UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
Byron White United States Courthouse
1823 Stout Street
Denver, Colorado 80257
(303) 844-3157
Patrick J. Fisher, Jr. Jane B. Howell
Clerk Chief Deputy Clerk
April 9, 2001
TO: ALL RECIPIENTS OF THE OPINION
RE: 00-3000, Commerce Bank v. Chrysler Realty Corp., et al.
__ F.3d __, 2001 WL 280479
Filed on March 22, 2001
On page two, the first sentence of the opinion is corrected to read as
follows:
Plaintiff-appellee Commerce Bank, N.A. (“Commerce”) brought this
action seeking actual and punitive damages as well as an accounting
for sums wrongfully paid to defendant Chrysler Realty Corporation
(“Chrysler Realty”) by co-defendant DaimlerChrysler Corporation
(“Chrysler Corporation”).
A copy of the corrected opinion is attached.
Sincerely,
Patrick Fisher, Clerk of Court
By:
Keith Nelson
Deputy Clerk
encl.
F I L E D
United States Court of Appeals
Tenth Circuit
MAR 22 2001
PUBLISH
PATRICK FISHER
UNITED STATES COURT OF APPEALS Clerk
TENTH CIRCUIT
COMMERCE BANK, N.A.,
Plaintiff-Appellee,
v. No. 00-3000
CHRYSLER REALTY
CORPORATION;
DAIMLERCHRYSLER
CORPORATION,
Defendants-Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS
(D.C. No. 99-CV-2017)
Submitted on the briefs:
James P. O’Hara and Andrew M. DeMarea of Shughart Thomson & Kilroy, P.C.,
Overland Park, Kansas, and William E. Quirk of Shughart, Thomson & Kilroy,
P.C., Kansas City, Missouri, for Plaintiff-Appellee.
James H. Geary and Janice M. Powell of Howard & Howard Attorneys, P.C.,
Peoria, Illinois, for Defendants-Appellants.
Before TACHA , Chief Judge, EBEL , and LUCERO , Circuit Judges.
LUCERO , Circuit Judge.
Plaintiff-appellee Commerce Bank, N.A. (“Commerce”) brought this action
seeking actual and punitive damages as well as an accounting for sums wrongfully
paid to defendant Chrysler Realty Corporation (“Chrysler Realty”) by co-
defendant DaimlerChrysler Corporation (“Chrysler Corporation”). 1
Defendants
appeal the district court’s order granting summary judgment in favor of
Commerce on Commerce’s claim for actual damages. Chrysler Realty
additionally appeals the district court’s order awarding Commerce $20,000 in
punitive damages. We reverse the order of summary judgment, vacate the award
of punitive damages and remand.
I
Most of the facts in this case were stipulated by the parties. On September
5, 1991, Chrysler Corporation entered into a sales and service agreement (“the
Dealer Agreement”) with one of its retail dealers, Bierwirth Chrysler Plymouth,
Inc. (“Bierwirth”). Under the Dealer Agreement, Bierwirth could earn factory
receivables, which include payment for sales promotion incentives, warranty work
and returned parts, from Chrysler Corporation. The Dealer Agreement also
1
After examining the briefs and appellate record, this panel has determined
unanimously that oral argument would not materially assist the determination
of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G). The case
therefore is ordered submitted without oral argument.
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provided that Chrysler Corporation could offset any amount Bierwirth owed to
Chrysler Corporation or its affiliates against any amount due from Chrysler
Corporation or its affiliates to Bierwirth.
On October 10, 1995, Chrysler Realty, an affiliate of Chrysler Corporation,
entered into a Dealer Lease Agreement, as landlord, with Bierwirth as tenant. As
part of the lease—and to secure its payment obligations under the lease’s
terms—Bierwirth assigned to Chrysler Realty any amounts due to Bierwirth from
Chrysler Corporation or its subsidiaries. The assignment stated that “[Bierwirth]
agrees that this right of assignment shall constitute a present security interest in
and to such accounts benefitting [Chrysler Realty] and the within agreements of
[Bierwirth] shall be a Security Agreement within the meaning of the Uniform
Commercial Code as applicable in the state where the premises are located.” (I
Appellants’ App. C at 3.) Notably, Chrysler Realty did not file a financing
statement to reflect the assignment.
