Replevin via the CPLR & UCC

By: Leo K. Barnes Jr.*

*Mr. Barnes, a member of Barnes & Barnes, P.C. in Melville,

can be reached at lkb@barnespc.com

 

This month we review an interesting decision regarding the provisional remedy of replevin.  Although the Plaintiff’s moving affidavit was inadequate to comply with the CPLR, luckily for the Plaintiff the Court nonetheless awarded Plaintiff possession of the subject chattel premised upon the UCC.

In Gerber Finance, Inc. v. Oved Diamond Company, Ltd. (New York Supreme Index No.: 600304/2010), Plaintiff, Gerber Finance, Inc. (“Gerber”), moved for summary judgment against Defendant, Oved Diamond Company, Ltd. (“Oved Diamond”), on its replevin claim to recover collateral pursuant to a loan agreement between the parties.  The Plaintiff and Defendant entered into a loan and security agreement (“the Loan Agreement”) for a revolving credit line for the Defendant’s diamond company, in which the Yhonathon Oved, the President of Oved Diamonds, personally guaranteed the loan.  In a separate agreement Oved Diamond agreed to have all of its receivables related to inventory sales placed into a collateral account or be delivered to Oved Diamonds’ office.

The Loan Agreement terminated by its terms on January 2, 2010 and at that time the outstanding balance became due, to which Oved Diamond subsequently defaulted on the loan.  On January 26, 2010, Gerber sent a letter to Oved Diamond declaring that the company was in default.  Days later, on January 28 and 29, Oved Diamond made three shipments of diamonds, that were subject to Plaintiff’s security interest, worth over $3 million to an affiliate of Oved Diamonds located in Israel; O.D.C. Diamonds, Ltd. (“ODC”).

Subsequently, the Supreme Court, New York County granted Plaintiff’s application for an order of seizure, directing the Defendants to turn over all collateral and for it to be seized by the New York County Sheriff.  Pursuant to that order, Plaintiff did recover some collateral, but  claimed that the same was insufficient to satisfy the balance of the Agreement.

In the instant action, Plaintiff sought to recover the remaining pledged collateral, including the diamonds shipped to ODC in Israel, under CPLR Article 71 and UCC 9-609.  The court rejected Plaintiff’s replevin under CPLR Article 71 because plaintiff failed to provide the required affidavit.  CPLR 7102(c) provides a road map for a movant, and confirms that the supporting affidavit must address the following issues:

(c) Affidavit. The application for an order of seizure shall be supported by an affidavit which shall clearly identify the chattel to be seized and shall state:

1. that the plaintiff is entitled to possession by virtue of facts set forth;

2. that the chattel is wrongfully held by the defendant named;

3. whether an action to recover the chattel has been commenced, the defendants served, whether they are in default, and, if they have appeared, where papers may be served upon them;

4. the value of each chattel or class of chattels claimed, or the aggregate value of all chattels claimed;

5. if the plaintiff seeks the inclusion in the order of seizure of a provision authorizing the sheriff to break open, enter and search for the chattel, the place where the chattel is located and facts sufficient to establish probable cause to believe that the chattel is located at that place;

6. that no defense to the claim is known to the plaintiff; and

7. if the plaintiff seeks an order of seizure without notice, facts sufficient to establish that unless such order is granted without notice, it is probable the chattel will become unavailable for seizure by reason of being transferred, concealed, disposed of, or removed from the state, or will become substantially impaired in value.

Luckily for Plaintiff, despite the fact that the Court rejected the article 71 claim due to the insufficiency of the moving papers, the Court did rule that Gerber was entitled to judgment as a matter of law on its replevin claim under UCC 9-609, “based on the Rule 19-a statement, Oved’s admissions in his affidavit, and by submitting the UCC-1 filing statements filed by Gerber.”  Section 9-609, entitled “Secured Party’s Right to Take Possession After Default”, provides:

(a)        Possession; rendering equipment unusable; disposition on debtor’s premises.

After default, a secured party:

(1) may take possession of the collateral; and

(2) without removal, may render equipment unusable and dispose of collateral on a debtor‘s premises under Section 9-610.

(b)        Judicial and non-judicial process.

A secured party may proceed under subsection (a):

(1) pursuant to judicial process; or

(2) without judicial process, if it proceeds without breach of the peace.

(c)        Assembly of collateral.

If so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.

In so finding, the burden then shifted to the defendants to show a triable issue of fact.  The court found that the defendants failed to meet this burden, and rejected their arguments that (1) the Plaintiff’s UCC-1 filing statement to secure a security interest on the pledged collateral was defective, and (2) other actions pending in Israel presented a likelihood of inconsistent results.  The Court summarily rejected Defendants’ main argument that the Plaintiff’s UCC-1 filing statements to secure the security interest on the pledged collateral were defective because Gerber filed their UCC-1 forms in the name of “Gerber Trade Finance, Inc.,” instead of “Gerber Finance, Inc.”  The court found that that this error did not make the financing statement “seriously misleading,” which would then render the financing statement ineffective.  The court relied on the Official Comment to UCC 9-506 that stated that an error in the name of the secured party’s name will not be seriously misleading.  Thus, the Court found that “no creditor could have been seriously misled by the error in the name,” and thus concluded that the UCC-1 financing statements were valid.  The Court likewise rejected the Defendants’ second argument that other actions pending in Israel presented a likelihood of inconsistent results because the Defendants failed to demonstrate any likelihood that such results would occur.

In rejecting the Defendants’ opposition, the Court held that Gerber was “entitled to demand return of the collateral not only from defendants, but also from whatever entity is in possession of the transferred collateral [emphasis added].”  The Court, citing Bank of India v. Weg and Meyers, P.C., 257 A.D.2d 183 (1st Dep’t 1999) found that Gerber was entitled to delivery of the collateral because “a party’s right to possession of collateral upon default may be asserted against a third party in possession, which may not properly refuse upon the secured party’s request for delivery.”  The Court, however, did acknowledge that it did not have personal jurisdiction over any Israeli entities in possession of the diamonds, another obstacle for Plaintiff to overcome.  However, the Court went even further and found that Yhonathon Oved was personally liable on Gerber’s replevin claim because “he admittedly participated in the tortious conversion of Oved Diamond’s inventory by transferring it to ODC, in violation of the loan agreement,” notwithstanding that the participation was for the corporation’s benefit, citing Retropolis Inc. v. 14th Street Development LLC, 17 A.D.3d 209 (1st Dep’t 2005) for the proposition that a corporate officer can be held personally liable for a tort even if the action was for the benefit of the corporation.

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