HASSE CONTR. CO. V. KBK FIN., 1998-NMCA-038,
125 N.M. 17, 956 P.2d 816
HASSE CONTRACTING COMPANY, INC.
Plaintiff-Counterdefendant-
Appellee,
vs.
KBK FINANCIAL, INC., Defendant-Counterclaimant-Appellant,
and GOSNEY & SONS, INC.,
Defendant-Counterclaimant-Appellee.
COURT OF APPEALS OF NEW MEXICO
1998-NMCA-038, 125 N.M. 17, 956 P.2d 816
APPEAL FROM THE DISTRICT COURT OF
BERNALILLO COUNTY. Diane Dal Santo, District Judge.
Certiorari Granted, No. 24,790,
February 26, 1998. Released for Publication February 27, 1998. As Corrected
March 23, 1998. As Corrected March 25, 1998.
RICHARD D. YEOMANS, GUEBERT &
YEOMANS, P.C., Albuquerque, NM for Plaintiff-Counterdefendant-Appellee.
GORDON S. LITTLE, GORDON S. LITTLE, P.A.,
Albuquerque, NM for Defendant-Counterclaimant-Appellant.
MICHAEL H. HOSES, MILLER, STRATVERT,
TORGERSON & SCHLENKER, P.A., Albuquerque, NM for
Defendant-Counterclaimant-Appellee.
MICHAEL D. BUSTAMANTE, Judge. WE CONCUR:
LYNN PICKARD, Judge, JAMES J. WECHSLER, Judge.
AUTHOR: MICHAEL D. BUSTAMANTE
{1} This interpleader
action, arising from a public construction project, involves a disputed fund
claimed by a materialman and a secured finance company which loaned money to
one of the subcontractors on the project. KBK Financial, Inc. (KBK), the
factor,
{*19} appeals a summary judgment
which determined that the materialman should be paid from the interpleaded fund
before KBK. We affirm.
STANDARD OF REVIEW AND APPLICABLE LAW
{2} When reviewing a
grant of summary judgment, appellate courts view the evidence in the light most
favorable to the party opposing the motion. That is, we review the evidence in
support of the right to a full trial on the merits.
Sarracino v. Martinez,
117 N.M. 193, 194,
870 P.2d 155, 156 . When there is conflicting evidence, or
the evidence supports conflicting inferences, summary judgment is improper.
Id.
Summary judgment should be granted only when a party is entitled to judgment as
a matter of law.
Id.
{3} KBK asserts that
we should apply Texas law because the contract was accepted in Texas, citing
Orcutt
v. S & L Paint Contractors, Ltd.,
109 N.M. 796,
791 P.2d 71 . However,
in its reply brief, KBK recognizes that Texas and New Mexico have adopted
similar versions of Article Nine of the Uniform Commercial Code governing
secured transactions, and further asserts that the result in this case would be
the same under either state's law. Given this concession, we do not address
KBK's conflict of laws issue directly. Instead, we analyze the case as a matter
of New Mexico law.
{4} Hasse Contracting
Company, Inc. (Hasse) subcontracted with Corn Construction to do much of the
concrete work on a state highway project located in San Juan County (the
project). Hasse's work included concrete for certain bridges, drainage
structures, and retaining walls. Hasse entered into an agreement with Hilfiker
Systems, Inc. (Hilfiker) in June 1994 for supply of some of the materials.
Under the agreement, Hilfiker agreed to deliver precast concrete panels to the
project at a specified unit price.
{5} The agreement
between Hasse and Hilfiker was memorialized on a printed purchase order form
supplied by Hasse (Purchase Order). The reverse side of the Purchase Order
recited conditions of the agreement. The only provisions relevant to the issues
in this case are numbers 1, 3, and 5. We quote them in pertinent part as
follows:
Compliance with General Contract Provisions:
Insofar as they are not inconsistent with the terms and conditions of this
order, the general conditions and provisions of the general contract for which
the material covered hereby is to be supplied are incorporated herein by
reference and made a part hereof as fully as if written herein.
Releases: The Seller agrees to furnish waivers
or releases from his material men or other suppliers for the purchases
represented on this order upon request by the general contractor.
