Outsource v. Horizon Communications Technologies CA2/2 ( 2023 )

Filed 3/23/23 Outsource v. Horizon Communications Technologies CA2/2
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions
not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion
has not been certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION TWO
OUTSOURCE, LLC, B314438
Plaintiff and Appellant, (Los Angeles County
Super. Ct. No.
v. 20STCV20862)
HORIZON
COMMUNICATIONS
TECHNOLOGIES, INC. et al.,
Defendants;
SUNWEST BANK,
Third Party Claimant
and Respondent.
APPEAL from an order of the Superior Court of Los
Angeles County, Stephen I. Goorvitch, Judge. Reversed.
Parcells Law Firm and Dayton B. Parcells III for Plaintiff
and Appellant.
Procopio, Cory, Hargreaves & Savitch, Steven Casselberry,
and Stephen Isbell for Third Party Claimant and Respondent.
******
The trial court ruled that the funds held in a bank deposit
account belonged to a third party possessing a security interest in
those funds as collateral for its prior loans to the account holder
rather than to a different creditor who had sued the account
holder and had obtained a writ of attachment against the funds
in the deposit account. This was error, so we reverse.
FACTS AND PROCEDURAL BACKGROUND
I. Facts
A. Horizon borrows money from Sunwest Bank
On August 6, 2018, Horizon Communications Technologies,
Inc. (Horizon) took out two small business loans—each in the
amount of $1 million—from Sunwest Bank (Sunwest).
For each loan, Horizon executed a Commercial Security
Agreement, in which Horizon granted Sunwest a “blanket”
“security interest” in many of its assets as “[c]ollateral to secure
the indebtedness.” That collateral included Horizon’s “deposit
accounts.”
On August 20, 2018, Sunwest filed a UCC financing
statement as to each loan with the California Secretary of State.
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B. Horizon defaults on payment plan with
Outsource
In February 2019, Horizon signed an “Agreement for
Payment Plan” with Outsource, LLC (Outsource). In that
agreement, Horizon admitted that it owed Outsource $433,261.66
for temporary staffing services previously provided by Outsource
pursuant to a 2010 contract between the two entities; Horizon
agreed to pay a discounted amount of $265,190.63 pursuant to a
weekly payment schedule; and Outsource agreed to accept this
discounted amount in lieu of the full amount if Horizon timely
made all scheduled payments.
Horizon stopped making the agreed-upon weekly payments
in August 2019.
II. Procedural Background
A. Outsource sues and obtains a writ of
attachment
On June 3, 2020, Outsource sued Horizon and its owner
(who had personally guaranteed Horizon’s obligations in the
original 2010 contract for services) for (1) breach of contract, (2)
account stated, (3) open book accounts, and (4) common counts.
All of these claims stem from Horizon’s failure to make the
payments under the 2019 payment plan agreement.
On June 23, 2020, the trial court issued Outsource a right
to attach order and writ of attachment. The court ordered that,
during the pendency of the litigation and so long as Outsource
posted a $10,000 undertaking, Outsource had the right to attach
Horizon’s property—including “all money in [Horizon’s] deposit
accounts”—in the amount of $562,652.90.
On July 22, 2020, Outsource served a notice of attachment
on Comerica Bank, where Horizon had a deposit account with a
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balance of $193,973.41, and Comerica Bank remitted those funds
to the levying officer (the local sheriff’s department).
B. Sunwest files a third party claim
On August 3, 2020, Sunwest filed a third party claim with
the levying officer asserting that (1) it held a security interest in
Horizon’s deposit account, and (2) its security interest was senior
to Outsource’s writ of attachment. In response, Outsource filed a
petition in the trial court seeking a determination of the validity
of Sunwest’s claim, arguing that Sunwest’s third party claim was
“defective and ineffective” because Horizon had not defaulted on
either of Sunwest’s loans and Sunwest only had a security
interest in the event of a default.
Almost one year later, and after further briefing, discovery,
and a hearing, the trial court on July 14, 2021, ruled that
Sunwest’s third party claim “is valid and entitled to priority.”
The court found that Sunwest “has the senior lien” because it
filed its UCC financing statements in 2018, which was before
Outsource obtained a writ of attachment in 2020. The court also
concluded that Outsource’s focus on whether Horizon was in
default on its loans with Sunwest “misse[d] ‘the forest for the
trees’” because the only “dispositive issue” was whether Sunwest
had a “superior security interest,” not whether Sunwest could
foreclose on that interest due to a default.
C. Appeal
Outsource filed this timely appeal.
