In re WL Homes, 080813 FED3, 12-3414

Docket Nº:12-3414, 12-3493
Opinion Judge:CHAGARES, Circuit Judge.
Party Name:In re: WL HOMES, Debtor v. WL HOMES LLC; JLH INSURANCE CORPORATION; GEORGE L. MILLER George L. Miller; JLH Insurance Corporation, Appellants WACHOVIA BANK NATIONAL ASSOCIATION In re: WL HOMES, LLC, Debtor WACHOVIA BANK NATIONAL ASSOCIATION, Appellant v. WL HOMES LLC; JLH INSURANCE CORPORATION; GEORGE L. MILLER
Attorney:Steven M. Coren, Esq. (ARGUED) Brian L. Watson, Esq. Kaufman, Coren & Ress, P.C. Two Commerce Square, Counsel for Appellants/Cross-Appellees. Francis A. Monaco, Jr., Esq. Thomas M. Horan, Esq. Womble Carlyle Sandridge & Rice, LLP James D. Whooley, Esq. (ARGUED) Milbank, Tweed, Hadley & McCloy, LL...
Judge Panel:Before: FUENTES, FISHER, and CHAGARES, Circuit Judges.
Case Date:August 08, 2013
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

In re: WL HOMES, Debtor

WACHOVIA BANK NATIONAL ASSOCIATION

v.

WL HOMES LLC; JLH INSURANCE CORPORATION; GEORGE L. MILLER George L. Miller; JLH Insurance Corporation, Appellants

In re: WL HOMES, LLC, Debtor

WACHOVIA BANK NATIONAL ASSOCIATION, Appellant

v.

WL HOMES LLC; JLH INSURANCE CORPORATION; GEORGE L. MILLER

Nos. 12-3414, 12-3493

United States Court of Appeals, Third Circuit

August 8, 2013

NOT PRECEDENTIAL

Argued June 26, 2013

On Appeal from the United States District Court for the District of Delaware (Nos. 1:11-cv-00619, 1:11-cv-00621, 1:11-cv-00692) District Judge: Hon. Richard G. Andrews

Steven M. Coren, Esq. (ARGUED) Brian L. Watson, Esq. Kaufman, Coren & Ress, P.C. Two Commerce Square, Counsel for Appellants/Cross-Appellees.

Francis A. Monaco, Jr., Esq. Thomas M. Horan, Esq. Womble Carlyle Sandridge & Rice, LLP James D. Whooley, Esq. (ARGUED) Milbank, Tweed, Hadley & McCloy, LLP Counsel for Appellee/Cross-Appellant

Before: FUENTES, FISHER, and CHAGARES, Circuit Judges.

OPINION

CHAGARES, Circuit Judge.

In 2007, appellee/cross-appellant Wachovia Bank, National Association 1("Wachovia") extended a loan to WL Homes, LLC ("WL Homes"). In exchange, WL Homes granted Wachovia a security interest in the $10 million bank account of a wholly-owned subsidiary called JLH Insurance Corporation ("JLH"). WL Homes eventually filed a bankruptcy petition and Wachovia sought a declaration in United States Bankruptcy Court for the District of Delaware that it had an enforceable security interest in the JLH bank account. The Bankruptcy Court granted Wachovia's motion for summary judgment, holding that Wachovia had a valid security interest in the account because JLH had consented to the pledge and, in the alternative, because WL Homes had use and control of the JLH account. The Chapter 7 trustee appointed to represent both WL Homes and JLH appealed. The District Court affirmed the grant of summary judgment on the basis of consent but reversed the use and control holding. Both parties appeal the decision of the District Court. For the reasons that follow, we will affirm.

I.

