GOLD CIRCLE, ETC. v. Riviera Finance-East Bay

• Citation: 540 F. Supp. 15
• Decision Date: 02 March 1982
• Docket Number: No. C-80-0373 AJZ.,C-80-0373 AJZ.
• Parties: GOLD CIRCLE STORES, A DIVISION OF FEDERATED DEPARTMENT STORES, INC., Plaintiff, v. RIVIERA FINANCE-EAST BAY, INC., Defendant and Third-Party Plaintiff, v. KESHUN'S FREIGHT SERVICE, a California partnership, Third-Party Defendant.
• Court: United States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Northern District of California

540 F. Supp. 15

GOLD CIRCLE STORES, A DIVISION OF FEDERATED DEPARTMENT STORES, INC., Plaintiff, v. RIVIERA FINANCE-EAST BAY, INC., Defendant and Third-Party Plaintiff, v. KESHUN'S FREIGHT SERVICE, a California partnership, Third-Party Defendant.

No. C-80-0373 AJZ.

United States District Court, N. D. California.

March 2, 1982.

Murphy, Weir & Butler, William J. A. Weir, Robert A. Julian, San Francisco, Cal., for defendant and third-party plaintiff Riviera Finance-East Bay.

Dinkelspiel & Dinkelspiel, Linda E. Stanley, Jay P. Wertheim, San Francisco, Cal., for plaintiff.

MEMORANDUM OPINION AND ORDER

ZIRPOLI, District Judge.

This is a diversity action for money had and received, for imposition of a constructive trust, and for declaratory relief. Because the amount in controversy, exclusive of interest and costs, exceeds $10,000, this court has jurisdiction over the controversy pursuant to the provisions of 28 U.S.C. section 1332.

Gold Circle Stores ("Gold Circle") and Riviera Finance-East Bay, Inc. ("Riviera") were defrauded in 1979 by Keshun's Freight System ("Keshun"), a carrier hired by Gold Circle to transport merchandise in the State of California.

Although it could issue only one freight bill for each original Gold Circle bill of lading, Keshun rendered numerous invoices, separately numbered for each shipment. Gold Circle paid $36,190.16 on the basis of these fraudulent freight bills to Riviera, the factor which purchased Keshun's accounts at a six percent discount.

Rather than pursue its remedy against Keshun, which is bankrupt, Gold Circle commenced this action, alleging that Riviera would be unjustly enriched by its retention of the payment.

The purpose of the trial was to ascertain which of the parties committed errors, mistakes, or oversights or otherwise so conducted its business as to tip the equities against it.

The Parties, Their Relationship to Each Other and Their Conduct

Gold Circle is a division of Federated Department Stores, Inc., a Delaware corporation with its principal place of business located at Worthington, Ohio. Gold Circle is a department store chain selling merchandise at the retail level. At least during 1977 through 1979, Gold Circle conducted business in California through seven regionally located department stores and had 42 department stores nationwide.

Keshun is a California partnership, which formerly did business in San Jose, California. During at least 1977 through April, 1979, Keshun did business as a carrier transporting goods interstate in the State of California. During this period of time, the partners of Keshun were Vincent Hodge and John Hodge.

Riviera is a California corporation with its principal place of business located in Oakland, California. It does business as a factor, i.e., it provides financing to California businesses by purchasing accounts receivable from these business clients at a discount and by collecting the accounts receivable from the clients' respective account debtors. As with other California factors, Riviera sometimes makes such collections on a "non-notification" basis, i.e., payments are remitted to a Riviera post office box without informing the various account debtors that Riviera is financing the client.

Industrial Traffic Corporation is a corporation specializing in the payment of freight bills, and its services were utilized by Gold Circle for the payment of its transportation bills. Hence, payment through Industrial Traffic Corporation must be treated as if paid directly by Gold Circle.

On or about July 12, 1977, Gold Circle hired Keshun's to transport its merchandise within the State of California. Gold Circle paid Keshun for its services after receiving freight bills from Keshun which set forth Keshun's charges for services rendered.

For each shipment made by Keshun, Gold Circle prepared a bill of lading which identified: (1) the Gold Circle store which shipped the goods; (2) the name of the carrier as "Keshun"; (3) the class and weight of the goods shipped; (4) the date of the shipment; and (5) the Gold Circle bill of lading number assigned to the shipment. In this case all the Gold Circle bill of lading numbers commenced with the prefix "GC7," which identified the shipment as a Gold Circle return to vendor, i.e., a shipment of goods made by Gold Circle back to the vendor which had originally delivered the goods to Gold Circle.

