Jeffrey Lew Liddle, et al.

UNITED STATES BANKRUPTCY COURT 	FOR PUBLICATION
SOUTHERN DISTRICT OF NEW YORK
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In re: 	Chapter 11
Jeffrey Lew Liddle, 	Case No. 19-10747 (SHL)
Debtor.
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MEMORANDUM OF DECISION
A P P E A R A N C E S:
FOLEY HOAG LLP
Attorneys for Debtor
1301 Avenue of the Americas
25th Floor
New York, New York 10019
By: 	William F. Gray, Jr., Esq.
Alison Bauer, Esq.
James Fullmer, Esq.
DAVID HUTCHER & CITRON LLP
Attorneys for Counsel Financial II LLP
605 Third Avenue
New York, New York 10158
By: 	David H. Wander, Esq.
Michael Wexelbaum, Esq.
Michael D. Katz, Esq.
SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court is a dispute about the ability of Jeffrey Lew Liddle, the above-captioned
debtor (“Liddle”), to use cash collateral over the objection of creditor Counsel Financial II LLC
(“CFII”). CFII contends that it has a perfected security interest and lien in cash proceeds from
the sale of a real property owned in part by Liddle. Liddle contends that CFII does not have a
perfected security interest in the sale proceeds. The question at issue is whether the transfer of
the sale proceeds into an escrow account held by Liddle’s attorney pursuant to a state court
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stipulation and order perfected a security interest for CFII under Sections 9-313(a) and (c)(2) of
the New York Uniform Commercial Code (the “N.Y. U.C.C.”). For the reasons set forth below,
the Court finds that it does not.
BACKGROUND
There are no disputes as to the relevant facts. CFII entered into a Security Agreement on
August 5, 2016 (the “CFII Security Agreement”) with Liddle’s law firm, Liddle & Robinson,
L.L.P. (“L&R”) as borrower. See CFII Security Agreement at 30, attached as Ex. C to Letter of
David Wander [ECF No. 55-3];1 Mem. of Law by Counsel Fin. II LLC in Supp. of its Perfected
Security Interest in and Lien on Cash Collateral at 2 (“CFII Brief”) [ECF No. 74]. Pursuant to
the CFII Security Agreement, Liddle and four other people (collectively, the “Debtors”)2 granted
CFII a security interest in “Collateral”, which was defined as follows:
All of each Debtor’s right, title and interest in all Goods (including, Equipment,
Fixtures and Inventory), Money, Instruments (including Promissory Notes),
Accounts, Deposit Accounts, Chattel Paper, Investment Property, Letter-of-Credit
Rights, Documents and General Intangibles (including payment intangibles),
Commercial Tort Claims described in the Questionnaire, Insurance Proceeds and
any other personal property (whether or not subject to the UCC), and all interest,
dividends and other distributions thereon paid and payable in cash or in property;
and all replacements and substitutions for, and all accessions and additions to, and
all profits, offspring, Products and other Proceeds of, all of the foregoing.
CFII Security Agreement at 30 (emphasis added). The CFII Security Agreement was executed
to secure L&R’s performance on a Revolving Promissory Note, dated August 5, 2016 (the “CFII
Note”). See CFII Note, attached as Ex. A to Letter of David Wander [ECF No. 55-1]. Liddle
and his former law partners also executed a Guaranty of Payment and Performance, dated
1 	Unless otherwise specified, references to the Electric Case Filing (“ECF”) docket are to the above-
captioned proceeding.
2 	The Security Agreement was also entered into by L&R’s former partners: Blaine H. Bortnick, James Ryan
Hubbard, and Christine A. Palmieri. See CFII Security Agreement at 30. Jeffrey Liddle, Blaine H. Bortnick, James
Ryan Hubbard, and Christine A. Palmieri are each defined under the CFII Security Agreement as “Debtor” and
collectively with L&R, as “Borrower”, as the “Debtors.” Id.
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August 5, 2016 that guaranteed L&R’s performance under the CFII Note. See Guaranty of
Payment and Performance, attached as Ex. B to Letter of David Wander [ECF No. 55-2].
