Opinion ID: 1204152
Heading Depth: 2
Heading Rank: 2

Heading: Holder in Due Course & Purchaser of Instruments

Text: 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. Triffin v. Pomerantz Staffing Servs., LLC, 370 N.J.Super. 301, 851 A.2d 100, 103 (2004) (quotation marks and citation omitted); see U.C.C. §§ 9-102(b) and 3-302(a) (defining holder in due course). 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. See id. at § 9-330(d) (purchaser of an instrument has priority over a security interest in the instrument perfected by a method other than possession ...). 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. Id. at § 9-330(d). [16] Because it is clear that Yale took the accounts receivable for value and that they did not bear markings of forgery or illegitimacy, and because the Bankruptcy Court did not reach the notice-related requirements in U.C.C. §§ 3-302 and 9-330(d), our inquiry has one central component did Yale act in good faith? Good faith is defined in the U.C.C. as honesty in fact and the observance of reasonable commercial standards of fair dealing. U.C.C. §§ 3-103(a)(4); 9-102(a)(43); see id. at § 9-331 cmt. 5 (In order to qualify as a holder in due course, the junior [secured creditor] ... not only must act `honestly' but also must observe `reasonable commercial standards of fair dealing' under the particular circumstances; id. at § 9-330 cmt. 7 [T]he same good faith requirement applicable to holders in due course applies to purchasers of instruments). This definition has both a subjective pronghonesty in factand an objective prongobservance of reasonable commercial standards of fair dealing. See Triffin, 851 A.2d at 104 (a holder in due course must satisfy both a subjective and objective test of good faith). The Bankruptcy Court found, and the parties do not dispute, that Yale satisfied the subjective requirement of the good faith definition. At issue in this appeal is the Bankruptcy Court's determination with regard to Yale's objective good faithwhether it observed reasonable commercial standards of fair dealing, see U.C.C. § 9-330 cmt. 7and that determination ... [is] reviewed de novo.  In re Joe Morgan, Inc., 985 F.2d 1554, 1558 (11th Cir.1993) (citations omitted). Yale's primary argument is that it did, in fact, act in good faith by following reasonable commercial standards of fair dealing. As the commentary provides, `good faith' does not impose a general duty of inquiry, e.g., a search of the records in filing offices, but there may be circumstances in which `reasonable commercial standards of fair dealing' would require such a search. U.C.C. § 9-331 cmt. 5. Neither party disputes that a search was required under the circumstances here. See id. (Consider, for example, a junior secured party in the business of ... buying accounts who fails to undertake a search to determine the existence of prior security interests. Because such a search ... would enable it to know or learn upon reasonable inquiry that collecting the accounts violated the rights of a senior secured party, the junior may fail to meet the good faith standard). Instead, the issue is whether the lien searches conducted by Dun & Bradstreet on Yale's behalf comported with reasonable commercial standards of fair dealing. [F]air dealing is a broad term that must be defined in context, [but] it is clear that it is concerned with the fairness of conduct rather than the care with which an act is performed. U.C.C. § 3-103 cmt. 4 (emphasis added). [17] It is likewise clear that fair dealing ... [is] to be judged in the light of reasonable commercial standards.... Id. Our inquiry, therefore, contains two steps: [F]irst whether the conduct of the holder [of the instruments] comported with industry or `commercial' standards applicable to the transactions and, second, whether those standards were reasonable standards intended to result in fair dealing. Maine Family Fed'l Credit v. Sun Life Assurance Co. of Canada, 727 A.2d 335, 343 (Me.1999). We begin with whether the Dun & Bradstreet lien searches comported with industry standards. We note, initially, that the lien searchesusing the search term Jersey Tractor Trailer Training and omitting Inc.,revealed a terminated lien on the accounts receivable of Jersey Tractor Trailer Training, Inc.  (App. at 764) (emphasis added). [18] Like the Bankruptcy Court, we are at a loss to understand how and/or why the ... search[es] failed to disclose Wawel's filing, ( id. at 94), but it does not follow that the searches were commercially substandard. As the search records demonstrate, the Dun & Bradstreet searches were tailored to discover liens against Jersey Tractor Trailer Training and Jersey Tractor Trailer Training, Inc. That they did not reveal Wawel's lien is anomalousand not evidence of commercial unreasonableness. The Bankruptcy Court's determination to the contrary was shaped by its reliance on In re Thriftway Auto Supply, Inc., 159 B.R. 948 (W.D.Okla.1993), aff'd 39 F.3d 1193 (10th Cir.1994). The Thriftway court addressed what constituted a `reasonably diligent' search in a different context namely whether a UCC-1 filing statement filed under the wrong name still served to perfect the creditor's security interest because it would have been discovered by a reasonably diligent searcher. See 159 B.R. at 951. The court held that a searcher should be required to at least take advantage of the flexibility offered by a computer system to find all potential filings with similar names, id. at 953, by using minimal creativity to search common variants of the debtor's corporate name. Id. at 954. But see In re Summit Staffing Polk County, Inc., 305 B.R. 347, 354 n. 7 (Bankr. M.D.Fla.2003) (collecting cases interpreting former Article 9 as requiring a more limited search). The Bankruptcy Court's reliance on Thriftway was error, because [r]evised Article 9 rejects the duty of a searcher to search using any names other than the name of the debtor.... Summit Staffing, 305 B.R. at 354-55. Indeed, revised U.C.C. § 9-506(c) narrows the responsibility of a reasonable searcher, providing that a misfiled financing statement will be considered seriously misleading unless a search of the records of the filing office under the debtor's correct name, using the filing office's standard search logic, if any, would disclose [the misfiled] financing statement.... Using revised U.C.C. § 9-506(c) as a guide, we hold that a commercially reasonable lien search is a search of the records of the [relevant state or county] filing office, under the debtor's correct name, using the filing office's standard search logic .... (emphasis added). It appears that the Dun & Bradstreet searches met that standard. See Int'l Ass'n of Commercial Adm., Uniform Commercial Code, Article 9, Model Administrative Rules, Rule 503.1.5 (2007) (in conducting searches words and abbreviations at the end of an organization name that indicate the existence or nature of the organization including Inc[.], are `disregarded' to the extent practicable). [19] We nevertheless leave that determination to the Bankruptcy Court in the first instance. In this narrow context, the second element of the reasonable commercial standards of fair dealing inquiryspecifically whether [the industry] standards were reasonable standards intended to result in fair dealing, Maine Family, 727 A.2d at 343yields a clear answer. See U.C.C. § 3-103 cmt. 4 (fair dealing is a broad term that must be defined in context). A lien search that complies with the standard set forth in U.C.C. § 9-506(c) necessarily reflects fairness of conduct, see id. at § 3-103 cmt. 4, tailored to reveal senior security interests. Thus, if the lien searches conducted on Yale's behalf used the standard search logic, U.C.C. § 9-506(c)a question left to the Bankruptcy Court on remandthey were in keeping with reasonable commercial standards of fair dealing. Whether the searches, if properly conducted, and Yale's other pre-factoring-agreement investigation of JTTT's business, were sufficient to meet Yale's duty to deal fairly in purchasing JTT's accounts receivable is likewise left to the Bankruptcy Court on remand. See id. at § 9-331 cmt. 5 (Whether the junior secured party acts in good faith is fact-sensitive and should be decided on a case-by-case basis). [20] The Bankruptcy Court added that a search of JTTT revealing no significant bank debt[] at a time when the company faced liquidity issues necessitating the use of a factor, should have raised red flags, and that Yale's failure to heed those red flags was evidence of its reckless[ness]. (App. at 94.) Reasonable commercial standards of fair dealing doubtlessly require a lien searcher to examine the results of a proper search with reasonable diligence, Summit Staffing, 305 B.R. at 355, and a complete absence of secured debt may be an indication that the lien search was improperly conducted. Yale argues, however, that the absence of secured debt may not be a red flag at allnoting that many companies that enter into factoring agreements do so because their credit rating is too low to take out traditional secured loans. While that might well be so, a wiser course may have been to have inquired about the absence of not only recently-acquired secured debt, but also past-acquired debt. The fact that Yale did not do so is, without more, insufficient support for the Bankruptcy Court's conclusion that Yale failed to comport with reasonable commercial standards of fair dealing. [21]