I. PROCEDURAL AND FACTUAL HISTORY OF THE CASE:
Plaintiff, Major's Furniture Mart (Major's), was in the business of making retail sales of furniture to consumers, and defendant, Castle Credit Corporation (Castle), is in the business of financing furniture dealers. Major's and Castle entered into a Sale of Receivables Agreement (Agreement), dated June 18, 1973, by which Major's agreed to transfer its accounts to Castle, and Castle agreed to provide funds to Major's at a given ratio to the accounts it accepted. Castle accepted accounts offered by Major's from July, 1973 until June, 1975. In March, 1975, and again in September, 1975, Castle notified Major's that its failure to repurchase delinquent accounts constituted a default under the Agreement.
Major's, a New Jersey corporation, (both with respect to incorporation and situs of its principal place of business), then brought this diversity action pursuant to 28 U.S.C. § 1332(a) against Castle, (a Pennsylvania corporation as to incorporation and location of its principal place of business); it alleged damages in excess of $10,000 based upon the following four counts: 1) payment to it of sums held in the reserve account established by the agreement; 2) reimbursement of overpayments made to satisfy a $30,000 promissory note; 3) damages for the destruction of its business by misuse of confidential information; and 4) equitable relief and damages for violations of the antitrust laws. Castle filed counterclaims with respect to the first two counts, and alleged the following: 1) failure by Major's to repurchase accounts as required by the acceleration clause in the agreement, and 2) default on the promissory note. Pursuant to our Order dated March 19, 1977,
Major's filed an amended complaint which revised its theory of recovery under Count I, and dropped Count IV. The parties then filed cross-motions for summary judgment with respect to Count I; Major's filed a motion for summary judgment with respect to the counterclaim to Count I; Castle moved for summary judgment as to Count II and its counterclaim under that same count. On June 13, 1977, we granted Major's motion for summary judgment, with an opinion to follow, and denied all of Castle's motions. Trial was held on Counts II and III, and the jury decided in favor of Castle. On July 25, 1977, we ordered that the parties submit briefs, proposed findings of fact and conclusions of law, and reply briefs, and scheduled oral argument,
to resolve the accounting issue left open by our grant of summary judgment in part on Count I of the complaint. Our reasons for the grant of plaintiff's motions for summary judgment and determination of the accounting issue follow.
II. SUMMARY JUDGMENT
The question presented for decision on summary judgment was whether accounts receivable held by Majors were sold to Castle or transferred as collateral security. Apparently, under the facts of this case, the matter is one of first impression. The significance of this question goes to the issue of Major's right to any surplus collected by Castle on the accounts, over and above the amount paid or loaned to Major's in exchange for the accounts.
Article 9 of the Uniform Commercial Code, (U.C.C.), applies "to any sale of accounts, contract rights or chattel paper," with exceptions not applicable to this type of transaction. 12 A.P.S. § 9-102(1)(b). Section 9-502(2) makes a distinction between transactions which "secure an indebtedness," and "sales," in the allocation of debtor's rights and creditor's obligations after a default. That section reads as follows:
A secured party [Castle] who by agreement is entitled to charge back uncollected collateral or otherwise to full or limited recourse against the debtor [Major's] who undertakes to collect from the account debtors or obligors must proceed in a commercially reasonable manner and may deduct his reasonable expenses of realization from the collections. If the security agreement secures an indebtedness, the secured party must account to the debtor for any surplus, and unless otherwise agreed, the debtor is liable for any deficiency. But, if the underlying transaction was a sale of accounts, contract rights or chattel paper, the debtor is entitled to any surplus or is liable for any deficiency only if the security agreement so provides. (Emphasis added). § 9-502(2).