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SE Property Holdings, LLC v. Unified Recovery Group, LLC

United States District Court, E.D. Louisiana

November 30, 2018

SE PROPERTY HOLDINGS, LLC
v.
UNIFIED RECOVERY GROUP, LLC, ET AL.

         SECTION: “J” (1)

          ORDER AND REASONS

          CARL J. BARBIER UNITED STATES DISTRICT JUDGE.

         Before the Court are a Motion for Summary Judgment (Rec. Doc. 106) filed by SE Property Holdings, LLC (“SEPH”), and a Motion for Summary Judgment (Rec. Doc. 110) filed by the United States of America (the “IRS”). These are cross motions for summary judgment and, as is often the case, many of the arguments made therein are duplicative with the substance of the parties' opposition and reply briefs. Considering the cross motions, the memoranda, the record, and the law, the court finds that partial summary judgment should be granted in favor of SEPH.

         FACTS AND PROCEDURAL HISTORY

         The central dispute in this case is whether SEPH's state law security interest or the IRS's tax lien has priority as to funds pertaining to certain accounts receivables that were generated from work performed in the aftermath of Hurricanes Katrina and Isaac. Following the devastation of Katrina, St. Bernard Parish entered into a contract with a group of joint-venturers to remove the debris left behind by the storm.[1] In September of 2005, the contract was assigned to Unified Recovery Group, LLC (“URG”). The parish entered into a second, direct contract with URG in December of 2005 (collectively, the “Katrina Contract”).[2] Then, after Hurricane Isaac struck, St. Bernard and URG entered into a third debris removal contract (the “Isaac Contract”).[3] URG completed all the debris removal work under the contracts relevant to the disputed funds before December 31, 2012.[4]

         On August 29, 2008, SEPH[5] and URG entered into three transactions.[6] First, URG executed a promissory note in favor of SEPH in the amount of $10, 000, 000. Second, URG executed a loan agreement (“Loan Agreement”) that stated SEPH would provide revolving loans to URG, up to the $10, 000, 000 limit of the note. Third, URG executed a (“Security Agreement”) in favor of SEPH, securing URG's repayment obligations and “any and all present and future indebtedness and obligations now or hereafter owing by the Borrowers.”[7] The Security Agreement grants SEPH a security interest in, among other things, “all of [URG's] accounts of any kind . . . whether now existing or hereafter arising.”[8] SEPH filed a corresponding financing statement into the UCC registry of Louisiana on August 29, 2008, [9] and SEPH has since filed routine continuation statements through August 1, 2018.[10]

         On the same day these transactions were entered into, URG was reorganized. A new entity, JKS, [11] was formed to effectuate the buyout of two other URG members.[12] For this transaction, URG and JKS entered into a “Contribution Agreement” in which URG transferred its interest in “[a]ll accounts receivable of [URG] . . . billed on or before” August 29, 2008, to JKS.[13] However, SEPH asserts, and nothing in the record contradicts, that no document was ever filed in the public registry or record of any state giving notice of this transfer.[14]

         In June of 2011, URG executed two more promissory notes in favor of SEPH, in principal amounts of $4, 000, 000 and $2, 681, 000.[15] Per its broad language, this additional indebtedness is also secured by the Security Agreement.

         SEPH made its first advance to URG on September 2, 2008 and its last advance on February 24, 2012. URG did not pay back the loans and in 2013, SEPH obtained a money judgment against URG for more than $20, 000, 000.[16] Before that judgment issued, the IRS filed a notice of tax lien with the East Baton Rouge Clerk of Court claiming unpaid federal taxes with interest.[17]

         In September of 2014, St. Bernard Parish filed a complaint as an interpleader so that the Court could determine who had priority as to FEMA funds that were distributed to the parish so that the parish could pay for the debris removal work.[18]In total, the parish has deposited $610, 081.45 of the FEMA funds into the Court's registry. The IRS intervened, and now claims it is entitled to $302, 803.37 of these funds, per its liens, with interest from September 30, 2018 and till payment, with costs.[19] JKS attempted to intervene but Magistrate Judge Shushan denied the interventions.[20]

         PARTIES' ARGUMENTS

         I. SEPH's Motion for Summary Judgment.

         SEPH argues its security interest in the funds attached and is perfected pursuant to Louisiana law.[21] URG authenticated the Security Agreement by signing it on August 29, 2008. SEPH gave value in the form of routine advances on the loan, beginning on September 2, 2008. Finally, URG had rights in the collateral because URG was a payment obligee pursuant to the Katrina Contract as of September 2, 2008 and an obligee pursuant to the Isaac Contract as of 2012.

