666 F.2d 673 (1st Cir. 1981), 80-1830, Michelin Tires (Canada), Ltd. v. First Nat. Bank of Boston

Docket Nº:80-1830.
Citation:666 F.2d 673
Party Name:MICHELIN TIRES (CANADA) LTD., Plaintiff, Appellant, v. FIRST NATIONAL BANK OF BOSTON, Defendant, Appellee.
Case Date:December 04, 1981
Court:United States Courts of Appeals, Court of Appeals for the First Circuit
 
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Page 673

666 F.2d 673 (1st Cir. 1981)

MICHELIN TIRES (CANADA) LTD., Plaintiff, Appellant,

v.

FIRST NATIONAL BANK OF BOSTON, Defendant, Appellee.

No. 80-1830.

United States Court of Appeals, First Circuit

December 4, 1981

Argued June 4, 1981.

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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.

Before CAMPBELL and BOWNES, Circuit Judges, and MAZZONE, [*] District Judge.

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MAZZONE, District Judge.

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

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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

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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.

I.

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.

(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 9-206 the rights of an assignee are...

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