Puritan Finance v. Bechstein Construction Corp.

ILLINOIS OFFICIAL REPORTS
Appellate Court
Puritan Finance Corp. v. Bechstein Construction Corp., 2012 IL App (1st) 112261Appellate Court PURITAN FINANCE CORPORATION, Plaintiff-Appellee, v.
Caption BECHSTEIN CONSTRUCTION CORPORATION, Defendant-
Appellant.
District & No. First District, First Division
Docket No. 1-11-2261
Filed June 4, 2012
Held In an action to collect a debt assigned to plaintiff in a bankruptcy
(Note: This syllabus proceeding, defendant was not entitled to set off an unrelated debt the
constitutes no part of assignor of the debt at issue owed defendant, notwithstanding the fact that
the opinion of the court defendant had performed services for the assignor prior to the assignor’s
but has been prepared assignment of its accounts receivable to plaintiff, since no cause of action
by the Reporter of had accrued in favor of defendant and against the assignor, and for
Decisions for the purposes of the language of section 9-404(a)(2) of the Uniform
convenience of the Commercial Code that allows a debtor to assert a setoff against an
reader.)
assigned debt, a claim does not accrue until a cause of action has accrued.
Decision Under Appeal from the Circuit Court of Cook County, No. 09-M1-113989; the
Review Hon. Pamela E. Hill Veal, Judge, presiding
Judgment Affirmed.
Counsel on Griffith & Jacobson, LLC, of Chicago (James E. Mahoney, of counsel),
Appeal for appellant.
Fred R. Harbecke, of Chicago, for appellee.
Panel PRESIDING JUSTICE HOFFMAN delivered the judgment of the court,
with opinion.
Justices Hall and Karnezis concurred in the judgment and opinion.
OPINION
¶1 The defendant, Bechstein Construction Corporation, appeals the circuit court’s decision
granting judgment in favor of the plaintiff, Puritan Finance Corporation, on the plaintiff’s
action to collect on indebtedness assigned to it during bankruptcy proceedings of Granite
Cartage Company (Granite). On appeal, the defendant argues that its liability on the
indebtedness should have been set off by an unrelated debt Granite owed it. For the reasons
that follow, we affirm the judgment of the circuit court.
¶2 The basic facts of this case are undisputed. In 2008, Granite filed for bankruptcy. At that
time, the plaintiff held a secured lien on Granite’s accounts receivable, and, the parties agree,
those accounts were assigned to the plaintiff. Among Granite’s accounts receivable were
invoices indicating that the defendant owed Granite approximately $22,000, for several
different cartage jobs. The defendant has never disputed the accuracy of that figure, but it
asserted that the $22,000 debt is “subject to a setoff pursuant to a course of dealing pursuant
to which [it] and Granite performed services for one another on mutual open account.” Under
that arrangement, Granite and the defendant would perform cartage work for one another
and, in the words of an employee of the defendant, “swap checks” periodically to settle
outstanding invoices. At the time Granite’s accounts receivable were assigned to the plaintiff,
the amount Granite owed the defendant exceeded the amount the defendant owed Granite.
¶3 The parties filed cross-motions for summary judgment, but the circuit court denied both
motions and set the matter for trial. The parties’ stipulated report of the trial proceedings
indicates that an employee of the defendant testified at trial regarding the arrangement
between Granite and the defendant. It also indicates that the defendant produced unpaid
invoices from it to Granite. After the trial, the circuit court entered judgment in favor of the
plaintiff. No explanation for the judgment appears in the record. Following the circuit court’s
judgment, the defendant filed this timely appeal.
¶4 On appeal, the defendant argues, as it did to the circuit court, that, by virtue of its unpaid
invoices to Granite, it is entitled to a setoff against the debt that was assigned to the plaintiff.
