Department of Transportation v. United Capital Funding Corp.

Citations: 219 So. 3d 126; 92 U.C.C. Rep. Serv. 2d (West) 668; 2017 WL 1536070; 2017 Fla. App. LEXIS 5902Docket: Case No. 2D14-2249

Court: District Court of Appeal of Florida; April 28, 2017; Florida; State Appellate Court

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The Florida Department of Transportation is appealing a summary judgment that mandates it to pay United Capital Funding Corp. for accounts receivable assigned to United Capital by Arbor One, Inc., a vendor for the Department. Central to the appeal is section 679.4061 of the Uniform Commercial Code, which stipulates that once a debtor receives notice of an assignment, they can only discharge their payment obligation by paying the assignee, not the assignor. Despite receiving notice of the assignment, the Department continued to pay Arbor One. The court addressed two primary issues: whether this statute applies to government agencies as account debtors and whether sovereign immunity prevents United Capital from suing the Department for non-payment. The court affirmed that the statute does apply to government agencies and that sovereign immunity does not bar United Capital's enforcement actions. Consequently, the Department was required to pay United Capital, affirming the judgment in favor of United Capital. The case also explains the concept of factoring, where a business sells its accounts receivable to a third party at a discount for immediate funding, and highlights the implications of Article 9 of the UCC on such transactions, emphasizing the risks for debtors who continue to pay the original seller after being notified of an assignment.

An account debtor who continues to make payments to the original business after being notified of an account assignment can be held liable for the total amount owed to the factor, despite having paid the original creditor. Specifically, if a debtor receives actual notice of an assignment but pays the original creditor instead of the assignee, they may face liability, creating a risk of double payment. In this case, the Department of Transportation entered contracts with Arbor One for roadside maintenance, becoming an account debtor. Arbor One subsequently assigned its receivables to United Capital and informed the Department in writing that all payments should be directed to United Capital, warning that payments to any other party would not fulfill the Department's obligations. Despite receiving this notice, the Department continued payments to Arbor One and refused to pay United Capital, prompting United Capital to seek a declaratory judgment to enforce its rights under section 679.4061. The Department contended that section 679.4061 did not apply to government entities and claimed sovereign immunity since it had not contracted with United Capital. The trial court dismissed these arguments, granted summary judgment in favor of United Capital, and the Department appealed. The court found no dispute over the facts and determined that the Department was indeed obligated to pay United Capital, confirming that section 679.4061 applies to government entities acting as account debtors. The statute facilitates the transfer of accounts by invalidating restrictions on their sale and clarifying the obligations that arise following an assignment notification. According to subsection (1), an account debtor can discharge its obligation by paying the original creditor until receiving proper notice of the assignment.

Upon receiving notification of an assignment, an account debtor can only fulfill its payment obligation to the assignee, not the assignor. In this context, the Department, as the account debtor for accounts receivable assigned from Arbor One to United Capital, must pay United Capital to discharge its obligation. Failure to do so could result in liability to United Capital. The statutory definition of "account debtor" includes government entities like the Department, as defined under Article 9 of the UCC, which recognizes "person" to encompass government bodies unless specified otherwise. Thus, section 679.4061 is applicable to the Department’s payment obligations.

The Department contends that section 679.1091(4)(n), which exempts government transfers from Article 9, limits the applicability of section 679.4061 to its payment processes. It argues that payments involving government units are excluded from these regulations. However, the language in section 679.1091 does not support this interpretation. The only relevant case, MP Star Financial, Inc. v. Cleveland State University, found that Ohio's equivalent to section 679.4061 does not apply to governmental account debtors, as the term "transfer" was interpreted to include payments that are categorized as transfers of money. The Ohio courts upheld this reasoning, affirming that payments on accounts receivable involve a transfer of funds and thus fall outside the statute’s regulation. The Department aligns with the outcome of MP Star, whereas United Capital disputes it.

Agreement exists with MP Star regarding basic principles of statutory interpretation, specifically applying unambiguous statutory language as written and giving undefined terms their common meanings. However, there is disagreement on whether these principles render section 679.4061 inoperative when a governmental unit is merely the account debtor. MP Star's interpretation is seen as incomplete, focusing solely on the term 'transfer' as encompassing a payment of money, neglecting the broader context of the statute. The government-transfer exception applies only when Article 9 'applies to' a transfer by the government, and it is established that Article 9 does not apply to any transfer by a governmental unit.

