Opinion
Case No: 06-12743 (MBK), Adv. Pro. No: 06-02003 (MBK).
September 28, 2007
Thomas P. Monahan, Jr., Esq., Dennis A. Maycher, Esq., Law Offices of Dennis A. Maycher, P.C., Wallington, NJ, Attorney for Plaintiff, Wawel Savings Bank.
Cory Mitchell Gray, Esq., Greenberg Traurig, LLP, Florham Park, NJ, Attorney for Defendant, Yale Factors NJ, LLC.
Lawrence R. Pinck, Esq., Pinck Pinck, Clifton, NJ, Attorney for Debtor-Defendant, Jersey Tractor Trailer Training, Inc.
MEMORANDUM OPINION
I. INTRODUCTION
This case arises out of the conflicting claims of Plaintiff, Wawel Savings Bank (hereinafter "Wawel"), and Defendant, Yale Factors NJ, LLC (hereinafter "Yale"), to the payments made and to be made by the account debtors of Defendant-Debtor, Jersey Tractor Trailer Training, Inc. (hereinafter "JTTT"). The Court conducted a trial on July 11 and July 13, 2007. For the reasons set forth below, the Court determines that Wawel maintains a first lien position, superior to Yale, with respect to the Debtor's accounts receivable, and is entitled to collect the proceeds thereof.
II. FINDINGS OF FACT
The Court has adopted and incorporated in its Opinion certain non-controverted facts set forth in the post trial submission brief of Plaintiff, Wawel, as well as additional findings of fact supported by testimony and evidence introduced at trial.
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1. Plaintiff, Wawel, is a federally chartered banking institution organized and existing under the laws of the United States of America. 2. Debtor, JTTT, is a corporation organized and existing under the laws of the State of New Jersey with its principle place of business located at 201 State Hwy. 17, Rutherford, New Jersey 07070. 3. Defendant, Yale, is a limited liability company organized and existing pursuant to the law of the State of New Jersey with its principle place of business located at 39 West 37 Street, New York, New York 10018. 4. On March 7, 2002, Wawel entered into a loan agreement with JTTT and its President, William B. Oliver, for the principal amount of $315,000 (Plaintiff's Exhibits "P-7" and "P-8"). 5. Wawel's President and CEO, Robert Ranzinger, had personal responsibility for Wawel's loan to JTTT, and the loan was the largest commercial loan made by Wawel. 6. The loan between Wawel and JTTT was to be repaid in seven (7) years at an annual interest rate of 12% amortized over twenty (20) years (See Plaintiff's Exhibit "P-7"). 7. On January 18, 2002, JTTT submitted a commercial loan/line application in order to obtain the loan and the amount of $315,000. (See Plaintiff's Exhibit "P-2") 8. On January 22, 2002, a Commercial Loan Offering was prepared by Wawel and forwarded to JTTT. (See Plaintiff's Exhibit "P-3") 9. The January 22, 2002, Commercial Loan Offering listed under the term "collateral," "UCC-1 filing on all Capital Equipment and all other assets of the company . . ." (See Plaintiff's Exhibit "P-3") 10. On January 23, 2002, Robert Ranzinger forwarded a letter to William Oliver, President of JTTT, which provided a detailed loan commitment. This document provided under the term "collateral" the following language, "UCC-1 (1st position) filing on all capital equipment and all other assets of the company." (See Plaintiff's Exhibit "P-4"). 11. In furtherance of obtaining this loan, Debtor entered into a Security Agreement with Wawel providing that all inventory, equipment, accounts, instruments, documents, chattel paper and other rights to payment, general intangibles, government payments and programs would serve as collateral. 12. To perfect Wawel's Security Agreement, Uniform Commercial Code Financing Statements ("UCC-1") were executed and filed with the New Jersey Department of Treasury on May 24, 2002 and the Bergen County Clerk's Office on June 12, 2002 (See Plaintiff's Exhibits "P-9" and "P-10"). 13. Both the Loan Agreement and the Security Agreement define a "default" as "any other creditor . . . [attempting] to collect any debt . . . [owed] him through court proceeding" (See Plaintiff's Exhibits "P-7" and "P-8"). 14. The "Warranties and Representations" section of the Security Agreement states, in relevant part: "If this agreement includes accounts, I will not settle any account for less than its full value without your written permission." (Plaintiff's Exhibit "P-8"). 15. Ranzinger testified (and Oliver confirmed) that under the Wawel-JTTT security agreement, JTTT was free to collect and compromise its own receivables and that Wawel imposed no restrictions on JTTT's use of its receivables or their proceeds; nor did Wawel monitor JTTT's business or its collateral. Ranzinger testified that Wawel's only interest was in having JTTT repay its loan. In fact, Ranzinger acknowledged that the funds advanced by Yale to JTTT were the "proceeds" of those accounts receivable and that JTTT was free to use them in its business operations without any restrictions imposed by Wawel. Further, neither the Wawel UCC-1 Financing Statement filed by Wawel or the Security Agreement imposed any restrictions on JTTT's use of the collateral or the proceeds of the collateral. 16. Mr. Ranzinger testified that under the Wawel-JTTT security agreement, Wawel only had the right to take possession of JTTT's accounts receivable or other collateral, or restrict JTTT's use of such collateral, when a default by JTTT had been declared by Wawel. Mr. Ranzinger further testified that the default by JTTT was its filing for bankruptcy protection in April 2006, long after all the transactions at issue had taken place. 17. On or about March 20, 2003, JTTT, suffering through severe cash flow problems, entered into a Factoring and Security Agreement with Yale (See Plaintiff's Exhibit "P-13"), under which Yale purchased account receivables from JTTT pursuant to absolute assignments and gave value in exchange in the form of monetary advances. 18. The application for the factoring relationship, filled out by JTTT, did not require JTTT to disclose the recurring debt of JTTT, including bank loans, lines of credit, etc. Moreover, Yale did not review JTTT's books and records prior to entering into the factoring arrangement. 