Attorney's Title Guaranty Fund, Inc. v. Town Bank , 355 Wis. 2d 229 ( 2014 )

2014 WI 63
SUPREME COURT OF WISCONSIN
CASE NO.: 2011AP2774
COMPLETE TITLE: Attorney's Title Guaranty Fund, Inc.,
Plaintiff,
v.
Town Bank,
Defendant-Respondent,
Heartland Wisconsin Corp.,
Defendant-Appellant-Petitioner.
REVIEW OF A DECISION OF THE COURT OF APPEALS
Reported at 345 Wis. 2d 705, 827 N.W.2d 116
(Ct. App. 2013 – Published)
PDC No: 2013 WI App 6
OPINION FILED: July 15, 2014
SUBMITTED ON BRIEFS:
ORAL ARGUMENT: February 25, 2014
SOURCE OF APPEAL:
COURT: Circuit
COUNTY: Waukesha
JUDGE: J. Mac Davis
JUSTICES:
CONCURRED:
DISSENTED: ABRAHAMSON, C.J., BRADLEY, J., dissent. (Opinion
filed.)
BRADLEY, J., ABRAHAMSON, C.J., dissent. (Opinion
filed.)
NOT PARTICIPATING:
ATTORNEYS:
For the defendant-appellant-petitioner, there were briefs
by David H. Hutchinson and Hutchinson Law Office, New Berlin,
and oral argument by David H. Hutchinson.
For the defendant-respondent, there was a brief by David I.
Cisar, Peter F. Mullaney, and von Briesen & Roper, S.C.,
Milwaukee, and oral argument by David I. Cisar.
2014 WI 63
NOTICE
This opinion is subject to further
editing and modification. The final
version will appear in the bound
volume of the official reports.
No. 2011AP2774
(L.C. No. 2011CV440)
STATE OF WISCONSIN : IN SUPREME COURT
Attorney's Title Guaranty Fund, Inc.,
Plaintiff,
v.
FILED
Town Bank, JUL 15, 2014
Defendant-Respondent, Diane M. Fremgen
Clerk of Supreme Court
Heartland Wisconsin Corp.,
Defendant-Appellant-Petitioner.
REVIEW of a decision of the Court of Appeals. Reversed.
¶1 PATIENCE DRAKE ROGGENSACK, J. We review a decision
of the court of appeals1 affirming an order of the circuit court2
granting summary judgment to defendant Town Bank. This case is
a priority battle between defendants Heartland Wisconsin Corp.
and Town Bank for proceeds of a debtor's legal malpractice claim
1
Attorney's Title Guar. Fund, Inc. v. Town Bank, 2013 WI
App 6, 345 Wis. 2d 705, 827 N.W.2d 116.
2
The Honorable J. Mac Davis of Waukesha County presided.
No. 2011AP2774
that plaintiff Attorney's Title Guaranty Fund, Inc. held in
escrow pending resolution of their dispute.
¶2 Town Bank claims that it is entitled to the proceeds
because proceeds from legal malpractice claims are not
assignable; therefore, Heartland, who claims its interest by
assignment of proceeds, has no protectable interest. Town Bank
also claims that if proceeds are assignable, it perfected a
common law creditor's lien on all of the debtor's personal
property, no matter when acquired, by serving the debtor with an
order to appear at supplemental proceedings.
¶3 Heartland disputes Town Bank's claims. First,
Heartland contends that the debtor validly assigned the proceeds
of his legal malpractice claim, which gave Heartland a security
interest in those proceeds that is superior to Town Bank's
interest as an unsecured judgment creditor. Second, Heartland
argues that a common law judgment creditor's lien does not
attach to property the debtor acquires after a supplemental
examination.
¶4 We conclude that (1) the debtor lawfully assigned the
potential proceeds from his legal malpractice claim as
collateral for a contemporaneously incurred debt to Heartland;
and (2) Heartland is entitled to the proceeds because it
perfected a security interest in them before Town Bank obtained
a superior interest by levy. See Associated Bank N.A. v.
Collier, 2014 WI 62, ¶3, __ Wis. 2d __, __ N.W.2d __ (a judgment
creditor with a docketed money judgment obtains a superior
interest in a debtor's non-exempt personal property when it
2
No. 2011AP2774
levies specifically identified property). In reaching this
conclusion, we note that Heartland lent money to the debtor. In
consideration for the loan, Heartland took a security interest
in the potential proceeds of the debtor's malpractice claim.
This allowed Heartland to access the debtor's property in a way
that Town Bank could not. Heartland filed a financing statement
for its security interest in the proceeds of the malpractice
claim before the proceeds came into existence. Therefore, the
moment the debtor acquired proceeds from his claim, Heartland's
interest became superior to that of other creditors, including
Town Bank, who had not levied the proceeds.
I. BACKGROUND
¶5 Defendants in the present case are creditors of
Timothy Brophy, a Milwaukee real estate investor and landlord.
Brophy has been involved in multiple lawsuits, including a class
action brought by tenants of certain rental properties, a
bankruptcy proceeding, and a malpractice claim against his
former attorney, all three of which provide factual
underpinnings of the present case. The narrow issue in this
case, however, is one of priority between a judgment creditor
and a Wis. Stat. ch. 409 secured creditor.
