MDQ, LLC v. Gilbert, Kelly, Crowley & Jennett LLP

Filed 2/27/19
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION EIGHT
MDQ, LLC, et al., B283025
Plaintiffs,
(Los Angeles County
v. Super. Ct. No. BC607973)
GILBERT, KELLY, CROWLEY
& JENNETT LLP,
Defendant and Appellant;
CLEOPATRA RECORDS, INC.,
Defendant and Respondent.
APPEAL from a judgment and order of the Superior Court
of the County of Los Angeles. Mark V. Mooney, Judge. Affirmed.
Freeman, Mathis & Gary, Timothy W. Kenna, and
Rebecca J. Smith for Defendant and Appellant.
Gutman Law, Alan S. Gutman; and Evan S. Cohen for
Defendant and Respondent.
**********
SUMMARY
The question in this interpleader action is which adverse
claimant was entitled to the interpleaded funds: a judgment
creditor with a properly recorded judgment lien, or an assignee
who did not file a financing statement with respect to
distributions irrevocably assigned to it by the judgment debtor
before the judgment lien was recorded. The answer depends on
whether the assignment created a security interest that had to be
perfected (but was not) by the filing of a financing statement
under California’s Uniform Commercial Code (UCC or the Code).
We agree with the trial court that although the assignment
created a security interest, the judgment creditor is entitled to
the interpleaded funds because its recorded judgment lien has
priority over the unperfected security interest.
Accordingly, we affirm the judgment. We also affirm the
trial court’s order requiring the assignee to pay the attorney fees
and costs of the plaintiffs in the interpleader action.
FACTS
1. The Parties and Earlier Proceedings
The four plaintiffs in the interpleader action (MDQ Holding
LLC, MDQ LLC, Johnny B. Goode Limited Liability Company
and MDQ Vegas LLC) are referred to as the MDQ entities. They
are limited liability companies that hold production rights or are
producers in different territories of a Tony-award winning
Broadway musical, “Million Dollar Quartet.” Each of the MDQ
entities had control over a portion of the interpleaded funds.
Floyd Mutrux was one of the authors of the musical. He
owned Northern Lights, Inc. Mr. Mutrux and/or Northern Lights
(collectively, Mutrux) was a member, manager, shareholder or
owner of each of the MDQ entities. Mutrux has certain economic
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rights, including “the right to be allocated profits, and to receive
distributions and payments from the MDQ entities.”
Two defendants in the interpleader action are adverse
claimants to the interpleaded funds: Cleopatra Records, Inc.
(Cleopatra) and Gilbert, Kelly, Crowley & Jennett (Gilbert Kelly
or the law firm).
The events that preceded the interpleader action were
these:
On July 24, 2012, Cleopatra filed a lawsuit against Mutrux
(the Cleopatra litigation). Gilbert Kelly represented Mutrux in
the Cleopatra litigation.
On April 14, 2015, the trial court in the Cleopatra litigation
filed a proposed statement of decision in favor of Cleopatra and
against Mutrux. The proposed award to Cleopatra exceeded
$1 million.
On April 22, 2015, Mutrux and the law firm executed a
“Notice of Assignment and Irrevocable Letter of Direction” dated
April 29, 2015 (the assignment). The recitals included reference
to Gilbert Kelly’s representation of Mutrux in the Cleopatra
litigation, and stated that “[i]n consideration for legal services
provided . . . and to be provided hereafter, Mutrux . . . wish[es] to
and intend[s] to irrevocably assigned [sic] a portion of their
economic interests in the MDQ Entities to [Gilbert Kelly]. While
the total amount of [Gilbert Kelly] fees incurred as of April 8,
2015 is in excess of $235,000 and will increase with post-trial
briefing, the first authorization for payments hereunder on the
foregoing will be for $175,000.00.”
