Opinion
Case No. 97-3259, (Related Case: 89-32633)
June 1, 1998
James H. Perlman, Toledo, OH., Atty. for Plaintiff.
Lawrence C. Meyerson, Los Angeles, CA., Atty. for Defendants.
MEMORANDUM OPINION AND DECISION
This cause comes before the Court upon the Plaintiff's Motion for Partial Summary Judgment, and upon Defendant's Motion for Summary Judgment. This Court has reviewed the arguments of counsel, exhibits, and the entire record of the case. Based upon that review, and for the following reasons, the Court shall deny the Plaintiff's Motion, and grant the Defendant's Motion to the extent of the determination of the issues herein.
FACTS
The issue in this case involves the return of monies to the Debtor from a letter of creditor posted as security by the Debtor to insure the payment of its workers' compensation claims. Defendant claims to have a valid security interest in the returned funds, and the Trustee disagrees.
Challenge Cook Brothers Inc. (hereafter "Debtor") was a corporation with employees in California. Debtor was qualified under the California Labor Code to self insure for payment of its worker's compensation claims, and elected to do so. Pursuant to § 3701 of the California Labor Code, Debtor was required to post security for its workers' compensation claims. The Debtor chose to post as security an irrevocable letter of credit issued by Community Bank. Community Bank maintained a security interest in the Debtor's assets.
On September 15, 1989, Debtor filed a Chapter 7 bankruptcy petition, and Plaintiff was appointed Trustee. On September 26, 1989, Community Bank received a demand for payment from the Manager of Self Insurance Plans (an office of the California Department of Industrial Relations) for the full amount of the letter of credit. On September 27, 1989, Community Bank paid One Million Dollars ($1,000,000.00) pursuant to the letter of credit. Community Bank then asserted its secured claim against the property of the bankruptcy estate, for this obligation among others. Community Bank was eventually paid one hundred percent of its claim, with the exception of claims for reimbursement of attorneys' fees and costs.
The Trustee realized tat the Debtor's outstanding workers' compensation liability claims may be substantially less than the One Million Dollar ($1,000,000.00) draw on the letter of credit made by the Manager of Self Insurance Plans, and hired an expert to seek the return of the excess. These efforts resulted in a compromise, approved by this Court, in which the Department of Industrial Relations Self-Insurance Plans paid the Trustee the sum of Five Hundred Fifty Thousand Dollars ($550,000.00). This amount has been held by the Trustee, and has grown with interest. Defendant now seeks to assert its security interest in these funds.
The Defendant now has subrogated rights to Community Bank's claims for reimbursement of attorneys fees and costs, as well as other secured claims which total well over the Six Hundred Ninety-eight Thousand Eighty-three and 18/100 Dollars ($698,083.18) the Trustee presently has on hand. It is not contested that the Defendant's security interest includes all Debtor's "general intangibles, now existing or hereafter acquired . . . accounts and accounts receivable, contact rights, instruments, letters of credit . . . [a]ll documents, instruments, documents of title, policies and certificates of insurance . . . deposits, proceeds of insurance, cash, liens . . . [and] [a]ll other property in which Debtor may have granted or may hereafter grant to a Secured party a security interest."
LAW
The Bankruptcy Code, 11 U.S.C. § 101, et seq., provides in pertinent part:
11 U.S.C. § 541. Property of the estate
(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:
(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.
(b) Property of the estate does not include —
(1) any power that the debtor may exercise solely for the benefit of an entity other than the debtor[.]11 U.S.C. § 552. Postpetition effect of security interest
(a) Except as provided in subsection (b) of this section, property acquired by the estate or by the debtor after commencement of the case is not subject to any lien resulting from any security agreement entered into by the debtor before the commencement of the case.
(b)(1) Except as provided in sections 363, 506 (c), 522, 544, 545, 547, and 548 of this title, if the debtor and an entity entered into a security agreement before the commencement of the case and if the security interest created by such security agreement extends to property of the debtor acquired before the commencement of the case and to proceeds, product, offspring, or profits of such property, then such security interests extends to such proceeds, product, offspring, or profits acquired by such security agreement and by applicable nonbankruptcy law, except to any extent that the court, after notice and hearing and based on the equities of the case, orders otherwise.
