Imperial Refining Co. v. Kanotex Refining Co.
29 F.2d 193, 1928 U.S. App. LEXIS 2645 (1928)
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Rule of Law:
When a party assigns a contract, the assignee who accepts the assignment is primarily liable for performance and assumes the contract's duties. If the assignee's breach causes the assignor to be held liable, the assignor may recover the amount of its losses from the assignee, and the cause of action for this reimbursement accrues when the assignor pays or becomes legally obligated to pay the damages.
Facts:
- On May 28, 1919, Imperial Refining Company entered into a written contract with Fern Oil Company, agreeing to purchase all oil produced from a specific lease for a one-year period.
- On the same day, Imperial Refining Company assigned this contract and all its rights thereunder to Kanotex Refining Company, which accepted the assignment in writing.
- After accepting the assignment, Kanotex made pipe line connections to the Fern Oil lease, which was being developed for oil production.
- Kanotex subsequently refused to run or take the oil being produced by Fern Oil Company, in breach of the assigned contract.
- As a result of Kanotex's failure to perform, Fern Oil Company held Imperial Refining Company legally responsible for its damages.
- Imperial Refining Company notified Kanotex of a lawsuit filed against it by Fern Oil Company and requested that Kanotex defend the suit.
- Imperial Refining Company ultimately paid an $18,000 judgment, plus attorney's fees and costs, to Fern Oil Company as a result of the breach.
Procedural Posture:
- Imperial Refining Company (plaintiff) sued Kanotex Refining Company (defendant) in federal trial court based on diversity of citizenship.
- Kanotex filed a demurrer to the complaint, arguing it failed to state a cause of action and that the claim was barred by the statute of limitations.
- The trial court sustained the demurrer.
- Imperial declined to amend its complaint, and the trial court entered a final judgment dismissing the case.
- Imperial Refining Company (plaintiff-appellant) appealed the dismissal to the U.S. Circuit Court of Appeals.
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Issue:
Does an assignee, by accepting the assignment of a contract's rights and benefits, also accept the duties of performance, making it liable to reimburse the assignor for damages the assignor was compelled to pay as a result of the assignee's breach?
Opinions:
Majority - Booth, Circuit Judge.
Yes. An assignee who accepts the benefits of a contract's assignment also accepts its burdens, making the assignee primarily liable for performance and obligated to reimburse the assignor for damages resulting from the assignee's default. First, the underlying agreement between Imperial and Fern Oil was a valid 'output' contract, not void for lack of mutuality, because Fern Oil was bound to sell its entire output to Imperial for a specified time and price. Second, when Kanotex accepted the assignment, it acquired Imperial's rights and also assumed its duties. This created a relationship where Kanotex had the primary duty to perform, and Imperial stood in the position of a surety. Because Imperial, as the surety, was compelled to pay for the default of the principal obligor (Kanotex), Imperial has a right to reimbursement. This right of action accrued not at the time of Kanotex's original breach, but when Imperial paid the judgment, so the suit is not barred by the statute of limitations.
Analysis:
This decision clarifies the legal relationship between an assignor and an assignee after a contract is assigned. It establishes that, absent a contrary agreement, the acceptance of an assignment implies an assumption of the corresponding duties, not just a transfer of rights. This places the primary burden of performance on the assignee and creates a surety-principal relationship with the assignor. The ruling is significant for commercial law as it solidifies the assignor's right to indemnification from a defaulting assignee and clarifies that the statute of limitations for such a claim begins upon payment or judgment, protecting the assignor from having its claim expire before its liability is even determined.