The assignment notified the MDQ entities that as of
April 29, 2015, the MDQ entities “shall make or cause to be
made, payment to [Gilbert Kelly] (in lieu of making such
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payments directly to [Mutrux]) in the various percentages
specified below from the total amounts of all distributions,
producer office fees, fixed fees, executive producer fees, office fees,
profits and/or other payments and fees of any other type payable
to [Mutrux] by the MDQ Entities.” (Royalties payable to
Mr. Mutrux as a writer or director were excluded.) The
applicable percentages differed among the MDQ entities (33,
30 or 20 percent).
The assignment provided that: “Payments will be made to
[Gilbert Kelly] for $175,000.00, until paid or for so long as any
MDQ Distributions are payable to Mutrux.” The assignment
stated that “[i]f no further authorizations are forthcoming after
[Gilbert Kelly] receives $175,000.00, the [MDQ entities] shall
resume making MDQ Distributions to Mutrux.”
On August 5, 2015, judgment was entered against Mutrux
in the Cleopatra litigation in the total amount of $965,851.47.
On August 21, 2015, Cleopatra sought a court order
“charging [Mutrux’s] interests in the MDQ Entities with payment
of the unsatisfied portion” of the August 5, 2015 judgment.
On October 1, 2015, the trial court issued a charging order
under Corporations Code section 17705.03.1 The court ordered
the MDQ entities “to pay any and all profits, distributions,
1 On application by a judgment creditor of a member or
transferee of a limited liability company, “a court may enter a
charging order against the transferable interest of the judgment
debtor for the unsatisfied amount of the judgment. A charging
order constitutes a lien on a judgment debtor’s transferable
interest and requires the limited liability company to pay over to
the person to which the charging order was issued any
distribution that would otherwise be paid to the judgment
debtor.” (Corp. Code, § 17705.03, subd. (a).)
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disbursements or other payments otherwise due to Judgment
Debtors [Mutrux], as members of the limited liability companies,
directly to counsel for Judgment Creditor Cleopatra,” until the
August 5, 2015 judgment has been fully satisfied.
The charging order also stated it was not intended to alter
rights to payments “established by irrevocable assignments of
rights existing prior to July 24, 2012.” (That was the date the
Cleopatra litigation was filed.) This reference is to an earlier
assignment to Katell Productions, Inc. Mutrux had assigned the
right to receive a percentage of distributions otherwise owed to
Mutrux from the MDQ entities to Katell Productions on
January 25, 2012. This assignment was later memorialized and
amended in a Notice of Assignment and Irrevocable Letter of
Direction, and the MDQ entities began making payments as
directed. The Katell Productions assignment is not in dispute.
The assignment to Gilbert Kelly concerns percentages of
distributions not already assigned to Katell Productions.
2. The Interpleader Action
On January 25, 2016, the MDQ entities filed a complaint in
interpleader, naming Gilbert Kelly, Cleopatra, and Mutrux as
defendants. Plaintiffs alleged conflicting claims by Cleopatra and
Gilbert Kelly to those portions of distributions owed to Mutrux
that had not otherwise been assigned to Katell Productions. The
MDQ entities deposited the distributions at issue (then about
$19,500), and undertook to add any future distributions not owed
and remitted to Katell Productions to the interpleaded funds.
The parties filed various pleadings, including answers, a
cross-complaint by Cleopatra, and a motion for summary
judgment by Gilbert Kelly. The MDQ entities sought an order of
discharge and an award of attorney fees and costs.
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On December 22, 2016, the trial court entered an order that
released the MDQ entities from any and all liability to the
interpleader defendants, ordered them to continue to deposit any
additional distributions with the court, and ordered payment to
the MDQ entities of $11,550 from the interpleaded funds for their
attorney fees and costs.
On February 1, 2017, the matter went to trial on
Cleopatra’s cross-complaint, with the parties submitting pretrial
briefs and documentation in support of their positions.
Gilbert Kelly argued that a charging order only attaches to
a “transferable interest” (Corp. Code, § 17705.03, subd. (a)), and
the interests assigned to it “were neither assignable nor
transferrable at the time of judgment [August 5, 2015] because
they had already been assigned to Gilbert Kelly in April 2015.”
