## Facts

- A 2006 dissolution judgment incorporating a marital settlement agreement awarded Renee Feresi one-half of the community’s 25% interest in The Livery, LLC and secured her ex-husband James Mesa’s obligations by pledging Mesa’s LLC interest as collateral.
- Feresi did not file a UCC financing statement, but she gave written notice of her interest to Mark Hartley and the other LLC members; the LLC amended its records and tax returns to reflect her membership interest.
- In 2008, after Mesa defaulted, Hartley (as trustee of the Fitzgerald–Hartley Pension Plan and managing member/president of the LLC) loaned Mesa $200,000, took a security interest in the same LLC interest, and perfected it by filing a financing statement.
- Hartley knew of Feresi’s earlier interest but did not disclose the loan or the security interest to her.
- Feresi sought to take the pledged LLC interest in satisfaction of Mesa’s default and brought litigation to foreclose her interest and quiet title.
- A related 2011 judgment quieted title in Feresi to a 25% interest in the LLC as against Mesa and the LLC.
- In this action, the trial court ruled Feresi held a 25% membership interest not encumbered by Hartley/the Plan’s claimed security interest.

## Issues

1. Under the California Commercial Code, does a later perfected security interest in an LLC membership interest have priority over an earlier unperfected security interest in the same collateral?
2. May equitable principles based on an LLC manager’s fiduciary duties reorder statutory priority where the later perfected interest was created and perfected through a breach of duty to the earlier claimant?

## Decision

- The Court of Appeal affirmed the judgment, with a modification striking references to “Mark Hartley, individually,” leaving him only in his capacity as trustee.
- The court recognized the general statutory rule that a perfected security interest has priority over a conflicting unperfected security interest.
- The court held that equity may override that rule when the perfected security interest was created by breaching a fiduciary duty owed to the holder of the earlier unperfected interest.
- Because Hartley, with notice of Feresi’s interest, obtained and perfected the competing security interest without disclosure in breach of his duties of good faith and fair dealing as LLC manager/co-member, Feresi’s earlier unperfected interest was given priority.

## Legal Principles

- Perfection generally requires filing a financing statement, and perfected interests ordinarily take priority over conflicting unperfected interests. (Cal. Com. Code §§ 9310(a), 9322(a)(2).)
- The Commercial Code is supplemented by principles of law and equity; equitable relief may be available when applying priority rules would reward wrongful conduct. (Cal. Com. Code § 1103(a), (b).)
- An LLC managing member owes duties of good faith and fair dealing to other members, and may not use superior knowledge or control to obtain a personal priority advantage against a known, earlier member interest.
- A security interest that is perfected through a fiduciary breach may be equitably subordinated to an earlier unperfected interest held by the person to whom the duty was owed.

## Conclusion

The court held that although statutory filing rules ordinarily control priority, equity can subordinate a later perfected security interest when it was created and perfected through an LLC manager’s breach of fiduciary duties to the holder of an earlier, known but unperfected security interest; the judgment confirming Feresi’s unencumbered 25% interest was affirmed as modified.


Feresi v. The Livery, LLC, 232 Cal. App. 4th 419 (Cal. Ct. App. 2014)