Opinion ID: 2188563
Heading Depth: 1
Heading Rank: 2

Heading: Recourse

Text: The existence of recourse against Commerce Alliance is claimed by the appellants as perhaps the single most important factor in determining whether the transaction was a legitimate factoring arrangement or a loan. One article has described the recourse issue in these terms: In several decisions courts have considered recourse to the seller for nonpayment of the transferred assets to be suggestive of a loan rather than a sale. This recourse can take the form of a repurchase obligation, a guarantee of collectability by the seller, a failure to extinguish or reduce an independent obligation for which an absolute assignment is made, or a hold back of reserves from the purchase price which are released to the seller only as receivables are paid. Robert D. Aicher & William J. Fellerhoff, supra at 186. Compare, e.g., Major's Furniture Mart, Inc. v. Castle Credit Corp., Inc., 602 F.2d 538 (3d Cir.1979) (holding that account sold with full recourse with a reserve from the purchase price held back to be applied to future nonpaying accounts and a requirement that the seller repurchase delinquent accounts after sixty days was a loan) with In re Golden Plan of California, 829 F.2d 705 (9th Cir.1986) (holding that an assignment of mortgage notes and a deed of trust without notice and no guarantee of repayment was a bona fide sale.). The appellants strongly contend that the Purchase Agreement establishes full recourse against Commerce Alliance in that the only exception is for bankruptcy, a condition that would not be applicable to the federal government. Further, they contend that a provision of the agreement is entitled No Recourse to Seller, when in point of fact there is recourse for breach. The circuit court concluded, nevertheless, that the provision for recourse against Commerce Alliance if the accounts were not paid in 90 days did not convert the arrangement into a loan. On this point, the court credited Christopher Barrier's expert testimony that it was commonplace to include recourse provisions in factor agreements and that recourse had a direct impact on the sales price. In Mr. Barrier's opinion, the extent of the recourse against the seller was an issue for negotiation between the parties. We conclude that the circuit court was not clearly erroneous in finding that this recourse agreement did not convert the transactions into loans. Recourse arrangements appear to vary from contract to contract. In the case before us, recourse against Commerce Alliance was only triggered if the account did not exist or it proved uncollectable in 90 days. No recourse in this case occurred until the 90-day warranty was breached, but at that time, the parties agreed that there would be full recourse. No doubt, this resulted in a higher purchase price for the accounts receivable and, thus, more cash to Commerce Alliance. Such a circumstance does not indicate a sale rather than a loan. This court has discussed the concept of recourse in Haley v. Greenhaw, supra , and analyzed whether the existence of full recourse converted the factoring arrangement into a loan. We consider the following quotation from Haley important to this issue, as did the circuit court: To so hold [that the transactions were usurious as a matter of law] would have the same effect as saying that a note bearing ten percent interest can never be sold at a discount unless the seller sells without recourse. Such a holding would of course, seriously curtail commerce, and would impair the negotiation and sale of commercial paper. Certainly, negotiable notes and mortgages are the subject of bona fide sales in the usual course of business, and very frequently their sales are at a discount. Probably, most often the sales are with recourse, for many business concerns would not purchase the paper otherwise. We see no reason why an actual and bona fide sale and purchase of paper at a discount should be hampered by the ruling that appellant seeks. 235 Ark. at 486, 360 S.W.2d at 759-757. We affirm once more the analysis in Haley and conclude that full recourse is not outcome-determinative for the issue raised in the instant case. (iv) Notice Mr. Carter also maintains that notice is a key factor to be considered in determining whether an agreement is a loan or a sale. As one commentator has put it: When the seller retains control over the collection of transferred receivables, the failure to notify account debtors of the transfer is likely to be viewed as a factor contrary to the characterization of the transaction as a sale. Reade H. Ryan, Jr., Trade Receivables Purchases, DS71 ALI-ABA 305, 373 (American Law Institute-American Bar Ass'n Continuing Legal Education 1999). The appellants argue that Four Seasons did not notify the government agencies of the sale of the accounts receivable, and in the one assignment when Four Seasons attempted to do so, it described itself as the manager of the account and not the owner operating under a factoring agreement. Despite this contention, Mr. Carter testified that the parties discussed the notice issue and Four Seasons wanted to notify the government to pay it instead of Commerce Alliance. Indeed, a minor skirmish in this case was the attempt of Four Seasons, prior to the adoption of the Addendum, to give notice to the government agency. Mr. Carter flared at the suggestion of notice, and instead proposed, as an alternative, that Four Seasons be given control of the Pulaski Bank account. This was done by the Addendum drafted by Mr. Carter. It is axiomatic that agreements are construed against the drafter. See Yellow Cab of Texarkana v. Texarkana Mun. Airport, 230 Ark. 401, 322 S.W.2d 688 (1959). The purpose of notice to the account debtor is to minimize the risk of nonpayment to the factor and assure that the account will be paid to it. In the instant case, the parties could not manage the risk in the traditional way but instead negotiated an alternative risk-managing scheme. Any lack of notice in this financial arrangement came about at Mr. Carter's insistence. Nor do we view the reference to managing in the one letter Four Seasons wrote to a government agency as indicative of loan intent. Absence of notice, accordingly, does not militate for a holding in the appellants' favor. (v) Pricing Mechanism and Adequacy of Consideration Mr. Carter and Commerce Alliance claim that when pricing is structured in a similar fashion to commercial loans, such as when it is based on a fluctuating interest index, the transaction is more likely to be characterized as a loan. Four Seasons answers that it did not employ a commercial fluctuating interest rate such as the prime rate and further that the price of the discount charge was fixed in advance by the discount schedule (3% per fifteen days), and was not retroactively calculated based on a changing interest rate in any respect. Mr. Carter and Commerce Alliance advanced, in addition, the argument that under the agreements the discount percentage could be assessed against the purchase price without limit until the fees required disgorgement of part of the 65% of the sale price already advanced to Commerce Alliance and maybe more. They add that Four Seasons changed its argument before trial to purge its claim of usury. It is true that Four Seasons attached an exhibit to its summary-judgment motion that included totals for discount fees on accounts that had accumulated for as many as 459 days. Yet, a witness for Four Seasons, Gregory Young, was steadfast at trial in testifying that Four Seasons was not seeking accumulated discount fees under its fifteen day formula but only the total of the face amounts outstanding on the accounts. This is what Four Seasons initially claimed in its third-party complaint, and those amounts totalled $316,616.70. Though Four Seasons did calculate discount charges based on the total time for which the accounts were unpaid in an exhibit for summary judgment, it asked for the face amount of the accounts in its third-party complaint and in testimony at trial. We hold that the circuit court did not err in the damages awarded based on the face amount of the outstanding accounts. (vi) Intent Mr. Carter claims that the parties consistently treated the transactions at issue as loans, and not as sales. He points again to the manager language in a letter written by Four Seasons to the government agency during Four Seasons's unsuccessful attempt to put the government on notice that it was the new owner of the accounts, and to the language of federal regulations involving contracting with the federal government that require a novation contract be given to the government in order to effect an assignment. The circuit court credited the testimony of Four Seasons officers that the corporation did not make loans and that the officers treated the transactions at issue in this case as purchases both in their business accounting and tax returns. We cannot say that these factual findings were clearly erroneous. Nor can we conclude that the circuit court clearly erred in finding the absence of loan intent on the part of Four Seasons.