H. John Homan Co., Inc. v. Wilkes-Barre Iron and Wire Works, Inc.

• Decision Date: 11 May 1989
• Docket Number: WILKES-BARRE
• Citation: 233 N.J.Super. 91,558 A.2d 42
• Parties: , 9 UCC Rep.Serv.2d 395 H. JOHN HOMAN COMPANY, INC., Plaintiff-Appellant, v.IRON AND WIRE WORKS, INC. and Thomas Lindstrom & Company, Inc., Defendants, and First Eastern Bank, N.A., Defendant-Respondent.
• Court: New Jersey Superior Court — Appellate Division

Page 91

233 N.J.Super. 91

558 A.2d 42, 9 UCC Rep.Serv.2d 395

H. JOHN HOMAN COMPANY, INC., Plaintiff-Appellant, v. WILKES-BARRE IRON AND WIRE WORKS, INC. and Thomas Lindstrom & Company, Inc., Defendants and First Eastern Bank, N.A., Defendant-Respondent.

Superior Court of New Jersey Appellate Division.

Argued April 25, 1989.

Decided May 11, 1989.

Brian F. McDonough, Morristown, for plaintiff-appellant (Brennan and Bernardin, Collingswood, and Shanley & Fisher, Morristown, attorneys, Michael G. Brennan, Woodbury, on the brief).

William E. Reifsteck, for defendant-respondent (Capehart & Scatchard, attorneys, Mount Laurel).

Before Judges PRESSLER, SCALERA and STERN.

The opinion of the court was delivered by

PRESSLER, P.J.A.D.

This appeal raises a narrow but fundamental question respecting accounts-receivable financing. If an account debtor has a defense or setoff which would enable him to withhold all or a part of the payment of the account but nevertheless, by mistake or negligence or without knowledge of a defense, he tenders full payment to an assignee for value of the account, who accepts it without notice of defenses, may the debtor thereafter recover that payment or any part of it from the assignee on restitutionary or other equitable principles? Although this issue has not been heretofore addressed in this jurisdiction, it has recently been considered by a number of others which, uniformly, have opted to follow the lead of the seminal opinion of the First Circuit Court of Appeals in Michelin Tires, etc. v. First Nat. Bank of Boston, 666 F.2d 673 (1st Cir.1981), which answered this question, essentially for policy reasons, in the negative. We are convinced of the correctness of the views expressed by Michelin and, consequently, join the roster of states which have adopted them.

The question arises in a typical and virtually undisputed factual complex. Plaintiff H. John Homan Company, Inc. (Homan) was the general contractor on a Gloucester County Municipal Utilities Authority construction project in accordance with a public works contract entered into between them in June 1983. Homan, as required by N.J.S.A. 2A:44-143, furnished the Authority with a bond guaranteeing the payment of all labor and materials provided to the job. In July 1983, Homan entered into a structural steel subcontract with defendant Wilkes-Barre Iron, and Wilkes-Barre in turn subcontracted part of the steel work to defendant Thomas Lindstrom & Company, Inc. On March 5, 1984, after substantial work on the project had been completed, Wilkes-Barre notified Homan that defendant First Eastern Bank, N.A. (bank) was a secured creditor and several weeks later requested Homan to make the next progress payment to it and the bank as co-payees. Homan complied and issued its check for $35,000 in that manner. Early in April Wilkes-Barre advised Homan that the bank was now in possession of all of its accounts receivable and that its final payment, then due, should be made to the bank alone. Homan again complied, sending the bank its check in the amount of $58,415, a sum which represented final payment less a retainage of $5,000 for undelivered materials.

Lindstrom in the meantime had sent a bill for work to date to Wilkes-Barre on March 13, 1984. This bill remained unpaid despite Homan's above described two subsequent payments to Wilkes-Barre and the bank. Lindstrom sent Wilkes-Barre its final bill on April 30, 1984, after Homan's last payment to the bank on Wilkes-Barre's account. Neither the bank nor Homan had been noticed of either of Lindstrom's billings and, insofar as this record indicates, neither had required any representation or certification from Wilkes-Barre respecting payment of its own subcontractors and materialmen. ¹ Wilkes-Barre, predictably, became insolvent and was unable to meet its obligation to Lindstrom. Lindstrom's bills, totaling some $35,000, remained unpaid, and in July 1984 it filed a statutory notice of lien claim pursuant to the Municipal Mechanics' Lien Law, N.J.S.A. 2A:44-132. It thereafter filed notice of claim on Homan's payment bond. The claim was validated, bond proceeds released to it, and Homan, ultimately liable on the bond, required to make payment. Homan seeks by this action to recover that payment from the bank and appeals from summary judgment in the bank's favor dismissing that claim. ²

Homan predicates its affirmative claim against the bank on N.J.S.A. 12A:9-318(1)(a), which provides in full as follows:

Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in 12A:9-206 the rights of an assignee are subject to

(a) All the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom....

