Summary

In an 21 page opinion published May 25, 2011, Judge Shannon ruled that, “the fact that an agent may represent more than one principal does not alter the well-established doctrine that an agent with authority is capable of binding its principal.” Opinion at *2-3. Judge Shannon’s opinion is available here (the “Opinion”).  

Background

WL Homes (the “Debtor”) formed JLH Insurance Corporation (“JLH”) in order to pay insurance claims filed against the Debtor. The Debtor funded JLH with $10 million, which JLH kept in an account at Wachovia. The Debtor then entered into a credit agreement with Wachovia, pledging JLH’s deposit accounts as security. Wayne Stelmar, who was at that time CFO of the Debtor and president of JLH, reaffirmed the Debtor’s obligations to Wachovia in June and July of 2008. Opinion at *4.

The Debtor and several of its affiliates filed for bankruptcy under chapter 11 on February 19, 2009. Shortly thereafter the case converted to chapter 7.  On March 20, 2009, Wachovia commenced an adversary proceeding seeking a declaration that it holds a perfected security interest in the JLH deposit accounts. Wachovia and the Trustee for WL Homes both moved for summary judgment following discovery, which led to this Opinion being issued.

Judge Shannon’s Opinion

After a detailed analysis of the case law surrounding motions for summary judgment, Opinion at *5-8, Judge Shannon examined Wachovia’s security interest under California law. Under California law, a security interest requires that (1) value is given, (2) a valid security agreement is entered and control over the account is given as collateral, and (3) the debtor has rights in the collateral. The Debtors' Trustee did not dispute either of the first two points, Opinion at *9-10, but disputed that WL Homes had the right to control the JLH deposit accounts.

Judge Shannon determined, however, that WL Homes had sufficient rights in the JLH account because of (1) WL Homes’ use and control of the account and (2) JLH’s consent to use the accounts. Opinion at *11. Judge Shannon provides his reasoning for this portion of his decision on pages 11 through 16 of the Opinion. One of Wachovia’s more compelling arguments appears to have been that all seven of the people authorized to manage the JLH account were at the relevant time, officers of WL Homes, and only two of them were also officers of JLH. Opinion at *12.

Additionally, although the signor of the loan documents signed on behalf of WL Homes, he was concurrently the president of JLH. Opinion at *15. Judge Shannon quoted In re Pubs, Inc. of Champaign, 618 F.2d 432 (7th Cir. 1980), for the proposition that “if the president, vice-president or director of a corporation has knowledge or notice of a fact, knowledge or notice of that fact is generally imputed to the corporation.” Opinion at *15. Judge Shannon determined that this knowledge and the apparent authority to act for JLH was binding upon JLH. Opinion at *16. Judge Shannon then granted Wachovia’s motion for summary judgment.

Judge Shannon finishes his decision by ruling on the Trustee’s motion for summary judgment, holding that the Trustee did not carry its burden for the granting of a motion for summary judgment. Opinion at *17-19.

  The law surrounding agency is complex and most States have developed a broad and complex collection of statutes and precedents to govern nearly any situation in which agency is a factor. Given the stakes of most lawsuits that implicate agency laws, and the variance across States, this is one area of law that should not be argued with intuition, but should only be argued after thorough research and preparation.