19. Yale conducted periodic UCC searches through its regular search company, Dun and Bradstreet. These reports searched filings against "Jersey Tractor Trailer Training", not the correct corporate name. The searches did not disclose Wawel's security interests against JTTT's assets. 20. The factoring agreement executed by JTTT was prepared by Yale. 21. The factoring agreement and all related documentation referred to the entity known as Jersey Tractor Trailer Training, Inc. (Plaintiff's Exhibit "P-13"). 22. The name Jersey Tractor Trailer Training, Inc. was known to Harry Perkal, President of Yale, as he prepared all documents utilizing the proper corporate name (Plaintiff's Exhibit "P-13"). 23. Mr. Perkal has acknowledged in his trial testimony that if Yale had been aware of the UCC filing by Wawel, it would have sought to enter into a subordination agreement or have paid off Wawel's loan to JTTT. 24. A closing was conducted with regard to the factoring Agreement on March 3, 2003 (Plaintiff's Exhibit "P-13"). 25. William Oliver purposefully concealed from Wawel JTTT's factoring arrangement, as he understood such a practice would be in violation of the loan agreement with Wawel. Mr. Oliver even concealed the factoring arrangement from his own accountant until such time as the accountant discovered the relationship on his own. Likewise, Mr. Oliver failed to disclose to Yale that JTTT had entered into a loan agreement with Wawel in which a prior UCC-1 had been filed. 26. Yale filed a UCC-1 Financing Statement on March 26, 2003, on all present and after acquired accounts receivable of JTTT. 27. Wawel holds a lien prior in time to Yale's UCC-1 Financing Statement. 28. Mr. Ranzinger testified that Wawel maintains an account at the Federal Home Loan Bank (FHLB) for the purposes of allowing its customers to conduct wire transfers. 29. Mr. Ranzinger testified that although wire transfer notices are received by the bank, they are handled by low level clerical employees, who assure that the wire transfers are credited to the customers' accounts. 30. In his capacity as bank president, Mr. Ranzinger indicated that he would not receive these wire transfer notices. Further, any such notices would be received to confirm that funds had been wired and credited to the correct account. 31. Mr. Ranzinger personally designated four bank officers as the only persons with authority to deal with the FHLB with respect to wire transfers because the wire transfers needed to be dealt with immediately and responsibly. Wawel designated (a) Robert Ranzinger, Managing Director and CEO; (b) Mr. Ranzinger's son, Robert H. Ranzinger, Vice-President, (c) Michael A. Sasjack, Controller and (d) Christina Jastrzab, Wawel's Treasurer, to act on its behalf with respect to FHLB. 32. On the March 11, 2002 Wire Transfer Authorization and Agreement Form (which, among other things, identifies the individuals at the correspondent bank who are authorized to "make or confirm telephonic, oral, written or other funds transfer requests from the accounts . . .") that Mr. Ranzinger executed on behalf of Wawel, he required that FHLB provide to Wawel telephone notification of each wire transfer directly to one of the designated bank officers. 33. Wawel executed its Wire Transfer Authorization and Agreement on March 11, 2002 and that WTAA governed the wire transfer aspects of Wawel's relationship with FHLB through March 8, 2007, at which time Wawel executed a new Wire Transfer Authorization and Agreement. Thus, it was the March 11, 2002 WTAA that applied to all transactions at issue here. 34. Ms. Jastrzab was the primary individual notified by telephone from FHLB, as evidenced by the transaction histories of FHLB's wire transfers to Wawel. Each telephone notification to Ms. Jastrzab included the name of the sender (Yale) and the name of the beneficiary (JTTT) as well as the amount of the transfer. 35. Wawel maintains an account at FHLB in order to receive wire transfers because, by virtue of its status as savings and loan associations, it is not authorized to have access to the federal funds system and therefore it can neither make nor receive wire transfers directly. 36. When wire transfers were received at FHLB into one of the correspondent bank accounts, such wire transfers would be accompanied by instructions from the sender as to the disposition of the funds. In the case of Wawel, funds were regularly received from Yale Factors NJ LLC, from its bank, Sterling Bank. Those funds were accompanied by wire transfer advices which directed FHLB to credit the funds to Wawel's account for the ultimate beneficiary, JTTT. The Sterling Bank wire transfer advices also instructed that the credit of those funds was to be notified to Wawel through Mr. Ranzinger. 37. On or about December 9, 2005, Mr. Ranzinger met with William Oliver to discuss the status of Debtor's checking account, which had an alarmingly low to negative balance. At this meeting, Mr. Oliver first informed Mr. Ranzinger that he had been utilizing Yale and had encountered financial problems as a result of reduced cash flow being provided to the Debtor by Yale. 38. On or about December 20, 2005, there was a meeting at Wawel's offices of all involved parties. Here, Wawel learned of the approximate amounts purported to be owed by Debtor to Yale, as well as the fees and interest rate being charged by Yale. 39. At that meeting, Mr. Ranzinger advised Yale that Wawel had a valid first lien in the accounts receivable of Debtor, and expressed his objection to the factoring of JTTT's accounts receivable. As a result of this disclosure, Yale conducted a new lien search and first discovered the existence of Wawel's lien. 40. Subsequent to the December 20, 2005 meeting, Mr. Perkal acknowledged to Mr. Ranzinger that Yale's UCC search had been performed on the incorrect corporate name. 41. On December 23, 2005, Mr. Ranzinger reaffirmed to Mr. Oliver that the utilization of a factor was in violation of the loan agreement with Wawel. As a consequence, on January 20, 2006, Debtor sent a letter to Yale informing them that it would not renew its contract which was scheduled to automatically renew on March 20, 2006. 42. Yale persisted in its collection actions against Debtor's customers culminating in Yale obtaining an Ex Parte Order to Show Cause with Temporary Restraints against Debtor on March 8, 2006. 43. Yale did not notify Wawel of the Order to Show Cause and its attendant restraints until March 10, 2006. 44. Yale's restraints in the aforementioned Order to Show Cause included relief such as a prejudgment transfer of monies to Yale on certain accounts receivable. 45. In response to Yale's Order to Show Cause, Plaintiff intervened in the action and certain accounts receivable payments received by Yale are now being held in the attorney trust account of its attorneys. 46. On April 4, 2006, Debtor filed its voluntary Chapter 11 petition for bankruptcy. 47. On June 29, 2006, Wawel filed this adversary proceeding against Yale and the Debtor. Cross motions for summary judgment were denied on March 12, 2007 and this matter came before the Court for trial on July 11 and July 13, 2007.III. JURISDICTION