         SEPH acknowledges that URG transferred all rights to accounts receivable billed on or before August 29, 2008 to JKS. URG invoice [A](801574) for $457, 115.01 was billed well before this date, on April 17, 2006.[22] Thus, it would appear that URG had no right to payment for work performed pursuant to invoice [A](801574) when URG granted the security interest in its accounts to SEPH. That is significant because $227, 075.00[23] of the disputed funds was distributed to St. Bernard to pay for work the performed pursuant to invoice [A](801574). Nevertheless, the sale of the accounts to JKS is inconsequential, says SEPH, because JKS never gave notice to the world that JKS had obtained ownership of URG's invoices. SEPH argues that, per the UCC-which Louisiana has adopted-because JKS never perfected its security interest as a buyer, SEPH's right to payment under invoice [A](801574) remains the same as if the pre-August 29, 2008 accounts had never been sold.[24]

         Regarding its competing creditor, SEPH admits that the IRS has a lien that is effective from January 29, 2013-the date the IRS filed its Notice of Tax Lien.[25]However, SEPH maintains that its security interest attached and was perfected no later than September 2, 2008. Therefore, SEPH argues it is entitled to priority to the disputed funds according to the general “first in time, first in right rule.” Moreover, SEPH avers that the result is not changed, even though the general rule is subject to the “choatness” doctrine.[26] That doctrine requires that property be “in existence” for a security interest to form. SEPH argues that its security interest became choate when URG completed all of the work in the URG invoices before the end of 2012.[27]Thus, SEPH's security interest came into existence in 2012 at the latest, and SEPH enjoys priority over the IRS's tax lien, which became effective against other creditors no earlier than January 29, 2013.[28]

         II. The IRS's Motion for Summary Judgment

         The IRS contends that whatever security interest SEPH has in the disputed funds is primed by the IRS's lien for the tax period ended June 30, through December 21, 2012, with interest.[29] That is because the Security Agreement begins its grant as follows:

Section 2.01. Grant of Security Interest. [URG] hereby grants and confirms that it has granted to [SEPH] a security interest, subject only to Permitted Liens (as defined in the Agreement) in . . . all of [URG's] accounts of any kind whether now existing or hereafter arising.

(Rec. Doc. 110-5 at 5). The IRS argues that this excerpt has the effect of subjugating SEPH's security agreement in favor of the IRS's lien. The IRS's argument requires the Court to first find that the IRS's tax lien is a “Permitted Lien.” Second, the Court must accept the IRS's argument that the effect of URG granting a security interest “subject only to” the IRS's lien, is that those words “limit[] SEPH's interest in the SBPG receivables to any amounts remaining after the payment of the IRS lien.”[30]

         Second, the IRS argues that it is the “law of the case” that the IRS lien is a Permitted Lien, because of the reasoning in Magistrate Judge Shushan's orders denying JKS's attempted interventions.[31] In her order Judge Shushan adopted the IRS's reasoning that “the assignment of receivables was made subject to taxes not yet due and payable and there can be no distribution to JKS until the obligation to the United States is satisfied.[32]

         Third, the IRS argues that SEPH's claim to funds arising from JKS's receivables fails because SEPH's internal documents indicate that SEPH is entitled to only one-third of any distribution of JKS's receivables.[33] These documents reflect that the other two-thirds belong to JKS's other member entities.

         Finally, the IRS argues that the disputed funds are receivables of a “unique nature” because they are derived from contracts funded by FEMA.[34] The consequence of this, the IRS urges, is that priority must be given to the IRS's lien, rather than SEPH's security interest. The crux of the IRS's argument is that SEPH's security interest did not come into existence until URG earned a right to payment based on performance. The IRS argues that “performance” in this case does not just mean the work of picking up the debris but also providing adequate documentation to substantiate the work performed. According to the IRS, URG did not acquire a right to payment until the parish and FEMA found URG's documentation of its work acceptable. Thus, SEPH did not have a valid security interest in receivables until FEMA approved distribution of funds. FEMA approved reimbursements at various times, for example, FEMA approved $279, 205 in funds for work performed under the Isaac contract on June 25, 2016, well after the IRS lien attached. The IRS urges that the evidence shows-or SEPH has failed to provide contradictory evidence-that FEMA approved reimbursement for funds after the IRS's lien attached, and therefore the IRS is entitled to priority to recover the tax debt from the disputed funds.

