U.S. Claims, Inc. v. Flomenhaft & Cannata, LLC

• Decision Date: 13 November 2006
• Docket Number: Civil Action No. 2:06-CV-0978-LDD.
• Citation: 519 F.Supp.2d 515
• Parties: U.S. CLAIMS, INC., Plaintiff, v. FLOMENHAFT & CANNATA, LLC, et al., Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

519 F.Supp.2d 515

U.S. CLAIMS, INC., Plaintiff, v. FLOMENHAFT & CANNATA, LLC, et al., Defendants.

Civil Action No. 2:06-CV-0978-LDD.

United States District Court, E.D. Pennsylvania.

November 13, 2006.

Memorandum Granting in Part Reconsideration February 26, 2007.

Steven M. Coren, Kaufman Coren & Ress, PC, John W. Morris, Philadelphia, PA, for Plaintiff.

Jeffrey A. Zucker, Paul Joseph Cianci, Fisher Zucker LLC, Philadelphia, PA, for Defendants.

MEMORANDUM

DAVIS, District Judge.

Presently before the Court is Defendant the Stillwater Asset-Backed Fund LP's Motion to Dismiss the Amended Complaint or to Transfer (Doc. No. 19) and Plaintiff's Response in Opposition (Doc. No. 24). Upon careful consideration of Plaintiff's pleadings, and after hearing oral argument on the matter on October 13, 2006, for the reasons set forth below, Defendant's Motion to Dismiss or Transfer is hereby GRANTED as to the dismissal of Count VI of the Amended Complaint (the declaratory judgment claim) and DISMISSED on the remaining grounds as moot.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

Plaintiff U.S. Claims, Inc. is a Delaware corporation engaged in the business of purchasing from attorneys fee interests in pending legal claims. Defendant Michael Flomenhaft is an attorney licensed to practice in New York, and is a partner of Defendant Flomenhaft & Cannata LLP, a New York Limited Liability Partnership (collectively "the Flomenhaft Defendants"). From late-2001 to mid-2003, the Flomenhaft Defendants allegedly executed a series of purchase agreements with Plaintiff, in which they agreed to sell their interests in future fees they would earn in various personal injury claims in exchange for a number of monetary advances from U.S. Claims. Each agreement contains a list of a number of the law firm's clients ("claimants"), and the agreement purports to sell and assign to U.S. Claims an "interest" in the fees earned by the firm in connection with each claimant's claim. See Am. Compl., Ex. A at 1. Total fees are determined based on terms of the attorneys fee agreements the firm has with each client. Id. U.S. Claims'"interest" is calculated based on the amount originally advanced to the firm, with the "interest" owned by Plaintiff increasing every month, ultimately tapering off and resulting in a final amount after a period of one to two years, depending on the terms of the relevant purchase agreement. See, e.g., id., Ex. A at 7-8. If any of the clients hires new counsel, or if any claims result in no proceeds, either as a result of an adverse verdict or a voluntary or otherwise termination, the firm must transfer to U.S. Claims "makeup fees" from other claims "in an amount at least equal to the estimated Fees with respect to any such Claim for which no Fee was payable." Id., Ex. A at 4. U.S. Claims is entitled to one hundred percent (100%) of what the firm collects as its fee in connection with each named claimant's case, until such time as the firm fully satisfies Plaintiff's "interest." Id., Ex. A at 1. No financing statements were ever filed by U.S. Claims with regard to any of these purchase agreements.

Subsequently, the Flomenhaft Defendants entered into a financing agreement with the Defendant the Stillwater Asset-Backed Fund LP ("Defendant Stillwater"), a New York partnership, in which the Flomenhaft Defendants pledged all their assets to Stillwater in exchange for a monetary advance. Am. Compl. ¶ 20. Stillwater filed a financing statement for this transaction in January 2005. Id. Plaintiff alleges Stillwater had knowledge of the terms of Plaintiff's agreements with the Flomenhaft Defendants because the Stillwater transaction was arranged by Brian Spira, a former representative of U.S. Claims who previously arranged the Plaintiff s financing transactions with the Flomenhaft Defendants. Id. at ¶ 21. After entering into the agreement with Stillwater, U.S. Claims alleges that the Flomenhaft Defendants have refused to honor their payment obligations to Plaintiff because they claim all their assets are now subject to Defendant Stillwater's lien. Id. at ¶ 22.

Plaintiff is suing the Flomenhaft Defendants for allegedly violating the purchase agreements and is proceeding against Defendant Stillwater for a declaratory judgment that Plaintiff's rights in the Flomenhaft Defendants' assets are superior to those of Stillwater. On September 29, 2006, Defendant Stillwater moved to dismiss Plaintiff's complaint (1) for failing to properly allege diversity of citizenship, (2) for improper venue under 28 U.S.C. § 1406(a), or in the alternative, for a change of venue to the Southern District of New York pursuant to 28 U.S.C. § 1404, and (3) for failure to state a claim. Plaintiff has subsequently amended its Complaint to cure the defect in its diversity of citizenship pleading.¹ Thus Defendant Stillwater's first ground for dismissal is now moot.

