Filed 12/15/14




                               CERTIFIED FOR PUBLICATION

                 IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                              SECOND APPELLATE DISTRICT

                                        DIVISION SIX


RENEE FERESI,                                                2d Civil No. B248607
                                                       (Super. Ct. No. 56-200900362200-
     Plaintiff and Respondent,                                   CU-CO-VTA)
                                                               (Ventura County)
v.

THE LIVERY, LLC et al.,

     Defendants and Appellants.




                    The Commercial Code1 provides that "a financing statement must be
filed to perfect all security interests . . . ." (§ 9310, subd. (a).) It further provides, "A
perfected security interest . . . has priority over a conflicting unperfected security
interest . . . ." (§ 9322, subd. (a)(2).) Although the code reflects the Legislature's
intention to create a simplified, clear and uniform means of prioritizing security
interests, there are circumstances when the letter of the law yields to the principles of
equity and the spirit of justice. (See § 1103, subds. (a), (b).) Here we hold that if a
perfected security interest is created by breaching a fiduciary duty owed to another
person, then equitable principles may be applied to give priority to an earlier
unperfected security interest.



1
    All statutory references are to the Commercial Code unless stated otherwise.
              This dispute arises from conflicting security interests held by two
persons in James Mesa's (Mesa) membership share in The Livery, LLC (the LLC).
The competing claimants are Mesa's former wife, Renee Feresi (Feresi) whose
unperfected security interest was created in 2006, and Mark Hartley as Trustee of the
Fitzgerald-Hartley Pension Plan (Hartley) whose perfected security interest was
created in 2008. Hartley is the president and managing member of the LLC.
              The LLC and Hartley appeal the trial court's judgment. Hartley contends
his perfected security interest in Mesa's ownership share of the LLC has statutory
priority over Feresi's preexisting but unperfected security interest. Feresi contends
Hartley's security interest is invalid because Hartley breached a fiduciary duty of good
faith and fair dealing that Hartley owed to her. Feresi contends Hartley surreptitiously
created and perfected a security interest in collateral he knew had been earlier pledged
by Mesa to secure his financial obligations to her.
              We modify the judgment to strike the references to "Mark Hartley,
individually" and affirm the judgment as modified.
                      PROCEDURAL HISTORY AND FACTS
              Feresi and Mesa married in 1995 and separated in 2002. During their
marriage, the couple acquired a 25 percent interest in the LLC. The LLC began with
four investors who owned equal shares. Hartley's family trust was an investor and he
served as the LLC's president and managing member.
              In May 2006, the court entered a judgment dissolving the marriage of
Feresi and Mesa. The judgment incorporated the terms of a Marital Settlement
Agreement (MSA) that awarded Feresi one-half of the community's interest in the
LLC. Mesa was also required to make the monthly payments on Feresi's home
mortgage and to pay it off within five years. Mesa's financial obligations to Feresi
were secured by Mesa's interest in the LLC and other properties.
              Feresi did not file a Uniform Commercial Code Financing Statement
(UCC-1 financing statement) to "perfect" her security interest in Mesa's share of the
LLC. She instead gave Hartley and the other members of the LLC written notice that


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the dissolution judgment awards her one-half of Mesa's share of the LLC and that
Mesa pledged his retained share as security for his financial obligations to her.
Amendments to the books and records of the LLC showed Feresi as a member with a
12.5 percent ownership interest. Corporate tax returns identify Feresi as an LLC
member.
              By 2008, Mesa was struggling financially and fell behind on his
obligations to Feresi. On October 7, 2008, Hartley made a short-term loan to Mesa
of $200,000 from the Fitzgerald-Hartley Pension Plan. Although Hartley knew
Mesa's membership share in the LLC secured his financial obligations to Feresi, he
nevertheless secured the loan from his pension plan by the same 12.5 percent
membership share Mesa pledged to Feresi in 2006. Hartley did not disclose to Feresi
either that his pension plan intended to loan money to Mesa or that it would be secured
by Mesa's membership share.
              On October 30, 2008, Feresi notified Hartley as president and manager
of the LLC that she intended to enforce Mesa's obligations to her by taking the 12.5
percent share of the LLC and certain other properties he pledged. To this end, Feresi
filed an Order to Show Cause (OSC) in the family law proceedings to compel Mesa to
convey his 12.5 percent membership share in the LLC to her. While the OSC was
pending, on November 12, 2008, Feresi filed a quiet title action against Mesa and the
LLC to foreclose the "judicial liens" created by the MSA and dissolution judgment,
and to obtain quiet title to Mesa's 12.5 percent membership share.2
              After he was notified of Mesa's failure to meet his obligations to Feresi
and of her OSC and quiet title action, Hartley determined that Feresi had not filed a
UCC-1 financing statement to perfect her security interest in Mesa's membership share
of the LLC. Hartley took advantage of this circumstance to acquire priority for his


