By Lisa M. Goolik, J.D.
In an unpublished opinion, the Superior Court of New Jersey, Appellate Division, held that a purchaser of collateral could not use Revised Article 9 to shield itself from successor liability. Although the acceptance of collateral in satisfaction of a lien terminates all subordinate interests, a judgment against the original debtor was not a subordinate interest that could be discharged by the purchase of the debtor’s collateral at a UCC sale. As a result, the all of assets of the purchaser, including those purchased at the sale, were subject to the judgment.
Background. In June 2003, the debtor, Elegant USA, LLC, a distributor of car seat covers, obtained a $20 million loan from the Bank of New York. The debt was later sold to General Electric Capital Corp. (GECC), and GECC became the priority secured lender.
In 2009, Kabile Ltd. and other individuals, the judgment creditors, obtained a judgment against Elegant in New York for just over $825,000. They later domesticated the judgment to New Jersey in August 2010.
At the same time, Elegant’s presumed president and CEO, Seffi Janowski, began negotiating with GECC and ultimately purchased GECC’s security interest in Elegant’s loan through another business of Janowski’s, Bergen Investments and Holdings, for $350,000. Bergen then foreclosed on the interest sold the assets it had acquired at public auction, where Bergen was the sole bidder. Bergen then sold the assets it acquired at the auction to another company owned by Janowski, Automotive Innovations, for $400,000. Automotive Innovations continued operating the same business as Elegant.
In August 2010, Automotive Innovations filed an order to restrain the judgment creditors from levying the New York judgment against Elegant’s bank accounts. The judgment creditors counterclaimed, seeking to hold Automotive Innovations liable for the New York judgment as the successor to Elegant. The judgment creditors essentially claimed that Janowski had attempted to shield himself and others from liability while continuing to profit from Elegant’s former business.
The trial judge determined that Automotive Innovations was the successor in liability to Elegant and responsible for the amount due on the New York judgment. However, the trial judge also concluded that the foreclosure of GECC’s lien discharged the judgment creditors’ subordinate interest and they could not levy the judgment on any of the assets Bergen purchased at auction. The judge concluded that, under Section 9-622 of the New York UCC, Bergen’s purchase of the collateral discharged all subordinate interests. On appeal, the judgment creditors argued the section did not apply, because the judgment was not yet a lien.
Judgment lien. The court concluded that, although the trial judge was correct that as purchaser of GECC’s security interest, Bergen’s acceptance of Elegant’s collateral in satisfaction terminated all subordinate interests in the collateral, the judgment was not a subordinate interest in Elegant’s collateral because the judgment was not yet a lien.
Under both New York and New Jersey law, a judgment becomes a lien on personal property only upon levy, which never occurred. Accordingly, because the judgment lien was not a subordinate interest in Elegant's collateral, it was not extinguished by the UCC sale, said the court. Because the trial judge entered a judgment in favor of the judgment creditors on the issue of successor liability, they were entitled to execute their judgment on any of Automotive Innovations’ assets, including those purchased at the sale.
The court's conclusion, although well-reasoned, also seems fair. If the allegations are true, Automotive Innovations purchased the collateral from itself, with full knowledge that a judgment was pending against Elegant. Section 9-622 is not intended to be used by debtors to wipe the slate clean.
The case is Automotive Innovations, Inc. v. J.P. Morgan Chase Bank, N.A. (Docket No. A-1473-12T3).
