Advance Financial Corp. v. Isla Rica Sales, Inc., s. 84-1170

• Decision Date: 24 October 1984
• Docket Number: 84-1171,Nos. 84-1170,s. 84-1170
• Parties: 39 UCC Rep.Serv. 1461 ADVANCE FINANCIAL CORPORATION, Plaintiff, Appellee, v. ISLA RICA SALES, INC., Defendant, Appellant. Antonio NOVOA, et al., Plaintiffs, Appellants, v. Boyd L. HOBBS, et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

Page 21

747 F.2d 21

39 UCC Rep.Serv. 1461

ADVANCE FINANCIAL CORPORATION, Plaintiff, Appellee, v. ISLA RICA SALES, INC., Defendant, Appellant.

Antonio NOVOA, et al., Plaintiffs, Appellants, v. Boyd L. HOBBS, et al., Defendants, Appellees.

Nos. 84-1170, 84-1171.

United States Court of Appeals, First Circuit.

Argued Sept. 6, 1984.

Decided Oct. 24, 1984.

Plinio Perez Marrero, Hato Rey, P.R., with whom Aurelio Garcia Morales, Naranjito, P.R., was on brief, for plaintiffs, appellants.

Ronald L. Rosenbaum, Hato Rey, P.R., with whom Woods, Rosenbaum, Luckeroth & Perez Gonzalez, Hato Rey, P.R., was on brief, for defendants, appellees.

Before COFFIN and BOWNES, Circuit Judges, and SELYA, ^* District Judge.

SELYA, District Judge.

These are consolidated appeals wherein Isla Rica Sales, Inc. (Isla), Antonio Novoa, and his spouse, Maria P. Novoa, jointly and severally complain of certain orders and judgments entered by the United States District Court for the District of Puerto Rico. Isla and Mr. and Mrs. Novoa, collectively, are herein sometimes referred to as "the appellants." The appellee in each instance is Advance Financial Corp. (AFC). The facts, though essentially undisputed, take some byzantine twists, and the procedural aspects of the two cases and their interrelationship are freighted with confusion. Accordingly, we begin by an orderly recitation of the material events, followed closely by an analysis of the proceedings below. It is only when a passable swath has been cut through this factual/procedural jungle that we can turn to a reasoned assessment of the issues presented by these appeals and a concise statement of the basis upon which we affirm the court below.

I. Underlying Facts.

A. Background

This saga starts with the lambent lure of easy money. In late 1982, Boyd L. Hobbs, known to his confreres as "Cotton," approached Leonel Diaz, a Puerto Rican entrepreneur, with a get-rich-quick proposition. The appellant Antonio Novoa acted as Diaz's interpreter in these negotiations. Hobbs, a convicted swindler, wore many hats at the time; among his millinery adornments, he held himself out to be the general manager of Monte Foods, Inc. (Monte-Alabama). Monte-Alabama was an Alabama corporation headquartered in Tuscaloosa. It was owned by a second corporation (Reliance Shipping) which was in turn owned by a third corporation (Hobbs Co.), of which Hobbs' wife was the sole shareholder.

Hobbs informed Diaz that he and Monte-Alabama had locked up favorable contracts with egg producers in Mississippi, Indiana, Georgia, and Alabama; that they had ready markets--indeed, agreements--for the profitable resale of these eggs; and that they lacked only the wherewithal to capitalize the venture. He asked for $100,000, and offered an extremely attractive return on investment.

Whatever his reliability might be as to the delivery of eggs, Hobbs was certainly no slouch when it came to delivering a slick sales pitch. On December 7, 1982, an agreement was signed whereby Novoa ¹ put up the $100,000; in turn, Hobbs and Monte-Alabama guaranteed repayment of the funds and agreed to pay Novoa a return on investment ranging from thirty percent to forty-six percent. Novoa, who had no prior experience in the egg business, left himself pretty much at Hobbs' mercy: the entire contract comprised two hundred and eighty-nine words; it identified neither the sources of supply nor the sales outlets for the hypothetical eggs; and it did not commit Hobbs or his corporation to any firm temporal deadlines or the like. No exclusivity was expressed or implied, and Hobbs remained at liberty to deal freely in the world of eggs in other ventures. Novoa transferred the money and Hobbs' plot was thus hatched.

It should come as no surprise that Hobbs' motives proved to be foul. After pocketing the cashier's cheque which Novoa gave him, Hobbs in short order sojourned forth to Atlanta. On January 10, 1983, he formed a brand, spanking new corporation which, perhaps as a creature of habit, he also called Monte Foods, Inc. (Monte-Georgia). Monte-Georgia had its own officers, directors and employees (largely distinct from Monte-Alabama), rented offices in Atlanta to serve as its principal place of business, and began trafficking in eggs. The record is devoid of any evidence that Monte-Georgia coopted any of the assets of Monte-Alabama, or that any of Novoa's loosely-guarded dollars flowed into, or benefitted, Monte-Georgia.