The parties focus their arguments primarily on the law governing setoffs against assigned
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indebtedness. The interpretation of the relevant statutes and the common law presents us with
a question of law to be reviewed de novo. See Cunningham v. Schaeflein, 2012 IL App (1st)
120529, ¶ 19.
¶5 There exist two Illinois statutes that pertain to setoffs asserted against assignees. The first
appears in section 2-403(a) of the Code of Civil Procedure (Code) (735 ILCS 5/2-403(a)
(West 2008)), which provides as follows:
“The assignee and owner of a non-negotiable chose in action may sue thereon in his or
her own name. *** The action is subject to any defense or set-off existing before notice
of the assignment.” 735 ILCS 5/2-403(a) (West 2008).
¶6 Although this provision might be construed to allow the type of setoff the defendant now
requests, Illinois case law has held that a setoff under section 2-403(a) cannot be based on
a contract separate from the assigned contract. See R.A.N. Consultants, Inc. v. Peacock, 201
Ill. App. 3d 67, 559 N.E.2d 283 (1990). The defendant does not dispute that its requested
setoff is based on a contract or other indebtedness separate from the debts assigned to the
plaintiff, and it does not ask us to overturn Illinois case law interpreting section 2-403(a).
Accordingly, we conclude that section 2-403(a) of the Code confers no right of setoff to the
defendant.
¶7 The parties focus their arguments more strongly on the setoff rights described in another
Illinois statute, section 9-404(a) of the Uniform Commercial Code (UCC) (810 ILCS 5/9-
404(a) (West 2008)). Section 9-404(a) provides as follows:
“Unless an account debtor has made an enforceable agreement not to assert defenses or
claims, *** the rights of an assignee are subject to:
(1) all terms of the agreement between the account debtor and assignor and any
defense or claim in recoupment arising from the transaction that gave rise to the
contract; and
(2) any other defense or claim of the account debtor against the assignor which
accrues before the account debtor receives a notification of the assignment ***.” 810
ILCS 5/9-404(a) (West 2008).
¶8 The parties call upon us to interpret whether subsection 9-404(a)(2) of the UCC allows
the defendant to assert a setoff against the plaintiff-assignee based on an unrelated debt owed
to the defendant by Granite, the assignor. That is, the parties ask us to determine whether the
defendant’s unrelated debt constitutes “any other defense or claim *** against the assignor
which accrue[d]” before the defendant learned that Granite’s accounts receivable had been
assigned to the plaintiff. The plaintiff interprets this language to require that the defendant
have accrued an actual cause of action or viable legal claim against Granite before
notification of the assignment. Thus, the plaintiff asserts, the defendant is not entitled to a
section 9-404(a)(2) setoff here, because the defendant had only a right to collect, not a legal
cause of action. For its part, the defendant argues that Granite’s unpaid debt to it amounted
to a “claim” even if no cause of action had accrued on the indebtedness.
¶9 The parties’ dispute centers on a question of statutory interpretation. The fundamental
goal for a court interpreting a statute is to give effect to the legislature’s intent, and the best
indicator of that intent is the statute’s language, given its plain and commonly understood
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meaning. In re Estate of Gagliardo, 391 Ill. App. 3d 343, 346, 908 N.E.2d 1056 (2009).
Questions of statutory interpretation present issues of law to be reviewed de novo. Gagliardo,
391 Ill. App. 3d at 346.
¶ 10 The parties direct us to no Illinois case law interpreting whether section 9-404(a)(2)
allows setoffs for accumulated but unrelated debt, or whether the section applies only if a full
cause of action accrued prior to notice of the assignment. The defendant relies on no Illinois
case law, and the plaintiff refers us to Illinois precedent that does not discuss section 9-
404(a)(2). See R.A.N. Consultants, 201 Ill. App. 3d 67 (discussing section 2-403(a) of the
Code); Berdex International, Inc. v. Milfico Prepared Foods, Inc., 258 Ill. App. 3d 738, 630
N.E.2d 998 (1994) (discussing section 2-717 of the UCC, regarding deductions of damages
from sale price on contracts); Rebaque v. Forsythe Racing, Inc., 134 Ill. App. 3d 778, 480
N.E.2d 1338 (1995) (discussing section 2-717 of the UCC). There is, however, persuasive
non-Illinois authority addressing this issue in the context of the same UCC language.
