment designed to reflect a mere name
change for an existing debtor did not apply here. The Debtor was
a new debtor. Qmect, Inc. was not just a new name for the
original debtor: i.e., the Koelling-McNeill Partnership, changed
to a corporate form. Under these circumstances, the Committee
contends, it was necessary to check the boxes in both Items 5 and
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9 and to enter the new debtor’s name in Item 9a. Burlingame
Funding replies that, even if the Committee is correct, the defect
was not sufficient to invalidate the amendments. It notes that
Cal. Comm. Code § 9506(a) provides that:
A financing statement substantially satisfying
the requirements of this part is effective,
even if it has minor errors or omissions,
unless the errors or omissions make the
financing statement seriously misleading.
The Court is not sufficiently clear on the law governing these
issues to summarily adjudicate them at this time. It agrees with
the Committee that, if it was appropriate to file an amendment to
an existing financing statement to perfect a security interest in
the personal property of a new debtor and in any event with
respect to the new description of collateral, the box in Item 9
should have been checked and the name of Qmect, Inc. should have
been entered in both amendments. However, the Court agrees with
Burlingame Funding that the failure to do so would not invalidate
the amendments because it did not render them seriously
misleading. The boxes checked in Item 5 and the entry of the
Debtor’s name in Item 7 was sufficient to permit the public
records to reflect the correct name of the new debtor. While the
Debtor’s name does not appear anywhere on the Amendment to
Financing Statement 476, the Amendment does clearly indicate that
it is amending Financing Statement 476. Financing Statement 476
does contain the Debtor’s name.
Rather, the Court’s uncertainty turns on whether a new initial
financing statement should not have been filed to perfect a
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security interest in collateral subsequently acquired by the
Debtor more than four months after it acquired its assets from the
Partnership. Clearly, under Cal. Comm. Code § 9508(a), with
respect to the personal property collateral acquired by the Debtor
from the Partnership, the existing perfected security interest
continued notwithstanding the transfer of ownership. Under Cal.
Comm. Code § 9508(a), the security interest would also attach
and be perfected with respect to any personal property of the type
described as collateral in the existing financing statement
acquired by the Debtor within four months after the Debtor’s
became bound by the Partnership’s security agreement with
Comerica.
However, Cal. Comm. Code § 9508(b)(2) provides that, unless
the difference in the names of the old and new debtor would not be
seriously misleading, the existing financing statement is not
effective to perfect a security interest in collateral acquired by
a new debtor more than four months after the new debtor becomes
bound under the security agreement unless an “initial financing
statement” providing the name of the new debtor is filed before
the expiration of the four months. An amendment to an existing
financing statement would not appear to qualify as an “initial
financing statement.” As a result, Burlingame Funding’s perfected
security interest would appear to be limited to the personal
property collateral transferred to it by the Partnership and any
personal property within the collateral description acquired by
the Debtor during the four months after it signed the Assumption
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20In its opposition to the motion, the Committee also
contends that Cal. Comm. Code § 9326(a) subordinates Burlingame
Funding’s perfected security interest in at least some of the
Debtor’s personal property to the security interests of certain
hypothetical secured creditors. As a result, it contends that,
to that extent, the security interest is subject to avoidance
pursuant to 11 U.S.C. § 544(a)(1). The allegations of
paragraphs 21 and 23 do not assert this claim, and Burlingame
Funding does not seek summary adjudication of it. As a result,
the Court will not make any ruling with respect to it. However,
the Court expresses doubt as to whether the holder of a security
interest created by a new debtor which is perfected by filing a
financing statement would qualify as the holder of a judicial
lien within the meaning of 11 U.S.C. § 544(a)(1).
43
Agreement. However, these statutes are sufficiently complex that
the Court declines to make a ruling on these issues at this time
without further briefing and argument by the parties.20
6. Sufficiency of Fred Koelling’s Signature To Bind the
Partnership
Paragraph 26 of the Complaint alleges that the Comerica Deed
of Trust was signed only by Fred Koelling, not by all of the
general partners of the Partnership. It alleges that Fred
Koelling may not have been authorized by a resolution signed by
all the general partners to sign the Comerica Deed of Trust on the
Partnership’s behalf. As a result, the Complaint alleges, the
Comerica Deed of Trust may be invalid.
