Delaware Truck Sales, Inc. v. Wilson

On August 20, 1984, Royal Bank of Pennsylvania (Bank) loaned Delaware Repair Service, Inc. (Repair) $75,000. Repair signed a promissory note promising to repay the loan and pledged many of its assets and its accounts receivable as security. Bank filed financing statements covering the assets and the accounts receivable in late September 1984. As additional security, Repair’s principal, Edward Wilson, and his wife (defendants) personally guaranteed repayment of the loan and gave Bank a mortgage on their home. On September 6, 1984, Delaware Truck Service, Inc. (Truck) (plaintiff) sold its assets to Repair for $300,000, comprised of $30,000 in cash plus a promissory note for $270,000 to be paid in installments. Wilson and George Fandrick, who were former Truck employees, personally guaranteed Repair’s payment of the promissory note. The sales contract gave Truck a lien in the assets sold and a “secondary lien” on Repair’s accounts receivable. Truck did not file a financing statement covering Repair’s accounts receivable until October 1984. Repair later failed to meet its payment obligations to Truck and Bank. In May 1988, Repair still owed Truck $166,936. Accordingly, Repair agreed to surrender to Truck the assets that Truck held a security interest in. Thereafter, Truck collected $98,600 from Repair’s accounts receivable, which it applied to Repair’s debt. In December 1988, Bank obtained a $62,000 default judgment against Repair and the guarantors. Bank then sought to recover the money Truck collected from Repair’s accounts receivable. In April 1989, Bank and Truck entered into a settlement agreement. Truck paid Bank $59,500, and Bank assigned to Truck its default judgment, security interests in Repair’s assets, and the Wilson’s personal guaranty. In July 1989, Wilson filed for bankruptcy. Truck filed a motion in bankruptcy court seeking relief from the automatic stay to foreclose on the Wilsons’ home. The bankruptcy court granted the motion, and Truck filed a foreclosure action. However, the lower court held that Truck could not foreclose on the mortgage. The lower court reasoned that because Bank had priority in Repair’s accounts receivable, the money Truck collected from Repair’s accounts receivable should have been applied to satisfy the remaining debt from Bank’s loan to Repair.