In 2018, L&R defaulted on the CFII Note. See Aff. of Paul Cody ¶ 3 (the “Cody
Affidavit”), attached as Ex. I to Resp. by Counsel Financial II LLC to Debtor’s Motion (I) Under
11 U.S.C. §§ 105, 524 and 543 for Turnover of Property by Escrow Agent or Custodian; and (II)
Under 11 U.S.C. § 363 for Use of Cash Collateral [ECF No. 24-8]; see also CFII Brief at 10. In
September 2018, CFII filed a motion for summary judgment in lieu of a complaint against L&R
and Liddle in the Supreme Court of the State of New York, Erie County. See Counsel Financial
II LLC v. Liddle & Robinson LLP, Jeffrey L. Liddle, Blaine H. Bortnick and James Ryan
Hubbard, Index No. 814703/2018 (the “Lawsuit”). CFII subsequently became aware that Liddle
was in the process of selling an apartment he owned jointly with his wife, Tara Liddle, in a
cooperative apartment building located at 11 Fifth Avenue, New York, New York (the “N.Y. Co-
op”), and CFII sought a temporary restraining order and an order of attachment from the state
court. See Cody Aff. ¶¶ 1, 62-76; CFII Brief at 6. On January 14, 2019, the state court issued an
order granting CFII a temporary restraining order preventing the disbursement of proceeds from
any sale of Liddle’s real property. See Second Amended Order to Show Cause (the “TRO”),
attached as Ex. P to Letter of David Wander [ECF No. 55-16]. The TRO required that the sale
funds from the N.Y. Co-op be held in escrow by Mr. Liddle while the request for an order of
attachment was decided. More specifically, the TRO provided that:
pending a hearing and determination on the Motion, defendant Jeffrey Liddle, his
designees, and/or any person or entity acting on his behalf, are hereby restrained
and prohibited from transferring, dissipating, or otherwise disposing of any
proceeds of any sales of Mr. Liddle’s residential real properties located at . . . 11
Fifth Avenue, Apts. 19M and 19N, New York, New York …. which funds shall
be held in escrow by Mr. Liddle pending the determination of this Motion.
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Id. at 2 (emphasis added). Less than a month later, the state court signed a Stipulation and Order
to allow the closing of the sale of the N.Y. Co-op notwithstanding the parties’ existing legal
dispute. See Stipulation and Order (the “Stipulated Order”), attached as Ex. Q to Letter of David
Wander [ECF No. 55-17]. Consistent with the spirit of the TRO, the Stipulated Order instructed
that:
the net proceeds of sale (i.e., the sales price of $6,600,000.00 less the eleven
authorized payments listed in Paragraph 2 hereof) shall be held in escrow by
Diane C. Nardone, Esq. (“Nardone”), the closing attorney for Liddle and Tara
Liddle on the sale of the Apartment, in her Attorney IOLA Account, subject to the
TRO pending the hearing and determination of Plaintiff’s motion for an order of
attachment and a further order of this Court disposing of that motion for an order
of attachment.
Id. ¶ 3 (emphasis added). It further provided, “Nardone shall confirm her agreement to serve as
Escrow Agent pursuant hereto and shall signify her acknowledgement of and agreement to be
bound by the escrow provisions of this Stipulation and Order by signing where indicated below.”
Id. ¶ 6. The Stipulated Order was signed by Diane C. Nardone, Esq. “[a]s Escrow Agent for
Jeffrey Liddle and Tara Liddle.” Id. at 4.
An order of attachment ultimately was entered in CFII’s benefit on March 7, 2019 (the
“Order of Attachment”), as to sale proceeds from the N.Y. Co-op that were “currently held in
escrow by . . . Nardone . . . , counsel for Liddle in connection with the sale . . . .”; the Order of
Attachment required Nardone to transfer into and deposit the funds with the Registry of the
Court. Order of Attachment at 3, attached as Ex. D to Letter of David Wander [ECF No. 114-4].
Before the sale proceeds could be transferred to the state court, Liddle filed a Chapter 11 petition
in this Court. See Chapter 11 Voluntary Petition for Individual, filed March 11, 2019 [ECF No.
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1]. The Order of Attachment was not served on the county sheriff before the filing of this
bankruptcy.3
After the filing of this bankruptcy, the Debtor filed a motion for use of the cash collateral,
which identified the cash collateral as Liddle’s fifty percent ownership in the sale proceeds from
the N.Y. Co-op. See Debtors’ Mot. for Entry of Interim and Final Orders (I) Authorizing the
Debtors to Use Cash Collateral, (II) Scheduling a Final Hearing and (III) Granting Related
Relief at 2 (the “Cash Collateral Motion”) [ECF No. 37]. The Cash Collateral Motion does not
name CFII as a secured party. See id. ¶ 4. 4 CFII filed an objection to the use of cash collateral
based on CFII’s purported security interest in the sale proceeds. See Obj. by Counsel Financial
II LLC to Debtor’s Second Cash Collateral Motion [ECF No. 47].
