## Facts

- On August 20, 1984, Royal Bank of Pennsylvania (Bank) loaned Delaware Repair Service, Inc. (Repair) $75,000, evidenced by a promissory note.
- Repair granted Bank a security interest in many business assets, including its accounts receivable, and Bank filed UCC financing statements covering the collateral in late September 1984.
- As additional security for the Bank loan, Repair’s principal, Edward Wilson, and his wife, Joan Wilson (the Wilsons), executed a personal guaranty and gave Bank a mortgage on their home.
- On September 6, 1984, Delaware Truck Sales, Inc. (Delaware Truck) sold its business assets to Repair for $300,000 ($30,000 cash and a $270,000 installment note).
- The Wilsons and another individual personally guaranteed Repair’s obligations to Delaware Truck. The sales agreement granted Delaware Truck a lien in the assets sold and a “secondary lien” on Repair’s accounts receivable.
- Delaware Truck did not file a financing statement covering Repair’s accounts receivable until October 1984, after Bank’s filing, making Delaware Truck junior to Bank as to the receivables.
- Repair later defaulted on its obligations to both Delaware Truck and Bank. By May 1988, Repair still owed Delaware Truck about $166,936 and agreed to surrender collateral to Delaware Truck.
- After taking control, Delaware Truck collected about $98,600 from Repair’s accounts receivable and applied the collections to Repair’s debt to Delaware Truck.
- In December 1988, Bank obtained a default judgment for about $62,000 against Repair and the Wilsons, then sought recovery based on its first-priority security interest in the receivables.
- In April 1989, Delaware Truck and Bank settled: Delaware Truck paid Bank $59,500, and Bank assigned to Delaware Truck the default judgment, the underlying debt, and Bank’s security (including the Wilsons’ guaranty and mortgage).
- In July 1989, Edward Wilson filed for bankruptcy. Delaware Truck obtained relief from the automatic stay and filed a foreclosure action against the Wilsons’ home.
- The trial court granted summary judgment allowing foreclosure, but the Appellate Division reversed, reasoning that the receivables proceeds subject to Bank’s priority should have been applied to Bank’s debt. The Supreme Court of New Jersey granted review.

## Issues

1. When a junior secured creditor collects accounts receivable that are subject to a senior perfected security interest, must those proceeds be treated as payment of the senior secured debt up to the amount of that debt?
2. If the senior debt is treated as paid from such proceeds, are the guaranty and mortgage securing that senior debt discharged, preventing an assignee of the senior creditor from foreclosing?
3. Does an assignment of the senior creditor’s judgment and collateral rights allow the junior creditor to enforce a mortgage and guaranty when the underlying obligation has already been satisfied in substance?

## Decision

- The Supreme Court of New Jersey affirmed the Appellate Division and denied Delaware Truck the right to foreclose on the Wilsons’ home.
- Because Bank held a first-priority security interest in Repair’s accounts receivable, the amounts Delaware Truck collected from those receivables were treated as proceeds belonging first to Bank’s claim, and thus as satisfying Bank’s debt to the extent of that claim.
- Once Bank’s loan obligation was satisfied, the Wilsons’ guaranty and mortgage—given solely as security for that Bank obligation—were discharged.
- Delaware Truck, even as Bank’s assignee, could not enforce the mortgage and guaranty to obtain an additional recovery after the Bank debt was treated as paid.

## Legal Principles

- Under Article 9 priority rules, a senior perfected security interest in accounts receivable has priority over a later-perfected interest, and the senior creditor is entitled to the receivables proceeds ahead of junior claimants.
- A junior secured creditor who takes or collects collateral subject to a senior perfected interest takes subject to the senior lien; collections from that collateral are applied first to the senior secured obligation up to the amount of the senior debt.
- A mortgage and guaranty given to secure a particular debt are dependent on the continued existence of that debt; payment of the principal obligation discharges the security.
- An assignee generally obtains no greater rights than the assignor possessed at the time of assignment; an assignment cannot revive or preserve enforcement of security for a debt that has already been satisfied.
- Courts will not permit a creditor to obtain more than one satisfaction of the same obligation through shifting paper ownership of a paid debt and its security.

## Conclusion

Because Bank’s earlier filing gave it first priority in Repair’s accounts receivable, Delaware Truck’s collection of those receivables was treated as payment of Bank’s secured claim; that satisfaction extinguished the Wilsons’ guaranty and mortgage securing the Bank loan, so Delaware Truck’s later assignment from Bank did not permit foreclosure on the Wilsons’ residence.


Delaware Truck Sales, Inc. v. Wilson, 618 A.2d 303 (1993)