Martens v. Hadley Memorial Hosp.

• Decision Date: 02 February 1990
• Docket Number: Civ. A. No. 87-1317.
• Parties: Vernon E. MARTENS, M.D., Plaintiff, v. HADLEY MEMORIAL HOSPITAL, Defendant, v. BLUE CROSS AND BLUE SHIELD OF the NATIONAL CAPITAL AREA, and First American Bank, N.A., Garnishees.
• Court: U.S. District Court — District of Columbia

729 F. Supp. 1391

Vernon E. MARTENS, M.D., Plaintiff, v. HADLEY MEMORIAL HOSPITAL, Defendant, v. BLUE CROSS AND BLUE SHIELD OF the NATIONAL CAPITAL AREA, and First American Bank, N.A., Garnishees.

Civ. A. No. 87-1317.

United States District Court, District of Columbia.

February 2, 1990.

Lee H. Karlin, Washington, D.C., Christian Camenisch, Alexandria, Va., for plaintiff.

Ronald L. Early, Louis S. Bonanni, Lerch, Early, Roseman & Frankel, Bethesda, Md., for defendant Hadley Memorial Hosp.

MEMORANDUM OPINION

(Awarding Payment of Judgment)

BARRINGTON D. PARKER, Senior District Judge:

BACKGROUND

On February 17, 1989, this Court, in accordance with a jury award of damages, entered judgment in favor of the plaintiff Vernon E. Martens, M.D. and against defendant Hadley Memorial Hospital ("Hadley" or "Hospital") in the amount of $609,906. Hadley owed this amount to Dr. Martens for professional pathological services rendered from January 1983 through June 1986.

Several months after the jury award, plaintiff's counsel attempted to satisfy the judgment by securing from this Court two Writs of Attachment.¹ The first, served on Blue Cross and Blue Shield of the National Capital Area ("BC/BS"), revealed an indebtedness to Hadley for a BC/BS claims payment in the amount of $76,565. Thereafter, plaintiff's counsel moved to condemn that claims payment.

The second attachment, served on First American Bank ("First American" or "Bank"), revealed that Hadley had on deposit $203,076 in demand accounts and $1,306,042 in a Debt Service Reserve Fund established in accordance with a Hospital Revenue Bond Issue and Loan Agreement ("Loan Agreement").² Martens moved to condemn these two accounts. The Bank then filed a motion to release attachment of the accounts, arguing that it had a prior perfected security intertest in the attached funds.

Plaintiff's counsel's response memorandum of November 21, 1989, in opposition to the Bank's motion to release attachment, did not contest the Bank's superior interest as a secured creditor. Rather, he argued that a material default by Hadley on the Loan Agreement is a precondition to First American's right to dissolve the writ or take possession of the assets. For authoritative support, he relied primarily upon section 28:9-311, D.C.Code Ann. (1981) ("Alienability of a debtor's rights in collateral: judicial process") and upon cases decided under the corresponding Uniform Commercial Code ("U.C.C.") Section 9.311.³

On January 5, 1990, the Bank as intervenor filed a response to Martens' opposition to release attachment of the BC/BS claims, arguing that its security interest extended to Hadley's interest in the BC/BS claims payment. It further alleged that Hadley was in default under the Loan Agreement and that as a secured party, the Bank was entitled to exercise its remedies under the U.C.C. to defeat plaintiff's judgment lien.

First American specifically argued that: default by Hadley was not legally required for this Court to direct the transfer of the attached assets to the Bank as Trustee; even if default was found to be a prerequisite to the exercise of the Bank's remedies as a secured creditor, Hadley's failure to stay execution of the judgment against it violated the conditions of the Loan Agreement and permitted the Bank to declare Hadley in default; having declared Hadley in default, the Bank was now free to accelerate any indebtedness owed to it by Hadley, including a separate unsecured $2.5 million loan ("First American Loan").⁴ Finally, First American contended that it is entitled to exercise a common law right of set off against debts owed to it by Hadley as to any accounts and investments held by the Bank. The Bank has not accelerated any debt of the Hospital or declared any debt presently due and payable.

ANALYSIS

Two issues are presented by the motions now before the Court: whether under the U.C.C. and the applicable D.C.Code, First American's priority interest in the BC/BS revenue and in the Hospital accounts held by the Bank enables the Bank to defeat Martens' writ of attachment; whether First American may use its common law right of set off to quash the attachment of the Hospital's bank accounts. These issues will be addressed in turn.

A.

