Source: http://openjurist.org/666/f2d/673
Timestamp: 2015-11-28 06:25:05
Document Index: 796913881

Matched Legal Cases: ['§ 9', '§ 9', '§ 9', '§ 9', '§ 9', '§ 9', '§ 9', '§ 9', '§ 9', '§ 9']

666 F2d 673 Michelin Tires Ltd v. First National Bank of Boston | OpenJurist
666 F. 2d 673 - Michelin Tires Ltd v. First National Bank of Boston HomeFederal Reporter, Second Series 666 F.2d.
666 F2d 673 Michelin Tires Ltd v. First National Bank of Boston 666 F.2d 673
32 UCC Rep.Serv. 657
MICHELIN TIRES (CANADA) LTD., Plaintiff, Appellant,v.FIRST NATIONAL BANK OF BOSTON, Defendant, Appellee.
Argued June 4, 1981.Decided Dec. 4, 1981.
Ralph Arnoldy, P.C., Boston, Mass., with whom Allen S. Feinstein, and Arnoldy & Wilcon, P. A., Boston, Mass., were on brief, for appellant.
James F. McHugh, Boston, Mass., with whom S. Elaine Renfro and Bingham, Dana & Gould, Boston, Mass., were on brief, for appellee.
This appeal is from a district court's denial of restitution to the plaintiff, a contractual obligor, of monies mistakenly paid to the defendant, an assignee of contract rights. We begin with a summary of the record.
Michelin Tires (Canada) Ltd. ("Michelin"), a Canadian corporation based in New Glascow, Nova Scotia, and J. C. Corrigan, Inc. ("JCC"), a building contractor, entered into an agreement on June 19, 1970 for the design and installation of a carbon black handling and storage system, which was to form part of a Michelin tire factory under construction in Pictou County, Nova Scotia. Michelin entered into the agreement through its agent, Surveyor, Nenniger & Chenevert ("SNC"), an engineering firm retained by Michelin to procure and supervise the building of the factory.
The construction contract provided that Michelin would make periodic progress payments to JCC in the amount of 90% of each invoice submitted by JCC for work completed. The amounts due were based on a schedule of values of the various parts of the entire project. JCC's invoices were to be submitted first to SNC for its review and certification that the work had been performed and the amount was correct. That certification was contained in an Engineers Progress Certificate ("EPC") and was completed by the SNC project manager. With each invoice, Michelin had the right to require JCC to submit a "Statutory Declaration," or sworn statement, stating the amount JCC owed to subcontractors, supplier, and others in connection with the work and listing any claims that could result in liens on Michelin's property. If JCC failed to make prompt payments to subcontractors and suppliers, SNC could withhold or nullify its certification and Michelin could deduct from its progress payments to JCC the amount necessary to protect its property from liens.
Prior to signing the construction contract with JCC, neither SNC nor Michelin made inquiries concerning JCC's financial situation. Initially, SNC had requested that JCC provide a performance bond to cover its work, and JCC had requested that Michelin provide a letter of credit to cover the payments due for work performed. Michelin, or SNC, dropped its proposal that JCC be required to provide a performance bond in return for JCC's withdrawal of its request for a letter of credit for Michelin.
The First National Bank of Boston ("FNB"), a commercial bank in Boston, Massachusetts, provided financing to JCC under a longstanding agreement dating from 1960. Under that agreement, FNB agreed to loan JCC an amount not greater than 80% of JCC's outstanding invoices. In return, FNB took a security interest in all JCC's accounts receivable and contract rights-including, of course, JCC's right to receive payments under its contract with Michelin.
On August 14, 1970, two months after the construction contract was executed, JCC assigned its rights under the contract to FNB. The bank notified SNC of the assignment and requested that future JCC invoices be paid directly to FNB. This assignment was acknowledged by SNC on September 3, 1970.
Shortly after JCC's assignment of its contract rights to FNB, Michelin sent FNB the payments it seeks to recover in the instant suit. The first payment was in response to JCC's invoice of August 24, 1970 in the amount of $118,000. JCC presented no EPC and no Statutory Declaration in support of this invoice. SNC prepared an EPC for the invoice and asked JCC to submit a Statutory Declaration with future invoices. Michelin paid 90% of the invoice, to FNB, as provided by the construction contract.
JCC submitted its next invoice on September 23, 1970 in the amount of $187,000. As with the previous invoice, no Statutory Declaration was presented. Michelin withheld payment and asked JCC to submit the Statutory Declaration. JCC did so on October 16, 1970.
JCC then sent Michelin an invoice dated October 22, 1970 in the amount of $313,000, accompanied by a Statutory Declaration and an EPC. Michelin paid 90% of the amounts of the latter two invoices on December 15, 1970, deducting amounts for uncompleted work and for a change order.
