In Auto. Fin. Corp. v. DZ Motors, LLC, Civil Action No. 16-7955 (MAS) (DEA), 2021 U.S. Dist. LEXIS 69915 (D.N.J. Apr. 9, 2021), Judge Shipp reached different conclusions on a lien priority dispute between a Floorplan lender and credit union with respect to 2 luxury vehicles “purchased” by an SoT dealer’s manager. With respect to the Bentley, the Court found that the vehicle remained inventory and the manager was no a BiOC.

Considering all of the evidence, the Court finds that the Bentley was at all times relevant DZ Motors’s inventory. Once again, the photos that accompanied the curtailment extension requests are persuasive evidence that the Bentley was for sale. Mr. Middleton’s testimony that lot audits confirmed that the Bentley was consistently on the lot—making the vehicle inventory under the terms of the Note—supports this finding, as does the fact that the vehicle was consistently advertised for sale on DZ Motors’s website. Furthermore, the Court credits Mr. Buzzanca’s testimony that AFC likely would not have financed the Bentley under the floor plan agreement if it were not for sale. To the extent the Bentley was not on the lot or otherwise sporadically driven by Mr. Zholobov in his personal life, those facts are convincingly accounted for by trial testimony from Mr. Buzzanca that AFC permitted Mr. Zholobov to use the vehicle as a “demo.” The Court credits Ms. Zholobov’s testimony that the vehicle was driven “random[ly].” Notwithstanding such random personal use, “the principal use to which the property is put is determinative.” N.J. Stat. Ann. § 12A:9-102 (comment 4a). Ms. Zholobov’s testimony that the vehicle was driven randomly is supported by other evidence in the record suggesting that the vehicle was consistently kept on the lot and for sale. Nor does the fraudulent transaction purportedly selling the vehicle to Ms. Zholobov suggest that the Bentley stopped being inventory. To the extent Ms. Zholobov owned the Bentley and her testimony can be understood as asserting that she financed the Bentley through Raritan Bay in order to buy her household a “family car,” the Court does not credit that testimony. Ms. Zholobov repeatedly claimed that she could not recall basic facts about her involvement with the transaction. (See, e.g., Trial Tr. 342:1-9 (“Q: So is it your testimony that this is your signature on [the Bentley loan agreement], or that you don’t remember? A: I think it’s mine, but I’m really—I don’t remember. Like, looks like mine, but I do not remember.”).) Ms. Zholobov also testified that she never made any payments on the car because “[i]t’s all, like Dmitriy’s business.” (Trial Tr. 362:13-14.) Because she failed to credibly testify to such basic details involving herself, the Court finds that Ms. Zholobov lacks credibility when discussing DZ Motors’s intended uses for the Bentley or the purpose of the August 2015 transaction. Furthermore, the Court notes that other courts have declined to find that the purported removal of goods from a retailer’s inventory via “sham sales” defeat a lender’s secured claims against the goods as inventory. See, e.g., Homes Say. Ass ‘n v. Gen. Elec. Credit Corp., 101 Nev. 595, 708 P.2d 280, 286 (Nev. 1985). Moreover, the fact that Morris County Auto Sales ultimately purchased the Bentley with a check payable to DZ Motors and received, in exchange, a title listing DZ Motors as owner rather than Elena Zholobov further supports the Court’s finding that the vehicle remained in the Dealership’s inventory. . . .A security interest generally survives disposition of the collateral and continues in the collateral’s proceeds. ‘JPMorgan Chase Bank, N.A. v. Jeffco Cinnaminson Corp, 2012 N.J. Super. Unpub. LEXIS 661, 2012 WL 996617, at *5-6 (N.J. Super. Ct. App. Div. Mar. 27, 2012) (“Under [N.J. Stat. Ann. §] 12A:9-315(a)(1) and (2), a perfected security interest continues in collateral upon any disposition, unless an exception in the UCC applies.”). “Proceeds” include “whatever is acquired upon the sale . . . or other disposition of collateral.” N.J. Stat. Ann. § 12A:9-102(a)(64)(A). Because the Bentley was inventory, AFC had a right to the proceeds of the vehicle’s sale, absent an exception like the buyer in the ordinary course doctrine. If Mr. Zholobov or Ms. Zholobov [*40]  were buyers in the ordinary course, either could take free and clear of AFC’s lien. N.J. Stat. Ann. § 12A:9-320(a) (“[A] buyer in ordinary course of business . . . takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence.”); Jeffco Cinnaminson Corp, 2012 N.J. Super. Unpub. LEXIS 661, 2012 WL 996617. at *6 (noting that the effect of N.J. Stat. Ann. § 12A:9-320(a) is that a buyer in the ordinary course “acquires the goods with clear title”). In that situation, New Jersey’s buyer in the ordinary course doctrine provides that AFC’s security interest would be lost because it “le[ft] the goods with a dealer in those goods with the expectation that they will be sold by the dealer in the ordinary course of business.” Ocean Cnty. Nat’l Bank v. Palmer, 188 N.J. Super. 509, 457 A.2d 1225, 1228 (N.J. Super. Ct. App. Div. 1983). A lender that financed and then perfected a secured claim against the Zholobovs, ordinary course purchase might then defeat AFC’s inventory lien. See, e.g., Ex parte Gen. Motors Acceptance Corp., 425 So. 2d at 467 (“[w]hen [buyer in the ordinary course] purchased the car he took it free of [floor-plan lender’s] security interest,” and thus, the buyer’s bank “receives the benefit of [buyer’s] protection” under the ordinary course doctrine). On this record, there can be no serious contention that the Zholobovs were in any sense buyers in the ordinary course. Accord with Martin Marietta Corp. v. N.J. Natl Bank, 612 F.2d 745, 751 (3d Cir. 1979) (“if the sale was a sham to avoid the seller’s obligation to his creditor, then it probably would not satisfy . . . the buyer in the ordinary course requirement”); Taylor Motor Rental, Inc. v. Assocs. Discount Corp., 196 Pa. Super. 182, 173 A.2d 688, 690 (Pa. Super. Ct. 1961) (rejecting an assertion that plaintiff was a buyer in the ordinary course where the operator of the dealership acted for both the dealership and the purported buyer “in applying for the certificate of title in the name of the plaintiff. The purported sale by seller to the plaintiff [buyer] was merely a paper transaction for the benefit of [seller], who now has possession of the automobile for which defendant has never been paid.”). Moreover, at trial, even Raritan Bay’s employees acknowledged the fraud involved in the August 2015 transaction. (Trial Tr. 586:18-19.) Furthermore, the parties have not asserted that some other exception to the general rule that a security interest generally survives disposition of the collateral. Nor does the Court find that any other exception applies in this case.

