Court Opinion

ID: 2655915
Source: CourtListenerOpinion
Date Created: 2014-03-07 18:28:37.001352+00
Date Added: 2024-06-11T12:32:12.777600
License: Public Domain

FILED
                                                          Mar 6 2014
                                                     SUSAN M. SPRAUL, CLERK
 1                                                     U.S. BKCY. APP. PANEL
                                                       OF THE NINTH CIRCUIT

 2
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )     BAP No.      NC-13-1365-KiDJu
                                   )
 6   ERNEST LINCOLN BONNER, JR.,   )     Bk. No.      11-72110-WJL
                                   )
 7                  Debtor.        )     Adv. No.    12-4177
                                   )
 8                                 )
     ELAINE W. WALLACE,            )
 9                                 )
                    Appellant,     )
10                                 )
     v.                            )     M E M O R A N D U M1
11                                 )
     ERNEST LINCOLN BONNER, JR.,   )
12                                 )
                    Appellee.      )
13   ______________________________)
14              Argued and Submitted on February 20, 2014,
                        at San Francisco, California
15
                             Filed - March 6, 2014
16
               Appeal from the United States Bankruptcy Court
17                 for the Northern District of California
18    Honorable William J. Lafferty, III, Bankruptcy Judge, Presiding
19
     Appearances:    Appellant, Elaine W. Wallace, Esq., argued pro se;
20                   Craig K. Welch, Esq. of the Law Office of Craig K.
                     Welch argued for appellee, Ernest Lincoln Bonner,
21                   Jr.
22
     Before:   KIRSCHER, DUNN and JURY, Bankruptcy Judges.
23
24
25
26
          1
             This disposition is not appropriate for publication.
27   Although it may be cited for whatever persuasive value it may have
     (see Fed. R. App. P. 32.1), it has no precedential value. See 9th
28   Cir. BAP Rule 8013-1.
 1        Appellant Elaine W. Wallace ("Wallace") appeals a summary
 2   judgment order avoiding her unperfected security interest under
 3   11 U.S.C. § 544(a)(1)2 and preserving it for the benefit of the
 4   estate.   Because Wallace did not raise a genuine issue of material
 5   fact in opposition to the debtor's motion for summary judgment, we
 6   AFFIRM.
 7               I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
 8   A.   Wallace's loans to debtor
 9        Wallace, an attorney, met debtor Ernest Lincoln Bonner, Jr.
10   ("Bonner") in approximately 1993 through her law firm employee.
11   Bonner is a physician and also attended law school.    Wallace's
12   employee was Bonner’s law school classmate.   During their
13   friendship, Bonner provided medical services to Wallace and her
14   family, and he would occasionally stop by Wallace's law office and
15   come to her home for dinner.
16        In October 1997, Bonner approached Wallace for a loan.
17   According to Wallace, Bonner informed her that for the past few
18   months he had been attempting to collect on previously
19   uncollectible medical liens worth "hundreds of thousands of
20   dollars."   Bonner was confident he could collect on these debts,
21   but told Wallace that he needed some money to tide him over during
22   the process.   Wallace, who represents federal employees in
23   administrative proceedings, was reluctant at first, but after
24   Bonner's repeated assurances that she would be protected from any
25   loss, even if Bonner filed bankruptcy, Wallace agreed to make the
26
          2
             Unless specified otherwise, all chapter,   code and rule
27   references are to the Bankruptcy Code, 11 U.S.C.   §§ 101-1532, and
     the Federal Rules of Bankruptcy Procedure, Rules   1001-9037. The
28   Federal Rules of Civil Procedure are referred to   as “Civil Rules.”

