Sonic Engineering, Inc. v. Konover Construction Co. South, 51 UCC Rep. Serv. 2d 844 (Conn. Super. Ct. 2003)

BEACH, J.

The plaintiff Sonic Engineering, Inc. ('Sonic') is a judgment creditor of the defendant Konover Construction Company South[ [FN1] ('KCCS'). Sonic sought to domesticate in Connecticut a Florida judgment pursuant to the Uniform Enforcement of Foreign Judgments Act ('UEFJA') and arranged for a bank execution on a KCCS account. Two non-party claimants, Michael Konover ('MK ') and Konover Construction Corporation ('KCC') have asserted security interests with priority in the bank account and thus contest the attempted execution. In the context of attempting to resolve a discovery dispute, the parties suggested that a summary judgment process may have the benefit of resolving the issue. The parties submitted briefs and factual materials claimed to be uncontested, and argued the issues orally on July 1, 2003. On the materials presented, I find that there is no genuine issue of fact and the claim of MK and KCC regarding their perfected security interest in the bank account is found to be valid.

FN1 It is not now disputed that the correct name of the intended defendant entity is not Konover Construction Company South, but rather is Konover Construction Corporation South, which entity has raised the issue regarding the correct nomenclature. It claims that there is no judgment as to it. I will address the problem briefly later in the memorandum.

The underlying facts are undisputed. The plaintiff Sonic instituted an action against an entity styled Konover Construction Company South in Florida and, after a jury verdict in November 2002, judgment was entered in favor of Sonic on January 28, 2003, in the amount of $218,144.97. Sonic apparently tried informally but unsuccessfully to collect the judgment. On April 16, 2003, the president of Sonic, one Possanza, traveled to Connecticut and reportedly was told by a Konover attorney that the company sued had no assets and no continuing business operation. Also on April 16 Sonic registered the Florida judgment in Connecticut pursuant to § 52-605 of the General Statutes, part of the Uniform Enforcement of Foreign Judgments Act. Sonic immediately [FN2] sought a bank execution on a People's Bank branch in Hartford pursuant to § 52-367a of the General Statutes, but that execution was apparently returned unsatisfied.

FN2 But see § 52-605(c), which states: 'The proceeds of an execution shall not be distributed to the judgment creditor earlier than thirty days after filing of proof of service with the clerk of the court in which enforcement of such judgment is sought.'

Sonic then requested state marshal Timothy Poeti to serve an execution on the Bridgeport home office of People's Bank. On April 28, 2003, Poeti approached Norma Junnack, an employee of People's Bank with whom Poeti had apparently dealt previously. In any event, Junnack told him that she wouldn't know until the next day if she should issue the check. When Poeti said that he couldn't return conveniently the next day because of other business, she agreed to issue a bank check in the amount of $245,081.59 [FN3] on the condition that he hold on to the check until she could confirm if there were any difficulty with the bank's complying with the execution. This transaction occurred at approximately 1:30 p.m.

FN3 Interest and costs were added to the amount of the judgment.

At about 4:00 p.m. Junnack left a message with Poeti that the check had to be returned to her because of a problem. Poeti called the next morning to find out what the problem was, and Junnack told him that a stop payment order had already been placed on the check. Poeti nonetheless tried to negotiate the check by placing it in his account on April 29, but he was soon notified that the check had indeed been stopped. He returned the execution unsatisfied on May 12, 2003.

Meanwhile, on May 6, 2003, MK and KCC filed in this court file the standard post-judgment form requesting a hearing for the determination of interest in property pursuant to § 52-356c of the General Statutes. Each claimed a perfected security interest superior to Sonic's interest as a claimed judgment creditor. When Sonic sought substantial discovery in preparation for such a hearing, MK and KCC moved to quash subpoenas duces tecum and objected to various requests for production of materials. At a conference, both sides suggested that perhaps the issues could be more economically resolved by motions for summary judgment on the issue of the security interest asserted by MK and KCC.

