Court Opinion

ID: 9631499
Source: CourtListenerOpinion
Date Created: 2023-08-22 10:40:13.308996+00
Date Added: 2024-06-11T12:29:25.782728
License: Public Domain

NOONAN, Circuit Judge,
dissenting as to Part III:
This case involves the interaction of common law principles of agency and tort with the Uniform Commercial Code. It is of uncommon interest in its potential impact on credit in the large area in which factors furnish credit. Because the case may be seen as merely “a commercial dispute” to be decided under state law, its broader significance needs to be addressed.
This case consists in a paying agent’s refusal to pay its principal’s creditor unless the agent obtained a benefit from the creditor that the agent was supposed to pay. To understand the case the jury needed to know that the principal had an absolute obligation to make the payment under U.C.C. § 9-406; that its agent had undertaken to make the payment; and that to advance its own interest the agent held up payment. The majority says that there is no principle of agency that required the paying agent to pay. The principle is that an agent to make a payment is bound by its acceptance of the agency. If the obligation of the principal to pay is absolute under an applicable statute, as it was here, the agent has an absolute duty to make the payment. For the agent to hold up payment in order to obtain a benefit for itself is improper and, when it results in injury to the payee, is an actionable interference with a business relationship between the payee and its clients.
The economy of the United States runs on credit. A critical section of the vast area is occupied by factoring — in this instance, the advance of cash to clients that are undercapitalized and not candidates for bank loans and possessed of few assets save their accounts receivable, which they assign the factors in return for their cash. Probably at least 2,500 factors do business in the United States. Factored sales in 2006 totaled more than $127.6 billion. Tina Szejkowski, AsseP-Based Lending Continues its Evolution as Mainstream Borrowing Option, Commercial Finance Association, (July 23, 2007), available at http://www.cfa.com/Statistics/statistics_ news_release.asp. New law affecting such *1066an industry is not to be lightly made or buried in a memorandum disposition. The present case requires an understanding in the case of the role of the Uniform Commercial Code, incorporated into the Nevada law that governs here by Nevada Revised Statute § 104.9406. Nationwide is a factor, advancing cash to carriers, typically small trucking companies, in exchange for their assignment of the freight invoices sent by the carriers to shippers. The shippers are obligated on these invoices and are, therefore, under U.C.C. § 9-406 “account debtors.” Shippers, however, typically do not pay the invoices directly but hire Cass as a paying agent to process and pay them. Cass processes and pays over 100,000 freight invoices per day, more than 25,000,000 per year. In relative strength, Cass is a Goliath, Nationwide a comparative David. For seventeen years these two middlemen enjoyed a profitable relationship.
In 2003, a dispute broke out between them as to Cass’s payment of one invoice. Cass drew attention to a hold-harmless agreement by which Nationwide absolved Cass from errors in payment. A new administrator of credit at Nationwide can-celled the agreement. Cass refused to do business without it. A substantial number of shippers used Cass as their paying-agent. When Cass would not act for them in paying invoices assigned to Nationwide, Nationwide was impacted. In the words of Nationwide’s expert, “The effect on Nationwide was profound.”
Nationwide had also discovered that Cass appeared to compete with it in a program it called Cass Expedite. The program is described by Nationwide’s expert:
The Expedite Service Agreement (entered into between a Carrier and Cass) relates to Accounts created by the carriage of freight by Carriers for Cass-Consignors. The Accounts would have whatever payment terms are agreed to between the Carrier and the Cass-Con-signor (thirty days, for example). In consideration of the payment of a fee by the Carrier to Cass, Cass agrees to accelerate payment of the Account to two business days following its processing of it. The effect on the Carrier is clear:
1. Its liquidity is improved, since it does not have to wait thirty days for payment.
2. It pays a fee for this “prepayment,” which is the functional equivalent of the fees which it would have to pay to a factor.
