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Mudge v. Sher-Mart Manufacturing Co.

Decided: February 27, 1975.


Leonard, Seidman and Bischoff. The opinion of the court was delivered by Seidman, J.A.D.


The issue involved in this appeal is whether a fully perfected security interest in an account receivable is superior to the lien of a subsequent judgment creditor who levied upon that account prior to default on the part of the debtor in the secured transaction.

The facts are not in dispute. On September 20, 1972, defendant Sher-Mart Manufacturing Co., Inc. (Sher-Mart) entered into a security agreement with The Princeton Bank and Trust Company to secure payment of a $50,000 loan evidenced by a promissory note. The agreement granted to the bank a first security interest in certain collateral described therein, including "accounts receivable of Borrower now owned, held and/or hereafter to be created satisfactory to the Bank." Simultaneously, a financing statement was filed in the office of the Secretary of State.

On May 4, 1973 plaintiff herein sued Sher-Mart in the Mercer County District Court to recover the sum of $1900 on a book account, together with interest and costs. Judgment was thereafter entered in its favor for $2100.76. Pursuant to a writ of execution, plaintiff caused a levy to be made on June 14, 1973 on a Sher-Mart account receivable due and owing from E.J. Korvette, Inc. Plaintiff then moved for an order directing Korvette to pay to the constable the amount of the judgment plus subsequent costs. Sher-Mart objected to the entry of the order and the matter was set down for hearing on August 30, 1973.

On August 14, 1973 the bank assigned all its right, title and interest in the security agreement to the Small Business Administration, an agency of the United States of America. A financing statement covering the assignment was duly filed. Sher-Mart owed at that time the sum of $48,109.35 plus interest accruing at the per diem rate of $10.88. By reason of Sher-Mart's having failed to pay the

July installment on its note, the Small Business Administration notified Sher-Mart on August 21 that it was in default and demanded payment in full.

The claimant herein next filed a motion in the county district court for an order vacating the levy and directing Korvette to pay the amount of the account receivable to the Small Business Administration. It was, on further motion, admitted as a party so as to assert its claim to the levied property. In a letter opinion the trial judge upheld plaintiff's levy on the ground that the right of the parties were fixed as of the date of the levy and Sher-Mart's subsequent default and the consequent right of the Small Business Administration to collect Sher-Mart's accounts receivable did not relate back to a date prior to the default.

Claimant appeals and we reverse.

Under the Uniform Commercial Code-Secured Transactions, N.J.S.A. 12A:9-302(2), claimant's assignment entitled it to whatever rights the bank had at the time. It is not in dispute that the bank had an enforceable security interest in the collateral described in the agreement (N.J.S.A. 12A:9-204 (1)). The collateral included accounts (N.J.S.A. 12A:9-105), defined in N.J.S.A. 12A:9-106 as "any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper." The security interest attached not only to present accounts receivable but also to those to be acquired in the future (see N.J.S.A. 12A:9-204(3)). It is uncontroverted that the bank had taken all necessary steps for perfecting its security interest (N.J.S.A. 12A:9-303(1)), including the filing of a financing statement (N.J.S.A. 12A:9-302(1)) with the Secretary of State (N.J.S.A. 12A:9-401(1)(c)).

There is no doubt that the bank had a perfected security interest in the Korvette account prior to the levy thereon by the judgment creditor. A security interest attaches to collateral as soon as there is an agreement that it attach (the security agreement here), value is given (the

bank's $50,000 loan to Sher-Mart), and the debtor has rights in the collateral (defendant's right to collect the money Korvette owed it) (N.J.S.A. 12A:9-204(1)). Cf. M. Rutkin Elect. Sup. Co., Inc. v. Burdette Elect., Inc. 98 N.J. Super. 378; 384 (Ch. Div. 1967). It is self-evident that the Korvette account must have been in existence before the levy. ...

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