a banking person calculating a legal case about enrichment on his computer
ComplianceFinanceFebruary 18, 2021

UCC filing sinks unsecured creditor’s unjust enrichment claim against bank

By: Michael Weissman, Of Counsel at Levin Ginsburg

 

In GlobalTranz Enterprises, Inc. v. PNC Bank, N.A., 2020 Del. Super LEXIS 311 (2020) the court applied California law and dismissed a lawsuit brought by GlobalTranz Enterprises, Inc. against PNC based on unjust enrichment. Breaking from states like Delaware and Illinois, California has recognized a cause of action for unjust enrichment wherein an unsecured creditor can sue a secured creditor based on the contention that the secured creditor has received a benefit and has been unjustly benefitted at the expense of an unsecured creditor. It is a crack in the absolute priority normally enjoyed by a properly secured creditor. But it is a crack that should be filled.

Although California, unlike most states, has been willing to open the door a crack on the UCC priority rules under the doctrine of unjust enrichment, the burden it imposes on an unsecured creditor is heavy and California courts do not seem to countenance the deviation from the customary UCC rules on priority lightly.

Here, since the unsecured creditor did not protect itself by ordering a UCC search, or by filing for a purchase money security interest (PMSI), it had little chance of success

The case facts

The case arose on a motion to dismiss which simply challenges the allegations made by the unsecured creditor; it is not an adjudication on the merits. It simply means the unsecured creditor has not pled enough to show it is entitled to a day in court.

Kraco Enterprises, LLC was an automobile accessory company based in California. In December 2015 it hired GlobalTranz, a freight brokerage company, to contract with freight carriers to deliver Kraco products to Kraco distributors. GlobalTranz paid the freight carriers for their services and then billed Kraco. 

Apparently, Kraco experienced financial difficulties during 2018. GlobalTranz provided freight forwarding services totaling about $800k from January 1, 2018, to May 2, 2018. Kraco failed to pay GlobalTranz for those services since it was going through liquidation in early 2018.

During this same period, Kraco was indebted to PNC and PNC apparently had a security interest in Kraco’s accounts receivable, including amounts due from Kraco distributors for products they had purchased. PNC was successful in obtaining the proceeds from those sales by directing payment to be made to it. It also obtained the proceeds from the liquidation of Kraco’s assets. At no point did GlobalTranz challenge PNC’s security interest. GlobalTranz’s attack on PNC came from a different angle.

GlobalTranz argued that PNC spearheaded the liquidation of Kraco in early 2018, that PNC acquiesced in GlobalTranz continuing to provide services to Kraco and/or encouraged Kraco to obtain services from GlobalTranz without disclosing Kraco’s deteriorating financial condition, and that PNC “knowingly accepted” the benefit of GlobalTranz’s services and was obligated to pay for those services in order to “avoid injustice.”

Despite acknowledging that California had created an exception to the UCC rules governing priority, the court ruled against GlobalTranz. It began by saying, “In order to overcome California’s Article 9 priority scheme, a plaintiff must show ‘something more’ than gain to the secured creditor.” It said that the “something more” had to be overreaching by the secured creditor or an unusual contribution by the unsecured creditor such as the preservation of perishable food products. 

How did the court rule?

The court said, “…GlobalTranz has failed to state a claim for unjust enrichment under California law.” On the issue of PNC’s acquiescence in GlobalTranz’s providing services to Kraco the court made a significant observation: that imposing liability on a secured creditor for simply acquiescing in the conduct of an unsecured creditor, “would upend [A]rticle 9’s interlocking notice-filing and priority provisions, [and] cannot be accepted.”

The court also said that “GlobalTranz did not provide goods or services that were necessary to preserve the collateral.” The court observed that GlobalTranz had other options to protect its interests that it did not pursue: perfecting a purchase money security interest (PMSI), doing a UCC search, or obtaining a subordination agreement from a prior perfected secured creditor. 

What’s the point?

Although California, unlike most states, has been willing to open the door a crack on the UCC priority rules under the doctrine of unjust enrichment, the burden it imposes on an unsecured creditor is heavy and California courts do not seem to countenance the deviation from the customary UCC rules on priority lightly. As noted above, since the unsecured creditor did not protect itself by ordering a UCC search, or by filing for a purchase money security interest, it had little chance of success.

Need help navigating complex state and jurisdictional laws?

Lien Solutions has the expertise in working with all state and local governments, so you can spend your time managing your business. These services could have been provided by Lien Solutions. Secure your assets by calling Lien Solutions at  (800) 833-5778 Monday-Friday, 7 am-7 pm, or via email at [email protected].

This piece is authored by Michael Weissman, Of Counsel at Levin Ginsburg

Michael L. Weissman is an attorney in Chicago who has served as Executive Vice President and General Counsel of a banking group, as an adjunct professor at a law school, as a FINRA arbitrator, as an educational trainer in the United States and overseas, as chairman of a leading legal educational organization in Illinois, and as an expert witness in commercial lending cases. Weissman is a winner of the 2018 Addis Hull Award of the Illinois Institute for Continuing Legal Education for speaking, writing, and governance. He serves as a consultant to Wolters Kluwer Lien Solutions and The Risk Management Association.