Frontier Enterprises, Inc. v. Anchor Co. of Marblehead, Inc.

• Citation: 536 N.E.2d 352,404 Mass. 506
• Parties: , 8 UCC Rep.Serv.2d 1252 FRONTIER ENTERPRISES, INC. v. ANCHOR COMPANY OF MARBLEHEAD, INC., et al. 1
• Decision Date: 06 April 1989
• Court: United States State Supreme Judicial Court of Massachusetts

Page 352

536 N.E.2d 352

404 Mass. 506, 8 UCC Rep.Serv.2d 1252

FRONTIER ENTERPRISES, INC. v. ANCHOR COMPANY OF MARBLEHEAD, INC., et al. ¹

Supreme Judicial Court of Massachusetts Suffolk.

Argued Dec. 8, 1988.

Decided April 6, 1989.

Elliott J. Mahler (Judith Ashton with him), for defendants.

John C. Plotkin, for plaintiff.

Before HENNESSEY, C.J., and ABRAMS, NOLAN, LYNCH and O'CONNOR, JJ.

HENNESSEY, Chief Justice.

The defendants, Attorney Harvey W. Levin and his partners, appeal from a judgment finding Mr. Levin liable for conversion for disbursing, at the direction of his client, Anchor Company of Marblehead (Anchor-Marblehead), funds he held which were generated in part by Anchor-Marblehead's sale of collateral in which the plaintiff, Frontier Enterprises, Inc. (Frontier), had a security interest. We transferred the case here on our own motion. We reverse and order entry of judgment for Mr. Levin and his partners.

We summarize the facts as found by the judge and review the documentary evidence. Anchor-Marblehead was a corporation in the business of providing home heating fuel to homeowners in the Marblehead area. During and prior to 1975, Frontier supplied Anchor-Marblehead with fuel oil. Anchor-Marblehead had been experiencing financial difficulties, and by October, 1975, it owed Frontier approximately $448,450 for fuel oil. To induce Frontier to continue supplying it with fuel oil, in June, 1976, Anchor-Marblehead as assignor granted Frontier as assignee a security interest in "all monies and claims for money due or to become due to the assignor under all of the assignor's ... present and future accounts, contract rights, chattel paper and general intangibles, as those terms are defined in the Uniform Commercial Code." Anchor-Marblehead granted this security interest for the purpose of "securing the payment of all present and future indebtedness of the Assignor to Frontier." Mr. Levin handled this transaction as attorney for Anchor-Marblehead.

Anchor-Marblehead continued to experience financial difficulties. In September, 1976, Anchor-Marblehead with other sellers entered into an agreement to sell certain assets to Anchor Fuel Corporation (Anchor Fuel). The sales agreement identifies the other sellers as Anchor Sanitation Company, Inc. (Anchor Sanitation), Peter A. Davekos, Peter G. Davekos, and George Davekos. It is undisputed that the Davekoses were principals of Anchor-Marblehead. In this agreement, the sellers agreed to sell to Anchor Fuel, "[t]he sellers' complete list of customers ... together with the exclusive right to use Sellers' name 'Anchor' in all matters pertaining to the retail sale of home heating fuel oil." The sellers also agreed to sell certain equipment and supplies which the agreement states were owned by Anchor Sanitation. As part of the same transaction, the Davekoses entered into covenants not to compete with Anchor Fuel.

In exchange for these assents and the covenants not to compete, the sellers were to receive under the agreement $90,000 for the equipment and supplies. The sellers also were to receive an additional amount, the formula price, based on the quantity of heating oil Anchor Fuel sold to the customers on the sellers' customer list. In the sales agreement, the parties allocated $500 of the formula price to the purchase of the customer list, good will, and the "Anchor" trade name, and allocated the remainder to the covenants not to compete. Anchor Fuel, as an advance on this formula price, was to pay $80,000 into an escrow account to be held by a Boston law firm. The payment of both the $90,000 for the equipment and the $80,000 advance on the formula price were conditioned on an audit by Anchor Fuel confirming the amount of sales previously made to accounts on the customer list. The agreement states that, upon a satisfactory audit, the escrowee law firm was to pay the advance over "to the Sellers' Attorneys, Davis, Davis, Davis and Levin of Boston." The sellers' attorneys were not parties to the agreement.

Mr. Levin received the sum of $45,000 under this sales agreement. A subsequent lawsuit developed between the parties to the sale. The lawsuit ultimately was terminated with no further funds being paid to the sellers under the sales agreement. At the direction of Peter G. Davekos, the controlling stockholder of Anchor-Marblehead, Mr. Levin distributed the $45,000 he received to entities other than Frontier. At the time Mr. Levin distributed these funds, he had been notified by Frontier that Frontier claimed it was entitled to the entire $45,000 because of its security agreement.

