Morrison Steel Co. v. Gurtman
| Decision Date | 03 March 1971 |
| Citation | 113 N.J.Super. 474,274 A.2d 306 |
| Parties | , 8 UCC Rep.Serv. 1203 MORRISON STEEL CO., Plaintiff-Respondent, v. William N. GURTMAN, Defendant-Appellant, and Joseph R. Matthews and Alfred Diemer, Defendants. William N. GURTMAN, Third-Party Plaintiff-Appellant, v. GRAVER WATER CONDITIONING CO., a Division of Union Tank Car Company, a foreign corporation, Third-Party Defendant-Respondent. |
| Court | New Jersey Superior Court — Appellate Division |
Aaron Z. Schomer, Passaic, for defendant-third party plaintiff-appellant (Gurtman & Schomer, Passaic, attorneys; Aaron Z. Schomer, Passaic, on the brief).
Otto F. Blazsek, Passaic, for defendant, Joseph R. Matthews.
Samuel H. Davis, Jersey City, for plaintiff-respondent (Davis & Roth, Jersey City, attorneys; Samuel H. Davis, Jersey City, on the brief).
Kenneth F. Kunzman, Newark, for third-party defendant-respondent (Hughes, McElroy, Connell, Foley & Geiser, Newark, attorneys; Kenneth F. Kunzman, Newark, on the brief).
Before Judges GOLDMANN, LEONARD and MOUNTAIN.
The opinion of the court was delivered by
MOUNTAIN, J.A.D.
Defendants Gurtman and Matthews appeal from a Chancery Division judgment entered against them and in favor of plaintiff in the sum of $16,188.66 together with costs. $A brief summary of the facts is necessary to an understanding of the issues involved. Plaintiff was a supplier of steel to Paterson Boiler and Tank, Inc. (Paterson). Defendants Gurtman and Matthews were officers of Paterson. The latter manufactured and sold finished steel and aluminum products to various customers, including York Separators (York). Paterson had a checking account with Bank of Passaic and Clifton, not now a party to this suit.
In December 1966 plaintiff, under the protection of a perfected security agreement, shipped materials to Paterson which it used in manufacturing a product sold to York. In payment York issued its check to Paterson in the amount of $25,248. The check was deposited by Gurtman, apparently with the knowledge of Matthews, in Paterson's regular checking account in Bank of Passaic and Clifton. Paterson then issued its check in the sum of $22,954.44 to the order of plaintiff in payment of the materials originally received. This check was deposited for collection, but prior thereto and on May 5, 1967 Paterson filed a petition in the Federal District Court for the District of New Jersey under Chapter XI of the Bankruptcy Act. The check issued to plaintiff by Paterson was not paid. The bank then charged Paterson's account by way of set-off with the balance due on a loan owed by Paterson to the bank in the amount of $8,028, together with the sum of $10,320.99 due the bank under a letter of credit it had issued in favor of Paterson. The balance of the account, $9,917, was turned over to the receiver appointed in the Chapter XI proceeding and thereafter, upon application being made by plaintiff in the federal court, was paid to it, less the sum of $750 allocated to administration expense. The present suit was brought against the individual defendants as officers and directors of Paterson, the theory of the case being that they are liable for having converted assets in the hand of Paterson which constituted security properly belonging to plaintiff.
The Chancery Division judge found in favor of plaintiff on the ground that the individual defendants, as such officers and directors, owed a duty to plaintiff, as a secured creditor of Paterson, to protect assets that came through their hands and that were properly subject to its security agreement. The deposit in Paterson's checking account of the funds received from York, thus exposing them to an exercise by the bank of its right of set-off, was held to be a breach of this duty and to constitute a conversion. In view of the trial judge's conclusion that conversion took the form of subjecting the proceeds received from York to an improper and unacceptable risk, namely, the possibility that the bank might exercise a right of set-off, we are faced with an initial inquiry as to whether the bank did or did not have this right under the facts as they existed when the deposit was made and the bank charged the account. The issue was not determined by the trial judge; it was apparently assumed that the right did exist. It is true that at one point the individual defendants suggested or requested that the bank be made a party to the suit--presumably to test the validity of its right of set-off--but no formal motion looking to this end was ever made. Clearly, if the bank had no right of set-off, then the deposit of the proceeds in the account did not subject the funds to this risk and cannot be considered a conversion. We deem it essential, therefore, to determine whether or not the right did actually exist.
