Lydig Const., Inc. v. Rainier Nat. Bank

• Decision Date: 28 March 1985
• Docket Number: No. 6196-III-5,6196-III-5
• Parties: , 41 UCC Rep.Serv. 1096 LYDIG CONSTRUCTION, INC., a Washington corporation, Appellant, v. RAINIER NATIONAL BANK, a federally chartered bank, Respondent. . Panel Four
• Court: Washington Court of Appeals

Page 141

40 Wn.App. 141

697 P.2d 1019, 41 UCC Rep.Serv. 1096

LYDIG CONSTRUCTION, INC., a Washington corporation, Appellant, v. RAINIER NATIONAL BANK, a federally chartered bank, Respondent.

No. 6196-III-5.

Court of Appeals of Washington, Division 3 Panel Four.

March 28, 1985.

Review Denied June 7, 1985.

Lynden O. Rasmussen, L.H. Vance, Jr., Winston & Cashatt, Spokane, for appellant.

Robert J. Adolph, Christopher M. Carletti, Weinrich, Gilmore & Adolph, Seattle, for respondent.

McINTURFF, Judge.

Lydig Construction, Inc. (hereinafter Lydig) appeals a trial court decision denying its claim seeking recovery of a progress payment it made to a subcontractor. The sole issue is whether a general contractor may assert an affirmative claim against a subcontractor's assignee for the contractor's negligently made progress payments. We affirm, holding the contractor cannot.

This case involves a dispute between a general contractor and a bank, the assignee of a subcontractor. On August 12, 1981, Lydig entered into a public contract with Kennewick School District 17 to construct an elementary school. As general contractor, Lydig subcontracted mechanical and plumbing work to Plumbing Contractors, Inc. (hereinafter PCI). ¹

PCI had been a customer of Rainier National Bank (hereinafter Rainier) for several years before this subcontract with Lydig. On July 1, 1981, PCI established a $300,000 line of credit and executed a note in that amount to Rainier. This note allowed PCI to borrow against the credit up to 75 percent of receivables outstanding for 60 days or less. As PCI received payments for its receivables, these checks were paid to Rainier reducing the balance owed.

During the next several months, through numerous phone calls and complaints from PCI's suppliers regarding late payments, Lydig became aware that PCI was in financial trouble and delinquent in its supplier payments. Consequently, in March 1982 Lydig issued joint checks to four different suppliers of PCI; the purpose of the joint checks was to insure the payments went to the suppliers rather than PCI. Also during this time, PCI's President, Lawrence Robertson, informed Lydig of PCI's banking relationship with Rainier.

In April 1982, Lydig issued its check for $84,042.55 as a progress payment to PCI for work performed on this project. Pursuant to the loan agreement between Rainier and PCI, PCI deposited this check with Rainier to reduce its loan balance and, after receiving this payment, Rainier made two subsequent advances to PCI totaling $35,315.

The Superior Court determined Lydig had negligently made the progress payment and RCW 62A.9-318 precluded Lydig from asserting an affirmative claim against Rainier. Lydig now appeals, contending assignee-Rainier "stands in the shoes" of assignor-PCI and therefore any claims that may be brought against PCI may, in like fashion, be brought against Rainier, citing Farmers Accep. Corp. v. DeLozier, 178 Colo. 291, 496 P.2d 1016, 1018 (1972). This case raises an issue of first impression in Washington. No Washington cases construing RCW 62A.9-318(1)(a) have been cited by the parties and our independent research has disclosed none.

RCW 62A.9-318 provides, in pertinent part:

(1) Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in RCW 62A.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; and

(b) any other defense or claim of the account debtor against the assignor which accrues before the account debtor receives notification of the assignment.

This case does not involve an agreement which precluded the assertion of defenses or claims falling within section 9-206. ² Thus, the issue is whether this section affords the account debtor Lydig, an affirmative claim against the assignee, Rainier, for payments it negligently made.

There are two distinct lines of cases construing U.C.C. Section 9-318(1)(a). Some courts interpret this section narrowly, permitting an account debtor to assert a claim only as an affirmative defense and not as the basis for an independent claim against an assignee. See, e.g., Michelin Tires (Canada) Ltd. v. First Nat'l Bank, 666 F.2d 673, 677-78 (1st Cir.1981); Gold Circle Stores v. Riviera Finance-East Bay, Inc., 540 F.Supp. 15, 21 (N.D.Calif.1982); Cuchine v. H.O. Bell, Inc., 682 P.2d 723, 724-25 (Mont.1984); Meyers v. Postal Fin. Co., 287 N.W.2d 614, 616-19 (Minn.1979); James Talcott, Inc. v. Brewster Sales Corp., 16 U.C.C.Rep.Serv. 1165, 1167 (N.Y.Sup.Ct.1975).