Liddle argues that CFII did not perfect a security interest in the sale proceeds because
CFII never served the state court Order of Attachment on the county sheriff. See Debtor’s Resp.
and Mem. of Law in Opp. to Counsel Financial II LLC’s Claim of a Perfected Security Interest
In and Lien on Certain Cash Collateral at 9 (the “Response”) [ECF No. 84]. CFII contends that
it is not relying on the order of attachment but instead upon the placement of the escrow funds
with Nardone pursuant to the Stipulated Order as constituting possession of the funds by CFII
under the N.Y. U.C.C. More specifically, CFII contends that the Stipulated Order made Nardone
an agent of CFII for purposes of Section 9-313(a). See CFII Brief at 11-15; see also Reply Mem.
3 	N.Y. C.P.L.R. 6203 provides in relevant part: “Where a plaintiff has delivered an order of attachment to a
sheriff, the plaintiff’s rights in a debt owed to the defendant or in an interest of the defendant in personal property
against which debt or property a judgment may be enforced, are superior to the extent of the amount of the
attachment to the rights of any transferee of the debt or property . . . .” N.Y. C.P.L.R. 6203.
4 	The Cash Collateral Motion states, “CF II, which claims a security interest in the Cash Collateral has not
consented to the relief requested herein, but as will be established with all reasonable likelihood, CF II does not have
a properly perfected security interest in the Sale Proceeds. CF II’s sole basis for claiming a security interest in the
Sale Proceeds is through an order of attachment which was not perfected.” Cash Collateral Motion ¶ 4. The Cash
Collateral Motion lists White & Wolnerman, PLLC as the sole secured party. See id.
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of Law by Counsel Financial II LLC in Further Support of its Perfected Security Interest in and
Lien Upon the Cash Collateral at 12-13 (the “Reply”) [ECF No. 95]. In the alternative, CFII
contends that—even if the funds remained outside CFII’s possession—the requirements for
perfection by recording under Section 9-313(c) of the N.Y. U.C.C. were satisfied. See id.5
DISCUSSION
A. Security Interest Under N.Y. U.C.C. Section 313(a)
Under the N.Y. U.C.C., a party may perfect a security interest in money by taking
possession of it. More specifically, Section 9-313(a) provides for perfection by possession or
delivery, whereby “a secured party may perfect a security interest in tangible negotiable
documents, goods, instruments, money, or tangible chattel paper by taking possession of the
collateral.” N.Y. U.C.C. § 9-313(a); see also N.Y. U.C.C. § 9-312(b)(3) (“Except as otherwise
provided in Section 9-315 (c) and (d) for proceeds . . . a security interest in money may be
perfected only by the secured party’s taking possession under Section 9-313.”).
Possession is not defined in Article 9. The Official Comments note that the Section
“adopts the general concept as it developed under former Article 9.” See Raiton v. G&R Prop.
(In re Raiton), 139 B.R. 931, 937 (B.A.P. 9th Cir. 1992) (“[I]t has been left to the courts to
determine what constitutes possession.”) (citations omitted); Marlow v. Rollins Cotton Co. (In re
Julien Co.), 146 F.3d 420, 424 (6th Cir. 1998) (citing commentary for proposition that
possession was left undefined for the courts to determine); Bank R.I. v. Mixitforme, Inc., 2007
R.I. Super. LEXIS 9, at *40 (R.I. Super. Ct. Jan. 11, 2007). “[U]nder former Article 9, in
5 	Liddle’s initial brief addressed a number of potential arguments for CFII’s security interest. See Response
at 5-13. But CFII has not asserted most of these as a basis for its position, instead relying solely on the placement of
the sale proceeds in escrow with Nardone. See CFII Brief at 11-15; see also Reply at 12-13.
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determining whether a particular person has possession, the principles of agency apply.” N.Y.
U.C.C. § 9-313 cmt. n. 3.