¶6 Town Bank became a judgment creditor of Brophy in an
action that included mortgage foreclosures of certain Milwaukee
properties. On February 13, 2006, Town Bank obtained and
docketed a judgment for $1,690,870. It pursued collection by
several means. First, it foreclosed on real estate and applied
the proceeds from the sale of those properties to the judgment,
3
No. 2011AP2774
leaving a $224,774.40 deficiency. Next, on February 15, 2006,
it obtained an order requiring Brophy to appear at supplemental
proceedings. It served Brophy with that order two days later.
Brophy appeared and revealed his assets, which at that time did
not include a filed malpractice claim, the proceeds of which
underlie this suit. Town Bank's supplemental receiver was
dismissed September 11, 2006.
¶7 In June and July 2007, Brophy obtained two loans
totaling $222,539 from Heartland. Brophy used the money
Heartland provided to settle a class action lawsuit pending
against him. As security for these loans, Brophy assigned
Heartland his interest in potential proceeds from his
malpractice claim against his former attorney, Harvey Goldstein.
Brophy defaulted on the loans Heartland made and, on August 17,
2007, he filed for bankruptcy.
¶8 Town Bank learned of Brophy's malpractice claim and
Heartland's interest in the proceeds during Brophy's bankruptcy
proceedings. On April 4, 2008, Town Bank filed a proof of claim
in the bankruptcy asserting that it had a "Judgment Lien on all
Real Estate; Receiver's Lien on all Real and Personal Property
of Debtor."
¶9 On January 23, 2009, Brophy's bankruptcy was dismissed
without a confirmed plan. Heartland filed a financing statement
for its security interest in the proceeds that same day.
¶10 On August 3, 2009, Town Bank moved the circuit court
to appoint a supplementary receiver and to grant that receiver
4
No. 2011AP2774
authority to proceed on Brophy's malpractice claim. The circuit
court did not rule on Town Bank's motion.
¶11 On September 9, 2009, Brophy settled his malpractice
lawsuit. Pursuant to an agreement among the parties to this
suit, Attorney's Title placed the proceeds from the settlement
in escrow. On February 3, 2011, Attorney's Title filed suit to
determine whether Town Bank or Heartland has a superior interest
in the proceeds of Brophy's malpractice claim.
¶12 Town Bank moved for summary judgment, which the
circuit court granted. Heartland appealed, and the court of
appeals affirmed. We accepted Heartland's petition for review,
and asked for additional briefing on two issues: (1) whether
the potential proceeds from a legal malpractice claim can be
lawfully assigned as security for a contemporaneously incurred
debt; and (2) whether such proceeds were future property at the
time of the 2006 supplemental examination Town Bank conducted.
We now reverse the decision of the court of appeals.
II. DISCUSSION
A. Standard of Review
¶13 Town Bank asks us to confirm what it asserts is a
judgment creditor's blanket lien on all of Brophy's personal
property, no matter when acquired. Heartland asserts it is a
secured creditor with respect to the proceeds of the legal
malpractice claim and therefore, its interest is superior.
"Whether a lien exists and the effect of an alleged lien against
third parties are questions of law that we review independently
of the court of appeals." Associated Bank, __ Wis. 2d __, ¶21.
5
No. 2011AP2774
B. Introduction
¶14 The conclusion we reached in Associated Bank, __
Wis. 2d __, also released today, underlies part of our decision
in the present case. In Associated Bank, we parsed the
competing interests of two judgment creditors. Id., ¶¶51-54.
We concluded that supplemental proceedings are a discovery tool
in aid of execution, and clarified that a judgment creditor with
a docketed money judgment obtains an interest superior to other
judgment creditors by levying specifically identified, non-
exempt personal property of the debtor. Id., ¶38. We rejected
the notion of a blanket lien on all of a judgment debtor's
personal property in favor of the first judgment creditor to
serve the debtor with notice to appear at a supplemental
examination. Id., ¶¶28, 38.
¶15 Statutory collection procedures drove our conclusion.
If a judgment creditor could encumber all of a debtor's personal
property by serving the debtor with an order to appear at
supplemental proceedings, statutory collection procedures would
be eviscerated. Id., ¶45. Put another way, the notion of a
blanket lien arising due to service of an order to appear at a
discovery proceeding is inconsistent with the incremental
statutory scheme of judgment debt collection.
¶16 We further explained that a blanket lien would
frustrate the policies statutory collection procedures serve.
For instance, requiring a debtor to levy specific items of a
debtor's personal property ensures that a creditor does not
encumber, at the expense of other creditors and the debtor, more
6
No. 2011AP2774
property than is necessary to satisfy its judgment. Id., ¶¶47-
48. By binding property at the time of levy, statutory
collection procedures also provide clear notice to third parties
that the debtor no longer has rights in the levied property.
Id., ¶49. Finally, the collection statutes reward diligence by
allowing competing judgment creditors to simultaneously seek out
assets to levy. Id., ¶50.
¶17 We do not repeat our full discussion from Associated
Bank. Instead, we apply its holding to the facts of this case.
First, however, we conclude that proceeds from legal
malpractice claims are assignable as collateral for
contemporaneously incurred debt. We then conclude that
Heartland, a secured creditor, perfected its security interest
in the proceeds of Brophy's malpractice claim before Town Bank
obtained a superior interest in those proceeds by levy. In our
discussion that follows, we further explain why Heartland was
able to access the proceeds in a way that Town Bank was not.
And finally, we discuss legislative choices about judgment
collection and secured transactions that drive our conclusions.