It is clear that, insofar as a Carrier is concerned, this is an alternative to factoring, at least to the extent that a Carrier is serving Cass-Consignors. Such a Carrier would enjoy the benefits of prompt payment of Accounts owning by Cass-Consignors (albeit upon payment of a fee to Cass) and would not need factoring services. Thus, through its Expedite program, Cass is now a competitor of Nationwide. Notably, the marketing material used by Cass to promote its Expedite program makes direct comparisons to traditional factoring. Both Cass, through its Expedite program, and Nationwide are seeking business from the same customer base— Carriers.
The accuracy of this analysis of Cass’s position was disputed. But believing that Cass had improperly refused to accept the invoices held by Nationwide and that Cass was attempting in this way to squash a small competitor, Nationwide brought this suit.
ANALYSIS
The standard of review. Cass argues that the standard is abuse of discretion, Nationwide that it is de novo. Nationwide has the better of the argument as to our *1067review of the instructions given the jury. The issues as to the instructions were issues of law, not fact. Review is de novo. Navellier v. Sletten, 262 F.3d 923, 944 (9th Cir.2001).
What is not an issue. Both sides agree that Cass is not an account debtor as defined by the U.C.C.
What is at issue, (a) Agency. Cass denies that there was proof that it was a paying agent for the account debtors. Cass made this denial in argument to the trial court and again in oral argument to us. The argument is succinctly put in its brief on this appeal:
Nationwide presented no evidence showing that Cass was the agent of the account debtor or that Cass somehow “stands in the shoes of the account debt- or.” Nationwide failed to prove that any such agency relationship existed or that Cass agreed to “stand in the shoes of the account debtor” so that Cass was required to pay Nationwide’s factored invoices.
Nationwide argues to the contrary. Cass’s self-description is that it is a payment service. It is as a payment service that it describes itself in the hold-harmless agreement. In the course of the trial Cass agreed that it was the agent for payments by shippers. The trial court concluded:
The parties agree that Defendant was the account debtor’s agent. Accordingly, this Court finds that Plaintiff may refer to Defendant as an agent of the account debtor because it will simplify the description of Defendant’s role in a typical factoring transaction.
The court instructed the jury that the following facts have been “admitted by the parties and require no proof:”
Cass is a freight invoice payment service which is typically hired by shippers or manufacturers to handle the processing and payment of their freight invoices. The shipper agrees to pay Cass the funds needed to pay all of the shipper’s verified transportation invoices, and Cass, in return, forwards those funds to the carrier or its designated agent to pay the outstanding invoices.
It may be said that the contract of agency was not in evidence and that we do not know every term of it. But we do know that Cass was not an agent to receive goods, ship goods, or collect damages for the shipper. As Cass described itself, it provided “payment service.” It provided such service to account debtors that had a statutory duty to pay for goods they received. To pretend that the nature of the agency was unknown is to engage in fantasy. The reason the account debtor made Cass its agent was to discharge its obligation to pay. Cass accepted that obligation as its business.
That Cass should, on this appeal, argue that it was not an agent underscores the weakness of its case.
(b) The place of the U.C.C. According to Cass, the U.C.C. is “simply irrelevant.” Once it is agreed that Cass is not an account debtor, Cass claims that the U.C.C. disappears from the case. Again, the argument points to the weakness of Cass’s position.
Nationwide’s case is comprehensible only if the U.C.C. is understood as relevant. The U.C.C. imposed on the shippers as account debtors an absolute duty to pay the freight invoices of which Nationwide was the assignee. The shippers could not duck the duty by an arrangement for payment that left their paying agent with discretion to pay or not. Accepting agency to pay, Cass accepted the obligation of the account debtors to pay.
The logic and force of Nationwide’s argument are compelling. It is not suing in contract but in tort against an agent which *1068improperly refused to fulfill an obligation it had undertaken and thereby interfered with Nationwide’s relationships with its clients.
