## Facts

- In 2008, Affinity Financial Corporation received two loans totaling $13.5 million from BHC Interim Funding II, LP and BHC Interim Funding III, LP (collectively, BHC).
- Affinity executed loan and security agreements granting BHC security interests in Affinity’s assets, including after-acquired property and proceeds.
- BHC perfected its security interests in 2008; Affinity later defaulted, and its assets were insufficient to satisfy the secured debt.
- In 2010, William Zimmerling obtained a federal default judgment against Affinity in the United States District Court for the District of Colorado for $370,930.39, based on an arbitration award arising from an employment-contract dispute.
- Zimmerling then filed an action in Massachusetts to enforce the Colorado judgment, including a reach-and-apply claim against AARP Financial, Inc., which owed Affinity substantial sums due to a separate arbitration award in Affinity’s favor.
- The Massachusetts Superior Court issued orders (including orders dated November 24, 2010; December 14, 2010; and August 19, 2011) that barred AARP from paying or transferring up to $500,000 to Affinity and required AARP to establish and fund an escrow account as prejudgment security for Zimmerling.
- BHC intervened in the Massachusetts action, asserting that its previously perfected security interests covered the funds owed by AARP to Affinity, including the funds deposited into the escrow account.
- On an undisputed summary-judgment record, the Superior Court ruled for BHC and awarded the escrowed funds to BHC as the senior claimant.
- Zimmerling appealed, arguing that under G.L. c. 106, § 9-332(b) (UCC § 9-332(b)), BHC’s security interest was cut off when AARP transferred the money from its deposit account into the escrow account.

## Issues

1. Whether UCC § 9-332(b) extinguishes a prior perfected security interest when funds are transferred from a deposit account into a court-ordered escrow account created as prejudgment security for a judgment creditor.
2. Whether, in this escrow setting, either the judgment creditor or the escrow agent is a “transferee of funds from a deposit account” who takes free of a security interest under § 9-332(b).
3. Whether a judgment creditor can obtain priority over a previously perfected secured creditor based solely on the court-ordered placement of disputed funds into escrow.

## Decision

- The Appeals Court of Massachusetts affirmed the Superior Court’s judgment for BHC.
- The court held that BHC’s perfected security interests were not extinguished by the transfer of funds into the court-ordered escrow account.
- The court concluded that neither Zimmerling nor the escrow agent qualified as a “transferee” within the meaning of § 9-332(b) on these facts.
- The court therefore upheld the award of the escrowed funds to BHC as the senior secured creditor.

## Legal Principles

- A perfected Article 9 security interest generally has priority over later judgment-creditor claims to the same collateral unless a specific statutory rule changes that result.
- Under G.L. c. 106, § 9-332(b), a “transferee of funds from a deposit account” can take the funds free of a security interest in the deposit account, but the provision is aimed at completed funds transfers that function like payments in ordinary commerce.
- A court-ordered escrow established as prejudgment security, subject to court control and contingent on later adjudication, does not constitute the type of transfer that makes the recipient a § 9-332(b) transferee taking free of prior security interests.
- A judgment creditor who obtains only a conditional, equitable claim to escrowed funds—dependent on prevailing in the reach-and-apply action and on priority—does not receive an ownership-type transfer that wipes out a prior perfected security interest.
- Moving funds into escrow to preserve them pending judicial resolution is treated as a change in custody and control of the funds, not an event that reallocates Article 9 priority between a senior secured creditor and a junior judgment creditor.

## Conclusion

Zimmerling held a Colorado judgment against Affinity and obtained Massachusetts orders requiring AARP (a debtor of Affinity) to place funds into escrow as prejudgment security, but the Appeals Court held that this escrow arrangement did not trigger UCC § 9-332(b)’s free-of-security-interest rule because neither Zimmerling nor the escrow agent was a qualifying “transferee”; accordingly, BHC’s earlier perfected security interests continued in the escrowed funds and had priority, and the judgment awarding the escrowed funds to BHC was affirmed.


Zimmerling v. Affinity Financial Corp., 14 N.E.3d 325 (2014)