Private Capital, Inc. v. J & K Engine & Rig Repair

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

07-1556

PRIVATE CAPITAL, INC.

VERSUS

J & K ENGINE & RIG REPAIR, ET AL.

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APPEAL FROM THE
FIFTEENTH JUDICIAL DISTRICT COURT
PARISH OF VERMILION, NO. 79632-J
HONORABLE KRISTIAN D. EARLES, DISTRICT JUDGE

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MARC T. AMY
JUDGE

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Court composed of Oswald A. Decuir, Marc T. Amy, and Billy Howard Ezell, Judges.

AFFIRMED.

Frederick T. Haas, III
Montgomery, Barnett, Brown, Read,
Hammond & Mintz, L.L.P.
3200 Energy Centre
1100 Poydras Street
New Orleans, LA 70163-3200
(504) 585-3200
COUNSEL FOR DEFENDANT/APPELLANT:
Coastal Drilling Co., Inc.

Jeffrey Ackermann
Durio, McGoffin, Stagg
and Ackermann
Post Office Box 51308
Lafayette, LA 70505
(337) 233-0300
COUNSEL FOR PLAINTIFF/APPELLEE:
Private Capital, Inc.

AMY, Judge.

The plaintiff, an accounts receivable factor, filed suit for recovery of sums

allegedly due on an invoice purchased from an oil rig repair business. The defendant

refused payment on the invoice, alleging that the work representing the sums due had

not been performed. Both parties filed motions for summary judgment. The trial

court granted that of the plaintiff, finding that the defendant had waived its right to

advance defenses against the plaintiff. The defendant appeals. For the following

reasons, we affirm.

Factual and Procedural Background

Private Capital, Inc. filed suit alleging that, in November 1997, it entered into

a Purchase and Security Agreement with J&K Engine and Rig Repairs, Inc. in which

it agreed to factor certain accounts of J&K. Under the terms of the agreement, Private

Capital would advance seventy percent of a factored account and, upon payment of

the invoice by J&K’s client, would return the amount of the invoice less a fee

determined by the timeliness of the payment.

This case relates to J&K invoice Number 2013, dated May 31, 2002 and issued

to Coastal Drilling Company, LLC d/b/a Corpus Christi Drilling and Workover

(hereinafter Coastal). The invoice related to work allegedly performed on a Coastal

oil rig. It reflected a $174,630.00 balance. J&K assigned the invoice to Private

Capital pursuant to its factoring agreement. On the same date that the invoice was

issued, J&K forwarded to Coastal a notice of the assignment of the account. The

notice, written on J&K letterhead, was signed by Coastal’s controller and returned.

The notice provides:

In order to accommodate the changes and growth in our business,
we have been fortunate to obtain the services of Private Capital, Inc. and
Gisbland Bank and Trust, as a source of additional funding through an
assignment of our accounts. The availability of this source will enable

us to serve our customers in a more efficient manner. Therefore we wish
to inform you that payment on all invoices should made [sic] payable to
J&K Engine & Rig Repair and mailed to:
Attn:Accounting Department
P.O. Box 52964
Lafayette, LA 70505

The assignment has been duly recorded under Louisiana statutes
and under the Uniform Commercial Code. Please make the proper
notations on your ledger and acknowledge the receipt of this letter by
signing one copy and then returning to Private Capital, Inc.

We also ask that you agree that you will not assert any claims or
defenses which you may have against J&K Engine & Rig Repair,
against Private Capital as assignee. We agree however that you fully
reserve the right to assert against J&K Engine & Rig Repair any claims
or defenses, otherwise unassertable against Private Capital, Inc.

If you have any questions concerning your billing, please contact
Private Capital, Inc. . . . upon receipt. All invoices will be accepted as
good and valid, with no right of offset or return, if there is no response
to the contrary by your company upon receipt of our invoices.

This notice and instruction remains in full force and effect until
you are notified by both the undersigned and Private Capital, Inc. in
writing to the contrary. . . . .

Sincerely,
/s/ Noah Perry

P.S. Please sign one copy of this agreement and return to Private
Capital, Inc. by fax as soon as possible. . . .

