May 23, 2013
LEGAL ASSET FUNDING, LLC, Plaintiff-Appellant,
NORMAN L. COUSINS, KEVIN VENESKI, McMAHON, MARTINE & GALLAGHER, ESQS., MMIA INSURANCE COMPANY, LAWRENCE SOKOLSKY, M.D., and CAMBRIDGE MANAGEMENT GROUP, LLC,  Defendants, and PLAINTIFF FUNDING CORPORATION, d/b/a LAW CASH, Defendant-Respondent.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued October 1, 2012
On appeal from Superior Court of New Jersey, Chancery Division, Hudson County, Docket No. C-0001-04.
Michael R. Perle argued the cause for appellant (Mr. Perle and DeClemente & Associates, attorneys; Mr. Perle, on the brief).
Robert M. Rich argued the cause for respondent.
Before Judges Graves and Espinosa.
Plaintiff Legal Asset Funding, LLC (LAF) appeals from an order that granted summary judgment to defendant Plaintiff Funding Corporation, d/b/a Law Cash (Law Cash). We affirm.
Both LAF and Law Cash are litigation-funding companies in the business of lending money to plaintiffs and plaintiffs' attorneys in exchange for assignments of their expected proceeds from lawsuits. This matter arises from loans that each extended to Norman L. Cousins, a disbarred attorney who was admitted to practice in New York and specialized in medical malpractice litigation. In January 2000, Cousins was representing the plaintiff in Veneski v. Queens-Long Island Med. Grp., P.C., et al., (Sup. Ct., N.Y. Cnty., Index No 100011/98) (the Veneski case), a matter for which funding was required.
LAF advanced Cousins a total of $340, 000 pursuant to three separate agreements. In the first agreement, in January 2000, LAF "purchased" a portion of Cousins's expected legal fees from the Veneski case by advancing $125, 000 to Cousins. LAF advanced an additional $125, 000 to Cousins pursuant to a second agreement, with the same terms, in February 2000.
In early 2001, after the first two agreements with LAF, Cousins approached Law Cash for money. At that time, unlike LAF, Law Cash provided litigation funding only to plaintiffs and not to attorneys. Cousins had a relationship with Law Cash based upon his referral of clients to Law Cash to seek funding for their lawsuits.
Harvey Hirschfeld, President of Law Cash, testified at his deposition that Cousins's request "was not like anything [Law Cash] normally would do. He was looking for money for himself. It wasn't for his client." Hirschfeld described Cousins's request and Law Cash's decision to make the loan as follows:
He just came to us. He said, Listen, I need some short-term cash. And at that stage in our career at Law Cash, he was an attorney that we thought could bring us additional other business. And we made him an advance. Basically, an unsecured loan in this case.
Law Cash issued two checks of $25, 000 each to Cousins. The first was dated April 5, 2001. Cousins obtained a verdict of $4, 215, 300 in Veneski's favor, which was overturned on appeal in July 2001. Law Cash's second check to Cousins was dated August 27, 2001.
Hirschfeld characterized the payments to Cousins as personal loans. Hirschfeld certified that Law Cash did not obtain a security interest in any of Cousins's expected proceeds. Rather, Law Cash merely
asked [Cousins] how he was going to pay us back. He mentioned he was working on some cases he thought would settle soon. . . . And he just said, I'll pay you from those.
Cousins provided Law Cash with the names of a few of the cases that he was working on and Law Cash's "attorneys look[ed], generally, to see what they [were, ]" but did not "buy" Cousins's expected proceeds from these cases. According to Hirschfeld, because Law Cash "[was] not purchasing assets[, ]" it did not make any Uniform Commercial Code (U.C.C.) filings, nor did it conduct a lien search. In fact, it was not Law Cash's business practice to conduct lien searches or make U.C.C. filings at that time. Hirschfeld testified that Cousins represented there were no liens, and stated, "We took him at his word, basically, on the fact that we knew him, and we were making this unsecured loan to him."
In the final agreement between LAF and Cousins dated November 10, 2001 (the Agreement), Cousins represented that he had an interest in the overturned Veneski verdict that would have resulted in a legal fee of "at least $1, 200, 000.00 plus $95, 000.00 in expenses[.]" Cousins further represented that "a Judgment in the sum of at least $3, 200, 000 is expected to be obtained" in the retrial. The Agreement stated that Cousins had provided LAF with "additional information regarding the anticipated Judgment amount and [his] interest therein[, ]" as well as information regarding anticipated judgments and Cousins's interest in a number of other identified contingency fee matters. At this time, Cousins sought additional funding to assist him to "effectively prosecute the retrial" of the Veneski case.
