In In re 140 W. 57th St. Bldg. LLC, the New York Supreme Court decided a dispute over priority with respect to bank account. Petitioner 140 W. 57th Street Building LLC (“140”) sought to enforce a $2,156,165.17 Judgement (the “Judgment”), entered in its favor against non-party Kate’s Paperie, LLC, Kate’s Paperie Ltd. and K.P. LLC (collectively, “Kate’s”). In aid of enforcement of the Judgment, 140 delivered to the Marshall an Execution and directed the Marshall to levy upon and conduct a sale of on Kate’s assets, Russ Teddy Bear Investments LLC (“Russ”) commenced a related special proceeding, pursuant to CPLR 5239, for an order vacating the Marshall’s levy and declaring that Russ has a priority interest over 140 with respect to Kate’s collateral. Russ’s claim was premised upon a security interest granted by Kate’s in April 2012 and a UCC-1 Financing Statement that Russ filed against Kate’s on May 23, 2012. The Court denied Russ’ motion for a preliminary injunction finding there was a question of fact on the issue of priority.
TD Bank Responded to 140’s Information Subpoena and advised that it held a deposit account in Kate’s name, with a balance of $40,147.22. TD Bank placed a restraint on that account. 140 commenced the special proceeding for an order, pursuant to CPLR 5225 and 5227, directing TD Bank to turnover the funds in the account and extend priority to 140’s Judgment. Russ intervened and argued that it has a perfected security interest in Kate’s collateral and that the funds in the TD Bank account are “identifiable proceeds from the sale” of such collateral, thereby giving Russ priority over the account. In support, Russ submitted an affidavit stating that Russ had a perfected security interest in Kate’s collateral to secure payment of over $5 million in loans prior to the entry of the Judgment and the Marshall’s levy, and that Kate’s, at the direction of Russ, had liquidated the collateral and deposited the funds in Kate’s TD Bank account. 140 argued in reply that Russ did not have a perfected security interest in the account because it did not take possession and control of the account as required by UCC §§104 and 314.
Citing UCC §9-314(a), which provides that a security interest in a deposit account “may be perfected by control,” the Court found that Russ did not perfect its security interest: (1) Russ is not the bank; (2) it did not offer an “authenticated record” between itself, Kate’s and TD Bank evidencing Kate’s consent to Russ’s disposition of the funds in the account; and (3) it failed to offer any other evidence showing that it exercised control over the account.
The Court also noted that a security interest in a deposit account may also arise where a secured interest in collateral has attached, and the secured party shows that such deposit account contains “identifiable proceeds of [such] collateral.” The Court found, however, that Russ failed to demonstrate that the TD Bank account contained identifiable proceeds of the sale of such collateral. Ultimately, the Court found that 140 could attach the TD Bank account in partial satisfaction of its Judgment and ordered a turnover of the funds to 140. The Court declined to issue a blanket order on any other TD Bank accounts until Russ had the opportunity to demonstrate that the account contained identifiable proceeds of the sale of Kate’s collateral.