{ "id": 1672665, "name": "BENTON STATE BANK v. Frank R. WARREN and wife", "name_abbreviation": "Benton State Bank v. Warren", "decision_date": "1978-03-06", "docket_number": "77-22", "first_page": "1", "last_page": "8", "citations": [ { "type": "official", "cite": "263 Ark. 1" }, { "type": "parallel", "cite": "562 S.W.2d 74" } ], "court": { "name_abbreviation": "Ark.", "id": 8808, "name": "Arkansas Supreme Court" }, "jurisdiction": { "id": 34, "name_long": "Arkansas", "name": "Ark." }, "cites_to": [ { "cite": "112 N.E. 2d 636", "category": "reporters:state_regional", "reporter": "N.E.2d", "year": 1953, "opinion_index": 0 }, { "cite": "159 Ohio St. 423", "category": "reporters:state", "reporter": "Ohio St.", "case_ids": [ 1062898 ], "year": 1953, "opinion_index": 0, "case_paths": [ "/ohio-st/159/0423-01" ] }, { "cite": "74 Yale L.J. 217", "category": "journals:journal", "reporter": "Yale L.J.", "year": 1964, "pin_cites": [ { "page": "235, n. 35" } ], "opinion_index": 0 }, { "cite": "178 Colo. 291", "category": "reporters:state", "reporter": "Colo.", "case_ids": [ 4649938 ], "weight": 2, "year": 1972, "opinion_index": 0, "case_paths": [ "/colo/178/0291-01" ] } ], "analysis": { "cardinality": 642, "char_count": 12891, "ocr_confidence": 0.891, "pagerank": { "raw": 2.482198670337993e-07, "percentile": 0.807611177331188 }, "sha256": "a17ff04538630699d84f2f8477b64153a7710aaba8455221b763e4ff8ecfe9be", "simhash": "1:e41812685a628a4e", "word_count": 2166 }, "last_updated": "2023-07-14T19:12:30.639178+00:00", "provenance": { "date_added": "2019-08-29", "source": "Harvard", "batch": "2018" }, "casebody": { "judges": [ "Byrd, J., dissents." ], "parties": [ "BENTON STATE BANK v. Frank R. WARREN and wife" ], "opinions": [ { "text": "George Rose Smith, Justice.\nThe appellees, the Warrens, are engaged in building and operating apartments in California and elsewhere in the United States. In 1974 the Warrens, as owners and general contractors, began the construction of a 111-unit apartment complex at 2000 Reservoir Road in Little Rock. Four separate sub-contracts \u2014 for concrete work, rough carpentry, finish carpentry, and heating and air conditioning \u2014 were let to Harps General Contractors.\nHarps failed to pay its suppliers of labor and materials, even though adequate progress payments were made from time to time by the Warrens. Those progress payments were made by checks payable jointly to Harps and to the appellant, Benton State Bank, which had lent money to Harps and had taken an assignment of Harps\u2019s right to receive progress payments. Eventually the Warrens had to take over and complete Harps\u2019s four subcontracts. Various unpaid materialmen brought this suit against Harps and the Warrens, asserting liens against the apartment property. The Warrens cross-complained against Harps and the bank for any loss that the Warrens might ultimately sustain. That loss proved to be $13,367.12, for which the chancellor entered judgment in favor of the Warrens against Harps and the bank. The bank appeals. The sole question is whether the loss should be borne by the bank or by the Warrens. As we view the case, that question in turn depends upon which was more seriously at fault in allowing the loss to occur, both being at fault to some degree.\nThe facts, though undisputed, are not simple. The subcontract between Harps and the Warrens for rough carpentry is typical of the four subcontracts. The agreement provides that the Warrens will pay Harps $55,080 for its performance of the subcontract. On the tenth of each month the Warrens will make a progress payment to Harps for 90% of the work done in the preceding month. If there are unpaid suppliers of labor and materials the Warrens at their option may make the progress-payment checks payable jointly to Harps and to the suppliers. The contract also provides that Harps\u2019s right to compensation under the contract is assignable. Any assignment is subject to the Warrens\u2019 rights against Harps.\nShortly before construction began, the bank made a $60,000 loan to Harps to pay a tax delinquency owed by Harps, secured by a lien on some cattle. Later on Harps, as additional security, assigned to the bank its right to the progress payments under its subcontracts with the Warrens.\nThe president of the bank testified that the bank agreed to make additional loans to Harps of up to 75% of the amount due upon each application by Harps for a progress payment. In practice, the matter was handled in this way: Harps signed a printed form of application for each progress payment. The form set out the amount due and requested payment of 90% of that amount. Harps certified on each form that all bills for labor and materials covered by earlier progress payments had been paid. Those certifications were false. Harps was delinquent all along in the payment of its outstanding accounts, as the bank had reason to know even if it did not have actual knowledge.