Cleopatra’s trial brief argued the assignment created a
security interest that “had to be perfected in order to have
priority. It was not perfected (i.e., Gilbert Kelly failed to file a
UCC-1 [financing statement]) and, as a result, Cleopatra’s
Judgment Lien has priority pursuant to [Code of Civil Procedure
section] 697.590.”
The trial court found that “[t]he intent of the parties in
executing the Assignment was to secure payment of an obligation
of Mutrux . . . (the debtor) to Gilbert Kelly (the creditor) with the
future revenues to be paid by the MDQ entities to Mutrux.” The
court found the assignment was a security agreement, and
Gilbert Kelly did not file a financing statement as required under
the UCC. (Cal. U. Com. Code, § 9310.) This failure to record did
not render the assignment invalid, the court observed, but it did
render the assignment inferior to the judgment lien recorded by
Cleopatra under Code of Civil Procedure section 697.590, which
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governs priorities between conflicting interests. Consequently,
Cleopatra was entitled to be paid all monies otherwise payable to
Mutrux until the judgment was satisfied.
On February 8, 2017, the court ordered release of $11,550
from the interpleader funds for the attorney fees of the MDQ
entities.
On March 3, 2017, Cleopatra filed a motion seeking an
order that the $11,550 in attorney fees awarded to the MDQ
entities be paid by Gilbert Kelly rather than from the
interpleader funds. The trial court granted the motion on May 4,
2017.
Also on May 4, 2017, judgment was entered ordering
immediate payment of all interpleaded funds to Cleopatra, and
ordering the MDQ entities to pay all subsequent monies
otherwise payable to Mutrux, except those allocated to Katell
Productions, to Cleopatra.
Gilbert Kelly filed a timely appeal from the judgment and
from the court’s order requiring Gilbert Kelly to pay the attorney
fees awarded to the MDQ entities.
DISCUSSION
1. Appeal from the Judgment – the Priority Issue
Gilbert Kelly argues its assignment has priority because it
preceded the charging order, and the assignment did not have to
be recorded to have priority because it was not a security
interest. The assignment, Gilbert Kelly argues, was “absolute
and unconditional” – a “completed transfer of the interest” –
before the charging order was made. The interests assigned to
Gilbert Kelly, the argument continues, were no longer the
“property of the judgment debtor” under section 695.010 of the
7
Code of Civil Procedure,2 and were no longer a “transferable
interest of the judgment debtor” against which a charging order
could be entered under Corporations Code section 17705.03.
As the basis for this analysis, Gilbert Kelly relies on
Kinnison v. Guaranty Liquidating Corp. (1941) 18 Cal.2d 256(Kinnison), where the Supreme Court held that an instrument –
an assignment of rents that had been recorded – “cannot be said
to have contemplated the transfer of a mere security interest.”
(Id. at p. 263.) Kinnison continued: “The instrument is phrased
as a complete transfer of [the debtor’s] interest in the rentals. . . .
[T]he rents were relinquished completely, to be applied by [the
creditor] in satisfaction of the total outstanding indebtedness.
This was not an assignment as further security for the
performance of [the debtor’s] obligations, but was an attempt to
liquidate the debt upon which [the debtor] had been in default for
at least eight months at the time the assignment was executed.
Unlike the rental assignments accompanying [earlier] deeds of
trust . . . , this assignment contemplated an immediate
application of the rentals as a means of satisfying the total
outstanding debt. . . . [[T]he creditor] held not merely a security
interest in the rentals but an absolute assignment of [the
debtor’s] interest therein.” (Ibid.)
While Gilbert Kelly’s argument has some surface appeal, it
suffers from insurmountable flaws. Kinnison predated the
enactment of California’s UCC by more than 20 years. Kinnison
involved a recorded assignment of rents and profits accruing from
2 Section 695.010 states that “[e]xcept as otherwise provided
by law, all property of the judgment debtor is subject to
enforcement of a money judgment.” (Code Civ. Proc., § 695.010,
subd. (a).)
