Filed 1/8/15 (unmodified opn. attached)

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SIX

RENEE FERESI,

 Plaintiff and Respondent,

v.

THE LIVERY, LLC et al.,

 Defendants and Appellants.

2d Civil No. B248607

(Super. Ct. No. 56-200900362200-

CU-CO-VTA)

ORDER MODIFYING OPINION

[NO CHANGE IN JUDGMENT]

THE COURT:

It is ordered that the opinion filed herein on December 15, 2014, be modified as 

follows:

1. On page 1, the first paragraph is deleted and the following paragraph is inserted in 

its place: 

The Commercial Code1provides that "a financing statement must be filed to 

perfect all security interests . . . ." (§ 9310, subd. (a).) It further provides, "A 

perfected security interest . . . has priority over a conflicting unperfected 

security interest . . . ." (§ 9322, subd. (a)(2).) This order of priority is not 

immutable and in some circumstances must yield to principles of equity. Here 

two parties hold security interests in the same entity. One party perfected his 

security interest by breaching a fiduciary duty owed to the party whose 

 

1 All statutory references are to the Commercial Code unless stated otherwise.
2

security interest was unperfected. We conclude that equity compels the 

subordination of the perfected interest to the holder of the unperfected interest.

2. On page 2, the first sentence in the first paragraph, beginning "This dispute arises," 

is deleted, and the following sentence is inserted in its place: "The security interests 

held by the parties to this dispute attach to James Mesa's (Mesa) membership share in 

The Livery, LLC (the LLC)."

3. On page 2, the second paragraph, beginning "The LLC and Harley appeal," is 

deleted and the following paragraph is inserted in its place:

The LLC and Hartley appeal the trial court's judgment in favor of Feresi. 

Hartley contends his perfected security interest in Mesa's ownership share of 

the LLC has statutory priority over Feresi's preexisting but unperfected 

security interest. Feresi contends Hartley's security interest is invalid because 

he created the priority of his interest by breaching the fiduciary duty of good 

faith and fair dealing that he owed to her as a member of the LLC.

4. On page 3, in the first full paragraph, add the words "and other creditors" to the end 

of the first sentence, so that the sentence reads: "By 2008, Mesa was struggling 

financially and fell behind on his obligations to Feresi and other creditors." 

5. On page 3, in line 4 of the first full paragraph, the word "he" is changed to 

"Hartley" so that the sentence reads: "Although Hartley knew Mesa's membership 

share in the LLC secured his financial obligations to Feresi, Hartley nevertheless 

secured the loan from his pension plan by the same 12.5 percent membership share 

Mesa pledged to Feresi in 2006."

6. On page 6, the first heading titled "Hartley's Business Relationship with Feresi as a 

Fiduciary" is changed to "Hartley's Duties as a Fiduciary."

7. On page 6, the following paragraph is inserted as the second full paragraph under 

the (new) heading Hartley's Duties as a Fiduciary:

The animating principle of a fiduciary’s duties to his charges is unfaltering

loyalty and honesty. “Many forms of conduct permissible in a workaday world 

for those acting at arm’s length, are forbidden to those bound by fiduciary ties. 
3

A trustee is held to something stricter than the morals of the market place. Not 

honesty alone, but the punctilio of an honor the most sensitive, is then the 

standard of behavior. As to this there has developed a tradition that is 

unbending and inveterate. Uncompromising rigidity has been the attitude of 

courts of equity when petitioned to undermine the rule of undivided loyalty by 

the ‘disintegrating erosion’ of particular exceptions [citation]. Only thus has 

the level of conduct for fiduciaries been kept at a level higher than that trodden 

by the crowd.” (Meinhard v. Salmon (1928) 249 N.Y. 458, 464.)

8. On page 7, in the first full paragraph beginning "Feresi had no reason to protect," 

the following sentence is added before the last sentence: "The primacy of Hartley’s 

security interest in Mesa’s share of the LLC must succumb to the infection of his 

duplicity and silence."

 Also, in the same paragraph, the words "Under these circumstances" are deleted, so 

that the last sentence reads: "The trial court properly refused to enforce the security 

interest held by Hartley's pension plan."

9. On page 7, the heading titled "The Commercial Code (UCC) Filing Scheme" is 

changed to "Equitable Subordination."

10. On page 8, the following two paragraphs are added after the first paragraph ending 

"(Knox, supra, at pp. 1364-1365.)":

We conclude that if a fiduciary engages in inequitable conduct with 

respect to a person to whom a fiduciary duty is owed, then its claim, lien or 

security interest may be wholly or partially subordinated. The doctrine of 

equitable subordination has deep common law roots and is based upon the 

inherent power of a court of equity to do justice as circumstances dictate. 