The Official Comments state that “if the collateral is in possession of an agent of the
secured party for the purposes of possessing on behalf of the secured party, and if the agent is not
also an agent of the debtor, the secured party has taken actual possession. . . .” N.Y. U.C.C. § 9-
313 cmt. n. 3. But this not true where the agent “is so closely connected to or controlled by a
debtor that the debtor has retained effective possession. . . .” Id. Courts have observed that
“[t]he rationale underlying perfection by possession is that the debtor’s lack of possession
coupled with actual possession by the creditor, the creditor’s agent or the bailee serves to provide
notice to prospective third party creditors that the debtor no longer has unfettered use of [his]
collateral.” Hassett v. Blue Cross & Blue Shield of Greater N.Y. (In re O.P.M. Leasing Services,
Inc.), 46 B.R. 661, 670 (Bankr. S.D.N.Y. 1985) (finding that under U.C.C. Section 9-305, which
in the Revised Article 9 was replaced by Section 9-313, the transfer of funds into an escrow
account subject to an escrow agreement that created the security interest in the money in
question sufficiently satisfied the possession requirement for perfection by the secured party)
(internal citations omitted); cf. In re Singer Prod. Co., 102 B.R. 912, 925 (Bankr. E.D.N.Y.
1989) (“[U]nless a putative secured party's possession of pledged instruments rises to the level of
‘actual and exclusive possession’ as required at common law, his security interest has not been
perfected. . . . The rationale for this rule is really quite simple—the debtor’s lack of possession
coupled with actual possession by the creditor, the creditor’s agent or the bailee serves to provide
notice to prospective third party creditors that the debtor no longer has unfettered use of [its]
collateral. . . .”) (internal citations omitted).
Applying these principles here, the Court concludes that CFII has not perfected a security
interest by possession under Section 9-313(a). CFII contends that by appointing Nardone to act
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as escrow agent, the Stipulated Order essentially made Nardone CFII’s agent and perfected
CFII’s security interest in the cash proceeds once Nardone took possession of the funds. See
CFII Brief at 11 (“When Nardone took possession of the Sale Proceeds, CF2’s security interest
in and lien upon the Cash Collateral became perfected under applicable state law. Specifically,
under N.Y. U.C.C. § 9-313(a), CF2’s security interest and lien were perfected when Nardone
took ‘possession’ of the Sale Proceeds as CF2’s escrow agent.”). But Nardone was holding the
sale proceeds as an agent of the Debtor, not for CFII. That is, in fact, exactly what the Stipulated
Order says. See Stipulated Order at 4 (signature block of the Stipulated Order specifying that
Nardone is the “Escrow Agent of Jeffrey Liddle and Tara Liddle”). This arrangement is
consistent with the TRO entered less than a month earlier, which specifically provided that the
sale proceeds “shall be held in escrow by Mr. Liddle pending the determination of this Motion.”
TRO at 2 (emphasis added). Additionally, the Stipulated Order as well as the subsequent Order
of Attachment both refer to Nardone as the Liddles’ counsel. See id. at 2-3; see also Order of
Attachment at 3 (identifying Nardone as counsel to Liddle). And consistent with Nardone’s
status as Lidddle’s counsel, the sale proceeds were held in Nardone’s attorney IOLA account.
See Stipulated Order ¶ 3.
CFII relies, among other things, on the Official Comments to the UCC that the prospect
of dual agency is not dispositive of possession. See N.Y. U.C.C. § 9-313 cmt. n. 3. But the
Official Comments carve out situations where, as here, the agent is “so closely connected to or
controlled by a debtor that the debtor has retained effective possession. . . .” Id. This exception
is satisfied here because Nardone was identified as escrow agent only for the Liddles, which is
consistent with her pre-existing relationship as the Liddle’s counsel for the sale of the N.Y. Co-
op. See Stipulated Order ¶ 3 (identifying Ms. Nardone as “the closing attorney for Liddle and
Tara Liddle on the sale of the Apartment. . . .”). By contrast, there is nothing in the Stipulated
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Order—or in any document—that identifies Nardone as CFII’s agent, or even describes Nardone
as acting more generally as the agent for the parties. See 1A Secured Transactions Under the
UCC § 6A.04[2][b] (“The possession-by-agency technique, which continues to be available
today under Article 9, contemplates the collateral being held or controlled by a party who is
aligned with the secured party.”).
