Opinion
C.A. No. 94C-09-208-WTQ
December 11, 1996, Submitted . January 31, 1997, Decided
Jeffrey S. Welch, Esquire, Carl N. Kunz, Esquire, Murphy Welch & Spadaro, Wilmington, DE.
Jeffrey S. Goddess, Esquire, Rosenthal Monhait Gross & Goddess, Wilmington, DE.
Francis S. Babiarz, Esquire, Biggs & Battaglia, Wilmington, DE.
Letter Opinion and Order on Motions for Summary Judgment
1. Plaintiff PNC Bank's Motion for Partial Summary Judgment
2. Defendant Berg's Motion for Summary Judgment
3. Defendants Tighe, Cottrell, Logan and Tighe, Cottrell & Logan, P.A.'s Motion for Summary Judgment
This is the Court's decision on plaintiff PNC Bank, Delaware's Motion for Partial Summary Judgment, defendant Howard M. Berg's Motion for Summary Judgment, and defendants Michael K. Tighe, Paul Cottrell, Donald L. Logan and Tighe, Cottrell & Logan, P.A.'s Motion for Summary Judgment For the reasons herein stated, plaintiff PNC Bank's Motion is GRANTED in part and DENIED in part, defendant Berg's Motion is DENIED, and defendants Michael K. Tighe, Paul Cottrell, Donald L. Logan and Tighe, Cottrell & Logan, P.A.'s (collectively "the Tighe defendants") Motion is DENIED.
FACTS
Howard M. Berg ("Berg") was a fixture on Delaware's legal landscape from his admission to the Bar in the 1950s until his retirement in the 1990s. His law firm has undergone many personnel changes over the years, but the one constant was the presence of Berg as the sole or majority partner. At the beginning of the time period relevant to this inquiry, around 1992, Berg's firm was Berg, Tighe & Cottrell, P.A. ("the Berg firm"). Berg owned 80% of the shares of the firm.
In early 1992, the Berg firm undertook a relocation and upgrade of its office space. To finance the project, Berg approached PNC Bank for a loan. Berg spoke with Steven Clark, a loan officer at PNC Bank whom he had known for some time. After reviewing Berg's personal financial statements, Clark set up two loans. The first was a $ 25,000 amortizing term loan for the Berg firm's new telephone system. The second was a $ 75,000 line of credit which would be drawn upon and repaid several times in the normal course of business. It is this second loan which is at the center of this litigation.
At the time of the loan, PNC Bank was still operating the Bank of Delaware in its original name. For purposes of simplicity, the Court will refer to the lending bank under its current name, "PNC Bank."
Clark was the lending officer on a 1989 loan made to a development corporation owned by Berg and Berg's wife. He was also the lending officer on a loan to a business entity owned by Berg's son-in-law, a loan which Berg guaranteed.
Clark sent a commitment letter on the loans to Kevin Downs, the Berg firm's controller, that is, internal accountant, with a copy to Berg. Absent demand or default, the interest on the loan was to be paid monthly, and the principal had to be reduced to a zero balance once each fiscal year. The commitment letter contained no personal guarantees, nor did it take a security interest in furniture and equipment. Pursuant to the commitment letter, the Berg firm executed and delivered to PNC Bank a note in the amount of $ 75,000. The Berg firm also executed and delivered a financing statement covering "all existing and future accounts, accounts receivable, contract rights, chattel paper, notes, instruments, documents, [and] contracts" owned by the Berg firm. PNC Bank delivered to the Berg firm a security agreement to be executed on behalf of the Berg firm. The security agreement was returned to PNC Bank bearing only the signature of the Berg firm's secretary, defendant Paul Cottrell. PNC Bank sent the "partially executed" security agreement back to the Berg firm for full execution, but this was apparently never accomplished. The Berg firm subsequently made draws against the line of credit and payments against the draws, but by mid-1992 the entire $ 75,000 line of credit was outstanding.
In December 1992, while Berg was vacationing in Florida, an agent of the United States Internal Revenue Service ("IRS") visited the Berg firm. Speaking to defendant Michael K. Tighe, she informed him that the Berg firm's withholding taxes had not been paid in some time and that delinquency notices had heretofore not been answered. The outstanding exposure on these unpaid taxes came to a total of $ 400,000. Defendants Tighe, Cottrell, and Logan confronted Downs regarding these financial discoveries. Downs apparently confirmed the IRS's report, telling them that Berg was aware of the nonpayment of the withholding taxes, having received and disregarded the delinquency notices. Downs also told Tighe, Cottrell, and Logan that Berg had engaged in various acts of self-dealing, including misdirecting to himself checks intended for the firm's accounts at banks. He estimated that Berg had diverted almost $ 200,000 in this fashion.