¶ 11 According to that non-Illinois authority, “[t]he cases generally hold that a defense or
claim ‘accrues’ when it would give rise to a cause of action.” James J. White & Robert S.
Summers, Uniform Commercial Code § 34-6 (2010). The rationale underlying that
conclusion was expressed by the Supreme Court of Oregon in Seattle-First National Bank
v. Oregon Pacific Industries, Inc., 500 P.2d 1033 (Or. 1972) (en banc). In Seattle-First
National Bank, the court observed that the UCC’s requirement that a setoff be limited to “any
other defense or claim *** against the assignor which accrue[d]” before notice was intended
to strike a balance between the interests of the assignee and the obligor. Seattle-First
National Bank, 500 P.2d at 1034. The actual “accrual” cutoff point, however, appeared to
the court to have been “selected arbitrarily.” Seattle-First National Bank, 500 P.2d at 1034.
Unable to divine direction from the purpose of the statute, the court turned to the meaning
of the statutory language:
“The comments to [Washington State’s version of the UCC provision] state: ‘The term
“accrues” appears to mean that the “claim” shall exist as such, i.e., as a cause of action,
before [notice of the assignment].’ [Citation.]
‘Accrue,’ aside from its fiscal use, generally is used in the law to describe when a
cause of action comes into being. Its chief use is to determine when the statute of
limitations commences. We believe it is advisable to use ‘accrue’ in the Code in its usual
sense; that is, a claim or setoff accrues when a cause of action exists.” Seattle-First
National Bank, 500 P.2d at 1035.
¶ 12 In a later case, Bank of Kansas v. Hutchinson Health Services, Inc., 773 P.2d 660 (Kan.
Ct. App. 1989), the Court of Appeals of Kansas relied on Seattle-First National Bank, but
articulated its standard slightly differently and expounded on the policy reasons for its
reading:
“A claim could ‘accrue’: (1) when the obligation to pay is incurred; or (2) when the
obligation is actually due and payable. The first definition reflects a fiscal view ***. The
second definition reflects the more usual sense of accrue, that is, that ‘a claim or setoff
accrues when a cause of action exists.’ [Citation.]
On balance, we believe that the policies of simplicity and commercial uncertainty
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underlying the UCC favor the second definition. [Citation.] Under the first definition, the
value of accounts assigned as security could never be accurately determined because the
accounts would always be subject to an independent claim arising against the assignor
after the assignment is made, but accruing beforehand. Under the second definition, the
value of accounts can be determined with reasonable certainty at the time of the
assignment.” Bank of Kansas, 773 P.2d at 665.
Although the Kansas standard bears a different wording, its effect is the same as that of
Oregon, because, absent some repudiation, a party’s cause of action does not accrue until
after payment has become due. Thus, under either holding, the “accrual” of a “claim” under
section 9-404 of the UCC does not occur until a party has developed a cause of action. See
also BarclaysAmerican/Business Credit, Inc. v. E&E Enterprises, Inc., 697 S.W.2d 694, 700
(Tex. Ct. App. 1985) (“the key question under [section 9-404(a)(2) of the UCC] is whether
the defense or claim, not the facts on which it is based, arose before the notification”
(emphasis in original)).
¶ 13 These interpretations, which are based on policy reasons and also on the definition of the
word “accrue,” are also in accord with other avenues of statutory construction. For example,
we note that the predominant legal definition of the noun “claim” implies a cause of action.
