Margit Livingston on Equitable Marshaling of U.C.C. Article 9 Security Interests

Margit Livingston on Equitable Marshaling of U.C.C. Article 9 Security Interests

 Plaintiff obtained a default judgment against Artemis Technologies and then sought to enforce that judgment serving writs of garnishment on their customers, who were the account debtors on the defendant's accounts receivable. For some reason the Bank with a prior perfected security interest had a problem with this and intervened.

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In the world of U.C.C. Article 9 secured parties, coming out on the top is key. The whole purpose of the security interest is to ensure that the secured party gets paid first out of the collateral before other creditors. See U.C.C. §§ 9-201, 9-317, 9-322 (Official Text 2013) (granting senior perfected secured parties priority over other claimants). Proper creation and perfection of the security interest generally guarantee the secured creditor the coveted senior position. But despite the precise hierarchy created under the Uniform Commercial Code, courts remain free to use traditional legal and equitable principles to fill in any gaps in the Code. U.C.C. § 1-103 (b) ("Unless displaced by the particular provisions of [the Uniform Commercial Code], the principles of law and equity . . . supplement its provisions."). As illustrated in a recent Michigan appellate decision, courts sometimes consider the time-honored doctrine of equitable marshaling to adjust creditor priorities outside of the Article 9 scheme. Sys. Soft Techs. v. Artemis Techs., No. 310091, 2013 Mich. App. LEXIS 1228 (Mich. Ct. App. July 16, 2013) [hereinafter Artemis] [an enhanced version of this opinion is available to lexis.com subscribers].

In Artemis, the plaintiff, System Soft Technologies, L.L.C., had provided services to the defendant, Artemis Technologies, Inc. After Artemis failed to pay for the services, the plaintiff obtained a default judgment against Artemis in Florida in an amount over $147,000. 2013 Mich. App. LEXIS 1228, at *2. The plaintiff then sought to enforce that judgment in Michigan by serving writs of garnishment on the defendant's customers, who were the account debtors on the defendant's accounts receivable. The defendant's secured party, Summit Community Bank, then intervened in the Michigan enforcement proceeding and argued that the plaintiff could not garnish the defendant's accounts receivable because of a prior perfected security interest in the Bank's favor. 2013 Mich. App. LEXIS 1228, at *3-4. The trial court agreed with the Bank and entered an order quashing the plaintiff's garnishment writs and enjoining it from further activities to collect on its judgment. The plaintiff appealed to the Michigan Court of Appeals, which reviewed the trial court's orders for abuse of discretion. 2013 Mich. App. LEXIS 1228, at *10.

Under U.C.C. Article 9, a perfected secured party clearly has priority over a later judgment lien creditor trying to capture the same assets. U.C.C. § 9-317 (a)(2). Hence the judgment creditor in Artemis started out in a weak position vis-à-vis the secured creditor Bank. But the judgment creditor attempted to overcome that weakness by means of two arguments supporting its ability to garnish the defendant debtor's accounts receivable. First, it asserted that because the Bank had not sought to enforce its security interest in the accounts, the plaintiff creditor was not in competition with it. Artemis, 2013 Mich. App. LEXIS 1228, at *10-11. In other words, if the Bank was not yet collecting or foreclosing on the collateral, the plaintiff was free to enforce its judgment. In particular, the debtor was still making its installment payments to the Bank, to which it owed approximately $422,000, and arguably was not even in default to the Bank. Second, the plaintiff argued that the court should apply the doctrine of equitable marshaling to permit the plaintiff to garnish the accounts ahead of the Bank. 2013 Mich. App. LEXIS 1228, at *17.

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