The Court reached a different conclusion with respect to the Mercedes-Benz, but as a matter of insurance law rather than commercial sales law.

The Mercedes was totaled in a car accident on March 10, 2017. (J-46; Trial Tr. 469:21-470:1.) Because of the total loss of the vehicle, on May 15, 2017, Progressive paid Raritan Bay $132,299.49 because of its status as the loss payee under the policy. (J-35; J-46, J-47.) Secured creditors are entitled to insurance payouts as proceeds “to the extent of the value of collateral and to the extent payable to the debtor or the secured party.” N.J. Stat. Ann. § 12A:9-102(a)(64)(E) (emphasis added). Raritan Bay, as “loss payee is not an insured but only a mere appointee of the insured[.]” Liberty Mut. Fire Ins. Co. v. Kahlaid, Inc., 199 N.J. Super. 494, 489 A.2d 1231, 1232 (N.J. Super. Ct. App. Div. 1985) (citation and internal quotation marks omitted). Under New Jersey law, “[b]ecause of the personal nature of a contract of insurance, if an insurance policy is made expressly payable to a second mortgagee, the second mortgagee is entitled to the policy proceeds in preference to the holder of a first mortgage who is not listed as a loss payee under the policy.” Midland Lumber & Supply Inc. v. J.P. Builders, 265 N.J. Super. 246, 626 A.2d 89, 91 (N.J. Super. Ct. 1993) (citing City of Newark v. Cent. & Lafayette Realty Co.. 150 N.J. Super. 18, 374 A.2d 504, 507 (N.J. Super. Ct. App Div. 1977) (“A contract of fire insurance, being personal to the insured, does not, in the absence of contract stipulation, inure to the benefit of the holder of a lien on the property insured.” (internal quotation and citations omitted))). New Jersey’s stance toward loss payees accords with other jurisdictions’ treatment of competing claims on insurance proceeds. See, e.g., In re Hardin, 375 B.R. 506 (E.D. Wisc. 2007) (“Generally, a lienholder who is named as loss payee is entitled to the insurance proceeds, despite the claims of other lien or judgment creditors, by reason of its contractual right with the insurer. ” (quoting 44A Am. Jur. 2d Ins. § 1704)); Fuller v. Stonewall Cas. Co. of W. Va., 172 W. Va. 193, 304 S.E.2d 347. 350 (W. Va. 1983) (“By reason of this contractual right, a lienholder who is named as loss payee on an insurance policy is entitled to the insurance proceeds to the extent of the amount of his debt which is independent of the claim of other lien or judgment creditors.”). Because of its status as loss payee, Raritan Bay was entitled to the $132.299.49 Progressive insurance payment for the 2016 Mercedes’s total loss. Accordingly, with respect to that payment, AFC’s conversion claim fails.