Lien Fails To Protect Firm’s Interest

The New York Appellate Division for the First Judicial Department ruled against a law firm’s effort to secure payment from a former client through a lien

This lawsuit concerns the issue of whether plaintiff, a law firm, subordinated its priority security lien in defendant SightSound’s patented technology related to selling digital video and audio recordings electronically through the Internet. SightSound originally retained plaintiff to provide it with legal advice on protecting its intellectual property and to prosecute a case for patent infringement against N2K. By July 2001 SightSound had amassed a large debt to plaintiff and could no longer afford to pay its legal fees in pursuit of the litigation.

As a consequence, in October 2001, plaintiff and SightSound entered into a Security Agreement pursuant to which plaintiff would forebear on enforcement of its fees in exchange for a secured first priority lien in SightSound’s assets, “now owned or at any time hereafter acquired” by SightSound. The assets, defined as the “Collateral,” include SightSound’s patents, patent licenses, and “to the extent not otherwise included all Proceeds and products of any and all of the foregoing (including, without limitation, license royalties and proceeds of infringement suits)” (Security Agreement §3). The Security Agreement also prohibited the sale or transfer of the Collateral without plaintiff’s written prior consent (Security Agreement §§5.5[a], 20.1). “Proceeds” was defined to include the proceeds of infringement lawsuits (Security Agreement §3). In 2004, the N2K litigation settled, and plaintiff received half of the settlement proceeds, or some $1.6 million.

SightSound believed it had additional financially valuable patent infringement claims against other entities, most notably Napster and Apple. Plaintiff commenced an action against Napster on SightSound’s behalf, but SightSound was unable to finance the additional patent infringement litigations and began searching for outside financing. Eventually it reached an agreement with defendant General Electric (GE). In November 2005, SightSound and GE’s subsidiary DMT, entered into an Asset Purchase Agreement (APA).

The Napster litigation settled for $3.1 million.

Because we agree that plaintiff consented to the APA waterfall provisions, plaintiff was not entitled to any money from the Napster settlement. The court correctly dismissed plaintiff’s claims for breach of contract, specific performance, or unjust enrichment.

Plaintiff’s fraudulent conveyance claim was also correctly dismissed. While the payment was made to an insider for an antecedent debt, it was made with plaintiff’s prior consent, as evidenced by the Consent Agreement, in exchange for an arrangement to maximize plaintiff’s chances of recovering on its own debt, and thus the transaction was carried out in good faith, which constitutes fair consideration (see Farm Stores v School Feeding Corp., 102 AD2d 249, 253-254 [2d Dept 1984], affd in part, appeal dismissed in part 64 NY2d 1065 [1985]).

The conversion claim was correctly dismissed on summary judgment because no claim for conversion lies where the monies are not a “specific, identifiable fund” (see Amity Loans v Sterling Natl. Bank & Trust Co. of N.Y., 177 AD2d 277, 279 [1st Dept 1991] [internal quotation marks omitted]), and in any event at trial plaintiff did not show it had “legal ownership or an immediate superior right of possession” to the Napster proceeds over defendants (National. Ctr. for Crisis Mgt., Inc. v Lerner, 91 AD3d 920, 920 [2d Dept 2012]).

(Mike Frisch)