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The Dryden Advisory Group LLC1 decision from the U.S. Bankruptcy Court for the Middle District of Pennsylvania addresses the recurrent question of whether a Factoring of accounts constitutes a true sale of the accounts or constitutes a secured transaction. As described by the court,
[a] business with outstanding payables may decide that it needs cash immediately. One solution to this liquidity problem is to sell receivables at some discounted price, another is to use the receivables to collateralize a loan. If the transaction is a "sale," then [the] title passes to the purchaser. If the transaction creates a security interest in favor of the lender, the business remains the owner of the receivables subject to the lender's interest.2
The significance of the distinction is not whether the transaction is subject to Article 9 of the Uniform Commercial Code, since Article 9 applies to sales of accounts as well as loans secured by accounts,3 4 but whether the factored accounts are property of the estate and thus within the jurisdiction of a bankruptcy court.
Background
The seller, Dryden Advisory Group LLC, was a tax-consulting firm that was compensated by commissions based on the tax savings that it obtained for clients. Because of the delays between the time that the services were performed and when payments were received, the seller required financing to address its cash-flow needs. Dryden first entered into loan agreements with Beneficial Mutual Saving Bank, guaranteed by the Small Business Administration, that were secured by perfected liens on all of the seller's assets, including its accounts receivable. When Dryden needed additional cash, it sought and obtained Beneficial's approval to factor two specific invoices,*
The seller entered into a nonrecourse receivable purchase contract and security agreement with the factor, Durham Commercial Capital Group, that was subsequently amended to meet Beneficial's requirements. The stated purpose of the amended factoring agreement was to "obtain a true nonrecourse sale of accounts receivable to Durham." "Numerous other provisions also specifically reference[d] or suggested] a sale."5 The economics of the transfer of accounts were, if Durham decided to buy a particular account offered to it:
(a) a factoring fee of 3.5% of the original face amount of the account [and]
(b) an additional 1.75% fee beginning thirty days after...