## Facts

- Jersey Tractor Trailer Training, Inc. (JTTT) borrowed $315,000 from Wawel Savings Bank (Wawel), granting Wawel a security interest in all of JTTT’s capital equipment and assets.
- Wawel perfected its security interest by filing UCC-1 financing statements in New Jersey.
- About a year later, JTTT entered a factoring arrangement with Yale Factors NJ, LLC (Yale), selling rights to JTTT’s accounts receivable for, among other consideration, an up-front payment tied to each account.
- Yale filed a UCC-1 claiming a lien on all present and after-acquired accounts receivable of JTTT.
- JTTT filed a Chapter 11 petition on April 4, 2006.
- Wawel filed an adversary proceeding seeking declarations that its lien had priority over Yale’s, that it was entitled to certain escrowed receivables proceeds, and that it was entitled to JTTT’s receivables until its lien was satisfied.
- The parties did not dispute Wawel’s earlier perfection and resulting seniority under the U.C.C.’s first-to-file-or-perfect rule.
- Yale argued it nevertheless had priority because (i) Wawel authorized sales of receivables free of its lien, (ii) Yale qualified as a holder in due course of instruments tied to the receivables, or (iii) Yale qualified for instrument-purchaser priority.
- The Bankruptcy Court ruled for Wawel, finding no authorization by Wawel and finding Yale failed the U.C.C. good-faith standard, citing deficiencies in Yale’s lien search (including omission of “Inc.”).
- The District Court affirmed; Yale appealed.

## Issues

1. Whether Wawel authorized disposition of JTTT’s accounts receivable free of Wawel’s security interest under U.C.C. § 9-315(a)(1), based on Wawel’s knowledge of and conduct regarding the factoring arrangement.
2. Whether Yale acted in “good faith” (honesty in fact plus observance of reasonable commercial standards of fair dealing) so as to claim holder-in-due-course protections or instrument-purchaser priority under U.C.C. §§ 3-302, 9-330(d), and 9-331(a).

## Decision

- The Third Circuit affirmed the determination that Wawel did not authorize sales of receivables free of its security interest; Wawel’s security interest continued and remained senior.
- The Third Circuit vacated the determination that Yale lacked good faith and therefore could not qualify as a holder in due course or protected purchaser of instruments.
- The case was remanded for reconsideration of Yale’s good faith and related status under the correct legal framework.

## Legal Principles

- A perfected security interest continues in collateral after disposition unless the secured party authorizes the disposition free of the security interest. U.C.C. § 9-315(a)(1).
- Knowledge of a debtor’s sale or assignment of collateral, without a manifestation of authorization, does not by itself establish authorization to dispose of collateral free of a security interest; inaction alone is not enough.
- Under the U.C.C., “good faith” includes both subjective honesty and objective compliance with reasonable commercial standards of fair dealing.
- Good-faith analysis for holder-in-due-course protections or instrument-purchaser priority cannot rest on a single technical defect in lien-search practice treated as dispositive; the inquiry must assess the transaction’s circumstances and relevant commercial standards.
- Article 9’s first-to-file-or-perfect priority rule may be displaced only if the later claimant satisfies the statutory requirements for specialized priority (including good faith) available to holders in due course or protected purchasers of instruments.

## Conclusion

The court held that a secured lender’s mere awareness of factoring does not equal authorization to sell receivables free of its lien, preserving the lender’s senior priority, but required a renewed determination of whether the factor acted in good faith to claim holder-in-due-course or instrument-purchaser priority.


Wawel Sav. Bank v. Jersey Tractor Trailer Training, Inc. (In re Jersey Tractor Trailer Training, Inc.), 580 F.3d 147 (3d Cir. 2009)