\nWhenever Harps submitted an application for a progress payment to the bank, the bank would advance money to Harps, as it had agreed to do. The bank president testified that he understood generally that the advances were to be used by Harps to meet its payroll. The bank sent each progress-payment application to the Warrens, with a covering letter like this one: \u201cEnclosed is a copy of [Harps\u2019s] Application for Payment . . ., which has been assigned to us. Please make your check payable to Benton State Bank, as per our agreement with Harp\u2019s Construction Company, and sign [an acceptance of the assignment] in the space provided at the bottom of this page, and return the original to us.\u201d\nThe Warrens, upon the receipt at their California office of each application for a progress payment, would send their check for the requested amount to the bank. The checks were payable jointly to Harps and to the bank and bore this statement above the payee\u2019s endorsement: \u201cBy endorsement of this check payee acknowledges payment for labor, materials, or both, in construction at the following address: 2000 Reservoir Road, Little Rock, Ark.\u201d Such progress-payment checks totaled $82,686.24. Of that amount the bank used $27,271.86 to repay itself for loans on the Warren project, used $9,393.42 to repay itself for other loans, and deposited the balance of $46,020.96 to Harps\u2019s general account at the bank.\nThe procedure that we have outlined was followed by the parties for several months. Finally, however, a representative of one of the unpaid materialmen visited the Warrens\u2019 superintendent at the project site and expressed concern about getting money that was overdue from Harps for materials delivered to the job. The Warrens at once made an investigation and learned that Harps was delinquent in its indebtedness to its suppliers and was unable to demonstrate its solvency. The Warrens then took over the responsibility for completing the work, arid this suit followed.\nIn our study of the case we have been assisted not only by the briefs of opposing counsel but also by a brief, submitted at our request, by counsel for the Permanent Editorial Board for the Uniform Commercial Code.\nThe case falls within the general purview of the Code, which applies by its terms to any transaction which is intended to create a security interest in accounts. Ark. Stat. Ann. \u00a7 85-9-102(1) (Supp. 1977). Harps\u2019s right to progress payments from the Warrens was an \u201caccount\u201d as that term is defined in \u00a7 85-9-106. The Warrens were \u201caccount debtors\u201d with respect to that account. \u00a7 85-9-105. Hence Harps was the assignor of an account, and the bank the assignee, as a result of Harps\u2019s assignment to the bank of its right to progress payments.\nSection 85-9-318 (1) (a) provides that the rights of an assignee (the bank) are subject to all the terms of the contract between the account debtor (the Warrens) and the assignor (Harps) and to any defense or claim arising therefrom. It follows that the bank necessarily took some risk in lending Harps up to 75% of the amount specified in each application for a progress payment. That is, if the Warrens, upon receipt of an application, had discovered that there were outstanding bills for labor and materials, the Warrens, under the subcontract, could have made their check payable jointly to the bank and to the suppliers of labor and materials. In that situation it cannot be doubted that the bank\u2019s interest in the check would have been subordinate to the suppliers\u2019 primary right to payment. That is so because the bank\u2019s rights as assignee were subject to any claim by the Warrens against the bank\u2019s assignor, Harps, who was primarily liable to its own suppliers.\nThat, however, is not what happened. Instead the Warrens, with no knowledge of Harps\u2019s indebtedness to its suppliers, made their checks payable to Harps and to the bank. The bank cashed the checks and applied part of the money to its own loans to Harps. The narrow question is: In that situation, are the Warrens entitled to recover from the bank their payments up to the amount of their net loss, $13,367.12? '\nThis precise question seems to have been considered in only one case, Farmers Acceptance Corporation v. DeLozier, 178 Colo. 291, 496 P. 2d 1016, 10 UCC Rep. 1099 (1972). That case was nearly identical to this one, in that a subcontractor had assigned his contract rights to a lender, the general contractor had made a progress payment to that lender, and the general contractor then sought to recover its payment when it sustained a loss as a result of the subcontractor\u2019s failure to pay its suppliers. In holding that the general contractor was entitled to recover the amount that the lender had applied to its own loan to the subcontractor, the court relied upon Code provisions that we have mentioned and upon this sentence in a law review article by Professor Grant Gilmore: \u201c[W]here the assignor fails to perform the contract, the assignee cannot retain mistaken, or even negligent, payments made to it by the [debtor] unless there has been a subsequent change of position by the assignee. \u201d Gilmore, The Assignee of Contract Rights and His Precarious Security, 74 Yale L.J. 217, 235, n. 35 (1964-65).