Category Archives: collateral

Will a Loan be Discharged When the Lender Releases the Liens on the Collateral Prior to Ensuring That the Payoff Checks Have Cleared?

In JPMorgan Chase Bank, N.A., v. Jeffco Cinnaminson Corporation, et. al., No. A-2601-10T3
(N.J. Super. Ct. App. Div. March 27, 2012), JP Morgan Chase Bank, N.A.  (“Plaintiff”) sued Jeffco Cinnaminson Corporation (“Jeffco”) and Paul T. Andrews (“Andrews”) (collectively “Defendants”) based upon its premature disbursement of collateral held as security against two loans.

In that case, Plaintiff granted Jeffco two loans in order to acquire a Ford GT and a Ferrari (collectively the “Vehicles”). In regard to both loan agreements (collectively the “Agreements”), Andrews signed the Agreements as a cosigner which made him a
guarantor of the debt. Id. at 4.

Plaintiff disbursed the money and, in order to secure the loans, recorded liens on the Vehicles. Subsequently, Defendants entrusted the vehicles to Alfred Sciubba (“Sciubba”), who owned and operated a specialty car business named “Auto Toy Store.” He agreed to find buyers for the Vehicles.  Id. at 4.

Sciubba found buyers for both vehicles. It provided pay off checks from Jeffco’s bank account to satisfy the car loans so the sale could be consummated (the buyers obviously would not want to purchase the cars with liens still recorded on the title). The problem arose when the Plaintiff bank endorsed the liens as paid before the check cleared. In fact it did this on two separate occasions, since the cars sold at different times. However, since neither check cleared due to insufficient funds in Jeffco’s bank account, Plaintiff was left with two unpaid and unsecured loans in Jeffco’s and Andrews’ names. Id. at 6-7.

As a result, Plaintiff filed suit in the Law Division of the Superior Court of New Jersey  (“Lower
Court”) against Jeffco and Andrews to recover the amounts due. Defendants argued that because Plaintiff had failed to protect the collateral, their two loans were discharged. They also filed a counterclaim which alleged that Plaintiff was negligent because it should not have endorsed both liens as paid before either of the checks had cleared. Id. at 7-8.

Subsequently, Plaintiff filed a motion for summary judgment and Defendants filed a cross motion for summary judgment. A motion for summary judgment allows a Court to determine a case without resort to a trial when there are no material issues of fact and judgment can be granted by applying
the relevant law.

Defendants’ submitted to the Court an expert report and opinion. The expert opined that Plaintiff’s release of the liens violated financial industry standards and was contrary to its policies and procedures. Further, the expert asserted that it failed to properly monitor and manage the Jeffco
loan portfolio after the first payoff check (for the Ford GT) bounced. Id. at 8-9.

The Lower Court stated that Plaintiff “implicitly knew” Sciubba was in the business of selling cars because it received a check from “Auto Toy Store.” It reasoned that because Sciubba regularly sold cars to the public, that alone was a sufficient basis for the Plaintiff to reasonably believe that the checks received from him were adequate and sufficient. Thus, it asserted that it was proper for Plaintiff to have endorsed the liens as paid before the checks had cleared. Further, the Lower Court stated that Defendants could not complain about Plaintiff’s release of the liens because they had set in motion the very facts that led to the consignment of the vehicle to the dealership.

Accordingly, the Lower Court granted Plaintiff’s motion for summary judgment against Defendants for the amounts due plus approximately $40,000.00 in attorney’s fees. Id.

Subsequently, Defendants appealed to the Superior Court of New Jersey, Appellate Division (the “Appellate Court”). In its analysis, the Appellate Court considered Plaintiff’s argument based upon Chapter Nine of the New Jersey Commercial Code (the “UCC”). It claimed that whenever an “innocent purchaser” is involved in the acquisition of an automobile, the rights of a secured lender, almost instantaneously (and inexorably), must bend to the will of the buyer.  Id. at 11-12. The Court rejected that argument.

It explained that under N.J.S,A. 12A:9-315(a)(1) and (2), a properly filed and recorded lien was not extinguished when the secured property was transferred to another, unless an exception to the UCC applied. One such exception is N.J.S.A. 12A: 9-320(a) because it automatically severs the lien so that the purchaser of the goods enjoys them with clear title; free of any liens due to their seller’s debt. Id.at 14. For example, if you purchased a new coat from a department store you will own that coat without any fear that the department store’s creditors have any rights in them. N.J.S.A. 12A: 9-320(a)
stated:

Except, as otherwise provided in this subsection (e), a buyer in the ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.  

(emphasis added) Id.

Further, the Court noted that the UCC did not require a secured lender to blindly release a lien without conducting reasonable due diligence; including ensuring that the proffered payoff is sufficient to extinguish the outstanding amount due on the loan. Id. at 13.

In its analysis, the Court explained several reasons why the Lower Court’s grant of summary judgment in favor of Plaintiff was improper. Some of those reasons were:

  • Contrary to the Lower Court’s conclusion, Plaintiff could not have implicitly known that the
    entity transmitting title to the vehicles was in the business of selling vehicles because it never received a check from the Auto Toy Store. Rather, Plaintiff received a check from Jeffco who was not an entity that was in the business of selling motor vehicles at the time Plaintiff received the checks. Id.
  • The security interests in this case were created by Jeffco and Andrews, not the Auto Toy Store.
    Since, the buyers of the Vehicles were dealing with Auto Toy Store, not Jeffco and Andrews, the provision did not apply to them. Thus, those buyers would have taken free of any security interest created by Auto Toy Store (the buyer’s seller), but not those created by Jeffco and Andrews. Therefore, that argument was immaterial.
    Id. at 15.
  • There was no requirement in the UCC that mandated a speedy release of Plaintiff’s security
    interests in the Vehicles. In light of Defendant’s expert’s opinion, it was possible that had the Plaintiff waited a few more business days, instead of robotically processing the lien releases, its discovery of the checks’ dishonor might have enabled Defendants to prevent the conversion
    of the purchase proceeds. Id.

Since many questions of fact remained open for the trier of fact to determine, the Appellate Court reversed the grant of summary judgment in favor of Plaintiff, vacated the reallocation of attorney’s fees without prejudice, and remanded back to the Lower Court. Id. at 21.