APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY (D.C. Civil No. 07-cv-05853) District Judge: Honorable Mary L. Cooper.
The opinion of the court was delivered by: Barry, Circuit Judge
Before: BARRY, SMITH, Circuit Judges, and DuBOIS*fn1 District Judge.
This case arises out of the competing claims of Wawel Savings Bank ("Wawel") and Yale Factors LLC ("Yale") to the accounts receivable of debtor Jersey Tractor Trailer Training, Inc. ("JTTT"). Wawel entered into a loan agreement with JTTT and its president, William B. Oliver, for the principal amount of $315,000. In the corresponding security agreement, JTTT pledged all capital equipment and assets of the company as collateral, and Wawel perfected its security interest by filing Uniform Commercial Code Financing Statements ("UCC-1s") with the New Jersey Department of the Treasury and the Bergen County Clerk's Office. Approximately one year later, JTTT entered into a factoring agreement with Yale whereby JTTT agreed to sell the rights to its accounts receivable in return for, inter alia, a 61.5 percent up-front payment of the amount due on the particular account receivable.
Yale subsequently filed a UCC-1 statement describing its lien on all present and after-acquired accounts receivable of JTTT.
On April 4, 2006, JTTT filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code, see 11 U.S.C. § 1101, et seq., and on June 29, 2006, Wawel brought this action seeking declaratory relief that its lien on JTTT's accounts receivable had priority over Yale's lien; that it was entitled to the proceeds of JTTT's accounts receivable that had been held in escrow following a state action filed by Yale; and that it was entitled to JTTT's outstanding accounts receivable until its lien was satisfied.*fn2 Because the parties did not dispute that Wawel had a "first in time" lien against JTTT's accounts receivable -- and thus a senior security interest -- the central issue was whether Yale could establish that it maintained a priority position as a matter of law. See N.J.S.A § 12A:9-322(a)(1); U.C.C. § 9-322(a)(1) ("Except as otherwise provided... [c]onflicting perfected security interests... rank according to priority in time of filing or perfection.").*fn3 More specifically, unless Yale could establish (a) that Wawel consented to the sale of JTTT's accounts receivable free of its security interest, see U.C.C. § 9-315(a)(1), or (b) that it was a holder in due course of JTTT's accounts receivable, see id. at 9-331(a), or (c) that it was a purchaser of instruments, see id. at 9-330(d), then Wawel was entitled to the relief it sought.
Following a two-day bench trial, the Bankruptcy Court found in favor of Wawel, stating that it was "entitled... to a judgment granting it... all [accounts] receivable proceeds presently held in escrow, as well as the proceeds of all outstanding accounts receivable." (App. at 97.) The Bankruptcy Court found, as a matter of fact, that Wawel did not authorize JTTT's factoring agreement with Yale, and held that Yale could not be considered a purchaser of instruments or a holder in due course because it did not establish that it acted in good faith by observing reasonable commercial standards of fair dealing. Yale conducted lien searches for "Jersey Tractor Trailer Training," omitting "Inc." from JTTT's full corporate name; those searches, the Bankruptcy Court determined, were substandard. Yale appealed to the District Court pursuant to 28 U.S.C. § 158(a), and the District Court affirmed.
We will affirm in part because the Bankruptcy Court properly concluded that Wawel had not authorized the sale of JTTT's accounts receivable free of its security interest. The Bankruptcy Court's analysis of whether Yale should be considered a purchaser of instruments or a holder in due course, however, is undermined by its legal conclusion that a lien search is commercially unreasonable if it does not include the debtor's full corporate name. We will, therefore, vacate the judgment of the District Court affirming the order of the Bankruptcy Court, and remand to the District Court with the direction that the case be remanded to the Bankruptcy Court to determine whether Yale qualifies as a holder in due course or as a purchaser of instruments.
JTTT is a closely-held New Jersey corporation that specializes in training truck drivers to pass the uniform Commercial Driver's License ("CDL") exam. In January 2002, JTTT's owner and president, William B. Oliver, applied to Wawel, seeking a loan in the amount of $315,000. JTTT's application was granted and, on March 7, 2002, JTTT and Wawel entered into a loan agreement. The corresponding security agreement pledged all of JTTT's assets, including its accounts receivable, as collateral for the loan.*fn4 The agreement further stated that "[i]f this agreement includes accounts, I [, Oliver,] will not settle any account for less than its full value without your written permission [and] I will collect all accounts until you tell me otherwise." (App. at 837.)
At the time, the JTTT loan was the largest commercial loan made by Wawel, and bank president Robert Ranzinger, Sr., was personally responsible for its administration. In an effort to keep an eye on JTTT's finances, Ranzinger asked Oliver to move JTTT's business bank accounts to Wawel, and Oliver agreed to do so. As Ranzinger testified, the security agreement allowed JTTT to sell its assets, including its accounts receivable, unless it ...