The California Labor Code (Division 4, Part 1, Chapter 4, Article 1) provides in pertinent part (legislative changes were made in 1993, the prior labeling of subsections is bracketed below):
§ 3701. Private self-insuring employer; annual renewal or deposit of new security for payment of compensation; minimum deposit, form of security; withdrawal; perfected security interest
(a) Each year every private self insuring employer shall secure incurred liabilities for the payment of compensation and the performance of the obligations of employers imposed under this chapter by renewing the prior year's security deposit or by making a new deposit of security. If a new deposit is made, it shall be posted within 60 days of the filing of the self insured employer's annual report with the director, but in no event later than May 1.
(d)[formerly (c)] The director [of Industrial Relations] may only accept as security, and the employer shall deposit as security, cash, securities, surety bonds, or irrevocable letters of credit in any combination the director, in his or her discretion, deems adequate security. The current deposit shall include any amounts covered by terminated surety bonds or excess insurance policies, as shall be set forth in regulations adopted by the director pursuant to Section 3702.10.
(e)[formerly (d)]Surety bonds, irrevocable letters of credit, and documents showing issuance of any irrevocable letter of credit shall be deposited with, and be in the form approved by, the director, shall be exonerated only according to its terms and, in no event, by the posting of additional security.
(j)[formerly (g)] Upon the sending by the director of a request to renew, request to post, or request to increase or decrease a security deposit, a perfected security interest is created in the private self insured's assets in favor of the director to the extent of any then unsecured portion of the self insured's incurred liabilities. That perfected security interest is transferred to any cash or securities thereafter posted by the private self insured with the director and is released only upon either of the following:
(1) The acceptance by the director of a surety bond or irrevocable letter of credit for the full amount of the incurred liabilities for the payment of compensation.
(2) The return of cash or securities by the debtor.
The private self-insuring employer loses all right, title, and interest in, and any right to control, all assets or obligations posted or left on deposit as security. The director may liquidate the deposit as provided in Section 3701.5 and apply it to the self-insured employer's incurred liabilities either directly or through the Self-Insurers' Security Fund.§ 3701.3. Return of excess amounts of security to private self-insured employer
The director shall return to a private self insured employer all amounts determined, in the director's discretion, to be in excess of that needed to assure the administration of the employer's self insuring, including legal fees, and the payment of any future claims.
§ 3701.5. Private self-insured, employer; failure to pay workers' compensation; utilization of security deposit; payment through Self-Insurers' Security Fund; audit; disputes; appeals
(a) If the director determines that a private self insured employer has failed to pay workers' compensation as required by this division, the security deposit shall be utilized to administer and pay the employer's compensation obligations.
(b) If the director determines the security deposit has not been immediately made available for the payment of compensation, the director shall determine the method of payment and claims administration as appropriate, which may include, but is not limited to, payment by a surety that issued the bond, or payment by an issuer of an irrevocable letter of credit, and administration by a surety or by an adjusting agency, or through the Self Insurers' Security Fund, or any combination thereof.
(c) If the director determines the payment of benefits and claims administration shall be made through the Self Insurers' Security Fund, the fund shall commence payment of the private self insured employer's obligation for which it is liable under Section 3743 within 30 days of notification. Payments shall be made to claimants whose entitlement to benefits can be ascertained by the fund, with or without proceedings before the appeals board. Upon assumption of obligation by the fund pursuant to the director's determination, the fund shall have a right to immediate possession of any posted security and the custodian, surety, or insurer of any irrevocable letter of credit shall turn over the security to the fund together with the interest that has accrued since the date of the self-insured employer's default or insolvency.
(e) The payment of benefits by the Self-Insurers' Security Fund from security deposit proceeds shall release and discharge any custodian of the security deposit, surety, any issuer of a letter of credit, and the self-insured employer, from liability to fulfill obligations to provide those same benefits as compensation, but does not release any person from liability to the fund for full reimbursement. Payment by a surety constitutes a full release of the surety's liability under the bond to the extent of that payment, and entitles the surety to full reimbursement by the principal or his or her estate. Full reimbursement includes necessary attorney's fees and other costs and expenses, without prior claim or proceedings on the part of the injured employee or other beneficiaries. Any decision or determination made, or any settlement approved, by either the director or the appeals board under subdivision (g) shall conclusively be presumed valid and bonding as to any and all known claims arising out of the underlying dispute, unless and appeal is made within the time limit specified in Section 5950.
