Commerce Bank v. Chrysler Realty Corp.

Decision Date22 March 2001
Docket NumberNo. 00-3000,00-3000
Parties(10th Cir. 2001) COMMERCE BANK, N.A., Plaintiff-Appellee, v. CHRYSLER REALTY CORPORATION; DAIMLERCHRYSLER CORPORATION, Defendants-Appellants
CourtU.S. Court of Appeals — Tenth Circuit

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF KANSAS. (D.C. No. 99-CV-2017)

James P. O'Hara and Andrew M. DeMarea of Shughart Thomson & Kilroy, P.C., Overland Park, Kansas, and William E. Quirk of Shughart, Thomson & Kilroy, P.C., Kansas City, Missouri, for Plaintiff-Appellee.

James H. Geary and Janice M. Powell of Howard & Howard Attorneys, P.C., Peoria, Illinois, for Defendants-Appellants.

Before TACHA, Chief Judge, EBEL, and LUCERO, Circuit Judges.

LUCERO, Circuit Judge.

Plaintiff-appellee Commerce Bank, N.A. ("Commerce") brought this action seeking actual and punitive damages as well as an accounting for sums wrongfully paid by defendant Chrysler Realty Corporation ("Chrysler Realty") to co-defendant DaimlerChrysler Corporation ("Chrysler Corporation").1 Defendants appeal the district court's order granting summary judgment in favor of Commerce on Commerce's claim for actual damages. Chrysler Realty additionally appeals the district court's order awarding Commerce $20,000 in punitive damages. We reverse the order of summary judgment, vacate the award of punitive damages and remand.

I

Most of the facts in this case were stipulated by the parties. On September 5, 1991, Chrysler Corporation entered into a sales and service agreement ("the Dealer Agreement") with one of its retail dealers, Bierwirth Chrysler Plymouth, Inc. ("Bierwirth"). Under the Dealer Agreement, Bierwirth could earn factory receivables, which include payment for sales promotion incentives, warranty work and returned parts, from Chrysler Corporation. The Dealer Agreement also provided that Chrysler Corporation could offset any amount Bierwirth owed to Chrysler Corporation or its affiliates against any amount due from Chrysler Corporation or its affiliates to Bierwirth.

On October 10, 1995, Chrysler Realty, an affiliate of Chrysler Corporation, entered into a Dealer Lease Agreement, as landlord, with Bierwirth as tenant. As part of the lease--and to secure its payment obligations under the lease's terms--Bierwirth assigned to Chrysler Realty any amounts due to Bierwirth from Chrysler Corporation or its subsidiaries. The assignment stated that "[Bierwirth] agrees that this right of assignment shall constitute a present security interest in and to such accounts benefitting [Chrysler Realty] and the within agreements of [Bierwirth] shall be a Security Agreement within the meaning of the Uniform Commercial Code as applicable in the state where the premises are located." (I Appellants' App. C at 3.) Notably, Chrysler Realty did not file a financing statement to reflect the assignment.

As part of a December 8, 1995 transaction in which Commerce supplied inventory floor plan financing to Bierwirth, Bierwirth granted Commerce a security interest in its inventory, all accounts receivable, contract rights and general intangibles then existing or thereafter owing to Bierwirth. Bierwirth executed and delivered to Commerce a security agreement. Commerce perfected its security interest by filing the security agreement with the Kansas Secretary of State on December 22, 1995. On February 4, 1998, Bierwirth executed and delivered to Commerce a second security agreement containing similar terms. Commerce also filed this security agreement with the Kansas Secretary of State on February 5, 1998, thereby perfecting its security interest.

On January 14, 1998, Chrysler Realty sent Chrysler Corporation a written notice of Bierwirth's assignment of factory receivables. In this letter, Chrysler Realty stated that Bierwirth's rent was past due in the amount of $34,165.84 and requested that factory receivables be paid to Chrysler Realty until further notice. Bierwirth later sold its assets, and Chrysler Realty paid a contractor for repairs at the dealership premises.

The amount in controversy is $218,000, which is the sum of the values of four checks that Chrysler Realty received from Chrysler Corporation after the January 14, 1998 notice. The dates and amounts of these payments are as follows:

                Date Amount 
                February 24, 1998               $ 545,000 
                March 24, 1998                  $ 550,000 
                April 24, 1998                  $ 110,000 
                May 15, 1998                    $  13,000 
                
                TOTAL:                          $ 218,000 
                

On May 6, 1998, Thomas J. Noack, Deputy General Counsel of Commerce, gave actual notice to Chrysler Corporation of Commerce's perfected security interest in the factory receivables owed by Chrysler Corporation to Bierwirth. Thus, three of the above-identified checks were sent to Chrysler Realty before Chrysler Corporation was given actual notice of Commerce's security interest. The remaining May 15, 1998 check was sent to Chrysler Realty after actual notice had been given.