As part of a December 8, 1995 transaction in which Commerce supplied
inventory floor plan financing to Bierwirth, Bierwirth granted Commerce a
security interest in its inventory, all accounts receivable, contract rights and
general intangibles then existing or thereafter owing to Bierwirth. Bierwirth
executed and delivered to Commerce a security agreement. Commerce perfected
its security interest by filing the security agreement with the Kansas Secretary of
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State on December 22, 1995. On February 4, 1998, Bierwirth executed and
delivered to Commerce a second security agreement containing similar terms.
Commerce also filed this security agreement with the Kansas Secretary of State
on February 5, 1998, thereby perfecting its security interest.
On January 14, 1998, Chrysler Realty sent Chrysler Corporation a written
notice of Bierwirth’s assignment of factory receivables. In this letter, Chrysler
Realty stated that Bierwirth’s rent was past due in the amount of $34,165.84 and
requested that factory receivables be paid to Chrysler Realty until further notice.
Bierwirth later sold its assets, and Chrysler Realty paid a contractor for repairs at
the dealership premises.
The amount in controversy is $218,000, which is the sum of the values of
four checks that Chrysler Realty received from Chrysler Corporation after the
January 14, 1998 notice. The dates and amounts of these payments are as
follows:
Date Amount
February 24, 1998 $ 45,000
March 24, 1998 $ 50,000
April 24, 1998 $ 110,000
May 15, 1998 $ 13,000
TOTAL: $ 218,000
On May 6, 1998, Thomas J. Noack, Deputy General Counsel of Commerce,
gave actual notice to Chrysler Corporation of Commerce’s perfected security
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interest in the factory receivables owed by Chrysler Corporation to Bierwirth.
Thus, three of the above-identified checks were sent to Chrysler Realty before
Chrysler Corporation was given actual notice of Commerce’s security interest.
The remaining May 15, 1998 check was sent to Chrysler Realty after actual notice
had been given.
Commerce filed this action on January 15, 1999, claiming that Chrysler
Corporation and Chrysler Realty had converted the $218,000 paid to Chrysler
Realty. In addition to a money judgment for the $218,000, Commerce requested
punitive damages against the defendants.
Evidence was presented that Chrysler Corporation paid Chrysler Realty
$2000 more than Chrysler Realty was entitled to claim from Bierwirth. Although
Commerce filed suit on January 15, 1999, Chrysler Realty did not notify Chrysler
Corporation, Bierwirth or Commerce of the surplus. The overpayment was not
disclosed until the deposition of Thomas H. Noles, Chrysler Realty’s Eastern Area
Manager, on May 17, 1999, five months after suit was filed. The district court
found that Chrysler Realty acted wantonly in retaining the $2000 surplus and that
Commerce was entitled to a punitive damage award equal to ten times the amount
withheld.
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II
A
This Court reviews de novo the district court’s summary judgment order.
L&M Enters., Inc. v. BEI Sensors & Sys. Co. , 231 F.3d 1284, 1287 (10th Cir.
2000). Summary judgment is appropriate “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 any material fact and that the moving
party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c).
“A federal court sitting in diversity applies the substantive law . . . of the
forum state.” Signature Dev. Cos., Inc. v. Royal Ins. Co. of Am. , 230 F.3d 1215,
1218 (10th Cir. 2000). We review the district court’s interpretation of Kansas
state law de novo. Beck v. N. Natural Gas Co. , 170 F.3d 1018, 1023 (10th Cir.
1999).
