Dryden Advisory Group, LLC v. Beneficial Mutual Savings Bank (In re Dryden Advisory Group, LLC)
534 B.R. 612
Bankr. M.D. Penn.2015Background
- Dryden Advisory Group, a tax-consulting firm, entered a Nonrecourse Receivables Purchase Contract and Security Agreement with Durham Commercial Capital (a factoring arrangement) to monetize certain accounts receivable after defaulting on loans from Beneficial Mutual Savings Bank and Citibank-related liens.
- Beneficial had made SBA‑guaranteed loans to Dryden and held a senior perfected security interest in Dryden’s accounts receivable; Citibank had earlier liens and an intercreditor arrangement with Beneficial.
- Beneficial reviewed and required amendments to the Factoring Agreement; an acknowledgment was signed stating Beneficial would release the Purchased Accounts and permit Durham to place a subordinate lien, but the parties dispute its scope (Beneficial says it only released the Fiserv accounts; Durham/Dryden say broader release was intended).
- Durham purchased multiple invoices (including Fiserv, Janney, Mountainview, Verizon, DST Health), advanced funds (typically 75%) and retained a 25% reserve; collection practices varied (some payments flowed through Dryden or its attorney Felker; Durham later notified debtors to pay Durham directly).
- Dryden filed bankruptcy; Durham objected to Dryden’s use of cash collateral for certain accounts it claims to have purchased prepetition. The court held evidentiary hearings to decide whether the transfers were true sales (removing the accounts from the estate) or secured financings (leaving them in the estate).
Issues
| Issue | Plaintiff's Argument (Dryden) | Defendant's Argument (Durham/Beneficial/Citibank) | Held |
|---|---|---|---|
| Whether the Amended Factoring Agreement constituted a true sale of accounts receivable or merely a secured financing (loan) | The agreement should be recharacterized as financing: Durham retained mechanisms (reserve, ability to require repurchase, course of conduct) indicating recourse and servicing by Dryden | The contract is a true nonrecourse sale: Durham assumed insolvency risk, purchased accounts at a discount, had rights to direct collection, and the written terms effectuate a sale | Court held the agreement, on balance, constituted a true sale of the accounts Durham purchased prepetition |
| Whether the bankruptcy court has jurisdiction to determine competing interests in the transferred accounts (i.e., priority disputes among Beneficial, Citibank, Durham) | Dryden (and Durham to extent accounts are estate property) implied that priorities could be resolved in bankruptcy | Durham argued accounts were not estate property so bankruptcy court lacks jurisdiction; Beneficial argued its lien priorities survive and some releases were limited | Because the disputed accounts were found not to be estate property, the court concluded it lacked subject‑matter jurisdiction to adjudicate priority disputes among non‑debtors |
Key Cases Cited
- Major’s Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538 (3d Cir.) (sale vs. secured loan factors; recourse analysis)
- Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir.) ("related to" bankruptcy jurisdiction standard)
- Wechsler v. Hunt Health Sys., Ltd., 198 F. Supp. 2d 508 (S.D.N.Y.) (factor must assume insolvency risk in New York factoring law)
- In re Grand Union Co., 219 F. 353 (2d Cir.) (classic analysis distinguishing sales from secured financing based on contract economics and course of dealing)
- State Bank of India v. Walter E. Heller & Co., Inc., 655 F. Supp. 326 (S.D.N.Y.) (allocation of commercial dispute/chargeback risks in factoring arrangements)