In re Lull

In March 2005, James W. Lull obtained a $3,800,000 loan from Gregg Gardiner. In September and December 2005, Kapaa 382, LLC (Kapaa 382) made several loans to Lull, which totaled to approximately $2,000,000. Lull failed to repay the loan from Gardiner when due in February 2006. In April 2006, Lull entered into a consignment agreement with Bowers and Merena Auctions, LLC (Bowers and Merena) (plaintiff) in which Bowers and Merena agreed to loan Lull $700,000 to be repaid with the proceeds of Bowers and Merena’s sale of Lull’s rare-coins collection. On July 19, 2006, as security for the outstanding debt, Lull executed a security agreement that granted Gardiner a security interest in all Lull’s personal property and other assets and specifically listed all commonly known categories of personal property, including goods, accounts, money, chattel paper, general intangibles, instruments, and the proceeds thereof. The next day, Gardiner recorded a financing statement that described Gardiner’s collateral as all Lull’s assets and personal property and their proceeds. On July 26, 2006, as a partial settlement of Lull’s outstanding debt, Lull agreed to transfer title to Lull’s rare-coins collection to Kapaa 382. On August 18, 2006, Bowers and Merena sold the rare-coins collection for $1,119,750, which, after repayment of the $700,000 loan, left net proceeds of $455,046.11. On August 22, 2006, Kapaa 382 recorded a financing statement regarding its interest in the rare-coins collection. Thereafter, Lull filed for chapter 7 bankruptcy. Bowers and Merena initiated an adversary proceeding involving Gardiner, Kapaa 382, and others (defendants) seeking interpleader relief as to which creditor was entitled to the net proceeds. Gardiner moved for summary judgment. Kapaa 382 argued that a security interest in money must be perfected by taking possession and that additional discovery may show that Bowers and Merena held the coins for Kapaa 382’s benefit thereby constituting constructive possession.