Burlingame Funding seeks summary adjudication of this claim,
declaring that the Comerica Deed of Trust may not be invalidated
on this ground. It contends that, even if it is established that
Fred Koelling did not have authority to bind the Partnership, the
Comerica Deed of Trust would still be valid unless it is proven
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either that Comerica was aware of Fred Koelling’s lack of
authority at the time the Comerica Deed of Trust was signed or
that the Comerica Deed of Trust was not executed for the apparent
purpose of carrying on the business of the partnership in the
ordinary course. In support of this proposition, Burlingame
Funding cites Cal. Corp. Code § 16301 which provides as follows:
(1) Each partner is an agent of the
partnership for the purpose of its business.
An act of a partner, including the execution
of an instrument in the partnership name, for
apparently carrying on in the ordinary course
the partnership business or business of the
kind carried on by the partnership binds the
partnership, unless the partner had no
authority to act for the partnership in the
particular matter and the person with whom the
partner was dealing knew or had received
notification that the partner lacked
authority. (2) An act of
a partner that is not apparently for carrying
on in the ordinary course of the partnership
business or business of the kind carried on by
the partnership binds the partnership only if
the act was authorized by the other partners.
In response, the Committee notes that it did not seek summary
adjudication of this issue. Therefore, it is not obliged at this
time to prove that Fred Koelling lacked authority to bind the
Partnership to the Comerica Deed of Trust. To the contrary, the
Committee contends that it is Burlingame Funding’s burden to
present evidence that Fred Koelling did have authority to sign the
Comerica Deed of Trust or that signing the Comerica Deed of Trust
was in the ordinary course of business of the Partnership. The
Committee points out that Burlingame Funding has presented no
evidence in support of either of these propositions.
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The Committee contends that execution of a deed of trust with
respect to all of a partnership’s real property is clearly not
within the ordinary course of the partnership’s business.
According to the Committee, this is precisely the type of
transaction that requires approval of all general partners. See
Tsakos Shipping & Trading, S.A. v. Juniper Garden Town Homes,
Ltd., 12 Cal. App. 4th 74, 93 (1993)(partner not authorized to bind
partnership to guaranty without specific authority, at least
implied from the previous course of dealing between the parties).
The Committee asserts that no prudent lender would accept a deed
of trust executed by one partner on behalf of a partnership
without an authorizing resolution signed by the other partners.
Burlingame Funding responds that, because it has sought a
summary adjudication of this issue, if it wishes to oppose this
request, the Committee is required to present evidence that Fred
Koelling was not authorized to sign the Comerica Deed of Trust.
In support of this contention, Burlingame Funding cites Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 256-57 (1986). See also
Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
The Court concludes that Burlingame Funding is entitled to
summary adjudication that Fred Koelling’s signature alone on the
Comerica Deed of Trust was sufficient to bind the Partnership. As
noted above, Cal. Corp. Code § 16301 provides that a partner may
bind the partnership by any act in the ordinary course of business
of the partnership, including the execution of an instrument,
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unless the person with whom the partner was dealing knew that the
partner lacked authority. In its motion, Burlingame Funding did
not squarely contend that Fred Koelling had express authority from
the other partners of the Partnership to execute the Comerica Deed
of Trust. Therefore, to resist summary adjudication of this
issue, the Committee was not compelled to present evidence that he
lacked express authority.
However, Burlingame Funding did squarely put at issue whether
execution of the Comerica Deed of Trust was in the ordinary course
of the Partnership’s business and whether Comerica had notice that
Fred Koelling lacked authority to sign the Comerica Deed of Trust
on behalf of the Partnership. The Committee treated the first
issue as a legal issue and cited authority to support its
contention that executing a deed of trust was not an ordinary
course transaction. It presented no evidence as to the latter
factual issue.
The Court concludes that the execution of the Comerica Deed
of Trust was within the ordinary course of the Partnership’s
business. The meaning of the phrase “ordinary course” in this
context is not the same as its meaning in a bankruptcy context.
The execution of a deed of trust encumbering all the real property
of a chapter 11 bankruptcy debtor would clearly not be viewed as
in the ordinary course of business. However, in the nonbankrupt
commercial world, the phrase is much less restrictive.21 A
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been dissolved by agreement of the partners, a general partner
borrowed money for his own benefit and signed a document
purporting to bind the partnership to a guaranty of the loan.