(g) Disputes concerning the positing, termination, exoneration, or return of all or any portion of the security deposit, or any liability arising out of the posting or failure to post security, or adequacy of the security or reasonableness of administrative costs, including legal fees, and arising between or among a surety, the issuer of an agreement of assumption and guarantee of workers' compensation liabilities, the insurer of a letter of credit, any custodian of the security deposit, a self insured employer, or the Self-Insurers' Security Fund shall be resolved by the director. An appeal from the director's decision or determination may be taken to the appropriate superior court by petition for writ of mandate. Payment of claims from the security deposit or by the Self-Insurers' Security Fund shall not be stayed pending the resolution of the disputes unless and until the superior court issues a determination staying a payment of claims decision or determination of the director.
(emphasis added).
The California Commercial Code provides in pertinent part:
§ 9106. Account; general intangibles
"Account" means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance. "General intangibles" means any personal property (including things in action) other than goods, accounts, chattel paper, documents, instruments, investment property, rights to proceeds of written letters of credit, and money. All rights to payment earned or unearned under a charter or other contract involving the use or hire of a vessel and all rights incident to the charter or contract are accounts.
The California Civil Code provides in pertinent part:
§ 953. Thing in action defined
A thing in action is a right to recover money or other personal property by a judicial proceeding.§ 954. Transfer of things in action
A thing in action, arising out of the violation of a right of property, or out of an obligation, may be transferred by the owner.§ 1427. Obligation defined
OBLIGATION, WHAT. An obligation is a legal duty, by which a person is bound to do or not to do a certain thing.§ 1428. Creation and enforcement
An obligation arises either from:
One — The contract of the parties; or,
Two — The operation of law. An obligation arising from the operation of law may be enforced in the manner provided by law, or by civil action or proceeding.§ 1434. Conditional obligation defined
OBLIGATION, WHEN CONDITIONAL. An obligation is conditional, when the rights or duties of any party thereto depend upon the occurrence of an uncertain event.
DISCUSSION
The allowance or disallowance of claims against the estate or exceptions from property of the estate are core proceedings pursuant to 28 U.S.C. § 157 (b)(2)(B). Thus, this is a core proceeding.
This case is before the Court upon the parties' Motions for Summary Judgment. However, the parties agree that there is no dispute as to any material fact in this case. Rather, the outcome of this case turns upon issues of law.
The issue in this case is whether Defendant's security interest in Debtor's general intangibles gives Defendant a security interest in the funds the Debtor received postpetition from the California Department of Industrial Relations Self-Insurance Plans. Because § 552 (a) of the Bankruptcy Code provides that property acquired after the commencement of the case is not subject to prepetition liens, this issue depends upon whether Debtor had a prepetition right to these funds, so that Defendant's security interest could have attached prepetition. This Court finds Debtor did have a property interest which was pledged as security to Defendant prepetition.
This Court will first address the Trustee's arguments. The Trustee argues that the Debtor had no prepetition property interest in the letter of credit it posted as security to insure its workers' compensation obligations pursuant to the California self insurance statute, and therefore it could not have pledged such an interest to Defendant. The Trustee points to several provisions of the California Labor Code which he believes divested Debtor from any property interest in the letter of credit which served as security, and therefore any possible return on excess funds drawn on that security. First, California Labor Code § 3701 (g) provides that "the private self insured employer loses all right, title, interest in, and any rights to control, all assets or obligations posted as security . . . [for payment of workers compensation claims]." Second, a related provision establishes the unconditional right of the Self Insurer's Security Fund to "obtain from the security deposit of an insolvent self insurer the amount of the self insurer's compensation obligation[.]" California Labor Code § 3744 (b). Third, with respect to the turnover of excess funds, another provision provides that the amount of excess security to be returned to the self insuring employer shall be determined "in the director's discretion." California Labor Code § 3701.3. (California Labor Code § 3700.1 (a) provides that the "director" is the California Director of Industrial Relations.)