8
real property covered by a deed of trust, and did not involve
personal property or a question of the priority of conflicting
interests. We are not persuaded that its conclusion the creditor
there “held not merely a security interest but an absolute
assignment” has any pertinence these many years later, when
the UCC governs secured transactions in personal property.3
In short, this is not a real property transaction. Secured
transactions in personal property are governed by division 9 of
the UCC. (Cal. U. Com. Code, § 9109, subd. (a)(1) [“this division
applies to . . . [¶] . . . [a] transaction, regardless of its form, that
creates a security interest in personal property or fixtures by
contract.” (Further undesignated statutory references are to the
California UCC.)
Several definitions are pertinent to our discussion. Thus:
3 Indeed, assignments of rents in connection with an
obligation secured by real property are now governed by Civil
Code section 2938. Section 2938 applies to assignments denoted
as “absolute” or otherwise, and provides that such assignments
are “effective to create a present security interest in existing and
future . . . rents . . . or profits of that real property.” (Id.,
subd. (a), italics added.) Thus subdivision (a) states: “A written
assignment of an interest in leases, rents, issues, or profits of real
property made in connection with an obligation secured by real
property, irrespective of whether the assignment is denoted as
absolute, absolute conditioned upon default, additional security
for an obligation, or otherwise, shall, upon execution and delivery
by the assignor, be effective to create a present security interest
in existing and future leases, rents, issues, or profits of that real
property.” (Ibid.) The interest granted by such an assignment
“shall be deemed fully perfected as of the time of
recordation . . . .” (Id., subd. (b).)
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A “ ‘[s]ecurity interest’ ” is “an interest in personal property
or fixtures which secures payment or performance of an
obligation. ‘Security interest’ includes . . . a payment
intangible . . . .”4 (§ 1201, subd. (b)(35).)
A “ ‘[s]ecurity agreement’ ” is “an agreement that creates or
provides for a security interest.” (§ 9102, subd. (a)(74).)
An “ ‘[a]greement,’ as distinguished from ‘contract,’ means
the bargain of the parties in fact, as found in their language or
inferred from other circumstances . . . .” (§ 1201, subd. (b)(3).)
“ ‘Collateral’ ” is “the property subject to a security
interest,” and includes payment intangibles. (§ 9102,
subd. (a)(12).)
Gilbert Kelly contends its assignment did not effect a
security interest in Mutrux’s distributions. But notably, in its
appellate brief Gilbert Kelly does not cite or acknowledge the
statutory provisions we have just quoted, or even mention the
UCC – this despite Cleopatra’s arguments to the trial court, and
the trial court’s own analysis based on the UCC provisions.
Unlike Gilbert Kelly, we cannot pretend the UCC does not
exist. And we cannot pretend it does not apply to assignments –
particularly to the assignment of a percentage of the debtor’s
4 A “ ‘[p]ayment intangible’ ” is “a general intangible under
which the account debtor’s principal obligation is a monetary
obligation.” (§ 9102, subd. (a)(61).) A “ ‘[g]eneral intangible’ ” is
“any personal property, including things in action, other than
accounts, chattel paper, commercial tort claims, deposit accounts,
documents, goods, instruments, investment property, letter-of-
credit rights, letters of credit, money, and oil, gas, or other
minerals before extraction. The term includes payment
intangibles and software.” (Id., subd. (a)(42).)
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interest in future distributions, which will revert to the debtor
once its debt to Gilbert Kelly is paid. While Gilbert Kelly’s
assignment may differ from some other secured transactions, in
that the collateral securing Mutrux’s obligation to Gilbert Kelly is
being paid as it accrues to satisfy that obligation, rather than
securing payment from another source, Gilbert Kelly offers us no
rationale under which we can conclude that it is not a security
interest within the meaning of the UCC.
