Competing Claims by Creditors against a Borrowers' Accounts Receivable
Editor’s Note: The following case illustrates how the courts view competing creditors’
claims against a borrower’s accounts receivable collateral. More specifically, a factoring company
that is properly perfected in it’s clients accounts receivable prevails against subsequent creditors’
claims against the accounts receivable. In this case, the term, “factoring company” has been
substituted for “bank”. The following is copyrighted by Loislaw.com, 2009
MUDGE v. SHER-MART MANUFACTURING CO., 132 N.J. Super. 517 (1975)
334 A.2d 357
SHAW MUDGE & COMPANY, A CORPORATION, PLAINTIFF-RESPONDENT, v. SHER-MART
MANUFACTURING CO., INC., A CORPORATION, DEFENDANT-RESPONDENT, UNITED STATES
OF AMERICA, CLAIMANT-APPELLANT.
Superior Court of New Jersey, Appellate Division.
Submitted February 10, 1975 -
Decided February 27, 1975.
Before Judges LEONARD, SEIDMAN and BISCHOFF.
Mr. Jonathan L. Goldstein, United States Attorney, attorney
for appellant (Mr. Ronald L. Reisner, Assistant United States
Attorney, of counsel).
Messrs. Jamieson, Walsh, McCardell,
attorneys for respondent Shaw Mudge &
Peskin, of counsel) .
Moore and Peskin, Company (Mr. Burton
No brief was filed in behalf of respondent Sher-Mart
Manufacturing Co., Inc.
The opinion of the court was delivered by SEIDMAN, J.A.D.
The issue involved in this appeal is whether a fully perfected
security interest in an account receivable is superior to the
lien of a subsequent judgment creditor who levied upon that
account prior to default on the part of the debtor in the secured
The facts are not in dispute. On September 20, 1972, defendant
Sher-Mart Manufacturing Co., Inc. (Sher-Mart) entered into a
security agreement with the Factoring Company to
secure payment of a $50,000 loan evidenced by a promissory note.
The agreement granted to the Factoring Company a first security interest in
certain collateral described therein, including “accounts
receivable of Borrower now owned, held and/or hereafter to be
created satisfactory to the Factoring Company.” Simultaneously, a financing
statement was filed in the office of the Secretary of State.
On May 4, 1973 plaintiff herein sued Sher-Mart in the Mercer
County District Court to recover the sum of $1900 on a book
account, together with interest and costs. Judgment was
thereafter entered in its favor for $2100.76. Pursuant to a writ
of execution, plaintiff caused a levy to be made on June 14, 1973
on a Sher-Mart account receivable due and owing from E.J.
Korvette, Inc. Plaintiff then moved for an order directing
Korvette to pay to the constable the amount of the judgment plus
subsequent costs. Sher-Mart objected to the entry of the order
and the matter was set down for hearing on August 30, 1973.
On August 14, 1973 the Factoring Company assigned all its right, title and
interest in the security agreement to the Small Business
Administration, an agency of the United States of America. A
financing statement covering the assignment was duly filed.
Sher-Mart owed at that time the sum of $48,109.35 plus interest
accruing at the per diem rate of $10.88. By reason of
Sher-Mart’s having failed to pay the July installment on its note,
the Small Business Administration
notified Sher-Mart on August 21 that it was in default and
demanded payment in full.
The claimant herein next filed a motion in the county district
court for an order vacating the levy and directing Korvette to
pay the amount of the account receivable to the Small Business
Administration. It was, on further motion, admitted as a party so
as to assert its claim to the levied property. In a letter
opinion the trial judge upheld plaintiff’s levy on the ground
that the right of the parties were fixed as of the date of the
levy and Sher-Mart’s subsequent default and the consequent right
of the Small Business Administration to collect Sher-Mart’s
accounts receivable did not relate back to a date prior to the
Claimant appeals and we reverse.
Under the Uniform Commercial Code-Secured Transactions,
claimant’s assignment entitled it to whatever rights the Factoring Company
had at the time. It is not in dispute that the Factoring Company had an enforceable
security interest in the collateral described in the agreement
(N.J.S.A. 12A:9-204 (1)). The collateral included accounts
(N.J.S.A. 12A:9-10S), defined in N.J.S.A. 12A:9-106 as
“any right to payment for goods sold
or leased or for services rendered which is not evidenced by an
instrument or chattel paper.” The security interest attached not
only to present accounts receivable but also to those to be
acquired in the future (see N.J.S.A. 12A:9-204(3)). It is
uncontroverted that the Factoring Company had taken all necessary steps for
perfecting its security interest (N.J.S.A.1ZA:~::::~Q~(1)),
including the filing of a financing statement (N.J.S.A.
:l,ZA:~::::~QZw)ith the Secretary of State (N.J.S.A.
There is no doubt that the Factoring Company had a perfected security
interest in the Korvette account prior to the levy thereon by the
judgment creditor. A security interest attaches to collateral as
soon as there is an agreement that it attach (the security
agreement here), value is given (the
Factoring Company’s $50,000 loan to Sher-Mart), and the debtor has rights in
the collateral (defendant’s right to collect the money Korvette
owed it. It is self-evident that the Korvette account
must have been in existence before the levy. Consequently, when
the levy was made the security interest had already attached to
N.J.S.A. 1.:lA:9-:3()1.(1) (b) provides that an unperfected
security interest is subordinate to the rights of a person who
becomes a lien creditor (in this case a creditor who has acquired
a lien on the property involved by levy, N.J.S.A.
