Barnes v. UB II (Lyons), LLC

OCR transcription for search; preserved printed pages are authoritative

Case 25-03004-jal Doc 52 Filed 06/16/26 Entered 06/16/26 14:49:44 Page 1 of 10
UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF KENTUCKY LOUISVILLE DIVISION
IN RE:
)
THE LYONS COMPANIES, LLC
)
Case No. 24-30684(1)(7)
Debtor
)
STEPHEN BARNES
)
(In his capacity as Chapter 7 Trustee)
)
)
Plaintiff
)
)
V.
Adv. No. 25-03004
UB II (Lyons), LLC, a Delaware
)
Limited Liability Company
)
a/k/a UB II (Hannibal), LLC
)
)
Successor by Assignment to NL Ventures
)
VI Electron, LLC, a Delaware
Limited Liability Company
Defendant )
MEMORANDUM-OPINION
This matter is before the Court on competing Motions for Summary Judgment filed by Plaintiff Stephen Barnes, (hereinafter the "Trustee") against Defendant, UB II (Lyons), LLC (hereinafter "UB II") and by UB II against the Trustee as the representative of the estate of The Lyons Companies, LLC (hereinafter the "Debtor"). For the following reasons, the Court will DENY the Trustee's Motion for Summary Judgment against UB II and GRANT UB II's Motion for Summary Judgment against the Trustee.
AUTHENTICATED U.S. GOVERNMENT INFORMATION
GPO
)
)


