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13-P-1439 Appeals Court
WILLIAM ZIMMERLING vs. AFFINITY FINANCIAL CORPORATION, &
others.1
No. 13-P-1439.
Middlesex. April 8, 2014. - August 18, 2014.
Present: Berry, Katzmann, & Sullivan, JJ.
Practice, Civil, Action to reach and apply. Escrow. Uniform
Commercial Code, Security interest, Secured creditor.
Words, "Transferee," "Interest in property."
Civil action commenced in the Superior Court Department on
November 24, 2010.
The case was heard by Joseph M. Walker, III, J., on motions
for summary judgment, and entry of final judgment was ordered by
Kenneth W. Salinger, J.
Brian T. Moore, of Colorado (W. Matthew Iler, Jr., with
him) for the plaintiff.
Thomas M. Elcock (Thomas Sutcliffe with him) for the
interveners.
1
BHC Interim Funding II, LP, and BHC Interim Funding III,
LP, interveners.
2
SULLIVAN, J. This appeal concerns the enforceability of
security interests in funds deposited in an escrow account
pursuant to an order of a judge of the Superior Court. The
plaintiff, William Zimmerling (Zimmerling), and the interveners,
BHC Interim Funding II, LP, and BHC Interim Funding III, LP,
(collectively BHC), are creditors of Affinity Financial
Corporation (Affinity). Zimmerling and BHC both lay claim to
money owed to Affinity by AARP Financial, Inc. (AARP Financial).
At issue is whether BHC's perfected security interests in the
funds held by AARP Financial were extinguished because they were
transferred from an AARP Financial bank deposit account to a
court-ordered escrow account. See G. L. c. 106, § 9-332(b)
(2001) (UCC § 9-332).2 We conclude that the BHC security
interests in the escrowed funds were not extinguished, and
affirm the judgment awarding the amounts held in escrow to BHC.
Background. The case was decided on cross motions for
summary judgment based on an undisputed record. In 2008 BHC
advanced funds totalling $13.5 million to Affinity. Loan
documents and security agreements were executed in connection
with each of the two loans. Zimmerling does not dispute that
2
This section of G. L. c. 106 is identical to § 9-332 of
the Uniform Commercial Code, 2000 Revision. For ease of
reference, this provision is referred to by the code citation,
i.e., UCC § 9-332.
3
these documents created valid security interests, that the
security interests were perfected on or about January 15, and
April 28, 2008, and that the security interests covered assets,
after-acquired assets, and proceeds of assets.
By March of 2010 Affinity had defaulted on the loans, and
BHC declared Affinity to be in default. Affinity's assets were
insufficient to pay the loans. Affinity also owed money to
Zimmerling, who had successfully arbitrated a claim for breach
of an employment contract against Affinity. The Zimmerling
award was confirmed by the United States District Court for the
District of Colorado. A default judgment entered in favor of
Zimmerling against Affinity in the amount of $370,930.39 on
November 12, 2010.
Zimmerling immediately brought an action to enforce the
Colorado judgment in Massachusetts. The enforcement action
included a reach and apply action against AARP Financial, which
owed Affinity substantial sums as a result of a different
arbitration award issued in Affinity's favor. By orders dated
November 24, 2010, December 14, 2010, and August 19, 2011, a
judge of the Superior Court granted a preliminary injunction
barring AARP Financial from "paying or transferring" any funds
due Affinity, up to a value of $500,000, "pending resolution of
this matter," and ordering AARP Financial to establish an escrow
account as prejudgment security for Zimmerling. The Affinity
4
arbitration award was ultimately confirmed by the United States
District Court for the District of Columbia.3 Thereafter, on
April 13, 2012, the escrow account was funded.
BHC learned of the transfer to the escrow account from AARP
Financial on or about April 13, 2012. BHC notified Zimmerling
of its claim that it had a superior perfected security interest
in the funds on April 26, 2012, and intervened in the
Massachusetts reach and apply action on May 11, 2012. On May
17, 2012, the judge issued an amended order requiring that
$500,000 remain in escrow pending resolution of all claims,
including BHC's. The judge subsequently entered judgment for
BHC on cross motions for summary judgment.
Discussion. Zimmerling does not dispute that BHC had
superior perfected security interests in the funds held by AARP
Financial that AARP Financial owed to Affinity. Rather,
Zimmerling contends that BHC's security interests in the
escrowed funds were extinguished when the funds were sent by
wire transfer from AARP Financial's deposit account to the
escrow account. Zimmerling maintains this constituted a
transfer within the meaning of UCC § 9-332(b), which provides:
"Transferee of funds from deposit account. A transferee of
funds from a deposit account takes the funds free of a
3
The Federal District Court judgment was affirmed on appeal
in an unpublished opinion.