ACKNOWLEDGED & AGREED BY: /s/ Arlene Adamson
TITLE: Controller
COMPANY: Corpus Christi Drilling & Workover, LLC
DATE: 5-31-02

(Emphasis added.) Private Capital asserts that, by agreeing to the emphasized

paragraph above, Coastal agreed not to assert defenses it may have against J&K,

against Private Capital.

Private Capital filed this matter after Coastal refused to pay the invoice due to

what it contends was its discovery that certain work represented by the invoice had

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not been performed. It named Coastal, J&K, and J&K’s president, Noah Perry, as

defendants. Private Capital obtained a default judgment against J&K and Mr. Perry.

Private Capital’s right to proceed against Coastal was preserved.

Thereafter, Coastal filed a reconventional demand against Private Capital

denying that it entered into a contractual relationship with Private Capital and

denying that it agreed to waive defenses to the invoice. It sought damages related to

defense of the litigation. Coastal also filed a cross claim and third-party demand

against J&K and Noah Perry, seeking indemnification for any judgment rendered

against it in the suit by Private Capital.

Private Capital and Coastal filed cross motions for summary judgment. The

trial court entered judgment in favor of Private Capital in the amount of $122,241.00,

plus interest. The judgment preserved Private Capital’s right to pursue the remainder

of the sums due under the invoice and its claim for attorney fees. The trial court

denied Coastal’s motion for summary judgment. After the judgment was designated

as a partial final judgment pursuant to La.Code Civ.P. art. 1915(B)(1), Coastal

appealed.

Coastal styles its assignments of error as follows:

1. The trial court erred in holding that a unilateral “waiver of
defenses” as contemplated by La.R.S. 10:9-403 is valid when
secured via an ex post facto letter transmitted after all
performance was allegedly rendered on a contract which was
negotiated five-and-a-half months earlier and which, if not
substantially performed at that point in time, would be voidable
due to default.

2. The trial court erred in holding that an assignee may avail itself
of the quasi holder-in-due course status provided by La.R.S. 10:9-
403 when it takes an assignment in violation of its own
contractual arrangement with the assignor.

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3. The trial court erred in failing to consider Coastal’s “real”
defenses to its alleged obligation on a fraudulently-assigned
invoice.

4. The trial court erred in failing to consider that a unilateral “waiver
of defenses” as contemplated by La.R.S. 10:9-403 is invalid when
obtained through fraud in violation of Louisiana’s law on
conventional obligations.

5. The trial court erred in failing to consider that a proposal which
unilaterally and materially modifies an existing contract of sale
between merchants is invalid pursuant to La.Civ.Code art. 2601.

6. The trial court erred in failing to recognize that the rights of an
assignee are limited by certain defenses pursuant to La.R.S. 10:9-
404.

7. The trial court improperly denied Coastal the opportunity to
present its well-pleaded affirmative defenses of fraud, error and
mistake.

Discussion

Summary Judgment

An appellate court reviews summary judgments de novo, using the same

criteria as the trial court in considering whether the ruling on the summary judgment

was appropriate. Supreme Services v. Sonny Greer, Inc., 06-1827 (La. 5/22/07), 958

So.2d 634. According to La.Code Civ.P. art. 966(B), summary judgment “shall be

rendered forthwith if the pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, if any, show that there is no genuine

issue as to material fact, and that mover is entitled to judgment as a matter of law.”

We consider Coastal’s appeal in light of this standard.

La.R.S. 10:9-403

Coastal assigns a number of alleged errors in the granting of the summary

judgment. However, the primary question posed by this appeal is whether the waiver

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of defenses clause, “acknowledged & agreed by” Coastal, is enforceable under

La.R.S. 10:9-403. The statute provides, in pertinent part:

[10:]9-403. Agreement not to assert defenses against
assignee

....

