Opinion
INDEX NO. 653406/2020
11-17-2020
WORTHY LENDING, LLC, Plaintiff, v. NEW STYLE CONTRACTORS, INC., Defendant.
NYSCEF DOC. NO. 18 PRESENT: HON. ARLENE P. BLUTH Justice MOTION DATE 11/12/2020 MOTION SEQ. NO. 001
DECISION + ORDER ON MOTION
The following e-filed documents, listed by NYSCEF document number (Motion 001) 10, 11, 12, 13, 14, 15, 16, 17 were read on this motion to/for DISMISSAL.
The motion to dismiss by defendant is granted.
Background
Plaintiff contends that it is a secured lender of non-party Checkmate Communications LLC d/b/a Checkmate Communications & Electric LLC ("Checkmate"). It argues that defendant is an account debtor of Checkmate and owes Checkmate $1,473,581.42 arising from accounts receivable.
Plaintiff claims that pursuant to a promissory note dated October 11, 2019, it made various loans to Checkmate and in exchange, Checkmate allegedly granted plaintiff a security interest in, and a lien upon, existing and future assets of Checkmate. Plaintiff asserts that on October 2, 2019, plaintiff notified defendant in writing that it had acquired a security interest in the accounts that defendant had with Checkmate. It insists that it filed a UCC-1 financing statement in New Jersey.
In April 2020, plaintiff allegedly sent Checkmate a notice of a default and demanded payment of all obligations. Plaintiff says it has attempted to resolve the underlying debt owed by Checkmate but that Checkmate continues to be in default. With respect to defendant, plaintiff claims that Checkmate assigned a security interest in defendant's accounts with Checkmate and plaintiff now seeks to recover those debts. It argues that defendant has not paid plaintiff despite a notice of assignment it sent to defendant dated October 2, 2019 directing it to pay plaintiff instead of Checkmate.
Plaintiff brings a single cause of action under UCC § 9-607 to collect any proceeds that defendant owed to Checkmate and to enforce the rights of Checkmate with respect to defendant.
Defendant moves to dismiss on the ground that plaintiff has not submitted any evidence that it actually purchased Checkmate's accounts and instead offers a security agreement that does not confer an assignment. It points out that this agreement only provides a security interest but does not constitute an assignment; defendant insists that Checkmate's accounts are merely collateral. Defendant argues that absent proof of a valid assignment, plaintiff cannot pursue its cause of action.
Defendant explains that it retained Checkmate as a subcontractor on two public construction projects in New York City (on the performing arts center at Queens Community College and renovation of a building at City College in Manhattan). Defendant insists that sending a notice of assignment is not sufficient to establish that there was a valid assignment and that UCC § 9-406 requires an actual assignment.
Defendant also argues that even if there was an assignment, it would be void because plaintiff did not file notices of assignment in accordance with Lien Law § 16, which contains specific filing requirements for contracts involving public improvement projects. Defendant maintains that it kept paying Checkmate.
In opposition, plaintiff contends that defendant has mischaracterized the nature of this action. It argues that the motion to dismiss does not address the specific cause of action set forth in the complaint. Plaintiff maintains that pursuant to its financing contract with Checkmate, it notified defendant that Checkmate had assigned to plaintiff all amounts due by defendant. Plaintiff complains that despite receiving the notice, defendant continued to pay Checkmate and therefore remains liable for payments it made to Checkmate after having received the notice of assignment. Plaintiff contends that a security interest is treated as an assignment for purposes of the UCC.
In reply, defendant asserts that there is no dispute that there is no actual assignment for the accounts receivable and there only was a security interest. It emphasizes that the rights of a secured party are not the same as those of an assignee under the UCC. Defendant concludes that absent an actual assignment, plaintiff is limited to its standing as a secured creditor and those rights are governed by UCC § 9-607. Defendant maintains that this UCC section does not, by itself, create any direct obligation to a secured party as a successor in interest. Defendant argues that it actually paid the accounts at issue to Checkmate pursuant to Checkmate's instructions and it owes no duty to plaintiff. Defendant insists that plaintiff's remedy is against its debtor—Checkmate.
Discussion
"In general, Article 9 [of the UCC] applies to a transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract"(ImagePoint, Inc. v JPMorgan Chase Bank, Nat. Assn., 27 F Supp 3d 494, 503 [SD NY 2014]).
As an initial matter, the Court finds that the agreement between plaintiff and Checkmate provided plaintiff with a security interest and was not an assignment (NYSCEF Doc. No. 2). "An assignment is a transfer or setting over of property, or of some right or interest therein, from one person to another, and unless in some way qualified, it is properly the transfer of one whole interest in an estate, or chattel, or other thing" (id.at 502 [internal quotations and citation omitted]). There is no question that the agreement only grants plaintiff a security interest rather than an assignment of all of Checkmate's accounts.