While the doctrine is most frequently asserted in bankruptcy court because it 

has statutory support in section 510 of the Bankruptcy Code, it has also been 

employed, though sparingly, in other contexts. (See, for example, General Ins. 

Co. v. Lowry (1978) 570 F.2d 120.)
4

As the Knox court observed, equity and thus equitable subordination 

should be invoked with caution by the courts. But where, as here, a petitioner 

has shown: (1) the fiduciary engaged in inequitable conduct; (2) the misconduct 

resulted in injury to the petitioner or conferred an unfair advantage on the 

fiduciary; and, (3) invocation of the remedy of equitable subordination will not 

be inconsistent with the Commercial Code, then the remedy has a place.

11. On page 8, the first two full paragraphs are deleted, and the following paragraph is 

inserted in its place:

The UCC itself acknowledges that its provisions are to be 

supplemented by "principles of law and equity." (§ 1103, subd. (b).) The 

UCC filing system provides a mechanism for creditors to establish the priority 

of security interests they secure from debtors and allows them to determine if 

others already have a claim on collateral. It sets the priority of valid security 

interests in the same collateral through a registration system. The statutory 

scheme is not intended to provide a vehicle for creditors to take advantage of 

persons with whom they have a fiduciary relationship. The application of 

equitable principles in this case strengthens the statutory scheme. Not 

rewarding the product of sharp practices in the creation of a security interest 

lends stability and security in commercial transactions among fiduciaries.

There is no change in the judgment.
Filed 12/15/14 (unmodified opn.)

CERTIFIED FOR PUBLICATION

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

SECOND APPELLATE DISTRICT

DIVISION SIX

RENEE FERESI,

 Plaintiff and Respondent,

v.

THE LIVERY, LLC et al.,

 Defendants and Appellants.

2d Civil No. B248607

(Super. Ct. No. 56-200900362200-

CU-CO-VTA)

(Ventura County)

The Commercial Code2provides that "a financing statement must be 

filed to perfect all security interests . . . ." (§ 9310, subd. (a).) It further provides, "A 

perfected security interest . . . has priority over a conflicting unperfected security 

interest . . . ." (§ 9322, subd. (a)(2).) Although the code reflects the Legislature's 

intention to create a simplified, clear and uniform means of prioritizing security 

interests, there are circumstances when the letter of the law yields to the principles of 

equity and the spirit of justice. (See § 1103, subds. (a), (b).) Here we hold that if a 

perfected security interest is created by breaching a fiduciary duty owed to another 

person, then equitable principles may be applied to give priority to an earlier 

unperfected security interest.

 

2 All statutory references are to the Commercial Code unless stated otherwise.
2

This dispute arises from conflicting security interests held by two 

persons in James Mesa's (Mesa) membership share in The Livery, LLC (the LLC). 

The competing claimants are Mesa's former wife, Renee Feresi (Feresi) whose 

unperfected security interest was created in 2006, and Mark Hartley as Trustee of the 

Fitzgerald-Hartley Pension Plan (Hartley) whose perfected security interest was 

created in 2008. Hartley is the president and managing member of the LLC.

The LLC and Hartley appeal the trial court's judgment. Hartley contends 

his perfected security interest in Mesa's ownership share of the LLC has statutory

priority over Feresi's preexisting but unperfected security interest. Feresi contends 

Hartley's security interest is invalid because Hartley breached a fiduciary duty of good 

faith and fair dealing that Hartley owed to her. Feresi contends Hartley surreptitiously 

created and perfected a security interest in collateral he knew had been earlier pledged 

by Mesa to secure his financial obligations to her.

We modify the judgment to strike the references to "Mark Hartley,

individually" and affirm the judgment as modified.

PROCEDURAL HISTORY AND FACTS

Feresi and Mesa married in 1995 and separated in 2002. During their 

marriage, the couple acquired a 25 percent interest in the LLC. The LLC began with 

four investors who owned equal shares. Hartley's family trust was an investor and he 

served as the LLC's president and managing member.

In May 2006, the court entered a judgment dissolving the marriage of 

Feresi and Mesa. The judgment incorporated the terms of a Marital Settlement 

Agreement (MSA) that awarded Feresi one-half of the community's interest in the 

LLC. Mesa was also required to make the monthly payments on Feresi's home 

mortgage and to pay it off within five years. Mesa's financial obligations to Feresi 

were secured by Mesa's interest in the LLC and other properties.