Assignment: The supplier or vendor shall not
assign this purchase order nor any interest therein without first obtaining the
written consent of the contractor, nor shall the supplier or vendor assign or
attempt to assign any funds accrued or to accrue under this purchase order
without first obtaining the written consent of the contractor and no such
assignment shall be binding on the contractor unless and until accepted in
writing by the contractor.
{6} Hilfiker, a Texas
company, entered into an agreement with Gosney & Sons, Inc., a Colorado
corporation (Gosney) to actually manufacture and deliver the precast concrete
panels to the job site. Hasse asserts that Hilfiker's arrangement with Gosney
was a violation of paragraph five of the Purchase Order, in that Hilfiker did
not notify Hasse of the subcontract and did not seek its permission.
{7} Gosney performed
under its agreement with Hilfiker, delivering acceptable precast concrete
panels to the job site in January and February of 1995. Aware of the delivery
of the acceptable panels, Hilfiker invoiced Hasse on or about February 14,
1995, in the amount of $ 55,924. The invoice
{*20}
was apparently incorrect, but the parties do not dispute that, when the per
unit cost was applied, the correct price for the material delivered was $
49,004.58, the amount interpleaded by Hasse.
{8} On February 14,
1994, prior to the agreement with Hasse, Hilfiker executed a Factoring
Agreement with KBK. There is no dispute in the record that KBK is "engaged
in the business of purchasing accounts receivable from those persons or firms
rendering services to others[.]" Under the Factoring Agreement, Hilfiker
agreed to sell to KBK its accounts receivable up to an aggregate amount of $
275,000.
{9} Paragraph two of
the Factoring Agreement, provided as follows:
All accounts purchased by KBK shall be purchased
without recourse against the Seller as to the financial ability of the
customers to pay, and all losses from financial inability of the customers to
pay such accounts shall be KBK's sole responsibility in the absence of any
breach by the Seller of the warranties, covenants and guarantees set forth.
The Factoring Agreement further required Hilfiker to sell,
transfer, and assign to KBK all of Hilfiker's rights in accounts accepted by KBK,
and Hilfiker was required to execute and deliver to KBK "such notices of
assignment and other documents . . . as KBK may request to better protect the
sale and assignment of accounts hereunder." Hilfiker and KBK executed a
financing statement which is valid on its face. The financing statement was
filed with the Texas Secretary of State on February 22, 1994.
{10} There is no
dispute in the record that Hasse was not aware of the Factoring Agreement
between Hilfiker and KBK when the Purchase Order was executed. It is also
uncontested that Hasse first became aware of the assignment to KBK of
Hilfiker's account receivable on March 7, 1995, when Hasse received by
facsimile transmission a letter from KBK giving notice that KBK was exercising
its rights under the Factoring Agreement and the Uniform Commercial Code to
demand that "Hilfiker's Systems, Inc.'s Customers make all future payments
directly to KBK."
{11} Hasse had not
made any payments to Hilfiker prior to March 7, 1995, when it received the
demand from KBK. In March 1995, Hilfiker filed for bankruptcy pursuant to a
chapter seven liquidation petition. Hilfiker did not pay Gosney. On March 10,
1995, it also made a specific assignment of the Hasse receivable to KBK. On
April 19, 1995, Gosney placed Corn Construction, the general contractor, on
notice that it had furnished materials to the project in the amount of $
50,840. Gosney gave notice that unless full payment of the amount due was
received within five days of the letter, Gosney would bring an action
"upon the contract payment bond provided in connection with the Project by
Corn Construction Company as general contractor." As required by New
Mexico's Little Miller Act, NMSA 1978, §§
13-4-18 to -20 (1923, as amended
through 1987), a payment bond had been provided for the project.
{12} Under the payment
bond, the surety would be responsible for paying Gosney. The bond required Corn
Construction as the general contractor to indemnify the surety for payments
made under the fund to materialmen. In turn, Hasse's contract with Corn
Construction required Hasse to indemnify Corn Construction for any cost and
expenses Corn Construction might incur satisfying the claims of any materialmen
to the project. Faced with the prospect of paying twice for the concrete work,
Hasse refused to pay KBK pursuant to its demand, and instead filed its
complaint for interpleader joining Hilfiker, KBK, and Gosney.
{13} KBK views the
case as a simple matter of priority under the Uniform Commercial Code (UCC).
