Opinion ID: 32797
Heading Depth: 2
Heading Rank: 1

Heading: Wal-Mart’s Right to Set Off the BSA/ITT Account

Text: BSA argues that the BSA/Wal-Mart purchasing contract does not provide Wal-Mart with a right to set off the BSA/ITT account for BSA’s purchase of the Goldstar merchandise. We review the district court’s construction of an unambiguous contract de novo. Tarrant Distributors Inc. v. Heublein Inc., 127 F.3d 375, 377 (5th Cir. 1997) (“[B]ut while interpretation of an unambiguous contract is a question of law, clear error is the standard of review when a district court uses extrinsic evidence to interpret an ambiguous contract.”) (internal quotations omitted). BSA first argues that the rights and duties of the parties are governed exclusively by the October 1991 vendor agreement executed with the Goldstar transaction. BSA uses this premise to launch several contract interpretation arguments, all of which reach the same conclusion -- that both the integration clause in the vendor agreement and the set-off clause in the purchase order terms and conditions are inapplicable to the Goldstar transaction because Wal-Mart was acting as a “seller” or “vendor,” rather than a “purchaser.” BSA is correct that Wal-Mart’s right to set off BSA debts cannot be derived from the October 1991 vendor agreement. The October 1991 vendor agreement was not accompanied by a companion 11 purchase order. There is, therefore, no set-off clause to be integrated by the integration clause. Of equal importance, the integration clause, and therefore the set-off clause, is facially inapplicable when Wal-Mart is acting as a “seller” or “vendor,” rather than in its traditional role of “purchaser.”6 BSA’s argument is flawed, however, because it is blind to the reality that the BSA/Wal-Mart relationship and the purchasing contract are defined by more than the October 1991 vendor agreement. The material terms of the BSA/Wal-Mart relationship are defined in the master vendor agreement executed in October 1990, as well as the standard purchase order terms and conditions incorporated therein. With respect to the October 1990 transaction, as well as many others that followed, Wal-Mart was acting in its defined role as “purchaser.” Moreover, each of those contracts granted Wal-Mart an ongoing right to set off WalMart debt incurred as a result of the subject transaction by BSA debt incurred as a result of either the subject transaction or future unrelated transactions. The record contains ample evidence that BSA sold Wal-Mart a large volume of product, that both the integration clause and the set-off clause were part and parcel of the vendor agreements and purchase orders executed by BSA and Wal- 6 The integration clause applies only to “purchases made by purchaser.” 12 Mart,7 that the parties comported themselves in accordance with those provisions, and that the Goldstar transaction was set off against Wal-Mart’s pre-existing debt to BSA for product sold pursuant to those agreements. We therefore hold that Wal-Mart’s right to set off the BSA/ITT account does not depend upon, and is not derived, from the October 1991 vendor agreement. Rather, WalMart’s right arises from the terms of earlier vendor agreements in which Wal-Mart was the purchaser. For those purchases, the integration clause, and the set-off clause integrated by the integration clause, allowed Wal-Mart to deduct the sums BSA owed Wal-Mart for the Goldstar transaction from the balance Wal-Mart owed BSA for earlier purchases. The district court’s construction 7 BSA argues that there is no competent evidence of the relevant contract terms in the record. BSA does not argue that the relevant terms do not appear in the purchasing contract or that better copies would disclose different language. BSA simply asserts that it should recover because Wal-Mart failed to produce completely legible copies of the executed vendor agreements. We disagree. The Court spent considerable time pouring over this exceptionally contentious record. Having completed that review, we are convinced that the record contains sufficient testimonial and documentary evidence to establish the relevant terms of the purchasing contract. BSA itself introduced a form vendor agreement illustrating the relevant terms at trial. While it is true that Wal-Mart’s copies of the original contracts are copied from microfilm and partially blurred, BSA’s objection that Wal-Mart’s proof fails for failure to offer better copies is in the nature of a best evidence objection, which should have been pressed at trial. The best evidence rule, as the parties must realize, is subject to a number of exceptions when original documents are, as in this case, unavailable. See FED. R. EVID. 1002; FED. R. EVID. 1003; FED. R. EVID. 1004. Moreover, we would in any event decline to allow BSA, who bears the burden of proof, to base a $21,000,000 recovery upon Wal-Mart’s failure to tender unavailable documents when neither party disputes the content of the controlling terms. 