Feresi v. The Livery, LLC
85 U.C.C. Rep. Serv. 2d (West) 393, 182 Cal. Rptr. 3d 169, 232 Cal. App. 4th 419 (2014)
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Rule of Law:
When a party with a perfected security interest obtains that priority by breaching a fiduciary duty owed to the holder of a prior, unperfected security interest, principles of equity will subordinate the perfected interest to the unperfected one.
Facts:
- In a 2006 divorce judgment, Renee Feresi acquired a 12.5% membership interest in The Livery, LLC and a security interest in her ex-husband James Mesa's remaining 12.5% interest to secure his financial obligations to her.
- Feresi did not file a UCC-1 financing statement to perfect her security interest, but she gave written notice of her interest to Mark Hartley, the LLC's managing member.
- Hartley, who was aware of Feresi's membership and security interest, was recognized by the LLC as a member on its corporate tax returns.
- In 2008, Hartley's pension plan loaned $200,000 to Mesa, who was in financial distress. Hartley secured this loan with the same 12.5% LLC share already pledged to Feresi, without disclosing this to her.
- After Feresi began enforcement proceedings against Mesa, Hartley discovered her security interest was unperfected and filed a UCC-1 financing statement for his pension plan's interest in an attempt to gain priority over her claim.
Procedural Posture:
- Renee Feresi filed an action for declaratory and injunctive relief in the superior court (trial court) against The Livery, LLC and Mark Hartley.
- After a bench trial, the trial court found that Hartley had breached his fiduciary duty to Feresi.
- The trial court entered judgment for Feresi, declaring her the owner of a 25% interest in the LLC, free of any claim from Hartley's pension plan, and ruled the pension plan's security interest null and void.
- Hartley, as trustee, and The Livery, LLC, as appellants, appealed the trial court's judgment to the California Court of Appeal, with Feresi as the respondent.
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Issue:
Does a perfected security interest, which would normally have statutory priority under the Uniform Commercial Code, take priority over a preexisting unperfected security interest if the holder of the perfected interest obtained that priority by breaching a fiduciary duty owed to the holder of the unperfected interest?
Opinions:
Majority - Burke, J.
No. A perfected security interest does not take priority over a pre-existing unperfected security interest when the perfection was achieved through a breach of fiduciary duty. As the managing member of the LLC, Hartley owed Feresi, an LLC member, a fiduciary duty of the utmost loyalty and good faith. He breached this duty by using his knowledge of her unperfected interest to secretly create a conflicting security interest for his own benefit, concealing it from her, and then surreptitiously perfecting it to destroy the value of her interest. While the Uniform Commercial Code (UCC) establishes a clear priority system to ensure predictability, its provisions are supplemented by principles of law and equity. The doctrine of equitable subordination is appropriate here because Hartley engaged in inequitable conduct that injured Feresi, and subordinating his claim is consistent with the UCC's purpose, as the statutory scheme is not intended to be a vehicle for fiduciaries to take advantage of their partners.
Analysis:
This decision establishes that the UCC's strict priority rules are not absolute and can be displaced by the common law doctrine of equitable subordination. It clarifies that a fiduciary cannot use the technical filing requirements of the UCC as a sword against a person to whom they owe a duty of loyalty and good faith. The case serves as a crucial precedent that acting on inside knowledge to gain a commercial advantage, even if technically compliant with a statute, can constitute a breach of fiduciary duty, empowering a court to reorder statutory priorities to achieve a just outcome.