C. Assignment of Potential Proceeds
1. Parties' positions
¶18 Town Bank maintains that it is contrary to law to
assign potential proceeds from legal malpractice claims. Town
Bank grounds this contention in what it asserts is a prohibition
against assigning the underlying legal malpractice claim. Town
Bank argues that Wisconsin permits assignment of only those
claims that survive the death of the claim's owner and legal
7
No. 2011AP2774
malpractice claims are not within that group. It also asserts
that such assignment should be prohibited because it would grant
the right to control the lawsuit to a stranger to the attorney-
client relationship, which is contrary to public policy. Town
Bank contends that 18 states prohibit assignments of legal
malpractice claims. Town Bank further contends that there is no
real distinction between a malpractice claim and its proceeds.
¶19 Not surprisingly, Heartland sees the assignment issue
quite differently. It asserts that it lawfully took an
assignment of the potential proceeds of Brophy's malpractice
claim, which Wis. Stat. ch. 409 specifically permits. It
thereby became a secured creditor in regard to a right to
payment out of the proceeds, with an interest superior to Town
Bank's interest as an unsecured judgment creditor. Heartland
also contends that proceeds differ from the claim from which
they arise, both in regard to how proceeds are treated in Wis.
Stat. ch. 409 and in regard to public policy concerns relating
to assignments. Heartland contends that proceeds are payment
intangibles under Wis. Stat. § 409.102(1)(p) and Wis. Stat.
§ 409.109(1)(c) and that malpractice claims are commercial torts
under § 409.102(1)(d). Therefore, Heartland asserts that Town
Bank's argument misses the mark because it is based on the
contention that a malpractice claim is not assignable; while by
contrast, Heartland took an assignment only in the potential
proceeds as a contractual right to payment, if and when proceeds
came into existence.
8
No. 2011AP2774
2. General principles
¶20 In order to validly assign property rights, those
rights must be alienable, i.e., transferrable from their owner.
Becker v. Chester, 115 Wis. 90, 110, 91 N.W. 87 (1902).
Alienability may be controlled by statute or common law public
policy concerns. See id. at 112; Schneider v. Schneider, 132
Wis. 2d 171, 176-77, 389 N.W.2d 835 (Ct. App. 1986).
¶21 In the context of legal malpractice claims, some
jurisdictions have refused to allow strangers to the attorney-
client relationship to litigate legal malpractice claims,
thereby restricting those claims "to only the parties involved."
Goodley v. Wank & Wank, Inc., 133 Cal. Rptr. 83, 86 (Cal. Ct.
App. 1976); George L. Blum, J.D., Assignability of Claim for
Legal Malpractice, 64 A.L.R. 6th 473 (updated 2013).3 As with
assigning a legal malpractice claim, levying such a claim by
obtaining a turnover order for the right to litigate the claim
to a receiver would result in a stranger to the attorney-client
relationship litigating the claim. While we need not decide
here if Wisconsin law prohibits assigning claims for legal
3
For arguments in favor of the assignability of legal
malpractice claims, see New Hampshire Insurance Co. v. McCann,
707 N.E.2d 332, 335-38 (Mass. 1999). These include a concern
that prohibiting the assignment of such claims will be perceived
as a self-serving effort by the legal profession to insulate its
own from litigation. Michael Sean Quinn, On the Assignment of
Legal Malpractice Claims, 37 S. Tex. L. Rev. 1203, 1206 (1996).
9
No. 2011AP2774
malpractice, we note potential concerns that some courts have
expressed.4
3. Wisconsin policies
¶22 Town Bank has cited no Wisconsin appellate case or
statute that prohibits assignment of potential proceeds of legal
malpractice claims. The cases cited by Town Bank speak to when
claims survive the death of the claimant. Those cases have no
bearing on Wis. Stat. ch. 409 or the assignment issue before us
because Heartland does not assert an interest in the malpractice
claim.
¶23 In addition, there is a real difference between the
claim from which proceeds arise and the proceeds themselves.
For example, a malpractice claim involves many choices about
whether and how to proceed, while proceeds are a payment
intangible, which is simply the right to be paid.5 In this case,
4
See Anthony J. Sebok, The Inauthentic Claim, 64 Vand. L.
Rev. 61, 85 n.106 (2011) (listing the states that do not permit
assigning legal malpractice claims); see also Michael Reese, The
Use of Legal Malpractice Claims as Security Under the UCC
Revised Article 9, 20 Rev. Litig. 529, 532-33 (2001) (explaining
that Article 9 permits the use of commercial tort claims,
including legal malpractice claims, as collateral and that any
restriction on their use is governed by law other than Article
9).
5
The proceeds of a tort claim are a category of collateral
known as a "payment intangible." Official Comment 15 to U.C.C.
9-109(d)(12) ("[O]nce a claim arising in tort has been settled
and reduced to a contractual obligation to pay, the right to
payment becomes a payment intangible and ceases to be a claim
arising in tort."). A party may file to perfect its interest in
a payment intangible. Official Comment 4 to U.C.C. 9-309(2)
(Wis. Stat. § 409.309(2)) ("Any person who regularly takes
assignments of any debtor's accounts or payment intangibles
should file").
10
No. 2011AP2774
it is Brophy's right to be paid in settlement of his legal
malpractice suit. See, e.g., Wis. Stat. § 409.102(1)(p); Wis.
Stat. § 409.109(1)(c).
¶24 Furthermore, the Wisconsin Legislature adopted the
revisions to Article 9 that "clearly contemplate[] that a
security interest in the proceeds of a tort claim is
conceptually distinct from one in the tort claim itself."
Michael Reese, The Use of Legal Malpractice Claims as Security
Under the UCC Revised Article 9, 20 Rev. Litig. 529, 532 (2001).
