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Shallcross v. Community State Bank and Trust Co.

Decided: April 7, 1981.

LAWRENCE SHALLCROSS, PLAINTIFF,
v.
COMMUNITY STATE BANK AND TRUST COMPANY, A NEW JERSEY BANKING INSTITUTION, DEFENDANT



Long, J.s.c.

Long

This case involves a novel issue arising out of a priority dispute between two secured creditors. The facts are as follows:

Plaintiff is Lawrence Shallcross, the president of Shallcross and Pace Sheet Metal Works. In February 1977 Shallcross had a discussion with Raymond Dunphey, president of R. Dunphey Sheet Metal Works, Inc., concerning a Wysong shear owned by Shallcross and an RAS shear owned by Dunphey. According to Shallcross, Dunphey wanted to purchase plaintiff's shear but could not then afford it. It was agreed that Shallcross would deliver the Wysong shear to Dunphey, and if Dunphey paid the purchase price of $13,500 within six months, Shallcross would transfer title to him. It was also agreed that if Dunphey sold its RAS shear within the six-month period, Shallcross was to be paid at that time. Dunphey took possession of the Wysong shear on or about February 25, 1977 and the terms of the above oral agreement were set forth in a letter dated March 4, 1977.

In January 1978 Dunphey sold its RAS shear and Shallcross sought payment for the Wysong shear. In June, 1978, Shallcross and Dunphey renegotiated the price of the Wysong shear downward to $11,250 when Dunphey indicated that only $10,000 had been received for its RAS shear. Dunphey agreed to make monthly payments of $356.95. On June 29, 1978 a bill of sale, promissory note, financing statement and security agreement were signed by plaintiff and Dunphey, and on July 12, 1978 the financing statement was filed. Dunphey made three of the monthly payments and then defaulted.

In the interim, defendant Community State Bank and Trust Company (hereinafter, the bank) entered into a loan transaction and security agreement with Dunphey on June 19, 1978. The Wysong shear was listed as one of the items of collateral for the loan, and the security agreement contained an after-acquired property clause. Pursuant to this agreement the bank loaned Dunphey $50,000 on the date of the agreement and an additional $40,000 on December 15, 1978, in accordance with the provision for future advances. This security agreement was filed on June 23, 1978. Dunphey defaulted in the payment of the loan and the shear was sold by the bank to offset the debt under the terms of this security agreement. When Shallcross attempted to satisfy Dunphey's obligation to him by obtaining possession of the shear, he found that the collateral was no longer available. Shallcross has sued the bank for wrongful conversion of the shear. The bank now moves for summary judgment, claiming that there are no genuine issues of fact and that it clearly had priority in the collateral under the provisions of Article 9 of the Uniform Commercial Code, N.J.S.A. 12A:9-101 et seq.

Article 9 lays out the framework upon which competing security interests can be evaluated and priorities established. In this regard, N.J.S.A. 12A:9-312(5) provides in relevant part that

In all cases not governed by other rules stated in this section (including cases of purchase money security interests which do not qualify for the special priorities set forth in subsections (3) and (4) of this section), priority between conflicting security interests in the same collateral shall be determined as follows: (a) in the

order of filing if both are perfected by filing, regardless of which security interest attaches first under 12A:9-204(1) and whether it attaches before or after filing . . . .

Here, it is undisputed that the bank filed first in time and therefore perfected its security interest prior to Shallcross. Shallcross maintains that this provision does not establish the relative positions of the parties, for several reasons which will be discussed serially.

First, Shallcross argues that he retained title to the shear and that that fact rendered the "first in time" provision of Article 9 inapplicable. However, N.J.S.A. 12A:9-202 provides clearly and unequivocally that

Each provision of this Chapter with regard to rights, obligations and remedies applies whether title to collateral is in ...


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