II. LEGAL STANDARD

A motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure tests the legal sufficiency of the complaint. See Markowitz v. Ne. Land Co., 906 F.2d 100, 103 (3d Cir.1990); Sturm v. Clark, 835 F.2d 1009, 1011 (3d Cir.1987). Dismissal for failure to state a claim is appropriate when it clearly appears that the plaintiff can prove no set of facts in support of the claim which would entitle him to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); Robb v. City of Phila., 733 F.2d 286, 290 (3d Cir.1984). In deciding a motion to dismiss pursuant to Rule 12(b)(6), all facts alleged in the complaint must be accepted as true. Malia v. Gen. Elec. Co., 23 F.3d 828, 830 (3d Cir.1994). A court may also consider any document appended to and referenced in the complaint on which plaintiff's claim is predicated. See Fed.R.Civ.P. 10(c); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir.1997); In re Westinghouse Sec. Litig., 90 F.3d 696, 707 (3d Cir.1996). While a court is to treat all facts alleged in the complaint as true when resolving a motion to dismiss, the same treatment does not extend to legal conclusions masquerading as facts. See, e.g., Morse v. Lower Marion School Dist., 132 F.3d 902, 906 (3d Cir.1997); Plasko v. City of Pottsville, 852 F.Supp. 1258, 1261 (E.D.Pa.1994). Nor must a court accept as true conclusory allegations contradicted by documents underlying the complaint. Steckman v. Hart Brewing, Inc., 143 F.3d 1293, 1295-96 (9th Cir.1998). A claim may be dismissed when the facts alleged and the reasonable inferences therefrom are legally insufficient to support the relief sought. See Corn. of Pennsylvania ex rel. Zimmerman v. PepsiCo., Inc., 836 F.2d 173, 179 (3d Cir.1988).

III. DISCUSSION

In Count VI of its Complaint, Plaintiff seeks a declaratory judgment against Defendant. Am. Compl. ¶¶ 49-54. U.S. Claims alleges that because the purchase agreements at issue created sales of "payment intangibles" under Article 9 of the Uniform Commercial Code ("Article 9"), perfection was automatic pursuant to UCC § 9-309(3), and thus Plaintiff is entitled to a declaratory judgment that Plaintiffs security interest in the Flomenhaft Defendants' assets is superior to that asserted by Stillwater. Id. at ¶¶ 50-51. Defendant Stillwater has moved to dismiss this claim under Fed.R.Civ.P. 12(b)(6), arguing instead that the relevant purchase agreements involved sales of "accounts," and not of "payment intangibles." Therefore, Stillwater argues, since U.S. Claims did not perfect its interest by filing, Stillwater's perfected security interest in the Flomenhaft Defendants' assets has priority as a matter of law.

The creation of a valid and enforceable security interest requires (1) the secured debtor receive some value, (2) the debtor have rights in the collateral at issue, and (3) an agreement. UCC § 9-203(b).² When all three requirements are met, a security interest "attaches" to the collateral and is enforceable between the parties to the agreement. UCC § 9-203(a). The next step, "perfection," is necessary in order to maximize the secured creditor's rights (i.e. to establish priority) against third persons laying claim to the same collateral. 4 James J. White & Robert S. Summers, Uniform Commercial Code § 30-1(b) (5th ed.2002). Where there are conflicting security interests in the same collateral, priority is determined by looking to the order of perfection. See UCC § 9-322(a). Perfected security interests take priority over conflicting unperfected interests. UCC § 9-322(a)(2). The subjective knowledge of a secured creditor with regard to another's conflicting security interest is irrelevant: the first to perfect prevails. UCC § 9-322, cmt. 4, ex. 2.

A. Proper Characterization of the Transactions at Issue

The procedure required to perfect a security interest depends on the type of collateral involved. While perfection is most commonly accomplished through the filing of a financing statement, with some types of collateral, perfection is automatic. White & Summers, supra § 30-1(b). Therefore, resolution of the issue in this case turns on the proper legal characterization of the assets that are the subjects of the purchase agreements between U.S. Claims and the Flomenhaft Defendants. If, as Plaintiff claims, the purchase agreements provided for sales of "payment intangibles," perfection is automatic upon attachment, see UCC § 9-309(3), and Plaintiff prevails. On the other hand, if the transactions between U.S. Claims and the Flomenhaft Defendants involved sales of "accounts" as Stillwater argues, then Stillwater's perfected interest takes priority over Plaintiff's unperfected interest. See UCC § 9-102, cmt. 5(a) (when accounts are sold, financing statement must be filed to perfect buyer's interest); see also UCC § 9-322(a)(2) (perfected interests prevails over unperfected interests).

Under UCC § 9-102(a)(2), "account" is defined as "a right to payment of a monetary obligation, whether or not earned by performance ... for...