Its theory is that it is entitled to the funds payable to Hilfiker because
pursuant to the Factoring Agreement and financing statement it is a secured
party possessed of a perfected security interest superior to all other claims
to the fund. KBK asserts it is entitled to the funds free and clear of any
claim by Gosney because the agreement between Hasse and Hilfiker (1) does not
"allow Hasse to pay Gosney rather than Hilfiker" and (2) does not
contain any
{*21} requirement that
Hilfiker pay its materialmen and suppliers, either prior to or as a condition
to Hasse's payment to Hilfiker.
{14} KBK would require
Hasse to pay it as assignee even if such a payment would essentially guarantee
that Gosney would not get paid from the fund since Hilfiker is in bankruptcy
and KBK has no obligation under the Factoring Agreement or the UCC to satisfy
Hilfiker's obligations.
See NMSA 1978, §
55-9-317 (1961). From a
practical standpoint, acceptance of KBK's position would result in Hasse
creating a claim against itself since the project surety or the general
contractor would seek reimbursement for payments made to Gosney under the
payment bond.
{15} Hasse and Gosney
dispute KBK's status as a secured party. They assert variously that: (1) the
assignment by Hilfiker to KBK was improper under Hilfiker's contract with
Hasse; (2) the subcontract between Hilfiker and Gosney was a breach of
Hilfiker's contract with Hasse; (3) the assignment to KBK was actually a
partial satisfaction of a pre-existing debt rather than a secured transaction; (4)
even if the assignment to KBK was effective, KBK took subject to all defenses,
set-offs, and counterclaims Hasse might have; and (5) Gosney's claim to the
funds is in any event superior because of its status as a materialman to the
project.
{16} We first review
KBK's status. KBK is a secured party within the meaning of the UCC pursuant to
the Factoring Agreement and its financing statement. It cannot be reasonably
doubted that KBK is in the business of lending money, and that it secures its
loans by means of instruments intended to create a security interest in its
customer's accounts receivable. Further, Hilfiker's claim against Hasse for
payment is an account within the meaning of the UCC. NMSA 1978, §
55-9-106
(1985). The transaction thus meets the principal test for coverage by Article
Nine. NMSA 1978, §
55-9-102(1)(a) (1985, prior to the 1996 and 1997
amendments). The Factoring Agreement creates an obligation to repay advances
made under its provisions, and the assignment of accounts described in it
serves as security for the obligation.
Id. cmt. 2.
{17} Even if there is
a question concerning application of Section 55-9-102(1)(a), the transaction is
covered by Section 55-9-102(1)(b) which applies to "any sale of accounts
or chattel paper." As noted in comment two to Section 55-9-102:
"Commercial financing on the basis of accounts and chattel paper is often
so conducted that the distinction between a security transfer and a sale is
blurred, and a sale of such property is therefore covered by Subsection (1)(b)
whether intended for security or not, unless excluded by Section 9-104."
{18} Gosney and Hasse
assert that Article Nine does not apply because the March 1995 assignment by
Hilfiker to KBK was no more than a "transfer of a single account to an assignee
in whole or partial satisfaction of a preexisting indebtedness," relying
on NMSA 1978, §
55-9-104(f) (1992, prior to 1997 amendment). Under the
circumstances of this case, no reasonable person could view Hilfiker's business
relationship with KBK as a single transaction. The terms of the Factoring
Agreement and the financing statement describe a normal and ongoing factoring
arrangement. As noted above, it is undisputed that KBK advanced funds on the
strength of payment to be made in the future. Thus, it cannot be reasonably
disputed that under the Factoring Agreement KBK was undertaking a risk for
which Hilfiker's accounts receivable stood as security. Simply because Hilfiker
did not call on the Factoring Agreement more frequently does not negate the plain
terms of the arrangement.
{19} Similarly, the
fact that KBK demanded and received a specific assignment of the account does
not convert the arrangement into single transaction "having nothing to do
with commercial financing transactions."
Id. cmt. 6. The March 1995
assignment is best characterized as the final self-help step in KBK's
collection on the obligation from Hilfiker. Acceptance of Hasse's and Gosney's
position would undermine the ability of secured parties to conduct self-help
repossession and collection procedures allowed by NMSA 1978, §
55-9-502 (1985).
