Continental Bank v. Blethen

• Citation: 86 Cal.Rptr. 485,7 Cal.App.3d 178
• Court: California Court of Appeals
• Decision Date: 04 May 1970
• Parties: CONTINENTAL BANK, Plaintiff and Respondent, v. Lloyd E. BLETHEN, Defendant and Appellant. Civ. 34685.

Page 485

86 Cal.Rptr. 485

7 Cal.App.3d 178

CONTINENTAL BANK, Plaintiff and Respondent, v. Lloyd E. BLETHEN, Defendant and Appellant.

Civ. 34685.

Court of Appeal, Second District, Division 4, California.

May 4, 1970.

Walleck, Shane & Baechtold and David L. Shane, Van Nuys, for defendant and appellant.

Caidin, Bloomgarden & Kalman and Newton Kalman, Beverly Hills, for plaintiff and respondent.

FILES, Presiding Justice.

The parties to this appeal are the successive assignees of the accounts receivable of a hotel. The trial court, sitting without a jury, found that defendant Blethen, the assignee first in time, had collected $8,491.53 on accounts which had been lawfully assigned to plaintiff Continental Bank, who had obtained priority by filing the notice prescribed in former Civil Code section 3018. The court therefore gave judgment in favor of the bank against Blethen in the amount of $8,491.53 plus prejudgment interest in the amount of $3,607.86. Blethen is appealing from this judgment.

Those of the underlying facts which are not in dispute will be stated first.

Under date of February 12, 1962, Blethen and Samuel J. DeSarno ¹ executed instructions addressed to Prudential Escrows, of Palm Springs. These instructions recited that Blethen would pay into the escrow $10,000, to be used when the escrow held the promissory note of DeSarno in that amount. The instructions included this:

'You are further authorized and in structed to advise American Express, Diners Club and Carte Blanc (sic) that all sums due Samuel J. De Sarna (sic) DBA HOWARD MANOR, Palm Springs, California, are to be paid direct to this escrow, commencing April 1, 1962, to apply on final payment of Note.'

Blethen did deposit $10,000 in the escrow, which was paid out to DeSarno or pursuant to his directions.

No notice of assignment of accounts receivable under Civil Code, section 3018 was filed. ²

On April 5, 1962, the bank entered into a written agreement with 'Howard Manor,' which set forth the terms under which 'Howard Manor' would sell to the bank 'such accounts belonging to Assignor as may be acceptable to the Bank. * * *' DeSarno signed this agreement on behalf of the assignor.

Notice of assignment of accounts receivable by Howard Manor, assignor, to Continental Bank, assignee, was filed with the County Recorder of Riverside County April 9, 1962.

Commencing April 10, 1962, and approximately once a week thereafter, 'Howard Manor, Inc.' executed documents headed 'schedule of accounts receivable assigned.' Each of these forms, which was signed by 'S. J. DeSarno, Pres.,' expressly assigned to the bank the accounts receivable listed therein by name of debtor, invoice date and amount due. The first of these schedules listed among other accounts, Diners Club, invoice date April 9, amount $2,635.56. The next schedule, dated April 15, contained no Diners Club account. The third schedule, dated April 22, included Diners Club, invoice date April 22, amount $2,075.59. Subsequent schedules regularly listed Diners Club invoices in similar manner. The last assignment was July 13, 1962.

Altogether $14,506.06 of Diners Club accounts were assigned to the bank between April 10 and July 13. The only payment by Diners Club to the bank was $539.76 on April 24, 1962.

Diners Club paid $4,305.75 into the escrow on May 23, 1962, and $4,185.78 on June 27, 1962. These amounts were paid over to Blethen, and make up the $8,491.53 which the trial court concluded Blethen should pay to the bank.

The record contains no satisfactory showing as to the legal relationship between Samuel J. DeSarno, Howard Manor, and Howard Manor, Inc., except what can be deduced from the documents and from DeSarno's conduct. Both parties to this action appear to have assumed that all of the accounts receivable which were referred to in this record were the receivables of a hotel in Palm Springs operating under the name of Howard Manor. In view of this, the uncertainty as to legal entities involved is inconsequential on this appeal.

The contentions of the parties on this appeal will be discussed in relation to three issues: (1) If proceeds of accounts assigned to the bank were in fact paid to Blethen, may the bank recover them from Blethen? (2) Did Blethen in fact receive the proceeds of accounts assigned to the bank? (3) Is prejudgment interest a proper element of damage?

We must reverse the judgment because there is no evidence supporting the bank on the second issue. The other two must be discussed for guidance of the trial court in the event of a retrial.