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334, and the Standing Order of Reference issued by the United States District Court for the District of New Jersey on July 23, 1984. This is a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(F) and (K). Venue is proper in this Court pursuant to 28 U.S.C. § 1409(a). The following constitutes the Court's findings of fact and conclusions of law as required by Fed.R.Bankr.P. 7052.IV. DISCUSSION
A. "True Sale" v. Secured Loan
As a preliminary matter, the Court will first address the issue of whether the Factored Accounts at issue are "true sales" or whether they represent a loan from Yale secured by the accounts and other assets of the Debtor. The starting point for the Court's analysis begins with the provisions of Article 9 of the Uniform Commercial Code ("UCC"), as adopted in New Jersey, which encompass both sales of accounts receivables and security interests in receivables. N.J.S.A. § 12A:9-109(a)(1) and (3). In this regard, Comment 4 of the official commentary to § 9-109 states:
A finding by this Court that the transactions at issue were not "true sales," but rather simply transfers of collateral in connection with secured financing, would dramatically undercut Yale's position in this litigation. In this regard, Yale would be unable to put forward its rights as a "good faith" purchaser of accounts and/or a "holder in due course".
4. Sales of Accounts, Chattel Paper, Payment Intangibles, Promissory Notes, and Other Receivables. Under subsection (a)(3), as under former Section 9-102, this Article applies to sales of accounts and chattel paper. This approach generally has been successful in avoiding difficult problems of distinguishing between transactions in which a receivable secures an obligation and those in which the receivable has been sold outright. In many commercial financing transactions the distinction is blurred.
Subsection (a)(3) expands the scope of this Article by including the sale of a "payment intangible" (defined in Section 9-102 as "a general intangible under which the account debtor's principal obligation is a monetary obligation") and a "promissory note" (also defined in Section 9-102). To a considerable extent, this Article affords these transactions treatment identical to that given sales of accounts and chattel paper. In some respects, however, sales of payment intangibles and promissory notes are treated differently from sales of other receivables. See, e.g., Sections 9-309 (automatic perfection upon attachment), 9-408 (effect of restrictions on assignment). By virtue of the expanded definition of "account" (defined in Section 9-102), this Article now covers sales of (and other security interests in) "health-care-insurance receivables" (also defined in Section 9-102). Although this Article occasionally distinguishes between outright sales of receivables and sales that secure an obligation, neither this Article nor the definition of "security interest" (Section 1-201(37)) delineates how a particular transaction is to be classified. That issue is left to the courts.
(Emphasis added). Yet, notwithstanding that the UCC provisions apply to both sales and security transfers of account receivables, the UCC does not address or provide guidance on the sale/financing characterization. Indeed, Comment 5 to § 9-109 makes it clear that the applicability of Article 9 to the sales of accounts is wholly irrelevant to any determination as to whether a particular transaction is to be deemed a sale or the creation of a security interest securing a loan:
5. Transfer of Ownership in Sales of Receivables. A "sale" of an account, chattel paper, a promissory note, or a payment intangible includes a sale of a right in the receivable, such as a sale of a participation interest. The term also includes the sale of an enforcement right. For example, a "[p]erson entitled to enforce" a negotiable promissory note (Section 3-301) may sell its ownership rights in the instrument. See Section 3-203, Comment 1 ("Ownership rights in instruments may be determined by principles of the law of property, independent of Article 3, which do not depend upon whether the instrument was transferred under Section 3-203."). Also, the right under Section 3-309 to enforce a lost, destroyed, or stolen negotiable promissory note may be sold to a purchaser who could enforce that right by causing the seller to provide the proof required under that section. This Article rejects decisions reaching a contrary result, e.g. Nothing in this section or any other provision of Article 9 prevents the transfer of full and complete ownership of an account, chattel paper, an instrument, or a payment intangible in a transaction of sale. However, as mentioned in Comment 4, neither this Article nor the definition of "security interest" in Section 1-201 provides rules for distinguishing sales transactions from those that create a security interest securing an obligation. This Article applies to both types of transactions. The principal effect of this coverage is to apply this Article's perfection and priority rules to these sales transactions. Use of terminology such as "security interest," "debtor," and "collateral" is merely a drafting convention adopted to reach this end, and its use has no relevance to distinguishing sales from other transactions. See PEB Commentary No. 14.
