Hasse Contracting Co. v. KBK Financial, Inc.
127 N.M. 316, 980 P.2d 641, 1999 NMSC 023 (1999)
Rule of Law:
An account debtor may assert contract defenses and setoff claims arising before notification of assignment against an assignee of a contractor who failed to pay a sub-supplier, even if the assignee holds a perfected security interest, particularly when statutory prompt payment clauses are incorporated into the underlying contract for public works projects.
Facts:
- On February 14, 1994, Hilfiker Systems, Inc. (Hilfiker) entered into a factoring agreement with KBK Financial, Inc. (KBK), granting KBK a security interest in its inventory, accounts, contract rights, and proceeds, including those that might arise later.
- KBK recorded its security interest by filing a financing statement with the Texas secretary of state on February 22, 1994.
- In June 1994, Hilfiker contracted with Hasse Contracting Company, Inc. (Hasse) to supply precast concrete panels for a state highway construction project in New Mexico, which contract included an anti-assignment clause and incorporated terms from the general contract, including a statutory requirement for prompt payment to subcontractors and suppliers (§ 13-4-28).
- Hilfiker arranged for Gosney & Sons, Inc. (Gosney) to cast and deliver the panels to Hasse at the job site between mid-January 1994 and early February 1995.
- On January 26, 1995, Gosney presented Hasse with a bill for the panels, and Hilfiker later sent Hasse Invoice No. 0366 on February 14, 1995.
- On or about February 1, 1995, KBK notified Hilfiker of its intent to terminate the factoring agreement, and on March 10, 1995, Hilfiker specifically assigned Invoice No. 0366 to KBK.
- On March 15, 1995, KBK notified Hasse that payment for Invoice No. 0366 should be sent directly to KBK.
- Hilfiker subsequently filed for bankruptcy in March 1995, and its trustee abandoned any interest in Invoice No. 0366, leaving Gosney unpaid, and Hasse facing conflicting demands for payment for the concrete panels.
Procedural Posture:
- Hasse Contracting Company, Inc. (Hasse) filed an interpleader action in district court, naming Gosney & Sons, Inc. (Gosney) and KBK Financial, Inc. (KBK) as parties and depositing the disputed funds with the court clerk.
- Hasse, Gosney, and KBK each moved for summary judgment in the district court.
- The district court, following a hearing, granted summary judgment, awarding Gosney all the deposited funds.
- KBK appealed the district court's decision to the Court of Appeals.
- The Court of Appeals affirmed the district court's decision.
- The New Mexico Supreme Court granted certiorari to review the Court of Appeals' rationale.
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Issue:
Can an account debtor on a public works project assert contract defenses and setoff claims against an assignee (who holds a perfected security interest) of a defaulting contractor, thereby allowing payment to a sub-supplier who actually performed the work, when the underlying contract incorporated a statutory prompt payment provision?
Opinions:
Majority - FRANCHINI, Justice
Yes, an account debtor on a public works project can assert contract defenses and setoff claims against an assignee of a defaulting contractor, thereby allowing payment to a sub-supplier. The New Mexico Supreme Court affirmed the district court's award to Gosney, but rejected the Court of Appeals' rationale that materialmen inherently hold an absolute public policy preference over secured creditors. The Court noted that the Legislature has not given suppliers absolute priority and that priority under materialmen's liens is typically determined by timing and notice, which were not thoroughly analyzed in this case, nor were they directly applicable to public works projects in the same way. Instead, the Court relied on NMSA 1978, § 55-9-318(1), which allows an account debtor to assert against an assignee (KBK) any defenses arising from the contract with the assignor (Hilfiker), or any claims accruing before notification of the assignment. The Court found two effective defenses for Hasse against KBK: (1) Hilfiker breached its contract with Hasse by failing to pay Gosney promptly as required by NMSA 1978, § 13-4-28 (the prompt payment clause incorporated by reference into the Hasse-Hilfiker contract), and Hilfiker's subsequent bankruptcy made it apparent Gosney would never be paid. This breach constituted a valid defense under § 55-9-318(1)(a). (2) Hasse had a valid setoff claim under § 55-9-318(1)(b) because Gosney's claim accrued (when it billed or completed delivery) in January or early February 1995, which was before Hasse received notification of KBK's assignment in March 1995. Given these effective defenses against KBK and Hasse's waiver of any potential defenses against Gosney (as Hasse was satisfied with Gosney's work), Gosney was entitled to the interpled funds.
Analysis:
This decision clarifies the interaction between the Uniform Commercial Code (UCC) Article 9 regarding secured transactions and an account debtor's rights in public works contracts. It rejects an expansive interpretation of 'public policy preference' for materialmen, instead grounding priority disputes in specific statutory provisions, particularly an account debtor's contractual and setoff defenses against an assignee. The case emphasizes the importance of prompt payment statutes in public contracts and provides a mechanism for ensuring sub-suppliers are paid even when a contractor defaults and has assigned its accounts. Future cases will likely scrutinize the timing of claims and notifications more closely when an account debtor seeks to assert defenses against an assignee.
