Wawel Savings Bank entered into a loan agreement with Jersey Tractor Trailer Training (JTTT), Inc., for the amount of $315,000. In the agreement, JTTT pledged all capital equipment and assets of the company as collateral, and Wawel filed Uniform Commercial Code Financing Statements with the New Jersey Department of the Treasury and the Bergen County Clerk’s Office. Sometime later, JTTT also entered into a factoring agreement with Yale Factors LLC whereby JTTT agreed to sell the rights to its accounts receivable in return for a 61.5 percent up-front payment of the amount due on the particular accounts receivable.
On April 4, 2006, JTTT filed a voluntary petition for bankruptcy, and on June 29, 2006, Wawel brought action against JTTT, seeking declaratory relief that its lien on JTTT’s accounts receivable had priority over that of Yale’s. The Bankruptcy Court found in favor of Wawel, stating that Wawel did not authorize JTTT’s factoring agreement with Yale and 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 appealed the decision.
JUDGE BARRY Yale asserts that it should be considered a holder in due course, or a purchaser of instruments, and therefore should have priority over Wawel’s senior security interest. Yale argues, first, that because the security agreement accompanying Wawel’s loan to JTTT did not expressly prohibit the sale of collateral, Wawel waived its security interest. That argument is without merit, especially given that in its agreement with Wawel, JTTT represented that it “w[ould] not settle any account for less than its full value without your written permission,” and that it would “collect all accounts until [told] otherwise.” JTTT’s sale of its accounts receivable, therefore, ran afoul of the security agreement.
Regardless of whether Wawel waived its security interest, Yale has priority over that interest if it is either a holder in due course or a purchaser of instruments.
A holder in due course is one who takes an instrument for value, in good faith, and without notice of dishonor or any defense against or claim to it on the part of any person. “If those requirements are met, a holder in due course take[s] priority over an earlier security interest, even if perfected….” U.C.C. § 9-331(a). The same is true for a purchaser of instruments. To be considered a purchaser of instruments, Yale must have “give[n] value and take[n] possession of the instrument in good faith and without knowledge that the purchase violates the rights of the secured party.” “Good faith” is defined in the U.C.C. as “honesty in fact and the observance of reasonable commercial standards of fair dealing.” The District Court is to remand this matter to the Bankruptcy Court to determine whether Yale qualifies as a holder in due course or a purchaser of instruments, and to resolve the good faith element of that analysis in accordance with this opinion.
CRITICAL THINKING:
The case entirely rested on the definition of the legal term good faith. Suppose that one of your classmates believes the term good faith as outlined by the UCC is too ambiguous to make an informed ruling. Would you agree with your classmate about the ambiguity of the term? Why or why not?
ETHICAL DECISION MAKING:
Some clues supporting Judge Barry’s decision and the UCC’s definition of good faith include honesty, transparency, and fairness. Can you think of any value preferences at the forefront of running a business that may conflict with the values outlined by the court and its definition of good faith?