## Facts

- Major’s Furniture Mart, Inc. operated a retail furniture business that generated consumer installment contracts and accounts receivable.
- Castle Credit Corp., Inc. financed furniture dealers and advanced funds against dealers’ receivables.
- The parties executed a June 18, 1973 written agreement “for the financing of Major’s accounts receivable,” structured and labeled as periodic “sales” of receivables to Castle.
- The receivables were assigned to Castle “with full recourse” against Major’s, and Castle could refuse to take particular accounts.
- Major’s was required to repurchase accounts that became delinquent (over 60 days) at full face value plus Castle’s costs, shifting nonpayment risk to Major’s.
- A reserve/holdback account was maintained to protect Castle against losses, functioning as additional protection typical of secured lending.
- Between June 1973 and May 1975, Major’s transferred hundreds of customer accounts and repurchased numerous delinquent accounts.
- Major’s alleged Castle declared it in default in 1975 and that Castle retained collections exceeding Castle’s advances and permissible charges, creating a surplus.
- On stipulated, undisputed facts, Major’s sought an accounting and payment of any surplus; the district court granted summary judgment for Major’s on that claim, and Castle appealed only that ruling.

## Issues

1. Whether the receivables transactions, although labeled as “sales,” were in substance secured financing transactions governed by Article 9 of the Pennsylvania UCC.
2. If the transactions were secured loans, whether Castle, as secured party collecting on collateral, had to account for and remit any surplus proceeds to Major’s.

## Decision

- The Third Circuit affirmed the summary judgment for Major’s.
- The court held the arrangement was not a true sale of accounts but a secured loan, because the economic substance reflected a debtor-creditor relationship with receivables serving as collateral.
- Given Article 9 treatment, Castle was required to account for collections and to remit any surplus after satisfaction of the secured obligation and allowable charges.

## Legal Principles

- Courts determine whether a receivables “sale” is a true sale or secured financing by examining economic substance rather than labels used in the contract.
- Extensive recourse, mandatory repurchase of delinquent accounts at face value plus costs, and reserve/holdback mechanisms indicate the transferor retained credit risk consistent with secured lending.
- When a transaction is treated as an Article 9 secured transaction, a secured party that collects on collateral must account to the debtor and pay over any surplus remaining after the secured debt and permitted expenses are satisfied.

## Conclusion

The court treated the receivables “sale” program as a secured financing because Major’s bore the principal risk of nonpayment and the structure operated as advances secured by accounts; accordingly, Article 9 applied and Castle had to provide an accounting and return any surplus collections.


Major’s Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538 (3d Cir. 1979)