(1)

Under the literal reading of Civil Code, section 3018 (fn. 2, Supra) the bank, which filed notice of assignment, was entitled to priority over Blethen, who filed no notice. A Diners Club balance is an 'account' within the meaning of the statute. (Pingree v. Sulmeyer (9th Cir. 1963) 315 F.2d 422.)

Under the court-made law which preceded the adoption of Civil Code, sections 3017--3029 in 1943, the assignee who first notified the debtor had priority over other assignors. (Graham Paper Co. v. Pembroke (1899) 124 Cal. 117, 56 P. 627.) The 1943 statute allowed an assignee to file a notice with the county recorder, and thereby attain priority without notifying the debtors. This made it feasible for a business to raise working capital by assigning accounts receivable without informing its customers (who were the debtors) of what it was doing. The third paragraph of section 3018 provides that 'A debtor, irrespective of the provisions of this chapter, until notified by the assignor or the assignee not to do so, may pay or otherwise deal in good faith with the assignor, * * *.'

Thus, under the statutory scheme, the debtor, having no knowledge of the assignment, will in the ordinary course of business pay the assignor, who will turn the money over to the assignee. The assignee takes the 'moral risk' that the assignor will faithfully pass along the proceeds of the accounts as they are collected and not misappropriate them; but the assignee relies upon the statute to give him protection against the insolvency of the assignor. (For historical explanation of the 1943 statute see Costello v. Bank of America (9th Cir. 1957) 246 F.2d 807; Durkin v. Durkin (1955) 133 Cal.App.2d 283, 291--292, 284 P.2d 185.)

Blethen contends that even if the bank had priority as to the accounts while uncollected, it was not entitled to follow the proceeds and recover from Blethen after collection. That the priority extends into proceeds was assumed in H. S. Mann Corp. v. Moody (1956) 144 Cal.App.2d 310, 301 P.2d 28. In that case a plaintiff, who had recorded a notice of assignment, recovered from a subsequent assignee the amount of the money which the latter had collected by virtue of its assignment.

Although the point argued here was not discussed in the Mann case, we take it to be a correct application of California law.

The right of action against Blethen as a person receiving payment by mistake is supported by Marshall v. Swaim (1929) 102 Cal.App. 119, 282 P. 423, where rent paid to the wrong person by mistake was recovered by the person entitled in an action against the recipient.

Further support for such a recovery is found in Widenmann v. Weniger (1913) 164 Cal. 667, 130 P. 421. Although that case did not involve the accounts receivable statute, it is an example of a senior assignee recovering from a junior assignee the amount which had reached the latter from the common assignor.

Blethen argues that under the escrow arrangement which he made with DeSarno, the escrow company collected the Diners Club accounts as the agent of DeSarno. Blethen's theory seems to be that in effect Diners Club paid its debt to DeSarno, and DeSarno paid his debt to Blethen, and Blethen is not concerned with whether or not DeSarno wrongfully applied money which he should have paid promptly to the bank.

But this argument overlooks the practical effect of the escrow arrangement as a security device. Whether we call the escrow instruction an 'assignment' of the Diners Club account or not, its purpose and effect were to keep the proceeds out of DeSarno's hands and channel them to Blethen to secure payment of DeSarno's debt to Blethen.

Holding Blethen responsible for what he received is consistent with the policy of Civil Code, section 3018. Had Blethen filed a notice of his February assignment he would have had protection against the subsequent assignment to the bank. When DeSarno approached the bank for financing in April, the bank was entitled to assume, from the lack of any recorded notice, that its assignment would have priority as against other creditors of its assignor. This expectation was frustrated when the escrow company, on Blethen's behalf, notified Diners Club to pay into the escrow. The escrow arrangement was a form of security which gave another creditor priority, in a manner not contemplated by the statute. When the bank advanced money to Howard Manor, it assumed the risk that DeSarno would misappropriate the Diners Club money when it reached him, but the bank had no reason to anticipate that another creditor of DeSarno had arranged to intercept the money before it ever reached DeSarno. Under these circumstances Blethen is unjustly enriched if he received the proceeds of accounts assigned to the bank.

Costello v. Bank of America (9th Cir. 1957) 246 F.2d 807 does not support Blethen's position here. In Costello, the assigned account (which had been unrecorded) had been paid to the assignee more than four months prior to bankruptcy. The court held that the trustee in bankruptcy could not recover the proceeds from the assignee because on the date as of which the trustee's standing accrued, there was no account receivable, it having been paid. The analogy which Blethen tries to draw here from the Costello case fails because Blethen had not yet collected the accounts assigned to him before the bank's rights accrued.

(2)

We now turn to the evidence...