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Charles and Carol Sachs v. Jefferson Loan Company


December 21, 2010


On appeal from the Superior Court of New Jersey, Law Division, Hudson County, Docket No. L-1414-07.

Per curiam.


Telephonically argued December 7, 2010 - Decided Before Judges Sabatino and Alvarez.

The present appeal is the third arising out of this case and other related litigation.*fn1 As the result of a jury verdict, plaintiffs Charles and Carol Sachs obtained a judgment on May 11, 2009 against defendant Jefferson Loan Company ("Jefferson") in the sum of $71,000, plus $16,519.66 in prejudgment interest. The judgment was based on Jefferson's non-payment of five debentures held by plaintiffs. Jefferson was formerly in the business of making auto and other consumer loans. It financed its operations by issuing debentures to investors such as plaintiffs and also through a bank line of credit. We incorporate by reference the chronology of events precipitating Jefferson's indebtedness to plaintiffs, which is detailed in our two prior unpublished opinions.*fn2


The issues in the present appeal exclusively concern plaintiffs' efforts to collect on their judgment against Jefferson. The judgment was recorded as a lien on July 2, 2009.

Plaintiffs have since pursued two avenues of potential recovery:

(1) a levy upon proceeds held by Pressler and Pressler, L.L.P. ("the Pressler firm"), a law firm retained to collect sums owed to Jefferson by third parties; and (2) a levy upon Jefferson's bank account at Valley National Bank ("Valley National").

The funds held by both the Pressler firm and by Valley National are affected by a significant debt that Jefferson owes to Valley National. That debt arises out of a $12 million line of credit that Jefferson originally established with Valley National in 2001. In December 2006, Jefferson, following a downward economic spiral, wrote to plaintiffs and its other debenture holders and advised that it was ceasing its operations and that it was going into liquidation. At that time, Jefferson owed Valley National, a secured creditor, $7.5 million on the line of credit.

Thereafter, Jefferson negotiated an agreement with Valley National*fn3 that would allow the debenture holders to share equally in Jefferson's revenues once Valley National was paid the first $3.5 million on the secured debt. Even though Jefferson is no longer engaged in new business, it continues to collect revenues from loans and other debts owed to it by third parties. In addition, Valley National has leased Jefferson space within the bank's offices, at a nominal sum of one dollar per year, to allow Jefferson to wind up its affairs and to make collections.

Jefferson still maintains a bank account at Valley National. Rather than depleting the balance in that account to recover sums due on its secured debt, Valley National has taken from that account only portions of what it is owed. The limited record reflects that Valley National has allowed Jefferson to maintain a positive balance in the account and to make various disbursements to other parties.

Valley National has filed a UCC-1 instrument to perfect its secured interests. As of the time of the motion practice that is the subject of the present appeal, Jefferson owed Valley National approximately $5 million, and Valley National's recovery apparently had not yet reached the negotiated threshold for the equal sharing of revenues with the debenture holders.

Pursuant to a writ of execution, on June 23, 2009, plaintiffs levied upon proceeds of Jefferson's accounts receivable that had been collected and that were being held by the Pressler firm. On July 7, 2009, Jefferson filed a motion with the trial court, seeking to vacate that levy and the corresponding writ of execution. Plaintiffs cross-moved for an order directing the Pressler firm to turn over the funds. Following oral argument, the trial court vacated the levy and the writ concerning the funds held by the Pressler firm and denied turnover of those funds to plaintiffs.

In her written opinion dated August 13, 2009, the motion judge*fn4 concluded that "Valley National Bank's security interest is superior to [p]laintiffs' judgment lien." Accordingly, the judge found that "[p]laintiffs are entitled to execute and levy upon that income earned or accrued to [Jefferson] where same is not the subject of the U.C.C. financing statement filed by Valley National Bank against [Jefferson] on March 19, 2001[.]" The judge further determined that "[t]he monies due or becoming due to [Jefferson] from [the Pressler firm] fall within the subject of the March 19, 2001 financing statement because such monies constitute receivables and/or cash proceeds from such receivables." On August 25, 2009, the motion judge entered an order granting Jefferson's motion to vacate and denying plaintiffs' motion for turnover.*fn5

After their unsuccessful attempt at obtaining recovery from the funds held by the Pressler firm, plaintiffs tried to obtain recovery from funds held in Jefferson's bank account at Valley National. On July 31, 2009, pursuant to a writ of execution, plaintiffs levied upon the proceeds of Jefferson's deposit account at Valley National. On September 1, 2009, plaintiffs made an additional levy upon that same account.

When these levies failed to generate any recovery, plaintiffs filed a motion with the trial court seeking an order directing Valley National to turn over funds and directing Jefferson to make monthly installment payments until plaintiffs' judgment was satisfied. Jefferson cross-moved to vacate the levy on the deposit account and the corresponding writ of execution. Although Valley National, in its capacity as a potential garnishee, was notified by plaintiffs' counsel of the pendency of their motion, plaintiffs did not file or serve any pleading against Valley National naming it as a party or asserting any specific claims or allegations against it.