B
Defendants argue the district court’s judgment in favor of Commerce
worked to improperly relieve Commerce from the setoff provision of the Dealer
Agreement in contravention of Kan. Stat. Ann. § 84-9-318(1)(a). That statute
reads:
(1) Unless an account debtor has made an enforceable agreement not
to assert defenses or claims arising out of a sale as provided in
section 84-9-206 the rights of an assignee are subject to
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(a) all the terms of the contract between the account debtor and
assignor and any defense or claim arising therefrom[.]
Chrysler Corporation, which is obligated to pay the dealer receivables to
Bierwirth, is the “account debtor” within the meaning of this statute. Bierwirth,
having assigned its rights to these receivables to Commerce, is the “assignor” and
Commerce is the “assignee.” Defendants argue that under § 84-9-318(1)(a)
Commerce’s interest in the funds paid to Chrysler Realty is subject to a “claim or
defense.” Their asserted defense is the provision of the Dealer Agreement that
allows Chrysler Corporation to offset any amount Bierwirth owes to Chrysler
Corporation or its affiliates against any amount due from Chrysler Corporation or
its affiliates to Bierwirth. Commerce responds that under the statute, its rights are
subject only to the claims and defenses of Chrysler Corporation as account debtor,
not to any setoff based upon Chrysler Realty’s claim against Bierwirth.
We have located no Kansas case precisely on point. 2
Because the Kansas
Supreme Court has not addressed the issue involved, we must predict how it
would decide the question. Blackhawk-Cent. City Sanitation Dist. v. Am.
Guarantee & Liab. Ins. Co. , 214 F.3d 1183, 1188 (10th Cir. 2000). In making this
determination we may look to “other state court decisions, federal decisions, and
2
As will be discussed, at least one Kansas Supreme Court case indirectly favors
the position taken by defendants.
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the general trend and weight of authority.” Farmers Alliance Mut. Ins. Co. v.
Salazar , 77 F.3d 1291, 1295 (10th Cir. 1996).
The district court relied on cases from other jurisdictions; however, those
cases are distinguishable from the present one and are unlikely to be followed by
the Kansas courts. In light of the general trend and weight of authority, we
conclude Kansas courts addressing the § 84-9-318 issue would follow the
principle of nemo dat qui non habet —no one may transfer more than he
owns—and rule for defendants.
1. Bank Leumi
The district court found persuasive the case of Bank Leumi Trust Co. of
N.Y. v. Collins Sale Serv., Inc. , 393 N.E.2d 468 (N.Y. 1979). Although the facts
in Bank Leumi bear some superficial resemblance to those in this case, the district
court failed to draw a crucial factual distinction.
Bank Leumi Trust Company loaned money to Precision Graphics and
secured its loan by taking a security interest in Precision’s accounts receivable.
Sesco Designs owed Precision $8000 for goods purchased from Precision. As
assignee of the funds due from Sesco, Bank Leumi sought to satisfy its claim by
attaching the $8000 owed to Precision.
Precision also owed moneys arising from commission sales to Collins Sales
Service, a corporation that had the same principal officer and shareholder as
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Sesco. Precision, Sesco and Collins reached a separate agreement allowing
Precision to offset any moneys owed to it by Sesco against its debt to Collins.
Collins and Sesco argued that under section 9-318(1)(a) of the Uniform
Commercial Code—which is identical to Kan. Stat. Ann. § 84-9-318(1)(a)—Bank
Leumi’s interest was subject to this setoff, and Collins therefore had first priority
to the money Sesco owed Precision. The New York Court of Appeals disagreed
concluding:
It is abundantly clear that only Sesco is an account debtor of
Precision, the assignor, Collins being an account creditor by virtue of
the money owed it by Precision. Thus, in order to invoke the
protection accorded by the statutory section, it was incumbent upon
Sesco to come forth with evidentiary facts that it had a claim or
defense against Precision arising from their contract for the sale of
goods which would negate its obligation to pay Precision. This,
defendant Sesco has failed to do.