2
 On November 28, 2011, a judgment was entered in the quiet title action against Mesa
and The Livery LLC that quieted title in Feresi to a 25 percent interest in the LLC.
This judgment was served on Hartley as president and manager of the LLC. Neither
Mesa nor the LLC appealed that judgment.

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own, conflicting security interest in the same membership share by filing a UCC-1
financing statement reflecting the loan made by his pension plan to Mesa.
              On January 22, 2009, a "judgment" was entered on Feresi's OSC,
ordering Mesa to "assign, convey and transfer" his remaining 12.5 percent interest in
the LLC to Feresi. Mesa complied with that order on January 26, 2009. On the same
day, Feresi notified Hartley and the other LLC members that Mesa's transfer was
complete and that the LLC's records should be amended to identify her as the owner of
a 25 percent membership interest.
              On October 7, 2009, Mesa failed to repay the loan from Hartley's
pension plan. On November 12, 2009, the pension plan published a "Notice of
Disposition" announcing that Mesa's 12.5 percent membership interest in the LLC
would be sold on November 23 to satisfy the debt. On November 19, 2009, Feresi
filed this action for declaratory and injunctive relief.
              After a trial in November 2012, the court issued its statement of decision
and factually found: "[B]y 2007, Renee Feresi [was] recognized as a member of The
Livery, LLC and [was] designated as a 12.5 [percent] member on The Livery LLC
[corporate tax] returns for 2007." It also found that, when Hartley and Mesa perfected
the security interest of Hartley's pension plan in Mesa's share of the LLC, Hartley had
actual notice of Feresi's prior security interest, knew Mesa was in default on his
obligations to Feresi, knew she was entitled to enforce her security interest by taking
Mesa's share of the LLC, and knew that she had filed the OSC and quiet title action to
do so. It also concluded that, once Hartley learned in October 2009 that Mesa had
transferred his 12.5 percent membership interest to Feresi, Hartley was obligated to
insure that the LLC's corporate records showed Feresi was the exclusive owner of a 25
percent membership interest in the LLC.
              The trial court ruled that Hartley breached a fiduciary duty owed to
Feresi and that the security interest created by Mesa and Hartley in October 2008 in
favor of Hartley's pension plan was "null and void." The trial court declared that
Feresi has a 25 percent membership interest in the LLC that is not encumbered by the