The Tsakos court noted that, even before dissolution, a guaranty
of the debt of a third party would not normally be viewed as in
the ordinary course of a partnership’s business. Tsakos, 12
Cal. App. 4th at 93. By contrast, in Owens v. Palos Verdes
Monaco, 142 Cal. App. 3d 855, 866-67 (1983), the court held that
the sale of a partnership’s sole asset was within its ordinary
course of business where the purpose of the partnership was to
sell the asset. Here, the Fixtures Deed of Trust was part of
the transaction by which Koelling-McNeill obtained the funds
necessary to its business operations. It is difficult to see
how this transaction could be viewed as outside the
partnership’s ordinary course of business.
22Burlingame Funding also asserts that the Debtor should be
estopped from denying its obligations pursuant to the Fixtures
Deed of Trust after having accepted the benefits of the loans
secured by it. See Nygard v. Dickinson, 97 F.2d 53, 57 (9th Cir.
1938)(knowledge of work done and accepting its benefits may
estop principal from denying authority of agent to contract for
it on principal’s behalf); Cowan v. Tremble, 111 Cal. App. 458
(1931). Because the Court concludes that Burlingame Funding is
entitled to summary adjudication of this issue for other
reasons, the Court need not address this ground.
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transaction is in the ordinary course of a partnership’s business
if the purpose of the transaction is to carry on the business of
the partnership. The execution of the Comerica Deed of Trust
clearly qualifies within that broader definition.22
7. Sufficiency of Fred Koelling’s Signature To Bind Debtor
Paragraph 27 of the Complaint alleges, on information and
belief, that any promissory note, security agreement, or other
loan document not signed by two corporate officers of the Debtor
and not authorized by a valid resolution of the Debtor’s Board of
Directors does not bind the Debtor. It alleges that the following
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documents executed by the Debtor in favor of Comerica fail for
this reason: (1) the Agreement Supplementing Deed of Trust, dated
November 5, 2001, (2) the Assumption/Modification Agreement, dated
November 8, 2001, (3) the Business Loan Agreement, dated April 24,
2002, and (4) the Security Agreement, dated April 24, 2004.
Burlingame Funding seeks summary adjudication of this issue,
declaring it to have no merit as a matter of law. It notes that
Cal. Corp. Code § 208(b) provides that “any contract...made in the
name of a corporation” binds the corporation if it is: (1)
“authorized or ratified by the board,” (2) “done within the scope
of the authority, actual or apparent, conferred by the board,” or
(3) “within the agency power of the officer executing it....”
Burlingame Funding notes that it has in its possession copies of
corporate resolutions and certifications signed by the Koellings,
identifying Fred Koelling as the Debtor’s president, with
authority to contract for the Debtor. Moreover, it argues
that, even without these corporate resolutions, the Court should
find and conclude that it was within Fred Koelling’s apparent or
implied authority to execute these contracts. See Memorial
Hospital Assoc. Of Stanislaus County v. Pacific Grape Prods. Co.,
45 Cal. 2d 634, 637 (1955)(corporation’s president/manager had
implied power to execute pledge agreement).
The Committee responds that, for a contract to be binding on
a corporation, it must be either: (1) authorized by a resolution
of the Board of Directors or (2) signed by both: (a) the president
or a vice-president and (b) the secretary or the treasurer. In
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23The Committee’s citation was incorrect. The Court assumes
that the Committee meant to provide the Supreme Court citation
rather than the lower appellate court citation, particularly
since the year provided in the Committee’s citation was the year
of the Supreme Court decision, not that of the lower court
decision.
24Section 313 provides, in pertinent part, that “any ...
contract ... executed ... between any corporation and any other
person, when signed by ... the president ... and the secretary,
any assistant secretary, the chief financial officer or any
assistant treasurer of such corporation, is not invalidated as
to the corporation by any lack of authority of the signing
officers in the absence of actual knowledge on the part of the
other person that the signing officers had no authority to
execute the same.” Cal. Corp. Code § 313.