Having concluded about one month earlier that they needed to leave the firm, Tighe, Cottrell, and Logan were convinced by the IRS visit and Downs' revelations that the need was pressing and that they should leave immediately. On December 31, 1992, Tighe, Cottrell, and Logan, without warning to PNC Bank, Berg, or the Berg firm, withdrew from the law firm and opened the new law firm of Tighe, Cottrell & Logan, P.A. ("the Tighe firm"). They took with them over 300 client files, apparently the active files on which Tighe, Cottrell, and Logan had been working.
The IRS filed a lien against the Berg firm for the unpaid withholding taxes. Defendants Tighe, Cottrell, and Logan met with Berg and insisted that he pay off the tax lien. An accord of some sort was apparently reached, as the lien was subsequently released in exchange for Berg's payment to the IRS of approximately $ 250,000. In exchange for assuming sole responsibility for the tax lien, Berg demanded that Tighe and Cottrell return their stock interests in the Berg firm. The negotiations culminated in a letter agreement dated January 26, 1993, in which the following agreement was made:
Howard Berg and the corporation forego any claim for fee recovery on contingent fee cases which the departing attorneys now have with them. Costs incurred shall be reimbursed in the event and to the extent the cases close with a recovery sufficient to pay the same.
On February 7, 1993, an article about the Berg firm had appeared in the Wilmington News-Journal, detailing the filing of the IRS lien and allegations of misconduct by Berg, and noting that the Berg firm was down to just three attorneys. Clark then sent Berg a letter in which he requested, once again, execution and return of the security agreement. The letter also requested information regarding plans for paying the outstanding loan balance, which accounts receivable remained with Berg and which were taken by Tighe, Cottrell, and Logan when they left, and a copy of an accounts receivable schedule. Apparently Berg never provided this information to Clark.
During the first sixteen months after defendants Tighe, Cottrell, and Logan left the Berg firm, Berg continued to cover the monthly interest payments due on the $ 75,000 line of credit. None of the outstanding balance on the line of credit was paid down, although the terms of the note required that it be paid down to a zero balance at least once each fiscal year. Berg ceased making payments in April 1994. On June 9, 1994, PNC Bank's internal counsel sent a default letter to the Berg firm, demanding payment by July 31, 1994. A copy of the letter was sent to defendants Tighe, Cottrell, and Logan. Authority for the loan and its collection was transferred from Clark to Michael P. McIntyre ("McIntyre"), a "troubled loan" workout officer for PNC Bank. McIntyre spoke with Christopher Amalfitano ("Amalfitano"), an attorney working for the remaining Berg firm. On behalf of Berg and the firm, Amalfitano offered to assign to PNC Bank all right, title, and interest in certain accounts receivables, the total amount of which, if fully collected, would cover the outstanding loan. These receivables, however, were as much as eighteen months old and had already proven difficult for the Berg firm to collect. PNC Bank did not accept the offer, and instead filed this action in September 1994 against Berg, Tighe, Cottrell, and Logan individually, the Berg firm, and the Tighe firm. The three count Complaint alleged that Berg was liable on the note because he had personally guaranteed it, that Berg had tortiously interfered with the PNC Bank/Berg firm loan, and that PNC Bank had a perfected security interest in the files which Tighe, Cottrell, and Logan removed from the Berg firm and took to the Tighe firm. The Tighe defendants then filed a cross-claim against Berg, arguing that they are entitled to indemnification from Berg should they be found liable to PNC Bank.
Prior to the deadline for making dispositive motions, each party moved the Court for summary judgment with respect to either all or part of the claims. The Tighe defendant's Motion seeks a dismissal of PNC Bank's complaint insofar as it applies to them. Berg's Motion seeks dismissal of PNC Bank's claims against him and of the Tighe defendants' cross-claim. PNC Bank's Motion seeks summary judgment with respect to its claims against the Tighe defendants.
