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IN RE CALLAHAN MOTORS

June 18, 1975

In the Matter of CALLAHAN MOTORS, INC., a corporation of the State of New Jersey, Debtor


The opinion of the court was delivered by: FISHER

This is a petition for review by the Princeton Bank and Trust Company (hereinafter Bank) of a bankruptcy proceeding in which its application to reclaim automobiles and sale proceeds from the bankrupt debtor was denied.

On February 23, 1973, the debtor in this action, Callahan Motors, Inc., (hereinafter Callahan), filed a Chapter XI Petition in bankruptcy. An Order was entered appointing Joel H. Sterns, Esquire, as Receiver. Callahan was engaged in the business of selling automobiles to retail customers and had, prior to the filing of the Chapter XI Petition, financed its purchases of automobiles for resale with the petitioner Bank by use of trust receipts. Pursuant to the agreement between the Bank and Callahan, the Bank would pay the wholesaler the cost of these vehicles and Callahan would then execute a promissory note and trust receipt security agreement covering the cost of these vehicles. When each vehicle was sold, Callahan was obligated to repay the Bank the amount loaned by the Bank for the cost of the purchase of the vehicle, with interest at 7 1/2% Per year.

 Although the debtor was required by the terms of the trust receipt security agreement to keep the sale proceeds of each vehicle separate with payment to the Bank to be made immediately on the amount due on each vehicle, it was discovered upon a check of the debtor's inventory subsequent to the filing of the Chapter XI Petition, that 29 vehicles had been sold 'out of trust' by Callahan without reimbursement to the Bank, resulting in a delinquency of $ 83,896.31 for the vehicles sold 'out of trust.'

 Further, the Bank filed a Notice of Motion to reclaim the 73 vehicles purchased by the debtor with funds advanced by the Bank which were still in the debtor's inventory, amounting to $ 112,853.25. Therefore, the Bank's total claim against the debtor for monies loaned on the trust receipts financing agreements amounted to $ 196,749.56.

 The Bankruptcy Judge, on April 24, 1973, approved a Consent Order directing the receiver to hold the proceeds from the sale of any such vehicle in escrow, or the vehicles themselves, pending final disposition by this Court of the issues raised in the Bank's Petition for Review of the Bankruptcy Court's decision with respect to its Motion to Reclaim.

 The motion is based on the following:

 On March 5, 1965, the Bank filed a financing statement with the Secretary of State perfecting its security interest in Callahan's inventory of new and used cars and the proceeds of the sale on other disposition of said inventory. On December 29, 1967, the Bank filed a continuation statement along with the appropriate filing fee and was given a copy of the statement stamped 'filed' by the Office of the Secretary of State. The Bank was never informed that the continuation statement would 'be deemed ineffective by the Office of the Secretary of State and no record (would be) made thereof,' nor that the Secretary of State would destroy the Bank's financing statement one year after its expiration date even though it had accepted the continuation statement for filing and had not rejected it as being premature. (Affidavit of Helen McGary, Supervisor of UCC Section of Department of State, March 28, 1973). The original financing statement was, in fact, destroyed along with the continuation statement as the Secretary of State determined that the latter did not result in expanding the term of the original financing statement beyond the five-year period which expired in March of 1970.

 Yet on January 1, 1968, only a few days after the Bank's continuation statement was filed, the Secretary of State's Office adopted a policy of returning unfiled to secured parties any documents which were deemed to be presented for filing prematurely with a rejection form appropriately marked.

 On May 2, 1973, the Bankruptcy Judge entered on Order denying the Bank's application to reclaim the automobiles and the proceeds of the sale based on the Court's determination that the continuation statement filed in late 1967 had no validity and did not extend the period of the original financial statement from 1970 to 1975 so as to render the continuation statement effective as of the filing of the Chapter XI Petition in 1973.

 The Bank then filed a Petition for Review which cited two reasons for reversing the order denying reclamation:

 1. The Bank's claim was secured prior to the rights of the Receiver because of the filing of the continuation statement by the petitioner with the Secretary of State of New Jersey on December 29, 1967, which extended the effective date of the filing of the original financial statement from March, 1970 to March, 1975.

 2. Even if the above is not found to be so, the unperfected security interest of the Bank is prior to any interest of the receiver, pursuant to N.J.S.A. 12A:9-301.

 Thus, the first issue to be determined is whether the filing of the continuation statement and its acceptance by the Secretary of State's Office in December, 1967 continued the effective date of the original statement from March, ...


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