Boatmen's National Bank of St. Louis (Boatmen's) extended a $5,000,000 revolving line of credit to Boardman’s Printing Company (BPC), securing a security interest in BPC's accounts receivable. Following BPC's default, Boatmen's took assignment of these receivables, including a debt owed by Sears, Roebuck and Company (Sears) for $909,641.52 related to advertising circulars. Sears claimed the right to offset this amount by payments made to BPC's paper suppliers, which it contended arose from agreements with those suppliers. The District Court ruled in favor of Boatmen's but allowed for the offset, determining that Sears owed $139,320.97 after applying the offset. Boatmen's appealed, asserting that it was entitled to the full amount without the offset. Both parties sought summary judgment, and the court's analysis hinged on § 9-318 of the UCC, which stipulates that an assignee (Boatmen's) holds all rights of the assignor (BPC) but is subject to any offsets or defenses from the account debtor (Sears). The case underscores the complex interplay between contractual obligations, security interests, and the rights to offsets in commercial transactions.
§ 9-318 stipulates that an assignee's rights are subject to the contract terms between the account debtor and assignor, as well as any defenses or claims the account debtor may have against the assignor before receiving notice of the assignment. Boatmen's asserts that neither subsection (a) nor (b) allows Sears to offset its debt to BPC. For subsection (a), Boatmen's argues that Sears is invoking rights from third-party agreements, not the contract with BPC. For subsection (b), Boatmen's contends that Sears’ claims for payments to paper suppliers arose after Sears received notice of the assignment, thus disqualifying them from offsetting against BPC.
Conversely, Sears claims its payments were valid offsets under subsection (a) as they were made in accordance with its contract with BPC, and under subsection (b), Sears argues it had a claim for anticipatory breach of contract against BPC prior to notice of the assignment. Both parties reference paragraph 19 of their contract, which states BPC must protect Sears from liabilities incurred through its operations. Sears interprets this as an obligation for BPC to indemnify it against supplier claims, while Boatmen's argues that Sears' obligations arose from separate agreements with the suppliers.
Boatmen's further contends that paragraph 19 does not grant Sears an express right to offset supplier payments, as it lacks explicit language to alert BPC of any such intentions, contrasting it with a similar case where an express offset right was included in the contract. They argue that Sears, having drafted the contract, failed to negotiate for an offset clause, and thus cannot claim one implicitly from paragraph 19. As a result, Boatmen's concludes that Sears' claims for offsets do not derive from its contract with BPC, rendering § 9-318(1)(a) inapplicable.
Sears asserts a common law right of offset as a defense related to its contract with BPC, claiming it aligns with § 9-318(1)(a). Citing Citizens Bank of Maryland v. Strumpf, Sears argues that mutual debts should be applied against each other to prevent inequity. However, the relationship between Sears and the parties is not mutual because Sears' obligation to the paper suppliers does not excuse its debt to Boatmen's, which is the assignee of BPC’s accounts. In contrast to Strumpf, where mutual debts existed, Sears' situation involves distinct obligations to different parties, undermining its claim for offset under § 9-318(1)(a).
Furthermore, allowing Sears' offset claim would conflict with the goals of Article 9 of the UCC, which aims for commercial certainty. There is no indication in the BPC-Sears contract of any side agreements with the paper suppliers, which would not justify defeating Boatmen’s perfected security interest in BPC’s accounts receivable. Regarding § 9-318(1)(b), Boatmen's argues that any offset claim from Sears could only arise post-February 15, 1994, after Sears made payments to the paper suppliers, while Sears contends that it had a claim for anticipatory breach when BPC defaulted on its loan on January 8, 1994. This default implied BPC would also fail to meet its obligations to the suppliers, potentially justifying an offset for Sears.
However, it is unclear if this anticipatory breach theory fits within § 9-318(1)(b), which addresses non-contractual claims, while § 9-318(1)(a) pertains to contractual terms and defenses arising from them. Hence, Sears' argument may not properly invoke § 9-318(1)(b) as it appears to relate more closely to contractual obligations.
Sears' claim for anticipatory breach of contract relies on its contract with BPC and should not be addressed under subsection (b). The claim necessitates consideration of side agreements tied to the main contract. Sears contends that its payments to paper suppliers were necessitated by BPC's potential breach. However, any liability to the suppliers stems from these side agreements, not the primary contract with BPC, invalidating Sears' justification for an offset based on BPC's potential breach. The court concludes that Boatmen's rights are unaffected by the Sears-BPC contract or any prior claims by Sears before being notified of the assignment of BPC's accounts to Boatmen's. Consequently, the court reverses and remands for a judgment in favor of Boatmen's for the full amount of Sears' debt to BPC.
