In re Commercial Money Center, Inc.
| Decision Date | 04 August 2008 |
| Docket Number | BAP No. SC-07-1298-DCMo.,Adversary No. 03-90331.,Bankruptcy No. 02-09721. |
| Citation | 392 B.R. 814 |
| Parties | In re COMMERCIAL MONEY CENTER, INC., Debtor. Federal Deposit Insurance Corporation, Appellant, v. Richard M. Kipperman, Chapter Trustee, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
Appeal from the United States Bankruptcy Court for the Southern District of California, Hon. John J. Hargrove, Bankruptcy Judge, Presiding.1
Karen Dougan Vogel, Sheppard, Mullin, Richter & Hampton LLP, San Diego, CA, for Appellant.
Oscar Garza, Gibson, Dunn & Crutcher, LLP, Irvine, CA, for Appellee.
Before DUNN, CARROLL2 and MONTALI, Bankruptcy Judges.
The Federal Deposit Insurance Corporation ("FDIC"), as receiver for NetBank, FSB ("NetBank"),3 appeals the bankruptcy court's grant of summary judgment in favor of the chapter 7 trustee, avoiding NetBank's security interest in rights to future payments due under various leases ("lease payments") and in contract rights under the surety bonds guaranteeing the lease payments.4 At issue in the appeal before us is whether NetBank perfected its security interests in the lease payments and the surety bonds so as to withstand the trustee's avoidance powers under §§ 544 and 547(b).
For the reasons set forth below, we AFFIRM.
The present appeal is the second appeal in the underlying adversary proceeding. Although we set forth substantial factual background in NetBank, FSB v. Kipperman (In re Commercial Money Center, Inc.), 350 B.R. 465 (9th Cir. BAP 2006) ("Commercial Money Center I"), we reiterate certain pertinent facts here for convenience of reference.
Commercial Money Center, Inc. ("CMC") engaged in the business of originating commercial equipment leases. CMC purchased equipment and leased it to consumer end-users with sub-prime credit. CMC then grouped these leases together into "lease pools" and assigned the lease payments (but not the leases themselves) to third-party investors. To enhance the marketability of the lease pools, CMC obtained surety bonds guaranteeing the lease payments and assigned its rights under the surety bonds to the investors.
Between March 18, 1999 and September 6, 2000, NetBank paid CMC approximately $47 million for seven lease pools.5 With respect to each of the seven lease pools, CMC, NetBank and Amwest Surety Insurance Company ("Amwest") entered into a separate Sale and Servicing Agreement ("SSA").6 Amwest initially issued the surety bonds, but its successor, Royal Indemnity Company ("Royal"), issued its own surety bonds to replace them.
Under the SSA, CMC assigned to NetBank its rights to and interests in the lease payments and its rights under the surety bonds, among other things (collectively, "transferred assets"). SSA, Article II, § 2.1(a)(i)-(iv). As security for the lease payments, CMC granted NetBank a security interest in a bundle of assets, including the leases themselves, the equipment, insurance policies, and all items contained in the lease files, and any other documents relating to the leases kept on file pursuant to CMC's customary procedures (collectively, "lease assets")—but not the surety bonds. SSA, Article II, § 2.1(b)(i).
At the time CMC assigned the transferred assets and granted the security interest in the lease assets to NetBank, CMC represented that all filings and other actions required to give NetBank a first priority perfected lien or ownership interest in the leases and the transferred assets had been accomplished, including filings of Uniform Commercial Code ("UCC") financing statements. SSA, Article II, § 2.4(n). CMC also agreed that it would take all actions necessary to maintain and/or preserve, in NetBank's favor, a first priority perfected security interest in the lease assets and the transferred assets. SSA, Article II, § 3.13(b)-(c); Article VI, § 6.5; Article X, § 10.2(a). Neither CMC nor NetBank filed any UCC financing statements with respect to the lease assets or the transferred assets.
Pursuant to the SSA, Royal was appointed as servicer, and CMC was appointed as sub-servicer. SSA, Article I, § 1.1.
As sub-servicer, CMC assumed all responsibility, as agent for and on behalf of the servicer, to perform the servicer's duties under the SSA, although the servicer was not relieved of any of its obligations under the SSA. SSA, Article I, § 1.1; Article III, § 3.7. NetBank agreed to deal directly with CMC for as long as it served as sub-servicer. SSA, Article III, § 3.7. CMC later formed Commercial Servicing Corporation ("CSC") to service the lease pools. CSC was a wholly-owned subsidiary of CMC.
