Opinion ID: 164803
Heading Depth: 2
Heading Rank: 1

Heading: The Liens Issue

Text: 14 In early 1999, LifeWise asked its Chairman Michael Salzhauer for financial assistance. On April 1, 1999, LifeWise obtained a $5 million loan from Benjamin Partners (BP), a Salzhauer family partnership, by executing a Security Agreement, XV Aplt.App. at 6716-37, and a Note Purchase Agreement, id. at 6690-715. 5 In the Security Agreement, LifeWise Family granted BP a security interest in all assets 6 of LifeWise, including LifeWise's interests in the policies held by Bankers Trust that secured ETRADE's advances. XII Aplt.App. at 5351. LifeWise does not dispute that liens were placed on the policies. XV Aplt.App. at 6736. On December 31, 2000, another Salzhauer family entity, Combined Partnership, was substituted as the secured party in the Security Agreement. 7 XII Aplt.App. at 5396-97. 15 ETRADE did not discover the liens on the policies until after this lawsuit was filed, during the deposition of LifeWise's Chief Financial Officer, Mr. Syver Norderhaug. XV Aplt.App. at 6788-94. Three weeks later, on April 1, 2001, LifeWise and Combined Partnership executed an Acknowledgment and Confirmation. Id. at 6736-37. The document acknowledged that LifeWise granted Combined Partnership a security interest in ... LifeWise's rights under certain Life Insurance Policies, but that Combined Partnership wishes to disclaim any and all right, title or interest in the Life Insurance Security Interest, if any such interest ever existed. Id. 16 The Security Agreement listed two ways in which BP's lien could be released. First, under § 7, the liens could be released if the Secured Obligations have been paid in full. Id. at 6728. Second, under § 11, BP could unilaterally decide to surrender the collateral. Id. at 6729. LifeWise concedes that neither of these conditions was met. 17 LifeWise argues, however, that BP's lien was released pursuant to § 5.6 of the Security Agreement, coupled with Section 9-306(2) of the Uniform Commercial Code, Utah Code Ann. § 70A-9-306(2) (1999). 8 Section 9-306(2) provided that a security interest continues in collateral notwithstanding sale, exchange, or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections by the debtor. (emphasis added). Section 5.6 of the Security Agreement, wherein BP authorized disposition of the collateral by LifeWise Family in certain cases, states: 18 Debtor will not sell, assign, transfer or otherwise dispose of any material portion of the Account or Contracts, which constitute a part of the Collateral, or attempt, offer or contract to do so except, so long as no Event of Default has occurred and is continuing, for the disposition of such accounts and Contracts [1] in the ordinary course of business [2] to third party purchasers [3] without recourse to the Debtor. 19 XV Aplt.App. at 6726 (emphasis added). 20 The dispute in the present case therefore focuses on whether the assignment of loans from LifeWise Family to LifeWise Master was without recourse and thus authorized by BP. If the disposition of the policies was authorized by BP, such authorization would extinguish any security interest BP would have had in the policies, and the policies would therefore be unencumbered when transferred to Bankers Trust as collateral. 21 The district court granted judgment as a matter of law to ETRADE on the liens issue. We review a grant of a judgment as a matter of law de novo, applying the same standard as the district court. Hyler v. Geo-Seis Helicopters, Inc., 269 F.3d 1190, 1193 (10th Cir.2001). A motion for judgment as a matter of law may be granted if a party has been fully heard on an issue and there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue. Fed.R.Civ.P. 50(a)(1). 22 LifeWise argues that when LifeWise Family transferred the life insurance policies to LifeWise Master and thereafter to Bankers Trust, any lien that was on the policies was terminated pursuant to UCC § 9-306(2) because BP authorized such disposition under § 5.6 of the Security Agreement. 23 As a preliminary matter, we note that ETRADE argues that because § 5.6 nowhere expressly released the liens, no release was ever created. Aplee. Br. at 35-36. This is unpersuasive. According to ETRADE, no release occurs absent the requisite words of release, discharge, or renunciation. However, the cases cited by ETRADE all relate to releases from tort liability. See State v. Upstate Storage, Inc., 145 A.D.2d 714, 535 N.Y.S.2d 246, 248 (N.Y.App.Div.1988); Carpenter v. Machold, 86 A.D.2d 727, 447 N.Y.S.2d 46, 46-47 (N.Y.App.Div.1982); Simonson v. Travis, 728 P.2d 999, 1002 (Utah 1986). It is well settled, however, that under UCC § 9-306(2), a lienholder who authorizes the sale of property in which he has a security interest waives the lien on the collateral. See First Fin. Co. v. Akathiotis, 110 Ill.App.2d 377, 249 N.E.2d 663, 665 (1969); Lisbon Bank & Trust Co. v. Murray, 206 N.W.2d 96, 97 (Iowa 1973); Whirlpool Corp. v. Dailey Constr., Inc., 110 N.C.App. 468, 429 S.E.2d 748, 750 (1993). No magic language of release is required; indeed, courts have even terminated security interests simply by implying authorization from a party's conduct. See, e.g., Lisbon Bank, 206 N.W.2d at 99. ETRADE has provided us with no contrary authority applying a stricter standard. 