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Attorney(S)

Mr. Jonathan L. Goldstein, United States Attorney, attorney for appellant ( Mr. Ronald L. Reisner, Assistant United States Attorney, of counsel). Messrs. Jamieson, Walsh, McCardell, Moore and Peskin, attorneys for respondent Shaw Mudge Company ( Mr. Burton Peskin, of counsel). No brief was filed in behalf of respondent Sher-Mart Manufacturing Co., Inc.

Judges

The opinion of the court was delivered by SEIDMAN, J.A.D.

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Smart Summary

Case Summary: Shaw Mudge Company v. Sher-Mart Manufacturing Co., Inc., United States of America (Claimant-Appellant)

Factual and Procedural Background

On September 20, 1972 Sher-Mart entered into a security agreement with The Princeton Bank and Trust Company securing a $50,000 loan and granting the bank a first security interest in specified collateral, including present and future accounts receivable. A financing statement was filed contemporaneously with the Secretary of State.

On May 4, 1973 plaintiff (Shaw Mudge Company) sued Sher-Mart in the Mercer County District Court on a book account and obtained judgment for $2,100.76. Pursuant to execution, plaintiff levied on June 14, 1973 an account receivable due Sher-Mart from E.J. Korvette, Inc., and moved to compel Korvette to pay the constable. Sher-Mart objected and a hearing was set.

On August 14, 1973 the bank assigned its rights under the security agreement to the Small Business Administration (the claimant-appellant), and a financing statement covering the assignment was filed. Sher-Mart had failed to pay the July installment on its note and the SBA notified Sher-Mart of default on August 21, 1973 and demanded full payment.

The claimant moved to vacate the levy and to direct Korvette to pay the account to the SBA. The trial judge denied that relief, upholding the plaintiff's levy on the ground that the parties' rights were fixed as of the date of the levy and that the SBA's later right after default did not relate back to a date before the default. The claimant appealed.

Legal Issues Presented

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 the debtor's default in the secured transaction.

Arguments of the Parties

Claimant-Appellant (Small Business Administration) — Summarized Arguments

The SBA, by assignment, acquired whatever rights the bank had at the time of assignment (citing N.J.S.A. 12A:9-302(2)).
The bank had a presently enforceable and perfected security interest in the accounts receivable (attachment and perfection satisfied; financing statement filed).
Because the security interest attached before the plaintiff's levy and was perfected, it is superior to the subsequent judgment lien; on default the secured party was entitled to possession and enforcement remedies.

