Opinion
No. 99-510.
Opinion filed October 6, 1999.
An appeal from the Circuit Court for Levy County, W.O. Beauchamp, Jr., Judge.
Randall P. Mueller, of Carey, O'Malley, Whitaker Manson, P.A., Tampa, for Appellant.
Michael D. Sechrest, of Peter A. Robertson Associates, P.A., Gainesville, for Appellee.
Appellant Cone Constructors (Cone) argues that the trial court erred in denying its motion to compel arbitration. As we explain below, we reverse and remand because we find that the court must determine preliminary issues of notice under Florida's Uniform Commercial Code (U.C.C.) before ruling on appellant's motion.
In the instant case, Power South, Inc., which is not a party to the action below or this appeal, executed over a period of three years several security agreements and promissory notes with appellee Drummond Community Bank (Drummond), assigning to the bank the proceeds of all its current and future contracts and accounts receivable. During that same period appellant Cone, the general contractor on a state project, subcontracted a portion of that project to Power South. Subsequently, Power South defaulted on its promissory notes, and Drummond brought suit against Cone alleging that despite its two previous notices under section 679.318, Florida Statutes, to Cone of Power South's assignment of its account receivables to Drummond that Cone had disbursed to other entities funds that were owed to Drummond. Cone responded with a motion to compel arbitration, in which it alleged that as assignee of Power South, Drummond was subject to the arbitration provision in the subcontract and was required to arbitrate its claim. The trial court denied Cone's motion to compel arbitration, and Cone appealed that decision.
An understanding of the applicability and effect of section 679.318, Florida Statutes, which is part of Florida's Uniform Commercial Code (U.C.C. § 9-318), on the question of arbitration before us is central to the issue on appeal. Only the following two paragraphs of the statute are relevant to our discussion:
(1) Unless an account debtor has made an enforceable agreement not to assert defenses or claims arising out of a sale as provided in s. 679.206 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 claims arising there from; 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.
. . .
(3) The account debtor is authorized to pay the assignor until the account debtor receives notification that the amount due or to become due has been assigned and that payment is to be made to the assignee. A notification which does not reasonably identify the rights assigned is ineffective. If requested by the account debtor, the assignee must seasonably furnish reasonable proof that the assignment has been made and unless he or she does so the account debtor may pay the assignor.
"`Account debtor' means the person who is obligated on an account, chattel paper, or general intangible." § 679.105, Fla. Stat.
Initially, we reject appellee Drummond's claim that because it was merely the assignee of a security interest, it is not subject to the arbitration provision contained in the underlying subcontract. The language of section 679.318(1) is clearly to the contrary. In Banque De Parise Et Des Pays-Bas v. Amoco Oil Co., 573 F. Supp. 1464, 1469-74 (S.D.N.Y. 1983), the court construed this same U.C.C. provision with regard to a bank similarly seeking to avoid arbitration by claiming its limited assignment of a security interest in a receivable entitled it to take its interest free of the contractual limitations. The federal court determined that although the assignee of a security interest or accounts receivable under a contract is not an assignee for purposes of performance of the contract, this does not mean that such an assignee is not subject to a remedial mechanism, such as arbitration, which is contained in the underlying contract. Id. at 1469. The court explained that
[t]he Uniform Commercial Code differentiates between a "normal commercial assignment, which substitutes the assignee for the assignor both as to rights and duties, and a financing assignment in which only the assignor's rights are transferred." U.C.C. § 2-210(4) Official Comment 5. The UCC makes explicit, however, that "the rights of an assignee are subject to . . . all terms of the contract between the account debtor and assignor and any defense or claim arising therefrom." U.C.C. § 9-318(1)(a). This principle applies to arbitration provisions, which would be of no value if a party "could escape the effect of such a clause by assigning a claim subject to arbitration between the original parties to a third party." Hosiery Manufacturers' Corp. v. Goldston, 238 N.Y. 22, 28, 143 N.E. 779, 780 (1924). Even an assignment only of contract "rights" not entailing any duty of performance, see U.C.C. § 2-210, Official Comment 5, must be deemed to include the bargained-for remedial procedure. See U.C.C. § 1-201(36) (defining "rights" to include "remedies"). Under the Code, moreover, and in New York where the UCC has been adopted, an assignee is entitled to enforce an arbitration clause as one of the rights acquired by assignment. At least one lower court has squarely held that a lender who takes an assignment of accounts receivable as security for a loan is required to follow the remedial procedure specified in the assigned contract. Cutting Room Appliances Corp. v. National Bronx Bank, 97 N.Y.S.2d 363 (Sup. Ct. Bronx Cty. 1950).
Id. at 1471-72 (some citations omitted). We agree with this analysis. Accordingly, where, as in the instant case, the assignee of the accounts receivable has brought suit against an account debtor to recover payments that the assignee alleges were due to the assignee, the assignee is subject to the arbitration provision in the underlying contract. The question remains, however, whether under the U.C.C. and the facts of this case there are any issues Drummond must arbitrate.See id. at 1470-72. The answer lies in the resolution of issues of notice.
Section 672.210(4), Florida Statutes, corresponds to U.C.C. § 2-210(4). Official Comment 5 to the section notes that subsection (4) "lays down a general rule of construction distinguishing between a normal commercial assignment, which substitutes the assignee for the assignor both as to rights and duties, and a financing assignment in which only the assignor's rights are transferred."
In the instant case, the bank alleges that it is only seeking from Cone the money due to it as assignee of Power South that Cone actually and improperly paid out to other parties after receiving notice under section 679.318. Clearly, these facts and the two provisions of section 679.318 cited above raise several issues regarding notice in a case such as this, e.g., whether notice was received, when it was received, and whether it was effective. Under the express language of section 679.318(1)(b), receipt of notice determines whether an account debtor may raise certain claims and defenses. In addition, as the court inAmoco explained, "[b]y giving notice under Section 9-318(1)(b), the assignee makes clear its refusal to become a party to the underlying agreement between the assignor and the debtor, insofar as that agreement provides a remedial mechanism (arbitration) to enforce rights and duties no longer enforceable in any forum." 573 F. Supp. at 1470. Thus under the U.C.C., Drummond would only be required to arbitrate those claims and defenses available to Cone under section 679.318(1) once issues of notice are resolved. Accordingly, resolution of these preliminary notice issues arising under the U.C.C. directly determines whether there are any claims that may be subject to arbitration. See id.
For the reasons explained above, we reverse and remand for the trial court's determination of these notice issues under section 679.318.
We recognize that in Amoco Oil, the court granted the motion to compel arbitration and referred the factual dispute over notice to arbitration because the assignee, which sought to defeat the motion, had not established that Amoco received notice. Here, however, Drummond, the assignee of the security interest under the subcontract, alleged in its complaint that effective notice was given, and the record before us does not reveal that Cone has disputed this allegation.
BARFIELD, C.J., MINER and PADOVANO, JJ., CONCUR.
NOT FINAL UNTIL TIME EXPIRES TO FILE MOTION FOR REHEARING AND DISPOSITION THEREOF IF FILED.