                                      -2-
 1   loan.
 2           In exchange for the funds, on October 27, 1997, Bonner
 3   executed a promissory note payable to Wallace for $45,350.00 with
 4   10% simple interest.    The due date for the note was July 27, 1999.
 5   The note also purported to give Wallace a security interest in
 6   various medical and office equipment belonging to Bonner Medical
 7   Corporation — a one-time entity of Bonner's.      Bonner allegedly
 8   told Wallace that she did not need to do anything further to
 9   protect herself; the note created an enforceable security
10   interest, and all she had to do was put it away for safekeeping.
11   Wallace claimed that she relied on Bonner's statements.
12           In January 1998, Bonner approached Wallace for a second loan.
13   Bonner allegedly told Wallace that he was unable to collect on the
14   medical liens, but that he was soon expecting money for services
15   he had provided to Medi-Cal/Medicare patients, which was more than
16   enough to pay back everything he owed her.      After Bonner provided
17   Wallace with the same assurances that she would be protected,
18   Wallace agreed to make the second loan.      In exchange for the
19   second loan, on January 2, 1998, Bonner executed a similar
20   promissory note payable to Wallace for $16,000.00 with 10% simple
21   interest.    The note purported to give Wallace a security interest
22   in the same medical and office equipment, as well as Bonner's
23   accounts receivable.    As with the first note, Bonner allegedly
24   told Wallace that she did not need to do anything further to
25   protect herself from any loss.
26           Wallace never filed a UCC-1 Financing Statement ("UCC-1")
27   with the California Secretary of State to perfect her security
28   interest in the named collateral.       According to Wallace's records,

                                       -3-
 1   over the course of thirteen years (1997-2010) Bonner paid Wallace
 2   a total of $53,400.00.
 3   B.   Bonner's instant bankruptcy case and adversary proceeding
          against Wallace
 4
 5        Bonner filed an individual chapter 11 bankruptcy case on
 6   November 16, 2011.   No trustee has been appointed, and Bonner
 7   remains the debtor in possession.
 8        Wallace filed an amended proof of claim asserting a secured
 9   claim for $127,094.94 and an unsecured claim for $70,183.74.
10   Bonner did not object.   After Bonner filed the instant bankruptcy
11   case, Wallace discovered through PACER that he had filed four
12   previous chapter 13 cases, two in 1998 and two in 2008.   Wallace
13   never received notice of any of Bonner's prior bankruptcies,
14   either formally or otherwise, even though she was a creditor
15   during these time periods.
16        1.     Bonner's adversary complaint
17        Bonner filed an adversary complaint against Wallace seeking
18   to avoid her unperfected security interest in the accounts
19   receivable and equipment under § 544(a)(1) and to preserve the
20   avoided interest for the benefit of the bankruptcy estate under
21   § 551.    In her answer, Wallace asserted several affirmative
22   defenses, including that the debt was excepted from discharge
23   under § 523(a)(2) based on Bonner's fraud.
24        In an attempt to settle the matter, on November 19, 2012,
25   Wallace and Bonner filed a stipulation allowing Wallace a secured
26   claim for $45,000.00 and allowing the remainder of her claim as an
27   unsecured claim for $152,378.68.    No order was ever entered.   The
28   bankruptcy court later stated at the hearing on Bonner's motion

                                      -4-
 1   for summary judgment that it denied the stipulation because
 2   Wallace had not provided anything to support an enforceable
 3   security interest in property of Bonner's estate.3
 4        2.     Bonner's motion for summary judgment
 5        Bonner moved for summary judgment on his complaint ("MSJ"),
 6   arguing that no material facts were in dispute.    Because Wallace
 7   had failed to perfect her security interest in the accounts
 8   receivable and equipment by filing a UCC-1, Bonner argued that he
 9   could assert his right as a hypothetical judicial lien creditor
10   and avoid Wallace's unperfected security interest using the
11   strong-arm provision of § 544(a)(1) and preserve that interest for
12   the estate under § 551.    A hearing was set for June 19, 2013.
13        In her amended opposition to the MSJ, Wallace contended that
14   her affirmative defense no. 4 — that the loan debt was excepted
15   from discharge under § 523(a)(2)(A) and (B) based on Bonner's
16   fraud — precluded summary judgment.    In her attached declaration,
17   Wallace set forth facts to support a nondischargeability claim
18   under § 523(a)(2)(A) and (B).    Wallace asserted that she did not
19   file a UCC-1 because of Bonner's assurances that she was protected
20   from any loss, even if he filed bankruptcy, and that she did not
21   need to do anything further to protect herself other than put the
22   notes in a safe place.    Wallace also argued that distributions in
23   Bonner’s bankruptcy case should follow California law.
24   Specifically, because California law gives creditors with an
25   unperfected security interest priority over an unsecured
26   creditor's claim, Wallace argued that her claim should be given
27
28        3
               See Hr'g Tr. (June 19, 2013) 3:24-4:4.

