No. 13506 INTHE SUPREME COURT OF THE STATE OF MONTANA 1977

MASSEY-FERGUSON CREDIT CORPORATION, a corporation, Plaintiff and Appellant,

-vsBRUCE BROWN, Defendant and Respondent.

Appeal from: DistrictCourt of the Tenth Judicial, Honorable LeRoy L. McKinnon, Judge presiding. Counsel of Record: For Appellant: Leonard H. McKinney argued, Lewistown, Montana For Respondent: James Wilkins argued, Lewistown, Montana

Submitted: May 26, 1977 ~ecided: 

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# 1m, Filed:Mr. Chief Justice Paul G. Hatfield delivered the Opinion of the Court. This is an appeal from an order of the district court, Fergus County,awarding defendant his counterclaimof $2,450 and costs of $279.85. Defendant Bruce Brown is a local farmer and rancher in the Lewistown,Montana area. Plaintiff Massey-Ferguson Credit Corporation (M-F) is the assignee of the former DanMorrison & Sons, a now defunct Massey-Ferguson implementdealer in the city of Lewistown. The original district court actionwas brought by M-F againstBruce Brown for a deficiency judgment. Brown answered and counterclaimed for the price of a combinewhich plaintiff's assignor, DanMorrison & Sons,had taken as a trade-in. The district court found for M-F. Defendant appealed. This Court reversed and remanded for consideration of Brown's counterclaim. Massey-Ferguson Credit Corporationv. Brown, Mont

# . , 547 P.2d 846, 33 St.Rep. 314 (1976). On remand the district court entered judgment for Brown in the amount of $2,450 with interest fromAugust 8, 1972,and for costs in the sum of $279.85. After denying the motion for new trial and to amend findings of fact and conclusions of law, the district court cited Brown saying M-F cannot be considered among those whose protection is contemplated by section 87A-9-206(1), R.C.M. 1947. M-F appeals from this decision on remand. The findings of fact by the district court show: "1. That defendant traded in to DanMorrison & Sons an International 141 combinevalued at $2,450.00 on a secondhandNew Holland 990 combinevalued at $7,700.00 as evidenced by a retail installment contract dated October 1,1970. "2. That DanMorrison & Sons concurrently assigned the contract to plaintiff, Massey-Ferguson Credit Corporation."3. That Dale Koc~, Massey-Ferguson's Credit Corporation representative,made certain representations to the defendant concerning the combine,and signed the contractaswitness, giving the plaintiff knowledge of the claims and defenses which might arise from the contract. "4. That plaintiff and its assignor failed to perform the required repair work on the New Holland 990 combine and thereafter on the 8th day ofAugust, 1972, took possession of the combine and thereby repudiated the contract. "5. That defendant did not recoverhis trade-in combine valued at $2,450.00, nor that sum of money. " The question on appeal iswhether Brown is entitled to receive fromM-F the value of the trade-in over and above being absolved frommaking any payments on the contract. The parties to this appeal are bound by the law of the

case as determined on prior appeal. OtBrien

### v. GreatNorthern R. Co., 148Mont. 429, 421 P.2d 710. In Brown, 547 P.2d 849, this Court stated: "Inour view, respondent Massey-Ferguson Credit Corporation cannotbe considered among those whose protection is contemplatedby section 87A-9-206(1). The evidence shows that respondent's representative participated, at least to some degree, inmaking the sale by orally affirming the seller's promises to appellant buyer. It is clear from the exhibits that the contractwas executed and assigned at about the same time and upon the same instrument,and the blank form sales contract employed was in this case furnished by respondent corporation. Under these circumstances,it has been held the assignee does not take the assignment

'without notice of a claim or defense' and is therefore not entitled to the enforcementprotectionprovided by section 87A-9-206(1), R.C.M. 1947." Since the defense of section 87A-9-206(1) is not applicable to M-F, the remaining question to be determined is to what extent

an assignee is liable to the buyer for claims against the assignor. 3 U.L.A.-U.C.C. S9-318(1) incorporates the general rule that an assignee of contract rights stands in the shoes of the assignor and has no greater rights against the accountdebtor than the assignor. The assignee is also subject to all the equities and defenseswhich could have been raised by the debtor against the assignor. FarmersAcceptance Corporation

v. DeLozier, 178 Colo. 291, 496 P.2d 1016, 1018. See also the official comment to section 9-318(1) which states that no substantial changes are made to prior law. Uniform LawsAnnotated, Volume 3, 9-318. Section 87A-9-318(1) isMontana's incorporation of this section. Section 87A-9-318(1) provides that the rights of an assignee.of contract rights. are subject to all terms of the contract between the accountdebtor and assignor, and any defense or claim arising therefrom. The term "claim" includes set-offs and counterclaims. See DeLozier, 496 P.2d 1018, where the Colorado Supreme Court, while interpreting a like statute, concluded that "claim"includes set-offs and counterclaims. See also Hudson Supply & Equipment Co. 

