Orix Financial Services, Inc. v. Kovacs
Filed September 30, 2008
First District, Div. Five
Cite as 2008 SOS 5561

Creditor as Transferee in a Judgment Satisfied from a Deposit Account

ADA Machine Company, Inc. (ADA) failed to pay its financial obligations to Orix Financial Services, Inc. (Orix) which were secured by interests in all of ADA’s goods, chattels and property. About $1.5 million still owed on those obligations.

Meanwhile, Mike Kovacs and Marius Marta, doing business as Bay Technology (Kovacs) acquired a judgment against ADA for $157,468.11. Thereafter, a writ of execution against ADA’s deposit accounts was issued.

Consequently, Orix filed a complaint for unjust enrichment and imposition of a constructive trust against the Kovacs.

In its demurrer, Kovacs admitted that as a secured creditor, Orix’s interest was superior to its own interest as an unsecured creditor under a traditional creditors’ priority analysis. However, such analysis was immaterial to the issue since the judgment was satisfied from a deposit account. Hence, free of such priority analysis.

Orix appealed when the curt sustained the demurrer.

As a case of first impression, the California Court of Appeal affirmed the judgment by holding that:

• Kovacs were deemed a transferee under Uniform Commercial Code §9332(b).
  
  The Code provides that unsecured creditor who obtained judgment from deposit account funds was deemed a "transferee". Hence, “transferees may take funds free of security interest in account unless transferee acted in collusion with debtor.”


• Orix failed to allege collusion between ADA and Kovacs and amend its complaint. Hence, Orix’s contention that ADA was passive and did not participate in the transfer belied any suggestion of collusion.