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In re Holly Knitwear Inc.

Decided: July 27, 1971.


Johnson, J.c.c. (temporarily assigned).


On December 16, 1970 the assignor corporation Holly Knitwear, Inc., which was engaged in the manufacture of knitted fabrics, effected an assignment for the benefit of creditors. Shortly thereafter, on January 15, 1971, a public auction sale of the assets of the assignor corporation was held, which sale was confirmed by order of the County Court on February 8, 1971. The amount realized pursuant to said sale, $73,395, was inclusive of all machinery, equipment and inventory held by the assignor, with the sole exception of an automobile for which the additional value of $2400 was received.

This matter subsequently came before this court by means of a petition and order to show cause entered on behalf of the assignee for instructions with regard to a determination as to the priority of the various claims to the funds resulting from the sale of the assets of the said assignor. Involved herein, in addition to the assignee's request for administration expenses, are the following claimants:

1) United States of America: The Federal Government has claimed taxes due to the Internal Revenue Service in the amount of $40,601.34 for social security and withholding taxes and for federal unemployment insurance contributions. However, the proofs indicate that all of the claims arose subsequent to the filing of these proceedings, with the exception of claims for the tax quarter ending June 30, 1970 upon which an assessment was made on November 27, 1970 in the amount of $3,868.29.

2) Jonathan Logan Inc. (hereinafter Logan): Its claim, arising out of a purchase money security interest in two sewing machines for which financing statements were filed on June 10, 1970, is in the amount of $7500. In addition, attorneys' fees are sought.

3) Northern Financial Corp. and/or Northern Commercial Corp. (hereinafter Northern): This claim of $8,939.32 is also predicated on a purchase money security interest which was appropriately filed with the Secretary of State of New Jersey on April 7, 1969. It, too, asks for reasonable attorneys' fees.

4) Textile Financial Corp. (hereinafter referred to as Textile): This party contends it has a valid and existing secured lien on assets in an amount equal to $23,870. This interest arose out of the security agreement entered into between Textile and the assignor to secure a loan to the assignor of $124,000. Said agreement was to serve as security for all future advances made by the creditor and was also intended to provide the creditor with a secured interest in all of the assignor's after-acquired property. Financing statements were filed October 3, 1967 and July 24, 1970. Attorneys' fees are also asked.

5) Feldwin Realty Co.: This party asserts a landlords' lien of $13,991.04 for rents due and for which it allegedly made a distraint on December 15, 1970.

6) State of New Jersey: The State claims priority for taxes due and owing the Business Personal Property Section in the amount of $4,652.04, in addition to some $1,339.80 due and owing the Division of Employment Security.

7) Employees of the assignor: These individuals seek sums totaling approximately $22,000 as wages to which they were entitled at the time of the assignment.


The initial question to be determined in this matter is whether, within the meaning of N.J.S.A. 2A:19-43, "all sums received by said assignee" constitutes value received for sale of collateral secured prior to the date of the assignment by purchase money security interests (as defined in N.J.S.A. 12A:9-107) and by general security liens, all of which were filed and perfected in accordance with N.J.S.A. 12A:9-101 et seq.

Essentially, the secured parties in question contend that their respective liens should not be included in an accounting of the general assets of the assignor's estate and hence should not be charged with any part of the assignee's request for compensation or expenses incurred during the administration of said estate. The facts, which are virtually uncontroverted, reveal that the parties holding these security interests agreed to a sale of the collateral on which they held valid liens, solely on the understanding that if a profit resulted, such would redound to the benefit of the estate and that the secured parties would receive full satisfaction to the extent of their outstanding claims. A profit was realized and accordingly these parties in interest assert their reliance on this agreement in advancing their contentions.