The rulings of the district court. Despite instructing that Cass was “a freight invoice payment service,” the district court refused Nationwide’s requested instructions on the law of agency:
Ms. Wright (Counsel for Nationwide): First of all, we had proposed some basic agency instructions that have not been included, specifically number ten, which defines what an agent is, and I would state that there has definitely been evidence in this trial that Cass was acting as an agent.
And most importantly is our instruction number 12 which makes it clear that an agent is liable in tort just as much as the principal, and I think that’s important because they’re probably going to argue it in closing, we’re just an agent.
So I think it’s key and important, and there’s definitely evidence as well as inferences at this trial to support such an instruction.
The Court: Counsel?
Mr. Trelz: Your Honor, there has been no evidence whatsoever of our agency relationship with a shipper client. There has been no proof of the course and scope of that agency relationship. In fact, [Nationwide’s administrator] testified that he had no knowledge of the terms of the agreements between Cass and its shipper.
To have an agency instruction under those circumstances, I think, is just absolutely wrong.
There have been references in the hold harmless agreement that we’re a payment agent. That doesn’t specify the course and scope of our agency relationship.
What are the terms? Under what— under what circumstances are we required to pay? That evidence is not in this case, and that instruction was properly excluded from this case.
The Court: Thank you. Your objection is noted, then, Ms. Wright.
Next objection?
Ms. Wright: The next one, of course, is about the UCC, our last one.
We had proposed instructions 23 and 24. The reason we had done that is, as you know, your Honor, defense had filed several motions in limine that were granted that no one could talk about the UCC in this trial, and we abided by that because we knew we could get a jury instruction in, and how that specifically relates is to your instruction [on the Restatement (Second) of Torts § 767] that we already have.
Subpart A of that instruction talks about the nature of the defendant’s conduct, and this goes to justification defense, or sometimes considered the improper prima facie element.
And the cases that I cited in our sources for this instruction specifically talked about when a defendant violates a statutory provision, that is evidence of improper nature of the conduct.
So it’s important to us that we somehow show to the jury how the UCC would apply to this situation.
Yes, Cass is an agent, but in fulfilling the duties given to it by its principal, it should be following the UCC, and since we weren’t able to talk about it, it’s my only other way to get it in front of the jury, and I wouldn’t have a problem with limiting some of the definitions in 23, our instruction 23.
I tried to include just those words that would have come up in trial because *1069certain words have specific meanings in this type of freight bill transaction, bill of lading, defines what it is, but — we can limit some of those.
But, obviously, what’s really important to us is our instruction 24 which is UCC 9-406 which says after notice, you pay the assignee, and that’s the key to this whole case.
Now, I really think we would be substantially prejudiced if we could not discuss the UCC in front of the jury.
The Court: The Court did not include the UCC instructions because of its pri- or finding that the UCC is not applicable because the defendant is not an account debtor, and therefore it will not include an instruction on the UCC.
Your objection is noted.
The errors of the majority opinion. The majority states: “Nationwide has not identified any legal authority extending the obligations of § 9^406 to the agent of an account debtor.” The principle of agency at the heart of Nationwide’s case is that an agent for paying the debt of its principal is bound to pay it if the principal is bound to pay it and acts improperly in holding up payment to obtain its own advantage.
Both sides acknowledge, and the Restatement counsels, that to determine whether Cass acted improperly, “the real question is whether [its] conduct was fair and reasonable under the circumstances.” Restatement (Second) of Torts § 767, comment (g), subsection j. The Restatement further explains that “[r]ecognized standards of business ethics and business customs and practices are pertinent, and consideration is given to concepts of fair play and whether the defendant’s interference is not ‘sanctioned by the rules of the game.’ ” Id.