### v. Home Factors 1 A tu--4--e, Corp.,/210 A.2d 837 (D.Ct.App. 1965). By virtue of the assignment,M-F was subject to the same defenses and claims of Brown aswould be the assignor, Dan Morrison & Sons. This Court in Brown determined that the seller breached its oral contract to Brown, and that this defense could be applied against the assignee M-F. M-F's rights under this assignment of the sales contract are subject to claims arising out of the sales contract. Plaintiff alleges thathe is not liable for the defendant's counterclaim since the transaction, where the assignor accepted the trade-in, arose between defendantand Dan Morrison
& Sons. Plaintiff cites DeLozier as a correctpronouncement on the law. InDeLozier, the plaintiff, FarmersAcceptance Corporation (FAC),accepted assignment of the right to monies under the assignor's contract with DeLozier. When the assignor failed to perform DeLozier cancelled the contractand sued FAC for the assignor's indebtedness arising out of the contract. The ColoradoCourt resolved this question of claims arising out of the contractaccording to the Uniform Commercial Code, 496 P.2d at



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## * * * Consequently, FACwas not entitled to any paymentswhich were made pursuant to the underlying contractand which were conditioned upon performance. "FACwas not, however, obligated to perform the contract upon Diviney's failure to perform. Neither was FAC liable for Diviney's indebtedness to DeLozier arising out of the contract. The reason is that an assignee of contract rights is not subject to the contractor tort liabilities imposed by the contract on the assignor, in the absence of an assumption of such liabilities. C.R.S. 1963, 155-9-317; 6Am.Jur.2d Assignments S109. "In instances such as this, where the assignee obtains money which the assignor could only retain upon performance of a contract, the following rule applies: '[Wlhere the assignor fails to perform the contract, the assignee cannot retainmistaken, or even negligent, paymentsmade to it by the [debtor] unless there has been a subsequent changeof position by the assignee.bilmore, The Assignee of Contract Rights and His Precarious Security, 74 Yale L.J. 217, 235,n. 35 (1964-65); see Firestone Tire & Rubber Co. v. CentralNat'l Bank, 159 Ohio St. 423, 112N.E.2d 636 (1953). See also, Westing v. Marlatt, 124 Colo. 355, 238 P.2d 193 (1951)

# ." See correspondingMontana sections 87A-9-318(1), 87A-9-317. While this Court agreeswith the general law cited by the Colorado Court, the case in question is factuallydistinguishable. In DeLozier the assignee, FAC,did not have a close relationship, nor participate in the transactionwith Howard DeLozier. The only contact FAC had with DeLozier came from the assignment of the assignor's right to monies under the contract between DeLozier and the assignor. In Brown,M-F's representativeparticipated in making the saleby orally affirming the seller's promises to defendant; the contract was executed and assigned concurrently to M-F; the blank form sales contract employed was furnished by M-F. The Colorado Courtdenied the assignee a payment that the debtor had made to it, but the Court did not order the assignee to make additional payments due to debtor from the assignor after all set-offs had been made, nor to perform the contract as the assignor

was obligated to. Under section 87A-9-317, R.C.M. 1947, this Court agrees with Colorado. In the case at bar the close relationship and participation between the assignor and assignee requires a departure from the general rule of law. Under certain circumstances an assignee has been held to have impliedly assumed the contractual obligations of the assignor. InNorthern Pac. Ry. Co. v. Sunnyside Valley Irr. Dist., 11Wash.App. 948, 527 P.2d 693, 694, the Washington Court considered all factspertaining to the conduct of the assignee: 

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## * * * While there is no express assumption of the underlying agreement, a consideration of all the facts compels the inference that the defendant assumed the conditions of thepermit. McGill v. Baker, 147Wash. 394, 266 

### P. 138 (1928).

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## * The defendant argued that it had not assumed any of the duties of the dissolved corporation and that itwas not an assignee under the contracts containing the indemnity agreements. In answer, the court stated: "A third personmay, of course, assume the obligation expressly in writing, or he may do so by implication where his conductmanifests an intent to become bound 

## * * *.In the latter event all the circumstancesmust be considered, suchas the subject matter of the contract, the third person's acts and words,whether he acquiesced in the terms of the contract,performed its obligations,or accepted its benefits." In Thompsonv. Lincoln Ins. Co., 114Mont. 521, 530, 138 P.2d 951,this Court reached the same conclusion: "Thedissentperforce admits the undeniable rule that the assignment of a contract does not ordinarily operate to cast the contract liabilities upon the assignee in the absence of an assumption thereof by him. The dissent further says,what is obvious, that the assigneemay assume the assignor's liabilities, that under certain circumstances and conduct the law will imply such assumption, and that he may not enforce the contractwithout performing its terms. 