Following a debtor's outright sale and transfer of ownership of a receivable, the debtor-seller retains no legal or equitable rights in the receivable that has been sold. See Section 9-318(a). This is so whether or not the buyer's security interest is perfected. (A security interest arising from the sale of a promissory note or payment intangible is perfected upon attachment without further action. See Section 9-309.) However, if the buyer's interest in accounts or chattel paper is unperfected, a subsequent lien creditor, perfected secured party, or qualified buyer can reach the sold receivable and achieve priority over (or take free of) the buyer's unperfected security interest under Section 9-317. This is so not because the seller of a receivable retains rights in the property sold; it does not. Nor is this so because the seller of a receivable is a "debtor" and the buyer of a receivable is a "secured party" under this Article (they are). It is so for the simple reason that Sections 9-318(b), 9-317, and 9-322 make it so, as did former Sections 9-301 and 9-312. Because the buyer's security interest is unperfected, for purposes of determining the rights of creditors of and purchasers for value from the debtor-seller, under Section 9-318(b) the debtor-seller is deemed to have the rights and title it sold. Section 9-317 subjects the buyer's unperfected interest in accounts and chattel paper to that of the debtor-seller's lien creditor and other persons who qualify under that section.
(Emphasis added). See also Comment 2 to § 9-318 ("Neither this Article nor the definition of `security interest' in § 1-201 provides rules for distinguishing sales transactions from those that create a security interest securing an obligation"). As a result, this Court must seek guidance outside of the UCC and examine the judicially created criteria, as applied to the parties' practices, objectives and expectations, in characterizing the transactions at issue.
The Courts have developed a series of factors to be employed in determining whether assets transfers are "true sales" or transfers of collateral in connection with secured financing. An excellent analysis and overview of applicable case law can be found in an article by Robert D. Aicher William J. Fellerhoff, titled Characterization of a Transfer of Receivables as a Sale or a Secured Loan Upon Bankruptcy of the Transferor, 65 Am. Bankr. L.J. 181 (1991) (hereinafter, "Aicher Fellerhoff"). The factors identified by various courts to find that a sale of receivables is in reality a loan are:
1. Language of the documents and conduct of the parties.
2. Recourse to the seller.
3. Seller's retention of servicing and commingling of proceeds.
4. Purchasers failure to investigate the credit of the account debtor.
5. Seller's right to excess collections.
6. Purchaser's right to alter pricing terms.
7. Seller's retention of right to alter or compromise unilaterally the terms of the transferred assets.
8. Seller's retention of right to repurchase asset.
Aicher Fellerhoff, supra, 65 Am. Bankr. L. J. at 186-194; See also Lois R. Lupica, Revised Article 9, Securitization Transactions and the Bankruptcy Dynamic, 9 Am. Bankr. Inst. L.Rev. 287, n49 (2001) (citing Fireman's Fund Ins. Cos. v. Grover (In re Woodson Co.), 813 F.2d 266, 272 (9th Cir. 1987) (Concluding that transferor retention of risk, coupled with lending interest rate, suggested loan, rather than sale); Bear v. Coben (In re Golden Plan of California, Inc.), 829 F.2d 705, 707, 710 (9th Cir. 1986); Major's Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 542-44 (3d Cir. 1979) (Describing factors relevant to determination of existence of true sale); In re Coronet Capital Co., 142 B.R. 78 (Bankr. S.D.N.Y. 1992) (Describing instance where transfer was loan due to transferee's payment of interest to purchasers of interests, notwithstanding transferor's default); In re Evergreen Valley Resort, Inc., 23 B.R. 659 (Bankr. D. Me. 1982) (Finding transfer was security interest due to debtor's retained interest); First Nat'l Bank of Louisville v. Hurricane Elkhorn Coal Corp. II (In re Hurricane Elkhorn Coal Corp. II), 19 B.R. 609 (Bankr. W.D. Ky. 1982) (Describing instance where transfer was security interest because of debtor's retained interest); Federated Dep't Stores, Inc. v. Comm'r, 51 T.C. 500, 511 (1968), aff'd, 426 F.2d 417 (6th Cir. 1970) (Concluding that because transferor retained some risk, transfer was deemed to be loan)).
While the above factors are helpful in cases where the intentions of the parties are not clearly expressed, the Court has no doubt that the language of the Factoring and Security Agreement in this case, as well as the conduct of the parties themselves, demonstrate that the parties intended that the agreement be a "true sale" of certain of the Debtor's accounts receivable. Support for this conclusion can be found throughout the Factoring and Security Agreement, which states in relevant part:
2. Sale; Billing;
2.1 Assignment and Sale.
2.1.1 Seller shall sell to Purchaser as absolute owner, such of Seller's Accounts as are listed from time to time on Schedules of Accounts. Upon purchase, Purchaser will assume the risk of nonpayment of the Purchase Price on Insolvency Accounts.
6. Security Interest.
6.1 As collateral securing the Obligation, Seller grants to Purchaser a continuing first priority security interest in and to the Collateral.
6.2 Notwithstanding the creation of the above security interest, the relationship of the parties shall be that of Purchaser and Seller of accounts, and not that of lender and borrower.
22. Relationship of Parties.
The relationship of the parties hereto shall be that of Seller and Purchaser of accounts, and neither party is or shall be deemed a fiduciary of or to the other.
(Plaintiff's Exhibit "P-13") (Emphasis added). Moreover, it should be noted that Wawel has not contested, at either trial or in post trial submissions, that the arrangement between Yale and JTTT did in fact contemplate a "true sale" of JTTT's accounts. Thus, the Court is satisfied that the Factored Accounts at issue are actual sales of the Debtor's accounts receivable.
