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Delaware Truck Sales Inc. v. Wilson

Decided: January 14, 1993.

DELAWARE TRUCK SALES, INC., PLAINTIFF-APPELLANT,
v.
EDWARD L. WILSON AND JOAN WILSON, A/K/A JOAN E. JABLONSKI WILSON, HIS WIFE, DEFENDANTS-RESPONDENTS, AND DELAWARE REPAIR SERVICES, INC. AND R.H. MACY COMPANY (BAMBERGERS DIVISION), DEFENDANTS.



On certification the Superior Court, Appellate Division.

Handler, Wilentz, Clifford, O'Hern, Garibaldi, Pollock, Stein

Handler

The opinion of the court was delivered by,

HANDLER, J.

This case presents issues of commercial law arising from the secured indebtedness of a business corporation and attempts by two creditors to satisfy their respective obligations out of the same collateral security. The controversy arose after the debtor defaulted on both obligations. The debtor surrendered to the second or junior creditor its accounts receivable, which the junior creditor then collected. The senior creditor, a bank, which had obtained a default judgment against the debtor, made a claim against the junior creditor, contending that it had a first priority lien on the accounts receivable. The junior creditor paid the bank a sum approximating the bank's judgment against the debtor in exchange for the bank's judgment together with the underlying debt and all its security. The junior creditor thereafter instituted this action to foreclose on the residential mortgage that the personal guarantors had given to the bank to secure the underlying debt. However, the debtor and guarantors claimed that the debt to the bank had been satisfied when the junior creditor collected the accounts receivable and paid them over to the bank.

The Chancery Division granted the junior creditor's motion for summary judgment. The Appellate Division reversed in an unreported opinion. This Court granted certification. 126 N.J. 340 (1991).

I

On August 20, 1984, Delaware Repair Service, Inc. (Delaware Repair) entered into a financial agreement with Royal Bank of Pennsylvania (Royal Bank or bank). Royal Bank loaned $75,000 to Delaware Repair evidenced by a demand promissory note. Delaware Repair also secured the loan. It executed a financing statement covering all of its "inventory, equipment, fixtures, machinery, appliances, tools, furniture and furnishings, leasehold interests, accounts receivable, now and hereafter acquired." Royal Bank filed that financing statement with the Camden County Clerk on September 19, 1984, and with the Secretary of State on September 25, 1984. As further security for the loan to Delaware Repair, defendants, Edward Wilson, a principal of Delaware Repair, and his wife, Joan Wilson, personally guaranteed the loan, which in turn was secured by a mortgage on their residence.

Plaintiff, Delaware Truck Service, Inc. (Delaware Truck), a corporation engaged in the cargo-container-repair business, sold its assets to Delaware Repair. According to the sales contract, dated September 6, 1984, the assets transferred included: "the machinery and equipment of the Seller as set forth on Exhibit 'A' hereto the business and goodwill of the Seller and including all customer records and files presently in the hands of Seller." Delaware Repair agreed to pay Delaware Truck a total of $300,000, $30,000 in cash, plus a promissory note for $270,000 payable in sixty equal monthly installments. Defendant Edward Wilson and George Fandrick, both former employees of Delaware Truck, personally guaranteed payment on the note. The agreement provided that Delaware Repair would execute "financing statements" that would create a lien in favor of plaintiff covering all assets sold, plus a "secondary lien" on Delaware Repair's accounts receivable, "subject only to a prior lien in favor of Purchaser's institutional lender." Delaware Truck filed a financing statement covering Delaware Repair's "inventory, equipment, fixtures, machinery, appliances, tools, furniture and furnishings, now and hereafter acquired" with the Secretary of State on August 29, 1984 (which predated the signing of the sales agreement), and with the Camden County Clerk on September 13, 1984. It filed a separate financing statement on October 4, 1984, covering Delaware Repair's accounts receivable.

Delaware Repair eventually defaulted on its payments to Delaware Truck and Royal Bank. On May 27, 1988, Delaware Repair entered into an agreement with Delaware Truck whereby Delaware Repair acknowledged its inability to pay the $166,935.58 it owed plaintiff and surrendered to plaintiff all of the assets in which plaintiff held a security interest. According to the "Surrender Agreement," those assets included "inventory, equipment, fixtures, machinery, appliances, tools, furniture and furnishings, now and hereafter acquired," as well as its accounts receivable. The agreement also noted that the accounts receivable were "probably" subject to a "secondary lien * * * in favor of Royal Bank of Pennsylvania * * * ." In the months following the surrender of assets, plaintiff collected $98,600 from Delaware Repair's accounts receivable, and applied that money to Delaware Repair's debt.