See Black’s Law Dictionary 247 (6th ed. 1990). Further, under the doctrine of noscitur a
sociis (“a word is known by the company it keeps”), we may ascertain the meaning of
questionable words or phrases in a statute by reference to the meaning of words or phrases
associated with them. See Hayes v. Mercy Hospital & Medical Center, 136 Ill. 2d 450, 477,
557 N.E.2d 873 (1990) (Calvo, J., dissenting, joined by Ward and Clark, JJ.). The language
that interests us here appears in the phrase “any other defense or claim *** which accrues”
before notice of assignment. The word “defense,” which appears alongside the word “claim,”
is understood in its legal sense to refer to an argument used to defeat a cause of action. See
Black’s Law Dictionary 419 (6th ed. 1990) (defining “defense” as “That which is offered and
alleged by the party proceeded against in an action or suit” or “That which is put forward to
diminish plaintiff’s cause of action or defeat recovery.”).
¶ 14 To argue for the opposite interpretation, the defendant cites to two federal district court
decisions: BarclaysAmerican/Business Credit, Inc. v Paul Safran Metal Co., 566 F. Supp.
254 (N.D. Ill. 1983), and Bank of America, N.A. v. Trinity Lighting, Inc., No. 10 C 2250,
2011 WL 3489693 (N.D. Ill. Aug. 9, 2011). However, we find neither of these decisions to
be persuasive. In the first decision, Paul Safran Metal Co., the court focused on the issue of
whether the defendant could assert a setoff because the setoff was based on matters outside
the contract or transaction that led to the plaintiff’s claim. The decision’s only discussion of
the “accrual” issue came in its penultimate paragraph, where it assumed that the defendant’s
sales to the assignor amounted to accrued claims and discussed only the timing of those
sales. See Paul Safran Metal Co., 566 F. Supp. at 257-58. Likewise, Trinity Lighting focused
exclusively on whether a setoff can derive from a transaction unrelated to the assignment and
did not address the “accrued claim” issue we now face. See Trinity Lighting, 2011 WL
3489693, at *2 (addressing the plaintiff’s “premise *** that an account debtor’s set-off
counterclaim against an assignee must arise from the contracts underlying the assignee’s
claim against the account debtor”). We, therefore, take guidance from neither decision upon
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which the defendant relies.
¶ 15 The defendant also argues that we must reject the above interpretation, because an
interpretation that forecloses its setoff renders subsection 9-404(a)(2) of the UCC
“meaningless surplusage.” We disagree. Under the interpretation that section 9-404(a)(2)
setoffs are limited to causes of action that accrued before notice of assignment, that section
still has a well-defined purpose. Section 9-404(a)(1) allows setoffs arising out of the same
transaction that gave rise to the assigned asset. See 810 ILCS 5/9-404(a)(1) (West 2008).
Section 9-404(a)(2) allows setoffs based on matters extrinsic to the assigned asset, and, to
protect the assignee and debtor alike, it adds the limitation that such matters may amount to
setoffs only if they accrue before notice of the assignment. See James J. White & Robert S.
Summers, Uniform Commercial Code § 34-6 (2010). Thus, even under the above
interpretation, section 9-404(a)(2) is not superfluous. See also Trinity Lighting, 2011 WL
3489693, at *2 (subsection (a)(2) must apply to “any defense or claim not ‘arising from the
transaction that gave rise to the contract’ underlying the assignee’s suit ***. Otherwise,
subsection (a)(2) would be superfluous ***.”).
¶ 16 For the above reasons, we follow the weight of foreign authority to conclude that a claim
does not accrue under section 9-404(a)(2) of the UCC until a cause of action has accrued.
Here, there is no dispute that, although the defendant had performed services for Granite
prior to Granite’s assignment of its accounts receivable, no cause of action had accrued
against Granite. Accordingly, under our interpretation of section 9-404(a)(2) of the UCC, the
defendant could not rely on those services as the basis for a setoff against the plaintiff’s
claim.
¶ 17 For the foregoing reasons, we affirm the judgment of the circuit court.
¶ 18 Affirmed.
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