Independent Nat. Bank v. Westmoor Elec., Inc.

• Decision Date: 03 May 1990
• Docket Number: No. 1,CA-CIV,1
• Citation: 164 Ariz. 567,795 P.2d 210
• Parties: , 13 UCC Rep.Serv.2d 581 INDEPENDENT NATIONAL BANK, a national banking association, Plaintiff-Appellee, v. WESTMOOR ELECTRIC, INC., an Arizona corporation, Defendant-Appellant. 88-419.
• Court: Arizona Court of Appeals

Page 210

795 P.2d 210

164 Ariz. 567, 13 UCC Rep.Serv.2d 581

INDEPENDENT NATIONAL BANK, a national banking association, Plaintiff-Appellee, v. WESTMOOR ELECTRIC, INC., an Arizona corporation, Defendant-Appellant.

No. 1 CA-CIV 88-419.

Court of Appeals of Arizona,

Division 1, Department D.

May 3, 1990.

[164 Ariz. 569] Rawlins, Burrus, Lewkowitz & Feinstein, P.C. by R. Stewart Halstead, Phoenix, for plaintiff-appellee.

Thaddeus G. Baker, Yuma, for defendant-appellant.

OPINION

BROOKS, Judge.

Westmoor Electric, Inc. (Westmoor), an account debtor, appeals from the trial court's entry of summary judgment in favor of Independent National Bank (the bank), an assignee of the account. Westmoor made payments to the bank's assignor, Western Communications, Inc. (WCI), after it received notice of the assignment and directions to pay the bank. We must determine whether the trial court correctly found that Westmoor is liable to the bank for these payments.

We find that the bank's wrongful payment claim against Westmoor is subject to claims and defenses arising from Westmoor's contract with the bank's assignor, WCI, that Westmoor could have asserted against WCI. We further find that genuine issues of material fact exist as to whether Westmoor has valid claims and defenses against WCI that would result in its owing nothing to the bank despite its failure to comply with the payment directions. We therefore reverse the trial court's entry of summary judgment in the bank's favor and remand.

We are mindful that summary judgment is only appropriate where the record demonstrates that there is no dispute as to any material fact, that only one inference can be drawn from the undisputed material facts, and that based upon those facts, the moving party is entitled to judgment as a matter of law. Haralambie v. Pima County, 137 Ariz. 207, 669 P.2d 984 (App.1983). In reviewing the trial court's grant of summary judgment for the bank, we must view the facts and all inferences that reasonably arise from them in the light most favorable to Westmoor, the nonmoving party. Farmers Ins. Co. v. Vagnozzi, 138 Ariz. 443, 675 P.2d 703 (1983).

FACTS

Westmoor was the successful bidder on a subcontract for the complete installation of all electrical equipment at the Yuma County Sheriff's Office and Detention Center in Yuma, Arizona. Part of the subcontract required Westmoor to design and install seven separate electrical systems for the detention center. In November of 1984, Westmoor subcontracted this portion of its subcontract to WCI for a total price of $480,000. Within three months, Westmoor discovered that WCI was having financial difficulties. It received a notice which stated that the Internal Revenue Service had filed a tax lien against WCI. In addition, some of the manufacturers who were supplying WCI with the required electrical system equipment and material told Westmoor that WCI was not paying them. They therefore refused to deliver any more equipment or materials unless they were paid directly or by joint checks.

Westmoor realized that any failure of performance on WCI's part would probably subject Westmoor to the penalty provisions of its own subcontract with the prime contractor. It therefore met with WCI in May of 1985 and modified the contract to provide for the orderly payment of the material suppliers, the disposition of the Internal Revenue Service lien, and WCI's work on the job. The material modifications of the contract were as follows:

1. By the end of July, August and September, 1985 Westmoor Electric, Inc. would pay to Internal Revenue Service $10,000 each month and by the end of October, 1985 the balance of $9,642.77 to satisfy the Tax Lien filed against Westmoor Electric, Inc. for Western Communications, Inc. tax obligation.

2. Joint checks made to Western Communications, Inc. and its suppliers would be issued each month for materials and equipment furnished to the project, less a 10 percent retainage.

3. $3,500.00 each month would be issued to Western Communications, Inc 4. Within 30 days after completion and final acceptance of the project Westmoor Electric, Inc. would issue a check to Western Communications, Inc., less all previously paid amounts to the Internal Revenue Service, the joint checks as stated above and to Western Communications, Inc.

According to Westmoor's president, the $3,500 monthly payment to WCI represented the amount necessary to keep WCI's office running so that it could remain on the project.