We conclude that the legislature set public policy for Wisconsin
by those revisions such that public policy does not prohibit the
assignment of potential proceeds in a malpractice claim as a
payment intangible. Were we to conclude otherwise, we would be
contravening the clear meaning of provisions of Wis. Stat. ch.
409 and could be seen as favoring lawyers against whom legal
malpractice claims are filed. Having concluded that Brophy's
assignment to Heartland is valid, we turn to its effect on third
parties.
D. Priority
¶25 The first creditor to obtain an interest in the
proceeds of Brophy's malpractice claim that is superior to other
creditors prevails here. The actions that a judgment creditor
and a secured creditor must take in order to obtain an interest
superior to other creditors, however, are not the same.
¶26 A judgment creditor with a docketed money judgment
obtains a superior interest in specifically identified personal
property of a judgment debtor by levying that property.
11
No. 2011AP2774
Associated Bank, __ Wis. 2d __, ¶38. A judgment creditor does
not have a blanket lien on all of the debtor's personal
property. A judgment creditor can levy in at least three ways:
(1) by executing against specifically identified personal
property with the assistance of a sheriff; (2) by serving the
garnishee defendant in a garnishment action to seize specific
property in the hands of the garnishee defendant; or (3) by
obtaining an order to apply specifically identified personal
property to the satisfaction of the judgment, which a creditor
may do with the assistance of a supplemental receiver. Id.,
¶¶23-25; Wis. Stat. § 815.05(6); Wis. Stat. § 812.01; Wis. Stat.
§ 816.08. Therefore, Town Bank is entitled to the malpractice
proceeds only if it obtained a superior interest by levy before
another creditor obtained a superior interest in those same
proceeds.
¶27 Heartland is also a creditor of Brophy, to which he
granted a security interest in potential proceeds of his
malpractice claim in order to obtain a loan. Because Brophy
voluntarily gave a security interest to Heartland so that
Heartland would lend him money, Wis. Stat. ch. 409, which adopts
Article 9 of the Uniform Commercial Code (UCC), governs the
steps Heartland needed to take in order to obtain an interest
superior to other creditors. Wis. Stat. § 409.101; Wis. Stat.
§ 409.109(1)(a); Nat'l Operating, L.P. v. Mut. Life Ins. Co. of
N.Y., 2001 WI 87, ¶31, 244 Wis. 2d 839, 630 N.W.2d 116
("Wisconsin has adopted each section of the U.C.C. relevant to
this case. This includes all of Article 9, which is embodied in
12
No. 2011AP2774
Chapter 409 of the Wisconsin Statutes. Chapter 409 does not
vary in any material respect from the uniform law."). Under ch.
409, a party obtains an interest superior to other creditors by
achieving statutory perfection. Wis. Stat. § 409.308; Daniel v.
Bank of Hayward, 144 Wis. 2d 931, 936, 425 N.W.2d 416 (1988)
("As a general rule, the holder of a perfected security interest
has an interest in . . . secured property which is superior to
the interests of the debtor, unsecured creditors of the debtor
and subsequent purchasers of the secured property.").
¶28 The requirements for statutory perfection can vary
depending on the type of collateral, but the general rule is
that "a financing statement must be filed to perfect all
security interests." Wis. Stat. § 409.310(1); Smith & Spidahl
Enters., Inc. v. Lee, 206 Wis. 2d 663, 669, 557 N.W.2d 865 (Ct.
App. 1996) (explaining that generally, the filing of a financing
statement is required to perfect a security interest).
Additionally, perfection requires attachment of the security
interest. Attachment, in turn, generally depends on three
things: (1) the debtor must sign a security agreement
identifying the collateral;6 (2) the creditor must give the
debtor value in exchange for the collateral; and (3) the debtor
6
In some situations, the creditor may use alternative
methods of perfection such as possession or control of the
collateral. Wis. Stat. § 409.203(2)(c)2., et seq.; Nat'l Pawn
Brokers Unlimited v. Osterman, Inc., 176 Wis. 2d 418, 434, 500
N.W.2d 407 (Ct. App. 1993) (explaining that Wisconsin law
authorizes perfection by the secured party's possession of the
collateral).
13
No. 2011AP2774
must have rights in the collateral. Wis. Stat. § 409.203(2);
Nat'l Exch. Bank of Fond du Lac v. Mann, 81 Wis. 2d 352, 358,
260 N.W.2d 716 (1978) ("The requirements that the debtor sign a
security agreement describing the collateral, that the creditor
give value and that the debtor have rights in the collateral
must all exist to give rise to an enforceable security
agreement.").
¶29 Accordingly, a debtor and secured creditor can take
some actions necessary for perfection at any time, but
perfection does not actually occur until all the criteria are
met. For instance, a debtor can execute a security agreement
and the creditor can disperse a loan and file a financing
statement, but perfection will not occur until the debtor has
rights in the collateral. Stated otherwise:
Assuming that the parties previously made an agreement
covering [an item of] after-acquired property, that
the secured party has either made an advance or
obligated himself to do so, and that a proper filing
has been made, the security interest attaches to the
after-acquired property and is perfected the instant
the debtor acquires "rights" to that property.
Peter F. Coogan, Article 9 of the Uniform Commercial Code:
Priorities Among Secured Creditors and the "Floating Lien", 72
Harv. L. Rev. 838, 851 (1959); Savig v. Americana State Bank of
Danube, 50 B.R. 1003, 1008 (D. Minn. 1985) (noting that "a
secured creditor's interest in after-acquired property is not
perfected until the debtor receives that property").