At about the same time, Hobbs wangled an introduction to Andre James Perry, the president and chief executive officer of AFC. Likewise based in Georgia, AFC was in the commercial factoring game. It was qualified to do business only in its home state. AFC, through Perry, agreed to supply conventional accounts receivable financing to Monte-Georgia. On January 10, 1983, the appellee filed a UCC-1 form with the clerk of the superior court of Cobb County, Georgia, to perfect its security interests. There is no question but that, under Georgia law, the filing was duly accomplished.

In general, the arrangement followed a familiar pattern. Monte-Georgia would effect a sale, and would then assign the account to AFC. The proposed invoice would accompany the proffered assignment. The factor would conditionally accept each assignment, and then verify the shipment of the eggs to the customer and their receipt in good condition. Once AFC was satisfied in these respects, it would release funds to Monte-Georgia against the account. ² AFC would then stamp the pre-prepared Monte-Georgia invoice with a special notification clause in bold red lettering, and would forward the invoice to the customer for payment on agreed terms (usually, net fourteen days or net twenty-one days). The stamped special notification language placed by AFC on each invoice read as follows:

This bill assigned

MAKE CHECK PAYABLE TO:

Advance Financial Corp.

270 Carpenter Dr., N.E.

Suite 460

Atlanta, Georgia 30328

Tel. (404) 256-2123

Promptly notify above of any returns, claims or disputes

The customer would then make payment for the goods directly to AFC. Hobbs testified, without contradiction, that the availability of AFC's financing was the key factor leading to the incorporation of Monte-Georgia and to basing it in Atlanta. ³

Meantime, Novoa had not been idle. Although it was not mentioned in his investment agreement with Hobbs and Monte-Alabama, Novoa, if gastronomical metaphors may be mixed, apparently had other fish to fry in connection with the joint venture. On December 31, 1982, he participated in the incorporation of Isla. Isla would, as Novoa envisioned it, buy Hobbs' wares and distribute the eggs as a wholesaler in Puerto Rico. Parenthetically, it might be added that Novoa is plainly a man of considerable talent; not many would aspire to skim cream off eggs. Virtually all of Isla's issued and outstanding stock was held by Diaz, but Novoa owned a two percent interest. ⁴ He was also Isla's vice-president and general factotum; and his wife, Maria, worked as Isla's controller.

With this infrastructure in place in early 1983 the series of events which gave rise to the inevitable denouement began to unfold in earnest.

B. The Specific Transactions

Subsequent to January 10, 1983, Isla started to purchase eggs through Hobbs. And, as shipments were made, Monte-Georgia presented and assigned invoices to AFC. The latter, after preliminary verification as described ante, purchased the accounts and mailed the invoices from Georgia to Isla in Puerto Rico. In addition to the scarlet-hued notification which emblazoned each invoice, AFC contemporaneously submitted a statement of account, which invariably included the following language:

Please be advised that this account, including the attached invoices covering goods and/or services provided by MONTE FOODS, INC. DUNS NUMBER 0-0-0 has been sold and assigned to Advance Financial Corporation. The respective invoices are listed below and are payable only to Advance Financial Corporation at the address below--to whom prompt notice must be given of returns, claims or disputes of any kind.

None of the invoices or statements indicated the state of incorporation of "Monte Foods, Inc." The appellants make much of the fact that some of the documents submitted to Isla (including in various instances bills of lading which accompanied the merchandise and certain of the invoices themselves) showed an Alabama address for the seller. Yet, this strikes us as totally beside the point: the evidence is undisputed that Monte-Georgia maintained what amounted to a branch office in Tuscaloosa, where it shared telex and other facilities with a bevy of corporate entities associated in some way with the prolific Mr. Hobbs. And, the record is similarly clear that Monte-Alabama was not engaged in the merchandising of eggs during this period. The most that can be said for the appellants' position is that they may have thought that they were buying comestibles from Monte-Alabama. But, the thought was apparently unfounded. On this record, AFC in no way can be said to have lulled the appellants into such a false sense of complacency.

Isla never protested the invoices or the statements; to the contrary, it made timely payments to AFC. During the interval of slightly over two months ending May 23, 1983, Isla remitted in excess of $270,000 to AFC on account. All bills for merchandise delivered through May 5 were satisfied by May 23. Maria Novoa wrote most of the checks, and Antonio Novoa signed them. In this same time frame, Hobbs made some monthly interest payments of $800 apiece on Novoa's investment. ⁵

Then, the bubble burst. The Novoas, having grown disenchanted with Hobbs, brought suit against him and Monte-Alabama in the San Juan Superior Court on May 27, 1983, claiming breach of the investment contract. Isla thereupon assumed a hard-boiled stance and made no further payments to the factor. Between May 6 and May 27, however, AFC had accepted assignment of...