Michelin's last payment to FNB was in response to JCC's invoice for $200,000, dated December 21, 1970. JCC sent the corresponding Statutory Declaration to Michelin on January 18, 1971, and Michelin sent its progress payment to FNB on January 20, 1971, including the amount previously withheld for uncompleted work.
It was not until March of 1971 that Michelin learned that JCC had not been paying its subcontractors. Accordingly, the above progress payments were not due under the construction contract, and JCC's Statutory Declarations of October 12, 1970 and January 18, 1971 were fraudulent, JCC made an assignment for the benefit of creditors on April 6, 1971 and was subsequently adjudicated a bankrupt.
The carbon black system was substantially completed by May 1, 1971, and the district court found that JCC performed all the work it could have done prior to May 1, 1971. JCC left, however, a total indebtedness of over $500,000 (Canadian) after its adjudication in bankruptcy.
Throughout this time, FNB maintained its lending relationship with JCC. FNB knew of JCC's financial difficulties. By early 1970, before JCC contracted with Michelin, FNB regarded its loan to JCC as a problem and was concerned about repayment. The bank knew from examining JCC's books that the company's earnings were declining, its trade debt was rising, and its customers were slow to pay. It was further evident from JCC's books that JCC was overstating its income in its reports to the bank. By late August of 1970, the bank was aware that JCC's outstanding indebtedness was greater than the agreed-upon loan ceiling of 80% of JCC's accounts receivable, and a bank officer reminded JCC that loan funds received while JCC was "over-advanced" were to be used only to meet payroll and pay taxes. FNB used the payments it received from Michelin after the assignment to reduce the outstanding amount on its loan to JCC. In October of 1970, FNB sent an inquiry to SNC to verify the accuracy of copies of invoices the bank had received from JCC, used by the bank to calculate the 80% loan ceiling. SNC replied that the invoices were "OK."
The district court specifically found that FNB knew of JCC's contractual obligations to Michelin. Those obligations included prompt payment of subcontractors. FNB, however, did not know that JCC was sending false Statutory Declarations to Michelin, stating under oath that the subcontractors had been paid.
On December 22, 1970, FNB notified JCC that it would extend no further loans to JCC after March 31, 1971 and that JCC should seek financing elsewhere. It was after JCC failed to find a new lender that the company made its assignment for the benefit of creditors on April 6, 1971 and filed a petition in bankruptcy.
After discovering JCC's fraud, Michelin brought this suit to recover the payments it made to FNB, a total of $724,197.60. Michelin asserted it was entitled to restitution under two theories. First, it claimed that since its right to restitution arose from its contract with JCC, the claim could be successfully asserted against FNB, the assignee of contract rights to payment, pursuant to § 9-318(1)(a) of the Uniform Commercial Code (UCC), Mass.Gen.Laws Ann. ch. 106, § 9-318(1)(a).1 Second, Michelin asserted that FNB was liable because it has been unjustly enriched under traditional restitutionary principles.
The district court tried the case without a jury and upon a stipulated record. In a detailed memorandum, the court found that JCC had breached its contract with Michelin by submitting fictitious invoices and fraudulent Statutory Declarations and by failing to pay its subcontractors when payment was due. It further found that Michelin's payments to FNB had been made in reliance on the fraudulent Statutory Declarations. The district court then ruled, first, that § 9-318(1)(a) does not create a new affirmative cause of action by an account debtor as against an assignee and, second, that since FNB did not know of the fraudulent Statutory Declarations or of JCC's indebtedness to subcontractors, FNB had not been unjustly enriched at the expense of Michelin. This appeal followed.
We affirm because we believe that (1) § 9-318(1)(a) of the UCC was not intended to create a new cause of action by an account debtor against an assignee and (2) the facts the district court found were available to FNB did not put it on notice of JCC's fraud and Michelin's mistake.
Michelin's first argument is that it has an independent cause of action against FNB under § 9-318 of the UCC, Mass.Gen.Laws Ann. ch. 106, § 9-318 (West Supp.1981). That section reads in pertinent part:
Defenses Against Assignee; Modification of Contract After Notification of Assignment; Term Prohibiting Assignment Ineffective; Identification and Proof of Assignment.
(a) all the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom.
In essence, Michelin contends that its restitution claim arises from its contract with JCC, and that § 9-318(1)(a) accordingly permits Michelin to recover from FNB as JCC's assignee. Although Michelin emphasizes the narrow application of this theory to the instant case, the theory rests upon a construction of § 9-318 that would impose full contract liability on assignees of contract rights. Under this view, a bank taking an assignment of contract rights as security for a loan would also receive as "security" a delegation of duties under the contract and the risk of being held liable on the contract in place of its borrower. We do not believe it was the intent of § 9-318(1)(a) to create such a result.