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support of this contention, it cites Snukal v. Flightways Mfg., 23
Cal. 4th 754 (2000)23 and Cal. Corp. Code § 313.24 To date, the
Committee notes, Burlingame Funding has not produced competent
evidence of a corporate resolution authorizing Fred Koelling to
sign the specified documents. The copies of the resolutions
produced by Burlingame Funding are either unsigned or relate to
other lending transactions. In addition, they are merely attached
to the declaration of Janice Judson, who the Committee contends is
not competent to authenticate them.
Moreover, the Committee asserts that, even if such corporate
resolutions exist and are properly authenticated, they would be
invalid. A corporation must have three directors if it has at
least three shareholders. See Cal. Corp. Code § 212(a). The
Debtor has always had three shareholders. However, the Debtor
appears to have had only two directors when the contracts
specified in paragraph 27 of the Complaint were signed. Because
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it was improperly constituted, the Committee reasons, the Board
did not have authority to elect Fred Koelling as President of the
Debtor. Therefore, Fred Koelling had no authority to contract for
the Debtor.
Finally, the Committee contends that the case law with respect
to apparent and implied corporate authority is conflicting. In
support of this contention, it cites two purported conflicting
decisions: i.e., Citizens’ Securities Co. v. Hammel, 14 Cal. App.
564 (1910) and McKiernan v. Lenzen, 56 Cal. 61, 64 (1880). The
Committee asserts that, to a large degree, this case law has been
supplanted by Cal. Corp. Code § 313. For this reason, the
Committee argues that determining whether Fred Koelling had the
apparent authority to bind the Debtor with respect to the
specified contracts should await an evidentiary hearing.
In reply, Burlingame Funding contends that the Court should
summarily adjudicate that the contracts bind the Debtor because:
(1) it was within Fred Koelling’s apparent authority to sign them
on the Debtor’s behalf; see Mem’l Hosp. Assoc. of Stanislaus
County v. Pacific Grape Prods. Co. 45 Cal. 2d 634 (1955); Snukal
v. Flightways Mfg., Inc. 23 Cal. 4th 754 (2000); and (2) the Debtor
should be estopped from contending that it is not bound by them
after having accepted the benefits of the contracts; see Nygard v.
Dickinson, 97 F.2d 53, 57 (9th Cir. 1938); Cowan v. Tremble, 111
Cal. App. 458 (1931).
The Court concludes that Burlingame Funding is entitled to
summary adjudication of this issue. The Committee may be correct
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25In Snukal, an individual who was the president, secretary,
and treasurer for a corporation leased a private residence in
the name of the corporation. When he defaulted on the rent, the
lessor sued the corporation for the debt. The corporation
defended on the ground that the board of directors had not
authorized the individual to enter into the lease. It contended
that Cal. Corp. Code § 313 did not apply because the individual
indicated only his office as president when he signed the lease.
It also contended that to gain the conclusive presumption of
authority granted by section 313, the lease had to have been
signed by two individuals holding the offices specified. The
California Supreme Court rejected both contentions. Snukal, 23
Cal. 4th at 776-87.
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that Burlingame Funding cannot rely on Cal. Corp. Code § 313 to
establish that the contracts bind the Debtor. Clearly, the sole
signature of Fred Koelling, the Debtor’s president, was not
sufficient to give rise to the conclusive presumption of authority
created by Cal. Corp. Code § 313. If the Debtor’s Board was
improperly constituted, as it appears to have been, any corporate
resolution adopted by it may have been invalid.
However, Cal. Corp. Code § 313 is not the only means by which
it can be established that a contract executed by a corporate
officer binds the corporation. As noted in Snukal, “Corporations
Code section 313 leaves intact the other party’s ability to assert
the validity of an instrument under existing common law doctrines
when the signatory or signatories do not hold the corporate
offices specified in that statute.” Snukal, 23 Cal. 4th at 783.25
The cases cited by the Committee for its contention that the
law governing apparent authority is conflicting are not
particularly persuasive, if for no other reason than their age.
More current case authority clearly establishes that “[w]here the
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president of a corporation is also its general manager, having the
power to superintend and conduct its business, he has implied
authority to make any contract or do any other act appropriate in
the ordinary course of its business.” Mem’l Hosp., 45 Cal. 2d at
637. As discussed with respect to the preceding issue, ordinary
course should not be understood in the same sense that it is used
by the Bankruptcy Code. The Court views contracts executed with
a corporation’s primary lender to enable the corporation to obtain
the operating capital required for its business to be in the
ordinary course of the corporation’s business.
