The U. S. District Court for the Northern District of Indiana recently addressed some procedural issues associated with the enforcement of a factoring and security agreement. Here is a .pdf of JD Factors v. Freightco, 2009 U.S. Dist. LEXIS 72636 (N.D. Ind. 2009). There are a handful of things to take away from JD Factors.
1. The business of factoring is a kind of financing characterized by “the buying of accounts receivable at a discount.” In JD Factors, JD and Brankle entered into a factoring and security agreement whereby JD agreed to buy Brankle’s accounts receivable under an agreed-upon discount formula. Under the agreement, JD advanced money to Brankle in exchange for an assignment of all rights, payments and proceeds in Brankle’s accounts. Account debtors then paid JD directly. The factoring and security agreement granted JD a first priority security interest in Brankle’s assets, including the accounts receivable.
2. Generally, factoring agreements can involve a security interest being granted in an account. As such, Indiana’s version of the UCC can govern the relationship. Ind. Code § 26-1-9.1-109(a) states that Article 9 will apply to a transaction intended to create a security interest in accounts and to any sale of accounts.
3. I.C. § 26-1-9.1-607 states: “If so agreed, and in any event after default, a secured party . . . may enforce the obligations of an account debtor . . . and exercise the rights of the debtor with respect to the obligation of the account debtor . . . . to make payment or otherwise render performance to the debtor . . ..” Under the UCC, therefore, JD (as a secured party) was entitled to enforce collection of defendant Freightco’s (the account debtor’s) debt.
4. The Court rejected the proposition that the secured party/factoring relationship was akin to that of principal and agent. Again, Article 9 of the UCC, not principal/agency law, applied. “Here, [plaintiff/JD] is not acting as a mere collection agent for Brankle; rather, the two entities are parties to a sophisticated lending relationship.” Only JD, not Brankle, possessed the authority to seek collection of the receivable. “[JD] is a secured party possessing a right to be enforced, and Section 607 of the Indiana UCC provides the statutory authority for its enforcement of the [debt/account receivable].”
The JD Factors opinion arose out of a technical dispute surrounding “diversity of citizenship” and whether the case could be in federal court, as opposed to state court. For any lawyers reading this post, the Court concluded that “[JD] as a secured party possesses a right subject to enforcement in this action and thus is a ‘real party in interest’. Consequently, diversity of citizenship exists between plaintiff [JD], a company of California citizenship, and defendant Freightco [account debtor], a company of Indiana citizenship . . ..” Freightco asserted that the Indiana citizenship of Brankle should destroy diversity so as to force the case to be heard in the Indiana state courts. The Court denied Freightco’s motion to dismiss.