B. Competing Claims to Factored Accounts
Now turning to Wawel and Yale's competing claims at issue, the Court must determine the relative rights of each party to the proceeds of the Factored Accounts. As previously noted, the parties do not dispute that in furtherance of its loan to the Debtor, Wawel and the Debtor entered into a Security Agreement providing that all inventory, equipment, accounts, instruments, documents, chattel paper and other rights to payment, general intangibles, government payments and programs would serve as collateral. The parties also do not dispute that Wawel perfected its Security Agreement by filing Uniform Commercial Code Financing Statements ("UCC-1") with the New Jersey Department of Treasury on May 24, 2002 and the Bergen County Clerks Office on June 12, 2002 (See Plaintiff's Exhibits "P-9" and "P-10"). Having filed its UCC-1 Financing Statement relative to its Factoring Agreement with JTTT on March 26, 2003, Yale may prevail only if it can demonstrate that it maintains a priority position as a matter or law despite Wawel's "first in time" filed UCC-1.
(1) Consent to Sale of Factored Accounts
Yale first argues that it has met the exception to Wawel's priority by demonstrating that Wawel consented to JTTT's sale of its accounts receivable to Yale free of Wawel's security interest. Yale argues that Wawel consented by either (1) having actual knowledge of Yale's factoring of JTTT's receivables and allowing Yale to proceed, and/or (2) based on the course of dealings between the parties in which Wawel allowed Yale to continue factoring. As to Yale's assertion that Wawel had actual knowledge, Yale alleges that certain conversations between Mr. Ranzinger and Mr. Perkal, as well as Mr. Ranzinger's conversations with Mr. Oliver, revealed to Wawel that Yale was factoring certain of the Debtor's receivables. As to Yale's argument that Wawel knew of Yale's factoring based on course of dealing, Yale argues that certain wire transfers beginning in November 2003 were sufficient to place Wawel on notice that Yale was factoring the Debtor's accounts.
With respect to Yale's consent/waiver argument, the relevant statute is N.J.S.A. § 12A:9-315, which states in relevant part:
§ 12A:9-315. Secured party's rights on disposition of collateral and in proceeds
(a) Disposition of collateral: continuation of security interest or agricultural lien; proceeds. Except as otherwise provided in this chapter and in 12A:2-403(2):
(1) a security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien . . .
N.J.S.A. § 12A:9-315. It follows, therefore, that in order to prevail under § 12A:9-315, Yale must establish that Wawel authorized the disposition of JTTT's collateral, free of Wawel's security interest. As such, Yale cites a slew of cases in which other courts have found that a secured party consented to the disposition of its collateral free of its security interest. In all of these cases interpreting § 12A:9-315, the courts determined that the secured party had evidenced its consent to the disposition of its collateral, either expressly or through conduct, including a course of dealing and/or performance. The voluminous case law submitted by Yale, however, offers the Court little assistance inasmuch as these cases present fact patterns differing significantly from the present matter. Therefore, in determining whether Yale has sustained its burden with respect to Wawel's alleged consent, the Court undertakes a case by case examination by evaluating the facts and evidence presented.
In In re Glunk, 342 B.R. 717 (E.D.Pa. 2006), the court noted the following:
Justice Scalia has suggested that use of a "totality of the circumstances" test as the explanation for a judicial decision "amounts to not so much pronouncing the law in the normal sense as engaging in the less exalted function of fact finding." A. Scalia, The Rule of Law As a Law of Rules, 56 U. Chi. L.Rev. 1175, 1180-81 (1989). If this conceptualization is accurate, it may follow that consideration of precedent should play a less significant role in a court's decision making process. As the court observed in In re Crater:
There are many areas of bankruptcy law where Congress apparently intended bankruptcy judges to weigh the evidence and utilize their experience and judgment to decide individual cases on a case by case basis. It does so by using terms that are inherently incapable of fine definition, such as "good faith," "substantial abuse," "undue hardship," and the like. Case law in such areas tends to identify "factors" that in reality are merely a checklist of relevant facts or issues to consider, none of which is dispositive. Perhaps such areas of bankruptcy law are best dealt with as in the civil system, with each judge reading and applying the statute and its underlying policies and principles to each factual situation that comes up, without regard to what the last judge did on different facts. Reported decisions in such areas serve little useful purpose, and in fact may be counterproductive.
286 B.R. 756, 772 (Bankr. D. Az. 2002) (Emphasis Added).
In this case, the Court is satisfied that a determination of whether Wawel "consented" to or "authorized" Yale's use of its collateral is a determination that must be made by weighing the applicable evidence under these individual set of facts. In marked contrast to the case at bar, most, if not all, of the cases cited by Yale were bottomed on circumstances in which a secured party knew of or became aware of the fact that their collateral was being disposed of by the debtor. In many of these cases, for example, the secured collateral at issue included livestock, farm products, machinery or equipment — all of which the secured party knew were being liquidated by sale, auction, or the like. In that regard, the secured party was on notice that the proceeds generated by the disposition of the collateral were traceable to the specific collateral.
As the trier of fact, this Court assesses the credibility of the trial witnesses. In doing so, the Court finds the testimony of Mr. Ranzinger, the President and CEO of Wawel, to be highly credible. The Court perceives Mr. Ranzinger as an experienced banking official, personally involved in all aspects of banking services and customer relations. To this day, Mr. Ranzinger has demonstrated an intent to support and assist Wawel's customers, even in difficult financial times. Indeed, the record reflects that Mr. Ranzinger, up until the bankruptcy filing, engaged in extensive efforts to negotiate and facilitate a resolution to the Debtor's financial quagmire, and continues to offer Wawel's support throughout the Chapter 11 proceedings. In marked contrast, this Court regards the testimony offered by William Oliver to be of little evidentiary value. Indeed, by his own testimony and actions, Mr. Oliver has made it clear that he would say or do anything to support his business. Consistent with this approach, Mr. Oliver concealed from both Wawel and Yale the competing financial accommodations. Thus, this Court will accord little, if any, weight to Mr. Oliver's testimony.