1:lA:!}::-:3()1(3)w)i,thout knowledge of the security interest and
before it is perfected. It has been pointed out that Code
statements generally are in the negative. Thus, there is no
affirmative rule as to perfected security interests, leaving “the
reader to imply that the rule is the opposite of the rule stated
as to unperfected interests.” 1 Coogan, Hogan and Vagts, Secured
Transactions under the Uniform Commercial Code, § 4.093 at
306. The inferences to be drawn from subsection (1) (b) “are that
an unperfected security interest is good against a lien creditor
with knowledge, and a perfected security interest is good whether
or not the subsequent lien creditor has knowledge.” Id.
Although there appears to be no reported case in this State
squarely in point, it has uniformly been held elsewhere, in the
absence of a statutory or common law exception, that a secured
creditor who has duly filed a financing statement is entitled to
priority over a subsequent lien creditor seeking to levy on or
otherwise claim the same collateral. Texas Oil & Gas Corp. v.
United States, 466 F.2d 1040 (5 Cir. 1972); Grain Merchants
of Ind. v. Union Factoring Company & S. Co., Bellevue, Ohio, 408 F.2cL209
(7 Cir. 1969); Rosenberg v. Rudnick, :?J?:2.f.$l? (D.
Mass. 1967); Troy Lumber Co. v. Williams ,~:l4GC!,APP’m§:3Ei,
1.~~$,J;.:l~~~() (App.Ct. 1971); Walker Factoring Company & Trust Co. v.
Smith, $8N~Y,~():l,~():tJ::t,:l~mEi:3!} (Sup.Ct. 1972); In re
Pasco Sales Co., Inc.,
lZMZ~4, J‘lQ~ (Sup. Ct. 1974); General
Motors Acceptance Corp. v. Stotsky, 60 Misc.2d 451,
303 N.Y.S.2d463 (Sup.Ct. 1969); William Iselin & Co. v. Burgess
& Leigh Ltd., §.~mMt$~4t:~~, Z(j_!!.Y$.2d_(j!?_~- (Sup. Ct.
1967); Ferguson v. Morgan, ~1!~1’I—"~-,1!:3, lJJ~$.,.J;~:l~J~..!Z
(Sup.Ct. 1972); West Coast Beet Seed Co. v. Polk County Farm
Co-op., 261 Or. 381, 494 P.2d 880 (Sup.Ct. 1972);
Industrial Packaging Prod. Co. v. Fort Pitt Pack. Int.,
:3!}!}P~.§4:3,:I.,§~A.:l~m:l.,!} (Sup.Ct. 1960); Gulf Oil Co. v. First
National Factoring Company of Hereford,~():3$.W:.:l~~()() (Tex.Civ.App.
1973). This rule applies as well to after-acquired collateral
covered by the agreement, provided, of course, attachment has
occurred as indicated hereinabove. Grain Merchants of Ind. v.
Union Factoring Company & S. Co., Bellevue, Ohio, supra. It should be
observed that the judgment lien here is not one which either by
statute or common law is entitled to priority over a perfected
security interest. Cf. Ferrante v. Foley,4.l,4~2, (1967).
The fact that at the time of the levy there may not yet have
been a default on the Factoring Company loan to which the security agreement
related is not determinative here. The rights of the parties were
fixed, not when the levy was made, as the trial judge held, but
rather when the security interest attached. Thus, while a
debtor’s rights in collateral may be voluntarily or involuntarily
transferred, including by way of levy (N. J. S .A.:t,7A:~=~:t,:J,) ,
such transfer would still be subject to a perfected security
interest. See Royal Store Fixture Co. v. N.J. Butter Co.,
114 N.J.Super. 263, 268 (App.Div. 1971). Cf. The First Nat’l.
Factoring Company of Bay Shore v. Stamper ,P~r,1.~Q,:J,!j~ (Law
Div. 1966). The Code merely sanctions sale or other creditor
remedies against the debtor’s equity in the chattel. See Farrow
v. Ocean County Trust Co., 1,:z,1,f’!.,l.L.~4.4. (Sup. Ct. 1938).
Nor is it of any consequence, as plaintiff now argues, that the
secured creditor would have been unable to reach the Korvette
account had it been paid to Sher-Mart prior to default. The
security agreement in this case created no security
interest in the proceeds of the accounts receivable but only in
the accounts themselves.
Sher-Mart was in default under the security agreement when it
failed to pay the note installment due July 21, 1973. The secured
party on default had the right to take possession of the
collateral, including, of course, the outstanding account
receivable here involved. N.J.S.A.12A:~=!j()3. It was empowered
to enforce its security interest by any available judicial
procedure. N.J.S.A. !2A:9-S01 (1).
We hold therefore that since the Factoring Company’s security interest in
the account receivable here in question, acquired by claimant by
assignment, was superior to plaintiff’s judgment lien thereon,
and since Sher-Mart’s default entitled claimant to immediate
possession of the proceeds of the account, the trial judge should
have directed payment thereof to claimant and not to plaintiff.
Reversed and remanded for the entry of an order consistent with
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