Having concluded the assignment was a security interest
subject to UCC requirements, we see little more that requires
discussion. The priority of a perfected judgment lien over an
unperfected security interest is established by section 697.590 of
the Code of Civil Procedure. Section 697.590 defines the terms
“ ‘[f]iling’ ” and “ ‘[p]erfection,’ ” among others. (Id., subd. (a)(1) &
(2).) With inapplicable exceptions, subdivision (b) determines
“priority between a judgment lien on personal property and a
conflicting security interest . . . in the same personal property.”
(Id., subd. (b).)
“Conflicting interests rank according to priority in time of
filing or perfection.” (Code Civ. Proc., § 697.590, subd. (b).)5 With
respect to a security interest, “ ‘[f]iling’ ” means “the filing of a
financing statement pursuant to Division 9 . . . of the Commercial
Code.” (Id., subd. (a)(1)(B).) And “ ‘[p]erfection’ ” means
5 Code of Civil Procedure section 697.590, subdivision (b)
continues: “In the case of a judgment lien, priority dates from the
time filing is first made covering the personal property. In the
case of a security interest . . . priority dates from the earlier of
the time a filing is first made covering the personal property or
the time the security interest . . . is first perfected, if there is no
period thereafter when there is neither filing nor perfection.”
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“perfection of a security interest . . . pursuant to Division 9 . . . of
the Commercial Code.” (Id., subd. (a)(2).) Under the UCC, with
certain exceptions, “a financing statement must be filed to perfect
all security interests . . . .” (§ 9310, subd. (a).)
In short, because Gilbert Kelly did not file a financing
statement, Cleopatra’s judgment lien has “priority in time of
filing or perfection” (Code Civ. Proc., § 697.590, subd. (b)).
That leaves us with Gilbert Kelly’s insistence, without
authority, that the distributions assigned to it were “no longer
the ‘property of the judgment debtor’ as defined in [Code of Civil
Procedure section] 695.010” (see fn. 2, ante), and no longer a
“transferable interest of the judgment debtor” against which a
charging order could be issued under Corporations Code
section 17705.03. This contention, however, is simply another
way of asserting the untenable proposition that the assignment
was not a security interest governed by the UCC.
To be clear, there is no dispute that Corporations Code
section 17705.03 governs the entry of a charging order “against
the transferable interest” of a limited liability company (LLC)
member who is a judgment debtor, for the unsatisfied amount of
the judgment.6 (§ 17705.03, subd. (a).) And, the charging order
6 The Corporations Code, title 2.6, governs LLC’s. Article 5
governs transferable interests and rights of transferees and
creditors of LLC’s. A “transferable interest” is personal property.
(Corp. Code, § 17705.01.) A transfer is permissible. (§ 17705.02,
subd. (a)(1).) A transferee “has the right to receive, in accordance
with the transfer, distributions to which the transferor would
otherwise be entitled; provided, however, that the pledge or
granting of a security interest, lien, or other encumbrance in or
against any or all of the transferable interest of a transferor shall
not cause the transferor to cease to be a member or grant to the
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“constitutes a lien on a judgment debtor’s transferable interest
and requires the limited liability company to pay over to the
person to which the charging order was issued any distribution
that would otherwise be paid to the judgment debtor.” (Ibid.)
But the claim that there is no “transferable interest” in the future
distributions already assigned to Gilbert Kelly is a mistaken view
of the statutory language that lacks supporting authority.
Section 17705.03 is simply the mechanism by which a judgment
creditor may enforce its judgment against an LLC member; it
does not establish priorities among creditors, and it does not
eliminate UCC requirements applicable to security interests.