In Michelin, for example, the account debtor brought an action to recover progress payments made to the assignee in reliance on the assignor's fraudulent representations that work under a construction contract had been completed. The assignee had no actual knowledge of the assignor's fraud, but was aware of the assignor's duties under the contract and knew that the assignor was encountering financial difficulties. The account debtor contended that because its claim arose from the contract, it could recover under Section 9-318(1)(a). The First Circuit affirmed the District Court's rejection of this theory, holding that Section 9-318(1)(a) did not allow affirmative claims by an account debtor against an assignee. The Michelin court concluded the phrase "subject to", which precedes "any defense or claim" in Section 9-318(1)(a), implies that the account debtor's claim can only be used as a defense to an assignee's suit to enforce a contract right. 666 F.2d at 677 (citing Anderson v. Southwest Sav. & Loan Ass'n, 117 Ariz. 246, 248, 571 P.2d 1042, 1044 (1977), and Englestein v. Mintz, 345 Ill. 48, 61, 177 N.E. 746, 752 (1931)).

Several courts, however, liberally construe Section 9-318(1)(a) to allow affirmative claims. See, e.g., BarclaysAmerican/Business Credit, Inc. v. Paul Safran Metal Co., 566 F.Supp. 254, 256-57 (N.D.Ill.1983); Kmart Corp. v. First Pennsylvania Bank, 29 U.C.C.Rep.Serv. 701 (Pa.Ct.Comm.Pl.1980); Benton State Bank v. Warren, 263 Ark. 1, 562 S.W.2d 74, 78 (1978); Massey-Ferguson Credit Corp. v. Brown, 173 Mont. 253, 567 P.2d 440, 444 (1977); DeLozier, 496 P.2d at 1018. In Massey-Ferguson, for example, the Montana Supreme Court allowed an affirmative recovery based upon the language of Section 9-318(1)(a). Although the case was decided on other grounds, the court, in dicta, declared the word "claim" includes setoffs and counterclaims and that Section 9-318(1)(a) would support an action against an assignee who retained payments made because of the account debtor's mistake, and who did not change his position relying on those payments. Massey-Ferguson, 567 P.2d at 442. ³

We find RCW 62A.9-318(1)(a) does not afford an account debtor an affirmative claim against an assignee for either one or all of five reasons. First, it has long been the rule in Washington that where a statute is ambiguous, the language of the act should be "construed in view of its title and lawful purposes, since the subject expressed in the title fixes a limit upon the scope of the act." Thayer v. Snohomish Logging Co., 101 Wash. 458, 460-61, 172 P. 552 (1918); see also Meese v. Northern Pac. Ry., 211 F. 254, 261, 127 C.C.A. 622, rev'd, 36 S.Ct. 223, 239 U.S. 614, 60 L.Ed. 467 (1914); Washington Optometric Ass'n v. Pierce Cy., 73 Wash.2d 445, 449, 438 P.2d 861 (1968); State v. Lundell, 7 Wash.App. 779, 781-82, 503 P.2d 774 (1972); Annot., Title of Statutes as an Element Bearing Upon Their Construction, 37 A.L.R. 927, 944 (1925 & Supp.1984). RCW 62A.9-318 is entitled in part: "defenses against assignee". The term "defense" suggests that the assignee must be suing the account debtor, not the reverse. The use of the word "claim" is ambiguous. But this would appear, in context, to refer to a claim made by the account debtor prior to payment where the assignee is suing to recover payments alleged to be due and owing. See Henson, A Problem Involving Assignments of Accounts Under Article 9, 40 Wash. & Lee L.Rev. 41, 45 (1983).

Second, the nature and purpose of the act indicate its operational effect. Washington Fed'n of State Employees v. State, 98 Wash.2d 677, 684, 658 P.2d 634 (1983). Instead of the word "claim", the term "set-off" is used as a synonym in Official Comment 1 to Section 9-318. ⁴ Thus, the title and Official Comments to RCW 62A.9-318 indicate Lydig, as an account debtor, may not assert an affirmative claim against an assignee, Rainier.

Third, the Section's language that

"the rights of an assignee are subject to ... (a) all the terms of the contract" connotes only that the assignee's rights to recover are limited by the [account debtor's] rights to assert contractual defenses as a set-off [sic ], [which implies] that affirmative recovery against the assignee is not intended.

Michelin, 666 F.2d at 677; Gold Circle Stores, 540 F.Supp. at 21. The words "subject to" ordinarily denote "subordinate to", "subservient to", or "limited by." Mintz, 177 N.E. at 752; Anderson. As the Mintz court indicated, "[t]here is nothing in the use of the words 'subject to,' in their ordinary use, which would even hint at the creation of affirmative rights." 177 N.E. at 752.

Fourth, decisions permitting affirmative claims rely upon the pre-U.C.C. case of Firestone Tire & Rubber Co. v. Central Nat'l Bank, 159 Ohio St. 423, 112 N.E.2d 636 (1953). There, the court required the bank to return payments to an account debtor because, although the bank was innocent of the assignor's fraud, the bank had unknowingly aided that fraud by independently requesting periodic payment from the account debtor. The bank attached invoices from the assignor to each request, thereby impliedly representing that the underlying obligation was valid. The court found that the account debtor relied on the genuineness of the invoices forwarded by the bank. Here, however, there was no such...