5
security interest in the deposit account unless the
transferee acts in collusion with the debtor in violating
the rights of the secured party."
It is undisputed that the funds were transferred from a deposit
account. See UCC § 9-102(a). There is no claim of collusion.
Therefore, the purely legal question presented is whether a
transfer within the meaning of UCC § 9-332(b) took place that
extinguished otherwise valid security interests in the
transferred funds.4
The purpose of § 9-332 is to "afford[] broad protection to
transferees who take funds from a deposit account and to those
who take money." See comment 2 to UCC § 9-332, 3 U.L.A. 377
(Master ed. 2010). The Uniform Commercial Code does not define
the term "transferee," except to state that a debtor is not a
transferee. See ibid. Zimmerling, relying on the Black's Law
Dictionary definitions of a transferee and an "interest in
property," maintains that a transfer encompasses a conveyance of
any interest in property, including a legal, equitable,
4
Zimmerling acknowledges that as the debtor, Affinity is
not a transferee, see comment 2 to UCC § 9-332(b), 3 U.L.A. 377
(Master ed. 2010), and that for this reason Affinity did not
receive its interest in the transferred funds free and clear of
BHC's security interests. Other challenges to the validity of
the security interests were argued below but have not been
pressed on appeal. We therefore assume, without deciding, that
BHC had valid security interests in the proceeds in the escrow
account unless otherwise extinguished by UCC § 9-332(b).
6
contingent, or conditional interest in property.5 We conclude
that this construction is contrary to the statute and is also
contrary to the legislative purpose of UCC § 9-332.
Accordingly, we affirm the judgment.
"In interpreting the meaning of a statute, we look first to
the plain statutory language. . . . 'All the words of a statute
are to be given their ordinary and usual meaning, and each
clause or phrase is to be construed with reference to every
other clause or phrase without giving undue emphasis to any one
group of words, so that, if reasonably possible, all parts shall
be construed as consistent with each other so as to form a
harmonious enactment effectual to accomplish its manifest
purpose.'" Worcester v. College Hill Properties, LLC, 465 Mass.
134, 138 (2013), quoting from Selectmen of Topsfield v. State
Racing Commn., 324 Mass. 309, 312-313 (1949).
The language of UCC § 9-332 contemplates an actual transfer
of "funds" -- not an interest in funds -- to a "transferee."
Zimmerling acknowledges that the funds were never transferred to
him, but asserts that he had an equitable interest in receiving
the funds at a future date if the judge found that he was
5
Black's Law Dictionary defines transferee as "[o]ne to
whom a property interest is given." Black's Law Dictionary 1636
(9th ed. 2009). An interest is defined as "[a] legal share in
something: all or part of a legal or equitable claim to or right
in property." Id. at 884.
7
entitled to them. This equitable interest was inherently
contingent, however, because the judge had ordered that no
payments be made until Zimmerling's right to the money was
established. "To deposit a sum in escrow is simply to deliver
it to a third party to be held until the performance of a
condition or the happening of a certain event." Childs v.
Harbor Lounge of Lynn, Inc., 357 Mass. 33, 35 (1970).6 Thus, the
escrow arrangement was both conditional and contingent.
By its terms, UCC § 9-332 does not address the transfer of
conditional or contingent interests in funds, only the transfer
of actual money or funds. See UCC § 9-332(a-b). The words
"interest in" funds do not appear in UCC § 9-332. The official
commentary to UCC § 9-332 references the payment of money, or
the transfer of funds by check, cashier check, or wire transfer,
all methods which contemplate a complete transfer of all
6
"While our [escrow] cases have dealt largely with
instruments for the conveyance of land (see Wheelwright v.
Wheelwright, 2 Mass. 447, 453; Foster v. Mansfield, 3 Met. 412,
415), the term [escrow] has long been commonly used 'with
respect to all written instruments as well as to the deposit of
money.' Gulf Petroleum, S.A. v. Collazo, 316 F.2d 257, 261 (1st
Cir. [1963]). See Oppenheim v. Colten, 291 Mass. 234." Childs
v. Harbor Lounge of Lynn, Inc., 357 Mass. 33, 35 (1970). See
Daggett v. Simonds, 173 Mass. 340, 348 (1899) ("The doctrine in
regard to the delivery of deeds in escrow is generally held
applicable to promissory notes, and there is no good reason why
it should not be").
8
interest in and control over the funds. The plain language of
the statue does not encompass the transfer of a partial,
conditional, equitable interest in funds.