DISCUSSION
Outsource argues that the trial court erred in determining
that Sunwest’s security interest in the funds in Horizon’s deposit
account was superior to its lien that was created by the writ of
attachment. By virtue of the writ of attachment issued by the
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trial court, Outsource has a pre-judgment lien in the amount of
the anticipated judgment in its pending lawsuit that reaches the
funds contained in Horizon’s deposit account. (Code Civ. Proc., §§
483.010, subd. (a) [requirements for issuance of writ of
attachment], 484.010, 488.500, subd. (a), 488.455 [writ of
attachment on deposit account]; Whitehouse v. Six Corp. (1995)
40 Cal.App.4th 527, 532.) California’s Enforcement of Judgments
Law (Code Civ. Proc., § 680.010 et seq.) creates a procedural
mechanism by which a third party who is a stranger to a pending
lawsuit and who has a security interest in the property subject to
a pre-judgment lien (here, Sunwest) can initiate a claim with the
levying officer that triggers the trial court that issued the writ of
attachment to decide whether the third party’s security interest
is “superior” to the pre-judgment lien (and, if the court so decides,
to prevent the plaintiff-creditor with that lien from having a
superior entitlement to the funds at issue if a verdict is
ultimately rendered in its favor). (Id., §§ 488.110, 720.210, subd.
(a), 720.220, 720.390.) This mechanism is a “summary
proceeding” (Cassel v. Kolb (1999) 72 Cal.App.4th 568, 579-580
(Cassel)), and the third party has the initial burden of showing
that it has a security interest superior to the pre-judgment lien
(Code Civ. Proc., §§ 720.360, 720.210, subd. (a) [requiring proof of
“superior” “security interest”]; cf. Oxford Street Properties, LLC v.
Rehabilitation Associates, LLC (2012) 206 Cal.App.4th 296, 307
(Oxford Street Properties) [once initial burden is met, burden
shifts to lien creditor to rebut third party’s showing of
superiority]). Under California law and as pertinent here, a third
party’s security interest in specific property is “superior” to a pre-
judgment lien over that property if (1) the third party’s security
interest has “attached” to that property; and (2) the third party’s
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security interest is senior to the pre-judgment lien. (Oxford
Street Properties, supra, 206 Cal.App.4th at p. 308.)
In evaluating a trial court’s order granting or denying a
third party’s claim of a superior security interest, we review
issues of law de novo and any factual findings for substantial
evidence. (Cassel, supra, at p. 574; Oxford Street Properties,
supra, 206 Cal.App.4th at p. 307.)
I. By the Time Outsource Obtained Its Pre-judgment
Lien, Had Sunwest’s Security Interest Attached to
Horizon’s Deposit Account at Comerica Bank?
A “security interest” is “an interest in” collateral, and
“collateral” is any property that “secures payment or performance
of an obligation.” (Cal. U. Com. Code, §§ 1201, subd. (a)(35)
[defining “security interest”], 9102, subd. (a)(12) [defining
“collateral”].) A security interest “attaches” to collateral if (1) the
secured party has provided value for its interest in the collateral,
(2) the debtor has rights (or the power to transfer rights) in that
collateral, and (3) the debtor has signed a security agreement
that identifies the collateral. (Id., § 9203, subds. (a) & (b), 9102,
subd. (a)(7) [defining “authentication” as signature].)
In this case, the trial court correctly concluded that
Horizon’s deposit account was “collateral” and that Sunwest’s
security interest in that collateral had “attached” back in 2018
(and hence prior to the issuance of Outsource’s pre-judgment lien
in 2020). Horizon’s deposit account at Comerica Bank secured
Horizon’s payment or performance of the two small business
loans Sunwest made to Horizon. Further, Sunwest’s security
interest had attached to the deposit account back in 2018. That
is because, as a result of Sunwest’s loans and the Commercial
Security Agreements, (1) Sunwest provided value (namely, the
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two $1 million loans) for the deposit account serving as collateral
for those loans, (2) Horizon had rights in its own deposit account,
and (3) Horizon signed a Commercial Security Agreement for
each loan that identified the deposit account as collateral.
Outsource resists this conclusion with two arguments.
First, Outsource argues that California Uniform
Commercial Code section 9332, subdivision (b), entitles it to
possession of the funds in Horizon’s deposit account “free of
[Sunwest’s] security interests.” Outsource is wrong. To be sure,
that section provides that a “transferee of funds from a deposit
account” takes “the funds free of a security interest” (Cal. U.