\nWe need not say whether we would agree with Gilmore\u2019s statement in every case, no matter how negligent the account debtor might be or how innocent of fault the assignee might be. The issue is open to some exercise of judgment, for the precise point is not covered by any specific provision in the Uniform Commercial Code. In fact, Gilmore\u2019s sentence is, in context, merely his summary of the holding in Firestone Tire & Rubber Co. v. Central Nat. Bank, 159 Ohio St. 423, 112 N.E. 2d 636 (1953), a pre-Code case.\nIn the case at bar the equities clearly do not stand entirely in favor of either party. No doubt the Warrens were remiss in making no apparent effort to verify Harps\u2019s representations that all previous bills for labor and materials had been paid. On the other hand, the bank was certainly not an innocent recipient of the progress payments, without notice of possible claims on the part of the Warrens against Harps.\nThe bank knew that Harps had been compelled to borrow a large sum to pay delinquent federal taxes. It. knew that another bank had refused to make that loan. It was in close touch with Harps\u2019s financial difficulties and knew, for instance, that shortly before the last progress payment was made at least eleven checks written by Harps on the bank had been dishonored. It had solid reasons for suspecting the truth of Harps\u2019s assertions, which the bank forwarded to the Warrens, that all past-due bills for labor and materials had been paid. It was on notice that its endorsements on the progress-payment checks recited that the money was furnished to pay for labor and materials. The president of the bank, a law school graduate, knew that unpaid laborers and materialmen could file liens against the project. He knew that part of the earlier progress payments had been applied by the bank to its own loans to Harps and assumed that additional progress-payment money had been used by Harps to meet its payrolls. The question would naturally arise, How had Harps been able to pay its suppliers when it had to borrow against the progress payments to meet its payrolls? When all the circumstances are considered, we cannot say that the Chancellor\u2019s decision in favor of the Warrens is clearly against the preponderance of the evidence.\nAffirmed.\nByrd, J., dissents.", "type": "majority", "author": "George Rose Smith, Justice." }, { "text": "Conley Byrd, Justice,\ndissenting. The provisions of the Uniform Commercial Code, so far as here applicable provide:\n\u201cArk. Stat. Ann. \u00a7 85-9-318 (Supp. 1977) (1) \u2018. . . 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 claim arising therefrom; . . . \u2019 \u201d\nThe term \u201crights\u201d is defined, Ark. Stat. Ann. \u00a7 85-1-201 (Supp. 1977) as follows:\n\u201c(36) \u2018Rights\u2019 includes remedies.\u201d\nThus when we look at Ark. Stat. Ann. \u00a7 85-9-318, supra, with the definition of \u201crights\u201d superimposed, we then read it as saying \u201c. . . the [remedies] of an assignee are subject to (a) all the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom; ...\u201d\nNotwithstanding the specific language of the Uniform Commercial Code and its specific definitions, the majority has now interpreted Ark. Stat. Ann. \u00a7 85-9-318 to place a liability upon the assignee. The Benton State Bank was not pursuing a remedy as to the accounts in question from which the Warrens could make any defense or claim arising from the pursuit of such remedy. The bank had no need to pursue a right (remedy) against the account debtor because all such accounts had been paid \u2014 in fact the bank was no longer an assignee as to those accounts.\nThe effect of the majority\u2019s view is to make every Banker, who has taken an assignment of accounts for security purposes, a deep pocket surety for every bankrupt contractor in the state to whom it has loaned money. Will the majority apply the same reasoning to product liability arising from such transactions under the innumerable warranty provisions? If so, what limitations will be applied to the bank\u2019s liability in such situations?\nI also disagree with the majority that the bank had such notice of the unpaid bills that it was not a bona fide purchaser of the accounts.\nFor the reasons herein stated, I respectfully dissent.", "type": "dissent", "author": "Conley Byrd, Justice," } ], "attorneys": [ "Hall, Tucker, Lovell & Alsobrook, by: O. Wendell Hall, Jr., for appellant.", "Owens, McHaney & McHaney, by: John C. Calhoun, Jr., for appellees." ], "corrections": "", "head_matter": "BENTON STATE BANK v. Frank R. WARREN and wife\n77-22\n562 S.W. 2d 74\nOpinion delivered March 6, 1978\n(In Banc)\nHall, Tucker, Lovell & Alsobrook, by: O. Wendell Hall, Jr., for appellant.\nOwens, McHaney & McHaney, by: John C. Calhoun, Jr., for appellees." }, "file_name": "0001-01", "first_page_order": 27, "last_page_order": 34 }