{20} {*22} We turn now to the applicability of NMSA
1978, §
55-9-318 (1985)--the primary issue in this case. We address Section
55-9-318(4) first. It provides:
A term in any contract between an account debtor and
an assignor is ineffective if it prohibits assignment of an account or
prohibits creation of a security interest in a general intangible for money due
or to become due or requires the account debtor's consent to such assignment or
security interest.
Having already determined that the transaction between
Hilfiker and KBK was intended to, and did create a security interest, Section
55-9-318(4) nullifies paragraph five of the Purchase Order to the extent it
seeks to disallow assignments for purposes of creating a security interest in
the account. Thus, Hilfiker's assignment to KBK of its account with Hasse is
unaffected by Hasse's attempted limitation. Id. cmt. 4.
{21} The more
difficult, and interesting, question is presented by Section 55-9-318 (1) which
provides:
Unless an account debtor has made an enforceable
agreement not to assert defenses or claims arising out of a sale as provided in
Section 9-206 [55-9-206 NMSA 1978] the rights of an assignee are subject to:
(a) all the terms of the contract between the account
debtor and assignor and any defense 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.
Section 55-9-318(1) recognizes the general common-law rule
that an assignee's interest is subject to all conditions, contingencies,
limitations, defenses, and/or set-offs which may be asserted by the account
debtor against the assignor. See Associates Loan Co. v. Walker, 76 N.M.
520, 522-23, 416 P.2d 529, 530-31 (1966); see also § 55-9-318 cmt. 1.
{22} Hasse asserts
that it has at least two defenses against Hilfiker's claim for payment: (1)
Hilfiker's delegation to Gosney of its obligation to perform under the purchase
order was in breach of paragraph five of the Purchase Order; and (2) Hilfiker
has a duty under paragraph one and three of the Purchase Order to pay, or
assure payment to, its materialmen and suppliers before Hasse is required to
pay Hilfiker.
{23} KBK does not
respond directly to Hasse's and Gosney's argument under Section 55-9-318(1).
That is, it does not assert that as a secured creditor with a perfected
security interest upon which it has foreclosed through self-help measures, it
takes Gosney's rights to payment free and clear of any defenses or set-offs
Hasse might assert. KBK argues only that there has been no breach and that
there are no defenses or set-offs upon which Hasse can rely.
{24} We believe
Hilfiker's involvement of a third party to perform work for the project, and
its failure to pay its supplier Gosney, carry implications for KBK's claim,
though not precisely for the reasons argued by the parties.
{25} We agree with the
essence of KBK's position as to the first asserted breach described above.
Paragraph five of the Purchase Order does seek to prohibit Hilfiker from
assigning the Purchase Order or "any interest therein" without
consent from Hasse. For purposes of this discussion, we assume Hasse meant to
prevent its subcontractors from delegating their obligation to perform, even if
there was no intent or attempt to escape their ultimate duty under the Purchase
Order. Hilfiker's arrangement with Gosney can be viewed as at least a technical
breach of paragraph five.
{26} However, there is
no contention that Hasse did not receive acceptable performance from Hilfiker,
albeit through its supplier Gosney. Thus, Hasse would not have any basis on
this record to refuse payment simply because someone other than Hilfiker did
the actual work. In addition, Hilfiker's technical non-compliance with the
Purchase Order did not result in anything other than nominal damage to Hasse.
See
Restatement (Second) of Contracts § 346 (1981); 5 Arthur Linton Corbin,
Corbin
on Contracts § 1003 (1964). Absent Hilfiker's insolvency, and Hasse's
knowledge that Gosney would not be paid by Hilfiker or KBK, Hilfiker would have
{*23} been entitled to payment in the
ordinary course of business.
See Shaeffer v. Kelton,
95 N.M. 182, 186,
619 P.2d 1226, 1230 (1980) (substantial performance in good faith will permit
recovery on construction contract);
Viking Communities Corp. v. Peeler
Constr. Co., 367 So. 2d 737, 739 (Fla. Dist. Ct. App. 1979) (technical
breach without damage is consistent with substantial performance).