DISCUSSION
When considering a motion for summary judgment, the Court's function is to examine the record to determine whether genuine issues of material fact exist. Oliver B. Cannon & Sons, Inc. v. Dorr-Oliver, Inc., Del. Super., 312 A.2d 322, 325 (1973). If, after viewing the record in a light most favorable to the non-moving party, the Court finds there are no genuine issues of material fact, summary judgment will be appropriate. Id. The Court's decision must be based only on the record presented, including all pleadings, affidavits, depositions, admission, and answers to interrogatories, not on what evidence is "potentially possible." Rochester v. Katalan, Del. Supr., 320 A.2d 704 (1974). All reasonable inferences must be drawn in favor of the non-moving party. Sweetman v. Strescon Indus., Del. Super., 389 A.2d 1319 (1978). Summary judgment will not be granted if the record indicates that a material fact is in dispute or if it seems desirable to inquire more thoroughly into the facts in order to clarify the application of law to the circumstances. Ebersole v. Lowengrub, Del. Supr., 54 Del. 463, 180 A.2d 467 (1962).
For purposes of clarity and comprehension, the Court will address defendant Berg's Motion separately. The cross-motions filed by PNC Bank and the Tighe defendants will be addressed together, since they both deal with the same issue, namely, the existence and validity of a perfected security interest in the contingency fee files which Tighe, Cottrell, and Logan took with them upon their departure from the Berg firm.
Summary Judgment as to Defendant Berg
During the submission of briefs, PNC Bank withdrew its claim that Berg had personally guaranteed the loan. The only issues remaining from the Berg Motion are whether summary judgment in favor of Berg is appropriate as to PNC Bank's tortious interference claim against Berg and whether the Tighe defendants have a factual case in their claim for indemnification against Berg for any liability they may have arising out of the default on the note.
Delaware generally follows the Restatement with regard to tortious interference with a contract.
One who intentionally and improperly interferes with the performance of a contract (except, a contract to marry) between another and a third person by inducing or otherwise causing the third person not to perform the contract, is subject to liability to the other for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.
RESTATEMENT (SECOND) OF TORTS § 766 (1977). A long line of Delaware cases endorses this principle. See, e.g., Irwin & Leighton, Inc. v. W. M. Anderson Co., Del. Ch., 532 A.2d 983, 992 (1987); Bowl-Mor Co. v. Brunswick Corp., Del. Ch., 297 A.2d 61, 64, appeal dismissed, Del. Supr., 297 A.2d 67 (1972). Beyond this statement, there are five general elements to this tort.
There must be (1) a contract, (2) about which defendant knew and (3) an intentional act that is a significant factor in causing the breach of such contract (4) without justification (5) which causes injury.
Irwin & Leighton Inc., 532 A.2d at 992 (citations omitted). As these elements make clear it is by no means necessary that the tortfeasor act for the primary purpose of interfering with the contract.
It applies also to intentional interference . . . in which the actor does not act for the purpose of interfering with the contract or desire it but knows that the interference is certain or substantially certain to occur as a result of his action. The rule applies, in other words, to an interference that is incidental to the actor's independent purpose and desire but known to him to be a necessary consequence of his action.
RESTATEMENT (SECOND) OF TORTS § 766, cmt. j (emphasis added).
PNC Bank's Complaint adequately alleges facts that, if proven, would support a claim for tortious interference. It alleges that, beginning in 1992, Berg knowingly diverted funds intended for the payment of the PNC Bank loan, as well as knowingly diverting other assets of the firm. The $ 400,000 federal tax lien was a direct consequence, it alleges, of Berg's diversion of funds. The Complaint also alleges that, upon discovering Berg's diversion of firm funds, Tighe, Cottrell, and Logan decided to leave the firm. Finally, the Complaint alleges that Berg's actions resulted in the subsequent default on and non-payment of the PNC Bank loan.
In making his Motion for Summary Judgment, Berg argues that PNC Bank has failed to demonstrate that Berg had the requisite intent to interfere and that PNC Bank has demonstrated a sustainable chain of causation from his actions to the Berg firm's defaulting on the loan. He makes several points in his argument. First, the Berg firm continued to make interest payments on the loan for more than one year after Tighe, Cottrell, and Logan departed. Second, the Berg firm offered to assign a substantial amount of accounts receivable to PNC Bank and assist in its collection. After they departure of Tighe, Cottrell, and Logan, the firm apparently continued to have ample resources to repay the loan, and even collected over $ 700,000 in receivables. Third, PNC Bank never made a demand for full payment of the loan, as the agreement permitted it to do, at the time it became concerned about the status of the loan. Fourth, PNC Bank never took any actions, beyond a letter and two conversations, to compel the Berg firm to pay the note down to a zero balance as required once every year.