Moreover, the Court agrees that the Debtor is estopped from
denying that it is bound by the contracts after having accepted
the loans and used the funds. See McGirr v. Gulf Oil Corp., 41
Cal. App. 3d 246, 257 (1974)(principal was estopped from asserting
agent’s lack of authority to enter into real estate contract where
principal had had complete knowledge of the circumstances and had
accepted the benefits of the contract).
8. Was Burlingame’s Deed of Trust Altered After Its Execution?
Paragraphs 34 of the Complaint alleges, on information and
belief, that the Burlingame Deed of Trust was altered after it was
executed by the Debtor and is therefore invalid. Paragraph 35
alleges, on information and belief, that the acknowledgement of
the Burlingame Deed of Trust is incorrect, inadequate and/or
altered and is therefore invalid. Paragraph 36 alleges that
certain of the alleged advances upon which Burlingame’s claims are
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based were not actually made to or for the benefit of the Debtor
and thus do not constitute valid debts of the Debtor.
Burlingame asks that these claims be “disregarded” or
“stripped” from the complaint. It views them as allegations of
fraud which must be stated with particularity. See Fed. R. Civ.
Proc. 9(b); Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1105 (9th
Cir. 2003). Burlingame Funding makes the same request with
respect to the allegations in paragraph 28: i.e., that the
acknowledgements of the Agreement Supplementing Deed of Trust and
the Assumption/Modification Agreement, both of which were executed
by the Debtor in favor of Comerica, are incorrect and/or
inadequate and are therefore invalid, unenforceable and/or
avoidable.
The Committee responds that Rule 9(b) is irrelevant as the
paragraphs in question contain no allegations of fraud. Moreover,
it asserts that a challenge based on Rule 9(b) is properly raised
by a motion to strike, not a motion for summary judgment. If
granted, the Committee is entitled to leave to amend to state its
claim with more specificity. In reply, Burlingame argues that
summary judgment should be granted because, once again, the
Committee has failed to provide any evidence that the Burlingame
Deed of Trust or any of the related documents were altered after
they were signed. It contends that it challenged this allegation
in its countermotion for summary judgment. Moreover, it disagrees
with the Committee’s contention that the allegations do not assert
fraud.
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The Court agrees with the Committee that the allegations in
paragraphs 28, 34, 35, and 36 do not assert claims of fraud or
fraudulent conduct. There is no allegation that any alteration
was made with the intent to deceive. Therefore, Rule 9(b) of the
Federal Rules of Civil Procedure does not apply.
If Burlingame and Burlingame Funding were correct that, in
their counter-motion, they had asserted that the documents were
not altered, they would be entitled to a summary adjudication with
respect to this issue given the Committee’s failure to produce any
evidence that they were altered. As discussed above, the
Committee would have had the burden of producing evidence of
alteration. However, Burlingame and Burlingame Funding do not
cite the page of their counter-motion on which they make this
assertion, and the Court has been unable to locate it. Therefore,
the request for summary adjudication of this issue will be denied.
9. Was Interest Rate on Burlingame’s Deed of Trust Usurious?
Paragraph 37 of the Complaint alleges, on information and
belief, that certain of the debts upon which Burlingame’s claims
are based include usurious interest or unconscionable charges and
are therefore unenforceable. The California Constitution imposes
a cap on the interest rate that entities may charge on loans.
However, certain lenders are exempt from its provisions. See Cal.
Fin. Code § 22002.
In its motion, Burlingame asserts that is a “certified
lender,” licensed by the California Department of Corporations and
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26Burlingame also contends that the burden is on the
Committee, as the party opposing summary adjudication, to
produce evidence that the loans made Burlingame did not comply
with the second two requirements: i.e., that the loan was made
from Burlingame’s licensed place of business (unless the Debtor
requested that it be made elsewhere) and that the license was
prominently posted at that place of business. The Court is
unwilling to grant summary adjudication of this issue on this
ground for two reasons. First, the argument was raised for the
first time in Burlingame’s reply. As a result, the Committee
has not had an opportunity to reply to it. Second, it is not
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thus exempt from the usury law. See Cal. Fin. Code § 22002. It
asks the Court to summarily adjudicate this claim in its favor.