In examining this question we think attention must first be focused upon the Uniform Commercial Code. N.J.S.A. 12A:9--306, dealing with a secured party's rights on disposition of collateral, reads in pertinent part, as follows:
(1) 'Proceeds' includes whatever is received when collateral or proceeds is sold, exchanged, collected or otherwise disposed of. The term also includes the account arising when the right to payment is earned under a contract right. Money, checks and the like are 'cash proceeds.' All other proceeds are 'non-cash proceeds'.
(2) Except where this Chapter otherwise provides, a security interest continues in collateral notwithstanding sale, exchange or other disposition thereof by the debtor unless his action was authorized by the secured party in the security agreement or otherwise, and also continues in any identifiable proceeds including collections received by the debtor.
(3) The security interest in proceeds is a continuously perfected security interest if the interest in the original collateral was perfected but it ceases to be a perfected security interest and becomes unperfected ten days after receipt of the proceeds by the debtor unless
(a) a filed financing statement covering the original collateral also covers proceeds; or
(b) the security interest in the proceeds is perfected before the expiration of the ten day period.
(4) In the event of insolvency proceedings instituted by or against a debtor, a secured party with a perfected security interest in proceeds has a perfected security interest
(a) in identifiable non-cash proceeds;
(b) in identifiable cash proceeds in the form of money which is not commingled with other money or deposited in a bank account prior to the insolvency proceedings;
(c) in identifiable cash proceeds in the form of checks and the like which are not deposited in a bank account prior to the insolvency proceedings; and
(d) in all cash and bank accounts of the debtor, if other cash proceeds have been commingled or deposited in a bank account, but the perfected security interest under this paragraph (d) is
(i) subject to any right of set-off; and
(ii) limited to an amount not greater than the amount of any cash proceeds received by the debtor within ten days before the institution of the insolvency proceedings and commingled or deposited in a bank account prior to the insolvency proceedings less the amount of cash proceeds received by the debtor and paid over to the secured party during the ten day period.
Initially it may be noted that the financing statement filed by plaintiff Does cover the proceeds of collateral, thus bringing plaintiff within the favor of paragraph (3)(a) quoted above. It should be further observed that we are here concerned with 'insolvency proceedings' as this phrase is used in the Code.
'Insolvency proceedings' includes any assignment for the benefit of creditors or other proceedings intended to liquidate or rehabilitate the estate of the person involved. (N.J.S.A. 12A:1--201(22))
A Chapter XI proceeding is of course designed and intended to rehabilitate the estate of the debtor and hence clearly comes within the scope of this definition.
Applying section 12A:9--306 of the Code quoted above to the facts of this case, it seems clear that under paragraphs (2) and (3) plaintiff had a continuing security interest in the check received by Paterson from York ('identifiable proceeds including collections received by the debtor') from the moment of its receipt to the time of its deposit, and that this was a 'continuously perfected security interest.' The check was deposited May 3 and the Chapter XI petition was filed and a receiver appointed May 5. Thus, paragraph (4), applicable to 'insolvency proceedings,' came into play. It will at once be seen that subparagraphs (a), (b) and (c) of paragraph (4) are inapplicable and that we are solely concerned with subparagraph (d). The language of this subsection of the Code was modeled upon section 10 of the Uniform Trust Receipts Act (R.S. 46:35--10), expressly repealed by N.J.S.A. 12A:10--105). The legislative intent in each case is clear--to create a security interest in Unidentifiable proceeds. Henson, "Proceeds' Under the Uniform Commercial Code,' 2 UCC Rep. 566, 578--584 (1966), reprinted from 65 Col.L.Rev. 232 (1965); Note, 'Entruster's Right to Proceeds of Sale Under § 10 of the Uniform Trust Receipts Act,' 66 Yale L.J. 922 (1957).
Generally, as is true here, proceeds will have been rendered unidentifiable by having been commingled with other funds in a single bank account. The security interest in unidentifiable proceeds thus arises upon the intervention of insolvency proceedings coupled with a commingling. The Code broadly extends this 'perfected security interest' to 'all cash and bank accounts of the debtor,' limited, however, to the amount of proceeds received within ten days of insolvency, less any portion thereof paid over to the secured party by the debtor during that period. Here all proceeds were received within the ten-day period and no part thereof was paid to plaintiff. Plaintiff would thus appear to have had a perfected security interest in...
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...of another party's right to a depositor's account depriving a bank of its setoff rights 8 was discussed in Morrison Steel Co. v. Gurtman, 113 N.J.Super. 474, 274 A.2d 306 (1971). That case was remanded to determine whether the bank properly exercised its setoff rights, noting that if the ba......
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