In Re: Advanced Sys

• Court: Court of Appeals for the Fifth Circuit
• Decided: April 24, 2002
• Docket: 01-30282
• Status: Unpublished

Opinion

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,

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 R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR.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.

-2- “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.

-3- 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.

-4- 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

-5- 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

-6- In accordance with the foregoing, the judgment of the

district court is AFFIRMED IN PART and REVERSED IN PART.

-7-