As authority, Logan and Northern have cited cases wherein the courts dealt with questions of an assignees' status as a general lien creditor, as defined in N.J.S.A. 12A:9-301. However, these references are inapposite for our purposes here. Presently at bar is not the issue of whether the funds should revert to the general assets of the estate but whether the assignee should in fact be recompensed by the security creditors for his services and expenses. It should be recognized that the assignee is not attempting to assert his statutory role as lien creditor under N.J.S.A. 2A:19-14 and 12A:9-301(3) in an effort to wrest from lesser claimants assets which by right should belong to the general estate. Rather, such assets, as determined by the efficacy of the liens outstanding, have already been conceded to these creditors in terms of their priority. Thus, the assignee's only claim here is for his efforts, costs and expenses in distributing such assets. See In re Pynn-Hawley Co. , 63 N.J. Super. 50 (Cty. Ct. 1960); In re General Assignment for Benefit of Creditors of Shay , 75 N.J. Super. 421 (App. Div. 1962); In re General Assignment for Benefit of Creditors of Xaviers, Inc. , 66 N.J. Super 561 (App. Div. 1961).

New Jersey courts have long recognized and made mention of the fact that such receivers, trustees and assignees are

agents of the court and in this capacity should be considered as working for the benefit of all creditors who seek to reclaim from the insolvent's estate that which is their just due. Sullivan v. James Leo Co. , 124 N.J. Eq. 317 (E. & A. 1938); Seidler v. Branford Restaurant Co. , 97 N.J. Eq. 153 (E. & A. 1925); Lerman v. Lincoln Novelty Co. , 130 N.J. Eq. 144 (Ch. 1941); Laudan v. ABC Travel System Inc. , 64 N.J. Super. 204 (Ch. 1960).

It is true that the above-mentioned cases concern corporate receiverships wherein the court itself took control of the insolvent enterprise. However, it is now settled that the rationales behind the statutes dealing with corporate receiverships, N.J.S.A. 14A:14-1 et seq. , and assignments for the benefit of creditors, N.J.S.A. 2A:19-1 et seq. , are identical. Therefore, the receivership cases supply instructive precedent for the assignment proceeding before this court. In re General Assignment for Benefit of Creditors of Xaviers, Inc., supra.

Next, the creditors rely on the case of Sliker v. Fisher , 45 N.J. Eq. 132 (1889). Involved there were lands subject to mortgages which were conveyed to an assignee who, with the consent of the mortgagees, proceeded to sell such property free from any encumbrances. The proceeds realized from the sale were then used to pay off the mortgages, but since the proceeds were less than the appraised value of the lands, the assignee asked for an allowance out of the general assets of the estate to make up the difference still due. In denying this request the court held that the mortgagees' interests in the lands were not assigned and hence the assignee had no power over them. The court refused to allow the assignee to be recompensed at the expense of the general unsecured creditors. If he was entitled to any compensation, it would have had to come from the mortgagees themselves on whose behalf he had acted as agent.

It is argued by the creditors that this decision stands squarely for their central proposition, namely, that a valid security interest is superior and paramount to the rights an

assignee receives by virtue of a deed of assignment. However, an appreciation of the limited intendment of that decision, to protect the unsecured creditors, and a look at a more recent case wherein Sliker was interpreted in what must be from the creditors' viewpoint a much less fortuitous light, indicates clearly that their position is not the decided state of the law. In In re Pynn-Hawley Co., supra , the court stated that the statutory language "on all sums received" would lay to rest any further questions raised on account of Sliker. The text of that opinion seems to intimate that the assignee's commission could be predicated on any and all sums dealt with in the administration of the estate regardless of their source.

Moreover, a substantial line of cases has held that administration expenses must take priority over all other claims. These general expenses of receivership may be paid out of the funds in a receiver's hands before the payment of debts, whether the latter be secured or unsecured. Laudan v. ABC Travel System Inc., supra; Albert and Kernahan v. Franklin Arms , 107 N.J. Eq. 468 (E. & A. 1931); Pemberton Lumber and Millwork Industries v. William G. Ridgway Co. , 38 N.J. Super. 383 (Ch. Div. 1955).

The Laudan case concerned an agreement between a travel agency and airlines, hotels and shipping lines, wherein it was provided that the agency would hold all funds collected by it for transportation costs in trust for the carrier. In the subsequent proceeding by the receiver of the insolvent agency for a pro rata apportionment of the administration expenses, the court dismissed the argument that trust funds involved did not constitute "assets" chargeable to any part of the receiver's compensation. The court stated succinctly that New Jersey courts have consistently afforded priority to the expenses of a receivership ...

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