## * * *"The facts and circumstances surroundingM-F's acceptance of Brown's contractput M-F in the position ofmore than a mere assignee accepting rights to monies under a sales contract. The ability of a court to consider all facts and circumstances is given supportby the Kentucky court inMasseyFerguson v. Utley, (Ky. 1969), 439 S.W.2d 57, 59: "However,Massey-Ferguson maintains that a breach of any implied warranty made by the dealer cannotbe asserted againstMasseyFerguson as assignee of the sales contract 

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"Ina substantial number of cases,annotated in 44ALR2d 8 @ 157 to 161, itwas held that a manufacturer to whom a dealer had assigned commercial paper was not a holder in due course. As indicated in the annotation, it appears that in most of the cases the circumstances were held to warrant a conclusion that the manufacturerwas the real vendor in the transaction. The circumstances most frequently held to be significantwere (1)a manufacturer's representative assisted or participated in the sale by the dealer, and (2) themanufacturer's course of dealing was for it to furnishblank sales contracts to its dealer, and for the dealer to immediatelyand routinely assign the contract to themanufacturer as soon as a sale wasmade. "Inthe instant case the evidencewas that a factory representativevisited Utley with the dealer and participated in making the sale. Also, thatMassey-Ferguson followed the course of dealing above described as to supplying blank formsand receiving immediate and routine assignments. So we have present here the two circumstancesmost frequently relied upon by other courts as a basis for holding themanufacturer-assigneenot to be a holder in due course. "It is our opinion that under the circumstances of this caseMassey-Ferguson cannot be considered to be within the class of those who are protected by the covenant against assertion of defenses, at least as to the defense of breach of an implied warranty of fitness. We base our conclusion on the proposition thatMassey-Ferguson's conduct put it in the status of a 'seller' and that its status as a 'seller'outweighs its status as an 'assignee,'as those terms are used in KRS 355.9- 206 and were used in the contract. It should notbe accorded the protection of an assignee againstdefenses that derived from its actions as a seller." Utley was cited by this Court in Brown, 547 P.2d at 850. The facts of this case in question are similar to Utley. M-F's representativeparticipated in the sale,M-F furnished the blank sales contract,and M-F received the concurrently executed and assigned contract. Based on SunnysideValley Irr. Dist. and Utley, the district court, in looking at the facts and circumstancesof the transaction,did conclude thatM-F was acting

asmore than amere assignee and impliedly accepted the obligations of its assignor. Theplaintiff looks to the pre-code situations inMontana for support to limit his liability. Apple v. Edwards, et al., 92Mont. 524, 16 P.2d 700. Apple, as discussed in 87A.L.R. 179, shows that in an action by an assignee of a conditional sales contract, the breach of the contract,occurring after assignment and notice thereof, might be shownby way of recoupment. The account debtor's right to claimdamages existed at the time the contract was made and continued as a defense against the assignee. Apple is factually distinguishable in the same manner

aswas DeLozier. No close relationship nor participation between the assignor and the assigneewas present. The false and fraudulent representations relied onby defendant for rescission of the contract aroseduring dealingswith the assignor. The facts show thatwhen defendant became aware of the falsityof the assignor's representations,he also learned of the assignment to plaintiff. Plaintiff had not participated in the formation of the contract between the assignor and defendant, nor was any close relationship shownbetween plaintiff and the assignor. In the case at bar, the close relationship and participation between the assignor and assignee put M-F on notice of theclaimswhich might arise. Due to this knowledge and participation,M-F was vulnerable to defendant's counterclaim. This Court is confrontedwith a situation similar to that faced by the Supreme Court of Texas. Dallas FarmMachinery Company v. Reaves, 158 Tex. 1, 307 S.W.2d 233. The facts are similar, except that in Reaves, the plaintiff was the implement seller suing on the installment sales contract. M-F and Dallas FarmMachinery Company are similar in that, according to the criteria of Utley,M-F is more a seller than an assignee and from Brown,M-F is without the protection of section 87A-9-206(1). In Reaves the Texas Supreme Court allowed the defendant to recover the value of the trade-in tractor and rescinded the contractdue to plaintiff's fraudulent representationsand inducement. Reaves, though a pre-code Texas case, is relied on today for authority. See Robert v. Sumerour (Tex.1976) 543 S.W.2d 890; Johnsonv. Buck (Tex. 1976) 540 S.W.2d 393. Plaintiff also submits that the counterclaim isnot a proper claim againstM-F and that there is no basis to afford Brown relief. This claim iswithout merit. Plaintiff is an assignee. An assignee stands in the shoesof the assignor and is liable for the claims arising out of the contract. Under these particular facts,M-F ismore than a mere assignee. The Court agrees with the handling of the claim against the assignee in DeLozier. Section 87A-9-317would control in the normal case. As has been established, this case requires an exception to the general rule as a result of M-F's representative orally affirming the seller's promises and participating in the sale. Had M-F not taken the assignment under these circumstances, participation in the sale and knowledgeof the seller's obligations, the assignee would not be obligated to perform the contract upon the assignor's failure to perform, nor liable for theassignor's indebtedness arising out of the contract. Had M-F not taken the assignment under these circumstances, section 87A9-317would have applied. Brown's recoursewould have then been against the assignor for the indebtedness arising out of the contract. This was not the case. The judgment of the district court is affirmed. The defendantmay recover fromM-F the value of the trade-in over and abovebeing absolved frommaking any payment on the contract.

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Chief Justice 

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