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H. John Homan Co. v. Wilkes-Barre Iron and Wire Works Inc.

Decided: May 11, 1989.


On appeal from the Superior Court, Chancery Division, Gloucester County.

Pressler, Scalera and Stern. The opinion of the court was delivered by Pressler, P.J.A.D.


[233 NJSuper Page 92] This appeal raises a narrow but fundamental question respecting accounts-receivable financing. If an account debtor has a defense or setoff which would enable him to withhold all or a part of the payment of the account but nevertheless, by mistake or negligence or without knowledge of a defense, he tenders full payment to an assignee for value of the account, who accepts it without notice of defenses, may the debtor thereafter recover that payment or any part of it from the assignee on restitutionary or other equitable principles? Although this issue has not been heretofore addressed in this jurisdiction, it has recently been considered by a number of others which, uniformly, have opted to follow the lead of the seminal opinion of the First Circuit Court of Appeals in Michelin Tires, etc. v. First Nat. Bank of Boston, 666 F.2d 673 (1st Cir.1981), which answered this question, essentially for policy reasons, in the negative. We are convinced of the correctness

of the views expressed by Michelin and, consequently, join the roster of states which have adopted them.

The question arises in a typical and virtually undisputed factual complex. Plaintiff H. John Homan Company, Inc. (Homan) was the general contractor on a Gloucester County Municipal Utilities Authority construction project in accordance with a public works contract entered into between them in June 1983. Homan, as required by N.J.S.A. 2A:44-143, furnished the Authority with a bond guaranteeing the payment of all labor and materials provided to the job. In July 1983, Homan entered into a structural steel subcontract with defendant Wilkes-Barre Iron, and Wilkes-Barre in turn subcontracted part of the steel work to defendant Thomas Lindstrom & Company, Inc. On March 5, 1984, after substantial work on the project had been completed, Wilkes-Barre notified Homan that defendant First Eastern Bank, N.A. (bank) was a secured creditor and several weeks later requested Homan to make the next progress payment to it and the bank as co-payees. Homan complied and issued its check for $35,000 in that manner. Early in April Wilkes-Barre advised Homan that the bank was now in possession of all of its accounts receivable and that its final payment, then due, should be made to the bank alone. Homan again complied, sending the bank its check in the amount of $58,415, a sum which represented final payment less a retainage of $5,000 for undelivered materials.

Lindstrom in the meantime had sent a bill for work to date to Wilkes-Barre on March 13, 1984. This bill remained unpaid despite Homan's above described two subsequent payments to Wilkes-Barre and the bank. Lindstrom sent Wilkes-Barre its final bill on April 30, 1984, after Homan's last payment to the bank on Wilkes-Barre's account. Neither the bank nor Homan had been noticed of either of Lindstrom's billings and, insofar as this record indicates, neither had required any representation or certification from Wilkes-Barre respecting payment of its

own subcontractors and materialmen.*fn1 Wilkes-Barre, predictably, became insolvent and was unable to meet its obligation to Lindstrom. Lindstrom's bills, totaling some $35,000, remained unpaid, and in July 1984 it filed a statutory notice of lien claim pursuant to the Municipal Mechanics' Lien Law, N.J.S.A. 2A:44-132. It thereafter filed notice of claim on Homan's payment bond. The claim was validated, bond proceeds released to it, and Homan, ultimately liable on the bond, required to make payment. Homan seeks by this action to recover that payment from the bank and appeals from summary judgment in the bank's favor dismissing that claim.*fn2

Homan predicates its affirmative claim against the bank on N.J.S.A. 12A:9-318(1)(a), which provides in full as follows:

Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in 12A: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. . . .

Homan argues that the use of the word "claim" in the stipulation that the assignee's rights are subject to "any defense or claim arising" from the contract between the account debtor and the assignor bespeaks a legislative intention not only to permit the account debtor to interpose affirmative defenses and setoffs in an action against him by the assignee to recover on the account, but also to permit him, as plaintiff, to make affirmative claims against ...

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