Opinion
Filed 19 June 1968
1. Sales 6 — There can be no implied warranties when the contract of sale contains express warranties upon the subject.
2. Sales 5, 14 — In an action by the assignee of accounts receivable against the assignor, evidence that some accounts were uncollectible in that the debtors had declared bankruptcy and that other debtors refused to pay accounts because they had received defective merchandise, is held, insufficient to be submitted to the jury on the issue of assignor's breach of a warranty that such assets "are free and clear of all liens and encumbrances and claims of every nature," the effect of the warranty being to protect against liabilities which would infringe on the title to the accounts and not to guarantee their collectibility.
APPEAL by plaintiff from Lupton, J., at the 29 January 1968 Civil Session of GUILFORD Superior Court.
Moseley Edwards, Attorneys for plaintiff appellant.
Falk, Carruthers Roth, Attorneys for defendant appellees.
This is a civil action in which plaintiff seeks to recover damages for the alleged breach of certain warranties made by the defendants in the sale of accounts receivable by the corporate defendant to plaintiff.
Plaintiff's pleadings allege that on 10 May 1962, Klimate-Pruf Paint Company, Inc., under a written contract, sold its operating assets, including raw materials, finished goods, work in progress, inventory, equipment, and accounts receivable to plaintiff, a newly organized company. The vendor then changed its name to the Klein Corporation.
This action is concerned only with the assignment of the accounts receivable and more particularly with only five of the 337 assigned. The contract of sale contains the warranty hereinafter set forth in the opinion. The individual defendants joined in the contract of sale for purpose of guaranteeing that the assets and properties conveyed were free and clear of all claims, liens, and encumbrances of every nature, and agreed to indemnify and save the purchaser harmless from any claims or demands arising out of the purchase of the assets covered by the agreement.
The complaint further alleges that plaintiff exercised due diligence to collect the accounts receivable; that it was unable to collect two of the accounts in question because the debtors filed petitions in bankruptcy; that it was unable to collect the other three because the debtors contended that the products purchased were defective.
Plaintiff made demand on defendants to pay the accounts receivable which plaintiff was unable to collect. Defendants failed to make the accounts good.
At the trial, plaintiff introduced evidence in support of its pleadings, including depositions from the three debtors relating to the defective merchandise.
At the conclusion of plaintiff's evidence, defendants moved for judgment as of involuntary nonsuit, which motion was granted and judgment entered thereon. Plaintiff appealed.
In its brief, appellant raises two questions: (1) Did plaintiff introduce sufficient evidence to raise a jury question under the theory of a breach of implied warranty of validity? (2) Did plaintiff introduce sufficient evidence to raise a jury question under the express warranty contained in the contract between the parties?
The paragraph of the bill of sale most pertinent to this appeal reads as follows:
"The seller covenants that it has the right to convey the assets and properties set forth above; that the said assets and properties are free and clear of all liens and encumbrances and claims of every nature; and that it will warrant and defend the title to these assets and properties against the lawful claims of all persons whomsoever."
The first question posed by appellant must be answered in the negative.
"There can be no implied warranties when the contract of sale contains express warranties upon the subject." 4 Strong, N.C. Index, Sales, 6, citing Petroleum Co. v. Allen, 219 N.C. 461, 14 S.E.2d 402.
The bill of sale set forth in the complaint contains an express warranty from the seller to the buyer (plaintiff) on the subject in controversy in this action; therefore, we hold that in this case there was no implied warranty.
Answering appellant's second question is more difficult, but it too must be answered in the negative.
It is plaintiff's contention that the uncollected accounts constitute a breach of that portion of the bill of sale which reads: "The seller covenants . . . that the said assets and properties are free and clear of all liens and encumbrances and claims of every nature . . ." With commendable candor, appellant's counsel admit in their brief that the covenant contained in the contract was not a warranty of collectibility as to accounts receivable. Clearly, the two accounts against debtors who filed bankruptcy proceedings fall within this admission and, as to them, nonsuit was proper.
Payment has been refused on the other three accounts on the grounds that the merchandise was defective. Plaintiff argues that this constitutes a breach of the covenant that the "assets and properties are free and clear of all . . . claims of every nature." This requires a construction of those words, and the context in which they were used must be considered.
An examination of the contract of sale indicates that there are three distinct covenants or warranties. First, to borrow a real estate term, there is a covenant of right to convey by which the seller provided assurance that it had sufficient capacity and title to convey the property which it, by its bill of sale, undertook to convey.
Second, there is the covenant or warranty against "liens and encumbrances and claims of every nature." Liens and encumbrances obviously embrace mortgages, tax liens, and the like. Then, without even a comma to break the connotation, follow the words, and claims of every nature. We think the effect of these words was to warrant the title to the property conveyed, including the accounts receivable, against liabilities that might not be considered a lien or an encumbrance, but which would affect or infringe on the title; a possible example would be the violation of the bulk sales statutes. A debtor's right of setoff or counterclaim for defective merchandise cannot be considered as affecting or infringing defendant's title to the accounts receivable.
Third, there is the warranty to defend which relates to the two preceding sections.
The defenses asserted by the three debtors do not create a lien, encumbrance or claim against the title of the accounts, but rather they relate to collectibility. If the parties intended that the accounts receivable be warranted to be free from any right of setoff or counterclaim, they should have so covenanted. See Warner v. Seaboard Finance Co., 75 Nev. 470, 345 P.2d 759.
The judgment of involuntary nonsuit entered by the Superior Court is
Affirmed.
CAMPBELL and MORRIS, JJ., concur.