The critical inquiry is whether the provisions of section 679.4061, which regulate the discharge of obligations upon assignment of accounts receivable, are applicable to a governmental account debtor, implying an application of Article 9 to a government transfer. The excerpt clarifies that payments on accounts receivable do not constitute transfers within the scope of Article 9, which is defined in section 679.1091. This section specifies that Article 9 applies to certain financial transactions but explicitly excludes the transfer of money as a mechanism for discharging obligations on accounts receivable. Consequently, since transfers of money do not fall under the defined scope of Article 9, the government-transfer exception cannot apply, as it pertains to transactions that Article 9 would have otherwise covered. The exceptions listed in section 679.1091(4) confirm that they are removed from Article 9's scope by legislative intent.

Transfers of money for account payments, chattel paper, or payment intangibles are not covered by Article 9. Section 679.4061 primarily regulates the assignment of these assets, such as the sale of accounts receivable from Arbor One to United Capital, rather than the subsequent transfer of money to discharge those obligations, like the Department's payments on the accounts. The statute invalidates restrictions on asset sales, defines the rights and obligations of involved parties, and clarifies the account debtor's performance obligations before and after the sale. While the account debtor can discharge its obligation by making payments, those payments are not the type of transfer the statute addresses; the relevant transfer is the sale of the accounts themselves. The government-transfer exception in section 679.1091 does not apply merely because the government is an account debtor; it would apply if the government sold such assets, which is not the case here. The Department, as the governmental account debtor, was properly notified of the sale and still owed its usual payments. Furthermore, the Department argues that sovereign immunity protects it from United Capital's claims due to a lack of contract with United Capital. However, it is held that the Department, having contracted with Arbor One, is bound by the assignment rules applicable to that contract, similar to any other party. Sovereign immunity allows the government not to be sued without consent, but legislative waivers of this immunity are permissible.

The legislature has waived the Department's sovereign immunity regarding contract claims, allowing suits to be brought against it for breaches of express provisions or implied covenants in written agreements. In these cases, the Department and the contractor have the same rights and obligations as private parties. The issue at hand is whether an assignee of contractual accounts receivable, specifically United Capital, can claim against the Department for failure to pay under the contract. It is determined that such a claim does fall within the waiver.

The Supreme Court's ruling in Pan-Am Tobacco Corp. v. Department of Corrections clarifies that while the legislature did not explicitly waive sovereign immunity for contract claims, it has empowered the Department to enter into contracts and conduct activities requiring such authority. The court concluded that if sovereign immunity barred contract claims against the Department, it would render the contracts invalid, contrary to legislative intent. Therefore, when a state agency has entered into a contract authorized by law, sovereign immunity does not protect it from breach of that contract.

The ruling establishes that government obligations under authorized contracts are subject to the same performance and enforcement standards as those applicable to private parties. Once the government engages in formal contracts, it relinquishes any special treatment regarding contract breaches. This principle reinforces the idea that the legislature intends for contracts involving the government to be enforceable, supported by existing common law and statutory rules governing contracts. Consequently, Florida courts consistently address sovereign immunity defenses in contract disputes, affirming that the government can be held liable for breaches of implied covenants in contracts, similar to private entities.

The government is liable for prejudgment interest in breach of contract actions similarly to private parties. In Kohl v. Blue Cross, the Fourth District concluded that sovereign immunity does not shield the State from contract claims regarding a health insurer's payments after being notified of an assignment of rights. This principle applies here, as Section 679.4061 outlines how a party can discharge payment obligations after notification of a contract assignment. The Department acknowledges this rule’s applicability in private party disputes but claims sovereign immunity protects it from paying United Capital, referencing cases that are not relevant as they involved non-express written contracts. In contrast, the current case involves an express written contract requiring the Department to compensate Arbor One for services rendered, thus sovereign immunity does not apply. 

The ruling clarifies that the government-transfer exception in Article 9 of the UCC does not exempt government agencies from the discharge upon assignment provision of Section 679.4061. If the conditions of Section 679.4061 are met, a government agency with an express written contract containing a payment obligation cannot invoke sovereign immunity against claims from the assignee of those accounts receivable. The trial court's final summary judgment is affirmed, with no merit found in the Department's arguments regarding venue transfer, dismissal for arbitration, or alleged non-compliance with conditions precedent. Although it is noted that ordinary contract law may yield similar outcomes, this argument was not sufficiently developed for consideration. The Department's assertion regarding an anti-assignment clause in its contract with Arbor One is acknowledged, but it did not demonstrate that this clause applied to the specific contracts in question.