For each shipment involved in this case, the Gold Circle shipping store would retain the original bill of lading and would send that original to Gold Circle's head office in Worthington, Ohio. Keshun was required to have a copy of that bill of lading by PUC regulations.

When Keshun's services were first hired, Gold Circle and Keshun agreed that Keshun's freight bills would not be paid unless: (1) a copy of the corresponding bill of lading was submitted along with the freight bill; and (2) the Gold Circle bill of lading GC7 number was identified on the freight bill. In fact, during a four-month period of 1977, Gold Circle did not pay Keshun's freight bills unless they were first matched to the corresponding bill of lading.

During February, 1978, Keshun agreed to sell its accounts receivable at a six percent discount to Riviera's corporate sister, Riviera Finance of the Peninsula, a separate corporate entity. At that time Riviera (the defendant in this action) had not been formed as a corporation. Riviera Finance of the Peninsula had its principal place of business located in San Jose, California. Pursuant to its agreement to purchase Keshun's accounts receivable, Keshun granted to Riviera Finance of the Peninsula a bookkeeping power of attorney to mail Keshun's freight bills to Keshun's account debtors on a non-notification basis, a fact as to which Gold Circle had no knowledge until April of 1979. Operating on such non-notification basis, Riviera Finance of the Peninsula purchased accounts receivable and received collections from Keshun's account debtors, including Gold Circle.

Mr. Reid Frederickson, an account executive for Riviera Finance of the Peninsula, supervised the collections of Keshun's accounts receivable. During the period when Riviera Finance of the Peninsula factored Keshun's accounts receivable, he had telephone communications with Gold Circle's employees in which they verified the validity of freight bills purchased from Keshun. During these communications, Gold Circle's employees routinely informed Frederickson that Gold Circle had no problems with freight bills.

During July, 1978, Riviera Finance-East Bay, Inc. (the defendant in this case) was formed as a corporation under the laws of the State of California, and in August, 1978, it appointed as its general manager Frederickson, the individual who had supervised collections of Keshun's accounts receivable while employed with Riviera Finance of the Peninsula. At that time, based upon the experience with Keshun for the period from February, 1978, to August, 1978, Frederickson believed, and it was reasonable that he should, that Keshun was a reliable client.

Pursuant to the agreement entered into by Keshun and Riviera on August 2, 1978, Keshun warranted that each account offered for sale to Riviera was an accurate and undisputed statement of indebtedness owed by Keshun's account debtors to it. This agreement too granted Riviera a power of attorney to mail all of its freight bills to the account debtors, to collect payments from Keshun's account debtors and to handle Keshun's mail.

Sometime during September, 1978, Riviera commenced to purchase Keshun's accounts receivable at a six percent discount and to mail the freight bills to Keshun's account debtors. One of these account debtors was Gold Circle. At that time, as indicated above, Frederickson formed the belief that Gold Circle never had problems with Keshun prior thereto and had proved itself to provide accurate statements of the services rendered by it to Gold Circle.

During the period August 2, 1978, through April 4, 1979, Riviera purchased Gold Circle related freight bills from Keshun which totaled $114,413.10. Riviera paid Keshun the sum of $107,548.31 for these freight bills. Of the $114,413.10 worth of accounts receivable purchased by Riviera, Gold Circle remitted to Riviera the sum of approximately $69,896.11. Of the amounts paid by Gold Circle, $36,190.16 was paid on the basis of invalid freight bills. For the remaining freight bills which Gold Circle had received from Riviera but for which it has not remitted any payment, Riviera is due the sum of $1,707.45.

To date, Riviera has incurred substantial losses as a result of Keshun's fraud, the exact amount of which remains unclear.

During the fall of 1978, Riviera collected approximately $25,000 of Keshun's accounts receivable from Gold Circle on a non-notification basis. During this same period Riviera's Frederickson made occasional telephone calls to Gold Circle employees in the course of which he asked Gold Circle to inform him on the type of documentation Gold Circle needed in order to pay money on freight bills sent to it. Gold Circle employees responded and stated that all Gold Circle needed on the freight bills was information relating to the store numbers and class numbers of the merchandise which was transported by Keshun.

With the exception of a memo dated March 21, 1979 (when it was too late), from Industrial Traffic Corporation to Keshun (Riviera, as the recipient of Keshun's mail) requesting a bill of lading before payment of three freight bills, no Gold Circle or Industrial Traffic Corporation employees ever informed Riviera that Gold Circle required a bill of lading to be submitted with Keshun's freight bills, or identification of the bill of lading number on the freight bills, in order to get a freight bill paid. In fact, during the period from September, 1978, through December, 1978, Riviera provided all material documentation to Gold Circle which Gold Circle stated it required in order...