¶30 This is precisely the type of arrangement into which
Brophy and Heartland entered. Brophy assigned Heartland the
14
No. 2011AP2774
potential proceeds of his malpractice claim as collateral before
the proceeds came into existence. Heartland gave notice of its
security interest by filing a financing statement several months
later, but still before Brophy actually settled the malpractice
claim. At that point, Heartland had set the stage, so to speak,
so that the moment Brophy received rights in the proceeds,
Heartland's interest became perfected.
¶31 By contrast, as of September 9, 2009, Town Bank had
not taken sufficient action to provide it with an interest in
the proceeds superior to other creditors. The only action Town
Bank took was to move for the appointment of a supplementary
receiver and to grant that receiver the authority to proceed on
Brophy's malpractice claim. The court never ruled on Town
Bank's motions. Stated otherwise, because Town Bank did not
levy before Heartland achieved statutory perfection, we conclude
that Heartland has the superior interest in the proceeds. See
Associated Bank, __ Wis. 2d __, ¶38.
¶32 Having applied the statutes regarding judgment
collection and secured transactions, we note that Heartland was
able to access some of Brophy's property in a way that Town Bank
could not. For example, when Town Bank examined Brophy on
March 9, 2006, he did not identify a legal malpractice claim.
Attorney Goldstein, the defendant in Brophy's malpractice claim,
represented Brophy at the time of the supplemental proceeding,
which suggests that Brophy was not aware of a potential
malpractice claim at that time.
15
No. 2011AP2774
¶33 Additionally, when Town Bank learned about the
malpractice claim, it could not levy due to the automatic stay
of the bankruptcy court, which prevents creditors from taking
actions to improve their positions during a bankruptcy. See 11
U.S.C. § 362. As a lender, Heartland avoided these problems by
taking an assignment of the potential proceeds of Brophy's claim
before they came into existence. This gave Heartland the upper
hand in at least two respects.
¶34 First, it gave Heartland an edge with respect to
timing. Rather than having to levy on specific property, which
requires the property to be in existence, Heartland was able to
encumber property Brophy did not yet have. Wis. Stat.
§ 409.204(1); see In re Pubs, Inc. of Champaign, 618 F.2d 432,
436 (7th Cir. 1980). It did so by filing a financing statement
after lending money so that the moment Brophy obtained the
proceeds, Heartland's security interest became perfected. See
Pubs, 618 F.2d at 437.
¶35 Second, Heartland's ability to take an interest in the
proceeds allowed it to avoid problems that might accompany the
litigation of a legal malpractice claim by someone other than a
client. See Official Comment 15 to U.C.C. 9-109(d)(12). As
explained above, the proceeds of a lawsuit are "treated just
like any other form of contractual obligation." 1C Julian B.
McDonnell, Secured Transactions Under the Uniform Commercial
16
No. 2011AP2774
Code, § 19A.02[2][b] (2009).7 Therefore, Heartland did not have
to worry that accepting Brophy's assignment might run afoul of
state law.
¶36 Applying the respective standards for judgment
creditors and secured creditors to obtain an interest superior
to other creditors, we conclude that Heartland is entitled to
the proceeds. Brophy settled the malpractice suit on
September 9, 2009, wherein the proceeds of the malpractice claim
came into existence. By that time, Brophy had executed a
security agreement identifying the proceeds as collateral, and
Heartland had loaned Brophy money and filed a financing
statement. All the requirements for perfection were met on that
date. See Wis. Stat. § 409.308; Wis. Stat. § 409.203(2); Pubs,
618 F.2d at 436 (explaining that "[t]he requirement that the
debtor have rights in the collateral is, inter alia, intended to
postpone attachment until the property proposed to be subject to
the security interest comes into existence or until the debtor
acquires rights in it").
¶37 Having explained Heartland's position relative to Town
Bank, we further review the legislative choices that established
this structure.
7
See also Weston v. Dowty, 414 N.W.2d 165, 167 (Mich. Ct.
App. 1987) ("[s]ince plaintiffs agreed to assign only a portion
of their recovery, if any, from the malpractice suit, . . . we
conclude that no assignment of a legal malpractice action
occurred"); First Nat'l Bank of Clovis v. Diane, Inc., 698 P.2d
5, 14 (N.M. Ct. App. 1985) (recognizing the ability of a client
to "assign[] only the proceeds and not the right of [a legal
malpractice] action").
17
No. 2011AP2774
E. Statutory Policies
¶38 Wisconsin Stat. ch. 409 is a uniform law that adopts
Article 9 of the UCC. Wis. Stat. § 409.101; Nat'l Operating,
244 Wis. 2d 839, ¶31. By adopting each section of the UCC
relative to secured transactions, the Wisconsin Legislature
sought to "simplify, clarify, and modernize the law governing
commercial transactions." Wis. Stat. § 401.103(1)(a). One way
Article 9 modernizes the law of secured transactions is by
"maximizing the financing available to [enterprises] and at the
risk of . . . unsecured creditors." 1 Julian B. McDonnell,
Secured Transactions Under the Uniform Commercial Code: Article
9 and the Security Controversy, § 1.03, at 1-14 (2009). As the
facts of this case aptly demonstrate, secured creditors may be
able to access a debtor's property in ways that an unsecured
judgment creditor cannot.