Those cases which recognize the transfer of a conditional
or equitable interest in funds are based on statutes which
explicitly define a transfer in that manner, and which serve
different statutory purposes. See 11 U.S.C. § 101(54)(D) (2012)
(under the Federal Bankruptcy Code "'transfer' means. . . each
mode, direct or indirect, absolute or conditional . . . of
disposing of . . . property[] or an interest in property");
Matter of Newcomb, 744 F.2d 621, 626 (8th Cir. 1984) (holding
that transfer to an escrow account constitutes a transfer under
11 U.S.C. § 101(40) and § 547(b), which govern "any transfer of
an interest of the debtor in property").7 See generally G. L.
c. 109A, § 2; G. L. c. 156D, § 3.02(4) (authorizing corporations
to transfer legal or equitable interests in property); Bakwin v.
Mardirosian, 467 Mass. 631, 643 (2014) ("Under the [Uniform
Fraudulent Transfer Act], a transfer is defined as 'every mode,
direct or indirect, absolute or conditional, voluntary or
involuntary, of disposing of or parting with an asset or an
7
At the time Matter of Newcomb, supra, was decided, the
definition of transfer was found at 11 U.S.C. § 101(40).
9
interest in an asset'"). These definitions are not controlling
here.
Zimmerling also claims that when the funds were wired to
the escrow account, a UCC § 9-332 transfer was made to the
escrow agent (his counsel). There is precedent to the effect
that an escrow agent may have an equitable interest in escrowed
property. See Grant v. Colonial Bank & Trust Co., 356 Mass.
392, 396 (1969). We need not reach the question whether an
equitable interest in the funds was transferred to the escrow
agent here, because even if there was a transfer of such an
interest, legal title to the funds would not, under any
circumstances, have been transferred to the escrow agent.8 In
the case of a transfer of funds to an escrow account, the escrow
agent holds the funds in trust as a fiduciary, see NRT New
England v. Moncure, 78 Mass. App. Ct. 397, 401 (2010), but the
legal title to the funds remains at all times with the grantor,
8
To the extent that Gladstein v. Martorella, 75 A.D. 3d
465(N.Y. App.Div. 2010) holds that mere physical possession of
funds in escrow constitutes a transfer within the meaning of UCC
§ 9-332, we agree with the dissent in that case that a judgment
creditor remains a claimant, not a transferee. (Nardella, J.
dissenting). For similar reasons, we find the analysis in Bank
of R.I. vs. Mixitforme, Inc., Superior Ct. of R.I., C.A., No. PM
06-1626 (Jan. 11, 2007), to be unpersuasive. In light of our
disposition here, we need not reach the question whether a
judgment creditor may be considered a transferee. See Orix
Financial Servs., Inc. v. Kovacs, 167 Cal. App.4th 242, 250
(2008).
10
here AARP Financial.9 See Foster v. Mansfield, 3 Met. 412, 414-
415 (1841); Daggett v. Simonds, 173 Mass. 340, 348 (1899);
Artemis v. Malvers, 322 Mass. 136, 138 (1947); McEachern v.
Budnick, 81 Mass. App. Ct. 511, 516-517 (2012) ("It has long
been recognized in Massachusetts that a deed or other document
may be placed in escrow . . . under a condition that delivery
shall not occur, and the instrument accordingly shall not become
effective, until satisfaction of one or more escrow
conditions"). By placing the funds in escrow, AARP Financial
did not lose its legal title to the funds, and the legal title
to the funds would not transfer, within the meaning of UCC § 9-
332, until such time -- if any -- as the escrow conditions were
fulfilled: that is, when the judge determined to whom the funds
should be paid.
For these reasons, neither the escrow agent nor Zimmerling
are transferees. We agree with the New Hampshire Supreme Court
that a transfer within the meaning of UCC § 9-332 takes place at
the time that both legal and equitable title to escrowed funds
pass to the beneficiary. See Rabbia v. Rocha, 162 N.H. 734, 740
(2011). The potential beneficiaries of the escrow, here
9
Consideration of the common law of escrow is appropriate
in limning the contours of the UCC. "Unless displaced by the
particular provisions of this chapter, the principles of law and
equity . . . [shall] supplement its provisions." G. L. c. 106,
§ 1-103(b) (2013).
11
Zimmerling and BHC, "hold[] an 'equitable interest' in the
property, consisting of the right to obtain legal title to the
property" when the conditions of the escrow are fulfilled. In
re NTA LLC, 380 F. 3d 523, 530 (1st Cir. 2004), quoting from
Merchants Natl. Bank v. Frazier, 329 Ill. App. 191 (1946).
"When, however, 'the condition of performance is completed,
ownership of the property in the escrow account immediately
transfers.'" Rabbia, supra at 739, quoting from McCarthy Bldg.
