Business Financial Services, Inc. v. AGN Development Corp.

• Decision Date: 27 November 1984
• Docket Number: CA-CIV,No. 1,1
• Citation: 694 P.2d 1217,143 Ariz. 603
• Parties: , 42 UCC Rep.Serv. 1079 BUSINESS FINANCIAL SERVICES, INC., an Arizona corporation, Plaintiff-Appellee, v. AGN DEVELOPMENT CORPORATION, an Arizona corporation, Defendant-Appellant. 6650.
• Court: Arizona Court of Appeals

Page 1217

694 P.2d 1217

143 Ariz. 603, 42 UCC Rep.Serv. 1079

BUSINESS FINANCIAL SERVICES, INC., an Arizona corporation, Plaintiff-Appellee, v. AGN DEVELOPMENT CORPORATION, an Arizona corporation, Defendant-Appellant.

No. 1 CA-CIV 6650.

Court of Appeals of Arizona Division 1, Department C.

Nov. 27, 1984.

Reconsideration Denied Jan. 24, 1985.

Sacks, Tierney & Kasen by Lawrence J. Rosenfeld, Phoenix, for plaintiff-appellee.

Winston & Strawn by Richard W. Shapiro, Phoenix, for defendant-appellant.

OPINION

JACOBSON, Chief Judge.

The central issue on this appeal, arising out of a garnishment action, is whether the trial court erred in refusing to grant an account debtor setoffs for monies paid after receiving notice of assignment by the account creditor of the debt.

Appellee, Business Financial Services, Inc., (hereinafter "BFS"), was a secured creditor of Bernardino and Maria Medina d/b/a Bernardino Concrete Construction Company (hereinafter "Bernardino"), and had taken a security interest in Bernardino's accounts receivable. Appellant, AGN Development Corporation, (hereinafter "AGN") was an account debtor of Bernardino, having contracted to pay Bernardino $9,935.25 to provide the concrete work on AGN's Ridgegate Construction project.

On July 8, 1981, BFS notified Bernardino that it was in default on its obligations to BFS. On this same date BFS notified AGN of its security interest in AGN's debt to Bernardino. On August 13, 1981, BFS took steps to foreclose its security interests and received a court order for the issuance of prejudgment writs of garnishment against various parties indebted to Bernardino, including AGN. ¹

A writ of garnishment was served on AGN on August 17, 1981. AGN filed an answer in garnishment admitting that it had been indebted to Bernardino under the terms of a contract in the sum of $9,935.25, but claiming setoffs for amounts previously paid out under the contract in the amount of $7,020.19, leaving $2,915.06 available for garnishment. BFS filed an affidavit controverting the answer of AGN and a tender of issue in garnishment. BFS argued that AGN was improperly trying to setoff payments it had made after receiving notice of BFS' interest in the contract proceeds. BFS filed a motion for summary judgment against AGN for $9,466.27. AGN filed a crossmotion for summary judgment, seeking a determination that it was entitled to setoffs of $7,020.19 and requested its costs and attorney's fees. The trial court denied AGN's motion for summary judgment and granted summary judgment for BFS in the amount of $9,466.27.

AGN appeals to this court raising four issues:

(1) Whether AGN can be held liable for a payment it made under the Bernardino contract in the amount of $1,000.00 before it received notice of the security interest held by BFS;

(2) Whether AGN was entitled to make payments to materialmen and laborers because of the provisions of A.R.S. § 47-9310 (formerly A.R.S. § 44-3131); ²

(3) Whether, after receiving notice of the security interest held by BFS, AGN was entitled to make payments to individuals and companies that supplied labor and materials in connection with the Bernardino contract in the total amount of $6,020.19.

(4) Whether AGN was entitled to an award of costs and attorney's fees as the prevailing party in this action.

PAYMENT PRIOR TO NOTICE

We first consider AGN's contention that it made a $1,000.00 payment under the Bernardino contract before receiving notice from BFS that any monies owed to Bernardino should be paid to BFS and therefore AGN should not be liable to BFS for this sum. BFS admits that if AGN had made a $1,000.00 payment for work performed under the contract prior to receiving the notice from BFS, AGN could not be held liable for such payment.

A.R.S. § 47-9318(C) provides that "[t]he account debtor is authorized to pay the assignor until the account debtor receives notification that the account due or to become due has been assigned and that payment is to be made to the assignee." The position taken by BFS, however, is that the $1,000.00 payment was made after AGN received notice and therefore § 44-3139(C) is not applicable. The trial court apparently so found.