It is manifestly evident that the Factoring Agreement between Yale and JTTT was an extraordinary business arrangement of which the Court is satisfied, based upon the trial testimony, that Wawel had no actual notice. It is clear from the testimony of Mr. Ranzinger that the December 9, 2005 meeting between Mr. Ranzinger and Mr. Oliver was the first time that Mr. Ranzinger knew that JTTT was utilizing Yale as a factor. In point of fact, Mr. Oliver purposefully concealed from Wawel, as well as his own accountant, the agreement between Yale and JTTT, knowing full well that the Agreement would not be acceptable to Wawel. It follows, therefore, that Wawel could not possibly have known which monies given to it by JTTT were actual proceeds traceable from JTTT's Factoring Agreement with Yale. Plaintiff has not introduced sufficient oral or documentary evidence to contradict Mr. Ranzinger's testimony that he never discussed the factoring relationship with Mr. Perkal prior to the December 9, 1005 meeting.
The Court also finds unavailing the argument presented by Yale that Wawel knew of the Factoring Agreement by virtue of certain wire transfers. The testimony of Mr. Ranzinger indicates that although wire transfer notices were received by Wawel, the notices were handled by lower-level employees whose job was to simply assure that the transfers were credited to a particular customer's account. Mr. Ranzinger further testified that although he had authority to deal with said wire transfers, he would not receive them in his capacity as bank president. Accordingly, the Court will not impute knowledge of the JTTT/Yale Factoring Agreement to Wawel simply because clerical employees at Wawel were aware that JTTT's account was, at times, credited with certain wire transfers originating from Yale.
(2) "Holder in Due Course"
As an alternative argument, Yale contends that it qualifies as a "holder in due course" as a purchaser of the Debtor's accounts receivable. Thus, Yale asserts that it takes priority over Wawel despite the fact that Wawel filed its UCC-1 before the Factoring Agreement between JTTT and Wawel was consummated. Under N.J.S.A. § 12A:3-302, a "holder in due course" is defined as follows:
a. Subject to subsection c. of this section and subsection d. of 12A:3-106, "holder in due course" means the holder of an instrument if:
(1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
(2) the holder took the instrument for value, in good faith, without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, without notice that the instrument contains an unauthorized signature or has been altered, without notice of any claim to the instrument described in 12A:3-306 [Claims to an instrument], and without notice that any party has a defense or claim in recoupment described in subsection a. of 12A:3-305.
N.J.S.A. § 12A:3-302. Therefore, in order for Yale to be considered a "holder in due course," it must demonstrate that it took the invoices of JTTT's accounts receivable (1) for value, (2) in good faith, and (3) without notice of Wawel's security interest or claim to the instrument. Furthermore, the determination of whether Yale is a "holder in due course" directly affects whether Yale may take priority over Wawel as a purchaser of an instrument under N.J.S.A. §§ 12A:9-330 and 9-331. As explained in Comment 5 to N.J.S.A. § 12A:9-331, which deals with the priority rights of purchasers of instruments:
Before the Court can assess whether Yale may qualify as a "holder in due course," it must first determine whether JTTT's accounts receivable may be considered "instruments" for purposes of N.J.S.A. § 12A:3-302. In that regard, N.J.S.A. § 12A:9-102(47) states in relevant part:
(47) "Instrument" means a negotiable instrument or any other writing that evidences a right to the payment of a monetary obligation, is not itself a security agreement or lease, and is of a type that in ordinary course of business is transferred by delivery with any necessary indorsement or assignment. The term does not include (i) investment property, (ii) letters of credit, or (iii) writings that evidence a right to payment arising out of the use of a credit or charge card or information contained on or for use with the card.
Based on the above definition of the term "instrument," the Court will accept, for purposes of this discussion, Yale's argument that the invoices requiring a recipient to make payment for services rendered on an individual Factored Account qualifies the Factored Accounts as "instruments" subject to a "holder in due course" analysis under N.J.S.A. § 12A:3-302.
Those sections state, in relevant part:
§ 12A:9-330. Priority of purchaser of chattel paper or instrument
(d) Instrument purchaser's priority. Except as otherwise provided in 12A:9-331(a), a purchaser of an instrument has priority over a security interest in the instrument perfected by a method other than possession if the purchaser gives value and takes possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party.
§ 12A:9-331. Priority of rights of purchasers of instruments, documents, and securities under other chapters; priority of interests in financial assets and security entitlements under chapter 8
(a) Rights under Chapters 3, 7, and 8 not limited. This chapter does not limit the rights of a holder in due course of a negotiable instrument, a holder to which a negotiable document of title has been duly negotiated, or a protected purchaser of a security. These holders or purchasers take priority over an earlier security interest, even if perfected, to the extent provided in Chapters 3, 7, and 8.
5. Collections by Junior Secured Party. Under this section, a secured party with a junior security interest in receivables (accounts, chattel paper, promissory notes, or payment intangibles) may collect and retain the proceeds of those receivables free of the claim of a senior secured party to the same receivables, if the junior secured party is a holder in due course of the proceeds. In order to qualify as a holder in due course, the junior must satisfy the requirements of section 3-302, which include taking in "good faith." This means that the junior not only must act "honestly" but also must observe "reasonable commercial standards of fair dealing" under the particular circumstances. See section 9-102(a). Although "good faith" does not impose a general duty of inquiry, e.g., a search of the records in filing offices, there may be circumstances in which "reasonable commercial standards of fair dealing" would require such a search.