The Committee responds that the burden is on the Burlingame to
establish the right to an exemption from usury laws. See Cal.
Fin. Code § 22053. To do so, Burlingame must prove that it was
licensed when the loan was made, that the loan was made from its
licensed place of business (or the borrower requested that it be
made at some other location), and (iii) that the lender’s license
was prominently posted at its licensed place of business. Cal.
Fin. Code §§ 22151 & 22155. Burlingame has only provided evidence
that Burlingame held a license at the time it made the loan to the
Debtor. It has not offered any evidence on the other two points.
In reply, Burlingame argues that its right to the exemption
is created by the California Constitution. According to
Burlingame, §§ 22151 and 22155 are regulatory in nature, and the
failure to satisfy them does not result in a forfeiture of the
lender’s right to claim the exemption. It does not cite any
authority for this contention.26
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clear to the Court that it is an element of a plaintiff’s claim
for usury. It seems more likely that the defendant must assert
that it is exempt as a defense to a usury claim. A plaintiff
should not be required to produce evidence to counter a defense
asserted by a defendant to resist a motion for summary
adjudication. The parties have not addressed these issues.
Therefore, summary adjudication on this ground is inappropriate.
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Article XV, section 1, of the California Constitution
establishes a limit on the rate of interest that may be charged on
loans or forbearances of “any money, goods or things in action, or
on accounts after demand....” However, it provides an exemption
from this limitation for certain types of lenders: e.g., banks,
credit unions, pawnbrokers. Included in the list of exempt
lenders is the catchall phrase “or any other class of persons
authorized by statute....” Cal. Const., art. XV, sec. 1.
Burlingame does not fit into any of the specified categories of
lenders. Thus, any right to an exemption from the usury
limitations on the interest rate it can charge is created by
statute: i.e., the California Finance Code.
The statute upon which Burlingame relies for its exemption is
the California Finance Lenders Law, Cal. Fin. Code § 22000 et seq.
The statute contains four articles: Article 1 Definitions,
beginning with section 22000, Article 2 Exemptions, beginning with
section 22050, Article 3 Licensing, beginning with section 22100,
and Article 4 Regulations, beginning with section 22150. Section
22002, which is contained in Article 1, provides that the statute
creates a class of exempt persons pursuant to Section 1 of Article
XV of the California Constitution.” Section 22009, also contained
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in Article 1, defines “finance lender” to include any person
engaged in making commercial loans.
The primary thrust of Article 2 is to specify those persons
and transactions to which the statute does not apply. Section
22050(e), which is contained in this article, provides that the
statute does not apply to commercial lenders which make no more
than one loan in a twelve month period. Neither Burlingame nor
the Committee has discussed whether Burlingame is removed from
coverage by the statute pursuant to this provision or the effect
of that removal. Section 22053, which is also contained in
Article 2, states that the burden of proving an exemption is upon
the person claiming it.
Article 3, entitled Licensing, contains section 22100 which
provides, in pertinent part, that “[n]o person shall engage in the
business of a finance lender ... without obtaining a license from
the commissioner. Section 22151 and 22155, the sections primary
relied upon by the Committee, are contained in Article 4, entitled
“Regulations.” Section 22151 requires the licensee to display the
license conspicuously in the place of business authorized in its
license. Section 22155 provides that no licensee shall make
commercial loans at any other place of business than that named in
the license unless the borrower requests that it do so.
Burlingame does not appear to contend that a borrower could
not assert a claim of usury against an unlicensed finance lender.
Therefore, the fact that a statutory requirement is not contained
in Article 2, entitled “Exemption,” should not be determinative of
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whether its violation gives rise to a private right of action.
Moreover, the fact that §§ 22151 and 22155 appear in an article
entitled “Regulations” is not determinative of the remedy
available for their violation. “Whether a regulatory statute
creates a private right of action depends on legislative intent.”