                                              4
claims of Hartley or his pension plan. Hartley, Hartley's family trust and his pension
plan were enjoined from attempting to enforce their security interest in Mesa's share of
the LLC.
                                      DISCUSSION
                                    Standard of Review
              The trial court's decision involves mixed questions of law and fact. The
court's findings of fact, primarily about what Hartley knew and when he knew it, will
be affirmed if they are supported by substantial evidence. When a party makes a claim
of insufficiency of the evidence we begin with the presumption the judgment is
correct. (Cahill v. San Diego Gas & Electric Co. (2011) 194 Cal.App.4th 939, 956.)
We may not reweigh or resolve conflicts in the evidence or redetermine the credibility
of witnesses. (Citizens Business Bank v. Gevorgian (2013) 218 Cal.App.4th 602, 613.)
We liberally construe the court's findings of facts, whether express or implied. (Ibid.)
The testimony of a single witness may be sufficient. (Ibid.; Evid. Code, § 411.) To
the extent the court's decision depends on the determination of pure issues of law,
primarily concerning the scope of the fiduciary duties imposed by law on partners and
the remedies in the event of a breach, the issues are subject to our de novo review on
appeal.
              Despite the diversions offered by Hartley, this case presents a relatively
simple set of facts and issues. If the trial court's factual findings are supported by
substantial evidence, then the question presented is whether Hartley is categorically
entitled to claim priority for the security interest in favor of his pension plan even if it
extinguishes the preexisting security interest of his co-member Feresi by breaching a
fiduciary duty he owes to her. We are satisfied the answer to that question is "No."
                   Feresi Has Been a Member of the LLC Since 2006.
              First, we disagree with Hartley's contention that Feresi was not a
member of the LLC and was therefore not a person to whom he owed a duty of good
faith and fair dealing. The trial court concluded otherwise and substantial evidence
supports that conclusion. Feresi and her counsel repeatedly gave oral and written


                                              5
notice to Hartley and the LLC that the MSA and judgment awarded Feresi a 12.5
percent membership share in the LLC and that Mesa had pledged his remaining 12.5
percent membership share as security for his financial obligations to Feresi. Hartley
and the other LLC members acknowledged Feresi was also a member by, for example,
identifying her as a member on the LLC's tax returns.
               Hartley's Business Relationship with Feresi as a Fiduciary.
               The manager of an LLC has a fiduciary duty and owes to the members of
the LLC the same duties of loyalty and good faith as a partner owes to the partnership
and its partners. (§ 3307; Corp. Code, former § 17153, repealed by Stats. 2012, now
§ 17704.09.) Thus, Hartley is obligated to act with the utmost loyalty and in the
highest good faith when dealing with any member of the LLC, including Feresi. He
may not obtain any advantage over Feresi (or any other member of the LLC) by even
the slightest misrepresentation or concealment. (Enea v. Superior Court (2005) 132
Cal.App.4th 1559, 1564; Yeomans v. Lysfjord (1958) 162 Cal.App.2d 357, 361-362.)
   Hartley Breached the Duty of Good Faith and Fair Dealing He Owed to Feresi.
               Substantial evidence supports the trial court's conclusion that Hartley
breached his fiduciary duty to Feresi by destroying the value of her security interest in
Mesa's ownership share in the LLC to advance his own. Hartley had actual knowledge
of Feresi's security interest in Mesa's LLC membership, knew that Mesa was in default
on his obligations to Feresi and knew that Feresi's security interest was immediately
enforceable. Hartley loaned money to Mesa, created a conflicting security interest in
Mesa's membership share and then surreptitiously perfected it to gain an advantage
over Feresi.
               We reject Hartley's contention that filing of the UCC-1 financing
statement was not a breach of his fiduciary duties because, "A partner does not violate
a duty or obligation under this chapter or under the partnership agreement merely
because the partner's conduct furthers the partner's own interest." (§ 16404, subd. (e).)
"The apparent purpose of this provision . . . is to excuse partners from accounting for
incidental benefits obtained in the course of partnership activities without detriment to