Feresi did not file a Uniform Commercial Code Financing Statement 

(UCC-1 financing statement) to "perfect" her security interest in Mesa's share of the 

LLC. She instead gave Hartley and the other members of the LLC written notice that 
3

the dissolution judgment awards her one-half of Mesa's share of the LLC and that 

Mesa pledged his retained share as security for his financial obligations to her. 

Amendments to the books and records of the LLC showed Feresi as a member with a 

12.5 percent ownership interest. Corporate tax returns identify Feresi as an LLC

member.

By 2008, Mesa was struggling financially and fell behind on his 

obligations to Feresi. On October 7, 2008, Hartley made a short-term loan to Mesa

of $200,000 from the Fitzgerald-Hartley Pension Plan. Although Hartley knew 

Mesa's membership share in the LLC secured his financial obligations to Feresi, he

nevertheless secured the loan from his pension plan by the same 12.5 percent

membership share Mesa pledged to Feresi in 2006. Hartley did not disclose to Feresi 

either that his pension plan intended to loan money to Mesa or that it would be secured 

by Mesa's membership share.

On October 30, 2008, Feresi notified Hartley as president and manager 

of the LLC that she intended to enforce Mesa's obligations to her by taking the 12.5 

percent share of the LLC and certain other properties he pledged. To this end, Feresi 

filed an Order to Show Cause (OSC) in the family law proceedings to compel Mesa to 

convey his 12.5 percent membership share in the LLC to her. While the OSC was 

pending, on November 12, 2008, Feresi filed a quiet title action against Mesa and the 

LLC to foreclose the "judicial liens" created by the MSA and dissolution judgment, 

and to obtain quiet title to Mesa's 12.5 percent membership share.3

After he was notified of Mesa's failure to meet his obligations to Feresi 

and of her OSC and quiet title action, Hartley determined that Feresi had not filed a 

UCC-1 financing statement to perfect her security interest in Mesa's membership share 

of the LLC. Hartley took advantage of this circumstance to acquire priority for his 

 

3 On November 28, 2011, a judgment was entered in the quiet title action against Mesa 

and The Livery LLC that quieted title in Feresi to a 25 percent interest in the LLC. 

This judgment was served on Hartley as president and manager of the LLC. Neither 

Mesa nor the LLC appealed that judgment.
4

own, conflicting security interest in the same membership share by filing a UCC-1 

financing statement reflecting the loan made by his pension plan to Mesa.

On January 22, 2009, a "judgment" was entered on Feresi's OSC, 

ordering Mesa to "assign, convey and transfer" his remaining 12.5 percent interest in 

the LLC to Feresi. Mesa complied with that order on January 26, 2009. On the same 

day, Feresi notified Hartley and the other LLC members that Mesa's transfer was 

complete and that the LLC's records should be amended to identify her as the owner of 

a 25 percent membership interest.

On October 7, 2009, Mesa failed to repay the loan from Hartley's 

pension plan. On November 12, 2009, the pension plan published a "Notice of 

Disposition" announcing that Mesa's 12.5 percent membership interest in the LLC 

would be sold on November 23 to satisfy the debt. On November 19, 2009, Feresi 

filed this action for declaratory and injunctive relief.

After a trial in November 2012, the court issued its statement of decision 

and factually found: "[B]y 2007, Renee Feresi [was] recognized as a member of The 

Livery, LLC and [was] designated as a 12.5 [percent] member on The Livery LLC 

[corporate tax] returns for 2007." It also found that, when Hartley and Mesa perfected 

the security interest of Hartley's pension plan in Mesa's share of the LLC, Hartley had 

actual notice of Feresi's prior security interest, knew Mesa was in default on his 

obligations to Feresi, knew she was entitled to enforce her security interest by taking 

Mesa's share of the LLC, and knew that she had filed the OSC and quiet title action to 

do so. It also concluded that, once Hartley learned in October 2009 that Mesa had 

transferred his 12.5 percent membership interest to Feresi, Hartley was obligated to 

insure that the LLC's corporate records showed Feresi was the exclusive owner of a 25 

percent membership interest in the LLC.

The trial court ruled that Hartley breached a fiduciary duty owed to 

Feresi and that the security interest created by Mesa and Hartley in October 2008 in 

favor of Hartley's pension plan was "null and void." The trial court declared that 

Feresi has a 25 percent membership interest in the LLC that is not encumbered by the 
5

claims of Hartley or his pension plan. Hartley, Hartley's family trust and his pension 

plan were enjoined from attempting to enforce their security interest in Mesa's share of 

the LLC.