(b) Agreement not to assert claim or defense.
Except as otherwise provided in this section, an agreement
between an account debtor and an assignor not to assert
against an assignee any claim or defense that the account
debtor may have against the assignor is enforceable by an
assignee that takes an assignment:

(1) for value;

(2) in good faith;

(3) without notice of a claim of a property or
possessory right to the property assigned; and

(4) without notice of a defense or claim in
compensation, set-off, or recoupment of the type that may
be asserted against a person entitled to enforce a negotiable
instrument under R.S. 10:3-305(a).[1]

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[10:]3-305. Defenses and claims in recoupment

(a) Except as stated in Subsection (b), the right to enforce the obligation of
a party to pay an instrument is subject to the following:

(1) a defense of the obligor based on (i) infancy of the obligor to the extent
it is a defense to a simple contract, (ii) duress, lack of legal capacity, or illegality of
the transaction which, under other law, nullifies the obligation of the obligor, (iii)
fraud that induced the obligor to sign the instrument with neither knowledge nor
reasonable opportunity to learn of its character or its essential terms, or (iv) discharge
of the obligor in insolvency proceedings;

(2) a defense of the obligor stated in another Section of this Chapter or a
defense of the obligor that would be available if the person entitled to enforce the
instrument were enforcing a right to payment under a simple contract; and

(3) a claim in recoupment of the obligor against the original payee of the
instrument if the claim arose from the transaction that gave rise to the instrument;
but the claim of the obligor may be asserted against a transferee of the instrument
only to reduce the amount owing on the instrument at the time the action is brought.

(b) The right of a holder in due course to enforce the obligation of a party to
pay the instrument is subject to defenses of the obligor stated in Subsection (a)(1),

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(c) When subsection (b) not applicable. Subsection (b) does
not apply to defenses of a type that may be asserted against a holder in
due course of a negotiable instrument under R.S. 10:3-305(b).

In light of this standard and the evidence presented by the parties in their summary

judgment submissions, we find, in sum, that the trial court correctly granted Private

Capital’s motion as it, as the assignee, took the J&K account for value, in good faith,

and without notice of claims or defense. Coastal failed to establish the presence of

real defenses pursuant to La.R.S. 10:9-403 and 10:3-305. We turn to discussion of

Coastal’s specific assignments.

Waiver

While Coastal acknowledges that a waiver of defenses clause is contemplated

by La.R.S. 10:9-403, it contends that the waiver is effective only if bargained for

contemporaneously with the underlying contract between the account debtor and the

assignee. Coastal argues that, since the waiver of defenses clause was created at the

end of its transaction with J&K, it is unenforceable. We find no merit in this

argument.

Although La.R.S. 10:9-403 specifically provides for a waiver of defenses, it

does not specifically address the timing of the waiver, and does not suggest

limitations to a waiver’s enforcement beyond the criteria listed. Its wording is clear

and free of ambiguity. See La.R.S. 1:4; La.Civ.Code art. 9. Coastal’s assertion that

the parties must bargain for the waiver of defenses at the time of the underlying

contract relates, however, to the fundamental requirement that the “agreement” to

waive defenses be valid. Coastal cites to jurisprudence indicating that

but is not subject to defenses of the obligor stated in Subsection (a)(2) or claims in
recoupment stated in Subsection (a)(3) against a person other than the holder.

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“consideration” may be an issue with waivers created after an underlying contract.2

Instead, we find that the validity of the agreement in this case must be addressed in

light of and by reference to La.Civ.Code art. 1966, which requires the existence of a

lawful “cause” for an obligation.3 “Cause” is defined as the reason a party obligates

itself. La.Civ.Code art. 1967. As noted by Revision Comment (c), cause is not

equivalent to consideration and the reason for a party to bind itself need not be to

obtain something in return or to secure an advantage. Rather, a party may even bind

itself in favor of another party without advantage for itself in return. See, e.g.,

La.Civ.Code art. 19104 and La.Civ.Code art. 19785. Here, Coastal chose to

“acknowledge[] & accept[]” the notice/waiver as part of its ongoing business

relationship with J&K. The facilitation of its relationship with J&K, particularly in

light of Coastal’s desire for conclusion of the project, establishes cause.

This assignment lacks merit.