                                            6
the partnership. [Fn. omitted.]" (Enea v. Superior Court, supra, 132 Cal.App.4th at p.
1566.) Hartley is not entitled to disregard his actual knowledge of Feresi's preexisting
security interest in the same property and perfect his security interest at her expense.
Hartley's filing of the UCC-1 financing statement was not without detriment to his
partner, Feresi. It rendered her security interest worthless. Section 16404, subdivision
(e) has no application under these circumstances.
              Feresi had no reason to protect the priority of her own security interest in
the same property because she was unaware that her partner held a conflicting interest.
Hartley took advantage of Feresi's ignorance by concealing this from her, and betrayed
her trust and confidence by perfecting his pension plan's security interest ahead of
hers. In doing so, Hartley breached the fiduciary duties of loyalty and good faith he
owed to Feresi. Under these circumstances, the trial court properly refused to enforce
the security interest held by Hartley's pension plan.
                      The Commercial Code (UCC) Filing Scheme
              Hartley contends the UCC sets a "hard line" that requires courts to
disregard the equities and accept "harsh results" to ensure that commercial transactions
are simple, clear and uniform. Citing Knox v. Phoenix Leasing, Inc. (1994) 29
Cal.App.4th 1357, 1368, Hartley observes that the statutory priority given to the holder
of a perfected security interest must be upheld even if the holder is unjustly enriched at
the expense of an unsecured creditor. In Knox, the perfected security interest attached
to all equipment owned or later acquired by a winery. The winery's obligation to the
seller of the equipment was unsecured. The Knox court acknowledged the harsh result
of finding the perfected interest had priority over that of the seller, but said it had to be
accepted to ensure "a predictable system of creditor priorities." (Id., at p. 1361.) Even
so, the Knox court cautioned that, "[V]ictory for a secured creditor is not an immutable
law of nature. Fraud, for example, is expressly put beyond the pale. [Citation.] A
code may strive for comprehensiveness, but exceptional situations will arise. Equity is
ordinarily meant to operate in these situations [citations], but its operation is subject to
the principle that 'equity follows the law.' [Citation.] This deference requires that


                                              7
equitable exceptions to statutory law be carefully limited to reduce any possible
conflict with an express statutory command." (Knox, supra, at pp. 1364-1365.)
              The UCC itself acknowledges that its provisions are to be supplemented
by "principles of law and equity." (§ 1103, subd. (b).) We do not believe the
Legislature intended to confer a benefit to a person who files a UCC-1 financing
statement in violation of a fiduciary duty. The Legislature's interest in simple, clear,
and uniform prioritization of security interests does not condone such an outcome.
The exceptional situation contemplated by Knox is found here. The application of
equitable principles in this case strengthens the statutory scheme. Not rewarding the
product of sharp practices in the creation of a security interest lends stability and
security in commercial transactions among fiduciaries.
              The UCC filing system provides a mechanism for creditors to establish
the priority of security interests they secure from debtors and allows them to determine
if others already have a claim on collateral. It sets the priority of valid security
interests in the same collateral through a filing system. The statutory scheme is not
intended to provide a vehicle for creditors to take advantage of persons with whom
they have a fiduciary relationship. Thus, in this case, it is not determinative that
Hartley perfected his pension plan's security interest in Mesa's membership share by
filing a UCC-1 financing statement.
                              Modification of the Judgment
              The judgment entered on March 25, 2013 declares that it is "in favor of
Plaintiff Renee Feresi and against The Livery, LLC and Mark Hartley, individually
and as Trustee of the Fitzgerald-Hartley Pension Plan." It also declares that "Renee
Feresi owns the [25 percent interest] in The Livery, LLC free and clear of any interest
asserted by Mark Hartley, or the Fitzgerald-Hartley Pension Plan to that interest."
              Mark Hartley was named individually as a defendant but the court
sustained his demurrer and the case was dismissed as to him individually. The
provisions of the judgment that are specific to him other than in his representative
capacity must be stricken.


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                                   DISPOSITION
             The Clerk of the Superior Court is instructed to strike the provisions in
the judgment found on page two, line 10 and lines 15 to 16 that refer to "Mark Hartley,
individually." The judgment, as modified, is affirmed. Respondent is awarded her
costs on appeal.
             CERTIFIED FOR PUBLICATION.




                                         BURKE, J.*


We concur:



             GILBERT, P. J.




             YEGAN, J.




*
 (Judge of the Superior Court of San Luis Obispo County, assigned by the Chief
Justice pursuant to art. 6, § 6 of the Cal. Const.)

                                           9
                              Charles R. McGrath, Judge

                          Superior Court County of Ventura
                         ______________________________


             Goldenring & Prosser, Peter A. Goldenring and James E. Prosser for
Defendants and Appellants.
             Law Offices of William Crockett, William E. Crockett and Kenneth C.
Bounds for Plaintiff and Respondent.
