UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 01-30282
In the Matter of:
ADVANCED SYSTEMS, INC.,
Debtor.
PARISH NATIONAL BANK,
Appellant
— Cross-Appellee,
versus
ADVANCED SYSTEMS, INC.,
Appellant,
versus
HISTORIC CONSTRUCTION, INC.;
NATIONAL UNION FIRE INSURANCE
COMPANY OF PITTSBURGH, PA,
Appellees
— Cross-Appellants.
Appeals from the United States District Court
for the Eastern District of Louisiana
(No. 00-CV-2985-R)
April 23, 2002
Before ALDISERT,* DAVIS and PARKER, Circuit Judges.
PER CURIAM:**
Parish National Bank (PNB) appeals the bankruptcy court’s
determination of the amount Historic Construction, Inc. (HCI),
owes PNB’s debtor, Advanced Systems, Inc. (ASI). HCI cross
appeals the court’s finding that it is not entitled to certain
setoffs. ASI also cross appeals, claiming that HCI must return
its equipment. Having reviewed the record, we affirm in part and
reverse in part.
BACKGROUND
HCI was the general contractor on a New Orleans project and
hired ASI as one of its subcontractors, making the company
responsible for odd jobs around the work site. At some point, it
determined that ASI was capable of performing more substantial
projects and hired the company as its gypsum board (“sheetrock”)
subcontractor. ASI had never before committed to a project as
large as the one it agreed to do for HCI. The contract between
the two companies provided that ASI could not assign its
contractual responsibilities to a third party; that HCI would
keep a portion of the payment due ASI each month--the
*
Circuit Judge of the Third Circuit, sitting by
designation.
**
Pursuant to 5TH CIR. R. 47.5, the Court has determined
that this opinion should not be published and is not precedent
except under the limited circumstances set forth in 5TH CIR. R.
47.5.4.
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“retainage”--until ASI had completely fulfilled its
responsibilities under the contract; that HCI was entitled to pay
ASI’s materials suppliers itself if ASI did not; and that HCI
could seize ASI’s equipment if ASI failed to perform. No party
disputes that the contract was enforceable from March 1997
forward, notwithstanding ASI’s not having executed it until
later.
In March 1997, ASI entered into an agreement with PNB
calling for the bank to extend ASI a $200,000 line of credit. In
exchange, PNB received a security interest in certain of ASI’s
accounts receivable. PNB perfected a security interest in the
receivables shortly thereafter. In a June 11, 1997 letter, PNB
notified HCI of its interest in the receivables. HCI contacted
PNB by phone to object to the assignment as violative of the
terms of the HCI-ASI contract.
On August 7, 1997, HCI sent a letter notifying ASI that it
was in default on the project. HCI’s letter noted a number of
areas were ASI had fallen short of its responsibilities, but
chief among them was failing to pay its suppliers and employees.
Shortly after HCI sent ASI the default letter, HCI took over much
of ASI’s responsibilities itself, including the payment and
supervision of employees and paying suppliers. On September 5,
1997, PNB loaned HCI $30,334 to cover its payroll expenses. PNB
perfected additional security interests in ASI’s equipment and
receivables.
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Save one payment for $68,936, HCI did not pay any of ASI’s
invoices past May 1997. On October 27, 1997, PNB initiated suit
against HCI in Louisiana state court, seeking to enforce its
interest in ASI’s receivables. HCI terminated ASI December 4,
1997. About a month later ASI filed for bankruptcy. PNB’s
claims were consolidated with the proceeding in bankruptcy court.
After a five-day trial, the bankruptcy court found that PNB was
due $44,854 from HCI. Among other things, the court found that
ASI had performed $188,349 in work from May 1997 until when ASI
was terminated; that HCI was entitled to keep the $75,559 in
retainage it forgot to deduct before May 1997; that PNB could not
recover from HCI the $30,334 it advanced ASI; that HCI was not
entitled to a credit for the $24,982 it paid ASI’s suppliers; and
that ASI was not entitled to return of its equipment, which was
seized by HCI. On appeal, the district court affirmed in all
respects. The district court also found that the evidence was
insufficient to conclude that National Union Fire Insurance
Company, through whom HCI got a performance bond, was liable to
PNB. PNB now appeals, and HCI and ASI have taken cross appeals.
DISCUSSION
We affirm the judgment of the district court with the
following exceptions.
1. HCI is entitled to a setoff for the amount it paid
ASI’s materials suppliers. Although § 9-318(3) of the U.C.C.
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states that an account debtor must pay the account assignee,
rather than the assignor, upon receiving notice of the
assignment, subsection (1)(A) of that same provision also
provides that “the rights of an assignee are subject to . . . all
the terms of the contract between the account debtor and assignor
and any defense or claim arising therefrom.” Cf. LA. REV. STAT.
ANN. § 10:9-318(3)(1993) with id. § 10:9-318(1)(a). The contract
in this case specifically states: “Should Subcontractor at any
time fail to pay all labor, materials or supplies used by
Subcontractor in work when done, Contractor may pay for same and
charge to Subcontractor, without Subcontractor’s consent.”
Stated differently, the contractual provision permitting HCI to
pay ASI’s materials suppliers directly and to receive a credit
for the amount paid is enforceable against PNB, the assignee.
HCI is therefore entitled to a credit of $24,982, the cost of the
materials.
2. ASI is entitled to return of its equipment. The
contract provides that if ASI cannot complete performance on the
contract HCI can “enter upon the premises and take possession,
for the use of completing the work, of all materials, supplies,
tools, equipment and appliances of [ASI] thereon and complete the
work . . . and be liable to [ASI] for no further payment under
this agreement . . . .” The phrase “for the use of completing
the work” limits the conditions under which HCI may take
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possession of ASI’s equipment and supplies, the word “for” in
this case meaning “in order to” or “with the object of.” See
WEBSTER’S THIRD NEW INTERNATIONAL DICTIONARY 886 (1981). The district
court apparently construed a different phrase--“and be liable to
Subcontractor for no further payment”--to mean that HCI was not
bound to return the equipment once it had completed the work. We
conclude that this construction is inconsistent with the basis
under which HCI was allowed to enter and possess the equipment in
the first place. We also conclude that the word “payment” should
not be read in ignorance of the phrase that follows it--namely,
“under this agreement.” Construed together, this language means
that HCI is absolved from paying ASI that which it was supposed
to pay under the contract had ASI fully performed, not that HCI
can keep ASI’s equipment without paying for it. ASI is therefore
entitled to the return of its equipment or the equipment’s value,
$30,600.
3. The district court erred in not dismissing National
Union. Even if National Union was somehow liable to PNB for
HCI’s not paying PNB’s debtor, the contract between the insurance
company and HCI was never entered into evidence. Absent a
stipulation or evidence of spoilage or some other extraordinary
showing, National Union’s liability cannot be established in this
case.
CONCLUSION
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In accordance with the foregoing, the judgment of the
district court is AFFIRMED IN PART and REVERSED IN PART.
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