¶39 The "fundamental policy choice [of] Article 9" that
favors secured creditors is not the product of antagonism or
unfairness toward unsecured creditors. Id. Rather, Article 9
aims to benefit unsecured creditors by enabling debtors to pay
them. One scholar succinctly explained the theory as follows:
[T]he availability of secured credit provides
liquidity, which reduces the chance of debtor
bankruptcy and thereby increases the expected value of
unsecured claims. . . . [I]mperfections in the
bankruptcy process tend to make creditors reluctant to
lend, even on a secured basis, to debtors that are
likely to go bankrupt, and also make debtors that are
likely to go bankrupt reluctant to incur secured debt.
New money secured credit therefore is usually extended
only where it helps an otherwise viable debtor avoid
18
No. 2011AP2774
bankruptcy, and not to support debtors that should be
allowed to fail.
Steven L. Schwarcz, The Easy Case for the Priority of Secured
Claims in Bankruptcy, 47 Duke L.J. 425, 431-32 (1997). Put
simply, the law favors the secured creditor because "the secured
creditor often provides the funds to enable the unsecureds to be
paid." 1 McDonnell, supra, at 1-14.
¶40 While the soundness of this theory has been the
subject of academic debate, it is beyond dispute that secured
creditors currently enjoy a specially protected status under the
law. Prod. Credit Ass'n of Madison v. Nowatzski, 90 Wis. 2d
344, 350-51, 280 N.W.2d 118 (1979). The ability of a party to
take a security interest in after-acquired property and achieve
perfection the moment the debtor acquires rights in the
property, while a judgment creditor must levy personal property
in order to bind it, is a prime example of this special status.
A secured party's potential to avoid public policy prohibitions
that could attach to the assignment of the legal malpractice
claim, itself, is another.
¶41 In the case before us, Town Bank says that it has an
interest superior to other creditors in all of a debtor's
personal property because it served the debtor with notice to
appear at a supplemental proceeding many years ago. This
includes, according to Town Bank, property that a debtor
acquired after the 2006 supplemental proceeding.
¶42 Accepting Town Bank's argument would take away the
specially protected status of secured creditors. See id. For
19
 No. 2011AP2774
example, if a judgment creditor could bind all of a debtor's
personal property with a blanket lien simply by serving a notice
to appear at a supplemental proceeding instead of levying
specifically identified property, it too could encumber property
before a debtor has rights in it. However, unlike a secured
creditor, an unsecured judgment creditor provides no value to
the debtor in exchange for such a benefit. It is this value to
society as a whole——financing to a debtor——that justifies the
secured creditor's protected status.
¶43 We conclude that if a judgment creditor were to have a
blanket lien on all the personal property of a judgment debtor
that precludes other creditors from pursuing collection, that is
a policy choice better left to the legislature than to the
courts. Compare Cal. Civ. Proc. Code § 708.110(d) (providing
for a lien on non-exempt personal property for one year from
service of notice to appear at supplemental proceedings); 735
ILCS 5/2-1402(m) (judgment "becomes a lien" on non-exempt
personal property when citation from the clerk is served).
¶44 Finally, we note that Town Bank's concept of the scope
of a judgment creditor's lien would diminish the lending Wis.
Stat. ch. 409 seeks to encourage. This is so because if a
judgment creditor could obtain a superior blanket lien on all of
a debtor's personal property, the debtor would not have
unencumbered non-exempt personal property to offer as security
for a loan, which may be necessary to continue the debtor's
business and pay its debts. In other words, a potential lender
could not acquire a superior security interest in any non-exempt
20
No. 2011AP2774
personal property of a debtor who has an unsatisfied judgment
against him or her and who has been served with notice to appear
at supplemental proceedings. This would discourage lending to
judgment debtors. It would thereby conflict with one of the
policies underlying Wis. Stat. ch. 409: to provide financing to
distressed debtors through a system of secured transactions.8
¶45 For these reasons, we decline to graft a blanket
common law lien onto statutory judgment collection procedures.
See generally Smith & Spidahl, 206 Wis. 2d at 673 ("Fashioning
equitable solutions to mitigate the hardship of [statutory]
requirements on particular creditors undermines [the system's]
purpose. . . . [R]elaxing [statutory] requirements does not
. . . justify the uncertainty and inconsistency that would
result from such an approach."). Instead, we affirm our
commitment to statutory procedures for judgment collection,
under which a judgment creditor with a docketed judgment binds
personal property by levying specifically identified property,
and Wis. Stat. ch. 409 grants secured parties special
protections in order to encourage lending that benefits society
as a whole. Accordingly, Heartland has the superior interest in
8
We recognize that there are circumstances under Wis. Stat.
ch. 409 in which a judgment creditor prevails over a ch. 409
secured creditor——a judgment creditor has priority over a ch.
409 secured party when it executes on property before the ch.
409 creditor perfects its interest in the security relative to
that property. See, e.g., Wis. Stat. § 409.322(1)(a); Wis.
Stat. § 815.19.
21
No. 2011AP2774
the proceeds of Brophy's legal malpractice claim and therefore,
we reverse the decision of the court of appeals.