Prior to the return date of the motions concerning Jefferson's deposit account, plaintiffs conducted limited discovery concerning the account. In particular, plaintiffs examined a five-month period of deposits into and disbursements from the account. According to plaintiffs, that examination revealed that between May 1 and September 30, 2009, Valley National allowed Jefferson to pay out of the account more than $100,000 to various parties. These assorted disbursements included, among other things, $28,107.90 paid to Caposella; $23,170.74 paid by Jefferson to itself for undisclosed purposes; $16,437.26 paid to a firm known as "Media Data Srvs Payroll" (alleged by plaintiffs to be an indirect payment to Caposella personally); over $9,000 paid to two law firms; $1,965 paid to a certified public accountant, and other miscellaneous payments. Plaintiffs argued that Valley National waived its asserted priority position as a secured creditor by allowing these withdrawals from Jefferson's account instead of enforcing its rights as a secured creditor.

In opposing plaintiffs' attempt to gain access to funds in the deposit account, Jefferson and the individual co-defendants presented a certification from a vice-president of Valley National. The relevant portion of that certification stated, in conclusory language, that "[u]nder the terms of [Valley National's] agreement with Jefferson Loan Company, they [defendants] are permitted to pay all expenses associated with the collection of accounts where the proceeds are applied directly to the account of Jefferson Loan Company in reducing its secured loan with Valley National Bank." However, the certification did not explain how each of the disbursements questioned by plaintiffs comported with those conditions as legitimate "expenses associated with the collection of accounts."

The motion judge heard oral argument on these matters concerning Jefferson's deposit account on January 8, 2010. In addition to considering the points raised by the parties, the judge also allowed counsel for Valley National to address the court, despite the absence of any pleadings filed against the bank and the absence of any brief or other written legal argument filed on the bank's behalf. In his oral remarks, the bank's attorney echoed the position of defendants' counsel that Valley National continued to have priority over the assets in Jefferson's account as a secured creditor, despite the disbursements that had been made to other parties.

Following oral argument, the motion judge denied plaintiffs' motion concerning the bank account in its entirety. The judge essentially relied upon the same rationale that she had applied in denying plaintiffs relief in August 2009 with respect to the funds levied at the Pressler firm. The judge denied, however, defendants' request for counsel fees, recognizing that there were some differences between the motion related to the collections held at the Pressler firm and the later motion related to the so-called "operational funds" that Jefferson maintained on deposit at Valley National.

The motion judge duly noted plaintiffs' concerns that Valley National may have allowed Jefferson to misuse its deposit account to the detriment of plaintiffs and other debenture-holding creditors. However, the judge found it significant that plaintiffs had not named Valley National as a party or brought any specific claims against the bank. In particular, the judge observed in her oral ruling that if [plaintiffs] consider[] that [Valley National] is mishandling the funds or doing something that is untoward, that is not allowed, [or] that is in violation of the law with respect to who is being paid these operating expenses [out of Jefferson's deposit account] . . . . then perhaps [plaintiffs] ought to be considering whether or not to bring [Valley National] in to a lawsuit for . . . whatever theory [plaintiffs] would consider to be available.

On January 19, 2010, the motion judge entered a written order denying plaintiffs' motion and granting defendants' cross-motion. This appeal ensued.*fn6

On appeal, plaintiffs argue that the motion judge erred when she declined to order Jefferson to satisfy their judgment through monthly installment payments pursuant to N.J.S.A. 2A:17- 64. Plaintiffs assert that Valley National relinquished its priority status by allowing Jefferson to make payments out of the deposit account to itself and to other parties. Plaintiffs further allege that Valley National misled the sheriff in response to its levies, by initially and falsely asserting to the sheriff that Jefferson's accounts at the bank were "closed" and then later asserting that Jefferson's bank account was "linked to a commercial loan."

In their reply brief, plaintiffs raise an additional issue--one they did not raise in the trial court--alleging that the UCC-1 financing statement does not perfect Valley National's security interests in Jefferson's funds at the bank. In particular, plaintiffs highlight that the financing statement refers only to an "account," which is a term defined in N.J.S.A. 12A:9-102(a)(2) to exclude "deposit accounts" under N.J.S.A. 12A:9-102(a)(29).*fn7 Consequently, plaintiffs contend that Jefferson's deposit account at Valley National is not covered by the UCC-1 financing statement and that the assets in that account are thus open to levy by unsecured creditors.

Defendants maintain that the motion judge's substantive rulings were correct in all respects, and that plaintiffs cannot access the deposit account because of Valley National's superior position as a secured lender. Defendants have not cross-appealed the trial court's denial of counsel fees.


Our examination of these issues involves several basic principles. A "debenture" is debt security that takes the form of an unsecured corporate obligation. By definition, a debenture represents "[a] debt secured only by the debtor's earning power, not by a lien on any specific asset." Black's Law Dictionary 430 (8th ed. 2004). Under English law,*fn8

"debenture" corresponds to "a company's security for a monetary loan." Ibid. Generally, a debenture is "a bond that is backed only by the general credit and financial reputation of the corporate issuer, not by a lien on corporate assets." Ibid. (emphasis added).