Thus, it is the Trustee's argument that the prepetition Debtor had no legal right to any of the excess funds until either the letter of credit was drawn upon, or the excess funds were actually received. Because both of these events occurred postpetition, the Trustee argues that the Debtor had no property interest which could have been pledged as collateral. As noted supra, § 552 (a) of the Bankruptcy Code provides that property acquired after the commencement of the bankruptcy case is not subject to any lien resulting from a prepetition security agreement, unless it fits into an exception in § 552 (b). None of the § 552 (b) exceptions apply in this case. The Trustee also notes that it is Defendant's burden to prove that a lien extends to after acquired property, citing In re T/H New Orleans Ltd. Partnership, 10 F.3d 1099 (5th Cir. 1993).
In his brief the Trustee notes that there is no real controlling precedent involving a claim of a security interest in excess funds recovered by a Trustee from the California Self Insurer's Security Fund. However, the Trustee does cite several cases which he feels are analogous. This Court will now address and distinguish these cases, showing that they are not particularly helpful to the determination of the issues in the case at bar.
The Trustee cites In re Duke Roofing Co., Inc., 47 B.R. 990 (D.C. 1985), wherein the Court held that a creditor could not assert a security interest in unearned insurance premiums against bankruptcy trustee. However, the Duke Court's holding rested upon the specific exclusion of transfers of interests in insurance policies from Article Nine of the Uniform Commercial Code, causing the Court to analyze the issue under common law. The Court held that common law did not recognize the assignability of future intangibles as against those who were not parties to the transaction, such as judgment lien holders (which trustees in bankruptcy are deemed to be under the Bankruptcy Code). Id. at 992. Unlike the situation in Duke, however, the Trustee has not shown that the herein would not be governed by Article Nine of the Uniform Commercial Code (incorporated into the California Commercial Code). As the Duke Court noted, the Uniform Commercial Code recognized interests in future intangibles to an extent unknown to the common law. Id. at 994.
The Trustee also cites In re Ludford Fruit Products, Inc., 99 B.R. 18 (Bankr.C.D.Cal. 1989), which held that a secured creditor's interest in general intangibles did not extend to the proceeds of preference actions brought in bankruptcy. However, the common sense exclusion of preference actions, which clearly do not arise until a bankruptcy petition is filed and a bankruptcy estate or debtor-in-possession is created, is not extremely helpful to the case at bar. This issue herein is whether the Debtor had a prepetition property interest in the return of assets pledged as security.
The Trustee also cites In re Harbaugh, 99 B.R. 671, 676 (Bankr.W.D.Pa. 1989), which held that the IRS could not set off debtors' tax refund against debtors' tax debt. The Court explained that a debtor's right to a tax refund cannot arise until, under § 6407 of the Internal Revenue Code, the IRS authorized the scheduling of the overpayment, which could not occur until the tax return was filed. This portion of Harbaugh Court's analysis is simply wrong. It is well settled that income tax refunds for taxes paid on prepetition income are prepetition assets which become property of the bankruptcy estate. See Kokoszka v. Belford, 417 U.S. 642, 94 S.Ct. 2431, 41 L.Ed.2d 374 (1974); Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2 428 (1966); Turshen v. Chapman, 823 F.2d 836 (4th Cir. 1987); Doan v. Hudgins, 672 F.2d 831 (11th Cir. 1982); In re Griffin, 1 B.R. 653 (Bankr.M.D.Tenn. 1979); In re DeVoe, 5 B.R. 618 (Bankr.S.D.Ohio 1980); In re Thomas, 14 B.R. 759 (Bankr.E.D.Mich. 1981); In re Medley, 29 B.R. 84 (Bankr.M.D.Tenn. 1983); In re Meade, 84 B.R. 106 (Bankr.S.D.Ohio 1988); In re Walton, 158 B.R. 943 (Bankr.N.D.Ohio 1993); In re McFarland, 170 B.R. 613 (Bankr.S.D.Ohio 1994) This line of authority weakens, rather than strengthens, the Trustee's case.