III. CONCLUSION
¶46 We conclude that (1) the debtor lawfully assigned the
potential proceeds from his legal malpractice claim as
collateral for a contemporaneously incurred debt to Heartland;
and (2) Heartland is entitled to the proceeds because it
perfected a security interest in them before Town Bank obtained
a superior interest by levy. See Associated Bank, __ Wis. 2d
__, ¶3 (a judgment creditor with a docketed money judgment
obtains a superior interest in a debtor's non-exempt personal
property when it levies specifically identified property). In
reaching this conclusion, we note that Heartland lent money to
the debtor. In consideration for the loan, Heartland took a
security interest in the potential proceeds of the debtor's
malpractice claim. This allowed Heartland to access the
debtor's property in a way that Town Bank could not. Heartland
filed a financing statement for its security interest in the
proceeds of the malpractice claim before the proceeds came into
existence. Therefore, the moment the debtor acquired proceeds
from his claim, Heartland's interest became superior to that of
other creditors, including Town Bank, who had not levied the
proceeds.
By the Court.—The decision of the court of appeals is
reversed.
22
No. 2011AP2774.ssa
¶47 SHIRLEY S. ABRAHAMSON, C.J. (dissenting). I agree
with the majority opinion that the proceeds of a legal
malpractice claim may be used as collateral to secure a loan
under Article 9 of the Uniform Commercial Code. Majority op.,
¶¶18-24.1 It is unclear from the record whether the malpractice
claim in question existed at the time of service of the notice
of the supplementary proceedings.2
¶48 Relying on In re Badger Lines, Inc., 224 Wis. 2d 646,
590 N.W.2d 270 (1999), the court of appeals concluded that Town
1
Wisconsin has codified its version of Article 9 of the
Uniform Commercial Code at Wis. Stat. ch. 409.
The majority opinion uses interchangeably the terms
"assign," "assignment," and "assignable" to refer to both
assignment of rights in the proceeds of a legal malpractice
claim and assignment of a security interest in the proceeds as
collateral for a loan under Article 9.
A property interest may be nonassignable, but may still be
used as collateral under Article 9, Section 9-408, Wis. Stat.
§ 409.408. See, e.g., Belke v. M&I First Nat'l Bank of Stevens
Point, 189 Wis. 2d 385, 525 N.W.2d 737 (Ct. App. 1994)
(certificates of deposit were properly used as collateral for a
loan under chapter 409 even though the certificates of deposit
explicitly stated that they could not be transferred or assigned
without the bank's consent and the bank did not consent). For
an overview of the use of nonassignable property interests as
collateral to secure loans under the UCC, see Thomas E. Plank,
The Limited Security Interest in Non-Assignable Collateral Under
Revised Article 9, 9 Am. Bankr. Inst. L. Rev. 323, 329-36
(2001); G. Ray Warner, Non-Assignable Rights, Contracts, and
Leases as Collateral Under Revised Article 9, Am. Bankr. Inst.
J., Oct. 2000, at 18.
2
Because I am in dissent in Associated Bank N.A. v.
Collier, 2014 WI 62, ___ Wis. 2d ___, ___ N.W.2d ___, and in the
instant case, I do not address the thorny issues raised by the
parties, such as whether the creditor's equitable lien extends
to after acquired property and whether the malpractice claim in
the present case was after-acquired property.
1
No. 2011AP2774.ssa
Bank acquired a common-law equitable lien superior to
Heartland's interest.
¶49 Relying on its decision in Associated Bank N.A. v.
Collier, 2014 WI 62, ___ Wis. 2d ___, ___ N.W.2d ___, of even
date, the majority opinion concludes that because Town Bank did
not "levy" before Heartland perfected its statutory lien,3
Heartland "has the superior interest" in the proceeds. Majority
op., ¶4 (citing Associated Bank, 2014 WI 62, ¶3).
¶50 For the reasons stated in my dissent in Associated
Bank, I do not join the majority opinion in the instant case.
¶51 I am authorized to state that Justice ANN WALSH
BRADLEY joins this dissent.
3
See majority op., ¶4.
2
No. 2011AP2774.awb
¶52 ANN WALSH BRADLEY, J. (dissenting). Although I join
the dissent, I write separately to voice my concern with this
court's recent trend in sua sponte expanding the issues before
it.
¶53 In this case a majority of the court voted to issue a
post oral argument order raising an issue heretofore non-
existent. It asked:
(1) whether the potential proceeds from a legal
malpractice claim can be lawfully assigned as security
for a contemporaneously incurred debt;
(2) if the potential proceeds from a legal
malpractice claim are assignable, whether such
assignment was future property at the time of the
supplemental exam conducted in this case.
Attorney's Title Guar. Fund, Inc. v. Town Bank, No. 2011AP2774,
unpublished order (Nov. 19, 2013).
¶54 Issues relating to the assignability of legal
malpractice claims were never raised by the parties in this
court, or in the court of appeals, or in the circuit court. An
exchange at oral argument nails this point:
Chief Justice Abrahamson: And there's no, is there an
issue in this case as to whether your assignment was
any good?
Attorney for Heartland: No, our assignment has never
been contested.
¶55 Rather than presenting an even playing field, the
majority appeared to offer an assist to Heartland's opposing
counsel. The answer to the new issue raised by the majority
could have proven to be outcome determinative, obviating the
need to address the issues actually raised and litigated by the
parties.
1
No. 2011AP2774.awb
¶56 By raising sua sponte a brand new outcome-
determinative issue, an appellate court tends to blur the lines
between the role of the lawyer as advocate and the role of the
judge as impartial decision maker. In contrast to the other
branches of government, the judicial branch's role seems better
fitted to respond to issues presented rather than creating
issues to present.
¶57 As I have previously written:
[T]he courts play a passive role in our system of
government. Unlike the legislative or the executive
branch of government which have as their regular fare
the responsibility to raise and resolve the issues of
the day, our role is to respond to the issues
presented. . . . The wisdom of such restraint is
apparent.