Cos. v. St. Louis, 81 S.W.3d 139, 144 (Mo. Ct. App. 2002). See
Foster v. Mansfield, supra (same).
In Rabbia, the plaintiff obtained a favorable judgment
enforcing a settlement, and ordering the release of escrowed
funds. Earlier in that litigation, the trial court had ordered
the settlement proceeds to be paid into escrow; ultimately the
escrowed funds were deposited with the court. After the
judgment requiring the disbursement of the funds to the
plaintiff had been affirmed, but before the escrowed funds were
disbursed, a finance company holding a perfected security
interest in the defendant's assets sought to intervene in the
trial court action in order to claim the amounts held in escrow.
The trial judge allowed the intervener's motion to intervene and
ruled that the escrowed funds should be paid to the intervener.
The court reversed and held that once it had affirmed the
judgment in the plaintiff's favor, which ordered the release of
12
the escrowed funds to the plaintiff, both legal and equitable
title were transferred to the plaintiff; thus, a transfer within
the meaning of UCC § 9-332 had occurred. That transfer gave the
plaintiff the right to take the escrowed funds free and clear of
the intervener's security interest.
By contrast, in this case, the funds were at all times
subject to the court's escrow order, which prohibited the escrow
agent from disbursing the funds to either Zimmerling or BHC,
absent further order of the court. AARP retained legal title,
and Zimmerling had only an equitable interest in the funds. The
conditions of the escrow were never fulfilled, because there was
no court order releasing the funds to Zimmerling, and there was
no transfer to Zimmerling of an equitable or legal interest that
would satisfy the phrase "transferee of funds" within the
meaning of UCC § 9-332.
This construction of the statute is more consistent with
its "manifest purpose." Worcester v. College Hill Properties,
LLC, 134 Mass. at 139 (citation omitted). The purpose of UCC
§ 9-332(b) would be ill-served by treating the transfer to an
escrow account as a transaction which extinguishes a security
interest in the transferred funds. The policy considerations
underlying UCC § 9-332 were expressly stated by the drafters.
"Broad protection for transferees helps to ensure that security
interests in deposit accounts do not impair the free flow of
13
funds. It also minimizes the likelihood that a secured party
will enjoy a claim to whatever the transferee purchases with the
funds." Comment 3, Policy, to UCC § 9-332, 3 U.L.A. 378 (Master
ed. 2010). This policy places a premium on the "finality" of
commercial transactions by protecting "completed" transactions
from being placed in "jeopardy." Ibid. In layman's terms, the
purpose of the provision is to keep the wheels of commerce
moving forward, even where funds subject to a valid security
interest have been transferred without the secured party's
permission or for no value, subject to the collusion exception
not invoked here.10
Applying UCC § 9-332(b) to a court-ordered escrow account
would be contrary to this purpose. By definition, a court-
ordered escrow account is the antithesis of finality. It is
intended to forestall a final disposition of assets by
preventing the completion of a transaction until the rights of
the parties can be sorted out. Taken to its logical conclusion,
Zimmerling's argument would render inoperable the use of escrow
agreements in commercial transactions involving secured parties,
because a transfer of funds to an escrow account would
10
There is one exception for "bad actors" who act in
collusion with the debtor. See comment 4 to UCC § 9-332, 3
U.L.A. 378 (Master ed. 2010). As previously noted, supra at 4,
no claim of collusion has been made here.
14
automatically and irretrievably extinguish a secured party's
security interest in the funds transferred from a deposit
account, even if the party seeking the escrow was ultimately
determined to have no right whatsoever to the funds.11 This
result would run contrary to another one of the enumerated
purposes of the UCC, namely to "to permit the continued
expansion of commercial practices through custom, usage, and
agreement of the parties." G. L. c. 106, § 1-103(a)(2) (2013).12
We do not read UCC § 9-332(b) to deprive those involved in
commercial transactions of a valuable tool designed to settle
disputes and facilitate commerce. "If a sensible construction
is available, [a court] shall not construe a statute to make a
nullity of pertinent provisions or to produce absurd results."
Plourde v. Police Dept. of Lawrence, 85 Mass. App. Ct. 178, 186
(2014), quoting from Flemings v. Contributory Retirement Appeal
Bd., 431 Mass. 374, 375–376 (2000).
Judgment affirmed.
11
This scenario is yet another reason why UCC § 9-332
should not be construed to apply to a purely equitable,
conditional, interest in an escrow account.
12
This statute was amended as of July 1, 2013. See St.
2013, c. 30, § 2. In the earlier version, this language
appeared at G. L. c. 106, § 1-102(2)(b).