MDQ, LLC v. Gilbert, Kelly, Crowley & Jennett LLP
32 Cal. App. 5th 702, 244 Cal. Rptr. 3d 211 (2019)
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Rule of Law:
An assignment of future economic distributions made to secure payment of an obligation creates a security interest under the California Uniform Commercial Code (UCC). To gain priority over a subsequent judgment creditor's lien, this security interest must be perfected, typically by filing a UCC-1 financing statement.
Facts:
- Floyd Mutrux was entitled to receive profit distributions from the MDQ entities, which held production rights for the musical 'Million Dollar Quartet.'
- Cleopatra Records, Inc. sued Mutrux and on April 14, 2015, a trial court issued a proposed decision against Mutrux for over $1 million.
- On April 22, 2015, Mutrux executed an assignment directing the MDQ entities to pay a percentage of his future distributions to his law firm, Gilbert, Kelly, Crowley & Jennett (Gilbert Kelly), to satisfy a $175,000 debt for legal services.
- The assignment stipulated that once the $175,000 was paid, the distributions would revert to Mutrux.
- Gilbert Kelly did not file a UCC-1 financing statement to perfect its interest in the assigned distributions.
- On August 5, 2015, a final judgment of $965,851.47 was entered in favor of Cleopatra and against Mutrux.
- Cleopatra then obtained a charging order, which created a judgment lien against Mutrux's interests in the MDQ entities.
- The MDQ entities, faced with conflicting claims to Mutrux's distributions from Gilbert Kelly and Cleopatra, were unsure whom to pay.
Procedural Posture:
- The MDQ entities filed a complaint in interpleader in a state trial court, naming Gilbert Kelly and Cleopatra as defendants.
- Cleopatra filed a cross-complaint against Gilbert Kelly.
- After a bench trial, the trial court found in favor of Cleopatra, concluding the assignment to Gilbert Kelly was an unperfected security interest that was subordinate to Cleopatra's judgment lien.
- The trial court also awarded attorney's fees to the MDQ entities and ordered Gilbert Kelly, as the losing claimant, to pay them.
- Gilbert Kelly (appellant) appealed the judgment and the attorney's fee order to the California Court of Appeal. Cleopatra (respondent) is the appellee.
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Issue:
Does a judgment creditor's properly recorded judgment lien have priority over a prior, unrecorded assignment of a debtor's future economic interests when that assignment created an unperfected security interest?
Opinions:
Majority - Grimes, J.
Yes, a judgment creditor's properly recorded judgment lien has priority over a prior, unperfected security interest. The assignment of Mutrux's future distributions to Gilbert Kelly was not an absolute transfer of property, but rather a security interest under the California Uniform Commercial Code (UCC) because it was an interest in personal property that secured the payment of an obligation. The court rejected Gilbert Kelly's reliance on pre-UCC case law, holding that secured transactions in personal property are governed by Division 9 of the UCC. Under the UCC, a security interest must be perfected, typically by filing a financing statement, to gain priority over other creditors. Because Gilbert Kelly failed to file a financing statement, its security interest was unperfected. Under Code of Civil Procedure section 697.590, priority between a judgment lien and a security interest is determined by the time of filing or perfection. Since Cleopatra properly recorded its judgment lien and Gilbert Kelly's interest was unperfected, Cleopatra's lien has priority.
Analysis:
This decision reaffirms the supremacy of the UCC in governing security interests in personal property, regardless of how the parties label their agreement. It clarifies that an 'irrevocable assignment' of future income to satisfy a debt is substantively a security interest, not an absolute transfer of ownership. The ruling serves as a crucial reminder to creditors, especially law firms taking interests in client assets, that they must comply with UCC perfection requirements to protect their claims from being subordinated to subsequent judgment liens. Failure to file a financing statement can render a chronologically earlier claim inferior to a later, properly recorded lien.
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