                                                   NOT PRECEDENTIAL

             UNITED STATES COURT OF APPEALS
                  FOR THE THIRD CIRCUIT
                       _____________

                           No. 12-3414
                          _____________


                    In re: WL HOMES, Debtor

          WACHOVIA BANK NATIONAL ASSOCIATION

                                 v.

WL HOMES LLC; JLH INSURANCE CORPORATION; GEORGE L. MILLER

              George L. Miller; JLH Insurance Corporation,

                                           Appellants


                          _____________

                           No. 12-3493
                          _____________

                     In re: WL HOMES, LLC,
                                   Debtor

         WACHOVIA BANK NATIONAL ASSOCIATION,

                                      Appellant

                                 v.

WL HOMES LLC; JLH INSURANCE CORPORATION; GEORGE L. MILLER

           On Appeal from the United States District Court
                      for the District of Delaware
         (Nos. 1:11-cv-00619, 1:11-cv-00621, 1:11-cv-00692)
              District Judge: Hon. Richard G. Andrews
                                 Argued June 26, 2013

            Before: FUENTES, FISHER, and CHAGARES, Circuit Judges.

                               (Filed: August 08, 2013)
                                    ____________

                                      OPINION
                                     ___________

Steven M. Coren, Esq. (ARGUED)
Brian L. Watson, Esq.
Kaufman, Coren & Ress, P.C.
Two Commerce Square, Suite 3900
2001 Market Street
Philadelphia, PA 19103-2713
      Counsel for Appellants/Cross-Appellees

Francis A. Monaco, Jr., Esq.
Thomas M. Horan, Esq.
Womble Carlyle Sandridge & Rice, LLP
222 Delaware Avenue, 15th Floor
Wilmington, DE 19801

James D. Whooley, Esq. (ARGUED)
Milbank, Tweed, Hadley & McCloy, LLP
601 S. Figueroa Street, 30th Floor
Los Angeles, CA 90017
       Counsel for Appellee/Cross-Appellant

CHAGARES, Circuit Judge.

      In 2007, appellee/cross-appellant Wachovia Bank, National Association 1

(“Wachovia”) extended a loan to WL Homes, LLC (“WL Homes”). In exchange, WL

Homes granted Wachovia a security interest in the $10 million bank account of a wholly-

owned subsidiary called JLH Insurance Corporation (“JLH”). WL Homes eventually


1
  After a merger, Wachovia is now Wells Fargo. Because the documents in the record
and the parties refer to the relevant entity as Wachovia, we will do the same.
                                           2
filed a bankruptcy petition and Wachovia sought a declaration in United States

Bankruptcy Court for the District of Delaware that it had an enforceable security interest

in the JLH bank account. The Bankruptcy Court granted Wachovia’s motion for

summary judgment, holding that Wachovia had a valid security interest in the account

because JLH had consented to the pledge and, in the alternative, because WL Homes had

use and control of the JLH account. The Chapter 7 trustee appointed to represent both

WL Homes and JLH appealed. The District Court affirmed the grant of summary

judgment on the basis of consent but reversed the use and control holding. Both parties

appeal the decision of the District Court. For the reasons that follow, we will affirm.

                                             I.

       In October 2007, WL Homes and Wachovia entered into a “Line of Credit Loan

Agreement” (“Loan Agreement” or “Agreement”). In the Agreement, Wachovia agreed

to extend a $20 million revolving line of credit to WL Homes. To secure the loan, WL

Homes, the borrower, pledged its interest in the JLH bank account as collateral to

Wachovia, the lender, through the following clause in the Agreement:

              Borrower shall maintain its JLH Insurance Co. primary
              deposit account (“the JLH Account”) with Lender. The funds
              on deposit in the JLH Account shall at no time be less than
              $10,000,000. Borrower shall also maintain its Laing Luxury
              primary deposit accounts . . . with Lender. The JLH Account
              and the Laing Luxury Accounts are collectively referred to as
              the Deposit Accounts. Borrower grants to Lender a security
              interest in the Deposit Accounts. [In the event of default],
              Lender shall not be obligated to release to Borrower any
              funds from the Deposit Accounts . . . .




                                             3
Appendix (“App.”) B172 (emphasis added). WL Homes and Wachovia extended the

loan with two letter agreements signed in June and July 2008. Those agreements

reaffirmed the obligations set forth in the initial Loan Agreement.