In response, PNC Bank argues that Berg's reading of Delaware law and Section 766 of the Restatement is incorrect. It argues that PNC Bank need only show that the default on the loan was a necessary consequence of Berg's actions. PNC Bank asserts that it has satisfied the chain of causation by adequately alleging that Berg knowingly diverted the Berg firm's assets, that he knew the withholding taxes were not being paid, and that if he diverted funds earmarked for the PNC Bank loan it would not be paid. PNC Bank argues that interest payments on the loan from 1992 to 1994 do not interrupt the chain of causation. Finally, PNC Bank asserts that its refusal to accept the Berg firm's offer of accounts receivables and collection assistance is irrelevant because the offer was not made until after the Berg firm defaulted and because the accounts receivable were old and uncollectable.
After reviewing the party's contentions and examining all of the evidence in a light most favorable to PNC Bank as the non-movant, the Court concludes that Berg's Motion for Summary Judgment must be denied. PNC Bank has brought sufficient facts regarding the existence of all five elements of the tort as the Irwin & Leighton Court described them. There was a contract, the PNC Bank loan, of which Berg clearly and undisputedly was aware. There is evidence, particularly in the testimony of Downs, the Berg firm's controller, tending to show that Berg's diversions of funds intended for the payment of the loan were intentional acts. There is also evidence in the record to support the conclusion that Berg's diversion of funds, not only those directly intended for payment of the PNC Bank loan but those which would have paid other firm expenses, including the withholding taxes, was a significant factor in causing a breach of the contract. That injury was caused to PNC Bank is clear, and the evidence, viewed in PNC Bank's favor, does not show that Berg's acts were justified. Under Delaware law, it appears that PNC Bank has set forth sufficient evidence to persuade this Court that summary judgment is inappropriate on this Count.
The Court reaches the same conclusion applying the literal language of the commentary to Section 766 of the Restatement (Second). The initial positions of both parties as to the requirements of Section 766 are incorrect. Actual intent to cause a default is not necessary, but a plaintiff must also show a little more than just that the default on the loan was a "necessary consequence" of the alleged tortfeasor's actions. What is necessary is that the effect of causing the breach is "known to [the tortfeasor] to be a necessary consequence of his action." RESTATEMENT (SECOND) OF TORTS § 766, cmt. j. Based on the evidence in the record, the Court is unable to conclude as a matter of law that Berg could not have known that the Berg firm's default on the loan would be a necessary consequence of his actions. The evidence in the record, particularly the testimony of Mr. Downs, if proven true, shows a systematic and continuous diversion of firm funds by Berg with the intent to keep his partners from discovering it. Downs' testimony alleges that Berg siphoned more than $ 250,000 of the firm's funds, funds that the firm needed to pay city, state, and federal taxes, as well as the PNC Bank loan. Downs also alleges that Berg threatened Downs with the loss of his job should he ever disclose any of Berg's actions to any of the other partners. Downs states that he told Berg that his actions were preventing the Berg firm from paying those debts. If Berg was indeed misappropriating firm funds and actively concealing the misappropriation, with the knowledge that his actions were impeding the firm's ability to operate in a financially sound manner, it is by no means an unforeseeable proposition that Berg simply had to know that his continued misappropriation of funds would ultimately cause the firm to be unable to meet its obligations with respect to the PNC Bank loan.
Berg, as the Court noted above, raises several facts that cast doubt on whether his alleged diversions of funds actually caused the Berg firm's default on the loan. Causation, however, generally involves substantial questions of fact and consequently is usually not susceptible to summary judgment. Such is the case here. For example, the fact that Berg continued to make interest payments on the loan may not mean much if his actions prior to that had already set the Berg firm on an irreversible course toward default. However, the Berg firm's collection of over $ 700,000 in receivables itself raises questions regarding why those funds were not used to pay down the balance. Finally, the Court wonders why PNC Bank failed to take any action prior to the default to ensure that the balance was paid down, such as insisting upon adherence to the yearly zero balance requirement. These and other unanswered question prevent the Court from deciding the causation issue at this stage.