The rule of law is generally best developed when
issues are raised by the parties and then tested by
the fire of adversarial briefs and oral arguments.
Indeed, "[t]he fundamental premise of the adversary
process is that these advocates will uncover and
present more useful information and arguments to the
decision maker than would be developed by a judicial
officer acting on his own in an inquisitorial system."
Adam A. Milani & Michael R. Smith, Playing God: A
Critical Look at Sua Sponte Decisions By Appellate
Courts, 69 Tenn. L. Rev. 245, 247 (2002), citing
United States v. Burke, 504 U.S. 229 (1992) (Scalia,
J., concurring).
City of Janesville v. CC Midwest, Inc., 2007 WI 93, ¶¶67-68, 302
Wis. 2d 599, 734 N.W.2d 428 (Bradley, J., dissenting).
¶58 Although the issue addressing the validity of the
assignment of legal malpractice claims relates to the issues
presented by the parties, it was not necessary for the court to
address the validity of the assignment in order to answer the
questions presented.
2
No. 2011AP2774.awb
¶59 Heartland filed a petition for review, asking this
court to address the following questions:
1) Does a judgment creditor's common law receiver's
lien attach to personal property acquired by a
judgment debtor indefinitely into the future after the
judgment creditor has conducted supplementary
proceedings?
2) Where a judgment creditor has admittedly failed to
make a supplemental commissioner's order, directing
the judgment debtor to appear at a supplementary
examination, a matter of public record by filing this
order and proof of service in the court file, as is
required by Wis. Stat. § 816.035(1), should a court
nevertheless enforce the judgment creditor's secret
receiver's lien in the judgment debtor's personal
property?
¶60 I would have addressed those questions and those
alone. Indeed, it is not apparent to me why the issue raised
sua sponte by the majority was not subject to our usual approach
of forfeiture. Here it was not a matter of merely failing to
preserve for appellate review an issue that was previously
raised. Rather, the issue never previously existed in this
case.
¶61 Typically, where a party has not raised an issue
before the circuit court or the court of appeals, we deem that
issue forfeited. See, e.g., Bostco LLC v. Milwaukee Metro.
Sewerage Dist., 2013 WI 78, ¶83, 350 Wis. 2d 554, 835 N.W.2d 160
(declining to address an inverse condemnation/takings claim
where its proponent "is attempting to make a fundamentally
different argument than that which it raised and tried before
the circuit court . . . ."); State v. Dowdy, 2012 WI 12, ¶5, 338
Wis. 2d 565, 808 N.W.2d 691 (declining to decide "whether a
3
No. 2011AP2774.awb
circuit court has inherent authority to reduce the length of
probation, and if so, what standard applies [because] [n]either
Dowdy's petition to the circuit court nor the circuit court's
order was grounded in the court's alleged inherent authority.");
Schill v. Wis. Rapids Sch. Dist., 2010 WI 86, ¶45, 327 Wis. 2d
572, 786 N.W.2d 177 ("Because the issue of the circuit court's
competence was never raised in the circuit court, we treat the
issue as having been forfeited.").
¶62 This court has emphasized that the forfeiture rule "is
essential to the efficient and fair conduct of our adversary
system of justice." State v. Huebner, 2000 WI 59, ¶12, 235
Wis. 2d 486, 611 N.W.2d 727. The rule:
gives the parties and the circuit court notice of the
issue and a fair opportunity to address it; encourages
attorneys to diligently prepare for and conduct
trials; and prevents attorneys from "sandbagging"
opposing counsel by failing to object to an error for
strategic reasons and later claiming that the error is
grounds for reversal.
Schill, 327 Wis. 2d 572, ¶45 n.21. It further "encourages
litigation of all issues at one time, simplifies the appellate
task, and discourages a flood of appeals." State v. Caban, 210
Wis. 2d 597, 605, 563 N.W.2d 501 (1997).
¶63 With its order for additional briefing on the
assignability of legal malpractice claims, the court offered
Town Bank a new bite at the apple. It suggested a new, possibly
outcome-determinative argument which Town Bank had previously
not made. This action is a departure from precedent suggesting
that the development of arguments be left to the litigants.
See, e.g., Jankee v. Clark Cnty., 2000 WI 64, ¶7, 235 Wis. 2d
4
 No. 2011AP2774.awb
700, 612 N.W.2d 297 ("If an issue is not raised in the petition
for review or in a cross petition, 'the issue is not before
us.'"); Gardner v. Gardner, 190 Wis. 2d 216, 238 n.3, 527 N.W.2d
701 (Ct. App. 1994) ("We will not independently develop
[appellant]'s argument and, therefore, we will not consider this
issue"); Estate of Balkus v. Sec. First Nat'l Bank, 128 Wis. 2d
246, 255 n.5, 381 N.W.2d 593 (Ct. App. 1985) (declining to
address issue not developed by the appellant).
¶64 Now, after ordering additional briefing and having a
second round of oral arguments on these new issues, the majority
comes to the conclusion that the parties' initial decision not
to contest this issue was correct. In the end, the majority's
efforts to sua sponte develop its own potentially dispositive
issue was for naught.
¶65 This unnecessary excursion underscores the wisdom of
exercising judicial restraint. The role of the lawyer as
advocate and the role of the judge as impartial decision maker
should be kept separate.
¶66 Accordingly, I respectfully dissent.
¶67 I am authorized to state that Chief Justice SHIRLEY S.
ABRAHAMSON joins this dissent.
5
No. 2011AP2774.awb
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