Consider, for example, a junior secured party in the business of financing or buying accounts who fails to undertake a search to determine the existence of prior security interests. Because a search, under the usages of trade of that business, would enable it to know or learn upon reasonable inquiry that collecting the accounts violated the rights of a senior secured party, the junior may fail to meet the good-faith standard. See Utility Contractors Financial Services, Inc. v. Amsouth Bank, NA, 985 F.2d 1554 (11th Cir. 1993) . . .
Whether the junior secured party qualifies as a holder in due course is fact-sensitive and should be decided on a case-by-case basis in the light of those circumstances.
The concepts addressed in this comment are also applicable to junior secured parties as purchasers of instruments under section 9-330(d). See section 9-330, comment 7.
N.J.S.A. § 12A:9-331.
(a) "For Value"
In this case, it is undisputed that Yale paid certain monies to JTTT before taking each account receivable. Mr. Perkal, on behalf of Yale, testified to the advance rate, the rebate rate, the amount of funds Yale advanced to purchase the JTTT accounts receivable, and the amount it has collected. Thus, the first prong is satisfied as Yale took each Factored Account from JTTT for value.
(b) "Good Faith"
With respect to the second prong, N.J.S.A. § 12A:9-102(43) defines "good faith" as "honesty in fact and the observance of reasonable commercial standards of fair dealing." In Triffin v. Pomerantz Staffing Services, L.L.C., 370 N.J. Super. 301, 309 (App.Div. 2004), the New Jersey Appellate Division held that "[a] party who fails to make an inquiry, reasonably required by the circumstances of the transaction, so as to remain ignorant of facts that might disclose a defect cannot claim to be a holder in due course." (citing General Inv. Corp. v. Angelini, 58 N.J. 396, 403-04 (1971)). While the issue inTriffin dealt with the business of check cashing, the Court finds the following analysis relevant to the case at bar:
The Court takes no issue with the "honesty in fact" element of good faith with respect to Yale, as the evidence before the Court does not suggest that Yale's actions were dishonest. Accordingly, the following analysis focuses on the "reasonable commercial standards of fair dealing" component of good faith.
It is reasonable, in considering whether the instruments were received in good faith and whether the holder comported with reasonable commercial standards, that the holder be expected to fully examine the front and back of the instrument and, where the instrument purports to contain a method by which its authenticity may be tested, that the holder actually utilize that method. While this failure would likely preclude any holder of these instruments from claiming holder in due course status, it particularly precludes entities in the business of cashing checks.
Triffin, 370 N.J. Super. 301, at 309-310.
Adopting the reasoning enunciated in Triffin, the Court finds that it is not unreasonable to expect Yale, as an entity who's sole business is the factoring of accounts receivable, to not only utilize the correct search method, but to conduct a proper UCC search of the Debtor, including JTTT's corporate name. Indeed, Mr. Perkal acknowledged the importance of a proper search when he testified that had Yale been aware of Wawel's UCC filing, it would have sought to enter into a subordination agreement or have paid off Wawel's loan to JTTT. Furthermore, Yale's comparison of this case to In re Thriftway Auto Supply, Inc., 159 B.R. 948 (W.D. OK 1993), aff'd In re Thriftway Auto Supply, Inc., 1994 U.S. App. LEXIS 31831 (10th Cir. 1994) actually serves to support Wawel's position. As explained in Thriftway, and as cited by Yale, the District Court for the Western District of Oklahoma, affirming the bankruptcy court, held:
Citizens [the creditor] conducted the most narrow search possible by searching only under Thriftway's legal name. As the bankruptcy court noted, "It is fatuous, especially in the commercial context, for one to argue that searching for one narrow entry in an electronic database is a reasonable search." In re Thriftway Auto Supply, Inc., 156 Bankr. 300, 302 (Bankr. W.D. Okla. 1993).
Thriftway, 159 B.R. 948, at 953. Thus, as reasoned by the court in Thriftway, the most narrow search a creditor can conduct is by searching solely under an entity's legal name. In the case at bar, Yale failed to meet even that narrow standard, despite the testimony of Mr. Perkal that the name "Jersey Tractor Trailer Training, Inc." was known to him, as he had prepared all documents utilizing the proper corporate name.
This Court remains at a loss to understand how and/or why the Dun Bradstreet search failed either to disclose Wawel's filing or identify "Jersey Tractor Trailer Training, Inc." as a related entity to be searched further. Neither party adequately explained this significant omission by a reputable search firm. Notwithstanding, this search failure is of no moment because it was incumbent upon Yale, as a participant in the financial lending community, to review the search results and undertake all necessary follow-up. Indeed, a search of JTTT revealing no significant secured bank debt, at a time when the company faced liquidity issues necessitating the use of a factor, should have raised red flags. This Court can only assume that Mr. Perkal's admitted inexperience in the factoring industry played a role in the oversight. Moreover, Yale's inability to produce any documentation to support Mr. Perkal's testimony that he had secured a lien search at the inception of the factoring relationship (e.g. — a search report, invoice, receipt or correspondence) undercuts Mr. Perkal's credibility and confirms the reckless manner in which the factoring relationship was pursued by Yale.
In light of the foregoing, this Court finds that Yale failed to observe reasonable commercial standards of fair dealing when it conducted its series of UCC searches on "Jersey Tractor Trailer Training", the incorrect corporate name. Consequently, Yale is not a "holder in due course," as it cannot satisfy the "good faith" requirement of N.J.S.A. § 12A:3-302. Thus, Counts One, Two, and Three of Wawel's complaint are granted to the extent provided below, and Counts One, Two, and Three of Yale's counterclaim are denied.