Goehring v. Chapman Univ., 121 Cal. App. 4th 353, 375-79
(2004)(statute requiring unaccredited law schools to provide
students with disclosure statements after receiving tuition
payments created private right of action, entitling students to
refund of tuition despite absence of legislative history
indicating intent to create right of private action and absence of
any specific statutory remedy).
In determining legislative intent, the first place to look is
at the words of the statute, given their ordinary meaning and
construed in their statutory context. Id. Section 22001 of the
California Financial Code provides that the statute shall be
liberally construed and applied to promote the statute’s
underlying purposes. Its underlying purposes include ensuring
“an adequate supply of credit to borrowers[,]” protecting
“borrowers against unfair practices by some lenders, having due
regard for the interests of legitimate and scrupulous lenders[,]”
and permitting and encouraging the development of fair and
economically sound lending practices[.]” Cal. Fin. Code §
22001(a)(1), (4), & (5).
Based on these stated purposes, the Court is inclined to
conclude that a violation of §§ 22151 or 22155 does give rise to
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a private right of action. The requirement that a commercial
lender be licensed does little, by itself, to protect the
borrower. The principal benefit is conferred by the requirement
that the license be posted in the lender’s authorized place of
business and that the loan transaction be made there. By this
means, the borrower is put on constructive notice that the lender
is entitled to charge a usurious rate of interest.
However, because this issue has not been adequately briefed
and because, as discussed above, Burlingame may not be covered by
the statute at all, the Court will make no ruling on this issue at
this time other than to deny Burlingame’s motion for summary
adjudication.
CONCLUSION
A. Committee’s Motion: The Court summarily adjudicates the
following issues:
1. The Lost Note and the Revolving Note are not cross-
collateralized by the Comerica Deed of Trust.
2. Burlingame Funding does not have a security interest in
any equipment leased by the Debtor pursuant to “true leases” but
does have a lien on the leases themselves as contract rights.
3. Neither of the Lenders has a security interest in the
Debtor’s deposit accounts.
4. Neither of the Lenders has a security interest in the
Debtor’s two delivery trucks.
5. The Real Property Tax Lien is senior in priority to any
deeds of trust held by the Lenders on the Real Property.
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6. GECC’s lien on the grid flooring and other fixtures is
senior to the Lenders’ deeds of trust on the Real Property.
7. Article 3 of the California Commercial Code only applies
to negotiable instruments.
8. The Burlingame and Burlingame Funding Proofs of Claim are
inadequate to establish a prima facie case in support of their
claims. As a consequence, Burlingame and Burlingame Funding must
present sufficient evidence to prove the validity and amount of
their claims.
9. Burlingame’s secured claim is undersecured.
The Court denies the Committee’s request for summary
adjudication of all other issues. Counsel for the Committee
is directed to submit a proposed form of order in accordance with
the Court’s rulings.
B. Lenders’ Cross-Motion: The Court summarily adjudicates the
following issues:
1. Burlingame Funding has a perfected security interest in
the Fixtures to the extent the Fixtures were acquired before or
within four months of the transfer of the Real Property and
Fixtures to the Debtor.
2. Burlingame Funding’s failure to record an assignment of
the Comerica Deed of Trust or to file an assignment of the
security interest in the Debtor’s personal property did not render
either security interest unperfected.
3. The Debtor’s failure to sign the Amendments to Financing
Statements 177 and 476 did not render the amendments invalid.
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4. Fred Koelling’s signature on the Comerica Deed of Trust
was sufficient to bind the Partnership.
5. Fred Koelling’s signature on the contracts specified in
paragraph 27 of the Complaint was sufficient to bind the Debtor.
The Court denies Burlingame’s and Burlingame Funding’s request
for summary adjudication of all other issues. Counsel for
Burlingame and Burlingame Funding is directed to submit a proposed
form of order in accordance with these rulings.
END OF DOCUMENT
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COURT SERVICE LIST
Philip J. Nicholsen
221 Main St., Ste. 740
San Francisco, CA 94105
Tobias S. Keller
Pachulski, Stang, Ziehl,
Young, Jones & Weintraub P.C.
Three Embarcadero Center, Ste. 1020
San Francisco, CA 94111-4023
Robert S. Moore
Allen Matkins Leck Gamble
& Mallory LLP
Three Embarcadero Center, 12th Floor
San Francisco, CA 94111
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