Lender has no security interest in arbitration award which was not intended as security

Facts: Two developers formed a partnership and purchased a property to redevelop. The partnership later entered into a partnership sales agreement (PSA) and refinanced the property, using the funds to buy out the partnership interest of one of the developers. The refinance loan was secured by a trust deed on the partnership’s property. The partnership did not pay the developer the full amount due under the PSA. The partnership later defaulted and the lender foreclosed on its interest. The developer later acquired the remaining money due to it under the PSA through arbitration. The lender sought to regain the money paid to the developer through arbitration.

Claim: The lender claimed its security interest attached to the award since the partnership’s refinance was secured by a trust deed on the property.

Counterclaim: The developer claimed the lender did not have a security interest in the arbitration award, since the money was never intended by the partnership to be used as security for the loan; rather, it was to pay off the developer under the PSA.

Holding: A California appeals court held the lender was not entitled to the developer’s funds since it did not have a security interest in the arbitration award, as the money was due to the developer under the PSA. [Oxford Street Properties v. Rehabilitation Associates, LLC, et al (2012) 296 CA 4^th 141]