Com. Code, § 9332, subd. (b)), and the term “transferee” has been
interpreted broadly (Orix Financial Services, Inc. v. Kovacs
(2008) 167 Cal.App.4th 242, 250). But even a broad definition of
“transferee” does not reach a party—like Outsource—to whom
funds were never actually transferred. Outsource obtained a writ
of attachment and obtained a pre-judgment lien as to the funds in
Horizon’s deposit account (Code Civ. Proc., § 488.500, subd. (a)),
but Sunwest’s third party claim halted the transfer of those funds
into Outsource’s proverbial hands (and, indeed, a transfer of
those funds could not in any event happen unless and until
Outsource prevails in its lawsuit against Horizon (Code Civ.
Proc., §§ 720.250, subd. (a) [levying officer may not execute writ
after third party claim timely filed], 697.020; Brun v. Evans
(1925) 197 Cal. 439, 442 [pre-judgment attachment lien merges
into judgment lien]; Anderson v. Schloesser (1908) 153 Cal. 219,
222-223 [“The effect of levying an attachment against the
property of the defendant was merely to create a lien on that
property as security for any judgment that might be recovered”])).
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Second, Outsource argues that Sunwest’s security interest
never attached to Horizon’s deposit account because the plain
language of the parties’ security agreements specifies that no
security interest attaches until Horizon defaults on Sunwest’s
loans. Again, Outsource is wrong. To be sure, “a security
agreement is effective according to its terms.” (Cal. U. Com.
Code, § 9201, subd. (a).) However, the plain language of the
security agreements here does not use default on the loan as a
trigger for attachment of the security interest; instead, the
agreements use default as the trigger for Sunwest’s right to
possess the collateral and to execute the rights of a secured
creditor vis-à-vis secured collateral. (See generally Cal. U. Com.
Code, § 9601 [enumerating rights of a secured party after debtor’s
default].)
II. Is Sunwest’s Security Interest Senior to the Pre-
judgment Lien?
The trial court erred in concluding that Sunwest’s security
interest in Horizon’s deposit account was “senior” to Outsource’s
pre-judgment lien.
California law provides that the determination of whether
a security interest that has attached to a deposit account in a
bank is senior to a pre-judgment lien is a function—not of
California law—but of “[t]he local law of the bank’s jurisdiction.”
(Cal. U. Com. Code, § 9304, subd. (a).) Which jurisdiction is “the
bank’s jurisdiction” is defined, in order of preference, as (1) the
jurisdiction expressly identified as the “bank’s jurisdiction” in “an
agreement between the bank and” the deposit account holder (id.,
subd. (b)(1)); (2) the jurisdiction identified for choice-of-law
purposes in such an agreement (id., subd. (b)(2)); (3) the
jurisdiction identified in such an agreement as the location where
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the deposit account is maintained (id., subd. (b)(3)); (4) the office
identified in the bank’s account statements as the office serving
the account holder’s account (id. subd. (b)(4)); or (5) the location
of “the chief executive office of the bank” (id., subd. (b)(5)).
Because Sunwest did not introduce the agreement between
Comerica Bank and Horizon, did not introduce any account
statements, and did not introduce any evidence on where
Comerica Bank’s chief executive office is located, we have no idea
which jurisdiction is Comerica Bank’s jurisdiction. This
evidentiary void is fatal to Sunwest’s third party claim. Without
that information, which was Sunwest’s burden—as the third
party movant—to establish, we cannot determine which “local
law” to apply to assess perfection and priority. Because
“perfection of a security interest makes it enforceable against
third parties and priority determines which of competing claims
to [the deposit account] will take precedence” (Oxford Street
Properties, supra, 206 Cal.App.4th at p. 308), we are unable to
conclude that Sunwest met the governing standard for perfection
and priority set by the unknown local law of Comerica Bank.
Even if we were to assume that California is Comerica
Bank’s “jurisdiction,” Sunwest satisfied neither of the two
pertinent methods of establishing the seniority of its security
interest. Under California law, a third party with a security
interest in collateral establishes the seniority of that security
interest by showing that, prior to the time that the pre-judgment
lien was created, either (a) the third party “perfected” its security
interest in that collateral, or (b) the third party signed a “security
agreement” and properly filed a UCC financing statement that
both identify that collateral. (Cal. U. Com. Code, §§ 9317, subd.
