Law School Case Brief
T. Gluck & Co., Inc. v. Craig Drake MFG., Inc. - 2013 NY Slip Op 31208(U) (Sup. Ct.)
Comment 9 for UCC § 9-324(b) states that “Debtor creates a security interest in its existing and after-acquired inventory in favor of SP-1, who files a financing statement covering inventory. SP-2 subsequently takes a purchase-money security interest in certain inventory and, under subsection (b), achieves priority in this inventory over SP-1. This inventory is then sold, producing accounts. Accounts are not cash proceeds, and so the special purchase-money priority in the inventory does not control the priority in the accounts. Rather, the first-to-file-or-perfect rule of Section 9-322 (a) (1) applies. The time of SP-1's filing as to the inventory is also the time of filing as to the accounts under Section 9-322 (b). Assuming that each security interest in the accounts proceeds remains perfected under Section 9-315, SP-1 has priority as to the accounts."
Plaintiff Gluck contracted to supply diamonds to defendant Craig Drake Mfg., Inc. (CDM), a jewelry manufacturer based in Pennsylvania, pursuant to a written amended consignment and security agreement, dated January 31, 1997 (Consignment Notice). After executing the Consignment Notice, Plaintiff filed a UCC-1 Financing Statement with the Pennsylvania Department of State on February 24, 1997. At this time, Brown Brothers Harriman & Co. (BBH) served as CDM's lender. The Security Agreement granted BBH a security interest in CDM's current and future accounts and inventory, as well as CDM's proceeds, pursuant to the UCC. Thereafter, BBH sold and assigned its security interest in CDM's collateral to Sovereign. Sovereign now contended that it maintained a first priority, perfected security interest in all of CDM’s assets and personal property prior in right and time to that of plaintiff. Plaintiff then instituted the present complaint, alleging that CDM sold its consigned diamonds without paying plaintiff the agreed-upon proceeds. Plaintiff’s motion for default judgment was granted by the district court. Sovereign sought summary judgment as to the claims asserted against it, arguing that plaintiff's security interest in the consigned goods did not have priority over Sovereign's security interest in CDM's accounts receivable.
Did Sovereign have priority over plaintiff’s security interest in CDM’s account receivable?
In the case at bar, the Court noted that Sovereign was the “first-to-file-or-perfect.” Under the terms of the July 17, 1989, Sovereign (through its predecessor in interest BBH) was granted a security interest in all of CDM's assets and personal property, including its accounts receivable and inventory. See Fairfield Aff. Ex. K, § 4.1. Sovereign perfected its security interest through the filing of a UCC-1 Financing Statement on July 27, 1989. Meanwhile Plaintiff was granted its security interest in CDM's collateral on January 31, 1997, and perfected this interest on February 24, 1997 — nearly eight years after Sovereign filed and perfected. Accordingly, consistent with Comment 9 to UCC § 9-324(b), Sovereign was first to file and perfect and thus holds the superior interest here.
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