Code of Civil Procedure Section 697.590 governed this one.
MDQ, LLC v. Gilbert, Kelly, Crowley & Jennett LLP, Case No. B283025 (2d Dist., Div. 8 February 27, 2019) (published) provides a valuable lesson in the importance of perfecting assigned security interests through the filing of a financing statement pursuant to Division 9 of the Commercial Code.
Floyd Mutrux was one of the authors of a Tony-award winning Broadway musical, “Million Dollar Quartet.” Four limited liability companies (LLCs) held production rights or were producers of the musical. Mr. Mutrux and/or his corporation (Mutrux) was a member, manager, shareholder or owner of each of the LLCs, and held certain economic rights to be allocated profits, and receive distributions and payments from the LLCs.
In 2012, a record company filed a lawsuit against Mutrux. A proposed statement of decision was filed by the trial court, on April 14, 2015, in favor of the record company to the tune of over $1 million. Eight days later, Mutrux and the law firm representing him in the record company litigation executed a “Notice of Assignment and Irrevocable Letter of Direction” assigning a portion of Mutrux’s economic interests in the LLCs to the law firm for the payment of legal fees until payments totaling $175,000 had been made. A few months later, on August 5, 2015, the trial court entered judgment in favor of the record company in the amount of $965,851.47. Then, on August 21, 2015, the record company received a charging order – pursuant to Corporations Code section 17705.03 – directing the LLCs “to pay any and all profits, distributions, disbursements or other payments otherwise due to [Mutrux] . . . directly to counsel for Judgment Creditor [record company], until the August 5, 2015 judgment was fully satisfied.
You can guess what came next. The LLCs filed a complaint in interpleader alleging conflicting claims by the record company and law firm to the applicable distributions owed to Mutrux. The LLCs then deposited the distributions at issue to interpleader funds. Before trial in this matter, the trial judge released the LLCs from any and all liability to the interpleader defendants, ordered them to continue to deposit any additional distributions with the court, and ordered $11,500 payed to the LLCs from the interpleader funds for their attorney fees and costs.
At trial, the record company argued that, pursuant to Code Civ. Proc. section 697.590, it had first priority to the distributions as the law firm had failed to perfect its security interest by filing a financing statement (UCC-1). The record company further argued that the $11,500 payment to the LLCs for attorney fees should be paid by the law firm rather than out of the interpleader funds. The trial court agreed – finding the assignment to the law firm inferior to the judgment lien recorded by the record company, and ordering the law firm to pay the LLCs attorney fees.
The law firm appealed to no avail. The 2/8 DCA affirmed the trial court’s judgment – finding the priority of a perfected judgment lien over an unperfected security interest to be clearly established by section 697.590, and finding no abuse of discretion regarding the trial court’s order for payment of the LLCs attorney fees – to which it was entitled under Code Civ. Proc. section 386.6.
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