13 of the contract is affirmed. II. Wal-Mart’s Acknowledgment of ITT’s Security Interest BSA argues that Wal-Mart’s acknowledgment of ITT’s security interest barred Wal-Mart from setting off the BSA/ITT account for the Goldstar transaction. BSA first reiterates its argument that Wal-Mart’s set-off right, if any, must be derived from the October 1991 vendor agreement. BSA thus concludes that Wal-Mart’s set-off right post-dated and was limited by the January 1991 notice of assignment. See TEX. BUS. & COM. CODE § 9.318(a)(2) (assignee is subject to those defenses “which accrue[] before the account debtor receives notification of the assignment”). We have already concluded that Wal-Mart’s contractual set-off right does not depend upon the October 1991 vendor agreement, but is derived instead from the master and subsequent vendor agreements and the parties’ course of dealing. Therefore, BSA’s argument that Wal-Mart’s execution of the notice of assignment preempted accrual of that right must fail. Alternatively, BSA argues that Wal-Mart’s acknowledgment effected a waiver of Wal-Mart’s pre-existing right to set off the BSA/ITT account. See TEX. BUS. & COM. CODE § 9.206(a) (providing that an agreement to enforce claims or defenses is enforceable). The relevant provision of the notice provides that Wal-Mart “agrees to make all current and future payments owed to Assigner [BSA] directly to ITT at the above mailing address notwithstanding any terms in any agreement, contract, invoice or purchase order to the 14 contrary.” The notice does not contain the word “waiver,” or “defenses,” and does not purport to limit Wal-Mart’s defenses to payment against either ITT or BSA. The notice simply does not contain the clear and unambiguous type of language that Texas courts have required to support a finding of intentional waiver. See, e.g., Jonwilco, Inc. v. C.I.T. Financial Servs., 662 S.W.2d 664, 666 (Tex. App.--Houston [14th Dist.] 1983, no writ) (finding waiver where note included statement that “debtor will settle all claims, defenses, set offs and counterclaims it may have against the secured party directly with the secured party, and not set up any thereof against secured party's assignee); see also Conoco, Inc. v. Amarillo Nat’l Bank, 950 S.W.2d 790, 795 (Tex.App.-Amarillo 1997, pet. filed) (“Waiver occurs when a person, who has full knowledge of the material facts, acts or fails to act upon a right which he legally holds, and such act or failure to act is inconsistent with that right or the intention to rely upon that right”). Wal-Mart’s execution of the acknowledgment simply bound Wal-Mart, notwithstanding any agreement to the contrary, to make payment directly to ITT. Wal-Mart abided by that agreement by tendering more than $20,000,000 in payments directly to ITT after receiving notice of the assignment. Wal-Mart’s execution of the acknowledgment did not waive Wal-Mart’s contractual defenses against BSA. When there has been no express waiver of defenses, Texas law 15 provides that the rights of an assignee are subject to the terms of the contract between the account debtor and the assignor. TEX. BUS. & COM. CODE § 9.318(a)(1). Thus, ITT accepted the security interest subject to Wal-Mart’s pre-existing contractual right to set off the BSA/ITT account. Conoco, 950 S.W.2d at 796-97 (applying the firstin-time rule to an analogous dispute). ITT could not obtain any rights greater than those possessed by BSA and BSA cannot now assert that the assignment to ITT effectively expanded its own rights against Wal-Mart by modifying the contract between BSA and Wal-Mart. The district court’s determination that Wal-Mart’s acknowledgment of ITT’s security interest did not extinguish WalMart’s contractual set-off right is affirmed. III. Oral Modification of the Vendor Agreement for the Goldstar Transaction BSA claims that Wal-Mart’s decision to breach the Goldstar agreement by setting off the cost of the Goldstar merchandise caused ITT to cease financing BSA business, with the result that BSA lost profits and business in the amount of $21,000,000. The district court rejected BSA’s theory of the case, finding that the alleged oral agreement not to set off the BSA/ITT account, if any, was legally ineffective to modify the express terms of the purchasing contract, which contained a clause prohibiting oral modification. Neither the summary judgment record nor the record of trial 16 support the conclusion that Wal-Mart agreed not to set off the BSA/ITT account for the Goldstar transaction. There is evidence suggesting that BSA’s President and Wal-Mart’s purchasing agent were concerned that ITT would be unhappy if and when the Goldstar transaction was set off against the BSA/ITT account. There is evidence that BSA wanted to sell the Goldstar merchandise quickly and pay Wal-Mart back directly so that ITT would not become involved. There is even evidence that Wal-Mart’s buyer hoped to purchase additional product from BSA, or to set off the Goldstar transaction in small increments, to avoid triggering a negative reaction from ITT. Conspicuously absent, however, is any evidence that the parties took the appropriate steps to insure that Wal-Mart would abandon its contract rights and deviate from the parties’ prior course of dealing by foregoing payment until BSA was in a position to pay directly. BSA sold the material quickly at a loss or reduced profit and then failed to use the proceeds to pay either Wal-Mart or ITT. Trial testimony established that a Wal-Mart representative contacted BSA President James Crocco for the express purpose of asking whether ITT was to remain as the payor or factor for purposes of the October 1991 Goldstar vendor agreement. Crocco advised the Wal-Mart representative that ITT should remain part of the deal. The record does not support the conclusion that Wal-Mart agreed not to exercise its contractual rights by setting off the 17 Goldstar transaction against the BSA/ITT account. It is, therefore, unnecessary to consider whether the parties’ failure to record the alleged agreement in writing would have made the agreement unenforceable.8 The district court’s refusal to give effect to the alleged oral agreement not to set off the BSA/ITT account is affirmed.