Satisfaction of La.R.S. 10:9-403

Coastal next contests Private Capital’s satisfaction of La.R.S. 10:9-403(b)(2)’s

requirement that the assignment be taken “in good faith.” Coastal argues that Private

Capital cannot satisfy the good faith element as it allegedly took the “assignment in

2
See, e.g., Brookridge Funding Carp. v. Northwestern Human Services, 175 F.Supp.2d 355
(D.Conn. 2001).
3
See La.R.S. 10:1-103, which provides that: “Unless displaced by the particular provisions
of this Title, the other laws of Louisiana shall apply.”
4
Art. 1910. Gratuitous contracts
A contract is gratuitous when one party obligates himself towards another for
the benefit of the latter, without obtaining any advantage in return.
5
Art. 1978. Stipulation for a third party
A contracting party may stipulate a benefit for a third person called a third party
beneficiary.
Once the third party has manifested his intention to avail himself of the
benefit, the parties may not dissolve the contract by mutual consent without the
beneficiary’s agreement.

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violation of its own agreement with the assignment.” Coastal points to that portion

of the factoring agreement between Private Capital and J&K, which provides:

7. Representations and Warranties. Seller [J&K Engine and
Rig Repairs, Inc.] hereby represents and warrants to Purchaser.

....

e. Each Account assigned and sold to Purchaser [Private
Capital] shall be based upon a bonafide sale and actual
shipment of the Merchandise or service performed and
shall be a valid and enforceable obligation of the customer,
with no rights of recoupment, offset or counterclaims or
return of merchandise which could reduce the amount of
such Account.

Coastal contends that Private Capital was or should have been aware that the

invoice at issue, Number 2013, was not representative of a valid and enforceable

obligation of the customer with no rights of recoupment, offset or counterclaims.

Recall that Coastal contends that J&K had not performed the work reflected on the

invoice and points to evidence in the record in support of its claim. However, the

ultimate validity of the invoice or the presence of the right of recoupment, offset, or

counterclaims is not pertinent to the issue of Private Capital’s taking of the

assignment in good faith. There is no indication in the record of a lack of good faith

on the part of Private Capital. In fact, the portion of the agreement referenced by

Coastal indicates that J&K represented and warranted to Private Capital that the

factored accounts satisfied the criteria of Section 7(e).

Real Defenses

Coastal next references La.R.S. 10:9-403(c), which specifies instances in which

an agreement not to assert defenses against an assignee is inapplicable. Subsection

(c) provides:

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(c) When subsection (b) not applicable. Subsection (b) does
not apply to defenses of a type that may be asserted against a holder in
due course of a negotiable instrument under R.S. 10:3-305(b).

With regard to defenses, La.R.S. 10:3-305 explains:

(a) Except as stated in Subsection (b), the right to enforce the
obligation of a party to pay an instrument is subject to the following:

(1) a defense of the obligor based on (i) infancy of the obligor to
the extent it is a defense to a simple contract, (ii) duress, lack of legal
capacity, or illegality of the transaction which, under other law, nullifies
the obligation of the obligor, (iii) fraud that induced the obligor to sign
the instrument with neither knowledge nor reasonable opportunity to
learn of its character or its essential terms, or (iv) discharge of the
obligor in insolvency proceedings;

....

(b) The right of a holder in due course to enforce the obligation
of a party to pay the instrument is subject to defenses of the obligor
stated in Subsection (a)(1), but is not subject to defenses of the obligor
stated in Subsection (a)(2) or claims in recoupment stated in Subsection
(a)(3) against a person other than the holder.

Coastal argues that, under La.R.S. 10:3-305(a), the “real” defenses of illegality of the

transaction and fraud are available. Based on the parties’ submissions, however,

neither is applicable.

While Coastal styles the dispute as one of an illegal transaction or of fraud, the

record indicates that Coastal’s complaint regarding the invoice is that it included

charges for work either not performed or performed unsatisfactorily. A defense

arising under La.R.S. 10:3-305(a)(1)(ii), requires “illegality of the transaction which,

under other law, nullifies the obligation of the obligor.” Coastal has pointed to no

provision of law rendering the transaction illegal. Rather it challenges whether J&K

performed under its contract as represented. Based on the record, Coastal’s challenge

does not rise to the level of “illegality of the transaction which, under other law,

nullifies the obligation of the obligor.” Neither is there evidence that Coastal can

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maintain a defense for fraud under La.R.S. 10:3-305(a)(1)(iii). The notice and waiver

of May 31, 2002 apprized Coastal of the assignment of the account. It was signed

and returned by Coastal’s controller. The submissions also indicate that Coastal, an

oilfield business, used factoring arrangements in its own business and was

accustomed to the practice.

