Conrad O’Brien wins motion involving an issue of first impression in Pennsylvania under the Uniform Commercial Code. At issue in the case of WFIC v. LaBarre was whether an assignment of anticipated proceeds to litigation qualified as a “payment intangible” under Article 9 of the UCC such that the holder of the assignment could assert priority over other secured creditors by claiming an automatically perfected security interest from the time of the assignment. Judge Glazer of the Philadelphia Court of Common Pleas rejected the plaintiff’s attempt to establish automatic perfection under the “payment intangible” exception to the normal UCC filing requirements necessary to perfect a security interest.
This article originally ran in The Legal Intelligencer on November 12, 2013.
A Philadelphia common pleas judge, taking a narrow view of what constitutes "payment intangible" under the Uniform Commercial Code, said the "mere hope" of recovery in litigation could not be counted as an asset for legal purposes without a lawyer's certification of the case.
In an apparent case of first impression under the Uniform Commercial Code in Pennsylvania, Philadelphia Court of Common Pleas Judge Gary S. Glazer ruled that the potential proceeds of a lawsuit could not be considered a payment intangible in satisfying the debt owed by a company to a lender.
The decision in WFIC v. LaBarre underscores the need for a lawyer's certification to ensure that his or her clients' debtors can repay them through established, not potential, assets.
Glazer wrote that an agreement entered to repay a lender through payment intangible must, under the UCC, be based on concrete assets.
"Payment intangibles require an obligation, and the mere hope of receiving favorable judgment does not create one on its own," Glazer said.
The litigation in WFIC stems from three loans totaling $1.4 million made by Larry Martin to a company, Polymer Dynamics Inc. (PDI).
PDI failed to pay back the loan and defaulted, according to Glazer, prompting Martin's attorney, Allen Turner, to file a confession of judgment.
PDI was insolvent at the time. However, it claimed that its primary asset was a breach of contract and negligent misrepresentation lawsuit against Bayer Corp., Glazer said. PDI believed that all of its claims against Bayer would yield an award of at least $100 million.
Based on Turner's advice, Martin agreed to release the confession of judgment in return for entering into a settlement agreement for a portion of the potential proceeds from the Bayer suit.
According to Glazer, the agreement stated that any proceeds garnered from the litigation would first be applied to attorney fees, then to any payments owed to the government, and lastly to any unpaid amounts owed to Martin.
Pursuant to the language of the agreement, Turner filed a UCC-1 financing statement in 2001 to perfect the agreement. However, the statement expired in 2006 because Turner failed to file a UCC-3 continuation statement, Glazer said.
Additionally, in 2005, PDI obtained a $12.5 million verdict against Bayer, but decided to appeal the decision. Glazer said the order was affirmed by the U.S. Court of Appeals for the Third Circuit in 2009.
PDI acquired investors during its appeal to fund its legal fees. According to Glazer, the litigation fund attracted investors because they would receive a share of the proceeds as part of the attorney fees paid out to PDI's lawyers.
From 2009 to 2010, the award money was paid out in the predetermined sequence; however, Martin did not receive payment because PDI determined that Martin's security interest was unperfected due to the failure to file the UCC-3 statement, Glazer said.
As a consequence, Martin sued Turner and Turner's insurance carrier—Westchester Fire Insurance Co. (WFIC)—for malpractice, which resulted in a settlement of $1 million, Glazer said.
The settlement agreement required that Martin assign his claim from the Bayer case to WFIC. According to Glazer, WFIC brought suit against all of the parties that received proceeds from the Bayer suit.
A court-appointed special trial master, Peter F. Vaira, requested that the parties submit briefs on three bifurcated issues: whether Martin perfected the security interest in the Bayer proceeds; if so, did Martin's interests continue to be superior to all others in the litigation; and lastly, whether the assignment of Martin's proceeds rights to WFIC was valid and enforceable by the court.
"This court rejects plaintiff's attempts to classify an assignment of an anticipated judgment resulting from a sale of defective goods as payment intangible," Glazer said.
Citing the state Supreme Court decision in Sams v. Redevelopment Authority of City of New Kensington, Glazer noted that proceeds could only be assigned after the filing, and any necessary continuance, of a financing statement.
Glazer also cited a Ninth Circuit opinion, In re Cohen, which said that until there is a contractual obligation to pay a judgment, a tort claim cannot be a payment intangible because the required monetary obligation is lacking.
"The mere likelihood that PDI would receive damages is insufficient," Glazer said. "Bayer's obligation only materialized once the verdict was upheld in 2009. Until then, Bayer was not bound to pay PDI anything."
Glazer concluded that Martin and his attorney failed to file the necessary statements to keep the interest from lapsing and WFIC could not bypass the filing requirement by designating its interest as payment intangible.
The attorney for WFIC, Benjamin A. Andersen of Powell, Trachtman, Logan, Carrle & Lombardo, did not return a phone call seeking comment.
Andrew S. Gallinaro of Philadelphia-based Conrad O'Brien represented William Anthony Hitschler, one of WFIC's litigation fund investors. Gallinaro said he was pleased with Glazer's ruling and that Glazer's reasoning tracked the defense arguments made.
"WFIC was trying to create new law on this issue that hasn't come up too often in any part of the country. No court has ever held that anticipated proceeds can be used as payment intangible," Gallinaro said.
When asked for comment, Turner said: "I'm not a party to this case."
Reprinted with permission from the November 12, 2013 issue of The Legal Intelligencer. © 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.