By contrast, Valley National's interest in Jefferson's financial assets is that of a secured lender. That interest is superior to that of unsecured creditors, such as plaintiffs and the other Jefferson debenture-holders. Moreover, "[u]nder N.J.S.A. 12A:9-301, a lien creditor, which includes a creditor who has acquired a lien on property by attachment, levy or the like, takes subject to a security interest securing advances made before the lien creditor acquired his lien." Pinkerton's Inc. v. Roebling Steel Corp., 186 N.J. Super. 10, 14 (Law Div. 1982).

The bank's superior position as a secured creditor arises here in a special context, in which the debtor maintains a deposit account at the bank that is also its secured creditor. The Uniform Commercial Code Comment to N.J.S.A. 12A:9-340 confirms that "a bank may hold a right of set-off against, and an Article 9 security interest in, the same deposit account. By holding a security interest in a deposit account, a bank does not impair any right of set-off it would otherwise enjoy." N.J.S.A. 12A:9-340, U.C.C. Comment 3. The Comment to N.J.S.A. 12A:9-341 further substantiates a bank's rights and duties with respect to such deposit accounts:

This section is designed to prevent security interests in deposit accounts from impeding the free flow of funds through the payment system. Subject to two exceptions, it leaves the bank's rights and duties with respect to the deposit account and the funds on deposit unaffected by the created or perfection of a security interest or by the bank's knowledge of the security interest. [N.J.S.A. 12A:9-341, U.C.C. Comment 2.]

Until they filed their reply brief on this appeal, plaintiffs accepted the trial court's finding that Valley National had perfected its position as a secured creditor by filing the UCC-1 financing statement. Plaintiffs now urge that we reverse the trial court's finding in that respect because of the particular phrasing of the financing statement and its omission of the word "deposit" before the word "account." We need not address or resolve that legal issue now, because it was never raised in the trial court. Nieder v. Royal Indemn. Ins. Co., 62 N.J. 229, 234 (1973). Instead, we remand that issue for initial consideration in the trial court, along with the other issues that, for the reasons we now discuss, must also be remanded.

The critical question before us is whether Valley National compromised or waived its asserted preferred status in the deposit account by permitting Jefferson to make the various disbursements that have been questioned by plaintiffs. N.J.S.A. 12A:9-207(b)(4)(A) authorizes a bank to allow a depositor, against whom it has a secured interest as a creditor, to make use of funds on deposit for reasonable business purposes in order to "preserve the collateral" of the debtor. The parties have presented us with competing case law from other jurisdictions suggesting that courts have varied in how broadly or narrowly to construe bank's authority to allow account funds to be used while still preserving the bank's priority status as a secured creditor. Compare First Third Bank v. Peoples Nat'l Bank, 929 N.E. 2d 210, 216 (Ind. Ct. App. 2010) (rejecting an unsecured judgment creditor's assertion that a bank lost its priority status as a secured creditor after the bank failed to exercise its right to a setoff), with In re Mycro-Tek, Inc., 191 B.R. 188, 194 (D. Kan. 1996) (holding that a depository bank waived its preferred position over an unsecured creditor when it allowed the debtor to make use of the account funds unencumbered and honored checks to others drawn on the account).

Unfortunately, the now-deceased motion judge did not make any specific findings concerning the propriety of the specific disbursements from Jefferson's bank account and whether they were made appropriately to "preserve the collateral" of the debtor to enable it to continue to recover additional revenues and wind up its affairs. To be sure, we appreciate that some professional services, such as those of law firms and accountants, will reasonably need to be maintained so that Jefferson can continue to collect what it is owed, to file tax returns, to manage its legal affairs, and the like. On the other hand, plaintiffs identified several payments out of the account that raise genuine questions that should be explored by the trial court and addressed in itemized judicial findings. Defendants' counsel did not oppose this panel's suggestion at oral argument to direct such a remand, given the absence of particularized findings. We therefore order such a remand out of necessity.

In now remanding this matter to the trial court, we must note our agreement with the motion judge's suggestion that plaintiffs file an appropriate pleading to make Valley National a party, if they intend to persist in making specific allegations of mishandling of funds. We do not prescribe the exact form of such a pleading, such as whether it should be styled as a claim for declaratory relief under N.J.S.A. 2A:16-53, a claim for affirmative relief, or some other formulation. Regardless of the form and content of the pleading, we do think that Valley National is an indispensable party to an adjudication that would, if plaintiffs prevail, result in a full or partial nullification of Valley National's preferred status as a secured creditor.*fn9

The question of whether plaintiffs are entitled to any payments or installments under N.J.S.A. 2A:17-64 shall abide the outcome of the remand. In addition, the trial court shall have discretion on remand to permit further discovery that may be warranted concerning Jefferson's bank account, or other relevant matters, given the passage of time while this appeal has been pending.

Remanded for further proceedings consistent with this opinion. We do not retain jurisdiction.

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