       The disputed account was held in the name of JLH. WL Homes formed JLH in

2005 as a wholly-owned, pure captive insurance company that could pay claims brought

against WL Homes.2 A pure captive insurance company insures the risks of its affiliates

— here, the risks of WL Homes, its sole parent.3 The disputed depository account at

Wachovia Bank was opened in January 2008, shortly after execution of the Loan

Agreement. According to WL Homes, JLH opened the account to fulfill Arizona’s

requirement that JLH, as a captive insurer, maintain a minimum level of capital in reserve

to pay claims.

       JLH was a wholly-owned subsidiary of WL Homes. All funds held in JLH’s name

were transferred from its parent company. Although JLH has its own formation

documents and maintained its own books and records, WL Homes’s financial statements

reported JLH’s assets as its own. Three of JLH’s corporate officers also served on the

board of WL Homes. The other two JLH board members were employees of Aon, the

company hired to manage JLH as required by Arizona captive insurer requirements. An




2
  JLH is an Arizona corporation subject to that state’s captive insurer statutes and
regulations.
3
  In general, “[a] captive insurance company is owned by and run for the benefit of an
operating company. Generally, the captive has few assets and employees and is
reinsured.” In re Petition of Bd. of Dirs. of Hopewell Int’l Ins., Ltd., 272 B.R. 396, 400
n.1 (Bankr. S.D.N.Y. 2002).
                                             4
individual named Wayne Stelmar was the president of JLH4 and the CFO of WL Homes

at all relevant times. Stelmar negotiated the initial Loan Agreement and signed the two

2008 letter agreements that extended the loan.

       In February 2009, WL Homes filed a Chapter 11 bankruptcy petition. Soon

thereafter, the case was converted to a Chapter 7 action for liquidation and a trustee was

appointed. On March 20, 2009, Wachovia filed the current action in Bankruptcy Court,

seeking a declaratory judgment that Wachovia held an enforceable security interest in the

JLH account and could enforce that interest to satisfy WL Homes’s obligations to

Wachovia. After discovery, Wachovia moved for summary judgment. The Chapter 7

trustee cross-moved, seeking a declaration that Wachovia’s security interest was invalid.

       The Bankruptcy Court granted the motion and denied the Chapter 7 trustee’s

cross-motion. The court identified two theories to support its conclusion that WL Homes

had sufficient rights in the JLH account to promise it as collateral: (1) WL Homes had

“use and control of the JLH account;” and (2) JLH consented to the use of its account as

collateral. App. 40.

       The trustee appealed to the United States District Court for the District of

Delaware. The District Court held that WL Homes did not exert sufficient use and

control over the JLH account to pledge it as collateral but affirmed the grant of summary

judgment on the basis that JLH had consented to the pledge of its account as collateral.



4
 JLH’s corporate bylaws gave its president the authority to “have general charge of the
business of the corporation” and to “sign, in the name of the corporation, all authorized
contracts, documents, checks and bonds, or other obligations.” App. B404.
                                             5
       The trustee timely appealed to this Court, arguing that no theory supports the

conclusion that Wachovia has an enforceable security interest in the JLH account.

Wachovia cross-appealed, arguing that the District Court improperly rejected the

alternative basis for enforcing the security interest — that WL Homes had sufficient use

and control to pledge the JLH account as collateral.

                                              II.5

                                              A.

       We exercise plenary review over a district court’s grant of summary judgment.

Chambers v. Sch. Dist. of Phila. Bd. of Educ., 587 F.3d 176, 181 (3d Cir. 2009). We will

apply the same standard applied by the district court, id., and grant summary judgment “if

the movant shows that there is no genuine dispute as to any material fact and the movant

is entitled to judgment as a matter of law,” Fed. R. Civ. P. 56(a).

                                              B.

       We apply state law to determine “whether claims asserted by creditors in

bankruptcy are secured.” In re SubMicron Sys. Corp., 432 F.3d 448, 458 (3d Cir. 2006).