Plaintiff-Respondent (Shaw Mudge Company) — Summarized Arguments

The trial court adopted the position that the parties' rights were fixed as of the date of the levy, and thus the plaintiff's levy should prevail.
Plaintiff also argued (as noted by the court) that the secured creditor would have been unable to reach the Korvette account had it been paid to Sher-Mart prior to default.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
M. Rutkin Elect. Sup. Co., Inc. v. Burdette Elect., Inc. 98 N.J. Super. 378; 384 (Ch.Div. 1967).	Illustration of the elements necessary for attachment of a security interest (agreement, value, debtor's rights).	Cited in explaining when a security interest attaches to collateral under N.J.S.A. 12A:9-204(1).
Texas Oil Gas Corp. v. United States, 466 F.2d 1040 (5 Cir. 1972)	Authority holding that a duly filed financing statement gives a perfected secured creditor priority over a subsequent lien creditor.	Relied upon as part of a body of out-of-state authority supporting the priority of perfected security interests over subsequent levies.
Grain Merchants of Ind. v. Union Bank S. Co., Bellevue, Ohio, 408 F.2d 209 (7 Cir. 1969)	Same: priority of perfected security interests, including after-acquired collateral.	Cited to support that after-acquired collateral covered by the agreement is subject to the same priority rule.
Rosenberg v. Rudnick, 262 F. Supp. 635 (D. Mass. 1967)	Support for priority of perfected security interests over subsequent lien creditors.	Used as part of uniform authority from other jurisdictions confirming the court's conclusion.
Troy Lumber Co. v. Williams, 124 Ga. App. 636, 185 S.E.2d 580 (App.Ct. 1971)	Support for the same priority principle.	Cited among other cases as persuasive authority for the rule applied.
Walker Bank Trust Co. v. Smith, 88 Nev. 502, 501 P.2d 639 (Sup.Ct. 1972)	Support for priority of perfected security interests.	Included in the list of decisions from other courts endorsing the priority rule.
In re Pasco Sales Co., Inc., 77 Misc.2d 724, 354 N.Y.S.2d 402 (Sup.Ct. 1974)	Support for priority doctrine as applied to accounts receivable.	Cited as additional authority consistent with the court's analysis.
General Motors Acceptance Corp. v. Stotsky, 60 Misc.2d 451, 303 N.Y.S.2d 463 (Sup.Ct. 1969)	Support for priority of perfected security interests.	Relied upon as persuasive authority among other jurisdictions.
William Iselin Co. v. Burgess Leigh Ltd., 52 Misc.2d 821, 276 N.Y.S.2d 659 (Sup.Ct. 1967)	Support for the same priority principle.	Included in the court's compilation of out-of-state authority.
Ferguson v. Morgan, 282 N.C. 83, 191 S.E.2d 817 (Sup.Ct. 1972)	Support for the priority of perfected security interests over subsequent lien creditors.	Cited as part of the uniform authority relied upon by the court.
West Coast Beet Seed Co. v. Polk County Farm Co-op., 261 Or. 381, 494 P.2d 880 (Sup.Ct. 1972)	Support for the priority rule.	Included among cases demonstrating consensus in other jurisdictions.
Industrial Packaging Prod. Co. v. Fort Pitt Pack. Int., 399 Pa. 643, 161 A.2d 19 (Sup.Ct. 1960)	Supportive authority regarding liens and security interests.	Cited by the court as additional persuasive precedent.
Gulf Oil Co. v. First National Bank of Hereford, 503 S.W.2d 300 (Tex.Civ.App. 1973)	Support for priority of perfected security interests.	Part of the out-of-state authority cited to confirm the court's conclusion.
Ferrante v. Foley, 49 N.J. 432 (1967)	Referenced regarding types of judgment liens that might be entitled to priority under statute or common law.	Cited to note that the judgment lien in the present case was not one entitled to priority over a perfected security interest.
Royal Store Fixture Co. v. N.J. Butter Co., 114 N.J. Super. 263, 268 (App.Div. 1971)	Authority that transfers (including by levy) of debtor's rights remain subject to perfected security interests.	Used to support the proposition that a levy or transfer of the debtor's rights does not defeat a prior perfected security interest.
The First Nat'l. Bank of Bay Shore v. Stamper, 93 N.J. Super. 150, 159 (Law Div. 1966)	Cited for related principles about the effect of transfers on secured interests.	Referred to by the court as corroborative New Jersey authority.
Farrow v. Ocean County Trust Co., 121 N.J.L. 344 (Sup.Ct. 1938)	Discusses creditor remedies against a debtor's equity in chattels.	Cited to indicate the Code sanctions sale or other creditor remedies against the debtor's equity.

Court's Reasoning and Analysis

The court's analysis proceeded in statutory steps under the Uniform Commercial Code (UCC):

By N.J.S.A. 12A:9-302(2), the claimant (SBA) by assignment acquired the rights the bank possessed at the time of assignment.
The bank had an enforceable security interest in the accounts receivable under N.J.S.A. 12A:9-204(1), and the collateral expressly included present and after-acquired accounts (N.J.S.A. 12A:9-204(3); N.J.S.A. 12A:9-105; 12A:9-106).
Perfection requirements were satisfied: the bank had taken the necessary steps to perfect its security interest by filing a financing statement (N.J.S.A. 12A:9-303(1); 12A:9-302(1); 12A:9-401(1)(c)).
Attachment occurs when there is a security agreement, value has been given, and the debtor has rights in the collateral (N.J.S.A. 12A:9-204(1)); these elements existed before the plaintiff's levy on the Korvette account, so the security interest had attached prior to levy.
The court observed that the UCC explicitly subordinates unperfected security interests to lien creditors who become such without knowledge and before perfection (N.J.S.A. 12A:9-301(1)(b)); the opinion reasons by negative implication that a perfected security interest is effective against subsequent lien creditors regardless of their knowledge.
The court corroborated this statutory analysis with a line of out-of-state authority holding that a duly filed financing statement secures priority over a subsequent lien creditor's levy, and that this protection extends to after-acquired collateral once attachment has occurred.
The court rejected the trial judge's focus on the date of levy as determinative; rights are fixed when the security interest attached, not when the levy occurred. It also rejected plaintiff's contention that the secured creditor could not reach the account if it had been paid prior to default, noting that the security agreement covered the accounts themselves (not proceeds) and that on default the secured party had rights to possession and enforcement (N.J.S.A. 12A:9-503; 12A:9-501(1)).
Because Sher-Mart was in default as of the missed July installment, the claimant was entitled to immediate possession and enforcement remedies with respect to the account which had been levied upon.