Despite the new arrangements, WCI's failure to comply with its agreement with Westmoor continued. WCI cashed checks that Westmoor made out to it and to certain suppliers jointly, without paying the suppliers the amounts that they were owed. It also failed to pay other suppliers. Westmoor tried to keep the work going by modifying the agreement again. The February 12, 1986, modification provided, among other things, that Westmoor would make payments directly to WCI's employees and suppliers. WCI eventually walked off the job and refused to perform. On May 5, 1986, Westmoor formally terminated WCI's work on the project. Westmoor finished the work itself at a cost that exceeded the original contract price by $93,060.58.

While some of these events were taking place, WCI borrowed $10,778.04 from the bank. It executed a promissory note for that amount on August 2, 1985. The note was secured by an agreement that granted the bank a security interest in WCI's inventory, equipment, accounts and other rights to payment, and general intangibles. WCI's president, James H. Clark, also executed a guarantee of WCI's obligations. WCI defaulted in the payment of its indebtedness to the bank, leaving the principal balance of $10,778.04 owing.

On November 5, 1985, after WCI defaulted on the note, the bank notified Westmoor by letter that WCI had specifically assigned its right to payments from the Yuma County jail project to the bank and that it had also provided the bank with a general assignment of its rights pursuant to the security agreement. The letter directed Westmoor to make all future payments stemming from its obligations to WCI directly to the bank. On December 5, 1985, WCI's president also notified Westmoor by letter that until further notice, Westmoor was to make all future payments directly to the bank.

Despite receiving these notices, Westmoor continued to pay WCI for the work done on the construction project. Payments that Westmoor made directly to WCI between November 20, 1985, and April 24, 1986, totalled $22,557.80. Payments that Westmoor made jointly to WCI and various suppliers during November and December of 1985 totalled $32,894.31. Westmoor made no payments to the bank and refused the bank's subsequent demands for payment.

On March 28, 1986, the bank filed suit against WCI, Clark, and Westmoor. It charged WCI and Clark with default under the promissory note and guarantee agreement. It charged Westmoor with making wrongful payment to WCI after receiving notice of the bank's assignment of WCI's rights to payment. The trial court granted the bank's motion for summary judgment against Westmoor. It entered judgment in the amount of $10,778 plus interest, costs, and attorney's fees in the bank's favor. Westmoor appeals from this judgment.

DISCUSSION

Westmoor does not deny that it was an "account debtor" as that term is used both in case law and in Arizona's version of the Uniform Commercial Code. See A.R.S. § 47-1101 et seq. ¹ It also does not deny that it received notification that WCI had assigned its rights to receive payments under the construction contract to the bank. Finally, it does not deny that both the bank and WCI's president directed it to make all future payments stemming from its obligations to WCI directly to the bank.

It is well settled that when an account debtor receives notice of a valid assignment and directions to pay to the assignee, the account debtor becomes liable to pay the assignee. Valley Nat'l Bank v. Flagstaff Dairy, 116 Ariz. 513, 570 P.2d 200 (App.1977); Bank of Yuma v. Arrow Constr. Co., 106 Ariz. 582, 480 P.2d 338 (1971); Greene v. Reed, 15 Ariz.App. 110, 486 P.2d 222 (1971). Generally, an account debtor who disregards directions to pay the assignee and instead pays the assignor remains liable to the assignee. Van Waters and Rogers, Inc. v. Interchange Resources, Inc., 14 Ariz.App. 414, 484 P.2d 26 (1971). The bank argues that since Westmoor made $22,557.80 in payments to WCI after it received notice of the assignment and directions to pay the bank, the trial court correctly granted summary judgment to the bank against Westmoor for WCI's $10,778 debt to the bank.

In response, Westmoor argues that the aforementioned principles of law are not applicable to the extent that the account debtor has defenses or claims that arise from the preexisting contract between it and the assignor. Westmoor urges us to find that summary judgment was improper in this case because the record demonstrates that material issues of fact exist as to whether it had any claims or defenses under the construction contract that would absolve it from liability to the bank.

Westmoor is correct in arguing that as an account debtor, it is entitled to assert against the assignee any claims and defenses arising out of its contract with the assignor that it would have been able to assert against the assignor itself. This principle is well established both by statute and by case law. See A.R.S. § 47-9318(A). As we stated in Business Financial Services v. Butler and Booth Development Co., 147 Ariz. 510, 512, 711 P.2d 649, 651 (App.1985):

[A]n assignee, cannot stand in any better position than its assignor, ... Farmers Acceptance Corp. v. DeLozier, 178 Colo. 291, 496 P.2d 1016 (1972). This position is made clear by the Restatement (Second) of Contracts, § 336, comment b (1981):

[T]he assignment of a non-negotiable contractual right ordinarily transfers what the assignor has but only what he has...