         STANDARD OF LAW

         Summary judgment is appropriate when “the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (citing Fed.R.Civ.P. 56(c)), Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994). When assessing whether a dispute as to any material fact exists, a court considers “all of the evidence in the record but refrains from making credibility determinations or weighing the evidence.” Delta & Pine Land Co. v. Nationwide Agribusiness Ins. Co., 530 F.3d 395, 398 (5th Cir. 2008). All reasonable inferences are drawn in favor of the nonmoving party, but a party cannot defeat summary judgment with conclusory allegations or unsubstantiated assertions. Little, 37 F.3d at 1075. A court ultimately must be satisfied that “a reasonable jury could not return a verdict for the nonmoving party.” Delta, 530 F.3d at 399.

         If the dispositive issue is one on which the moving party will bear the burden of proof at trial, the moving party “must come forward with evidence which would ‘entitle it to a directed verdict if the evidence went uncontroverted at trial.'” Int'l Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th Cir. 1991). The nonmoving party can then defeat the motion by either countering with sufficient evidence of its own, or “showing that the moving party's evidence is so sheer that it may not persuade the reasonable fact-finder to return a verdict in favor of the moving party.” Id. at 1265.

         If the dispositive issue is one on which the nonmoving party will bear the burden of proof at trial, the moving party may satisfy its burden by merely pointing out that the evidence in the record is insufficient with respect to an essential element of the nonmoving party's claim. See Celotex, 477 U.S. at 325. The burden then shifts to the nonmoving party, who must, by submitting or referring to evidence, set out specific facts showing that a genuine issue exists. See Id. at 324. The nonmovant may not rest upon the pleadings but must identify specific facts that establish a genuine issue for trial. See, e.g., id. at 325; Little, 37 F.3d at 1075.

         When examining matters of state law, this Court will employ the principles of interpretation used by the state's highest court. Am. Int'l Specialty Lines Ins. Co. v. Rentech Steel LLC, 620 F.3d 558, 564 (5th Cir. 2010). Mindful of Louisiana's distinction between primary and secondary sources of law, the Court will begin its analyses with reliance on the Louisiana Constitution and statutes before looking to “jurisprudence, doctrine, conventional usages, and equity, [which] may guide the court in reaching a decision in the absence of legislation and custom.” Shaw Constructors v. ICF Kaiser Eng'rs, Inc., 395 F.3d 533, 547 (5th Cir. 2004) (quoting La. Civ. Code. art. 1 rev. cmt. b). If the Court must make an “Erie guess” on an issue of Louisiana law, the Court will decide the issue the way that it believes the Supreme Court of Louisiana would decide it. Id. (citation omitted). This Court is not strictly bound by the decisions of the state intermediate courts and will disregard them if the Court is “convinced that the Louisiana Supreme Court would decide otherwise.” In re Katrina Canal Breaches Litig., 495 F.3d 191, 206 (5th Cir. 2007).

         DISCUSSION

         This is a priority dispute. To resolve it, the Court must first determine “[t]he existence, nature and extent of [SEPH's] security interest, ” an inquiry in that is “governed by state law.” Butner v. United States, 440 U.S. 48, 55 (1979). Here, that means applying the law of Louisiana. The IRS does not appear to dispute that SEPH has a perfected security interest in the majority of URG's accounts receivables and therefore the disputed funds. Instead the IRS's first contention is that the security agreement subjugates SEPH's security interest in favor of tax lien as a matter of contractual agreement.[35] If the Court resolves that question in favor of SEPH, the Court will need to address the IRS's alternative argument that federal tax lien law affords priority to the IRS because SEPH's security interest did not come into existence until after the IRS had given appropriate notice of its tax lien.

         I. Whether SEPH's Security Interest Is Primed by the IRS's Lien by the Security Agreement's Language

         The IRS argues that as a matter of contract, the Security Agreement gives priority to the IRS's tax liens. As noted above, the Security Agreement between URG and SEPH is quite broad. Article II, which describes SEPH's security interest, states:

Section 2.01. Grant of Security Interest. [URG] hereby grants and confirms that it has granted to [SEPH] a security interest, subject only to Permitted Liens (as defined in the Agreement) in, a general lien upon, and a right of set-off against the following described property: (a) all of [URG's] accounts of any kind (including all leases) whether now existing or here after arising.[36]