“The jury determines whether [Cass’s] interference with [Nationwide’s] advantageous relation was intentional or not.” Id. at subsection 1. Nationwide argues that U.C.C. § 9-406 constitutes the “rules of the game” for the factoring industry. Properly instructed, the jury could have found that the shipper clients of Cass had an absolute duty under the U.C.C. to pay the carriers which shipped their goods; that Nationwide had been assigned all the rights of such carriers; that Cass had no right to demand a payment or any agreement as a condition for discharging a debt it was being paid to discharge and had agreed to discharge; and that Cass had acted unjustifiably to injure Nationwide as its competitor.
The importance of the issue. Cass contends strenuously that Nationwide’s position would destroy its business:
Under Nationwide’s outrageous view of UCC § 9-406, the liability of payment agents would increase astronomically. Nationwide’s position would require every payment service to guarantee the obligation of the account debtor. Accordingly, if the account debtor were unable to fulfill its obligation, the payment service or agent would have to step in and make good on the debt. This result likely would cause the end of the payment service industry because account debtors’ agents could not afford to assume the debt or would have to increase their fees beyond ability of the account debtor to afford the payment service.
Neither result is acceptable. Payroll payment services would be deemed to “stand in the shoes” of the employer, thereby making the payment service the obligor of the employees’ wages in the event the employer cannot pay. Likewise, banks that offer bill paying services would also be deemed to “stand in the shoes” of the customer so that if the customer cannot pay the bills, the bank would have to make good on the debt. These two simple examples demonstrate *1070the absurdity of Nationwide’s position and the reckless nature with which it urges this court to adopt it.
To the contrary, Cass’s position, upheld, would put a severe crimp in the credit functioning of factors. Cass’s position is that the paying agent of an account debtor may hold up the factor, may get something for nothing, and without offering any consideration in exchange may walk away with a hold-harmless agreement. The account debtor itself could not get such an agreement as a condition for payment; the account debtor, making a mistake as to the entity it pays, has to pay twice. U.C.C. § 9-406. The account debtor’s agent is not in a better position. Of course, the agent does not step into its principal’s shoes in the sense that it must make payment if its principal defaults. The agent is in the principal’s shoes in the sense that it cannot insert conditions of its own before making payment.
Cass’s two “simple examples” limp. If the payroll service would not pay an employee unless he deposited his check in a particular bank or agreed to hold the payroll service harmless if it should mistakenly pay the wrong employee, or if a bank would not pay a bill unless the payee deposited the payment with it, they would act without justification. Obviously, a payroll service could not demand a hold-harmless agreement be signed by every employee it paid. Obviously, a bank paying a customer’s bills could not require each recipient of a check to agree to hold the bank harmless if the bank erred.
■ An illustration contrary to Cass’s position comes from FRED H. Miller & Alvin C. Harrell, The Law of Modern Payment System and Notes (West Group 2002): “[I]f a payor bank refuses to pay and (dishonors) an item that is properly payable, it may be liable for wrongful dishonor under [U.C.C.] § 4-402, unless it has some additional defense or excuse.” Id. at 406. “In other words, the bank cannot simply refuse to pay at its own discretion, without a further reason.” Id. at 418. Cass and Nationwide’s relationship is analogous to that of a bank and the presenter of the check for payment. Of course, the freight invoice assigned to Nationwide is not a negotiable instrument. There may be defenses to payment. But if there were defenses, it was incumbent on Cass to plead and prove them. Cass has a way of protecting itself from ruin: obtain a hold-harmless agreement from the shipper for whom it acts.
Whether the district court’s errors were prejudicial. “An error in instructing the jury in a civil case requires reversal unless the error is more probably than not harmless.” Swinton v. Potomac Corp., 270 F.3d 794, 805 (9th Cir.2001). It is unclear that this jury would have reached the same verdict. A crucial element of the torts at issue requires Nationwide to show that Cass intentionally and improperly interfered with Nationwide’s business relationships. Nationwide’s theory of the case — that Cass acted improperly by conditioning payment on a hold-harmless agreement — could not be understood without evidence of the shippers’ payment obligations under the U.C.C. Nationwide was fatally prejudiced by the court’s failure to grasp the correctness of its objections.