In December 1988, Royal Bank sued Delaware Repair and the guarantors on the unpaid promissory note and obtained a default judgment against Delaware Repair and the guarantors in the full amount of $62,000. The record does not indicate that any of the defendants interposed any defenses. Thereafter, Royal Bank, apparently having learned that Delaware Truck had obtained and collected the debtor's accounts receivable, sought to recover from Delaware Truck the amounts thus realized. In April 1989, Royal Bank entered into a settlement agreement with Delaware Truck. Delaware Truck paid $59,500 in exchange for an assignment of Royal Bank's judgment against Delaware Repair and the guarantors, its security interests in Delaware Repair's assets, and the Wilsons' personal guaranty secured by the mortgage on the Wilson home. Royal Bank also entered into a subordination agreement with plaintiff whereby Royal Bank acknowledged that "every security interest held by Royal Bank in each and every asset of Delaware Repair Services, Inc. is subordinate to the security interest of Delaware Truck."

In April 1989, Delaware Truck filed suit against Delaware Repair, Edward and Joan Wilson, and George Fandrick seeking to collect on the note made by Delaware Repair in favor of plaintiff, as well as on Royal Bank's judgment.*fn1 It sued to enforce both the note and personal guaranties. In July 1989, defendant Edward Wilson filed for personal bankruptcy. Plaintiff then filed a motion in bankruptcy court seeking to modify the automatic stay so that it could foreclose the mortgage on the Wilsons' residence, which constituted security for the Wilsons' personal guaranty. The bankruptcy court granted the motion, and plaintiff, as assignee of Royal Bank, filed the complaint in this action seeking to foreclose on the Wilsons' residence.

The trial court granted plaintiff's motion for summary judgment. Defendants argued that because Royal Bank had the first lien on accounts receivable, plaintiff should have applied the proceeds from the accounts receivable to satisfy the mortgage obligation in favor of Royal Bank. The trial court rejected defendants' arguments on two grounds. First, the trial court found that plaintiff had a senior security interest in the accounts receivable because plaintiff had filed a financing statement before Royal Bank. Second, even if plaintiff's security interest was junior to Royal Bank's, the trial court found that plaintiff had obtained the senior security interest through the assignment and subordination agreements. The trial court relied on the language of the guaranty made by the Wilsons to Royal Bank, which stated that the guaranty may be enforced "without first resorting to any security or other property or invoking other available rights or remedy."

The Appellate Division reversed, concluding that plaintiff could not foreclose on the mortgage. The Appellate Division found that Royal Bank was first to file a financing statement covering accounts receivable and therefore had priority over plaintiff's security interest in Delaware Repair's accounts receivable. The Appellate Division, however, further determined that because the moneys collected by plaintiff from Delaware Repair's accounts receivable should have been applied to Royal Bank's debt, the latter's debt had been satisfied and extinguished with the payment to Royal Bank.

II

Plaintiff first argues that it had priority with respect to Delaware Repair's accounts receivable, and therefore its realization of the proceeds from the accounts receivable prior to the assignment of Royal Bank's interests against Delaware Repair could not satisfy Delaware Repair's debt to Royal Bank.

Both creditors, Delaware Truck and Royal Bank, had perfected their respective security interests in Delaware Repair's assets through the execution of financing statements describing the collateral. N.J.S.A. 12A:9-302 and 303. Delaware Repair executed a UCC-1 financing statement in favor of Royal Bank on its demand promissory note covering accounts receivable. Delaware Repair gave plaintiff a financing statement on the debtor's promissory note which created a lien on all or most of its assets, including accounts receivable. Consequently, each secured creditor had a perfected security interest in the same collateral.

N.J.S.A. 12A:9-312 addresses the priority of creditors with respect to collateral. When no special priority rules are in effect, N.J.S.A. 12A:9-312(5)(a) governs the determination of priority between parties with a security interest in the same collateral:

In all cases not governed by other rules in this section * * * priority between conflicting security interests in the same collateral shall be determined according to the following rules:

(a) Conflicting security interests rank according to priority in time of filing or perfection * * *.

Thus, priority to collateral and its proceeds depends on when the parties filed financing statements covering the claimed collateral.

On August 29, 1984, Delaware Truck filed a financing statement covering the debtor's assets with the Secretary of State. That financing statement did not mention Delaware Repair's accounts receivable. However, the sales agreement between these parties, dated September 6, 1984, stated that the lien in favor of plaintiff was only "secondary" with respect to the accounts receivable. Although the agreement by its date was executed after the filing of the financing statement, that the basic understanding embodied therein preceded the filing of Delaware Truck's first financial statement is inferable from its reference to accounts receivable. On September 25, 1984, Royal Bank filed a financing statement that ...


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