Carter v. Four Seasons Funding Corp.

• Decision Date: 06 February 2003
• Docket Number: No. 01-1315.,01-1315.
• Citation: 351 Ark. 637,97 S.W.3d 387
• Parties: Marcus G. CARTER and Commerce Alliance, Inc. v. FOUR SEASONS FUNDING CORPORATION.
• Court: Arkansas Supreme Court

97 S.W.3d 387

351 Ark. 637

Marcus G. CARTER and Commerce Alliance, Inc. v. FOUR SEASONS FUNDING CORPORATION.

No. 01-1315.

Supreme Court of Arkansas.

February 6, 2003.

COPYRIGHT MATERIAL OMITTED

Williams & Anderson LLP, by: Peter G. Kumpe and Stephen B. Niswanger, Little Rock, for appellants.

Cuffman & Phillips, by: Stephen K. Cuffman, Little Rock, for appellee.

ROBERT L. BROWN, Justice.

Appellants Marcus G. Carter and Commerce Alliance, Inc., appeal a judgment in favor of Four Seasons Funding Corporation (Four Seasons) in the amount of $313,836.79 and the imposition of a constructive trust on various outstanding accounts receivable and proceeds. Appellants raise four points on appeal: (1) the circuit court erred when it held that the two agreements between the parties established purchases rather than usurious loans; (2) the circuit court misconstrued the agreements to permit Four Seasons to retain non-factored proceeds; (3) the circuit court erred when it awarded damages to Four Seasons that varied from the terms of the contract; and (4) the circuit court erred when it imposed a constructive trust on accounts receivable and proceeds when there was an adequate remedy at law. We affirm the circuit court.

The facts in this matter, which are undisputed, are taken largely from the memorandum opinion of the circuit court entered June 14, 2001. At all times relevant to this appeal, appellant Marcus Carter was the sole shareholder of several Arkansas corporations which he used in his business dealings, including Commerce Alliance, Inc. Commerce Alliance was an Arkansas corporation that contracted with customers to assist them in making bids to federal government agencies for the purchase of certain supplies. Commerce Alliance showed its customers how to submit bids which complied with the complicated and exacting procedures and formats required by the government agencies. If a government agency accepted a bid, the agency would then issue a purchase order to the customer which set out the supplies, purchase price, and delivery terms. Under the Commerce Alliance contract, customers assigned their rights in these purchase orders to Commerce Alliance, and Commerce Alliance contracted, in turn, with third-party suppliers to meet the terms of the purchase orders. In some cases, these third-party suppliers required an up-front payment before they would ship the supplies to the government agency, and Commerce Alliance advanced this payment on behalf of its customer. Upon receiving notification of the delivery of conforming supplies, Commerce Alliance issued an invoice to the government agency, instructing it to remit payment to Commerce Alliance or its designated agent. In accordance with its customer contract, Commerce Alliance kept a percentage of the profit on the invoice, paid any balance due to the supplier, and paid the rest to its customer.

The "designated agent" referred to in Commerce Alliance's invoices was Alliance Escrow, Inc., another corporation where Mr. Carter was sole shareholder. Alliance Escrow was organized to serve as the escrow agent under the contract between Commerce Alliance and its customers. The government agencies typically paid on the purchase orders via electronic funds transfer to a checking account maintained at Pulaski Bank & Trust in Little Rock, although some payments were made by mail. When a payment was paid into the account, Alliance Escrow would pay the vendor for the supplies and then remit the appropriate amounts to Commerce Alliance and its customer, in accordance with the customer contract. At times, Commerce Alliance would not have enough funds on hand to advance payment to the third-party suppliers. The need for capital led to the financial arrangement between Four Seasons and Commerce Alliance that is the subject matter of this litigation.

a. The Purchase Agreement

On January 13, 1998, Four Seasons agreed to purchase accounts receivable from Commerce Alliance under the terms of a Purchase and Sale Agreement ("Purchase Agreement"), which Four Seasons prepared. The agreement provided that Commerce Alliance would sell, transfer, and assign "all of the seller's rights, title and interest" in certain accounts receivable to Four Seasons. The purchase price that Four Seasons would pay for an account receivable would be equal to the face value of the account minus a discount, minus some adjustments for items like long-distance, copies, postage, and the like. The discount was calculated by using a "discount schedule," which tied the amount of the discount to the length of time it took to collect the balance on the account. The discount schedule set the discount at three percent for accounts collected within fifteen days. The discount then increased by three percent for every subsequent fifteen-day period (6% for 16-30 days, 9% for 31-45 days, and so on).