                                      -5-
 1   priority over other general unsecured claims.    Finally, Wallace
 2   contended that an equitable lien should be imposed because she had
 3   relied on Bonner's false representations that perfection was not
 4   required to protect her security interest, citing Funk v. G.W.
 5   Custom Homes, LLC (In re Funk), 2011 WL 3300350 (9th Cir. BAP
 6   May 11, 2011)(unpublished).
 7        In his reply, Bonner argued that even if Wallace's debt was
 8   excepted from discharge, the lien securing her claim would still
 9   be avoidable under § 544(a).   Nonetheless, argued Bonner, the debt
10   was dischargeable because the time to file a nondischargeability
11   action had expired.   In sum, Bonner argued that his conduct and
12   liability were not at issue here.     This was not an objection to
13   Wallace's claim; this was an action to avoid her lien.
14        3.   The bankruptcy court's ruling on the MSJ
15        The hearing on the MSJ lasted approximately four minutes,
16   with neither party offering oral argument.    The bankruptcy court
17   announced its ruling in favor of Bonner, finding that Wallace had
18   not taken the proper steps to perfect her security interest, and
19   the fact that Bonner "may or may not have made some statements
20   that may or may not have been correct, that may or may not have
21   supported a § 523(a)(2) complaint [was] neither here nor there."
22   Hr'g Tr. (June 19, 2013) 4:7-12.    Bonner's misstatements, which
23   might have supported a § 523(a)(2) claim, did not create an
24   affirmative defense to an avoidance action under § 544(a)(1), even
25   though it might have supported a lawsuit against him, which
26   Wallace never brought.
27        In the MSJ order entered on July 24, 2013, the bankruptcy
28   court determined that a claim under § 523(a)(2)(A) was not a

                                     -6-
 1   cognizable affirmative defense to an avoidance action; the purpose
 2   of that statute had no relationship to the avoidance of an
 3   unperfected security interest.   Therefore, because Wallace had not
 4   filed a UCC-1 with the California Secretary of State to perfect
 5   her security interest as against the rights of third parties, her
 6   interest was unsecured.
 7        Alternatively, the bankruptcy court determined that even if a
 8   claim under § 523(a)(2)(A) were cognizable under the
 9   circumstances, Wallace's reliance was not justifiable.    Bonner
10   never represented that he would file the UCC-1 to perfect her
11   security interest, and Wallace was a sophisticated party who had
12   previous experience with bankruptcy cases and, prior to finalizing
13   their agreement, vocalized her wish that Bonner protect her
14   interests.   As such, Wallace's professional and practical
15   knowledge belied any reliance on Bonner to take the simple step of
16   filing the UCC-1.
17        The bankruptcy court also determined that no grounds existed
18   to impose an equitable lien on the estate's assets because Wallace
19   had made no attempt to perfect her own interests.   The court found
20   Wallace's reading of In re Funk as "overly narrow" and that she
21   had misstated the case's actual holding.   In the court's opinion,
22   In re Funk held that an equitable lien may not be imposed when the
23   lienholder possessed other remedies at law to protect its
24   interests.
25        The bankruptcy court entered a separate judgment on July 29,
26   2013, avoiding Wallace's security interest under § 544 and
27   ordering that it be preserved for the benefit of the bankruptcy
28   estate under § 551.   Wallace's timely appeal followed.