Holding and Implications

HOLDING: The court held that the bank's security interest in the account receivable, acquired by assignment by the claimant (Small Business Administration), was superior to the plaintiff's judgment lien on that account, and that Sher-Mart's default entitled the claimant to immediate possession and enforcement of the account.

Direct effect: The Appellate Division reversed the trial court and remanded with instructions that the trial judge should have directed payment of the Korvette account to the claimant rather than to the plaintiff.

Broader implications: The opinion applies established UCC provisions and cites out-of-state authority to confirm that a perfected security interest (via financing statement) has priority over subsequent judgment liens that levy on the same collateral. The opinion does not purport to establish a novel rule of law beyond the statutory application and cited authorities.

Decision delivered by Judge Seidman, Appellate Division. Reversed and remanded for further proceedings consistent with this opinion.

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SHAW MUDGE COMPANY, A CORPORATION, PLAINTIFF-RESPONDENT, v. SHER-MART MANUFACTURING CO., INC., A CORPORATION, DEFENDANT-RESPONDENT, UNITED STATES OF AMERICA, CLAIMANT-APPELLANT.

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 transaction.

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 Princeton Bank and Trust Company to secure payment of a $50,000 loan evidenced by a promissory note. The agreement granted to the bank 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 Bank." 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 bank 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 default.

Claimant appeals and we reverse.

Under the Uniform Commercial Code-Secured Transactions, N.J.S.A. 12A:9-302(2), claimant's assignment entitled it to whatever rights the bank had at the time. It is not in dispute that the bank 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:9-105), 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 bank had taken all necessary steps for perfecting its security interest (N.J.S.A. 12A:9-303(1)), including the filing of a financing statement (N.J.S.A. 12A:9-302(1)) with the Secretary of State (N.J.S.A. 12A:9-401(1) (c)).

There is no doubt that the bank 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 bank'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) (N.J.S.A. 12A:9-204(1)). Cf. M. Rutkin Elect. Sup. Co., Inc. v. Burdette Elect., Inc. 98 N.J. Super. 378 ; 384 (Ch.Div. 1967). 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 the account.

N.J.S.A. 12A:9-301(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. 12A:9-301(3)), without 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, § 4.09[3] 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 Bank S. Co., Bellevue, Ohio, 408 F.2d 209 (7 Cir. 1969); Rosenberg v. Rudnick, 262 F. Supp. 635 (D. Mass. 1967); Troy Lumber Co. v. Williams, 124 Ga. App. 636, 185 S.E.2d 580 (App.Ct. 1971); Walker Bank Trust Co. v. Smith, 88 Nev. 502, 501 P.2d 639 (Sup.Ct. 1972); In re Pasco Sales Co., Inc., 77 Misc.2d 724, 354 N.Y.S.2d 402 (Sup.Ct. 1974); General Motors Acceptance Corp. v. Stotsky, 60 Misc.2d 451, 303 N.Y.S.2d 463 (Sup.Ct. 1969); William Iselin Co. v. Burgess Leigh Ltd., 52 Misc.2d 821, 276 N.Y.S.2d 659 (Sup.Ct. 1967); Ferguson v. Morgan, 282 N.C. 83, 191 S.E.2d 817 (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., 399 Pa. 643, 161 A.2d 19 (Sup.Ct. 1960); Gulf Oil Co. v. First National Bank of Hereford, 503 S.W.2d 300 (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 Bank 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, 49 N.J. 432 (1967).

The fact that at the time of the levy there may not yet have been a default on the bank 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. 12A:9-311), 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. Bank of Bay Shore v. Stamper, 93 N.J. Super. 150 , 159 (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., 121 N.J.L. 344 (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:9-503. It was empowered to enforce its security interest by any available judicial procedure. N.J.S.A. 12A:9-501 (1).

We hold therefore that since the bank'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 the foregoing.

MUDGE v. SHER-MART MANUFACTURING CO