Finally, the Trustee cites In re Gross Feibel Co., Inc, 21 B.R. 648 (Bankr.S.D.Ohio 1982). In Gross, the trustee received two checks after the bankruptcy petition was filed. One was a refund for excess state unemployment taxes, and the other was a refund of unearned insurance premiums. A secured creditor with a collateral interest in the debtor's prepetition general intangibles claimed that these refunds were covered by its security interest. The Court noted that the property at issue was the right to receive these checks, and not the checks themselves, and that this type of property would be considered a general intangible under the applicable state's commercial code. Id. at 649. Further, the Court stated that "it cannot be denied that the rights to refunds are within the [creditor's] list of collateral." Id. at 649-650. However, the Court felt that this was not enough to show that the debtor acquired the property prepetition. The Court held that the record was "entirely silent as to the time when that right as to either refund arose, whether prior to or subsequent to the filing of the bankruptcy petition[.]" Id. at 650. The Court then held that it was the creditor's burden to prove its security interest, and therefore the creditor lost. Id.
This Court does not believe that it can resolve this controversy based solely on which party bears the burden of proof, as the Court did in Gross. In this case, the record is clear as to the all times when monies were paid and refunded. In Gross, the Court only knew that the refunds were received post-petition. It does not appear that the Court knew whether the monies were initially paid before or after the petition date. Further, according to the Court's reasoning, the creditor's security interest in general intangibles could attach to debtor's right to the refunds. Had the creditor in Gross shown that the debtor's right to these refunds, termed "chose in action" by the Court, arose prepetition, it appears the creditor would have prevailed.
This Court will now address the Defendant's arguments. Defendant's argument is that Debtor's right to receive a refund of the surplus funds constitutes a "general intangible" under California Commercial Code § 9106, which was included in its list of collateral. Defendant looks to § 3701.3 of the California Labor Code as evidence that the Debtor held a contingent right to the excess funds in the private self insured employer's account. Defendant also cites several cases which it believes are helpful, though not controlling. This Court will address each of these cases in turn.
First, Defendant cites Northwest Acceptance Corp. v. Lansdowne, 93 B.R. 243 (Bankr.D.Or. 1998) as an analogous case. In Northwest, an adversary proceeding was brought for a determination of whether a creditor with a security interest in debtor's general intangibles had any claim to the over-funded portion of debtor's pension plan, which was terminated postpetition. The Court noted that under the controlling statute (ERISA) the employer was entitled to any excess funds that could be available, and that the employer's interest was properly characterized as a "reversion" under property law. Id. at 248. Because reversions are alienable property interests, the debtor had granted the creditor a secured interest in this asset prepetition. Though Northwest presents is a helpful rendition of property law, it does not address the particular effects of the California Labor Code on the collateral at issue in the case at bar.
Defendant also cites In re McLean Trucking Co., 74 B.R. 820 (Bankr. W.D.N.C. 1987). McLean is the only case cited by the parties which deals with the provisions of California Labor Code at issue herein. In McLean, the debtor-in-possession sought to enjoin the California Department of Industrial Relations from collecting on the security which it had posted to secure its workers' compensation obligations. The Court looked to the provisions of the California Labor Code, which divest the debtor from all right, title, and interest in the security, and held that the debtor has no legal or equitable interest in the bond in that case. Id. at 827. However, it was important to the Court that there was no excess security, and indeed there would be a significant shortfall between the amount of the debtor's workers' compensation liability obligations and the amount of the security. Thus, the debtor had no right to any return of excess security under § 3701.3. Id. However, the Court did remark, in dicta, that, "In the abstract, [the § 3701.3 requirement that excess security funds be repaid to the self insured employer] could be construed to provide a self insured employer with a contingent right or interest which would have become property of a debtor's estate." Id. Whether the debtor had a prepetition interest which could be pledged as collateral is exactly what is at issue in the case at bar, though this statement made by the McLean Court was clearly only dicta.
Defendant also cites In re Hayes, 168 B.R. 717 (Bankr.D.Kan. 1994) (Debtor had sufficient interest in tort settlement annuity payments, notwithstanding the fact that he had no ownership interest in the annuity contract itself to have conveyed a security interest in same, because Debtor was a third party beneficiary to the contract, which was a chose in action that could be enforced); Valley National Bank of Arizona v. Cotton Growers Hail Ins. Inc., 747 P.2d 1225 (1987) (Court of Appeals of Arizona held that debtor had sufficient interest in the potential proceeds of hail insurance policy that creditor's security interest could attach at the time the loss occurred).