                                      -7-
 1                             II. JURISDICTION
 2        The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
 3   and 157(b)(2)(K).   We have jurisdiction under 28 U.S.C. § 158.
 4                                  III. ISSUE
 5        Did the bankruptcy court err in granting summary judgment
 6   avoiding Wallace's unperfected security interest under
 7   § 544(a)(1)?
 8                         IV. STANDARDS OF REVIEW
 9        We review de novo the bankruptcy court's ruling on a motion
10   for summary judgment, its interpretation of the Code, and its
11   interpretation of state law.    Trunk v. City of San Diego, 629 F.3d
12   1099, 1105 (9th Cir. 2011)(summary judgment); Hopkins v. Cerchione
13   (In re Cerchione), 414 B.R. 540, 545 (9th Cir. BAP 2009)
14   (interpretation of the Code and state law).     We may affirm a grant
15   of summary judgment on any ground supported by the record.    Balint
16   v. Carson City, 180 F.3d 1047, 1054 (9th Cir. 1999).
17                              V. DISCUSSION
18   A.   The bankruptcy court did not err when it granted summary
          judgment avoiding Wallace's unperfected security interest,
19        thereby rendering her claim an unsecured nonpriority claim.
20        Summary judgment is proper when the pleadings, discovery and
21   affidavits show that there is "no genuine dispute as to any
22   material fact and that the movant is entitled to judgment as a
23   matter of law."   Civil Rule 56(a), incorporated by Rule 7056.     The
24   party moving for summary judgment bears the burden of identifying
25   those portions of the pleadings, discovery and affidavits that
26   demonstrate the absence of a genuine issue of a material fact.
27   Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).     Material
28   facts are such facts as may affect the outcome of the case.

                                       -8-
 1   Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
 2        Wallace raises several arguments for why Bonner was not
 3   entitled to summary judgment.      We address each argument in turn.
 4        1.    Section 544(a) and the California Commercial Code
 5        Section 544(a), the "strong-arm clause," gives a bankruptcy
 6   trustee special powers to set aside transfers or liens against
 7   property of the bankruptcy estate.         Specifically, § 544(a)(1)
 8   "grants a trustee in bankruptcy 'the rights and powers of a
 9   hypothetical creditor who obtained a judicial lien on all of the
10   property in the estate at the date the petition in bankruptcy was
11   filed.'"   Neilson v. Chang (In re First T.D. & Inv., Inc.),
12   253 F.3d 520, 526 (9th Cir. 2001)(quoting Brady v. Andrew
13   (In re Commercial W. Fin. Corp.), 761 F.2d 1329, 1331 n.2 (9th
14   Cir. 1985) (citing § 544(a)(1)).4         "'One of these powers is the
15   ability to take priority over or “avoid” security interests that
16   are unperfected under applicable state law . . . .'"           Id. (quoting
17   In re Commercial W. Fin. Corp., 761 F.2d at 1331 n.2).           "Avoiding
18   such interests relegates them to the status of a general unsecured
19   claim."5   Id. (citing 5 COLLIER   ON   BANKRUPTCY ¶¶ 544.02, 544.05
20   (Lawrence P. King ed., 15th ed. rev. 2000)).
21        The applicable state law in this case, the California
22
23
24
25        4
             Although § 544 specifically gives avoidance powers only to
     a "trustee," § 1107(a) gives a chapter 11 debtor in possession all
26   of the rights, powers and duties of a trustee, with certain
     exceptions not relevant to this case.
27
          5
             A general unsecured claim is the same as an unsecured
28   nonpriority claim.