DISCUSSION

Standard of Review

The trial court's decision involves mixed questions of law and fact. The 

court's findings of fact, primarily about what Hartley knew and when he knew it, will 

be affirmed if they are supported by substantial evidence. When a party makes a claim 

of insufficiency of the evidence we begin with the presumption the judgment is 

correct. (Cahill v. San Diego Gas & Electric Co. (2011) 194 Cal.App.4th 939, 956.) 

We may not reweigh or resolve conflicts in the evidence or redetermine the credibility 

of witnesses. (Citizens Business Bank v. Gevorgian (2013) 218 Cal.App.4th 602, 613.) 

We liberally construe the court's findings of facts, whether express or implied. (Ibid.) 

The testimony of a single witness may be sufficient. (Ibid.; Evid. Code, § 411.) To

the extent the court's decision depends on the determination of pure issues of law, 

primarily concerning the scope of the fiduciary duties imposed by law on partners and 

the remedies in the event of a breach, the issues are subject to our de novo review on 

appeal.

Despite the diversions offered by Hartley, this case presents a relatively 

simple set of facts and issues. If the trial court's factual findings are supported by 

substantial evidence, then the question presented is whether Hartley is categorically 

entitled to claim priority for the security interest in favor of his pension plan even if it 

extinguishes the preexisting security interest of his co-member Feresi by breaching a 

fiduciary duty he owes to her. We are satisfied the answer to that question is "No."

Feresi Has Been a Member of the LLC Since 2006.

First, we disagree with Hartley's contention that Feresi was not a 

member of the LLC and was therefore not a person to whom he owed a duty of good 

faith and fair dealing. The trial court concluded otherwise and substantial evidence 

supports that conclusion. Feresi and her counsel repeatedly gave oral and written 
6

notice to Hartley and the LLC that the MSA and judgment awarded Feresi a 12.5 

percent membership share in the LLC and that Mesa had pledged his remaining 12.5 

percent membership share as security for his financial obligations to Feresi. Hartley 

and the other LLC members acknowledged Feresi was also a member by, for example, 

identifying her as a member on the LLC's tax returns.

Hartley's Business Relationship with Feresi as a Fiduciary.

The manager of an LLC has a fiduciary duty and owes to the members of 

the LLC the same duties of loyalty and good faith as a partner owes to the partnership 

and its partners. (§ 3307; Corp. Code, former § 17153, repealed by Stats. 2012, now 

§ 17704.09.) Thus, Hartley is obligated to act with the utmost loyalty and in the 

highest good faith when dealing with any member of the LLC, including Feresi. He 

may not obtain any advantage over Feresi (or any other member of the LLC) by even 

the slightest misrepresentation or concealment. (Enea v. Superior Court (2005) 132 

Cal.App.4th 1559, 1564; Yeomans v. Lysfjord (1958) 162 Cal.App.2d 357, 361-362.)

Hartley Breached the Duty of Good Faith and Fair Dealing He Owed to Feresi.

Substantial evidence supports the trial court's conclusion that Hartley 

breached his fiduciary duty to Feresi by destroying the value of her security interest in

Mesa's ownership share in the LLC to advance his own. Hartley had actual knowledge 

of Feresi's security interest in Mesa's LLC membership, knew that Mesa was in default 

on his obligations to Feresi and knew that Feresi's security interest was immediately

enforceable. Hartley loaned money to Mesa, created a conflicting security interest in 

Mesa's membership share and then surreptitiously perfected it to gain an advantage 

over Feresi.

We reject Hartley's contention that filing of the UCC-1 financing 

statement was not a breach of his fiduciary duties because, "A partner does not violate 

a duty or obligation under this chapter or under the partnership agreement merely 

because the partner's conduct furthers the partner's own interest." (§ 16404, subd. (e).)

"The apparent purpose of this provision . . . is to excuse partners from accounting for 

incidental benefits obtained in the course of partnership activities without detriment to 
7

the partnership. [Fn. omitted.]" (Enea v. Superior Court, supra, 132 Cal.App.4th at p. 

1566.) Hartley is not entitled to disregard his actual knowledge of Feresi's preexisting 

security interest in the same property and perfect his security interest at her expense.

Hartley's filing of the UCC-1 financing statement was not without detriment to his 

partner, Feresi. It rendered her security interest worthless. Section 16404, subdivision 

(e) has no application under these circumstances.

