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Riviera Finance of Texas, Inc. v. Robert Elgart & Son, Inc.

A-3083-01T1 (N.J. Super. App. Div. 2003) (Unpublished)

LOANS; FACTORING; BANKRUPTCY—A commercial factor accepts the credit risk of an account receivable; therefore, a claim for return of allegedly preferential payments in a bankruptcy proceeding does not arise out of a dispute between the factored supplier and its customer, but is exactly the risk contemplated.

A commercial factor financed accounts receivables owed by a department store to a supplier. The store paid the accounts receivables, but filed for bankruptcy shortly thereafter. In its bankruptcy proceeding, it demanded return of its recent payments as a preferential transfer. The factor demanded recourse against its customer “should [the department store] be successful in its preference action… .” The factoring agreement contained a provision giving the factor recourse against its client if its client and a customer, such as the department store, “are involved in a dispute of any kind, regardless of validity.” The lower court and the Appellate Division held for the borrower-client. In doing so, they looked at the agreement which expressly stated that the factor would have no recourse against its client when an account went unpaid because of a “Credit Problem.” Under the terms of the factoring agreement, a “Credit Problem” meant “a customer [was] unable to pay its debts because of insolvency, the dissolution, termination of existence, or business failure of the account debtor, the voluntary filing of a petition of bankruptcy or the commencement of any proceeding under the Bankruptcy Code… .” Each court found that the relevant term of the agreement was the no recourse provision. Further, each court found that the preference claim was “not the kind of customer disagreement” that was embraced by the provision of the contract. In a factoring agreement, “the commercial factor is to check the credit of a proposed customer on behalf of its client and determine whether or not to accept the absolute risk of their solvency.” Further, the factoring contract “did not impose on [the borrower-client] a continuing obligation to vouch for the solvency of the customer.” The Appellate Division added that the lower court was not restricted merely to an examination of the single provision of the contract which formed the basis of the factor’s claim. The court rules do “not put such blinders on the judge. ... whether non-payment results from the original failure to pay or from the obligation to return a payment made as an illegal preference in bankruptcy, [the factor’s] bottom line is identical. Its situation in either case flowed from the failure [the department store’s] credit, something about which [the factor] had the right to assure itself and upon which it assumed the risk.”

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