{27} KBK also
correctly points out that the Purchase Order does not by its terms require
payment of suppliers as a condition precedent to satisfaction of Hilfiker's
invoice. Paragraph three of the Purchase Order simply requires Hasse's
subcontractor to produce lien waivers on request. There is no indication in the
record that Hasse invoked the provisions of paragraph three before refusing to
pay Hilfiker or KBK. Paragraph one does generally incorporate the terms of the
contract between the owner (the State) and the general contractor (Corn
Construction) to the Purchase Order. We need not, however, resolve in this case
to what extent, if any, incorporation of the contract may support one party or
the other. Even if the Purchase Order did not explicitly support Hasse's and
Gosney's position, that fact would not mean that KBK would be entitled to win.
This case is not a contest between Article Nine secured parties that is
governed by normal priority rules and nothing else. Gosney's claim as a
materialman is grounded on public policy reflected in statutory provisions and
arises by operation of law.
{28} We believe an
obligation to pay materialmen and suppliers should be implied in the Purchase
Order, and, indeed, in all construction contracts subject to New Mexico's
materialmen's lien statute or Little Miller Act. We agree with the Arizona
Court of Appeals when it stated: "In view of the Arizona statutory
provisions establishing materialmen's lien rights, the contractual obligation
of the subcontractor to 'supply' materials must be construed as including an
obligation on the subcontractor's part to pay for the materials so as to
preclude the establishment of lien rights against the property."
Business
Fin. Servs., Inc. v. Butler & Booth Dev. Co., 147 Ariz. 510, 711 P.2d
649, 651-52 (Az. Ct. App. 1985) (holding that a general contractor could make
payments to suppliers engaged by a subcontractor even after receipt of notice
from a secured assignee) (citation omitted). New Mexico has enacted a similar
materialman's lien provision.
See NMSA 1978, §
48-2-2 (1993). Thus, we
conclude that pursuant to Section 55-9-318(1)(a), Hasse could assert Hilfiker's
past and prospective failure to pay Gosney as a defense or set-off under the
Purchase Order, allowing Hasse to retain and interplead the funds.
{29} We recognize that
Section 48-2-2 does not apply to this case directly because this was a public
works project, and public property cannot be subjected to a materialmen's lien
under Section 48-2-2. However, the project was covered by a Little Miller Act
performance and payment bond pursuant to Sections 13-4-18 to -20. The Little
Miller Act is designed to provide in the public contracts arena a remedy
similar to the statutory materialmen's lien.
See State ex rel. W.M. Carroll
& Co. v. K.L. House Constr. Co.,
99 N.M. 186, 187-88,
656 P.2d 236,
237-38 (1982). The purpose of the Little Miller Act is to protect suppliers,
including so-called third-tier suppliers, in public construction projects.
Id.
;
see also State ex rel. Elec. Supply Co. v. Kitchens Constr., Inc.,
106
N.M. 753, 755,
750 P.2d 114, 116 (1988). Even though there is no lien provision
attached or included in the Little Miller Act, the public policy goals are the
same. We see no reason to treat materialmen and suppliers on public versus
private projects differently for purposes of determining their priority to
retained funds intended to be used to pay project costs.
{30} Our conclusion is
consistent with cases in other jurisdictions enunciating the rule that, in the
absence of a specifically contrary statute, materialmen take precedence over
assignees when distributing retained funds. Of these cases, the most closely
related by fact pattern is
Farmers Acceptance Corp. v. DeLozier, 178
Colo. 291, 496 P.2d 1016 (Colo. 1972) (en banc).
DeLozier began as an
action by a materialman against a general contractor to recover the costs of
materials supplied to the project through a subcontractor. 496 P.2d at 1017.
The
{*24} general contractor had already
paid the subcontractor and its assignee but they had failed to pay the
materialman.
Id. The general contractor filed a third party complaint
seeking reimbursement from both of them.
Id. In affirming a judgment in
favor of the general contractor and against the assignee, the Colorado Supreme
Court noted that the assignee could acquire nothing more than the subcontractor
was entitled to under the contract. 496 P.2d at 1018. The court held that the
subcontractor's rights to payment was conditioned upon performance of the
actual work and "subject to the burden of all the material bills incurred
by [the subcontractor] in the performance of the contract."
Id.