Feresi had no reason to protect the priority of her own security interest in 

the same property because she was unaware that her partner held a conflicting interest. 

Hartley took advantage of Feresi's ignorance by concealing this from her, and betrayed

her trust and confidence by perfecting his pension plan's security interest ahead of 

hers. In doing so, Hartley breached the fiduciary duties of loyalty and good faith he 

owed to Feresi. Under these circumstances, the trial court properly refused to enforce 

the security interest held by Hartley's pension plan.

The Commercial Code (UCC) Filing Scheme

Hartley contends the UCC sets a "hard line" that requires courts to 

disregard the equities and accept "harsh results" to ensure that commercial transactions 

are simple, clear and uniform. Citing Knox v. Phoenix Leasing, Inc. (1994) 29 

Cal.App.4th 1357, 1368, Hartley observes that the statutory priority given to the holder 

of a perfected security interest must be upheld even if the holder is unjustly enriched at 

the expense of an unsecured creditor. In Knox, the perfected security interest attached 

to all equipment owned or later acquired by a winery. The winery's obligation to the 

seller of the equipment was unsecured. The Knox court acknowledged the harsh result 

of finding the perfected interest had priority over that of the seller, but said it had to be 

accepted to ensure "a predictable system of creditor priorities." (Id., at p. 1361.) Even 

so, the Knox court cautioned that, "[V]ictory for a secured creditor is not an immutable 

law of nature. Fraud, for example, is expressly put beyond the pale. [Citation.] A 

code may strive for comprehensiveness, but exceptional situations will arise. Equity is 

ordinarily meant to operate in these situations [citations], but its operation is subject to 

the principle that 'equity follows the law.' [Citation.] This deference requires that 
8

equitable exceptions to statutory law be carefully limited to reduce any possible 

conflict with an express statutory command." (Knox, supra, at pp. 1364-1365.)

The UCC itself acknowledges that its provisions are to be supplemented 

by "principles of law and equity." (§ 1103, subd. (b).) We do not believe the 

Legislature intended to confer a benefit to a person who files a UCC-1 financing 

statement in violation of a fiduciary duty. The Legislature's interest in simple, clear,

and uniform prioritization of security interests does not condone such an outcome. 

The exceptional situation contemplated by Knox is found here. The application of 

equitable principles in this case strengthens the statutory scheme. Not rewarding the 

product of sharp practices in the creation of a security interest lends stability and 

security in commercial transactions among fiduciaries.

The UCC filing system provides a mechanism for creditors to establish 

the priority of security interests they secure from debtors and allows them to determine 

if others already have a claim on collateral. It sets the priority of valid security 

interests in the same collateral through a filing system. The statutory scheme is not 

intended to provide a vehicle for creditors to take advantage of persons with whom 

they have a fiduciary relationship. Thus, in this case, it is not determinative that 

Hartley perfected his pension plan's security interest in Mesa's membership share by 

filing a UCC-1 financing statement.

Modification of the Judgment

The judgment entered on March 25, 2013 declares that it is "in favor of 

Plaintiff Renee Feresi and against The Livery, LLC and Mark Hartley, individually

and as Trustee of the Fitzgerald-Hartley Pension Plan." It also declares that "Renee 

Feresi owns the [25 percent interest] in The Livery, LLC free and clear of any interest 

asserted by Mark Hartley, or the Fitzgerald-Hartley Pension Plan to that interest."

Mark Hartley was named individually as a defendant but the court 

sustained his demurrer and the case was dismissed as to him individually. The 

provisions of the judgment that are specific to him other than in his representative 

capacity must be stricken.
9

DISPOSITION

The Clerk of the Superior Court is instructed to strike the provisions in 

the judgment found on page two, line 10 and lines 15 to 16 that refer to "Mark Hartley,

individually." The judgment, as modified, is affirmed. Respondent is awarded her 

costs on appeal.

CERTIFIED FOR PUBLICATION.

BURKE, J.*

We concur:

GILBERT, P. J.

YEGAN, J.

 

*

(Judge of the Superior Court of San Luis Obispo County, assigned by the Chief 

Justice pursuant to art. 6, § 6 of the Cal. Const.)
Charles R. McGrath, Judge

Superior Court County of Ventura

______________________________

Goldenring & Prosser, Peter A. Goldenring and James E. Prosser for 

Defendants and Appellants.

Law Offices of William Crockett, William E. Crockett and Kenneth C. 

Bounds for Plaintiff and Respondent.