To the extent that CFII argues that an agency relationship between Nardone and CFII
should be implied in this circumstance, that argument runs afoul of principles of agency. It is
well established that the formation of an agency relationship requires a manifestation of consent
from both parties. See Restatement (Third) of Agency §1.01 (2006) (“Agency is the fiduciary
relationship that arises when one person (a ‘principal’) manifests assent to another person (an
‘agent’) that the agent shall act on the principal's behalf and subject to the principal's control, and
the agent manifests assent or otherwise consents so to act.”); see also In re Shulman Transport
Enterprises, Inc., 744 F.2d 293, 295 (2d Cir. 1984) (“An essential characteristic of an agency
relationship is that the agent acts subject to the principal’s direction and control.”); cf. Qube
Films Ltd v. Padell, 2016 U.S. Dist. LEXIS 25328, at *4 (S.D.N.Y. Mar. 1, 2016) (“The scope of
an Escrow Agent's fiduciary duty is defined by the scope of its contractual duty under the
Escrow Agreement.”). Thus, “parties to an escrow agreement cannot impose upon
[the escrow agent] any obligations in addition to its limited duties under the express terms of its
contract.” H&H Acquisition Corp. v. Fin. Intranet Holdings, Inc., 669 F.Supp. 2d 351, 363
(S.D.N.Y. 2009) (citations and quotations omitted). There is no evidence that Nardone was
willing to act as agent on behalf of CFII, which is not surprising given that she was serving as
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counsel to the Liddles. Without Nardone as CFII’s agent, there is no basis to conclude that CFII
obtained possession of the sale funds when they were transferred to Nardone. 6
CFII emphasizes that possession under U.C.C. Article 9 focuses in significant part on the
importance of notice to third parties of a potential encumbrance on a debtor’s property. See CFII
Brief at 13-14; see also In re Copeland, 531 F.2d 1195, 1203-04 (3d Cir. 1976) (“Historically
and prior to the Code, possession of collateral by a creditor or third party has served to impart
notice to prospective creditors of the possessor’s possible interest therein. The Code carries
forward the notice function which the creditor’s possession formerly provided. . . [I]t is clear that
possession by the debtor or an individual closely associated with the debtor is not sufficient to
alert prospective creditors of the possibly that the debtor’s property is encumbered. . . .”);
Ingersoll-Rand Fin. Corp. v. Nunley, 671 F.2d 842, 844-45 (4th Cir. 1982) (“The rationale
underlying perfection pursuant to s 9-305 is that the debtor’s lack of possession coupled with
actual possession by the creditor, the creditor’s agent or the bailee serves to provide notice to
prospective third party creditors that the debtor no longer has unfettered use of [his] collateral.”)
(internal citations and quotations omitted); Hassett v. Blue Cross and Blue Shield of Greater New
York (In re O.P.M. Leasing Services, Inc.), 46 B.R. 661, 670 (Bankr. S.D.N.Y. 1985) (same).
But a focus on notice alone risks ignoring the concepts of control or ownership embedded
in the very idea of “possession.” “Possession” is commonly understood as: “(1) (a) the act of
having or taking into control; (b) control or occupancy of property without regard to ownership;
6 	To support its position on agency, CFII relies on Bank R.I. v. Mixitforme, Inc., 2007 R.I. Super. LEXIS 9
(R.I. Super. Ct. Jan 11, 2007). In Mixitforme, the Rhode Island court found that a stipulated order functioned as an
escrow agreement which created the security interest in question. See id. at *31-36. The Mixitforme court then
determined that there was perfection by possession because “the Registry escrow arrangement made the Court the
equivalent of an ‘agent’ of [the creditor] for purposes of determining possession.” Id. at *43; see also id. at *43-44
(court acknowledged the peculiarity of this conclusion). But respectfully, the Mixitforme decision is quicker to find
an agency relationship than this Court would be, given the concern about casting a court as an agent for one party to
a dispute when a court’s role is to impartially resolve disputes as a neutral arbiter for all parties.
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(c) OWNERSHIP . . . ; (2) something owned, occupied, or controlled : PROPERTY; (3) (a)
domination by something (such as an evil spirit, a passion, or an idea) . . . .” Possession
Definition, Merriam-Webster, https://www.merriam-webster.com/dictionary/possession; see also
In re Singer Prod., 102 B.R. at 925. Such concepts cannot be glossed over when examining an
escrow arrangement, as is the case here. “[A]n escrow is generally defined as a written
instrument entrusted by a grantor to a third party agent or trustee who, in accordance with
instructions, subsequently delivers the instrument to the grantee once certain conditions are met.”