The parties agree, as does the Court, that California law governs this action. Under

California’s Commercial Code, “[a] security interest attaches to collateral when it

becomes enforceable against the debtor.” Cal. Com. Code § 9203(a). A security interest

in a deposit account becomes enforceable against the debtor when: (1) “value has been

given;” (2) “the debtor has rights in the collateral or the power to transfer rights in the

5
  The District Court had jurisdiction over WL Homes’s appeal from the final order of the
Bankruptcy Court pursuant to 28 U.SC. § 158(a)(1). We have jurisdiction over an appeal
from the judgment or order of the District Court pursuant to 28 U.S.C. § 158(d)(1).
                                               6
collateral to a secured party;” and (3) the secured party has control over the deposit

account. Cal. Com. Code § 9203(b) (emphasis added), § 9104. The parties dispute the

second element: whether WL Homes had sufficient rights in the JLH account to pledge it

as collateral for the Wachovia loan.

       A debtor may pledge as security property it does not fully own, but may only

pledge the rights that it has in the property. See In re Ferandos, 402 F.3d 147, 156 (3d

Cir. 2005) (“It is hornbook law that the debtor can only grant a security interest in

whatever rights he has in the collateral.”); see also Official UCC Comment 6, § 9-203

(“A debtor’s limited rights in collateral, short of full ownership, are sufficient for a

security interest to attach. . . . . [T]he baseline rule is that a security interest attaches only

to whatever rights a debtor may have, broad or limited as those rights may be.”). There is

no bright-line rule that specifies the “quantum of rights” in a particular piece of property

that will allow a party to pledge it as collateral; “less than full legal title will do and the

secured party will get whatever rights the debtor had.” Ferandos, 402 F.3d at 156

(quotation marks omitted). The consent of the owner of the collateral is one way to give

the debtor sufficient rights in the property to pledge it as security. See In re Atchison,

832 F.2d 1236, 1239 (11th Cir. 1987) (“[A]ll of the courts that have considered the

question have ruled that an owner’s permission to use goods as collateral creates rights in

the debtor sufficient to give rise to an enforceable security interest.”).

       We must determine the quantum of rights that WL Homes had in the property of

JLH, its wholly-owned subsidiary. We begin with the assumption that parent companies

and wholly owned subsidiaries share the same interests. See In re Teleglobe Comm’cns

                                                7
Corp., 493 F.3d 345, 366-67 (3d Cir. 2007) (applying Delaware law). We apply

principles of agency to determine whether JLH had notice of and manifested its consent

to the pledge of its account as collateral and will assume that, “[a]s against a principal,

both principal and agent are deemed to have notice of whatever either has notice of, and

ought, in good faith and the exercise of ordinary care and diligence, to communicate to

the other.” Cal. Civ. Code § 2332; see also Huston v. Procter & Gamble Paper Prods.

Corp., 568 F.3d 100, 106 (3d Cir. 2009) (explaining that, “[f]or purposes of determining a

principal’s legal relations with a third party, notice of a fact that an agent knows or has

reason to know is imputed to the principal if knowledge of the fact is material to the

agent’s duties to the principal” (quoting Restatement (Third) of Agency § 5.03 (2006))).

An agent has a duty to disclose material information to the principal, and the principal is

“deemed to have knowledge” of those facts. O’Riordan v. Fed. Kemper Life Assurance

Co., 114 P.3d 753, 757 (Cal. 2005).

       Two standards limit the knowledge that we will impute to the principal. First, we

will only impute knowledge that is within the scope of the agent’s duties. Huston, 568

F.3d at 107 (“[A] corporation is not charged with the legal consequences of an

employee’s knowledge of a fact that lies outside the scope of the employee’s duties to the

corporation”). Second, we will only impute knowledge that is material to the employee’s

duties to the employer. Id. “In other words, the employee’s knowledge of facts may be

imputed to the employer only if that knowledge is important to the function the employee

is employed to perform.” Id. Absent misconduct or malfeasance, the material

knowledge of an agent is imputed to the principal, even if that knowledge was acquired in

                                              8
another capacity as long as “that knowledge can reasonably be said to be present in the

mind of the agent while acting for the principal.” O’Riordan, 114 P.3d at 757 (quotation

marks omitted); cf. Bank South, N.A. v. Midstates Grp, Inc., 364 S.E.2d 58, 61-62 (Ga.

Ct. App. 1987) (holding that debtor lacked sufficient rights in collateral when non-debtor

presented evidence of forgery with respect to the pledge).