The servicer and/or sub-servicer acted as NetBank's agent. SSA, Article II, § 2.2(a); Article III, § 3.1. As agent, the servicer and/or sub-servicer was to manage the leases and collect and distribute the lease payments, among other things. SSA, Article III, § 3.1; Article III, § 3.2(a).
The servicer and/or sub-servicer also acted as NetBank's custodian of documents and instruments relating to the leases. SSA, Article II, § 2.2(a). Specifically, the servicer and/or sub-servicer was to be in possession and maintain custody of the original leases, all documents relating to the leases and copies of all of the surety bonds, among other things. SSA, Article II, § 2.2(a)(i)-(iv); Article II, § 2.2(c)(i)-(iii). CMC was to hold and maintain the lease files in its offices in Escondido, California. SSA, Article II, § 2.2(b). Royal agreed to deliver the original lease files to CMC as sub-servicer, though CMC was to deliver the original surety bonds to NetBank. SSA, Article II, § 2.7(a)-(b).
CMC retained physical possession of the lease files at its offices. NetBank actually had physical possession of the surety bonds.
In late 2001 and early 2002, CMC failed to distribute the payments owed to NetBank under the SSAs. NetBank demanded compensation from Royal as surety for the defaulted payments; Royal complied.
On February 1, 2002, Royal initiated an action against CMC in the United States District Court for the Southern District of California ("District Court Action"),7 seeking to freeze certain bank accounts of CMC, remove CMC as sub-servicer and obtain an order requiring CMC to provide an accounting of the books and financial records of the Royal bonded leases.
On the same day, Royal obtained a temporary restraining order ("TRO") against CMC, requiring CMC to "make available to Royal all books, records, and accounts related to Royal bonded leases." CMC also was prohibited from withdrawing or transferring any Royal bonded lease payments.
Between February 11, 2002 and March 26, 2002, Royal and CMC stipulated to several amendments to the TRO,8 all of which required CMC to "make reasonably available" to Royal, beginning on February 6, 2002, all books, records and accounts related to Royal's bonded leases. Royal initially did not seek possession of the lease files, but rather access to them.
The amendments to the TRO further prohibited CMC from: (1) withdrawing any lease payments from certain accounts related to the Royal bonded lease pools; (2) removing any leases from Royal bonded lease pools without Royal's consent; (3) depositing any Royal bonded lease payments into accounts other than those related to the Royal bonded lease pools; (4) instructing lessees in the Royal bonded lease pools to deposit or transfer lease payments into bank accounts other than those related to Royal; (5) depositing any proceeds from any collection activities related to any Royal bonded leases into bank accounts other than those related to Royal; (6) transferring any payments from leases that had been removed from the Royal bonded lease pools ("removed leases") and placed into non-Royal accounts; and (7) selling or transferring any of the removed leases or any payments derived from the removed leases without Royal's consent.
On February 26, 2002, the magistrate judge in the District Court Action entered an order requiring CMC to produce an electronic copy of all lease accounting data maintained by CMC with respect to the Royal bonded leases by March 4, 2002 ("February 26 order"). CMC also was required to produce or provide access to "the removed lease files bonded by the respective sureties" by March 6, 2002. On March 4, 2002, CMC provided compact discs containing lease accounting data and copies of some electronic files to counsel for Royal.
On March 8, 2002, counsel for CMC directed Royal and the other sureties by letter to retrieve their respective lease files from CMC's offices on March 11, 2002. When James Patterson, counsel for Royal, arrived at CMC's offices, the offices were vacated and closed. On the same day, by a faxed letter, counsel for CMC informed Royal and the other sureties that the lease files would be available for retrieval the next day. Mr. Patterson retrieved the lease files on March 12, 2002.9
On March 19, 2002, the district court approved a stipulation between CMC, Royal and the other sureties ("March 19 stipulation")10 whereby CMC resigned as sub-servicer. CMC also would make available for retrieval by Royal, beginning March 12, 2002, all of the original files related to its bonded leases. CMC was obligated to make all of the lease files available to Royal until it was able to inventory the files and verify that CMC indeed had made available all the necessary files. CMC further agreed to preserve and maintain and make reasonably available to Royal, for inspection and copying, all documents and records not previously made available to Royal, "however stored or maintained and wherever located, now in [CMC's] possession or under [its] control related to the business or activities of CMC/CSC."
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