While this Court finds Defendant's cases more compelling than those of the Trustee, they do not address the most troubling issue in this case. That is, how could Debtor have pledged a property interest in the excess collateral pledged to the California Self Insurance Plans, notwithstanding the provisions of the California Labor Code which appear to divest the Debtor of all right to such property? Thus, this case requires this Court to harmonize various provisions of the California Labor Code, the California Commercial Code, the California Civil Code, the Bankruptcy Code, and general notions of property law. This Court will now attempt to do so.
First, this Court will address the California Labor Code. Perhaps the most troubling provision to Defendant is § 3701, which provides that the self insured employer loses all right and title to the collateral. How could Defendant have had a security interest in the return of collateral in which the debtor had no interest? However, it does appear that the Debtor had something. Sections 3701.1 and 3701.5 provide for legal mechanisms whereby a self insured employer can assert his claim for the return of any excess security. How can these sections be harmonized with § 3701? The answer is that when a self insured employer posts security for its workers' compensation obligations, it gives up all right and title to that security. However, at the same time, it acquires a right to seek the return of any amounts subsequently determined to be in excess of that necessary to secure his obligations. Thus, the self insured employer relinquishes one asset, but gains another. Whether Debtor had a right to the collateral is immaterial. From the time the letter of credit was posted as security, Debtor clearly had a right to use the procedure established in the statute, complete with appeal rights (see Calf Labor Code § 3701.5 (g)), to seek a determination and refund of any excess amounts.
The concept of giving up one asset and gaining another is, of course, nothing new. In re Bakersfield Westar Ambulance, Inc., 123 F.3d 1243 (9th Cir. 1997) provides an analogous situation which is particularly helpful in this case. In Bakersfield, the Court, applying California law, explained that when a depositor makes a deposit of funds at a bank, the title to the funds passes to the bank. Id. at 1246. The depositor no longer has an interest in the deposited funds. In return, the depositor receives a contract claim against the bank for an amount equal to the account balance, which is a general intangible known as a "chose in action." Id. Similarly, in the case at bar, when Debtor posted a letter of credit as security for its obligations, it gave up all rights in the letter of credit, but gained a chose in action for the return of excess security. Under California law, a chose in action is personal property of the holder. United States v. Stonehill, 83 F.3d 1156, 1159 (9th Cir. 1996). Though the Debtor's chose in action for the return of excess funds was based upon the contingent and unliquidated obligation of the California Director of Industrial Relations to return excess security, it nevertheless arose at the instant the Debtor posted the letter of credit as security. It was at that instant that the Debtor gained rights under the California Labor Code to seek the return of excess collateral.
Seen in the light of the procedure established for the determination and return of such excess security, the Trustee's argument under § 3701.3 also fails. (Again, the Trustee contends that because § 3701.3 provides that the determination of any excess security was left to the director's discretion, the Debtor had no right, and therefore no property interest, in the excess funds.) In view of the procedure established for these disputes, this provision can be seen as intending to provide the standard for review of the director's determination, i.e. the abuse of discretion standard. That is, the director's determination will be upheld absent an abuse of discretion. See Los Banos v. Industrial Accident Commission of California, 181 Cal. 150, 183 P. 538 (1919). While this is a relatively differential standard, it clearly provides the self insured employer with substantial rights. The director cannot arbitrarily determine, or fail to determine, that there are no excess funds.
Having determined that the Debtor possessed a right to seek the return of excess amounts of security under the California Labor Code, this Court must now determine whether this right was an asset that could have been, and was, pledged as collateral in favor of Defendant, and when that right arose.
It is not disputed that Defendant had a valid security interest in Debtor's "general intangibles." The California Commercial Code, § 9106, explicitly states that "general intangibles" includes "things in action" (also known as "choses in action"). The California Civil Code, § 953, explicitly defines "thing in action." It is defined as "a right to recover money or other personal property by a judicial proceeding." A review of the related provisions of California Civil Code, Division 2, Part 3, Title 2, Chapter 1, Article 1, including §§ 954.5, 955, and 955.1, reveals that this provision was intended to work in conjunction with Article Nine of the Commercial Code. As previously determined, Debtor had a right to recover excess security pursuant to the judicial proceedings provided for in the California Labor Code. Thus, it is clear that the Debtor's right to recover excess funds was a "thing in action" under California law.