The reason espoused by Sesco for refusing payment for the
goods it received from Precision is not a claim or defense arising
from their contract, but, rather, a collateral agreement in which the
method of payment of Precision’s obligation to Collins was
established.
Bank Leumi , 393 N.E.2d at 469-70.
Defendants persuasively argue that Bank Leumi should be distinguished
from this case. Unlike Bank Leumi , the offset involved here is more than just an
ex post, collateral agreement concerning payment. Chrysler Corporation has a
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valid defense 3
against Bierwirth. The Dealer Agreement itself provides that
Chrysler Corporation may offset against its obligations to Bierwirth any amount
Bierwirth owes to Chrysler Corporation or its affiliates . Because Chrysler Realty
is an affiliate of Chrysler Corporation, Chrysler Corporation may assert the setoff
against Bierwirth and hence against Commerce. Chrysler Corporation is not
asserting a right held only by Chrysler Realty or, as in Bank Leumi , a mere
payment arrangement collateral to the original indebtedness agreement.
2. MNC Commercial
The other case upon which the district court relied, MNC Commercial
Corp. v. Joseph T. Ryerson & Son, Inc. , 882 F.2d 615 (2d Cir. 1989), is similarly
distinguishable from the current case. MNC Commercial involved a triangulated
business arrangement similar to the one in the present case and in Bank Leumi .
MNC was the secured party/assignee of Ramco. Ryerson, the account debtor,
owed money to Ramco, the assignor. Ramco in turn owed money to Inland Steel,
Ryerson’s parent company. Ryerson stated in its order forms with Ramco that it
3
We employ the term “defense” here to include the claimed setoff. Although
§ 84-9-318(1)(a) refers to a “defense or claim,” the Comment to § 9-318 of the
Uniform Commercial Code expressly includes setoffs existing before the account
debtor is notified of a subsequent assignment. See Kan. Stat. Ann. § 84-9-318,
Official UCC Comment (“An assignee has traditionally been subject to defenses
or setoffs existing before an account debtor is notified of the assignment.”).
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reserved the right to set off any sums that Ramco owed either to Ryerson or to its
parent company, Inland Steel, against Ryerson’s obligations to Ramco.
MNC sued to recover certain funds owed to Ramco that Ryerson had sent
directly to Inland Steel in reliance on the claimed right of offset. Ryerson cited
U.C.C. § 9-318 in support of the argument that it properly relied on the setoff
provision, based on Ramco’s debt to Inland Steel, as a defense to MNC’s action.
The Second Circuit brushed aside issues of bankruptcy law and the “battle of the
forms” and rejected Ryerson’s argument.
The court [in Bank Leumi ] left open the question whether a setoff
would be a defense under Section 9-318 where an intercorporate
transaction between the third-party-setoff claimant (Inland) and the
account debtor (Ryerson) led to the assumption by the account debtor
of the third party’s claim against the assignor (Ramco). See [Bank
Leumi , 393 N.E.2d at 469]. In those circumstances, of course, the
account debtor would own the claim against the assignor. No
argument is made that Ryerson owns Inland’s claim against Ramco.
Viewed in the light most favorable to Ryerson, therefore, the claimed
contract with Ramco as to the setoff established at best “a collateral
arrangement [regarding] the method of payment” that did not alter
Ryerson’s underlying obligation.
MNC Commercial , 882 F.2d at 620 (emphasis added).
In other words, the Second Circuit determined that the forms in use
between Ryerson and Ramco created a “collateral arrangement regarding the
method of payment” and did not create any rights that Ryerson could assert
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against Ramco or its assignee. 4
Specifically, the arrangement was collateral to the
debtor’s (Ryerson’s) agreement to do business with the assignor (Ramco).
Notably, the court in MNC Commercial viewed the issue before it as whether a
subsequently arising setoff could take priority over a perfected security interest.