The aforesaid security interest is a result of several agreements entered into among Michael Konover, People's Bank and Konover Construction Corporation South. On January 28, 2003, Konover signed a loan agreement, authorizing loans from Konover to KCCS in an amount not to exceed two million dollars, KCCS signed a revolving loan promissory note, and, critically, a 'control agreement' was signed by Michael Konover, Michael Kolakowski, who was then the president of KCCS, and a representative of People's Bank. The control agreement was clearly intended to comply with the provisions of § 42a-9- 104 of the Uniform Commercial Code in order to establish a security interest in the KCCS's bank account in favor of Michael Konover. [Footnote omitted.] Michael Konover loaned KCCS $400,000 pursuant to the loan agreement on January 30, 2003, and another $300,000 on March 18, 2003. It does not appear from the records that any of those proceeds have been repaid to Michael Konover.

On these facts [Footnote omitted.] both sides claim they should prevail as to the execution. Sonic asserts that it is a holder in due course, and thus has an interest which defeats any security interest that others may have, and also that the attempted execution by Poeti was a transfer of funds pursuant to § 42a-9-332(b) of the General Statutes and thus the transfer was accomplished free of any security interest. The Konover interests and, to a degree, the bank [Footnote omitted.] argue that the control agreement, together with the advancement of funds by Konover, create a perfected security interest which has priority over the nonsecured judgment creditor.

. . . . . .

I first consider Sonic's claim that it is a holder in due course. It is plain that there is no dispute as to the events material to the outcome of the issue. Sonic dispatched the marshal to carry out a bank execution some twelve days after it certified the foreign judgment pursuant to § 52-605 of the General Statutes. The marshal obtained a bank check in the requested amount but, critically, was asked to forgo doing anything with it for twenty-four hours, in order to give the bank time to see if there were any problems with the execution. When the bank employee called back within several hours, she left a message that there were problems and the check should be returned. The marshal nonetheless deposited the check in his account and it was stopped. It was stopped because of the existence of the control agreement in favor of MK. Sonic never had physical possession of the check.

A holder in due course is a holder of an instrument if the instrument is authentic and the holder took the instrument (1) for value, (2) in good faith, and (3) without notice, inter alia, of any claim to the instrument. See § 42a-3-302(2) of the General Statutes. At least two fairly glaring defects flaw Sonic's position as to the Uniform Commercial Code. First, Sonic was not and is not now a holder of the instrument. The concept of being a holder requires possession. See § 42a-1-201(20) of the General Statutes. Although the argument could be advanced that the marshal at one time was in possession, the marshal is an officer of the court. See, e.g., Nemeth v. Gun Rack, Ltd., 38 Conn.App. 44, 52 (1995). Second, if, in context, the marshal should be deemed to have been at least in part acting as an agent of Sonic, then Sonic had notice of a potential claim when Poeti was required not to part with the check for twenty-four hours.

A more fundamental flaw arises out of the context in which the execution occurred. An instrument acquired by legal process is not one, ordinarily, subject to the holder in due course insulation from prior claims, presumably because it is not obtained in the ordinary course of business. See Rosa v. Colonial Bank, 207 Conn. 483, 488&rg;89 [7 UCC Rep Serv 2d 490] (1988) (quoting Comment 3 to the Uniform Commercial Code). More particularly, various statutory provisions require delay in the post-judgment procedures, at least partly in order to provide those with a colorable interest in the property the opportunity to protect their interests. For example, the UEFJA prohibits the transfer of the proceeds of an execution until thirty days after notice to the judgment debtor; § 52-605(c); and, of course, § 52-356c requires a stay of twenty days in which a party with a superior interest may assert its claim.