Homan argues that the use of the word "claim" in the stipulation that the assignee's rights are subject to "any defense or claim arising" from the contract between the account debtor and the assignor bespeaks a legislative intention not only to permit the account debtor to interpose affirmative defenses and setoffs in an action against him by the assignee to recover on the account, but also to permit him, as plaintiff, to make affirmative claims against the assignee in order to recover a mistaken or wrongful payment made to it. The trial judge disagreed, and so do we.

Our analysis is, at the outset, premised on the understanding that Section 9-318(1)(a) was intended to make no change in New Jersey law existing at the time of adoption of the Uniform Commercial Code, N.J.S.A. 12A:1-101, et seq. That is expressly stated by paragraph 1 of the New Jersey Study Comment on Section 9-318, which echoes the Uniform Commercial Code Comment, whose explanation of that code section commences with the statement that "Subsection (1) makes no substantial change in prior law."

Our first step then is to determine the scope of the account debtor's rights against the assignee prior to the Code. The basic rule, succinctly stated by the former Supreme Court in Falkenstern v. Herman Kussy Co., 25 N.J.Misc. 447, 55 A.2d 11 (Sup.Ct.1947), aff'd 137 N.J.L. 200, 59 A.2d 372 (E. & A.1948), and reaffirmed by Talcott v. H. Corenzwit and Company, 76 N.J. 305, 309-310, 387 A.2d 350 (1978), is that

An assignee of a chose in action takes what the assignor had, subject to all set-offs, discounts and defenses which the debtor has, not only against the assignee but also against the assignor before notice of the assignment, * * * but the assignee does not thereby, without more, assume the liabilities of the assignor.

[25 N.J.Misc. at 448, 55 A.2d 11 (citations omitted) ]

Clearly then, since the essence of the assignment is an assignment of rights under a contract without a delegation of the performance obligation, the account debtor may defend against his own obligation to pay based on any defensive posture available to him were the assignor seeking payment. Thus, he is able to defeat the assignee's claim to all or part of the payment rights transferred to him by the assignor. In effect then, the actual value of the assigned right to payment by the assignor's debtor may be diminished, if not completely vitiated, by the defenses and setoffs available to the debtor. But while the debtor can defeat the assignee's payment right, he cannot impose affirmative liability on the assignee beyond the amount of the assigned contract debt for damages flowing from the assignor's failure of or defect in performance. Consequently, the maximum loss risked by the assignee is the loss of the value he has given for the assignment. In sum then, while the account debtor can avoid payment to the assignee, he cannot obtain damages from the assignee. ³ These are well understood and well settled principles in this jurisdiction as a matter of both pre- and post-Code law. See Talcott v. H. Corenzwit and Company, supra. And see Chemical Bank v. Penny Plate, 144 N.J.Super. 390, 365 A.2d 945 (App.Div.1976); Toker v. Perl, 108 N.J.Super. 129, 260 A.2d 244 (App.Div.1970).

There is, thus, no doubt that if Homan had not made payment in full to the bank of Wilkes-Barre's payment rights under the Homan/Wilkes-Barre contract, Homan could have deducted from the amount due the sum necessary to pay Wilkes-Barre's subcontractor, Lindstrom. And if the bank had had to sue Homan to recover Wilkes-Barre's payment rights, Homan would have been entitled to a setoff in the amount of Lindstrom's claim. Indeed, it would have been entitled to defend against payment for any cause arising out of Wilkes-Barre's performance.

The question which has not been raised in this jurisdiction as a matter of pre-Code law is the precise question here posed, namely, whether an account debtor who pays the assignee despite an available defense or setoff can recover that payment on equitable principles. This question has, however, been dealt with by the Restatement, Restitution (1937) § 14(2) at 55, which declares as a common-law proposition that

An assignee of a non-negotiable chose in action who, having paid value therefor, has received payment from the obligor is under no duty to make restitution although the obligor had a defense thereto, if the transferee made no misrepresentation and did not have notice of the defense.

As the note on this section of the Restatement by its original Reporters, Warren A. Seavey and Austin W. Scott, explains, this rule was then not only virtually uniformly followed throughout the country but was also regarded as the correct rule by the Advisers. See Restatement, supra, § 13, 14, reporters' notes, p. 9. ⁴ See also Restatement, supra, § 28(d) at 124, which applies the same rule in respect of payment induced by fraud or misrepresentation where the payee himself was not a party to or on notice of the fraud when he gave value for the payment right. ⁵ And see, in accord, 3 Restatement (Second), Contracts, § 336 (defenses against an assignee).

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