99 Commercial Street, Inc. v. Goldberg, 811 F. Supp. 900, 905 (S.D.N.Y. 1993) (Sotomayer, J.).
“[L]egal title to property placed in escrow remains with the grantor until the occurrence of the
condition specified in the escrow agreement.” Alarmex Holdings, LLC v. Gowan (In re Drier
LLP), 527 B.R. 126, 133 (S.D.N.Y. 2014) (citing In re O.P.M. Leasing, 46 B.R. at 667). The
deposit of funds in escrow creates “in the grantee such an equitable interest in the property that
upon full performance of the conditions according to the escrow agreement, title will vest at once
in him.” Id. (citations omitted). Thus, “[i]n a very real sense, ownership [in an escrow] is held
in stasis, the instrument available neither to grantor nor grantee, awaiting disposition by the agent
in accordance with the terms of the agreement.” 99 Commercial Street, 811 F. Supp. at 906.
The Court’s conclusion about CFII’s lack of possession is further confirmed by the
interim nature of the Stipulated Order. Like the prior TRO, the Stipulated Order appears to have
been entered to maintain the status quo. It did so by permitting the sale of the N.Y. Co-op but
preserving the parties’ rights to the resulting funds pending an adjudication of CFII’s request for
an order of attachment. There is nothing in the Stipulated Order—or elsewhere—to suggest that
the parties intended to fundamentally change their rights from those set forth in the TRO, where
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the money had been specifically placed in the possession of the Liddles.7 CFII’s position is also
undermined by the fact that the Stipulated Order was entered while CFII was seeking—but
before it had been granted—an order of attachment. “Attachment [is] a provisional remedy, with
the object of securing a debt by preliminary levy upon property to conserve it for eventual
execution. . . .” Penoyar v. Kelsey, 150 N.Y. 77, 80 (1896). It is unclear what purpose an order
of attachment would have served if the Stipulated Order is deemed to have already granted CFII
a perfected security interest. Indeed, the Order of Attachment would appear unnecessary under
CFII’s reading. 8
7 	CFII submitted a post-hearing letter where, among other things, it objects to Liddle’s counsel’s argument
on the nature of a TRO and the Stipulated Order as “freezing things in place while the court adjudicates the motion
for an order of attachment.” Letter of David Wander, dated July 1, 2019 at 1 (the “Post-Hearing Submission”) [ECF
No. 114] (quoting Hr’g Tr. 24:22-23 (June 24, 2019) [ECF No. 113]). CFII alleges that this is a new argument
presented after briefing and thus prohibited. See id. CFII’s objection is misplaced. The nature of the Stipulated
Order is central to resolving the question of perfection under Section 9-313. Indeed, the Court specifically raised this
issue from the very beginning of the hearing irrespective of any comments by counsel. See Hr’g Tr. 11:22-12:13
(June 24, 2019). Indeed, this was a question asked by the Court to CFII during oral argument:
[C]ourts will do this sort of thing on a not infrequent basis, where the parties say, we have a
dispute, and to avoid an issue they’ll throw it into an escrow agreement; . . . [A]nd so the
involvement of the court—does it change anything where basically it’s saying that this stipulation
is subject to approval by the Court and basically that the money is essentially being made subject
to the Court’s determination. . . .
Id. at 11:22-12:6. In response to the Court’s question, CFII’s counsel states that CFII “went in for a TRO to lock up
the funds. . . .” Id. at 13:14-15. The Court further elaborated, “So my concern is that I—again, perhaps because of
the Court’s involvement, it seems to essentially say, well, there’s a dispute about attachment and that’s going to be
decided. You want to make sure the money isn’t going to wander off somewhere. So this a protective measure.” Id.
at 17:12-16. The Court specifically asked CFII “would you say you have a security interest based solely on the
escrow agreement, or does it take the act of the court granting the order of attachment, to make it a possessory—to
satisfy the possession requirement of the UCC?” Id. at 19:10-14. Clearly, the Court was interested in this question
from the start of the hearing, and Liddle’s counsel subsequent discussion on the matter was in response to the
Court’s inquiries.