882 F.2d at 619.
Unlike Bank Leumi and MNC Commercial , this case involves an offset
provision in the original agreement between Chrysler Corporation and Bierwirth,
the agreement that made Chrysler Corporation the debtor. The offset provisions
in Bank Leumi and MNC Commercial arose subsequent to the original agreements
and were accordingly deemed to be mere collateral payment agreements. Because
the offset provision was integral to the original indebtedness agreement at issue in
this case, the right is a contractual one that constitutes a defense to a claim of
non-payment asserted against the account debtor. The terms of the agreement
provide no right to Bierwirth to insist that Chrysler Corporation pay amounts
directly to it so long as Bierwirth still owed money to Chrysler Realty. Simply
put, Chrysler Corporation had the contractual right to discharge its obligation to
Bierwirth by paying Chrysler Realty instead of Bierwirth.
3. Kansas Law
4
The Second Circuit did not reach the issue of whether a contractual right of
setoff was created by the forms sent to Ramco by Ryerson.
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Kansas would most likely adopt a commercially pragmatic view toward the
transaction at issue and rule in favor of the account debtor’s assertion of its
contractual rights. Defendants cite a Kansas case applying Kan. Stat. Ann.
§ 84-9-318(1)(b) under circumstances similar enough to those here to suggest that
a Kansas court would rule for defendants in this case. Bank of Kan. v.
Hutchinson Health Servs., Inc. , 785 P.2d 1349 (Kan. 1990).
In Bank of Kansas , the account debtor was the Kansas Department of
Social and Rehabilitation Services (“SRS”), a state agency. SRS owed money to
assignor Hutchinson Health Services (“Hutchinson”). Hutchinson in turn owed
money to the Kansas Department of Human Resources (“DHR”). The Bank of
Kansas, Hutchinson’s assignee, made loans to Hutchinson secured on
Hutchinson’s accounts receivable. Pursuant to its security interest, the Bank
sought to intercept payment due to Hutchinson from SRS. DHR objected, arguing
that it had priority to the payment as an offset against funds Hutchinson owed to
DHR.
Although the contract between SRS and Hutchinson did not expressly
permit offset, the court held that DHR had a statutory right to set off funds owed
to HHS by SSR. Instead of applying Kan. Stat. Ann. § 84-9-318(1)(a), the court
applied § 84-9-318(1)(b), which subjects the rights of an assignee to “any other
defense or claim of the account debtor against the assignor which accrues before
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the account debtor receives notification of the assignment.” The Kansas Supreme
Court held that DHR was entitled to offset the payment due to Hutchinson from
SRS and that under § 84-9-318(1)(b) the Bank of Kansas could claim priority to
funds advanced after DHR was notified of its security interest. Thus, the
government’s offset right took priority over the Bank’s security interest, even
though the government’s interest was not secured by a U.C.C. filing.
Commerce argues that Bank of Kansas should be distinguished from the
case at bar because it involved government parties rather than corporate
subsidiaries. The salient point, however, is that the offset in Bank of Kansas
trumped a perfected security interest under § 84-9-318. As the Kansas
commentary to § 84-9-318 notes, “[t]he rights of the Article 9 assignee are . . .
much less than those of a holder in due course of a negotiable instrument.”
Kan. Stat. Ann. § 84-9-318, Kan. Comment to Subsection (1).
A case of more general interest is H. Freeman & Son v. Henry’s, Inc. , 717
P.2d 1049 (Kan. 1986). There the Kansas Supreme Court refused to compel an
account debtor that had relied on an offsetting credit it had with a bankrupt
merchant to repay the bankrupt’s assignee. Id. at 1051. The credit with the
bankrupt assignor was sufficient to cover the debt allegedly accrued with the
assignee. H. Freeman suggests that offsets will be honored when failure to do so
would work an injustice: it held that absent notice of the bankruptcy to the
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account debtor, the assignee had acquired no greater right to the money than its
bankrupt assignor. See id.
a. Nemo Dat Qui Non Habet
The Kansas Supreme Court’s holding in H. Freeman that an assignee can
acquire rights no greater than those held by the assignor is consistent with the
basic principle of commercial law encapsulated in the Latin phrase nemo dat qui
non habet . 5 This principle can be found in several provisions of the Kansas
U.C.C., including § 84-9-318. See, e.g. , Kan. Stat. Ann. §§ 84-3-305 (defenses to
obligations on instruments), 84-7-504(1) (transfer of documents of title).