In the Agreement, Cousins stated:
I wish to pledge these matters in order to receive an additional sum of money, to wit: $100, 000.00 to be paid in $10, 000.00 installments every two weeks from the date of the complete execution of this contract so as to effectively prosecute the retrial of [the Veneski case]. . . . I acknowledge that you have advanced on the Veneski case the sum of $270, 000.00 towards fees, expenses and costs and I reaffirm all of my commitments in the previously executed contacts [sic] and addendums in the Veneski litigation as to payment of the sums to you for your investment subject to the provisions of § 2 below. I hereby sell and assign to you my right, title and interest to the properties above mentioned, so as to receive additional funding to allow my clients (Kevin and Juanita Veneski) and I to go forward with the aforementioned Veneski litigation.
Cousins represented that he was entitled to recover legal fees on the identified cases upon successful conclusion. He stated:
I hereby sell and assign to you all of my right, title and interest in and to the properties above mentioned to the extent indicated below.
In full payment for the Properties (my proportionate share of the legal fees) and in consideration of the sale and assignment to you wherein you have already paid to me, as aforementioned, the sum of Two Hundred Seventy Thousand and 00/100 ($270, 000.00) Dollars, you agree to pay another One Hundred Thousand and 00/100 ($100, 000.00) Dollars, payable in increments of $10, 000.00 every two weeks, beginning two weeks subsequent to the date of the signing of this contract (the Veneski contract having already been signed). In the event that the Veneski transaction does not succeed, I agree to pay you a total of Seven Hundred Fifty Thousand ($750, 000.00) Dollars prorated from each and every case above, to which I am entitled to a fee. I agree to pay you One Third (1/3) of my share of the recovery of each and every case above, set forth, upon settlement or final judgment, until you receive the sum of Seven Hundred Fifty Thousand ($750, 000.00) in full, prorated from all of the above matters.
Cousins made several representations to LAF, including that he owned "good title to the properties that are being pledged above, free and clear of all liens, claims or interests of others except as otherwise disclosed in writing." He agreed that the original Veneski verdict "entitle[d] [LAF] to an ownership interest in whatever verdict is obtained in Veneski (to the extent of [LAF's] interest therein)" and that the other collateral would be available for payment only in the event that the Veneski case was unsuccessful. He stated further:
I understand that the cases referred to in § 1 above is your collateral to secure your past and future advances to me in order to successfully pursue the Veneski litigation. Upon Legal Asset Funding's payment to Norman L. Cousins of the additional sum of $100, 000, Legal Asset Funding, LLC will own title with the same effect and to the same extent as to the sum purchased ($750, 000.00) as I do plus the agreed upon return on the additional advance (15% of $100, 000 annually after one year from the date of the execution of this contract).
Finally, the Agreement contained a clause which stated: "This agreement contains the entire agreement between the parties; supersedes all previous agreements, whether written or oral, with regard to the subject matter hereof[.]" LAF perfected each assignment by filing all three contracts in accordance with the U.C.C.
It is undisputed that LAF never paid Cousins the full $100, 000 sum that was the subject of the Agreement. In January 2002, LAF's attorney sent Cousins a check for $10, 000 with a letter stating that the enclosed check would be the last because "you have now sufficient funds to try the case." Cousins responded to LAF's attorney by letter dated February 4, 2002, stating that the $10, 000 check did not cover the remaining portion of LAF's obligations under the Agreement, which totaled $50, 000. Thereafter, LAF's attorney provided Cousins an additional $20, 000 in funding and continued to withhold the remaining $30, 000. The total amount thus advanced to Cousins was $70, 000.
The Veneski matter was settled and Cousins obtained a portion of his fee in December 2002. Cousins issued the following checks to Law Cash:
Repayment of Loan from Law Cash in Full August 27, 2001 LOAN
Loan Application Fee August 27, 2001 LOAN
Interest on August 27, 2001 Loan PAID IN FULL
Interest on April 5, 2001 Loan PAID IN FULL
Repayment of April 5, 2001 Loan PAID IN FULL
Cousins repaid approximately $217, 500 to LAF.
In September 2005, LAF initiated this lawsuit against Law Cash, seeking to recover the money Cousins paid to Law Cash in repayment of its loans to him. LAF alleged that Law Cash "negligently failed to conduct appropriate UCC searches, and/or negligently failed to investigate any and all other liens that existed against the Veneski litigation that were superior to its lien position[, ]" and that, because LAF had made U.C.C. filings, Law Cash was on actual or constructive notice of LAF's superior liens.