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(a)(2), 9203, subd. (b)(3)(A); Oxford Street Properties, supra, 206
Cal.App.4th at p. 308.)1
Sunwest did not establish that it ever perfected its security
interest in Horizon’s deposit account. Under California law, a
security interest in a deposit account is perfected by the secured
party’s “control of the collateral.” (Cal. U. Com. Code., §§ 9312,
subd. (b)(1), 9314, subd. (a); see also Official Comments on the
Cal. U. Com. Code foll. § 9104 [“when a deposit account is taken
as original collateral, the only method of perfection is obtaining
control”].) California law defines “control” as being when (1) the
secured party is the bank where the deposit account is
maintained, (2) the secured party becomes the bank’s customer
“with respect to the deposit account,” or (3) the secured party, the
account holder, and the bank have entered into a so-called
“control agreement” that empowers the secured party to “direct[
the] disposition of funds in the deposit account without further
consent by the” account holder. (Cal. U. Com. Code, §§ 9314,
subd. (a), 9104, subd. (a).) Sunwest did not meet this standard.
That is because Sunwest never established in the record before
1 Several other methods of determining the seniority of
competing interests in a debtor’s property exist, but do not apply
here. Because a pre-judgment lien is necessarily unperfected
(e.g., Diamant v. Kaspaian (In re Southern California Plastics,
Inc.) (9th Cir. 1999) 165 F.3d 1243, 1246 (Diamant) [pre-
judgment lien is a “potential” or “contingent” interest, dependent
upon outcome of the yet-to-occur trial]), the rules for determining
seniority between competing perfected interests are not
pertinent. (Cal. U. Com. Code, §§ 9317, subd. (a)(1), 9322, subd.
(a).) Because a pre-judgment lien is not a purchase money
security interest, the rule for determining the seniority of that
specific type of interest is also not pertinent. (Id., § 9317, subds.
(a)(2), (e).)
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us the “control” required by California law: Sunwest is not
Comerica Bank (the bank where Horizon maintains its deposit
account); Sunwest did not become Comerica Bank’s customer
regarding Horizon’s deposit account; and Sunwest never
introduced a “control agreement” granting it power to dispose of
the funds in Horizon’s deposit account.
Sunwest at first blush seems to have satisfied the second
pertinent method of establishing seniority because it has security
agreements with Horizon and because it filed UCC financing
statements in California, all of which identify the deposit
account. But Sunwest did not establish that the UCC financing
statements were properly filed. That is because, without knowing
which jurisdiction is Comerica Bank’s jurisdiction, we do not
know whether the UCC financing statements filed in California
were filed in the right place.2
In these respects, this case is indistinguishable from Full
Throttle Films, Inc. v. National Mobile Television, Inc. (2009) 180
Cal.App.4th 1438 (Full Throttle). In that case, as here, a third
party who had obtained a security interest in deposit accounts
held by a bank filed a third party claim for priority over a
creditor who had secured a pre-judgment writ of attachment over
the same accounts. (Id. at p. 1440.) In that case, as here, there
was no evidence of which jurisdiction was the bank’s jurisdiction.
(Id. at p. 1444.) And in that case, as here, the inability to know
which jurisdiction’s law to apply meant that a UCC financing
statement filed in California was not properly filed (even though
it was properly filed under California law). (Ibid.) Just as Full
2 Although Sunwest may in theory have covered all the bases
by filing UCC financing statements in all 50 states, it has not
introduced any evidence of that fact.
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Throttle concluded that the third party’s claim must be denied, so
must we.
Sunwest resists this conclusion with what boils down to
three arguments.
First, and as a procedural matter, Sunwest argues that we
cannot consider whether its security interest is senior because
Outsource did not raise the issue of seniority before the trial
court (and instead focused on the lack of attachment and its own
status as a “transferee” under California Uniform Commercial
Code section 9332). Although Sunwest is correct that Outsource
did not object to the seniority of Sunwest’s security interest
before the trial court, this is of no consequence because it was
Sunwest’s burden to prove the seniority of its security interest;
that burden exists whether or not anyone else objected to it.
Sunwest responds that its burden did not include establishing
seniority, but it is wrong: The Enforcement of Judgments Law
plainly requires the third party to establish that its “claimed”
“security interest” is “superior” to the pre-judgment lien (Code
Civ. Proc., § 720.210, subd. (a)), and superiority under the
California Uniform Commercial Code necessarily includes a
showing of seniority.
Second, Sunwest argues that its filing of UCC financing
statements perfected its security interest in Horizon’s deposit
account. Sunwest is wrong. Although the filing of a UCC
financing statement is a sufficient method for perfecting security
interests in many types of collateral (see, e.g., Cal. U. Com. Code,
§ 9312 [filing sufficient for “chattel paper, negotiable documents,
instruments, or investment property”]; Corona Fruits & Veggies
Inc. v. Frozsun Foods, Inc. (2006) 143 Cal.App.4th 319, 322 [“In
California, the filing of a UCC-1 financing statement is generally
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required to perfect a security interest . . .”]), California law—
again, assuming California is Comerica Bank’s jurisdiction—
explicitly erects a different method for deposit accounts, and
hinges perfection of a security interest of such accounts upon
control and control alone. (Cal. U. Com. Code, §§ 9312, subd.