The basic concept behind nemo dat is that a transferee’s rights are no better
than those held by his transferor. Applying the principle of nemo dat as
expressed in § 84-9-318 and elsewhere in the Kansas U.C.C., Commerce, as
Bierwirth’s assignee, took its right to receive the funds subject to the right of
Chrysler Corporation, the account debtor, to pay them to Chrysler Realty. The
fact that Commerce had a perfected security interest, and Chrysler Realty did not,
makes no difference because Commerce’s secured status comes into play only
after it is shown that Bierwirth was entitled to payment of the funds.
Although it is not a U.C.C. case, OXY USA, Inc. v. Colorado Interstate Gas
Co. , 883 P.2d 1216 (Kan. Ct. App. 1994), is instructive. In OXY the Kansas
5
“He who hath not cannot give.” Black’s Law Dictionary 1037 (6th ed. 1990).
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Court of Appeals applied nemo dat , “the time-honored rule of law” that the
“assignee ‘stands in the shoes of the assignor,’” to reject an attempt by an
assignee to obtain a greater interest than its assignor. Id. at 1223. The assignor
was the Watson family, who had entered into a gas operating agreement (“GOA”)
with OXY USA, a gas production company. The GOA called for the Watsons to
receive fifty percent of the gas produced and bear fifty percent of the operating
costs of gas production. The Watsons later executed an instrument assigning all
of their mineral interest for a period of ten years to assignee Colorado Interstate
Gas Company (“CIG”). At issue was whether the assignment allowed CIG to take
its fifty percent interest free of the costs of production. The Kansas Court of
Appeals held that CIG’s interest was subject to the obligation to pay OXY USA
the Watsons’ share of production costs:
The law is settled that CIG could not acquire a greater right
from the assignment than those possessed by its assignor. In this
case, the assignor’s right to receive production income was subject to
a lien in favor of their share of the cost of production. The assignee
can gain no greater interest. This is a fundamental rule of law , and
no resort to the complexities of the Uniform Commercial Code can
render it impotent in this action.
Id. at 1223 (emphasis added).
Other Kansas cases also recognize the principle of nemo dat in commercial
transactions. See, e.g. , H. Freeman & Son , 717 P.2d at 1051 (“[I]t is
fundamental that the assignee of a contract acquires no greater rights from the
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assignment than those possessed by the assignor.”). This principle is a matter of
hornbook contract law. See Restatement (Second) of Contracts § 336 Comment b
(1981) (“[T]he assignment of a non-negotiable contractual right ordinarily
transfers what the assignor has but only what he has.”).
In creating a security interest against Bierwirth’s accounts payable,
Commerce took the risk that Bierwirth’s entitlement to funds from an account
debtor might be limited by the account debtor’s defense or claim. For the
foregoing reasons, judgment for Commerce should be reversed.
C
Upon de novo review of the $20,000 punitive damage award, see FDIC v.
Hamilton , 122 F.3d 854, 857 (10th Cir. 1997), we reject Chrysler Realty’s
position that there was insufficient evidence to support an award of punitive
damages for its actions in withholding the $2000 surplus in this case. We
conclude, however, that the punitive damage award should be vacated to allow the
district court to consider whether Chrysler Realty’s position as a prevailing party
in this matter justifies a different amount of punitive damages than the $20,000
previously awarded.
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III
The grant of summary judgment in favor of Commerce Bank is
REVERSED and its order awarding punitive damages is VACATED . This case
is REMANDED for further proceedings not inconsistent with this opinion.
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