Given the Court's ruling that Yale cannot meet the "good faith" standard for "holder in due course" status, it is unnecessary to determine whether Yale has met the third prong of N.J.S.A. § 12A:3-302, to wit, whether Yale was "without knowledge" that the Factoring Agreement violated the rights of Wawel.
C. Tortious Interference
In order to sustain a claim for tortious interference with a contract and/or prospective business relationship, a plaintiff must demonstrate the following:
1. the plaintiff had some reasonable expectation of economic advantage;
2. the defendant's actions were malicious in the sense that the harm was inflicted intentionally and without justification or excuse;
3. the interference caused the loss of the prospective gain or there was a reasonable probability that the plaintiff would have obtained the anticipated economic benefit, and
4. the injury caused the plaintiff damage.
Singer v. Beach Trading Co., 379 N.J. Super. 63, 81 (App.Div. 2005). As the New Jersey Appellate Division further explained:
Malice is determined on an individualized basis, and the standard used by the court must be flexible, viewing the defendants' actions in the context of the case presented. Ideal Dairy Farms, Inc. v. Farmland Dairy Farms, Inc., 282 N.J. Super. 140, 199, 659 A.2d 904 (App.Div.), certif. denied, 141 N.J. 99, 660 A.2d 1197 (1995).
Singer, 379 N.J. Super 63, at 81-82.
In the case at bar, the Court finds Wawel's claim for tortious interference to be without merit. It is clear to the Court from the testimony of Mr. Perkal that Yale did not act with any form of malicious intent to disrupt Wawel's relationship with JTTT. To the contrary, Mr. Perkal testified that had Yale known of Wawel's UCC-1 filing, he would have sought to enter into a subordination agreement or have paid off Wawel's loan to JTTT. Thus, based on Yale's conduct under these particular circumstances, Wawel's Fourth Count for tortious interference is denied.
D. Conversion
In Advanced Enterprises Recycling, Inc. v. Bercaw, 376 N.J. Super. 153 (App.Div. 2005), the court explained:
The tort of conversion is the wrongful exercise of dominion and control over property owned by another in a manner inconsistent with the owner's rights. Commercial Ins. Co. of Newark v. Apgar, 111 N.J.Super. 108, 114-15, 267 A.2d 559 (Law Div. 1970). "It is essential that the money converted by a tortfeasor must have belonged to the injured party." Id. at 115, 267 A.2d 559. An action for conversion will not lie in the context of a mere debt or chose in action, however. Where there is no obligation to return the identical money, but only a relationship of a debtor and creditor, an action for conversion of the funds representing the indebtedness will not lie against the debtor. [citations omitted]
Advanced Enterprises Recycling, Inc., 376 N.J. Super. 153, at 161.
Based on the analysis described in Advanced Enterprises Recycling, Inc., Wawel cannot sustain its claim against Yale for conversion. It was JTTT, not Wawel, which was the owner in possession of its accounts receivable, subject only to Wawel's lien, and which was permitted to use its receivables in its discretion. Thus, the only way Wawel could take possession and ownership of said receivables was to declare a default against JTTT, which did not occur until JTTT's bankruptcy filing. Secondly, upon loaning monies to JTTT, the relationship between JTTT and Wawel became that of debtor and creditor. As such, JTTT was not obligated to return the identical monies that Wawel loaned. Indeed, Mr. Ranzinger's testimony demonstrates that Wawel's only concern was that its loan was repaid by JTTT, regardless of whether the payments came from the proceeds of JTTT's accounts receivable or elsewhere. Accordingly, it cannot be said that the JTTT/Yale factoring arrangement amounted to a conversion of Wawel's property and, therefore, Wawel's Fifth Count for conversion must be denied.
V. CONCLUSION
In light of the foregoing, this Court determines that Yale has not demonstrated that its lien maintains a first priority position as a matter of law, priming Wawel's "first in time" filed UCC-1. Thus, the Court is now left to measure the damages sustained by Wawel and the recovery to which it is entitled. As noted in ¶ 15 of the Court's Findings of Fact, prior to Wawel's declaration of default, which Wawel delayed until Yale's bankruptcy filing, JTTT was free to utilize all receivables in its business operations without restriction. In other words, JTTT was empowered by Wawel to expend the proceeds of the receivables in any fashion it so desired. Upon the declaration of default, Wawel reasonably could expect to recover only those receivables and proceeds which remained outstanding and/or readily identifiable. For instance, Wawel could not expect to recover receivable proceeds used to pay suppliers or employees in the ordinary course of business. Accordingly, this Court finds that Wawel is entitled only to a judgment granting it entitlement to all receivable proceeds presently held in escrow, as well as the proceeds of all outstanding accounts receivable. Defendant Wawel is to submit a proposed form of judgment consistent with this opinion.
NOTICE OF JUDGMENT OR ORDER Pursuant to Fed.R.Bankr.P. 9022
Please be advised that on September 28, 2007, the court entered the following judgment or order on the court's docket in the above-captioned case:
Document Number: 32 — 1
Opinion (related document:[1] Complaint filed by Counter-Defendant Wawel Savings Bank, Plaintiff Wawel Savings Bank). The following parties were served: Plaintiff, Plaintiff's Attorneys, Defendants, Defendants' Attorneys. Signed on 9/28/2007. (slf,)
Parties may review the order by accessing it through PACER or the court's electronic case filing system (CM/ECF). Public terminals for viewing are also available at the courthouse in each vicinage.