The key statutory language is ambiguous. That "the rights of an assignee are subject to ... (a) all the terms of the contract" connotes only that the assignee's rights to recover are limited by the obligor's rights to assert contractual defenses as a set-off, implying that affirmative recovery against the assignee is not intended. See Englestein v. Mintz, 345 Ill. 48, 61, 177 N.E. 746, 752 (1931), quoted in Anderson v. Southwest Savings & Loan Association, 117 Ariz. 246, 248, 571 P.2d 1042, 1044 (1977):
The words "subject to," used in their ordinary sense, mean "subordinate to," "subservient to," or "limited by." There is nothing in the use of the words "subject to," in their ordinary use, which would even hint at the creation of affirmative rights.
On the other hand, the use of the word "claim" raises the possibility that affirmative recovery was indeed contemplated. However, the section's title and the official Comment support the view that the section does not create affirmative rights. The title reads, "Defenses Against Assignee." Official Comment 1 states in pertinent part:Subsection (1) makes no substantial change in prior law. An assignee has traditionally been subject to defenses or set-offs existing before an account debtor is notified of the assignment.
Under prior law, an assignee of contract rights was not liable on the contract in the place of his assignor. Wright v. Graustein, 248 Mass. 205, 142 N.E. 797 (1924). Common sense requires that we not twist the "precarious security"2 of an assignee into potential liability for his assignor's breach.
It is evident that § 9-318 has become a red herring in suits against an assignee. We note two cases that have denied account debtors the right to sue. James Talcott, Inc. v. Brewster Sales Corp., 16 UCC Rep.Serv. 1165 (N.Y.Sup.Ct.1975); Meyers v. Postal Finance Co., 287 N.W.2d 614 (Minn.1979). There are also cases that have allowed affirmative claims, at least in limited circumstances. Benton State Bank v. Warren, 263 Ark. 1, 562 S.W.2d 74 (1978); Farmers Acceptance Corp. v. DeLozier, 178 Colo. 291, 496 P.2d 1016 (1972); K Mart Corp. v. First Penn. Bank, 29 UCC Rep.Serv. 70 (Pa.1980).
The decisions permitting an affirmative suit all rely on the pre-UCC case of Firestone Tire and Rubber Co. v. Central Nat. Bank, 159 Ohio St. 423, 112 N.E.2d 636 (1953). There the court required the bank to return payments to an account debtor because, although the bank was innocent of the assignor's fraud, the bank had unwittingly assisted that fraud by independently requesting periodic payment from the account debtor. The bank attached invoices from the assignor to each request thereby impliedly representing that the underlying obligation was valid. The court found that the account debtor relied on the genuineness of the invoices forwarded by the bank. Id. 112 N.E.2d at 639. In the case at hand there was no such reliance. Rather, Michelin established its own system of assuring compliance, including approval of an intermediary, SNC. In addition, they required a Statutory Declaration under oath from JCC. The stipulated record indicates that FNB had no involvement in verifying JCC's performance and was completely unaware of the Statutory Declaration.
Benton State Bank, supra, represented a situation similar to Firestone. In Benton State Bank the bank advanced progress payments to the assignor. Each request for a progress payment was then forwarded by the bank to the general contractor accompanied by the assignor's certification, a representation similar to the Statutory Declaration submitted by JCC in this case. The court permitted the contractor to recover against the bank because the bank "had solid reasons for suspecting the truth of Harp's (the assignors) assertions, which the bank forwarded to the Warrens (the account debtors), that all past-due bills for labor and materials had been paid." Id., 562 S.W.2d at 76. FNB did not assume an active role in sending JCC's statements to Michelin, nor were they even aware of JCC's misrepresentation to Michelin in any way.
The bank in K Mart Corp., supra, was also actively involved in the relationship between the account debtor and the assignor. In K Mart Corp., the court permitted the account debtor, K Mart, to recover from the assignee certain payments made for goods that were later found to be defective. Id. at 707. However, the recovery permitted in K Mart Corp. is best viewed as merely anticipated repayment. For nearly 8 years the bank accepted payment from K Mart equal to the value of the assignor's, PSM, invoices minus an allowance for defective goods received and paid for in the prior month. The assignor's bankruptcy prevented such an adjustment on the final payment so the court allowed recovery. The court noted "that merely because PSM is bankrupt and can no longer be expected to repay K Mart, the bank may not now unilaterally ignore its prior understanding, which was clearly in the contemplation of the parties, and retain funds which should not have been paid to it initially." Id. at 706 (emphasis added). There is no indication that Michelin and FNB agreed to make periodic adjustments depending upon the quality of JCC's performance.
Finally, the Colorado Supreme Court permitted recovery by the account debtor against the assignee in DeLozier, supra. The extent of the involvement by the assignee, Farmers Acceptance Corp. ("FAC"), in the underlying contract is ambiguous in that case. The brief opinion indicates that FAC, first used the payment it received from the account debtor to satisfy the personal indebtedness of the assignor and then applied the remainder to the assignor's unpaid account with a materialman. Id., 496 P.2d at 1017. This latter payment to the subcontractor's creditor s