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In re General Assignment for Benefit of Creditors of Holly Knitwear Inc.

Decided: March 9, 1976.

IN THE MATTER OF THE GENERAL ASSIGNMENT FOR THE BENEFIT OF CREDITORS OF HOLLY KNITWEAR, INC., ASSIGNOR. FELDWIN REALTY CO., APPELLANT, TEXTILE FINANCIAL CORP., RESPONDENT, CROSS-APPELLANT, UNITED STATES OF AMERICA, RESPONDENT


Kolovsky, Bischoff and Botter. The opinion of the court was delivered by Botter, J.A.D.

Botter

[140 NJSuper Page 379] Holly Knitwear, Inc. made an assignment for the benefit of creditors on December 16, 1970. N.J.S.A. 2A:19-1 et seq.; R. 4:54; see In re Xaviers, Inc. , 66 N.J. Super. 561 (App. Div. 1961). Its assets were sold and the trial court was called upon to determine the priority of claims against the fund. The principal issue on this appeal concerns the priority of liens held by United States of America (United States), a secured creditor, Textile Financial Corp. (Textile), and the assignor's landlord, Feldwin Realty Co. (Feldwin). Under federal law, the secured creditor's lien concededly had priority over the Federal Government's claim under 31 U.S.C.A. ยง 191 (United States v. City of New Britain , 347 U.S. 81, 74 S. Ct. 367, 98 L. Ed. 520 (1954); Exchange Bank & Trust Co. v. Tubbs Mfg. Co. , 246 F.2d 141, 143 (5 Cir. 1957), cert. den. 355 U.S. 868, 78 S. Ct. 118, 2 L. Ed. 2d 75 (1957)), which in turn had priority over the landlord's lien (United States v. Waddill, Holland & Flinn, Inc. , 323 U.S. 353, 65 S. Ct. 304, 89 L. Ed. 294 (1945); United States v. Saidman , 97 U.S. App. D.C. 344, 231 F.2d 503 (D.C. Cir. 1956)), but under state law the landlord's lien had priority over the lien of the secured creditor. N.J.S.A. 2A:44-166. The funds were insufficient to pay these claims in full. The issue raised has been termed the circularity of priorities. See Plumb, "Federal Liens and Priorities -- Agenda for the Next Decade," 77 Yale L.J. 228, 231 (1967); Note, "Circuity of Liens -- A Proposed Solution," 38 Colum. L. Rev. 1267 (1938); Benson, "Circuity of Lien -- A Problem in Priorities," 19 Minn. L. Rev. 139 (1935). For cases in New Jersey dealing with problems arising solely under state law, see Hoag v. Sayre , 33 N.J. Eq. 552 (E. & A. 1881); Jarecki v. Manville Bakery, Inc. , 7 N.J. Super. 387 (Ch. Div. 1950); Vanderhoff v. Wasco , 109 N.J. Eq. 463 (Ch. 1932); Fidelity Union Title & Mtg. Guar. Co. v. Magnifico , 106 N.J. Eq. 559 (Ch.

1930); Meeker v. Warren , 66 N.J. Eq. 146 (Ch. 1904); Andrus v. Burke , 61 N.J. Eq. 297 (Ch. 1901); Clement v. Kaighn , 15 N.J. Eq. 47 (Ch. 1862).

The facts are set forth in the trial court's opinion, reported at 115 N.J. Super. 564, which deals with some issues not presented on this appeal. Claims have been presented on behalf of:

(a) Two creditors, Jonathan Logan, Inc. (Logan) and Northern Financial Corp. (Northern), holders of purchase money security interests on specific items of personal property;

(b) United States, for social security and withholding taxes, totaling approximately $40,000;

(c) Textile, for approximately $24,000 plus attorneys' fees, for the balance due on loans made pursuant to an agreement secured by a lien on all assets, including after-acquired property;

(d) Feldwin, for approximately six months' rent due in the approximate sum of $14,000;

(e) State of New Jersey, for taxes due in the sum of $6,000, and

(f) Alleged wage-earners.

Out of the total assets of approximately $76,000 the lower court ordered payment of approximately $16,000 to Logan and Northern based upon their purchase money security priority, subject to a contribution toward administration expenses. The trial judge also determined that the alleged wage claims were not entitled to priority accorded by N.J.S.A. 2A:19-30 because the claims were payable to a trust fund for health, welfare and recreation benefits and can be claimed only by the union, not the wage-earners. Finally, the court ordered the remaining $60,000 (all figures used are approximate and are rounded off for convenience), less administrative expenses ($24,000), which included legal fees, or a balance of $36,000 distributed, so far as relevant, as follows:

1. To Textile, $24,000, less $14,000 claimed by Feldwin (the landlord's lien being superior under state law), which $14,000 is to be designated a special fund, leaving $10,000 for Textile, against which an assessment ...


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