         Subsections (b) through (i) go on to list URG's general intangibles, equipment, inventory, instruments, commercial tort claims, deposit accounts, and proceeds, among other collateral types.[37] In other words, excepting real, non-movable property, the Security Agreement collateralizes SEPH's loans with just about every asset that URG had rights in or could come to have rights in. There is no contesting then that SEPH has a security interest in the disputed funds.[38] Whether considered either as accounts receivable or proceeds, the funds fall under the wide scope of the Security Agreement. The IRS maintains instead that a clause in the middle of the introductory sentence concedes SEPH's priority to the tax liens. The IRS argues the phrase, “subject to Permitted Liens (as defined in the Agreement)” requires the IRS to be paid ahead of SEPH, for the IRS's tax liens are “Permitted Liens.”

         To resolve the meaning of this phrase, the court must engage in contract interpretation according to the principles set for in articles 2045-2057 of the Louisiana Civil Code. The most basic being, “Interpretation of a contract is the determination of the common intent of the parties.” La. Civ. Code Ann. art. 2045. If a contractual phrase is unambiguous and will not result in absurd consequences, the plain meaning controls. La. Civ. Code Ann. art. 2046. However, where “[w]ords are susceptible of different meanings” the Court must choose the “meaning that best conforms to the object of the contract.” La. Civ. Code Ann. art. 2048.

         In their briefing the parties largely ignore the phrase “subject only to” but the Court believes the meaning of these words is necessary to understand what follows. The meaning of “subject to” in a contract depends on context. In re Babcock & Wilcox Co., No. CIV.A. 08-3608, 2008 WL 4809486, at *6 (E.D. La. Oct. 31, 2008) (recognizing “subject to” means “liable to” in one context and “contingent upon” in another). Here, the Court believes that “subject only to” means that SEPH's security interest may be subordinated only by certain liens specifically contemplated by the signatories. “In other words, the phrase is ‘introducing a subordinate provision,' indicating that the proposition set forth before the phrase can be superseded by a contrary provision in [the provision referenced thereafter].” Carson v. Home Owners Ins. Co., No. 308291, 2014 WL 1510039, at *3 (Mich. Ct. App. Apr. 15, 2014) (quoting Garner's Dictionary of Legal Usage 616 (3rd ed. 2011)). The phrase then, is an acknowledgement that “Permitted Liens, ” may exist and these permitted liens, and only they, may have priority over SEPH's Security Interest.[39] To determine whether a Permitted Lien does subjugate the Security Agreement, the Court believes the proper course is to turn to the priority rules.

         The IRS interprets “subject only to” to itself concede SEPH's priority to all “Permitted Liens, ” regardless of what the priority rules say. This interpretation is at odds with the object of the signatories and is an unnatural reading of the Security Agreement. This is clear when the meaning of the second half of the clause- “Permitted Liens (as defined in the Agreement)”-is considered. Given the parenthetical, one would assume that all one must do to determine whether the IRS's tax lien is a “Permitted Lien” is look at the definitional section of the Security Agreement. But the Security Agreement does not actually define Permitted Liens. Which “Agreement” the signatories meant would define the Permitted Liens is not clear because the Security Agreement mostly, but not always, refers to itself as “Security Agreement.”[40] Further confusing things, section 6.11 of the Security Agreement states, “If any provision contained in this Security Agreement is in direct conflict with, or inconsistent with, any provision of the Agreement, the provision in the Agreement shall govern and control.” (Rec. Doc. 110-5 at 19). From this it would appear that “Agreement” must refer to some other agreement between the parties. The IRS suggests that the referenced “Agreement” is the Contribution Agreement which was attached to the Security Agreement and which does indeed self-define itself as “this Agreement.”[41] However, that's another dead end; the Contribution Agreement does not define “Permitted Liens” either.[42]

         The Loan Agreement though, signed on the same day as the Security Agreement, does define “Permitted Liens.”[43] The IRS asks this Court to find “Permitted Liens” to be an ambiguous phrase and to determine the parties' intent by applying the Loan Agreement's definition pursuant to the exception allowing parol evidence.[44] In the Loan Agreement's article X, which describes certain negative covenants, section 10.4 states:

Encumbrances. [URG] shall not create, incur, assume or permit to exist any Encumbrances on any of their properties now owned or hereafter acquired, except the following (hereinafter referred to as the “Permitted Encumbrances”):
(a) Encumbrances for taxes, assessments, or other governmental charges not yet due or which are being contested in good faith by appropriate action promptly initiated and diligently conducted, if such reserves as shall be ...

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