(b)(1), 9314; Royce v. Michael R. Needle, P.C. (N.D.Ill. 2019) 381
F.Supp.3d 968, 982 [under analogous federal law, “distinction”
between deposit accounts and other collateral “is critical”].)
Lastly, Sunwest argues that its security interest is senior—
even if that interest is unperfected—because, pursuant to Code of
Civil Procedure section 697.590, subdivision (b), a conflict
between two unperfected interests in property is resolved in favor
of the first one created; because, Sunwest continues, its security
interest in Horizon’s deposit account was created in 2018, that
security interest is senior to Outsource’s pre-judgment lien
created in 2020. The legal premise of Sunwest’s argument is
incorrect. Code of Civil Procedure section 697.590, subdivision
(b), provides the governing rule when resolving a conflict between
a “judgment lien” and a “conflicting security interest.” But
Outsource does not have a judgment lien; it has a pre-judgment
lien by writ of attachment. Thus, the pertinent governing rule is
the one that resolves conflicts between a pre-judgment lien and a
security interest. That rule is supplied, as noted above, by
California Uniform Commercial Code section 9317, subdivision
(a)(2), which resolves conflicts between a “lien creditor” (which
includes a creditor that has obtained a writ of attachment (Cal.
U. Com. Code, § 9102, subd. (a)(52)(A); Full Throttle, supra, 180
Cal.App.4th at p. 1441)) and a “security interest” in favor of the
secured party only if that security interest (1) is “perfected” or (2)
is accompanied by a security agreement and a properly filed UCC
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financing statement. (Cal. U. Com. Code, § 9317, subd. (a)(2).)
This pertinent rule does not rest upon a simple inquiry into
which unperfected security interest came first. Indeed, the first-
in-time rule Sunwest urges would inevitably dictate that the pre-
judgment lien would inevitably be junior because pre-judgment
liens are by definition unperfected (see In re Southern California
Plastics, Inc., supra, 165 F.3d at p. 1246), and would always be
created after the third party’s unperfected security interest. We
decline to adopt a rule that would eviscerate California Uniform
Commercial Code section 9317, subdivision (a)(2). (Accord,
Tuolomne Jobs & Small Business Alliance v. Superior Court
(2014) 59 Cal.4th 1029, 1037 [statutory interpretations that lead
to absurd results or render words surplusage are to be avoided];
People v. Bullard (2020) 9 Cal.5th 94, 107 [same].)
In the interest of fairness, we sought supplemental briefing
from the parties on the relevance of the “local law” requirement
not squarely addressed in the parties’ briefing. In its
supplemental briefing, Sunwest concedes that the “local law” of
Comerica Bank governs the determination of whether its security
interest was perfected and has priority. However, Sunwest offers
two further arguments. First, Sunwest suggested at oral
argument that choice of law issues can be waived, and (echoing
its argument about seniority of liens) urges that Outsource
waived the ability to contest which law is the appropriate “local
law” by not raising the issue before the trial court. But this
argument ignores that Sunwest had the burden of proving the
seniority of its security interest; Sunwest cannot now shift to
Outsource the blame for Sunwest’s own failure to prove its
entitlement to relief under the proper “local law.” Second,
Sunwest asserts that the appropriate remedy is to remand the
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matter to give Sunwest an opportunity to conduct discovery to
obtain evidence establishing that governing local law. But
Sunwest is not entitled to that second bite at the apple. As noted,
Sunwest bore the burden of establishing that its security interest
is senior and it failed to do so under the applicable statutes.
What is more, Outsource’s petition to determine the priority of
the competing interests in Horizon’s deposit account was pending
for nearly one year, yet Sunwest never sought discovery. (See
Clark v. Optical Coating Laboratory, Inc. (2008) 165 Cal.App.4th
150, 182, fn. 32 [failure to request a continuance to conduct
further discovery to oppose summary judgment waives the right
to further discovery].)
DISPOSITION
The order is reversed. Outsource is entitled to its costs on
appeal.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.
______________________, J.
HOFFSTADT
We concur:
_________________________, Acting P. J.
ASHMANN-GERST
_________________________, J.
CHAVEZ
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