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Visual Expressions, Inc. v. Toys R’ Us Headquarters, Inc.

A-3549-00T5 (N.J. Super. App. Div. 2002) (Unpublished)

CONTRACTS; ASSETS; LIABILITIES— An obligation to pay a commission included as part of a contract acquired in the purchase of a business is part of an asset and is not classified a liability because if there are no sales, there is no commission to pay.

A “rack jobber” that supplied video tapes, kept track of sales, and resupplied the product to a major retailer sold its assets to a competitor. The competitor agreed to pay a small commission on net sales billed to that retailer. About two years later, that retailer notified the new owner that it would begin to purchase the product directly from suppliers. About the same time, a third company was looking to purchase a wholesaler such as the one that now had the retailer’s account. It was undisputed that the company with the retailer’s account told the third company that its relationship with the retailer would be ending. However, it did not inform the third company of the commission obligation to pay its predecessor because it was assumed that the retailer would no longer be a customer. The new company took over the second company’s entire business and retained most of its offices and employees. Business with the retailer continued and a substantial commission obligation to the original business owner was created. When it wasn’t paid, the original business owner sued both the company that had bought its business and the third company had became the successor to the business. It also sued the retailer, which settled the matter. The ultimate owner of the “rack jobbing business” alleged that its contract to buy the business excluded “unnamed liabilities,” and that “the commission obligations to [the original supplier to the toy company was] a liability and therefore,” it wasn’t obligated to pay the commission. The lower court disagreed, holding that both the second company and third company were jointly and severally liable for the judgment. It made the second company primarily liable and the third company secondarily liable. The lower court also imposed an equitable lien on the sales by the third company to the retailer. In doing so, the lower court recognized that the second company and the third company, in their transaction, had overlooked the commission agreement. It believed that “the obligation to pay the commissions [was] ... an asset in the sense that it’s part of the” retailer’s account. In its view, “[a]lthough the obligation to pay commissions itself is a liability, it was the result of the acquisition of the [retailer’s] account.”

The Appellate Division agreed with the lower court and held that “the commission obligation was part and parcel of the [retailer’s] account. [T]he account was an assigned asset.” The Court’s analysis was that “[t]he commission obligation was not a liability because [the third company] would owe no commission unless it sold” products to the retailer. In other words, at the time the [acquisition agreement for the business] was executed, the commission obligation was not a liability. It would never become one until [the third company] sold” products to the retailer. Further, even after the third company came to know that the commission obligations were attached to the account, it continued to sell products to the retailer for years thereafter. On the other hand, the Appellate Division did not agree with the lower court’s imposition of an equitable lien on the proceeds of the sales. An equitable lien “is a peculiar remedy. An equitable lien is essentially a [judicially-created] security interest in a specifically identified property.” As such, “[i]t is neither a debt nor a right of property, but is a merely a remedy for a debt.” Here, the commission agreement never suggested that there was any agreement that sales to the retailer would be set aside or dedicated as security for future payments. Further, nothing in the subsequent conduct of the parties suggested there was an intent to create a security interest in the retailer’s account. Therefore, the Court concluded “that an equitable lien should not have been imposed to secure the commission obligation… .”

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