SE Prop. Holdings, LLC v. Unified Recovery Grp., LLC, 410 F. Supp. 3d 775 (E.D. La. 2019).
A Louisiana parish contracted with Unified Recovery Group, LLC (“URG”) to remove debris following Hurricane Katrina (the “Katrina Contract”) and Hurricane Isaac (the “Isaac Contract”). Thereafter, URG entered into a security agreement with SE Property Holdings, LLC (“SEPH”), whereby SEPH would provide URG loans in exchange for a security interest in, among other things, URG’s accounts receivable. On the very same day, URG entered into a “Contribution Agreement” with JKS-URG Management Co., LLC (“JKS”), which was formed to effectuate the buyout of two URG members, whereby URG transferred its interests in its accounts receivable to JKS. Notably, SEPH filed a UCC financing statement and corresponding continuation statements while JKS filed neither. Subsequently, the internal revenue service (the “IRS”) filed a tax lien against URG claiming unpaid federal taxes with interest. This interpleader action was filed by the parish in Louisiana District Court (the “Court”) to determine which of SEPH, JKS, and the IRS has priority to the funds distributed by the Federal Emergency Management Agency for the debris removal.
The Court previously determined as between SEPH and the IRS, that SEPH had priority over the IRS’s tax lien with respect to the Katrina Contract receivables. The Court was unable to rule as to the priority of the Isaac Contract receivables based on the evidence submitted at the time. Subsequently, the Court permitted JKS to join and argue its entitlement to the funds relating to one invoice under the Katrina Contract (the “Remaining Katrina Invoice”). The two issues that remained were (i) whether SEPH or JKS is entitled to the Remaining Katrina Invoice receivables, and (ii) whether URG completed performance under the Isaac Contract before the 45-day grace period for the IRS’s tax lien expired.
With respect to the Remaining Katrina Invoice, the Court entered judgment in favor of SEPH and rejected JKS’s argument that UCC Article 9 did not govern perfection of its interests because JKS did not meet either of two exceptions. Specifically, UCC Article 9 applies to “sales of accounts” but does not apply to either “a sale of accounts…as part of a sale of the business out of which they arose” or an “assignment of accounts…for the purpose of collection only.” The Court held that (i) the Contribution Agreement was not a “sale of the business” as the transaction documents clearly stated the Contribution Agreement was its own distinct transaction, and (ii) the Contribution Agreement was not “for the purpose of collection only,” which generally applies when accounts are assigned to a collection agency. The Court also rejected JKS’s other two arguments that SEPH was estopped from asserting its interests and that JKS was not a “buyer” within the meaning of UCC Article 9—JKS failed to meet its burden with respect to its estoppel argument and the language of the Contribution Agreement clearly indicated that JKS was a buyer.
With respect to the Isaac Contract, the Court held that the IRS has priority over the URG receivables because approval of the invoices, which best evidenced URG’s resolution of its cleanup responsibilities, came after the effective date of the IRS’s lien.
Contributed by Jeff Dutson of King & Spaulding LLP