Berg also asserts that he is entitled to summary judgment on the cross-claim filed against him by the Tighe defendants, a cross-claim that seeks to have Berg indemnify them should they be found liable to PNC Bank. He claims that the letter agreement of January 26, 1993 contains an express indemnity provision that limits Berg's liability for indemnification strictly to taxes:
Howard Berg and the corporation will indemnify Michael Tighe, Paul Cottrell and Don Logan and hold them harmless against any claims, assessments or liability arising from or with respect to the corporation's taxes including state and local taxes.
Notwithstanding Berg's arguments, the letter agreement did not purport to be an integrated dissolution agreement, complete on its terms. There is nothing to suggest that it was intended to represent a comprehensive treatment of all issues which could arise after the break up of the Berg firm. In other words, there is nothing to suggest that the parties intended that tax liability was the only point on which liability would be agreed. The cases cited by Berg do not support his claim. Rather, they make it clear that the parties' intent to indemnify something must be clearly and unequivocally expressed in the indemnification agreement. See Rock v. Delaware Elec. Coop., Inc., Del. Super., 328 A.2d 449, 453 (1974) (holding that parties cannot enlarge by implication one party's indemnifying liability when a written agreement expressly sets forth that party's liability); Waller v. J.E. Brenneman Co., Del. Super., 307 A.2d 550, 553 (1973). This letter agreement does not "expressly" set forth Berg's indemnification liability. It simply sets his liability with regard to indemnification arising out of the IRS tax lien, and does not appear to contain any express language covering indemnity on points other than the tax lien. The January 23, 1993 letter agreement does not preclude the Tighe defendants from claiming indemnity against Berg. Consequently, Berg's Motion for Summary Judgment is DENIED on all grounds.
Summary Judgment on PNC Bank's and the Tighe Defendants' Motions
PNC Bank's and the Tighe defendants' cross-motions deal with the same issue, namely, the existence and validity of a perfected security interest in the hourly billing and contingent fee files which Tighe, Cottrell, and Logan took with them upon their departure from the Berg firm.
It is not clear whether the parties continue to dispute whether the Security Agreement itself is valid. PNC Bank has argued, with some strength, that a security agreement need not be in a specific form; that a writing which sufficiently describes the collateral, is signed by the debtor, and establishes that a security interest was agreed upon satisfies the formalities of the statute. Delaware Trust Co. v. Adams, Del. Super., 1988 Del. Super. LEXIS 442, *4, C.A. No. 88 C-JN-138, Gebelein, J., 1988 WL 130368 (Dec. 2, 1988). This gives effect to the general theory that one should not exalt the form of the security agreement over its substance. In re Bollinger Corp., 3d Cir., 614 F.2d 924, 928 (1980).
Although PNC Bank thus far has been unable to provide the Court with a complete copy of the Security Agreement that shows any signatures, PNC Bank's Motions assert that the agreement was signed and the Tighe defendants initially take no issue with this. Instead, the Tighe defendants argue that the description of collateral in the Security Agreement does not include the client contracts (files) which they took with them when the departed the Berg firm. However, the Tighe defendants, in their Reply Brief to their own Motion, state that they have never argued that PNC Bank lacked security because it never obtained a signed security agreement, but then state that "in point of fact, there was no security agreement." Given the entire tenor of the Tighe defendants' briefs, the Court understands the Tighe defendants to be saying not that there was no security agreement per se, but that there was no valid security interest in the contingent fee files. The Court will assume for purposes of these Motions that a security agreement exists, but it would be helpful if someone would supply the Court with a complete copy of the Security Agreement document, to the extent that it exists. Under some circumstances, there can of course be a binding agreement even without a fully-executed document.
The Court currently has only a one page portion of the Security Agreement. This page identifies and describes the collateral, but does not contain any signatures of either the creditor (PNC Bank) or the debtor (the Berg firm).
The question for the Court's resolution, then, is whether a law firm's hourly billing and contingency fee contracts come within one of the definitions of collateral described in the Security Agreement. Stated more broadly, the question is whether a lender can take a security interest in those contracts. It appears that the question is an issue of first impression here in the Delaware courts. The first page of the Security Agreement for the PNC Bank loan listed the following types of collateral as security for the loan:
ACCOUNTS, ETC. - All existing and future accounts, accounts receivable, contract rights, chattel paper, notes, instruments, documents, contracts, choses in action, returned and unearned insurance premiums, tax refunds and all obligations now or hereafter owing to Borrower, together will all interest of Borrower in goods, the sale or lease of which shall have given or may give rise to such accounts and contract rights.