                                         -9-
 1   Commercial Code6 ("CAL. COM. CODE"), provides that an unperfected
 2   security interest is subordinate to the rights of a "lien
 3   creditor."    CAL. COM. CODE § 9317, subd. (a)(2).7   A security
 4   interest in accounts receivable and business equipment — i.e.,
 5   personal property — is perfected by filing a UCC-1 with the
 6   California Secretary of State.     CAL. COM. CODE § 9310, subd. (a).8
 7        Wallace concedes that she did not perfect her security
 8   interest in accordance with California law by filing a UCC-1.       As
 9   a result, Bonner, as a hypothetical lien creditor, could avoid
10   Wallace's unperfected security interest pursuant to § 544(a)(1).
11        2.      The bankruptcy court did not err in determining that a
                  claim under § 523(a)(2) could not be an affirmative
12                defense to an avoidance action under § 544(a).
13        Wallace contends that summary judgment was improper because
14   she raised the affirmative defense of fraud under § 523(a)(2)(A)
15   and (B), and the bankruptcy court erred in holding that such
16   claims were not a cognizable defense to an avoidance action under
17   § 544(a).
18
19
          6
             Unless otherwise noted, all references to Division 9 of
20   the California Commercial Code are to such Division as it was
     revised and effective on Jan. 1, 2007.
21
          7
             CAL. COM. CODE § 9317, subd. (a)(2) provides, in relevant
22   part: "A security interest . . . is subordinate to the rights of
     . . . a person that becomes a lien creditor before the earlier of
23   the time the security interest . . . is perfected, or one of the
     conditions specified in paragraph (3) of subdivision (b) of
24   Section 9203 is met and a financing statement covering the
     collateral is filed."
25
          8
             CAL. COM. CODE § 9310, subd. (a) provides: "Except as
26   otherwise provided in subdivision (b) and in subdivision (b) of
     Section 9312, a financing statement must be filed to perfect all
27   security interests and agricultural liens." Wallace has not
     contended or shown that any exceptions noted above apply in this
28   case.

                                       -10-
 1        Wallace has not cited, and we could not locate, any authority
 2   to support her contention that a nondischargeability claim under
 3   § 523(a)(2) can be raised as an affirmative defense to a trustee's
 4   avoidance action under § 544(a).   The two statutes have no
 5   relationship with one another and serve entirely different
 6   purposes:   nondischargeability of a debt versus avoiding a
 7   creditor's unperfected lien.   Further, even if the debt to Wallace
 8   were deemed nondischargeable, Bonner as trustee could still have
 9   avoided her unperfected security interest.     While an unfortunate
10   situation, we are unable to apply § 523(a)(2) as an affirmative
11   defense to the trustee's strong-arm powers under § 544(a).     In the
12   context of lien avoidance, either Wallace perfected her lien or
13   she did not.   Accordingly, we discern no error by the bankruptcy
14   court.
15        Wallace takes issue with the bankruptcy court's silence as to
16   her argument under § 523(a)(2)(B).      Because a nondischargeability
17   claim under any paragraph of § 523(a) could not support a defense
18   to an action under § 544(a), the bankruptcy court did not need to
19   address Wallace's argument and therefore did not err by not
20   addressing it.
21        3.     Once her unperfected security interest was avoided,
                 Wallace's claim became an unsecured nonpriority claim by
22               operation of bankruptcy law and is not entitled to
                 priority.
23
24        Wallace contends that the bankruptcy court erroneously
25   "converted" her claim into an unsecured nonpriority claim, even
26   though California law gives priority to creditors holding
27   unperfected security interests over creditors with unsecured
28   claims.   In other words, Wallace contends she has priority over

                                      -11-
 1   all other unsecured nonpriority creditors in Bonner's bankruptcy
 2   case.
 3           We agree with Wallace that under California law, a creditor
 4   with an attached but unperfected security interest has priority
 5   over an unsecured creditor's claim.      People v. Green,
 6   125 Cal.App.4th 360, 377 (2004)(citing CAL. COM. CODE § 9201,
 7   subd. (a) and Bank of Stockton v. Diamond Walnut Growers, Inc.,
 8   199 Cal.App.3d 144, 155 (1988)).    However, California priority law
 9   does not apply when it comes to distributions in bankruptcy.
10           Priority of distribution in bankruptcy is a question of
11   federal, not state law.    See Am. Sur. Co. of N.Y. v. Sampsell,
12   327 U.S. 269, 272 (1946)("[F]ederal bankruptcy law, not state law,
13   governs the distribution of a bankrupt’s assets to his
14   creditors."); Matter of Quanta Res. Corp., 739 F.2d 912, 920
15   (3d Cir. 1984)(state law regulating distribution of assets among
16   creditors must give way to the "all-encompassing federal law of
17   creditors' rights"); Sticka v. Applebaum (In re Applebaum),
18   422 B.R. 684, 694 (9th Cir. BAP 2009)(Markell, J., dissenting)
19   ("[I]t is well-settled that federal law has primacy over contrary
20   state law, especially in the area of bankruptcy distribution.")
21   (citing Sampsell and Elliott v. Bumb, 356 F.2d 749, 755 (9th Cir.
22   1966)("state creation of priorities in various classes of
23   creditors . . . would tend to thwart or obstruct the scheme of
24   federal bankruptcy")); In re Macomb Occupational Health Care, LLC,
25   300 B.R. 270, 292 (Bankr. E.D. Mich. 2003).
26           Under federal bankruptcy law, Wallace has not shown that she
27   is entitled to priority over other unsecured nonpriority
28   creditors.    She has made no argument that her claim fits under any