The Purchase Agreement specified that the purchase price of the account receivable would be paid by Four Seasons by an initial payment of 65% of the face value of the account. Because the exact purchase price would not be known until the account was paid by the government agency and the discount schedule had been applied, payment of the remainder of the purchase price was held in abeyance. After the government agency paid the account receivable in full, Four Seasons would then make a final payment on the purchase price equal to the full amount of the account assigned to Commerce Alliance, minus the initial payment, minus the discount amount.

Commerce Alliance made certain warranties and representations in the Purchase Agreement regarding the accounts receivable. It represented that it was the sole owner of the accounts, that there were no set-offs applicable to the accounts, that there were no deductions or disputes with respect to the accounts, and that each account would be due and collectable within ninety days without the need to resort to litigation.

The Purchase Agreement also provided for a right of recovery against Commerce Alliance if any of the warranties or representations in the agreement were breached. The agreement stated that Four Seasons would have no such right against Commerce Alliance, unless an event defined as a breach elsewhere in the contract occurred. For example, the agreement stated that if an account turned out not to be collectable within ninety days for any reason except bankruptcy of the debtor, Commerce Alliance would be in breach. As a remedy for breach, Four Seasons was allowed to take a credit against the reserve of proceeds from other factored accounts, or it could require Commerce Alliance to repurchase the account. Additionally, Commerce Alliance granted Four Seasons a security interest and lien against all of Commerce Alliance's existing and future accounts and proceeds, whether factored or not. Finally, the Purchase Agreement provided that Mr. Carter personally guaranteed all obligations of Commerce Alliance under the agreement.

b. The Addendum

Four Seasons's normal practice, as a purchaser of accounts receivable, was to put account debtors on notice that it was the new owner of the accounts in question. After Commerce Alliance sold the accounts receivable to it, Four Seasons tried unsuccessfully to notify one government agency of the factoring arrangement. It then asked to notify all government agencies that payment on the account should be remitted to it instead of to Commerce Alliance. Commerce Alliance balked at this request. It gave as its reason the fact that it typically financed its accounts at a late stage in the business process and that the government agencies' rather rigid policies would not tolerate a change in payee at that late date.

To resolve the dilemma, Mr. Carter proposed that Four Seasons take control of the Pulaski Bank account, which was in the name of Alliance Escrow and to which the debtor government agencies would remit payment. On November 19, 1998, an agreement to that effect was memorialized in an Addendum to the Purchase Agreement. The Addendum was drafted by Mr. Carter and signed by Carter/Commerce Alliance and Four Seasons. Commerce Alliance agreed in the Addendum that two officers of Four Seasons would be signors on the account, that it would turn over all checks to Four Seasons, and that it would not make any withdrawals from the Pulaski Bank account during the term of the factoring agreements. Proceeds from all Commerce Alliance accounts would flow into the bank account. Because of this, the Addendum provided that Four Seasons was not allowed to apply a discount fee to any account except accounts that Commerce Alliance had sold to Four Seasons and that Four Seasons would remit the proceeds of non-assigned accounts to Commerce Alliance.

The parties did business under the factoring agreement from November, 1998, to July, 2000. Commerce Alliance, however, did not sell all of the accounts paid into the Pulaski Bank account to Four Seasons. The parties followed this arrangement until May 1999. At that time, Mr. Carter shut down Commerce Alliance and transferred its assets to Alliance Escrow without formally giving notice of that fact to Four Seasons.¹ For a time, all accounts that Mr. Carter factored were owned by Compusoft of Missouri, Inc., a corporation solely owned by Mr. Carter. Four Seasons records, however, continued to list the factored accounts under the name Commerce Alliance. Later, however, the assets of Compusoft of Missouri were also transferred to Alliance Escrow.

Over time, several accounts receivable which had been assigned to Four Seasons under the Purchase agreement became due and were uncollectable for a period of time longer than 90-days. As a result, beginning on September 21, 1999, Four Seasons applied the proceeds of non-factored accounts toward its delinquent accounts. No discount fee was assessed by Four Seasons against the proceeds from non-factored accounts.

On September 23, 2000, while there were proceeds in Pulaski...