GENERAL INTANGIBLES - All present and future general intangibles, including but not limited to customer lists, books, records, including, without limitation, all correspondence and credit files, tapes cards, computer runs, computer programs, and other papers and documents whether in the possession or control of Borrower or any computer service bureau, rights in franchises and sales contracts, patents, copyrights, trademarks, logos, trade names, label designs, brand names, plans, blueprints, patterns, trade secrets, licenses, jibs, dies, molds and dormulae.
All proceeds and products of the foregoing Collateral, including insurance proceeds.
All products of the type designated herein as Collateral now owned or hereafter acquired including but not limited to all replacements, substitutions, additions, and accessions thereto.
All records whether printed electronic or otherwise pertaining to any of the Collateral now owned or hereafter acquiring or arising.
The U.C.C. defines an "account" as "(i) any right to payment for goods sold or leased or for services rendered, and (ii) any credit device account, which, in either case, whether or not it has been earned by performance." 6 Del. C. § 9-106. To the extent that the Security Agreement includes, inter alia, accounts receivable, contracts, and contract rights, they are subsumed within the definition of an account. See Bramble Transp., Inc. v. Sam Senter Sales, Inc., Del. Super., 294 A.2d 97, 100 (1971), aff'd, Del. Supr., 294 A.2d 104 (1972) (accounts receivable). See also Ronald A. Anderson, 8A UNIFORM COMMERCIAL CODE 502 (3d ed. 1990) (contracts, contract rights).
With regard to hourly billing or contingent fee cases as accounts receivable, neither party disputes that a matured contingent fee claim is an account receivable under the U.C.C. The fee has been earned and the money is owed. They disagree, however, whether an unmatured contingency fee contract is an account receivable. The question appears to be resolved by prior case law in this State, which dealt with a bank's taking of a security interest in the "accounts receivable" of a construction company.
The parties have not been entirely clear in their preparation of materials. The Tighe defendants indicate that the most of the 300 files they took with them were hourly billing files, mostly insurance defense work. Yet the vast bulk of both PNC Bank's and the Tighe defendants' Motions concerns whether the eighteen contingency fee files are covered by the Security Agreement and includible within the Delaware Uniform Commercial Code ("U.C.C.") definition of accounts or general intangibles. Little discussion is made regarding the hourly billing files. PNC Bank asserts that it has a valid, perfected security interest in the hourly billing contracts, but does not explain how. The Tighe defendants agree only that the time they spent on hourly billing matters while they were being paid by the Berg firm created accounts receivable which were properly the property of the Berg firm. The Court is uncertain to what degree the parties agree or disagree that hourly billing and contingent fee files are to be accorded similar treatment by the Court and whether their arguments as to the contingent fee contracts should apply, where applicable, to the hourly billing contracts.
A security interest cannot attach, however, until the debtor has rights in the collateral. A debtor has no rights in an accounts receivable until the debt is owed. In other words, a security interest in an accounts receivable cannot be perfected until it has attached by means of the debtor having delivered goods or performed services which caused the account to come into existence. Therefore, the Bank here could not have perfected its security interest in the accounts receivable due from the State until the accounts actually became receivable.
United Pacific Ins. Co. v. Ripsom, Del. Ch., 1984 Del. Ch. LEXIS 543, *6-7, C.A. No. 7056, Hartnett, V.C. (Sept. 25, 1984) (statutory citations omitted and emphasis added). Since an unmatured contingent fee is not yet owed, the debtor cannot yet have rights in it as an account receivable. Under this reasoning a contingent fee contract is not an account receivable.
PNC Bank correctly points out, however, that its purported security interest extends further, to include "contracts" and "contract rights." Both are now included within the definition of account. In the 1962 version of Article 9, contract rights were a category of collateral separate and distinct from "accounts." Contract rights were, and presumably still are, defined as "any right to payment under a contract not yet earned by performance and not yet evidenced by an instrument or chattel paper." United States v. Samel Refining Corp., 3d Cir., 461 F.2d 941, 942 (1972) (applying Pennsylvania law). It is, in other words, "a right to payment to be earned by future performance under an existing contract." Matthews v. Arctic Tire, Inc., R.I. Supr., 106 R.I. 691, 262 A.2d 831, 833 (1970) (emphasis added). A "contract right" in many respects is a "potential account receivable." That is, it is contingent upon future performance, becoming an account receivable as that performance is made. See Continental Finance, Inc. v. Cambridge Lee Metal Co., N.J. Super. Law Div., 100 N.J. Super. 327, 241 A.2d 853, 860 (1968), aff'd, N.J. Super. App. Div., 105 N.J. Super. 406, 252 A.2d 417 (1969), aff'd, N.J. Supr., 56 N.J. 148, 265 A.2d 536 (1970). It was the difference between being earned and unearned that distinguished "account" from "contract right" under the 1962 Code. See Anderson, 8A UNIFORM COMMERCIAL CODE 510-11. The 1972 amendment to the U.C.C. includes contract rights within the definition of account. Id. at 504.