                                       -12-
 1   paragraph of § 507(a), and we see none under which it could apply.
 2   Accordingly, the bankruptcy court did not err in determining that
 3   Wallace's claim is an unsecured nonpriority claim.
 4           4.   The bankruptcy court did not err in determining that
                  Wallace had not shown any grounds to impose an equitable
 5                lien on the estate's assets.
 6           Lastly, Wallace argues that a material issue of disputed fact
 7   existed as to whether she set forth any grounds to support an
 8   equitable lien on the estate's assets.    Namely, Wallace contends
 9   that she justifiably relied on Bonner's misrepresentations, which
10   is why she did not perfect her security interest.    In addition,
11   she argues that the bankruptcy court erroneously interpreted
12   In re Funk as holding that an equitable lien may not be imposed
13   when the lienholder possessed other remedies at law to protect its
14   interest, and, based on that erroneous interpretation, erred in
15   concluding she was not entitled to an equitable lien because she
16   could have filed a UCC-1, but failed to file one.
17           We do not disagree with the bankruptcy court's interpretation
18   of In re Funk.     Presumably, the only reason the court even
19   discussed the case, which is unpublished and not even binding on
20   this Panel, is because it was the only authority Wallace raised in
21   her five-sentence argument as to why an equitable lien should be
22   imposed.     However, the bankruptcy court's interpretation of
23   In re Funk is of no moment, since we are able to affirm its ruling
24   on other grounds supported by the record.    Balint, 180 F.3d at
25   1054.
26           Even if Wallace was entitled to an equitable lien and was
27   granted one by the bankruptcy court, it would still be subordinate
28   to Bonner's interest as a hypothetical judgment lien creditor and

                                       -13-
 1   avoidable.   Palmer v. Wash. Mut. Bank (In re Ritchie), 416 B.R.
 2   638, 646 (6th Cir. BAP 2009); In re Hendleman, 91 B.R. 475, 476
 3   (Bankr. N.D. Ill. 1988)(equitable lien in debtor's property is by
 4   definition unperfected and can never survive attack by trustee);
 5   Hunter v. Ohio Citizens Bank (In re Henzler Mfg. Corp.), 36 B.R.
 6   303, 306 (Bankr. N.D. Ohio 1984)("[E]ven if MFG could claim an
 7   equitable lien it would nevertheless be subordinate, under the
 8   relevant provisions of UCC, to a subsequent legal lien of a
 9   judgment creditor and is invalid against the Trustee in this case
10   who has asserted his hypothetical lien creditor status under
11   § 544(a)(1)."); Hassett v. Revlon, Inc. (In re O.P.M. Leasing
12   Servs., Inc.), 23 B.R. 104, 120 (Bankr. S.D.N.Y. 1982)("The
13   legislative history of the Bankruptcy Code makes clear that
14   Article 9 of the U.C.C. treats equitable liens as 'unperfected
15   security interests which the trustee can in any case set
16   aside.'").   Therefore, a trial on this issue would serve no
17   purpose.
18                              VI. CONCLUSION
19        Because the bankruptcy court did not err when it determined
20   that no genuine issue of material fact existed, and that Bonner
21   was entitled to summary judgment as a matter of law, we AFFIRM.
22
23
24
25
26
27
28

                                     -14-