Citibank, N.A. v. Tele/Resources, Inc., 29

• Decision Date: 06 December 1983
• Docket Number: D,No. 29,29
• Citation: 724 F.2d 266
• Parties: CITIBANK, N.A., Plaintiff-Appellee, v. TELE/RESOURCES, INC., Defendant, and Newmarket Company Limited, Defendant-Appellant. Cal.ocket 83-5011.
• Court: U.S. Court of Appeals — Second Circuit

Page 266

724 F.2d 266

CITIBANK, N.A., Plaintiff-Appellee, v. TELE/RESOURCES, INC., Defendant and Newmarket Company Limited, Defendant-Appellant.

Cal. No. 29, Docket 83-5011.

United States Court of Appeals Second Circuit.

Argued Oct. 17, 1983.

Decided Dec. 6, 1983.

Mark D. Lebow, New York City (Coudert Brothers, Carlos E. Mendez-Penate, New York City, of counsel), for defendant-appellant.

Louise Sommers, New York City (Rogers & Wells, Joseph H. Levie, New York City of counsel), for plaintiff-appellee.

Before FRIENDLY, VAN GRAAFEILAND and MESKILL, Circuit Judges.

VAN GRAAFEILAND, Circuit Judge:

The basic issue in this case is whether a party to a written contract, who orally assigns or subordinates his rights thereunder to a third person, can avoid the third-party transaction on the ground that a clause in the contract prohibits any modifications thereof that are not in writing and signed by the party who made the assignment or subordination. Because the judgment on appeal is based on the erroneous premise that the assignment or subordination agreement had to be in writing, we are compelled to reverse.

Newmarket Company Ltd. appeals from an order of the United States District Court for the Southern District of New York (Motley, C.J.), upholding a decision of the United States Bankruptcy Court for the Southern District of New York (Schwartzberg, B.J.), which granted summary judgment in favor of appellee, Citibank, N.A. In 1977, Citibank and Tele/Resources, Inc. entered into a revolving credit and loan agreement. As security for advances made by Citibank, Tele/Resources granted Citibank a security interest in all of Tele/Resources' assets, including receivables and general intangibles. Both the loan and security agreements provided in substance that no amendment or modification would become effective unless contained in a writing signed by the bank. The security agreement also provided that Tele/Resources could not "create, incur, assume or suffer to exist any security agreement subject to the Uniform Commercial Code" without the prior written approval of the bank.

In 1980, Tele/Resources approached Citibank to discuss the possibility of obtaining an additional advance to cover operating expenses. When the bank refused the request, Tele/Resources turned to its controlling shareholder, Newmarket, for a $250,000 loan. As part of this transaction, Tele/Resources gave Newmarket a promissory note stating that the loan was secured by and would be paid from the federal tax refund Tele/Resources expected to receive for the year 1977. A copy of this note was sent to Citibank, and it is Newmarket's position, supported by the affidavit of Roger Lewis, Tele/Resources' chief executive officer, that its loan was made with Citibank's "knowledge, encouragement and agreement."

Thereafter, Newmarket rolled over the loan to permit Tele/Resources to substitute its expected 1980 tax refund as collateral, thus allowing the ailing company to apply its 1977 refund to immediate operating expenses. Tele/Resources executed an amendment to the promissory note stating that payment of the note was secured by and would be paid from the 1980 tax refund. Lewis's affidavit states that this transaction also took place with Citibank's "prior knowledge, agreement and consent."

Following the subsequent commencement by Tele/Resources of Chapter 11 bankruptcy proceedings, 11 U.S.C. Sec. 1101 et seq., Citibank brought this action to enforce its alleged security interest in all of Tele/Resources' tax refunds. Newmarket intervened, seeking an adjudication that it had a valid first priority security interest in the 1980 refund to the extent of its $250,000 loan, by reason of an assignment and/or subordination by Citibank.

In granting Citibank's motion for summary judgment, the bankruptcy judge relied upon Sec. 15-301(1) of New York's General Obligations Law which provides:

A written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent.

The court held that, because of this statute and the prohibition against oral modifications in Citibank's loan and security agreements, a written document signed by Citibank was a "sine qua non" of recovery by Newmarket. The court also held that Newmarket could not recover on a theory of waiver or estoppel, such remedies, in the view of the bankruptcy court, being available only to the parties to the underlying contract, Citibank and Tele/Resources. The district court affirmed on the opinion of the bankruptcy judge. We believe that the district court should have reversed.

Where it is possible, courts are inclined to hold that rights under a contract are assignable to third parties. Portuguese-American Bank v. Welles, 242 U.S. 7, 11-13, 37 S.Ct. 3, 4, 61 L.Ed. 116 (1916); 3 Williston on Contracts, 3d ed. Sec. 412, at 47. Ordinarily, for example, New York courts treat covenants not to assign as personal covenants whose breach justifies only an award of damages, unless the language of the covenant clearly indicates a stronger intent. Belge v. Aetna Casualty & Sur....