24 We now turn to whether LifeWise Family's assignment of the loans and the underlying security interests in the policies was in accordance with § 5.6 of the Security Agreement. As stated above, § 5.6 required that dispositions be (1) in the ordinary course of business, (2) to third party purchasers, and (3) without recourse to LifeWise. 25 There can be no serious dispute that the first two requirements of § 5.6 were met in the transfer of the loans to LifeWise Master. LifeWise Master is a distinct and separate legal entity from LifeWise Family. Moreover, as the Loan Sale Agreement stated, LifeWise Master was formed ... for the sole purpose of acquiring certain ... loans secured by related life insurance policies, and LifeWise Family intend[ed] to sell or contribute [the] loans to LifeWise Master. II Aplt.App. at 736. Thus, LifeWise sold its loans in the ordinary course of business and to a third party purchaser. 26 ETRADE, however, attempts to argue that the first two requirements are not met because (1) a purchaser requires a sale, and that no sale was made between LifeWise Family and LifeWise Master because the transfer of the policies constituted, in part, a capital contribution by LifeWise Family under the Loan Sale Agreement, (2) life insurance policies are not goods and therefore cannot be purchased in the ordinary course of business, and (3) LifeWise Family is not in the business of selling insurance policies. Aplee. Br. at 39-43. ETRADE arrives at these three arguments by equating the requirement in § 5.6 that the dispositions be made in the ordinary course of business to third party purchasers to the definition of a buyer in the ordinary course in UCC § 1-201(9), Utah Code Ann. § 70A-1-201(9). That provision, however, concerns purchasers of goods, and, as ETRADE states, insurance policies are not goods. Aplee. Br. at 42. But the Security Agreement and specifically § 5.6 both concerned the life insurance policies on which BP had a lien. Therefore, to apply § 1-201(9)'s definition of buyer in ordinary course onto § 5.6 would render the section a nullity. 27 As for the third requirement, the Loan Sale Agreement is again instructive: Section 2(i) states 28 [1] Except as specifically provided for herein, [2] the sale and the purchase of the Loans under this Agreement is without recourse to any Seller; [3] provided that the Seller shall be liable to the Purchaser for all representations, warranties, covenants and indemnities made by it under this Agreement. 29 II Aplt.App. at 744 (emphasis added). Following § 2(i) is a list of seventeen representations and warranties that survived the sale of any loan. 30 The district court essentially held that because § 2(i) has an except clause and a provided that clause, the sale of loans was not without recourse. The court reasoned that if the sale were truly without recourse, the provision would have stated simply that `the sale and the purchase of the Loans under this Agreement is without recourse to any Seller.' XIII Aplt.App. at 5649. 31 We conclude that the district court erroneously interpreted the phrase without recourse. Recourse refers only to the liability of a seller of receivables to the purchaser if the underlying obligors fail to pay the receivables. A seller disclaims this liability, known as credit liability, by selling the receivables without recourse. See Thomas E. Plank, The True Sale of Loans and the Role of Recourse, 14 Geo. Mason L.Rev. 287, 289 (1991). However, although the sale of receivables without recourse releases the seller from liability in case of the debtor's insolvency, the seller retains liability for breach of warranty, or warranty liability. 9 See id. at 306. As the Oklahoma Supreme Court stated, 32 the term no recourse or without recourse in an assignment does not, without more, evidence an intent to disclaim the implied warranty of genuineness and validity, but is meant only to make clear the assignor does not guarantee the debtor's solvency or that the debtor will fulfill his obligation. 33 Indiana Nat'l Bank v. State Dep't of Human Servs., 880 P.2d 371, 380 (Okla.1994); see also Gen. Elec. Credit Corp. v. Air Flow Indus., Inc., 432 So.2d 607, 609 (Fla.App.Ct.1983) (implied warranties are not affected ... by the fact that the assignment was made `without recourse.'); 12 C.F.R. pt. 3, app. A, § 4(a)(11) & (a)(3)(iii) (excluding from definition of recourse [w]arranties that permit the return of assets because of fraud, misrepresentation, or incomplete documentation). 