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Case 25-03004-jal Doc 52 Filed 06/16/26 Entered 06/16/26 14:49:44 Page 4 of 10
In July of 2024, Simmons Bank, the successor to Triumph Bank, and the Debtor entered into a settlement agreement (the "Settlement Agreement"), which was approved by the Court. (See Exhibit I to the Joint Stipulations of Fact). As part of the Settlement Agreement, the Bank received $4.4 million and retained an unsecured claim for its substantial deficiency balance. Simmons Bank released all of the liens it previously held on Debtor's property. See Settlement Agreement, paragraph 4.
The Trustee argues that UB II's subordinated possessory lien on the Security Deposit was also released by Simmons Bank under the Settlement Agreement at the same time as the Simmons Bank's liens. The Trustee argues that the Landlord Agreement and Settlement Agreement gave Simmons Bank the authority to release the UB II possessory lien, thus giving the Trustee the legal right to avoid UB II's possessory lien upon the Security Deposit for the benefit of the Debtor's estate. Significantly, UB II did not sign the Settlement Agreement.
The Trustee alternatively claims that Simmons Bank transferred to the Trustee its pre- conversion superior claim to the Security Deposit, thus giving the Trustee the right to assert the priority of the Simmons Bank lien ahead of UB II. See p. 3, to Trustee's Motion for Summary Judgment. The Court has reviewed the Landlord Agreement and the Settlement Agreement and cannot find any clear and unequivocal grant by UB II to Simmons Bank of an ownership interest in the Landlord's lien or authority to dispose of it. All Simmons Bank had, relevant to this issue, were its loan documents, liens and the Landlord Agreement, none of which granted Simmons Bank anything greater than a subordination agreement from UB II.
In sum, the Trustee contends, that he is entitled to utilize 11 U.S.C. § 544(a) to strip and avoid the alleged unperfected lien of UB II to the Security Deposit and recover it for the Debtor's estate.
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LEGAL ANALYSIS
UB II has been in possession of the Security Deposit since September of 2016. The Trustee claims that UB II did not perfect its lien because it did not file a UCC-1 financing statement. Yet, UB II was not required to file a UCC-1 financing statement in order to maintain its status as perfected. See UCC § 9-313(a)(1) which states that " ... a secured party may perfect a security interest in goods, instruments, negotiable tangible documents or tangible money, by taking possession of the collateral." See also UCC § 9-314(a), referring to perfection of a security interest in electronic money by control of the collateral.
It is clear that UB II did not violate the automatic stay by retaining the Security Deposit despite the Trustee's demand to turnover the Security Deposit. Section 362(b)(3) of the United States Bankruptcy Code specifically protects a creditor in this situation where it must maintain possession of the security deposit to maintain or continue the perfection of its interest in the property.
Next, Trustee contends that the Security Deposit is an "Account" as defined by KRS 355.9- 102(b)(1). This section defines an "account" as a "right to payment of a monetary obligation, whether or not earned by performance . .. (a) for property that has been or is . . . to be leased . . . (b)[f] or services rendered or to be rendered .. . (d)[f] or a secondary obligation incurred or to be incurred." In Kentucky, an account is perfected through filing a financing statement. KRS 355.9- 312.
Pursuant to Section 9.16 of the Lease, the Debtor was required to post a Security Deposit in the amount of $245,000.00. See Joint Stipulations of Fact at par. 5. There is no evidence that UB II ever held the Security Deposit in a segregated account. The evidence of record establishes that UB II, at the time of its purchase of the assets including the leasehold, received a settlement
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statement accounting for the transfer of "Lease Adjustments" as a credit toward the purchase price. The "Lease Adjustments" identified those funds as part of the assets that UB II acquired. See Exhibit 2 to Settlement Statement.
The Trustee's claim that the Security Deposit is an "account" is not persuasive. The documents and the facts all point toward UB II holding the Security Deposit as an adjustment on the documentation of the purchase price as opposed to a separate account held or controlled by a third party. By retaining possession from the beginning of the transaction and continuing to this day, there is no evidence or law to support the claim that UB II lost its right to claim perfection by possession. The Trustee has failed to identify any provision in any of the relevant documents demonstrating UB II unequivocally waived its right to hold possession of, and a possessory security interest in the Security Deposit. Absent this, UB II is entitled to claim perfection by possession of the Security Deposit under UCC § 9-313(a)(1).
The Trustee alleges that the Debtor and Simmons Bank released UB II's possessory lien to the Security Deposit by way of the Settlement Agreement. The Settlement Agreement was approved by the Court pursuant to Fed. R. Bank. P. 9019. Simmons Bank agreed to release its own senior lien on Debtor's collateral and vaguely attempted to release UB II's previously subordinated lien. See Settlement Agreement, paragraph 4. Such an agreement cannot alter the rights of third parties, such as UB II. It is elemental contract law that in a case with facts that exist as in the case at bar, a contract or the surrender of a contractual right must be signed by the party to be charged, which in this instance was UB II. See KRS 371.010(9). No other process, other than an adversary proceeding for a declaration of rights, would have been sufficient. The only power Simmons had over the possessory lien of UB II was its right to a liquidation preference,
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which disappeared upon the release of its lien. The Trustee has not identified any documents or provisions of said documents, granting Simmons the power to release UB II's possessory lien.
Regardless of the terms of the Settlement Agreement, UB II retained a perfected, though subordinate, secured possessory lien on the collateral, until Simmons Bank released its liens. Once Simmons released its liens on Debtor's property, the terms of the Landlord Agreement providing for subordination of UB II's lien, restored UB II's lien to its prior status as a possessory lien perfected by possession, and superior to other liens of record. See UCC §§ 9-313(a)(1) and 9-314.
The Trustee contends that the strong-arm powers of 11 U.S.C. § 544(a) grant the Trustee an interest in the Security Deposit which is superior to that of UB II. See Count III of Trustee's Memorandum in Support of Motion for Summary Judgment. According to the Trustee, § 544(a)(1) of the Bankruptcy Code allows the Trustee to "step into the shoes of a judicial lien creditor and avoid any lien that is inferior to the interest held by either of those hypothetical parties." See cases cited at page 20 of 24 of Trustee's Motion for Summary Judgment.
The Chapter 7 Trustee does not hold an interest in the Security Deposit superior to UB II. From the beginning of the Lease Agreement to this day, UB II has held a perfected, possessory lien in the Security Deposit, subordinated only to the Triumph Bank's lien under the Landlord Agreement.
The Debtor then entered into the July 2024 Settlement Agreement with Simmons Bank under which the Debtor paid Simmons Bank cash "in exchange for a release of its lien on the Debtor's assets." See Joint Stipulations of Fact at paragraph 18, Joint Ex. I. Simmons Bank retained its unsecured deficiency claim as part of the July 2024 Settlement Agreement.
The Court agrees with UB II's conclusion that UB II's lien is the senior lien on the Security Deposit. The Trustee's claim that any "remaining assets shall be carved out (after the payout to
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Simmons Bank) for the benefit of the Debtor's bankruptcy estate free and clear of all liens which are junior to those of Simmons," is incorrect insofar as it relates to the UB II Security Deposit. See Joint Stipulations of Fact, Exhibit I, p. 5-6, Section 4. It is clear that, Simmons did not have the legal right to release UB II's lien without its consent. UB II was not a party to the July 2024 Settlement Agreement entered into by Simmons Bank and the Debtor. There is no evidence that Simmons Bank assigned its loan documentation and/or liens to the Trustee. Nevertheless, the Trustee, on or about September 27, 2024, demanded disgorgement of the Security Deposit. UB II properly refused the Trustee's request.
UB II received notice of the July 2024 Settlement Agreement which it did not execute. The Settlement Agreement does not waive UB II's possessory lien on the Security Deposit. Any such waiver language would have to be clear and unambiguous and signed by UB II.
UB II is correct in its analysis that due process requires adequate notice that is calculated to apprise interested parties of the pending action. Further, any party seeking to either contest or "obtain a declaratory judgment regarding the validity, priority, or extent of a lien must file an adversary proceeding against the lienholder." See page 10 of 16 of UB II's Motion for Summary Judgment, citing Fed. R. Bankr. P. 7001(2), (9); In re: Loloee, 241 B.R. 655, 660 (B.A.P. 9th Cir. 1999) (holding that Rule 7001(2) explicitly requires an adversary proceeding to resolve a lien priority dispute).
Despite the Trustee's efforts, UB II holds a possessory lien on the Security Deposit that is superior to the claim of the Trustee and is not subject to the avoidance pursuant to 11 U.S.C. § 544 et seq.
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CONCLUSION

For all the above reasons, the Chapter 7 Trustee’s Motion for Summary Judgment, be and
hereby is, DENIED and UB II (Lyons), LLC’s Motion for Summary Judgment, be and hereby is,

GRANTED.

ye A Ft

Joafi A. Lloyd Ui
nited States Bankruptcy Judge

Dated: June 16, 2026


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