Sonic further argues that it is a transferee pursuant to § 42a-9-332(b) of the General Statutes and therefore takes without regard to any prior secured interest. That section provides that a 'transferee of funds from a deposit account takes the funds free of a security interest in the deposit accounts unless the transferee acts in collusion with the debtor in violating the rights of the secured party.' Sonic's position is consistent with its reliance of § 52-367a of the General Statutes, which indicates that a bank is to honor executions on accounts by its midnight deadline, which is the midnight following the business day in which the request is made. See § 42a-4-104(a)(10) of the General Statutes.

There is some merit to this position, and it highlights the legitimate area of controversy between the parties. Essentially, Sonic claims that once People's Bank issued the bank check, commercial principles dictate that the check cannot be 'taken back' and that any recourse of the secured party would be against, presumably, the bank. Sonic argues that bank executions are different from personal property executions and are governed by different statutes. Section 52-367a clearly relates to bank executions, while § 52-356c, relied upon to a great extent by the Konover interests, perhaps appears to apply to executions on personal property other than deposit accounts. [FN7]

FN7 Section 52-356a by its terms refers to the procedures to be used when executing against the nonexempt personal property of the judgment debtor 'other than debts due from a banking institution or earnings.' Section 52-356b refers to procedures for turnover orders regarding certain personal property and documents providing documentary evidence of title to property or a debt owed to the judgment debtor. Section 52-356c then provides for a hearing where a third person asserts a superior interest in 'personal property' sought to be levied on. Simply reading the statute may logically lead one to the conclusion that the 'personal property' referred to in § 52-356c does not include bank accounts, which of course are, analytically, debts owed by the bank to its customer. Even this exercise is complicated by the definitions appearing in § 52-350a(16). There, 'property' includes any personal property including 'any debt.' It may be noted that § 52-356a specifically excludes from personal property debts due from a banking institution, and § 52-356c contains no such limitation. Thus, it may be argued that where 'personal property' appears without a specific exclusion, as in § 52-356c, debts owed by a banking institution are included.

As stated infra, this particular minutium need not be resolved, because in the circumstances of this case a hearing was properly invoked by MK and KCC.

The tension is resolved in large measure by Simko v. LaMorte, 222 Conn. 793 (1992), in which the Supreme Court held that a hearing pursuant to § 52-356c was required, in part by equitable considerations, when a dispute arose as to interests in bank executions. Although the identical issue was not precisely raised in Simko, the reasoning of the case compels the conclusion that an opportunity to raise the possibility of a protected security interest must be extended. The due process protections, mandated by cases such as Sniadach v. Family Finance Corp., 395 U.S. 337 (1969), certainly extend to secured parties. [FN8] Sound policy considerations as well as constitutional notions of encouraging an opportunity to be heard, combined with what would appear to be the intent of the legislature [FN9] in providing for delays designed to give persons the opportunity to object, clearly tilt the scales toward mandating a hearing in the specific circumstances of this case.

FN8 In its brief, the plaintiff makes the rather startling statement that notions of procedural due process protect only the poor. Although for some purposes certain safeguards may be extended only to the impoverished, such as the provision of counsel in many criminal cases, I cannot imagine any court holding that our constitutional bedrock requirement of due process generally does not extend to all.

FN9 See, e.g., §§ 52-605(c); 52-356c(a).

The outcome of this case might be closer had the bank effectively delivered the check to Sonic. But, as stated previously, the bank never did 'transfer' the proceeds to Sonic. The facts in this case are thus less favorable to the judgment debtor than were those of Ferrato v. Webster Bank, 67 Conn.App. 588 (2002), in which a stop payment order issued well after the midnight deadline was effective, when a bank rather tardily discovered that it had transferred funds that had been erroneously credited to the judgment debtor's account. The writing of the bank cheek clearly does not necessarily terminate any possibility of recouping the check or the proceeds of the check.

Having found that Sonic is not a holder in due course and is not a 'transferee' such that no recourse against it is cognizable, I turn to the motions of MK and KCC. Once the positions of Sonic are considered and, as it turns out, rejected, the issue is whether there is any genuine fact in dispute regarding a superior security interest in the account. On the materials presented, I find that there is no genuine issue in dispute.