This assignment lacks merit.

Mistake

Coastal also cites La.Civ.Code art. 1949 in its assertion that the waiver must

fail due to mistake. Article 1949 provides: “Error vitiates consent only when it

concerns a cause without which the obligation would not have been incurred and that

cause was known or should have been known to the other party.” In support of its

argument, Coastal points to testimony from J&K’s president indicating that the

purpose of forwarding the notice and waiver form was to apprize Coastal of the

assignment of the account and from Coastal’s managing partner that Coastal would

not have signed a waiver requiring it to pay for work not performed. These

references, however, do not reveal error vitiating consent pursuant to La.Civ.Code art.

1949. J&K’s notice and waiver included specific information pertinent to the

assignment and to the waiver. Coastal, familiar with factoring agreements, signed

and returned the notice. It did so within the course of an ongoing business

relationship.

This assignment lacks merit.

Louisiana Civil Code Articles 2601 and 2602

Coastal next argues that the waiver of defenses constituted a unilateral

modification of its pre-existing contract with J&K and must fail under La.Civ.Code

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arts. 26016 and 26027. Coastal’s argument presumes, however, that any modification

was unilateral. It was not, as Coastal consented to the waiver, without exception or

alteration, when its representative signed and returned the notice and waiver form.

Recovery under La.R.S. 10:9-404

In its sixth assignment of error, Coastal asserts that Private Capital’s rights, as

assignee, are subject to defenses it could assert against J&K. It cites La.R.S. 10:9-

404, which provides, in part, that:

(a) Assignee's rights subject to terms, claims, and defenses;
exceptions. Unless an account debtor has made an enforceable
agreement not to assert defenses or claims, and subject to subsections
(b) through (e), 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 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 authenticated by the assignor or the assignee.

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Art. 2601. Additional terms in acceptance of offer to sell a movable
An expression of acceptance of an offer to sell a movable thing suffices to
form a contract of sale if there is agreement on the thing and the price, even though
the acceptance contains terms additional to, or different from, the terms of the offer,
unless acceptance is made conditional on the offeror’s acceptance of the additional
or different terms. Where the acceptance is not so conditioned, the additional or
different terms are regarded as proposals for modification and must be accepted by
the offeror in order to become a part of the contract.

Between merchants, however, additional terms become part of the contract
unless they alter the offer materially, or the offer expressly limits the acceptance to
the terms of the offer, or the offeree is notified of the offeror's objection to the
additional terms within a reasonable time, in all of which cases the additional terms
do not become a part of the contract. Additional terms alter the offer materially when
their nature is such that it must be presumed that the offeror would not have
contracted on those terms.
7
Art. 2602. Contract by conduct of the parties
A contract of sale of movables may be established by conduct of both parties
that recognizes the existence of that contract even though the communications
exchanged by them do not suffice to form a contract. In such a case the contract
consists of those terms on which the communications of the parties agree, together
with any applicable provisions of the suppletive law.

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This assignment, however, is rendered moot by the determination that Coastal “made

an enforceable agreement not to assert defenses or claims[.]”

Affirmative Defenses

Coastal referred to the invoice as a “fraudulent” document in its answer to

Private Capital’s petition, yet did not set forth the specific affirmative defenses of

fraud, mistake, and error. After the trial court granted Private Capital’s motion for

summary judgment and denied Coastal’s cross-motion, Coastal requested leave to

assert affirmative defenses. The trial court denied the request. In its final assignment,

Coastal contends this was error. Although it did not list specific, affirmative defenses

of fraud, mistake, and error, the record indicates that Coastal made argument and

presented evidence regarding these defenses. It has done so again before this court.

It did not seek to specifically plead the defenses until after summary judgment was

rendered against it. This assignment requires no correction on appeal.

DECREE

For the foregoing reasons, the judgment of the trial court is affirmed. All costs

of this proceeding are assessed to the appellant, Coastal Drilling Company, L.L.C.

AFFIRMED.

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