In the Court's opinion, both the hourly billing and the contingency fee contracts meet the definition of "contract rights," and therefore "accounts," within the meaning of the Uniform Commercial Code. The hourly billing contract is an "existing contract" creating a "right to payment," the hourly fee, that is "to be earned by future performance," future work by an attorney on that case. In a contingency fee case the "right to payment" is more speculative, since the amount of payment to be earned by future performance depends upon whether the case results in a verdict or other recovery in favor of the client. This seems, however, to be a distinction without a difference.
The Tighe defendants also argue that a valid security interest cannot exist because they themselves do not have a valid Article 9 security interest. However, it is of little consequence for resolution of this issue that an attorney's lien to secure his fees and expenses is not an Article 9 security interest itself. See 6 Del. C. § 9-104(c) (excluding from Article 9 "a lien given by statute or other rule of law for services or materials"). The ability to claim an Article 9 security interest in a secured obligation "is not affected by the fact that the obligation is itself secured by a transaction or interest to which [Article 9] does not apply." 6 Del. C. § 9-102(3). PNC Bank can claim a security interest in the hourly billing and contingent fee contracts even though the underlying obligation, the attorney's lien for services rendered, is not subject to Article 9.
The Tighe defendants suggest that it is "inappropriate" for a lender to have a security interest in an attorney's contract rights. Yet it is routine practice for lenders to take security interests in the contract rights of other business enterprises. A law firm is a business, albeit one infused with some measure of the public trust, and there is no valid reason why a law firm should be treated differently than an accounting firm or a construction firm. The Rules of Professional Conduct ensure that attorneys will zealously represent the interests of their clients, regardless of whether the fees the attorney generates from the contract through representation remain with the firm or must be used to satisfy a security interest. Parenthetically, the Court will note that there is no suggestion that it is inappropriate for a lender to have a security interest in an attorney's accounts receivable. It is, in fact, a common practice. Yet there is no real "ethical" difference whether the security interest is in contract rights (fees not yet earned) or accounts receivable (fees earned) in so far as Rule of Professional Conduct 5-4, the rule prohibiting the sharing of legal fees with a nonlawyer, is concerned. It does not seem to this Court that we can claim for our profession, under the guise of ethics, an insulation from creditors to which others are not entitled.
The Tighe defendants raise additional arguments. They assert that any security interest in the hourly billing and contingent fee contracts was lost as a result of the negotiated agreement of January 26, 1993, wherein the Berg firm forewent any interest in the taken files as consideration for return of the Tighe defendants' twenty percent stake in the Berg firm. At first blush, this argument seems to have less to do with whether PNC Bank has a security interest than it does with whether the Tighe defendants are entitled to indemnification from the Berg firm. Nevertheless, the Tighe defendants argue that agreement was a "sale," and that it is the proceeds of that "sale," the twenty percent interest in the Berg firm, which the security interest must follow. However, unless this transfer was authorized in some way by PNC Bank, Section 9-306 of the U.C.C. would allow PNC Bank to "follow" the collateral notwithstanding "sale, exchange or other disposition, . . and also [follow] identifiable proceeds." 6 Del. C. § 9-306. Furthermore, even were this "transfer" to come within Section 9-306, the Tighe defendants would have to demonstrate that PNC Bank either expressly or impliedly authorized the disposition. The Tighe defendants claim that Clark's failure to stop them from taking the files, or notify them that PNC Bank had an interest in them, constitutes implied authorization. It is premature for the Court to rule whether or not Clark's actions here constitute an implied authorization, there are issues of material fact regarding the nature and extent of this claimed implied authorization that preclude the Court from deciding the question as a matter of law.