8 	The Court is concerned that adopting CFII’s position would discourage parties from reaching interim
agreements like the Stipulated Order to preserve the status quo while providing a court sufficient time to rule on the
underlying merits of a dispute. After all, what party would risk entering into such a stipulation if it might mean the
party ceded its legal rights on the ultimate issue in dispute?
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B. Security Interest under N.Y. U.C.C. Section 313(c)
CFII also claims a security interest based on Section 9-313(c)(2) of the N.Y. U.C.C.
Under that section, a security interest exists when the collateral is in possession of someone other
than the debtor or the secured party but certain requirements have been met:
With respect to collateral other than certificated securities and goods covered by a
document, a secured party takes possession of collateral in the possession of a
person other than the debtor, the secured party, or a lessee of the collateral from
the debtor in the ordinary course of the debtor’s business, when . . . the person
takes possession of the collateral after having authenticated a record
acknowledging that it will hold possession of collateral for the secured party’s
benefit.
N.Y. U.C.C. § 9-313(c)(2).
A “Record” is defined as “information that is inscribed on a tangible medium or which is
stored in an electronic or other medium and is retrievable in perceivable form.” N.Y. U.C.C. §
9-102(a)(70). The statute defines “Authenticate” as “(A) to sign; or (B) with present intent to
adopt or accept a record, to attach to or logically associate with the record an electronic sound,
symbol, or process.” N.Y. U.C.C. § 9-102(a)(7). Pursuant to Section 9-313(c)(2), the record
must acknowledge that it is being held for the secured party’s benefit. See N.Y. U.C.C. § 9-313
cmt. n. 4 (“[P]erfection does not occur unless the third person authenticates an acknowledgement
that it holds possession of the collateral for the secured party’s benefit.”); see also Heyer v.
Conesus Milk Producers Coop. Ass’n (In re Clayson), 341 B.R. 137, 140 (Bankr. W.D.N.Y.
2006) (“To establish possession for purposes of perfection, it no longer suffices to show that a
bailee had received notification of a security interest. Rather, the bailee must acknowledge that
it possesses on behalf of the secured creditor and that acknowledgement must be in a record.”)
(emphasis added); Mixitforme, 2007 R.I. Super. LEXIS 9, at *42 (“Section 313(c) serves as a
safety measure for parties when it is uncertain whether the person in possession would be
deemed an agent of the secured party: ‘In some cases, it may be uncertain whether a person who
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has possession of collateral is an agent of the secured party or a non-agent bailee. Under those
circumstances, prudence might suggest that the secured party obtain the person’s
acknowledgement to avoid litigation and ensure perfection by possession regardless of how the
relationship between the secured part[y] and the person is characterized.’”) (quoting N.Y. U.C.C.
§ 9-313 cmt. n. 4).
CFII contends that the Stipulated Order satisfied the requirements of Section 9-313(c)(2)
because it is a record authenticated by Nardone’s signature whereby she agrees to hold the sale
proceeds. See CFII Brief at 15-17. However, for many of the same reasons set forth above, CFII
fails to show that Nardone acknowledged holding the proceeds for CFII’s benefit. The
Stipulated Order states that “Nardone shall confirm her agreement to serve as Escrow Agent
pursuant hereto and shall signify her acknowledgement of and agreement to be bound by the
escrow provisions of this Stipulation and Order by signing where indicated below.” Stipulated
Order ¶ 6. This language stipulated only Nardone’s agreement to be held bound to the escrow
provisions of the Stipulated Order; it does not speak to Nardone’s acknowledgment of holding
the funds for CFII’s benefit. As explained more fully above, the Stipulated Order contemplated
that the funds were held by Nardone as escrow agent for the Liddles, consistent with the TRO,
and thus did not satisfy the requirements of Section 9-313(c)(2).
CONCLUSION
For the reasons above, the Court concludes that CFII does not have a perfected security
interest in the cash proceeds from the sale of the N.Y. Co-op because it did not satisfy the
requirements of Section 9-313(a) or Section 9-313(c)(2) of the N.Y. U.C.C. As such, the Court
overrules CFII’s objection to the use of cash collateral on the basis of its purported status as a
secured creditor.
Liddle should settle an order on three days’ notice. The proposed order must be
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submitted by filing a notice of the proposed order on the Case Management/Electronic Case
Filing docket, with a copy of the proposed order attached as an exhibit to the notice. A copy of
the notice and proposed order shall also be served upon counsel to CFII.
Dated: New York, New York
September 6, 2019
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
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