In October 2007, WL Homes and Wachovia entered into a "Line of Credit Loan Agreement" ("Loan Agreement" or "Agreement"). In the Agreement, Wachovia agreed to extend a $20 million revolving line of credit to WL Homes. To secure the loan, WL Homes, the borrower, pledged its interest in the JLH bank account as collateral to Wachovia, the lender, through the following clause in the Agreement:

Borrower shall maintain its JLH Insurance Co. primary deposit account ("the JLH Account") with Lender. The funds on deposit in the JLH Account shall at no time be less than $10, 000, 000. Borrower shall also maintain its Laing Luxury primary deposit accounts . . . with Lender. The JLH Account and the Laing Luxury Accounts are collectively referred to as the Deposit Accounts. Borrower grants to Lender a security interest in the Deposit Accounts. [In the event of default], Lender shall not be obligated to release to Borrower any funds from the Deposit Accounts . . . .

Appendix ("App.") B172 (emphasis added). WL Homes and Wachovia extended the loan with two letter agreements signed in June and July 2008. Those agreements reaffirmed the obligations set forth in the initial Loan Agreement.

The disputed account was held in the name of JLH. WL Homes formed JLH in 2005 as a wholly-owned, pure captive insurance company that could pay claims brought against WL Homes.2 A pure captive insurance company insures the risks of its affiliates — here, the risks of WL Homes, its sole parent.3 The disputed depository account at Wachovia Bank was opened in January 2008, shortly after execution of the Loan Agreement. According to WL Homes, JLH opened the account to fulfill Arizona's requirement that JLH, as a captive insurer, maintain a minimum level of capital in reserve to pay claims.

JLH was a wholly-owned subsidiary of WL Homes. All funds held in JLH's name were transferred from its parent company. Although JLH has its own formation documents and maintained its own books and records, WL Homes's financial statements reported JLH's assets as its own. Three of JLH's corporate officers also served on the board of WL Homes. The other two JLH board members were employees of Aon, the company hired to manage JLH as required by Arizona captive insurer requirements. An individual named Wayne Stelmar was the president of JLH4 and the CFO of WL Homes at all relevant times. Stelmar negotiated the initial Loan Agreement and signed the two 2008 letter agreements that extended the loan.

In February 2009, WL Homes filed a Chapter 11 bankruptcy petition. Soon thereafter, the case was converted to a Chapter 7 action for liquidation and a trustee was appointed. On March 20, 2009, Wachovia filed the current action in Bankruptcy Court, seeking a declaratory judgment that Wachovia held an enforceable security interest in the JLH account and could enforce that interest to satisfy WL Homes's obligations to Wachovia. After discovery, Wachovia moved for summary judgment. The Chapter 7 trustee cross-moved, seeking a declaration that Wachovia's security interest was invalid.

The Bankruptcy Court granted the motion and denied the Chapter 7 trustee's cross-motion. The court identified two theories to support its conclusion that WL Homes had sufficient rights in the JLH account to promise it as collateral: (1) WL Homes had "use and control of the JLH account;" and (2) JLH consented to the use of its account as collateral. App. 40.

The trustee appealed to the United States District Court for the District of Delaware. The District Court held that WL Homes did not exert sufficient use and control over the JLH account to pledge it as collateral but affirmed the grant of summary judgment on the basis that JLH had consented to the pledge of its account as collateral.

The trustee timely appealed to this Court, arguing that no theory supports the conclusion that Wachovia has an enforceable security interest in the JLH account. Wachovia cross-appealed, arguing that the District Court improperly rejected the alternative basis for enforcing the security interest — that WL Homes had sufficient use and control to pledge the JLH account as collateral.

II.5

A.

We exercise plenary review over a district court's grant of summary judgment. Chambers v. Sch. Dist. of Phila. Bd. of Educ., 587 F.3d 176, 181 (3d Cir. 2009). We will apply the same standard applied by the district court, id., and grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law, " Fed.R.Civ.P. 56(a).

B.

We apply state law to determine "whether claims asserted by creditors in bankruptcy are secured." In re SubMicron Sys. Corp., 432 F.3d 448, 458 (3d Cir. 2006). The parties agree, as does the Court, that California law governs this action. Under California's Commercial Code, "[a] security interest attaches to collateral when it becomes enforceable against the debtor." Cal. Com. Code § 9203(a). A security interest in a deposit account becomes enforceable against the debtor when: (1) "value has been given;" (2) "the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party;" and (3) the secured party has control over the deposit account. Cal...

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