34 Thus, even in a non-recourse assignment, there is still an implied warranty that, for instance: 35 &#x2022; the chose assigned is a valid and genuine obligation of the parties; 36 &#x2022; the right assigned actually exists and is subject to no limitations or defenses other than those stated or apparent at the time of the assignment; 37 &#x2022; the right assigned is based on adequate consideration; 38 &#x2022; any evidence of the right delivered as part of the assignment, or exhibited as an inducement to accept the assignment, is genuine and what it purports to be. 39 6 Am.Jur.2d Assignment § 158 (footnotes omitted); see also Wait v. Williams, 107 S.C. 32, 91 S.E. 969, 970 (1917); Restatement (Second) of Contracts § 333. 40 Contrary to the district court's and ETRADE's position, the warranty made by LifeWise Family to LifeWise Master in § 5(i) of the Loan Sale Agreement does not convert the sale from a nonrecourse assignment to a recourse assignment. Section 5(i) provides that, if LifeWise Family breaches one of the seventeen representations and warranties that materially and adversely affects a loan, LifeWise Family must immediately repurchase the loan from LifeWise Master. The section merely provides a remedy if LifeWise Family breached an express warranty or made a false representation; it does not allow recourse against LifeWise Family simply for the obligors' insolvency or failure to pay. The seventeen representations and warranties act as an inducement for LifeWise Master to accept the assignment; even in a nonrecourse assignment, LifeWise Family must warrant that those representations are genuine. See Penowa Coal Sales Co. v. Gibbs & Co., 199 Md. 114, 85 A.2d 464, 467 (1952). 41 In deciding that the LifeWise Family's sale of the loans to LifeWise Master was not without recourse, the district court also reasoned that 42 were the Court to interpret the except for and the provided for clauses as not providing recourse in this case, they would convey no new rights to LifeWise Master than it was already entitled to as a matter of contract law. However, New York law disfavors contract interpretations that render provisions of a contract superfluous. 43 XIII Aplt.App. at 5652. We disagree. 44 First, the seventeen representations and warranties in the Agreement are specific to this transaction. Their incorporation into the part of the Agreement that details the parties' liability is therefore not superfluous. Moreover, while the except for and provided that language technically may not be necessary as a matter of contract law, their placement along with the without recourse language reinforces and confirms LifeWise Family's responsibilities under the Agreement. Indeed, sellers frequently specify that a sale of a receivable is without recourse, even when they sell with express warranties. See, e.g., 1 U.C.C. Legal Forms § 2:174 (Assignee's Right to Payment); 3 U.C.C. Legal Forms § 9:473 (Assignment Without Recourse). LifeWise's argument that such redundancy in contracting language is common to avoid frivolous litigation is given greater weight in light of the fact that without recourse is often found in assignment contracts but also simply restates the law of assignment. See 29 Williston on Contracts § 74:8 ([When using the phrase `without recourse,'] the assignor is only seeking to make certain what the law would indeed, in any event, imply from mere assignment, that the assignor is not responsible for the solvency of the debtor.); see also Restatement (Second) of Contracts § 333(2) (An assignment does not of itself operate as a warranty that the obligor is solvent or that he will perform his obligation.). Under the district court's ruling, any contract provision that attempts to state the law is superfluous and therefore must be interpreted in a manner inconsistent with the law. We do not interpret New York's law regarding contract construction so broadly. 45 Finally, our conclusion as to the meaning of without recourse in the law of assignments is in accord with the meaning of that term for negotiable instruments. An indorser of a negotiable instrument assumes credit liability. See UCC § 3-415(a), Utah Code Ann. § 70A-3-415(1) (an indorser becomes liable to pay the instrument according to its terms if the primary obligor fails to pay the instrument). The indorser may disclaim credit liability by indorsing the instrument without recourse. See UCC § 3-415(b). Disclaiming credit liability by indorsing without recourse does not, however, disclaim applicable transfer and presentment warranties. See UCC § 3-416 cmt. 3. 46 Because LifeWise Family's assignment of the policies to LifeWise Master was without recourse, we hold that BP's lien on the collateral was released upon the transfer of the loans from LifeWise Family to LifeWise Master. LifeWise therefore did not fail to satisfy a condition precedent to the funding agreement with ETRADE.