LAF's motion for summary judgment against Law Cash was denied in August 2007. Law Cash later filed a motion for summary judgment, which was granted by the trial court in December 2007. In its oral decision, the court stated there was no competent proof that the transaction between Law Cash and Cousins "was anything other than a simple loan in the amount of $25, 000 times two between Law Cash and Cousins that was repaid." Citing U.C.C. § 9-332(a), codified at N.J.S.A. 12A:9-332(a), the court concluded that Law Cash received the funds free and clear of any interest LAF had in the funds unless there was collusion between Cousins and Law Cash to violate the rights of a secured party. Viewing the record in the light most favorable to LAF, the court found no evidence of collusion and granted summary judgment to Law Cash.
In its appeal, LAF presents the following issues for our consideration:
THE CHANCERY DIVISION MIS-APPLIED [SIC] THE SUMMARY JUDGMENT STANDARD.
COUSINS HAD PREVIOUSLY SOLD THE VENESKI CASE FEE TO LAF; WHEN HE RECEIVED THE FEE, AND HELD THE PROCEEDS OF THAT FEE, IT WAS IN THE CAPACITY OF LAF'S "ATTORNEY" AND "FIDUCIARY" FOR THE OWNER, LAF; ACCORDINGLY, UCC 9-203(b)(2) AND 9-318, NOT UCC 9-332, GOVERNED THE RESPECTIVE RIGHTS OF LAF AND LAW CASH, AND MANDATE JUDGMENT IN FAVOR OF LAF.
A. SUMMARY OF ARGUMENT.
B. THE COUSINS-LAF TRANSACTIONS WERE ABSOLUTE ASSIGNMENTS OF COUSINS' "RIGHT, TITLE AND INTEREST IN THE VENESKI FEE" AND DISBURSEMENTS, MAKING LAF THE LEGAL OWNER OF THE PROCEEDS OF THE FEE.
C. WHILE EVERY ABSOLUTE ASSIGNMENT/SALE OF A "PAYMENT INTANGIBLE" OR "ACCOUNT" GOVERNED BY ARTICLE 9 SUBSUMES AN [SIC] THE GRANT TO ASSIGNEE OF A SECURITY INTEREST IN SUCH "PAYMENT INTANGIBLE" OR "ACCOUNT" TO SECURE PAYMENT TO THE ASSIGNEE, UNDER ARTICLE 9 ASSIGNEE'S RIGHTS THEREIN ARE DETERMINED ON THE BASIS THAT IT IS THE OWNER, NOT MERELY A PLEDGEE.
D. THE SECURITY INTEREST IN THE FEE AUTOMATICALLY GRANTED TO LAF UNDER UCC 1-207 BY VIRTUE OF THE ASSIGNMENT FROM COUSINS WAS JUST AN INCIDENT OF LAF'S OWNERSHIP INTEREST; IT DID NOT DISPLACE, OR DIMINISH ANY OF LAF'S OWNERSHIP RIGHTS, INCLUDING THE PROTECTION GRANTED UNDER UCC 9-318(a); PURSUANT TO UCC 9-203(b)(2), SINCE COUSINS HAD PREVIOUSLY CONVEYED OWNERSHIP TO LAF, HE HAD NO POWER TO GRANT LAW CASH A SECURITY INTEREST IN THE SAME COLLATERAL.
EVEN ASSUMING ARGUENDO THAT UCC 9-322(b) COULD HAVE BEEN APPLIED, THE QUESTION OF "COLLUSION" PRESENTED A GENUINE ISSUE OF MATERIAL FACT WHICH SHOULD HAVE PRECLUDED THE GRANTING OF SUMMARY JUDGMENT; THE COURT ALSO ERRED I [SIC] ASSUMING THE PAYMENTSTO [SIC] LAW CASH CONSTITUTED TRANSFERS FROM A "DEPOSIT ACCOUNT."
A. SUMMARY OF ARGUMENT.
B. SUMMARY OF FINDINGS BELOW WHICH WERE THE BASIS FOR GRANTING SUMMARY JUDGMENT TO LAW CASH.
C. THE COUSINS-LAW CASH TRANSACTIONS WERE NOT SIMPLE PERSONAL LOANS; I.E. LOANS WHICH, INTER ALIA, WOULD NECESSARILY HAVE A FIXED MATURITY DATE, NOT CONTEMPLATE A PARTICULAR SOURCE OF REPAYMENT, AND IMPOSE PERSONALLY [SIC] LIABILITY ON COUSINS.