Commerce filed this action on January 15, 1999, claiming that Chrysler Corporation and Chrysler Realty had converted the $218,000 paid to Chrysler Realty. In addition to a money judgment for the $218,000, Commerce requested punitive damages against the defendants.

Evidence was presented that Chrysler Corporation paid Chrysler Realty $2000 more than Chrysler Realty was entitled to claim from Bierwirth. Although Commerce filed suit on January 15, 1999, Chrysler Realty did not notify Chrysler Corporation, Bierwirth or Commerce of the surplus. The overpayment was not disclosed until the deposition of Thomas H. Noles, Chrysler Realty's Eastern Area Manager, on May 17, 1999, five months after suit was filed. The district court found that Chrysler Realty acted wantonly in retaining the $2000 surplus and that Commerce was entitled to a punitive damage award equal to ten times the amount withheld.

II
A

This Court reviews de novo the district court's summary judgment order. L&M Enters., Inc. v. BEI Sensors & Sys. Co., 231 F.3d 1284, 1287 (10th Cir. 2000). Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c).

"A federal court sitting in diversity applies the substantive law . . . of the forum state." Signature Dev. Cos., Inc. v. Royal Ins. Co. of Am., 230 F.3d 1215, 1218 (10th Cir. 2000). We review the district court's interpretation of Kansas state law de novo. Beck v. N. Natural Gas Co., 170 F.3d 1018, 1023 (10th Cir. 1999).

B

Defendants argue the district court's judgment in favor of Commerce worked to improperly relieve Commerce from the setoff provision of the Dealer Agreement in contravention of Kan. Stat. Ann. 84-9-318(1)(a). That statute reads:

(1) Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in section 84-9-206 the rights of an assignee are subject to

(a) all the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom[.]

Chrysler Corporation, which is obligated to pay the dealer receivables to Bierwirth, is the "account debtor" within the meaning of this statute. Bierwirth, having assigned its rights to these receivables to Commerce, is the "assignor" and Commerce is the "assignee." Defendants argue that under 84-9-318(1)(a) Commerce's interest in the funds paid to Chrysler Realty is subject to a "claim or defense." Their asserted defense is the provision of the Dealer Agreement that allows Chrysler Corporation to offset any amount Bierwirth owes to Chrysler Corporation or its affiliates against any amount due from Chrysler Corporation or its affiliates to Bierwirth. Commerce responds that under the statute, its rights are subject only to the claims and defenses of Chrysler Corporation as account debtor, not to any setoff based upon Chrysler Realty's claim against Bierwirth.

We have located no Kansas case precisely on point.2 Because the Kansas Supreme Court has not addressed the issue involved, we must predict how it would decide the question. Blackhawk-Cent. City Sanitation Dist. v. Am. Guarantee & Liab. Ins. Co., 214 F.3d 1183, 1188 (10th Cir. 2000). In making this determination we may look to "other state court decisions, federal decisions, and the general trend and weight of authority." Farmers Alliance Mut. Ins. Co. v. Salazar, 77 F.3d 1291, 1295 (10th Cir. 1996).

The district court relied on cases from other jurisdictions; however, those cases are distinguishable from the present one and are unlikely to be followed by the Kansas courts. In light of the general trend and weight of authority, we conclude Kansas courts addressing the 84-9-318 issue would follow the principle of nemo dat qui non habet--no one may transfer more than he owns--and rule for defendants.

1. Bank Leumi

The district court found persuasive the case of Bank Leumi Trust Co. of N.Y. v. Collins Sale Serv., Inc., 393 N.E.2d 468 (N.Y. 1979). Although the facts in Bank Leumi bear some superficial resemblance to those in this case, the district court failed to draw a crucial factual distinction.

Bank Leumi Trust Company loaned money to Precision Graphics and secured its loan by taking a security interest in Precision's accounts receivable. Sesco Designs owed Precision $8000 for goods purchased from Precision. As assignee of the funds due from Sesco, Bank Leumi sought to satisfy its claim by attaching the $8000 owed to Precision.

Precision also owed moneys arising from commission sales to Collins Sales Service, a corporation that had the same principal officer and shareholder as Sesco. Precision, Sesco and Collins reached a separate agreement allowing Precision to offset any moneys owed to it by Sesco against its debt to Collins. Collins and Sesco argued...

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