As we have seen, priorities among creditors are governed
by Code of Civil Procedure section 697.590 (“Conflicting interests
rank according to priority in time of filing or perfection.”). Had
Gilbert Kelly perfected its security interest, this would be
another story, and the charging order could not be applied to that
first-in-time, perfected security interest. But Gilbert Kelly did
not do so. Accordingly, there was no error in the trial court’s
judgment releasing the interpleaded funds to Cleopatra and
ordering the MDQ entities to pay all subsequent monies
otherwise payable to Mutrux, except those allocated to Katell
Productions, to Cleopatra, until the judgment is satisfied.
2. The Attorney Fee Order
Code of Civil Procedure section 386.6 allows the payment of
costs and attorney fees, from interpleaded funds, to a stakeholder
transferee or to anyone else the power to exercise any rights or
powers of a member, including, without limitation, the right to
receive distributions to which the member is entitled.” (Id.,
subd. (b).)
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being discharged from an interpleader action. It also allows the
court to “make such further provision for assumption of such
costs and attorney fees by one or more of the adverse claimants
as may appear proper.”7 (Id., subd. (a).) Our review is for abuse
of discretion. (Wertheim, LLC v. Omidvar (2016) 3 Cal.App.5th
921, 925 (Wertheim).)
In this case, Cleopatra sought an order that Gilbert Kelly
pay the attorney fees of the MDQ entities, contending Gilbert
Kelly’s claim to the interpleaded funds was “clearly erroneous”;
as an equitable matter, Gilbert Kelly should pay the fees so that
Cleopatra’s recovery would not be reduced; and Code of Civil
Procedure section 386.6 “recognizes this inequity” and authorizes
the court to make an appropriate order. The trial court agreed
and ordered Gilbert Kelly to pay the fees.
On appeal, Gilbert Kelly argues that “unique
circumstances” are necessary to justify the court’s order; Gilbert
Kelly had a “colorable claim” to the interpleaded funds and took
its position in good faith; and it “did not drive up the litigation
costs.” Gilbert Kelly relies on the Wertheim case for these
7 Code of Civil Procedure section 386.6 states: “A party to an
action who follows the procedure set forth in Section
386 [interpleader] may insert in his motion, petition, complaint,
or cross complaint a request for allowance of his costs and
reasonable attorney fees incurred in such action. In ordering the
discharge of such party, the court may, in its discretion, award
such party his costs and reasonable attorney fees from the
amount in dispute which has been deposited with the court. At
the time of final judgment in the action the court may make such
further provision for assumption of such costs and attorney fees
by one or more of the adverse claimants as may appear proper.”
(Id., subd. (a).)
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propositions, and then further argues that Code of Civil
Procedure section 386.6 itself requires the fees to be paid only
from the interpleaded funds. The latter contention is frivolous.
It is contradicted by the statute itself, not to mention the
Wertheim case on which Gilbert Kelly relies for its other
contentions, which are likewise without merit.
Wertheim found the trial court did not abuse its discretion
when it declined to allocate some or all of the attorney fees of the
interpleading parties to the losing claimant. (Wertheim, supra,
3 Cal.App.5th at p. 924; id. at p. 925 [“Although equity certainly
would have countenanced Wertheim paying at least some of the
fees, equity does not demand that it do so.”].) Wertheim says
nothing about “unique circumstances.” Wertheim observes that
in related litigation, both adverse claimants had admitted to
conduct amounting to breach of fiduciary duty and elder abuse.
(Id. at pp. 923-924.) And both claimants argued that the other’s
litigation tactics drove up the interpleader’s attorney fees. (Id. at
p. 923.) The court observed that the claimant that ultimately
obtained the interpleaded funds could have avoided the
interpleader action, and “the trial court could reasonably find it
proper that the party that necessitated the interpleader action
pay for it.” (Id. at p. 925.)
In short, the circumstances in Wertheim were entirely
different. Nothing in Wertheim assists Gilbert Kelly in
establishing an abuse of discretion by the trial court. There was
none.
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DISPOSITION
The judgment and the order are affirmed. Cleopatra
Records, Inc. shall recover its costs on appeal.
GRIMES, J.
WE CONCUR:
BIGELOW, P. J.
STRATTON, J.
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