The steps undertaken by MK, KCC, KCCS and the bank regarding the security interest in the account have been outlined above and need not be repeated. Similarly, a full exposition of Article 9 of the Uniform Commercial Code is neither practical nor necessary. Suffice it to say that § 42a-9-203(b) provides, as is relevant to the facts underlying this decision, that a security interest is enforceable as to third parties if (and only if): (1) value has been given; (2) the debtor has the ability to transfer rights in the collateral to the third party; and (3) if the collateral is a deposit account, that the secured party has control under, inter alia, § 42a-9-104, pursuant to the debtor's security agreement. [FN10] Section 42a-9-104, in turn, provides that a secured party has 'control' of a deposit account if the 'debtor, secured party and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the debtor.' Section 42a-9-104(a)(2). An otherwise secured party is still secured even if the debtor has the ability to dispose of funds in the account, subject apparently to instructions of the secured party. Section 42a-104(b) of the General Statutes; see also § 42a-9-205 of the General Statutes.

FN10 Section 42a-9-203(b)(3)(D) of the General Statutes.

The materials submitted by the parties clearly show that all of the requirements have been met. A perfected security interest of course has priority over an unsecured judgment against the same debtor. See, e.g., Walter E. Heller & Co. v. Salerno, 168 Conn. 152, 159 [16 UCC Rep Serv 840] (1975). This general proposition is not contested by Sonic. Rather, Sonic contends that there is at least a genuine issue as to whether value was extended by MK in exchange for the security interest in the account; Sonic also apparently contends that KCCS retained too much dispositional control of the account, and thus defeated any enforceable security interest. [FN11]

FN11 This contention is fully met by §§ 42a-9-104(b) and 42a-9-205.

I first turn to the question of value extended in the creation of the enforceable security interest. It is not contested, nor on the materials submitted could it be contested, that Michael Konover extended a total of $700,000 to the account under the auspices of the control agreement. It is difficult to conceive of how that amount could not be 'value.' In its response to the motions of MK and KCC regarding their superior secured positions, Sonic hypothesizes that there may have been no intent to repay the loan and that the proceeds may have been used to pay other creditors, perhaps even other judgment creditors; these possibilities suggest, according to Sonic, that further discovery is required.

I do not see how any of the suggested possibilities could support the conclusion that value was not extended in return for the security interest. 'Value' is defined very broadly for the purpose of the Uniform Commercial Code, and includes 'any consideration sufficient to support a simple contract.' Section 42a-1-201(44). Even if the funds were not intended to be repaid, they nonetheless were 'value.' There might be more of an argument if an ephemeral promise of funds had been advanced rather than actual funds, but there is no question that funds were advanced and that payments were made to others from those funds. [FN12] Similarly, the use of the funds by KCCS is clearly contemplated by the Uniform Commercial Code and there is nothing to suggest fraud.

FN12 If the loan had been repaid, in whole or in part, through straw men or some other device, then indeed a fraud of sorts might exist and further discovery would be mandated. There has been no suggestion of such activity here: rather, Sonic has suggested that other creditors might have been paid.

Sonic also claims that other Konover entities may be receiving income due to KCCS, thus artificially reducing the debtor's bank account. Again, such a specter doesn't defeat the security interest: the judgment creditor is in any event no worse off that it would have been had Michael Konover not extended the loan to KCCS. In short, there is nothing in the materials to suggest that further discovery would make a difference.

In sum, on the facts presented, Michael Konover and the Konover Construction Company have proved that their security interest in the contents of the bank account are superior to the unsecured judgment. As such, I find that the stop payment order is effective and the check ought to be returned to the bank. [Footnote omitted.] The Uniform Commercial Code quite clearly encourages the movement of resources to encourage commerce, and there is no reason why the policy ought not to be recognized here.