Small Business Financial Solutions, LLC v. Pearl Beta Funding, LLC (Cir. Ct. Mont. Cnty)

Filed: September 29, 2017

Opinion by: Harry C. Storm

Holding: A claim that a small business finance lender tortiously interfered with a contract and with the rights of a senior secured lender under the UCC could not be resolved on summary judgement because the lender had entered into a loan agreement with a customer despite having notice of the terms of an agreement between the customer and another lender, and questions of intentionality and collusion central to the plaintiff’s claims were questions of fact.

Facts: Plaintiff loaned a Kentucky-based chiropractic practice (the “Practice”) monies, which would be repaid through daily bank account debits. Under the loan agreement, Plaintiff had a security interest in the personal property and proceeds of the Practice. Also, the Practice was prohibited from disposing of Plaintiff’s collateral outside the ordinary course of business. Furthermore, as conditions of default, the Practice was prohibited from (1) selling any existing or future account receivables to any third party without the Plaintiff’s consent or (2) entering into any financing agreement requiring daily or weekly repayments. 

Plaintiff filed a UCC-1 Financing Statement and sent Notice Letters to small business finance lenders, including a predecessor-in-interest to Defendant. The Notice Letters notified the businesses of the terms of the loan agreements and warned that engaging in activities that violated the terms constituted an interference with Plaintiff’s contracts.

Subsequently, the Practice sought additional loans, including one from Defendant. In its application, the Practice disclosed the existing loans with Plaintiff. Defendant learned of the daily debits to Plaintiff and of the UCC-1 Financing Statement. Defendant required the Practice to represent and warrant that contracting with Defendant would not cause it to default on any other loans. Under the loan agreement, Defendant would receive all of the Practice’s future accounts and payments from its clients, and a grant of a security interest in its property.

Two weeks later, the Practice asked Defendant to reduce the amount of its daily debits. One of Defendant’s representatives concluded that the Practice was overfunded, and Defendant temporarily reduced the debits. Subsequently, the Practice stopped paying both parties. Eventually, Defendant was repaid in full and the Practice and Plaintiff came to a settlement.

Analysis: 

Plaintiff sought relief under two theories: tortious interference of the loan agreement and interference of Plaintiff’s rights as a senior secured lender under Maryland UCC Section 9-625. Defendant moved for summary judgment, which the Court denied because the issues could not be resolved as a matter of law. The summary judgement standard requires the Court to enter judgement where there is no genuine dispute as to any material fact and a party is entitled to judgment under matter of law.

Tortious interference with contract has five elements; one is intentional interference. “Intentional interference” requires intentionality, interference, and impropriety. The intentionality issue hinged on several facts, including the receipt of the Notice Letter, the filing of the UCC-1 Financing Statement, and the information known to Defendant through the application process.  Next, purposeful conduct, however subtle, may be enough to constitute inducement. Furthermore, if a fact-finder determined that Defendant interfered with the contract, this determination may suffice to show that the interference was improper. Thus, these issues were matters of fact rather than of law. 

As for damages, Plaintiff claimed that Defendant’s funding caused the Practice to breach its loan agreement because it was unable to sustain the volume of debits. Defendant argued that its infusion of funds actually allowed the Practice to make some repayments to Plaintiff. Both positions had support in the record; thus, summary judgement was inappropriate. 

As for the UCC claim, Section 9-625(b) states that a “transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party.” Defendant is a transferee of the collateral shared with Plaintiff. Its rights to the collateral depend on whether it colluded with the practice. A comment to another UCC section defines the term “collusion” to include a scenario where one party knows that the other’s conduct constitutes a breach and gives substantial assistance or encouragement to the other. This is a question for the fact-finder. 

The opinion is available in PDF here.