The next issue is whether plaintiff can state a cause of action under the UCC under the theory that defendant, the account debtor, must make payments to the secured party (plaintiff) rather than the debtor (Checkmate). The basis for plaintiff's claim that defendant should have made payments to plaintiff is that plaintiff sent a notice of assignment to defendant (NYSCEF Doc. No. 3). Defendant claims that it paid Checkmate and did not have to recognize plaintiff's notice of assignment because it was not accompanied by proof of an assignment. However, plaintiff's cause of action is brought pursuant to UCC § 9-607, which governs the rights of a secured party to bring certain actions.
"N.Y. U.C.C. § 9-607(a)(3) provides that a secured party has the right to enforce the obligations of an account debtor ... and exercise the rights of the debtor with respect to the obligation of the account debtor ... to make payment or otherwise render performance to the debtor, and with respect to any property that secures the obligations of the account debtor" (id. at 505). This section of the UCC also provides that "[t]his section does not determine whether an account debtor, bank, or other person obligated on collateral owes a duty to a secured party" (UCC 9-607 [e]). In other words, the section upon which plaintiff's cause of action is based does not determine whether defendant owes a duty to plaintiff.
The Michigan Court of Appeals, when considering similar circumstances and interpreting the same UCC provisions, found that a secured party could not bring an action under UCC § 9-607 and that it should have brought a claim under UCC § 9-406 (Buckeye Retirement Co., LLC, Ltd. v Meijer, Inc., 279625, 2008 WL 4278038, at *3 [Mich Ct App 2008]). In Buckeye, just as here, a secured party attempted to collect from an account debtor while a dispute between the secured party and a debtor persisted. The Michigan court dismissed the UCC claim on the ground that the notice provided by the secured party did not comply with UCC § 9-406 (id.).
In ImagePoint (cited above), the Southern District of New York opined that "In situations like Buckeye, where there is a dispute between the secured creditor and the debtor as to who has the right to collect from an account debtor, the secured creditor cannot be said to be exercising the rights of the debtor with respect to the obligation of the account debtor. In other words, to hold that an account debtor is obligated to pay the secured creditor and not the debtor would be tantamount to creating a duty owed by the account debtor to the secured creditor that was separate and distinct from the duty it owed to the debtor. Such a result is barred by the plain language of § 9-607(e), which states that the secured party's right to collect from an account debtor does not determine whether an account debtor ... owes a duty to a secured party" (ImagePoint, Inc., 27 F Supp 3d at 506) [SD NY 2014] internal quotations and citation omitted]).
This description captures the situation here. Plaintiff's complaint admits that there is an underlying dispute between it and Checkmate, and that Checkmate owes plaintiff over $3 million (NYSCEF Doc. No. 1, ¶ 13). The existence of that dispute bars plaintiff from bringing a cause of action under UCC § 9-607. In other words, that ongoing dispute prevents plaintiff from bringing a case against one of Checkmate's debtors based on the notion that defendant should have started paying plaintiff before Checkmate even defaulted (the notice of assignment to defendant is dated October 2, 2019 and the complaint contends Checkmate defaulted on its obligations to plaintiff in April 2020).
The Court also finds that the notice of assignment was not sufficient under UCC § 9-406 to require defendant to start making payments to plaintiff. Of course, a secured party with a security interest is not the same as an assignee (IIG Capital LLC v Archipelago, L.L.C., 36 AD3d 401, 404, 829 NYS2d 10 [1st Dept 2007] [noting that there is no authority to treat a security interest and an assignment as the same for purposes of UCC § 9-406]).
Summary
The Court concludes that plaintiff cannot sustain a cause of action under UCC § 9-706 or under 9-406 (even though it did not plead under that section). To be clear, the Court finds that plaintiff cannot maintain a case where it alleges that defendant should have started paying it despite the fact that it has an ongoing dispute with Checkmate. The question, then, is what happens if plaintiff is not successful against Checkmate. Should defendant be required to pay both plaintiff and Checkmate? The purpose of the UCC is not to facilitate double recovery. As defendant points out, plaintiff can recover from Checkmate, especially if defendant did in fact pay Checkmate.
Accordingly, it is hereby
ORDERED that the motion to dismiss by defendant is granted, and the Clerk is directed to enter judgment accordingly along with costs and disbursements after presentation of proper papers therefor. 11/17/2020
DATE
/s/ _________
ARLENE P. BLUTH, J.S.C.