{31} While the
DeLozier
case has been the subject of some criticism, the criticism has been limited to
DeLozier
's allowance of affirmative relief against the lender once the lender had
already been paid.
See Michelin Tires v. First Nat'l Bank, 666 F.2d 673,
678-80 (1st Cir. 1981);
Lawson State Community College v. First Continental
Leasing Corp., 529 So. 2d 926, 930-33 (Ala. 1988),
overruled on other
grounds by Berner v. Caldwell, 543 So. 2d 686, 688 (Ala. 1989);
H. John
Homan Co. v. Wilkes-Barre Iron & Wire Works, Inc., 233 N.J. Super. 91,
558 A.2d 42, 44-46 (N.J. Super. Ct. App. Div. 1989);
Irrigation Ass'n v.
First Nat'l Bank, 773 S.W.2d 346, 349-51 (Tex. Civ. App. 1989);
Lydig
Constr., Inc. v. Rainier Nat'l Bank, 40 Wash. App. 141, 697 P.2d 1019, 1022
(Wash. Ct. App. 1985). In our case, the lender was not paid, and at least two
of the above cases note that a different result is present when the suppliers
make their claims against the lenders or contract obligors or both as a
defensive matter.
See Michelin Tires, 666 F.2d at 673;
H. John Homan
Co., 558 A.2d at 44.
{32} General Electric
Supply Co. v. Epco Constructors, Inc., 332 F. Supp. 112 (S. D. Tex. 1971)
and
Panhandle Bank & Trust Co. v. Graybar Elec. Co., 492 S.W.2d 76
(Tex. Civ. App. 1973) both decided under Texas law, are to the same effect as
the
DeLozier case. Both cases involve disputes between secured assignees
and materialmen on projects.
General Elec. Supply Co. involved a public
works contract, thus invoking the Texas version of New Mexico Little Miller
Act.
Panhandle Bank & Trust Co. appears to have been a private
contract and involved a Texas version of our materialmen's act. While both
cases, as noted by KBK, are dependent to some degree on statutory provisions,
both of them also clearly state that the statutory provisions are simply
reflective of the preferred position of materialmen and suppliers. Both cases
state that the UCC did not diminish the preferred position of materialmen over
assignee money lenders.
General Elec. Supply Co., 332 F. Supp. at 115;
Panhandle
Bank & Trust Co., 492 S.W.2d at 81.
See also Jensen v. First City
Nat'l Bank, 616 S.W.2d 452, 454 (Tex. Civ. App. 1981) (distinguishing
Panhandle
Bank & Trust Co. on the ground of a specific statute exempting banks
from the operation of the materialmen's act).
{33} The public policy
preference for materialmen was aptly summarized as follows by the Utah Court of
Appeals:
Given the legislature's creation of a specific
statutory preference for mechanics' lienholders, if the question is framed as a
choice between which party should receive a windfall, we believe it should be
the mechanics' lienholder. . . . Given the statutory protection granted
mechanics' lienholders, it is much more appropriate to have commercial lenders
bear the burden of protecting themselves.
Richards v. Security Pac. Nat'l Bank, 849 P.2d 606,
612 (Utah Ct. App. 1993).
{34} Our decision also
reflects and supports general expectations in the construction industry.
Economic viability of the industry requires that payments made by the owner are
properly applied down the line in order to assure performance and an unburdened
final product. To support this multi-tier payment system "'courts and
legislatures have increasingly found that the parties have an independent legal
duty arising from reasonable commercial expectations to see to the proper
application of construction funds.'"
In re Davidson Lumber Sales, Inc.,
66 F.3d 1560, 1566 (10th Cir. 1995) (quoting
Selby v. Ford Motor Co.,
590 F.2d 642, 648, (6th Cir. 1979)).
{35} KBK held a properly
perfected security interest in Hilfiker's right to payment. However, KBK could
take no more than Hilfiker owned. Hilfiker's claim to payment was reasonably
subject to the requirement that it pay its suppliers for the project. In this
situation, where it was clear that Gosney would not be paid by Hilfiker or KBK,
thus subjecting Hasse to potential double liability, it was appropriate to
resolve the contest to the fund in a manner calculated to provide maximum
protection to the materialman. The summary judgment is affirmed.
MICHAEL D. BUSTAMANTE, Judge