       Several jurisdictions, including California, have applied principles of imputation

to situations in which individuals act in two capacities — either as an officer of both a

parent and a subsidiary, or as a corporate officer and as an individual. In Northern

Natural Gas Co. v. Superior Court, for instance, the California Supreme Court,

considering an issue that did not involve a secured transaction, addressed a dual agency

situation in which an individual who was the president of both a parent company and its

wholly-owned subsidiary made representations in his capacity as the president of the

subsidiary. 134 Cal. Rptr. 850, 856 (Cal. Ct. App. 1976). The court applied the “doctrine

of imputed knowledge” to charge the parent company with the knowledge that the

individual had gained in his capacity as president and chairman of the subsidiary. Id.

(“The trial court had a right to conclude that Propane Gas as stockholder of Geni-Chlor

elected Larson president of Geni-Chlor so that Larson as president of Propane Gas would

be fully aware of what its wholly owned subsidiary was doing.”).

       In Matter of Pubs, Inc. of Champaign, 618 F.2d 432, 435-38 (7th Cir. 1980), the

Court of Appeals for the Seventh Circuit considered a situation in which two individuals

who were also the officers of the debtor corporation promised their own equipment as

collateral for a loan from the bank. The debtor corporation later filed for bankruptcy and

                                             9
the court held that the individuals had properly pledged the collateral and concluded that

“[n]otice to the director of a corporation is notice to the corporation and estops the

corporation and its receiver from questioning the validity of a prior transaction.” Id. at

438. In Atchison, the Court of Appeals for the Eleventh Circuit, applying the Uniform

Commercial Code, likewise held that the signature of the person who owned the

collateral individually but pledged it on behalf of his corporation had manifested his

consent to granting a security interest in the property. 832 F.2d at 1239-40 (“[E]ven if he

did own the equipment, his signature for A & W was sufficient to infer his consent to its

use as collateral.”). A United States Bankruptcy Court has applied Atchison to facts

similar to those presented here — to a situation in which the individuals who owned the

property pledged as security (a coin collection) signed the security agreement in his

capacity as a corporate officer. In re 4-R Management, Inc., 208 B.R. 232, 237 (Bankr.

N.D. Ala. 1997). The court held that the owners’ individual signatures on the security

agreement “was sufficient to infer corporate consent to use the coins as collateral.” Id. at

238.

       Here, the trustee claims that the president of the subsidiary, Wayne Stelmar, acted

only in his capacity as CFO for the principal, WL Homes, when he signed the two Letter

Agreements that continued the pledge of the JLH account. We look to Stelmar’s role and

the relationship between WL Homes and JLH to determine whether to impute Stelmar’s

knowledge of the pledge of the Wachovia account to JLH. Stelmar served as president of

JLH, served as CFO of WL Homes, negotiated the initial Loan Agreement, and signed

the 2008 letter agreements that extended the loan. Stelmar was not the only dual agent.

                                             10
The majority of JLH’s board members were also officers of WL Homes. Stelmar had

specific knowledge of the pledge of the account because he negotiated the Loan

Agreement in which the security interest was granted in his capacity as CFO to one of the

principals — WL Homes. Knowledge of that fact was material to Stelmar’s duties to his

other principal — JLH. JLH’s bylaws specify the duties of the president: the president

will “have general charge of the business of the corporation” and “may sign, in the name

of the corporation, all authorized contracts, documents, checks and bonds, or other

obligations.” App. B404.

       A pledge of a corporation’s capital reserves undoubtedly involves the “general

business” of the corporation and was well within the scope of Stelmar’s duties as

president. Stelmar was thus obligated “in good faith and the exercise of ordinary care

and diligence” to communicate to JLH the fact WL Homes had pledged its account as

collateral. Cal. Civ. Code § 2332. Stelmar need not have been acting specifically in his

capacity as JLH’s president when he received this information. Cf. O’Riordan, 114 P.3d

at 757 (imputing agent’s knowledge to the principal even though agent acquired the

relevant information before the agency relationship began). The undisputed facts demand

that we impute Stelmar’s knowledge of the pledge of the JLH account to JLH. That

knowledge manifests consent. We therefore conclude that Wachovia had an enforceable

security interest and is entitled to judgment as a matter of law.6



6
  Because we hold that JLH consented to the pledge of its account as collateral for the
loan, we need not reach the question of use and control raised in Wachovia’s cross
appeal.
                                             11
                                           III.

      For the foregoing reasons, we will affirm the decision of the District Court that

upheld the Bankruptcy Court’s grant of summary judgment to Wachovia.




                                           12