The Tighe defendants also argue that there was no "meeting of the minds" over whether PNC Bank would have security in contingent fee contracts. This argument on these Motions is similarly unpersuasive. The loan "contract" with PNC Bank clearly includes "contract rights" as a category of collateral. The parties clearly had a meeting of the minds on this point. That the Tighe defendants unilaterally believed that the security interest did not cover contingent fee and/or hourly billing contracts does not change the fact that the parties objectively manifested in writing a meeting of the minds that contract rights were a category of collateral. There has been no evidence that "contract rights" was intended to have any meaning other than that which the law would normally attribute to it. The Tighe defendants have presented no evidence that the parties ever discussed whether contract rights included hourly billing and contingent fee contracts. The mistake of the Tighe defendants, if any, was one of law, unilateral and uncommunicated. That mistake, even if established, cannot carry the day.
The Tighe defendants make another argument, this one premised on the fact that the security interest was "lost over time" on the contingency fee files, just as it says happened with the accounts receivable and contingency fee files which closed at the Berg firm. They cite to 6 Del. C. § 9-306(3) for support. However, this section of Article 9 says nothing about "losing" a security interest. All it states is that, under certain circumstances, a perfected security interest may be lost. In other words, the perfected becomes the unperfected, but the security interest remains. Nor do the Tighe defendants cite to any case law in support of their argument that a mere lapse of time, without more, can end a security interest. This opinion, however, should not be construed as foreclosing the argument as a factual matter for trial.
For our purposes, the difference between a perfected and unperfected security interest here is simply that a perfected security interest gives the secured party a priority over certain other creditors. See generally 6 Del. C §§ 9-301 to 9-318. Therefore, even if a secured creditor has an unperfected security interest, it will usually still have certain rights over the collateral vis-a-vis the debtor.
The final argument advanced by the Tighe defendants is that they have invested "eighteen months of effort and additional expense outlays on the assumption that the total of any contingent fee recoveries would be theirs." Whatever the truthfulness of this statement, it has absolutely nothing to offer on the issue of whether PNC Bank has a security interest. Having taken those files from the Berg firm, the Tighe defendants would have invested the same amount of additional effort and expense even if they made a different assumption, since the Rules of Professional Conduct require an attorney to represent zealously the interests of his client. See Delaware Lawyers' Rule of Professional Conduct 1.3. No one would have expected or asked them to cease work on those files. All PNC Bank expects is that it will be able to reach the proceeds of those contract rights, and in the Court's opinion the law does not prohibit that.
From a practical standpoint, it seems best to limit a lender's recovery to the proceeds generated from the contract rights of hourly billing or contingent fee cases. The Tighe defendants' grand invocation of the spectre of interference with the attorney-client relationship is no great worry here, although the Court agrees with the Tighe defendants that actual physical possession could run up against the general right of a litigant to choose her own counsel and could result in delays which conceivably could harm a client's interests. PNC Bank, however, does not ask for physical possession of the files, since the files are of little value to them as such. Instead, they want to follow the proceeds arising from those contract rights, and in this respect the Court is unable to conclude that contract rights are any different from accounts receivables.
The Tighe defendants' Motion for Summary judgment is DENIED. PNC Bank's Motion for Summary Judgment is GRANTED to the limited extent that PNC Bank seeks a determination that the law permits a security interest in hourly and contingency fee contracts. In all other respects, PNC Bank's Motion is DENIED.
CONCLUSION
Defendant Berg has failed to demonstrate that there are no genuine issues of material fact regarding PNC Bank's claim against him for tortious interference with a contract. PNC Bank has alleged sufficient facts to support this tort claim, and there is a genuine issue of material fact as to whether Berg's alleged malfeasance did in fact cause the default. The tax liability indemnification provision of the January 23, 1993 letter agreement does not preclude the Tighe defendants from claiming indemnity against Berg. Defendant Berg's Motion for Summary Judgment is DENIED. IT IS SO ORDERED.
As a matter of law, plaintiff PNC Bank was not precluded from taking a security interest in the hourly billing and contingent fee contracts of the Berg firm, as "contract rights" collateral. There are genuine issues of material fact concerning whether by its actions PNC Bank has waived its right to assert its security interest in the hourly billing and contingent fee files taken from the Berg firm by the Tighe defendants. As more specifically noted above, plaintiff PNC Bank's Motion for Partial Summary Judgment is GRANTED in part and DENIED in part. Defendants Tighe, Cottrell, Logan, and Tighe, Cottrell & Logan, P.A.'s Motion for Summary Judgment is DENIED. IT IS SO ORDERED.
William T. Quillen