First American claims, and the plaintiff Martens does not contest, that under the Loan Agreement, First American as Trustee has an enforceable security interest in the "unrestricted revenues"⁵ of Hadley Memorial Hospital.⁶ Nor does he dispute that the BC/BS revenues owed to Hadley are accounts⁷ under the Loan Agreement and therefore subject to First American's prior perfected security interest.⁸ Rather, he argues that in the absence of a material default on the loan underlying the debt, First American's security interest in the BC/BS account is neither presently enforceable nor does it suffice to dissolve the writ of attachment. The Bank alleges that it has declared Hadley in default under the terms of both the Loan Agreement⁹ and the Indenture.¹⁰

Art. IX of the U.C.C. and the corresponding D.C.Code sections allow a creditor to obtain a security interest in property of the debtor to insure payment of the debt owed. See D.C.Code Ann. §§ 28:9-101 to 507 (1981). If the debtor defaults on the debt, the creditor can avail himself of the remedies provided in Art. IX. See D.C.Code Ann. §§ 28:9-501 to 507 (1981). Among the remedies available to a secured party is the right to seize the collateral. Id. § 28:9-503. Default is, however, the essential prerequisite to the exercise of the secured parties rights.¹¹ In the absence of such, a secured creditor cannot seize the collateral and apply it against the loan or otherwise prevent another creditor of the debtor from taking possession of the collateral.¹² See, e.g., Frierson v. United Farm Agency, Inc., 868 F.2d 302, 304-305 (8th Cir.1989), aff'g in relevant part 672 F.Supp. 1272 (W.D.Mo.1987); Sur-Gro Plant Food Co., Inc. v. State Savings Bank, 730 S.W.2d 602, 604-605 (Mo.Ct. App.1987); Humble Oil and Refining Co. v. Pathological and Diagnostic Laboratories, Inc., 11 U.C.C. Rep.Serv. 386, 387 (N.Y.Civ.Ct.1972); see also D.C.Code Ann. § 28:9-501(1) (1981) ("When a debtor is in default, a secured party has the rights and remedies provided in this part and ... those provided in the security agreement.") (emphasis added); D.C.Code Ann. § 28:9-503 (1981) ("Unless otherwise agreed a secured party has on default the right to take possession of the collateral.") (emphasis added). The question presented here is whether under Art. IX of the U.C.C., given the circumstances of Hadley's default, First American can assert its rights as a secured party to quash plaintiff's writs of attachment in the BC/BS revenue and in the Hadley accounts held by First American.

Plaintiff cites U.C.C. § 9-311, adopted and codified in the District of Columbia at D.C.Code Ann. § 28:9-311 (1981) in support of the argument that First American cannot dissolve the above writs. Section 28:9-311 provides:

The debtor's rights in collateral may be voluntarily or involuntarily transferred (by way of sale, creation of a security interest, attachment, levy, garnishment or other judicial process) notwithstanding a provision in the security agreement prohibiting any transfer or making the transfer constitute a default.

The purpose of this section, according to the U.C.C., is "to make clear that in all security transactions under this Article, the debtor has an interest (whether legal title or an equity) which he can dispose of and which his creditors can reach." U.C.C. § 9-311 comment 1; Frierson, 868 F.2d at 305 (permitting secured creditor to impair "the status of other creditors by preventing them from exercising valid liens ... would fly in the face of all Article 9, which is premised on the debtor's ability to exercise rights in the property" (citing Mo.Stat. Ann. § 400.9-311)); New Jersey Bank v. Community Association Farms, Inc., 666 F.2d 813, 819 (3d Cir.1981); Brescher v. Associates Financial Services Company, 460 So.2d 464, 466 (Fla.App.1984) (citing comment 1 as establishing the intent of the U.C.C. § 9-311 to change the common law rule in some states that prohibited the judgment creditor from proceeding against debtor's interest in personal property covered by a security agreement).¹³

Courts that have examined the issue of default under Art. IX of the U.C.C. have held that the mere declaration of a default in the absence of other affirmative remedial action, such as the acceleration of the loan, does not entitle the secured party to take possession of the collateral under U.C.C. § 9-503. Frierson, 868 F.2d at 304-305; see also Humble Oil & Refining Co. v. Pathological and Diagnostic Laboratories, Inc., 11 U.C.C.Rep.Serv. 386 (N.Y. Civ.1972) (ordering the transfer of collateral to judgment creditor notwithstanding the prior perfected security interest of a secured creditor in the collateral and default by debtor, because the secured creditor chose to allow the debtor to retain possession of the collateral prior to enforcement by judgment creditor).

In Frierson v. United Farm Agency, Inc., 672 F.Supp. 1272 (W.D.Mo.1987), 868 F.2d at 303-305, the trial court, on facts similar to those in the present case, found that a secured party cannot assert its rights under a security agreement to dissolve a writ of attachment or prevent a judicial sale "absent a declaration that the secured debt is in default and an exercise by the secured creditor of its rights over the collateral." Id. at 1276 (emphasis added). The trial court further stated:

Most secured loans provide for numerous events which constitute default, many of which are technical in nature and are inserted in the loan documents to enable the lender to declare the note in default when even a relatively minor problem arises with the loan or the debtor. Thus, at any given time many secured loans are technically in default, but are never treated as such by secured

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