Bank of Waunakee v. Rochester Cheese Sales, Inc.

• Citation: 906 F.2d 1185,12 U.C.C. Rep. Serv.2d 284
• Decision Date: 13 July 1990
• Docket Number: No. 89-2110,89-2110
• Parties: 12 UCC Rep.Serv.2d 284 BANK OF WAUNAKEE, a Wisconsin banking corporation, Plaintiff-Appellant, v. ROCHESTER CHEESE SALES, INC., a Minnesota corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1185

906 F.2d 1185

12 UCC Rep.Serv.2d 284

BANK OF WAUNAKEE, a Wisconsin banking corporation, Plaintiff-Appellant, v. ROCHESTER CHEESE SALES, INC., a Minnesota corporation Defendant-Appellee.

No. 89-2110.

United States Court of Appeals Seventh Circuit.

Argued Feb. 13, 1990.

Decided July 13, 1990.

Robert Brill, Francis Eustice, Brill & Eustice, Sun Prairie, Wis., for plaintiff-appellant.

Bruce M. Davey, Lawton & Cates, Madison, Wis., for defendant-appellee.

Before WOOD, Jr. and COFFEY, Circuit Judges, and ESCHBACH, Senior Circuit Judge.

HARLINGTON WOOD, Jr., Circuit Judge.

Plaintiff-appellant Bank of Waunakee ("the Bank") appeals the district court's order granting defendant-appellee Rochester Cheese Sales, Inc.'s motion for summary judgment on the Bank's claim for collection of an account receivable. The Bank also appeals the district court's Order denying the Bank's Motion for Reconsideration, in which the Bank asserted that the court should vacate its earlier order and allow the Bank to pursue a conversion claim despite its failure to plead a conversion claim in its complaint.

I. FACTUAL BACKGROUND

Defendant-appellee Rochester Cheese Sales, Inc. ("RCS") is a Minnesota corporation that buys and resells cheese. Waunakee Kase Haus, Inc. ("Kase Haus") was in the business of purchasing and reprocessing various types of cheeses under its own label. As part of their business, RCS and Kase Haus each purchased cheese from particular sources and sold different types of cheese to these same sources. RCS and Kase Haus shared such a business relationship in 1987.

Kase Haus bought $46,970.47 worth of cheese from RCS on March 22, 1988; $50,094.59 worth of cheese on April 1, 1988; and $22,417.42 worth of cheese on May 24, 1988. Kase Haus wired $22,000.00 to RCS in May 1988 as partial payment. RCS purchased $41,863.55 worth of cheese from Kase Haus on May 6, 1988, and $80,326.20 worth of cheese on May 11, 1988. Larry Oliver, Kase Haus's manager, had the authority to make the sales to and purchases from RCS.

On June 10, 1988, Don Roberts, acting on behalf of RCS, initiated a telephone conference with Larry Oliver of Kase Haus to review the various outstanding invoices between RCS and Kase Haus. Roberts and Oliver determined that, taking into account all outstanding invoices, credits, shipping charge adjustments, weight adjustments, and payments received, RCS owed Kase Haus the total net sum of $22,643.69. On the same day, RCS issued and mailed a check to Kase Haus for the sum of $22,643.69 with the notation on the check register delivered with the check that the check "PAID IN FULL" the amount RCS owed Kase Haus. Kase Haus negotiated the RCS check without objection.

Several months before the transactions between Kase Haus and RCS, Kase Haus borrowed money from the Bank under several loan agreements. Kase Haus subsequently defaulted on its obligation under its loan agreements with the Bank. At the time the Bank filed its complaint, Kase Haus owed the Bank a sum in excess of $1,434,585.30. The Bank had a perfected security interest in Kase Haus's inventory and accounts receivable that provided in part:

VERIFICATION AND NOTIFICATION. Bank may verify Collateral in any manner, and Debtor shall assist Bank in so doing. Upon default Bank may at any time and Debtor shall, upon request of Bank, notify the account debtors to make payment directly to Bank and Bank may enforce collection of, settle, compromise, extend or renew the indebtedness of such account debtors. Until account debtors are so notified, Debtor, as agent for Bank shall make collections on the Collateral....

(emphasis added). Prior to the transactions between RCS and Kase Haus, the Bank assigned its interest in Kase Haus's accounts receivable to another lender, CFC Capital Corporation ("CFC"). Kase Haus reported to CFC on the status of its accounts receivable on a weekly basis. CFC would then wire funds to Kase Haus through the Bank. CFC continued to advance money to Kase Haus throughout June 1988. When the Bank declared Kase Haus in default, it immediately notified CFC. The Bank purchased CFC's rights to Kase Haus's accounts receivable during August 1988.