D. THE RECORD DISCLOSES STRONG CIRCUMSTANTIAL EVIDENCE, GIVING RISE TO REASONABLE INFERENCES OF COMMERCIAL UNREASONABLENESS, BAD FAITH, WILFUL [SIC] BLINDNESS, AND COERCION OF THE DEBTOR COUSINS, ALL CONSTITUTING "CONDUCT WHICH, IN THE COMMERCIAL CONTEXT, WAS RATHER CLEARLY IMPROPER [UNDER NEW JERSEY LAW], " WHICH IS TANTAMOUNT TO "COLLUSION."
E. THE PAYMENTS TO LAW CASH WERE NOT LEGITIMATE "TRANSFERS FROM A DEPOSIT ACCOUNT."
After reviewing these arguments in light of the applicable legal principles and the record before the motion judge, we conclude that none have any merit and affirm.
In reviewing an order granting summary judgment, this court employs the same standard of review as the trial court. Coyne v. N.J. Dep't of Transp., 182 N.J. 481, 491 (2005); Burnett v. Gloucester Cnty. Bd. of Chosen Freeholders, 409 N.J.Super. 219, 228 (App. Div. 2009). Summary judgment is appropriate if the competent evidential materials presented, when viewed in the light most favorable to the non-moving party, "show that there is no genuine issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a matter of law." R. 4:46-2(c); see also Brill v. Guardian Life Ins. Co., 142 N.J. 520, 540 (1995). We review issues of law de novo and accord no deference to the motion judge's conclusions on issues of law. Zabilowicz v. Kelsey, 200 N.J. 507, 512-13 (2009).
As a preliminary matter, we address and reject LAF's contention that our review of the record should include consideration of any document submitted to the trial court over the years that this matter was litigated. In Lombardi v. Masso, 207 N.J. 517 (2011), the Supreme Court stated that an appellate court reviewing a summary judgment order must "confine [itself] to the original summary judgment record[.]" Id. at 542; see also Ji v. Palmer, 333 N.J.Super. 451, 463-64 (App. Div. 2000) ("In reviewing a summary judgment, we can consider the case only as it had been unfolded to that point and the evidential material submitted on that motion.") (emphasis added) (internal quotation marks omitted). Therefore, our determination as to whether a genuine issue of fact exists to preclude summary judgment is confined to the evidence presented to the motion judge in support of and in opposition to the summary judgment motion under review.
LAF argues that U.C.C. § § 9-203(b)(2) and 9-318 (codified as N.J.S.A. 12A:9-203(b)(2) and 12A:9-318) governed the transactions here and, therefore, the motion judge erred as a matter of law in concluding that N.J.S.A. 12A:9-332 applied. We disagree.
N.J.S.A. 12A:9-318(a) provides that "[a] debtor that has sold an account, chattel paper, payment intangible, or promissory note does not retain a legal or equitable interest in the collateral sold." LAF argues that, because Cousins had sold the proceeds of his fee from the Veneski case to it, he did not have any legal or equitable interest in that fee. LAF argues further that, as a result, Cousins lacked any legal or equitable interest in the funds in his account used to pay Law Cash. N.J.S.A. 12A:9-203(b)(2) states that "a security interest is enforceable against the debtor and third parties with respect to the collateral only if the debtor has rights in the collateral[.]"
However, the argument that LAF had an enforceable security interest is not dispositive because the "broad protection" afforded by N.J.S.A. 12A:9-332, see Comment 2 to N.J.S.A. 12A:9-332, presupposes that such an interest exists and provides that a transferee takes the funds free of that interest. N.J.S.A. 12:A:9-332(b) provides:
A transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.
The policy underlying this provision is explained in Comment 3 to N.J.S.A. 12A:9-332, in part, as follows:
Broad protection for transferees helps to ensure that security interests in deposit accounts do not impair the free flow of funds. It also minimizes the likelihood that a secured party will enjoy a claim to whatever the transferee purchases with the funds. Rules concerning recovery of payments traditionally have placed a high value on finality. The opportunity to upset a completed transaction, or even to place a completed transaction in jeopardy by bringing suit against the transferee of funds, should be severely limited.
See, e.g., Rabbia v. Rocha, 162 N.H. 734, 738 (2011) (holding that the transfer of funds in a deposit account to a third party who did not act collusively with the transferor extinguished the security interest that another party had in the deposit account).