BFS bases its post-notice payment contention upon two arguments: (1) that AGN made an admission in its answer in garnishment that all of the payments including the $1,000.00 payment at issue here were made after the notice of July 8, 1981, was received and (2) a letter from AGN's attorney stating the payment was made on July 10, 1984. Turning to the first contention, suffice it to say we have reviewed AGN's answer in garnishment and find no language that can be interpreted as an admission that the $1,000.00 was paid after notice was received on July 8, 1981. The answer in garnishment merely states that the advance of $1,000.00 was made in July, 1981, with no indication of whether it was made before or after July 8, 1981, the date notice was given.

As to the second contention that AGN's attorney indicated that that particular payment had been made to Bernardino on July 10, 1981, AGN argues that the information presented in the letter concerning the $1,000.00 was erroneous. AGN produced a copy of a cancelled check for $1,000.00 was made payable to Henry M. Carrasco on a Norarm Properties account, dated June 19, 1981 and signed by John S. Norris, who is president of AGN. An affidavit from Norris was submitted which stated that the check had been issued on the Norarm Properties account to Henry M. Carrasco on that date at Bernardino's request as partial satisfaction of the amount due on the contract between AGN and Bernardino. No evidence was presented contraverting these facts. Based upon this record, no factual dispute exists that the $1,000.00 payment to Carrasco was made prior to July 8, 1981. ³

PAYMENT AFTER NOTICE FOR LABOR AND MATERIALS

We next consider AGN's arguments that it should have been allowed to claim setoffs for payments totaling $6,020.19 made to laborers and materialmen in connection with the Bernardino contract even though it had received notice of BFS' claim to the contract proceeds prior to making the payments. On July 8, 1981, AGN received notice that BFS held a security interest in Bernardino's accounts receivable and that Bernardino was in default. On August 10, 1981 AGN disbursed a joint check for $5,551.21 to Bernardino and Fastway for materials supplied by Fastway to the Ridgegate project. Throughout July and August, 1981, AGN had disbursed additional checks totaling $468.98 directly to other materialmen and laborers on the Ridgegate project under the Bernardino contract. AGN argues that it was entitled to setoff these payments for labor and materials supplied to the project both under its contract with Bernardino and because of the provisions of A.R.S. § 47-9310.

a. A.R.S. § 47-9310: Priority of Possessory Liens

We first consider whether A.R.S. § 47-9310 provides any assistance to AGN. This statute provides:

When a person in the ordinary course of his business furnishes services or materials with respect to goods subject to a security interest, a lien upon goods in the possession of such person given by statute or rule of law for such materials or services takes priority over a perfected security interest unless the lien is statutory and the statute expressly provides otherwise.

This statute addresses the priority of security interests in goods to which services or materials have been supplied. The statute provides, in general, that a lien upon the goods in the possession of the person supplying the services or materials has priority over other kinds of perfected security interests in the goods. For each of the reasons stated by BFS, we find this provision to be inapplicable to the situation presented in this case. First, there are no facts in the record showing that the materialmen and laborers who received payment from AGN had ever filed a lien. Second, § 47-9310 applies only to possessory liens, those in which the person providing the services or materials possesses the collateral. Third, § 47-9310 applies only to security interests in "goods." Accounts receivable, the collateral in this case, are not considered "goods" as indicated by A.R.S. § 47-9105.

b. A.R.S. § 47-9318: Contract Defense

We now turn to AGN's argument that it was entitled to setoff payments made for materials and labor supplied by third parties pursuant to the terms of its contract with Bernardino. A.R.S. § 47-9318 provides, in general, that the rights of an assignee are subject to:

1. All the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom; and

2. Any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives notification of the assignment.

Here, although the contract provided for payment of $9,935.25 to Bernardino for the work it was to perform, the contract also contained the following restriction concerning payment to Bernardino:

4. PAYMENT: Company shall make payments provided for in Schedule B within twenty (20) days after receipt of written application for payment, in a form acceptable to the Contractor, together with evidence satisfactory to Contractor that all indebtedness for labor, equipment, materials and services has been discharged. Company reserves the right to make any payments directly to materialmen, subcontractors or laborers, and deduct said amounts from the balance owing to Subcontractor by the Contractor. (emphasis added)

AGN argues that BFS, as Bernardino's assignee, took the contract subject to the reservation in the contract that AGN could pay materialmen and laborers directly and deduct such payments from the amount due to Bernardino. We agree.

AGN's valid contract defense is illustrated by the case of Associates Loan Company v. Walker, 76 N.M. 520, 416 P.2d 529 (1966). In that case Walker had executed a written contract with Partin to...