Problem.SP vs. lien creditor

    A.  Mel Town is a graphic artist specializing in the design of web sites for commercial clients.  The interests of two of his creditors have recently collided.  A former partner, Phillip Country, recently obtained a judgment against Mel in the amount of $10,000 from an action for dissolution of the Town and Country partnership.  Computopia recently sold Mel $20,000 worth of new computer equipment for use in Mel's design business, retaining a security interest in the equipment to secure $15,000 of the purchase price still owing. 

    On March 5, the sheriff levied a writ of execution on the computer equipment pursuant to instructions from Country.  Town notified Computopia, which filed a third party claim asserting that its lien was superior to the execution lien of Country. 

    In support of its third party claim, Computopia submitted copies of it security agreement with Town, proved the attachment of a security interest prior to the levy of the writ of execution, and submitted a copy of a financing statement showing filing by the Secretary of State prior to the levy of the writ of execution.   The financing statement listed the debtor's name as Nel Downe. 

    How should the court rule on the third party claim?  Would your answer be different if the computer equipment had been delivered to Mel on February 25 and Computopia had filed a second financing statement, listing the debtor's name as Mel Town, on March 10?  Would your answer be different if on March 5, instead of execution, Country had recorded an Abstract of Judgment with the county recorder of the county in which Mel's home was located?  What if, instead of execution, Country had filed a notice of judgment lien with the California Secretary of State on March 5?  What if, instead of any of the actions mentioned above, on March 5 Country had obtained a court order for the examination of the debtor about the debtor's assets? 
Consider U.C.C. 9-201(a), 9-317(a)(2), (e), 9-102(a)(52), 9-506, In re Mines Tire Co. 

     B. Except for the names, we are not making this up! Honestly!

     You are an attorney for Ruben Espinosa, a former employee of a fish market, operated by Sunshi Corporation, located in Santa Clara County. Sunshi Corporation is wholly owned by Salmon Cushman and the fish market is the only business operated by the corporation. On behalf of Mr. Espinoza, you filed suit against Sunshi Corporation seeking $35,000 for unpaid overtime wages and vacation pay, statutory penalties under the state labor code, interest, and attorney fees. Shortly before trial, you became concerned that Sunshi Corporation, fearful of a judgment in favor of Mr. Espinoza, might attempt to transfer or conceal assets. Accordingly, as authorized in the state's attachment statute, you obtained a court order authorizing the clerk of the court to issue a writ of attachment on the equipment and inventory of the fish market.

     1. The state attachment statute reads, in pertinent part, as follows:

     To levy an attachment on equipment or inventory of a going business in the possession or under the control of the defendant, the sheriff, having been presented with a copy of a writ of attachment, shall file with the Office of the Secretary of State a notice of attachment, in the form prescribed by the Secretary of State. The levy shall be deemed to occur at the time the Secretary of State accepts the notice of attachment for filing. A levy on property under a writ of attachment creates an attachment lien on the property from the time of levy until expiration of three years from the date of issuance of the writ of attachment.

Having procured the writ of attachment, what would you do next?

     2. Suppose that the sheriff's office returns the writ of attachment to you, three weeks after you mailed it to the sheriff's office, with a handwritten note from a deputy that says: "We do not file notices of attachment. You need to file one yourself." After cursing the sheriff's office, what do you do now? Is there anything you could have done to avoid losing three weeks?

     3. Suppose that you mailed the appropriate notice of attachment and the appropriate filing fee to the Secretary of State on August 30, 1996 with a request that it be filed.  Two days later the trial court rendered judgment in favor of your client in the amount of $35,000. On September 12, 1996 you received from the Secretary of State a conformed copy of the notice of attachment indicating that it was accepted for filing on September 5, 1996.

     The defendant has refused to pay the judgment. In late September you obtained a writ of execution and instructed the sheriff to levy the writ on a Sunshi Corporation bank account. The sheriff mailed you a copy of the bank's response to the levy indicating that Sunshi Corporation had on deposit with the bank at the time of levy the amount of $2,500. A few days later, defendant's counsel served you with notice of a hearing on a claim of exemption. The claim of exemption stated that the money on deposit in the bank account was the proceeds of the sale of inventory subject to a security interest in favor of the sister-in-law of the sole shareholder of Sunshi Corporation, securing a note to the sister-in-law, and, as such, should be released to the debtor. The claim of exemption was accompanied by a copy of the security agreement and a copy of the promissory note, in the amount of $250,000, evidencing the debt secured. Pursuant to U.C.C. 9-523(c), you obtained from the Secretary of State its certification that a financing statement covering the collateral mentioned in the security agreement was filed on September 15, 1996.

     Having filed an excellent response to the claim of exemption, you drive to the hearing confident of the result. What do you expect and why?  Don't read the next paragraph until you have tried to answer this question.

     4. Really.  Don't read this paragraph until you have tried to answer the previous question.  Come on, it will be good for you if you try to answer the previous question before you read this paragraph.  The judge rules against you and releases the bank account from the levy of the writ of execution. The judge agreed that Sunshi Corporation was not entitled to an exemption (exemptions are for individuals, not for corporations) and that the appropriate procedure would have been for the sister-in-law to assert a third party claim to the property, but ruled that, for the sake of judicial economy, the claim of exemption should be treated as if it were a third party claim filed by the sister-in-law. The judge also ruled that the order for a writ of attachment that you had obtained for your client automatically expired at the time you obtained the judgment and that filing of the notice of attachment with the Secretary of State therefore did not create a lien. You think the judge is wrong on all counts, but realize that you'll now never see the $2,500 in the bank account.

     What should you do now?  Would you have been better off had you filed a notice of judgment lien with the Secretary of State the day after obtaining the judgment?  See U.C.C. 9-317(a)(2) and the non-uniform version of California 9-102(a)(52) quoted in problem A, above.   Would filing such a notice do you any good now?  See U.C.C. 9-515(c), U.C.C. 1-201(32).  

     5.  In the meantime, you start wondering about the real property on which the fish market is located. You conduct a examination of the debtor and learn that Sunshi Corporation leases the real property under a lease that still has 10 years to run. The debtor tells you that the leasehold is also security for the $250,000 promissory note. Later, in your office, you notice that the sister-in-law's financing statement mentions the leasehold as collateral but that the description of collateral in the security agreement does not mention a leasehold. You remember Lovelady v. Bryson Escrow, Inc.   Any hope here?