This Court must next determine whether this "thing in action" was assignable under California law. The California Civil Code, § 954, explicitly provides that, "A thing in action, arising out of the violation of a right of property, or out of an obligation, may be transferred by the owner." This provision was clearly intended to promote the basic public policy that assignability of things in action would be the rule, and nonassignability the exception. Goodley v. Wank and Wank, Inc., 62 Cal.App.3d 389, 393 (1976). The Goodley Court explained the narrowness of the exception to assignability: "This exception is confined to wrongs done to the person, the reputation, or the feelings of the injured party, and to contracts of a purely personal nature, like promises of marriage . . . Thus, causes of action for personal injuries arising out of a tort are not assignable. . . Assignable are choses in action arising out of an obligation or breach of contract as are those arising out of the violation of a right of property or a wrong involving injury to personal or real property." Id. (citations omitted). Thus, the Debtor's "thing in action" was assignable under California law if it arose out of an "obligation."
The California Civil Code also defines the term "obligation." Section 1427 states that an obligation "is a legal duty, by which a person is bound to do or not to do a certain thing." Calf Civil Code § 1427. Section 1428 of the Civil Code further provides that an obligation can arise from an operation of law, and that "an obligation arising from operation of law may be enforced in the manner provided by law, or by civil action or proceeding." In this case, the California Director of Industrial Relations was legally bound to make a determination of the excess funds, and return them to the employer pursuant to §§ 3701.3 and 3701.5 of the California Labor Code. Thus, Debtor's "thing in action" arose out of an "obligation," and was therefore assignable, under California law. It is also clear that California law contemplates that obligations may be conditional. See California Civil Code § 1434 ("An obligation is conditional, when the rights or duties of any party thereto depend upon the occurrence of an uncertain event.")
In sum, Defendant has an interest in debtor's prepetition "general intangibles", which includes "things in action". The Debtor's right to seek a refund of excess security posted to secure its workers' compensation obligation was a "thing in action." This "thing in action" arose out of an "obligation," and was therefore assignable. Therefore, Defendant had a prepetition security interest in Debtor's right to seek a refund of the excess security, which is personal property under California law. The Trustee's compromise with the California Department of Industrial Relations Self-Insurance Plans simply reduced this property into money form. Accordingly, Defendant has a valid security interest in the funds at issue.
It can also be seen that under Bankruptcy law, the Debtor's right to the excess funds was property of the bankruptcy estate at its commencement, albeit subject to the Defendant's valid security interest. An analogous situation arises when a debtor files bankruptcy, but has not yet filed for or received an income tax refund for excess wages withheld prepetition. In such a situation, the debtor does not have a right to seek immediate return of the funds at the commencement of the case, nor has the amount of the refund determined. However, the Supreme Court held that such funds are indeed property of the bankruptcy estate, explaining that income tax refunds are "sufficiently rooted in the pre-bankruptcy past to be defined as property [of the bankruptcy estate]." Kokoszka, 417 U.S. at 648, 94 S.Ct. at 2435 (1974). Similarly, the asset at issue herein was rooted in the pre-bankruptcy past. It relates to prepetition assets pledged as collateral prepetition. The letter of credit was a prepetition asset, as were the assets which were pledged to secure it. The refund arose not as a result of transactions with the postpetition debtor, but as the result of transactions involving the prepetition debtor and its prepetition operations.
The Debtor's right to the return of the excess security was clearly a prepetition asset, which, subject to Defendant's security interest, was included in the bankruptcy estate under § 541 (a), as a legal or equitable interest of the debtor in property as of the commencement of the case. This asset was not "acquired by the estate," so that § 552 of the Bankruptcy Code did not bar Defendant's security interest from attaching to this property. Rather, it was an asset of the estate as of its commencement, which was subsequently liquidated by the Trustee.
In reaching the conclusion found herein, the Court has considered all of the evidence, exhibits and arguments of counsel, regardless of whether or not they are specifically referred to in this Opinion.
Accordingly, it is
ORDERED that the Trustee's Motion for Partial Summary Judgment is DENIED, Defendant's Motion for Summary Judgment is GRANTED to the extent that it is hereby determined that the Defendant has a valid security interest in the funds at issue.