Cottonport Bank v. Roy

Citation: 58 F.3d 168Docket: No. 94-40947

Court: Court of Appeals for the Fifth Circuit; July 13, 1995; Federal Appellate Court

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The plaintiff/appellee, Wade Kelly, trustee for the bankruptcy estate of the law firm Chris J. Roy, filed a petition in bankruptcy court to declare an alleged pledge to Cottonport Bank unperfected and unenforceable. The bankruptcy court ruled that a valid pledge did not exist, a decision that was affirmed by the district court. In 1989, following the law firm’s voluntary bankruptcy filing, Kelly sought to establish that a pre-bankruptcy pledge of a contingency fee from a case against American Honda Motor Company was invalid. In 1986, Roy signed a document pledging 25% of the fee to Cottonport Bank as collateral for loans, later amending it in 1988 to pledge 100% of the fee interest. The case settled in 1987, yielding a $500,000 fee paid in installments via an annuity. Payments were initially made jointly to the law firm and Cottonport Bank, but subsequent payments were made solely to the firm, with proceeds applied to debt owed to the bank. Kelly claimed that no valid assignment or pledge was established, leading to the bankruptcy court initially dismissing his complaint. However, the district court reversed this, ordering the return of funds to the bankruptcy estate. On appeal, the court affirmed the absence of a valid assignment but remanded for determination of the pledge's validity. The bankruptcy court ultimately found no perfected pledge, which the district court confirmed. Cottonport Bank is now appealing the determination of whether a perfected pledge existed.

The Louisiana Civil Code defines a pledge as a contract where a debtor provides security to a creditor for a debt, traditionally requiring the physical delivery of the security. Revised statutes now allow for the pledge of incorporeal property without such delivery. In this case, the law firm’s interest in the Juneau fee was identified as an accounts receivable, qualifying as incorporeal property that can be pledged without delivery. However, formal requirements must still be met for a perfected pledge: (1) a mutual agreement and intent to pledge, which can be expressed orally or in writing, and (2) written notice to or acknowledgment by the obligor. The written documents executed by Chris Roy suggested his intent to secure debts owed to Cottonport Bank with the Juneau fee, but the district court found insufficient specifics regarding the debt and property, indicating a lack of mutual agreement. Cottonport Bank referenced a precedent case where an oral pledge was deemed sufficient without a written agreement. The appellate court concluded that there was sufficient intent to pledge in Roy's agreement with Cottonport Bank, countering the district court's findings. The remaining issues involve determining the obligor's identity and whether the obligor received the required written notice. The appellant contended that notice was unnecessary for perfecting the pledge, contradicting statutory requirements. Additionally, the appellant identified Reliance as the obligor responsible for the pledged property, while the courts identified Union Pacific as the obligor per the annuity contract.

Reliance, considered as the obligor, did not receive formal notice of the pledge from Roy. In October 1988, Roy sent a letter indicating his assignment of attorney's fees to the Central Bank, requesting a check to be made payable to both his law corporation and the bank. However, this letter did not explicitly identify the transaction as a pledge or specify the secured debt. The letter was the sole instruction for payment to be joint, while subsequent payments were directed solely to Roy or his brother. Despite ambiguity regarding the notice requirements under La.Rev.Stat. 9:4323, the court concluded that Roy's single payment instruction was insufficient for notice, rendering the pledge unperfected and unenforceable against the bankruptcy estate.

The agreements between Roy's firm and the appellant bank indicated a meeting of the minds regarding the pledge's creation, but the notice to Reliance did not meet the statutory requirements. Consequently, the district court's decision was affirmed. The assigned documents included a pledge of a 25% interest in attorney's fees, later amended to 50%, and ultimately to 100% for the case against American Honda Motor Company. According to civil code articles and statutes cited, a valid pledge requires the creditor to be put in possession of the pledged item unless they already possess it. Moreover, claims and rights not evidenced by written instruments can be pledged similarly to other property, and a pledge remains valid without delivery to the pledgee.

In Vaughn Flying Service v. Costanza and related cases, the legal requirements for perfecting a pledge of incorporeal rights not documented in writing are examined. Louisiana Revised Statute 9:4323 mandates that a written notice of the pledge must be given to the obligor to bind them to pay the amount due to the pledgee. This requirement is reinforced by multiple court decisions, including Vaughn Flying Service and Bank of Coushatta, which confirm the necessity of written notice for perfection of the pledge. 

For a pledge to be enforceable against third parties, case law indicates differing standards. Some courts, such as in Citizens Bank and Trust Co. v. Consolidated Terminal Warehouse, require a written instrument that specifies the debt amount and the nature of the property pledged. Conversely, Vaughn Flying Service holds that a pledge can be valid against third parties without such written documentation, leading to conflicting interpretations of the applicable statutes and civil codes. Overall, while written requirements are crucial for binding obligors, the standards for third-party effectiveness of pledges remain contested.