Although "[s]ubsection (b) applies to transfers of funds from a deposit account[, ] it does not apply to transfers of the deposit account itself or of an interest therein." Comment 2 to N.J.S.A. 12A:9-332. Even if LAF held a valid security interest in the deposit account funded by Cousins's fees, neither the deposit account itself nor an interest in that account was transferred to Law Cash. Rather, the transaction here closely mirrors Example 1, provided in the Official Comment to N.J.S.A. 12A:9-332:
Debtor maintains a deposit account with Bank A. The deposit account is subject to a perfected security interest in favor of Lender. Debtor draws a check on the account, payable to Payee. Inasmuch as the check is not the proceeds of the deposit account . . ., Lender's security interest in the deposit account does not give rise to a security interest in the check. Payee deposits the check into its own deposit account, and Bank A pays it. Unless Payee acted in collusion with Debtor in violating Lender's rights, Payee takes the funds . . . free of Lender's security interest.
[Ibid. (emphasis added).]
The distinction drawn between a security interest in the deposit account and a check drawn on that account serves the underlying policy that "security interests in deposit accounts do not impair the free flow of funds." Comment 3 to N.J.S.A. 12A:9-332.
Contrary to the arguments raised by LAF, a perfected security interest will not preclude application of the provision to Law Cash, whether or not Law Cash was an unsecured creditor. In holding that U.C.C. § 9-332 applied to an unsecured judgment creditor that satisfied its judgment from a deposit account subject to a security interest, the Court of Appeal of California stated:
[T]he lion's share of transferees from a deposit account are creditors of one form or another -- secured, unsecured, judgment, etc. For instance, a landlord and a utility company are creditors and are, ordinarily, unsecured. They would not be excepted from the protections of section 9-332(b). Thus, any suggestion that the rights of a secured creditor cannot be compromised by junior creditors is not persuasive. Indeed, . . . a protected transferee need not be a creditor at all, but may have been paid by mistake or otherwise have provided no value to the debtor in exchange for the payment.
[Orix Fin. Servs., Inc. v. Kovacs, 167 Cal.App.4th 242, 250 (Cal.App. 1st Dist. 2008).]
We therefore conclude that N.J.S.A. 12A:9-332(b) applied to Cousins's transfers of funds from his account to Law Cash. LAF argues that, even if that is the case, summary judgment was not warranted because there was sufficient evidence of collusion to create a genuine issue of fact. Again, we disagree.
The "collusion" language that provides an exception to the protection provided in this provision sets a high bar for the lender who seeks to reach the transferred funds. Comment 4 to N.J.S.A. 12A:9-322 observes that the "collusion" language, which is borrowed from Article 8, applies "the most protective . . . of the various standards now found in the UCC." See also Orix Fin. Servs., supra, 167 Cal.App.4th at 249. It "is intended to adopt a standard akin to the tort rules that determine whether a person is liable as an aider or abettor for the tortious conduct of a third party[, ]" Comment 5 to N.J.S.A. 12A:8-115; see Restatement (Second) of Torts § 876 (1979); see also GE Capital Corp. v. Union Planters Bank, N.A., 342 B.R. 790, 798-99 (Bankr. E.D. Mo. 2006) (In re Mach., Inc.). Within the context of N.J.S.A. 12A:9-332, the transferee must collude with the debtor for a specific goal, i.e., to "violat[e] the rights of the secured party[, ]" to lose the provision's protection. N.J.S.A. 12:9-332 (a) and (b). Thus, only truly "bad actor" transferees are not protected by the collusion standard. In re Mach., Inc., supra, 342 B.R. at 798.
LAF argues that there is sufficient evidence to create a genuine issue of fact that Law Cash and Cousins acted in collusion. Much of its argument depends upon speculation that is unsupported by the record. Turning to those arguments that have some evidentiary support, LAF identifies a statement Cousins made to its counsel in a telephone conversation that "everyone knows everything[.]" LAF argues that this statement provides proof that Law Cash knew that LAF had a security interest in Cousins's proceeds from the Veneski matter prior to lending Cousins money. LAF argues that Law Cash knew that Cousins had no source other than the fee he would receive from the Veneski case from which to repay the loans, should have been "skeptical" of Cousins's representation that there were no other liens on the proceeds, and yet failed to conduct a lien search prior to lending Cousins money. LAF further hypothesizes that Law Cash was indifferent to the existence of a security interest in Cousins's fee from the Veneski case because Law Cash intended "all along, if needed, simply to strong-arm Cousins into paying Law Cash first by threatening him with ethics charges, without regard to its legal rights." This argument is highly speculative. However, even if all favorable inferences are drawn in LAF's favor, the knowledge and inaction LAF attributes to Law Cash is insufficient to create a genuine issue of fact as to collusion within the context of § 332.
LAF's remaining arguments are without sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). Summary judgment was properly granted here.