Approximately three years after giving notice to Mr. Levin, Frontier brought an action against Anchor-Marblehead, Anchor Sanitation, Mr. Levin, Mr. Levin's partners, Anchor Fuel, and various other defendants seeking to recover the full amount owed to it by Anchor-Marblehead. The counts against all the defendants but Mr. Levin and his partners were disposed of by summary judgment, dismissal, or default. The judge found for Frontier on its count against Mr. Levin and his partners, and concluded that Mr. Levin converted the $45,000. Because he found that the conversion occurred while Mr. Levin was acting in the ordinary course of business of his law partnership, the judge ruled that Mr. Levin's partners were jointly and severally liable for Mr. Levin's acts.

The judge reasoned that Anchor-Marblehead had a contingent right to the payment of money held in escrow under the sales agreement with Anchor Fuel. When this contingent right to payment arose, he determined, it became subject to Frontier's security interest as an account or a general intangible. The judge also reasoned that Mr. Levin acted as escrow agent under the sales agreement and, as such, was obligated by the agreement to pay the $45,000 he received to Anchor-Marblehead. The judge stated that Mr. Levin, therefore, was "obligated on an account ... or general intangible" and was thus an "account debtor" under the Uniform Commercial Code, Art. 9, G.L. c. 106, § 9-105(1)(a ), inserted by St.1957, c. 765, § 1. As an account debtor, the judge ruled, Mr. Levin was required to pay the obligation he owed to the debtor, Anchor-Marblehead, directly to the secured party, Frontier, upon receiving notice of the secured party's intent to collect. The judge found that Mr. Levin had notice of Frontier's claimed right to the $45,000. Therefore, even though the judge stated that other sellers under the sales agreement had rights to the $45,000, he concluded that Mr. Levin was liable to Frontier for failing to pay it the entire $45,000 directly.

We first consider Mr. Levin's arguments that the judge erred in finding that he acted as an escrow agent or an account debtor under the sales agreement. We conclude that Mr. Levin received the $45,000, not as an escrow agent or an account debtor, but merely in his capacity as attorney for the sellers, Anchor-Marblehead and the Davekoses. An escrow is created when one party to a transaction delivers a sum to a third party, the escrow agent, for him or her to hold until the performance of a condition and then to deliver to the other party to the transaction. See Childs v. Harbor Lounge of Lynn, Inc., 357 Mass. 33, 35, 255 N.E.2d 606 (1970); Artemis v. Malvers, 322 Mass. 136, 138, 76 N.E.2d 3 (1947). Under the sales agreement, Mr. Levin was to receive from the named escrow agent the advance on the formula price. Mr. Levin's delivery of this sum to his clients was not conditioned upon the performance of some act or other happening of some event. See Childs, supra. Because Mr. Levin held the funds unconditionally, the judge erred in concluding that he was acting as an escrow agent.

The judge also erred in concluding that Mr. Levin was an account debtor. At the time, the Uniform Commercial Code defined an "account debtor" as "the person who is obligated on an account, chattel paper, contract right or general intangible." Art. 9, G.L. c. 106, § 9-105(1)(a), inserted by St. 1957, c. 765, § 1. The official comments further clarified this definition by stating that "[w]here the collateral is an account, contract right, chattel paper or general intangible the original obligor is called the 'account debtor.' " 3 U.L.A. Art. 9, § 9-105, 1972 official comment 2 at 165 (1981). Thus, in a situation which involves an account debtor, there are three parties: (1) the account debtor, who is obligated in some fashion to the debtor; (2) the debtor, who has used his or her rights against the account debtor as collateral for his or her own financing; and (3) the secured party, who has a security interest in the debtor's rights against the account debtor. See 8 W.D. Hawkland, R.A. Lord & C.C. Lewis, Uniform Commercial Code Series (Art. 9) § 9-105:02 (1986). Mr. Levin was not an escrow agent under the sales agreement, and was not otherwise obligated under this agreement. Therefore, the only rights Anchor-Marblehead had against Mr. Levin for any portion of the $45,000 were those general rights a client has to recover money an attorney receives on the client's behalf. G.L. c. 221, § 51 (1986 ed.). See Cameron v. Sullivan, 372 Mass. 128, 133 n. 6, 360 N.E.2d 890 (1977) (client has action in contract for amounts attorney withheld from client); Cannon v. Fahey, 327 Mass. 245, 246, 97 N.E.2d 731 (1951) (same).

We perceive no intent by Frontier and Anchor-Marblehead in their security agreement to subject to Frontier's security interest a future right of Anchor-Marblehead to collect money from its attorney. Other courts have noted that a person does not become an account debtor under the Uniform Commercial Code by simply collecting a sum as an agent for the debtor. E.g., Utica Nat'l Bank & Trust Co. v. Associated...