On July 21, 1988, the Bank notified RCS that it expected RCS to make payments to the Bank for the amount it allegedly owed Kase Haus. RCS received a letter dated July 18, 1988, from the Bank's attorney that stated in part:

This brings us to the account of Rochester Cheese Sales as it is reflected on the records of Waunakee Kase Haus, Inc. and to the point of this correspondence. Account records reflect that on and between May 6, 1988 and May 11, 1988, Rochester Cheese Sales acquired cheese from the inventory of Waunakee Kase Haus, Inc. having a total value of $120,126.17. At this time, Waunakee Kase Haus, Inc. was indebted to Rochester Cheese Sales for purchases on account totalling $75,065.00. On June 9, 1988, this indebtedness increased to $97,482.48 reflecting a purchase made by Waunakee Kase Haus, Inc. on that date.

It appears that on or after June 9, 1988, Rochester Cheese Sales tendered a check to Waunakee Kase Haus, Inc. for $22,643.69 and set off its accounts payable to Waunakee Kase Haus, Inc. with its account receivable from Waunakee Kase Haus, Inc. In so doing, it converted the collateral of the Bank of Waunakee to the extent of the amount of the set off; [sic ] $97,482.48.

We are provided with no information that Rochester Cheese Sales at any time owned a security interest in the inventory of accounts of Waunakee Kase Haus, Inc. to secure payment of the account of Waunakee Kase Haus, Inc. Therefore, clearly, Rochester Cheese Sales was no more than a general, unsecured creditor of Waunakee Kase Haus, Inc. at the time of the set-off. Since the right of set-off in a creditor who does not have a security interest does not abrogate the security interest of a secured creditor, the offset taken by Rochester Cheese Sales was, in fact, a conversion. As such, Rochester Cheese Sales remains indebted to the Bank of Waunakee for the sum of $97,482.48.

On November 10, 1988, the Bank filed a complaint against RCS that contained a solitary claim for the collection of accounts receivable. In its preliminary pretrial report, the Bank reasserted that its complaint sought to collect an account receivable. On March 15, 1989, RCS moved for summary judgment on the Bank's claim for the collection of accounts receivable. The Bank also filed a motion for summary judgment on April 4, 1989, asserting that it was entitled to judgment on a claim that RCS had converted inventory (the cheese it had received from Kase Haus) in which the Bank had a security interest and also on its claim that "as assignee of Waunakee Kase Haus" it was entitled to payment on the account RCS owed to Kase Haus. In its complaint, the Bank alleged that Kase Haus "conveyed" certain personal property, including Kase Haus's accounts receivable, to the Bank under the terms of the security agreement executed by Kase Haus. The conversion of inventory claim was mentioned nowhere in the Bank's complaint, and the Bank never sought leave to amend its complaint to add a conversion claim of any kind pertaining to either accounts receivable or inventory. RCS opposed the Bank's summary judgment motion on the grounds that the Bank had never pled the conversion claim, the motion was not timely, and the undisputed material facts did not support the claim.

The district court granted RCS's summary judgment motion and denied the Bank's cross-motion for summary judgment, noting that a cause of action for conversion of collateral of any kind was contained nowhere in the complaint; rather, the complaint simply alleged that the Bank sought to collect an account receivable. The district court found that there were no material facts in dispute and that RCS as an account debtor was entitled to set off amounts Kase Haus owed it against the amount it owed Kase Haus pursuant to section 409.318(1)(b) of the Wisconsin Uniform Commercial Code. In its opinion denying the Bank's subsequent motion for reconsideration, the trial court noted that "even with the most liberal construction [of the complaint] plaintiff has come nowhere within haling [sic ] distance of stating a claim for conversion of inventory." The district court further stated that even though the Bank's July 18, 1988, letter informed RCS that the Bank believed it had a valid conversion claim, the court was "aware of no authority which requires that issues at trial be framed by letters exchanged between the parties at some time prior to litigation."

11. ANALYSIS

The Bank alleges that the trial court erred in entering summary judgment on RCS's behalf on the grounds that (1) the documents it executed with Kase Haus did not constitute an assignment; (2) even if the Bank became a "de facto assignee" upon Kase Haus's default, section 408.318(1)(b) would not apply because the Bank did not acquire all right, title, and interest in Kase Haus's accounts receivable; and (3) the district court should have construed its motion for reconsideration as a motion for leave to amend the complaint to convert the underlying cause of action to one for conversion.

We review the district court's decision to grant summary judgment de novo and use the same standard of decision making as that employed by the district court. McMillian v. Svetanoff, 878 F.2d 186, 188 (7th Cir.1989). Therefore, we will only affirm the grant of summary judgment when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. FED.R.CIV.P. 56(c).

A. RCS's Right to Set Off

Section 409.318(1) of the Wisconsin Uniform Commercial Code provides:

(1) Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in s. 409.206 the rights of an assignee are subject to:

(a) All the terms of the contract between the account debtor and assignor...