James Talcott, Inc. v. H. Corenzwit and Company

387 A.2d 350, 76 N.J. 305, 24 U.C.C. Rep. Serv. (West) 445, 1978 N.J. LEXIS 174

• Court: Supreme Court of New Jersey
• Decided: May 15, 1978
• Status: Published

Opinions

The opinion of the court was delivered by

Schreiber, J.

The plaintiff James Talcott, Inc., assignee of a book account arising out of sales of toys by Remco Industries, Inc. (Remco) to the defendant H. Corenzwit & Co., instituted this action to collect the balance due of $36,000. The factual and legal issues centered about a provision in the terms of the purchase agreement to the effect that Remco guaranteed that there would be no drop in prices of the type of merchandise sold to the defendant for a period of 12 months. Talcott, having obtained the Remco inventory upon a default in its borrowing arrangement, sold toys at prices below the Remco guarantee. The defendant asserted that these sales violated the purchase agreement and that breach of the guarantee entitled it to a set-off against the balance due on the account receivable. Holding that the purchase agreement required Remco to reimburse the .defendant "for total gross purchases retroactive to time of [its] first purchase” during the 12-month period prior to the date of violation, the trial court found that the total gross sales in that period exceeded the $36,000 and entered judgment for the defendant. The Appellate Division reversed. It reasoned that the drop-in-price provision was not triggered because the plaintiff Talcott had no contractual relationship with the defendant and it, Talcott, not Remco, sold the merchandise. We granted certification. 75 N. J. 19 (1977).

At the trial the parties stipulated that the amount of the account receivable was $36,000, that the indebtedness arose out of the sales of toys sold and delivered by Remco to the defendant, and that all sales were governed by tbe terms prescribed in the defendant’s purchase order.

The defendant, one of the five largest toy distributors in the United States, had been purchasing toys from Remco, a toy manufacturer, since at least 1966. The defendant’s purchase order forms were used and accepted by both parties for' each order. The orders contained the following pertinent provisions :

The acceptance and Shipment of this order is the Vendor’s certification that the prices, discounts and the terms of the resulting invoice, or invoices, covering the sale are the same that are granted any other customer of similar classification for the same quantity, make, type, quality and grade of merchandise under like circumstances.

If price is omitted on order, it is agreed that Vendor’s price will be the lowest prevailing market price and in no event is the order to' be filled at higher prices than last previously quoted or charged with< lit Purchaser’s written consent. ■ -

Vendor guarantees cost of merchandise against drop in price for 12 months from date of shipment. He agrees to reimburse purchaser for total gross purchases retroactive to time of first purchase for such decrease at once.

• Because of the volatile nature of tbe toy business, the defendant deemed it essential to protect itself as a toy distributor against a drop in prices at the wholesale level. Such a provision, the defendant believed, assured the saleability of its inventory and acted as a safety device with respect to the defendant’s customers who had received a comparable assurance on their purchases from the defendant.

Between February 1973 and February 1974, defendant had purchased $65,842 worth of merchandise from Remco. At some point during that period Remco decided to go out of business. Attempts to sell its inventory located in the Remco Building in Harrison, New Jersey, at 60 percent of the manufacturer’s cost, failed. The inventory was subsequently sold in February 1974 by A. J. Wilner, an auctioneer, on behalf of plaintiff Talcott. Its interest in the inventory resulted from financial arrangements previously made with Remco. Talcott had advanced funds to Remco and obtained a security interest in Remco’s accounts receivable and in Remco’s inventory at Harrison, New Jersey. Upon default, Talcott became assignee of the $36,000 accounts receivable owing by the defendant and caused the inventory to be sold. As we previously observed, these sales occurred at prices lower than those fixed in the defendant’s purchase orders. As of June 11, 1974 the defendant had on hand $15,150 of those goods. These had not been saleable because of the 'sharp drop in prices occasioned by the Remco distress sale.

Plaintiff contends that the drop-in-price clause was not applicable to a distress sale of this type. We do not agree. The contractual language is an outright guarantee that the cost of merchandise will not drop in price for 12 months from date of shipment. There is no intimation that Remco would be relieved of this obligation if some agent, assignee or third person made the sale in its place. The distributor was seeking protection against a wholesale price cut irrespective of the identity of the seller of the toys. Uncontradicted testimony of the defendant’s vice-president was that one “reason we put [the clause] on the purchase order is to protect us in case” Remco went out of business, though he had not expected that occurrence. The distress sale of the Remco inventory violated the defendant’s agreement and understanding with Remco.

We next turn to whether plaintiff Talcott as assignee of the accounts receivable should be subjected to the defendant’s set-off claim, the claim having arisen after the assignment of the accounts receivable became effective. Both parties agree that their respective rights and duties are governed by the Uniform Commercial Code. The Code has continued the common law view that an assignee of a chose in action, such as a receivable, stands in the shoes of the assignor. N. J. S. A. 12A :9 — 318 (1); 12A:1-103; Restatement of Contracts, § 167(1) (2) (1932); 3 Williston, Contracts, § 432 at 181-186 (3d ed. 1960). Generally speaking, the assignee at common law was subject to the equities and defenses which the account debtor could have asserted against the assignor prior to the assignment. In Falkenstern v. Herman Kussy Co., 25 N. J. Misc. 447 (Sup. Ct. 1947), aff’d 137 N. J. L. 200 (E. & A. 1948), the court wrote:

An assignee of a chose in action takes what the assignor had, subject to all set-offs, discounts and defenses which the debtor has, not only against the assignee but also against the assignor before notice of the assignment, [citation omitted] but the assignee does not the-reby, without more, assume the liabilities of the assignor. [Id. at 202 (quoting from 25 N. J. Misc. at 448)]

This proposition has been incorporated in the Code.¹ N. J. S. A. 12A:9-318. Section 9-318 provides that the rights of an assignee are subject to claims arising under the contract between the assignor and the account -debtor. It reads, in pertinent part:

* * * 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 * * *. [12A:9-318(1) (a)]

It is clear then that the rights of the assignee of an account receivable are subject to contract defenses or claims of the account debtor arising by virtue of the terms of the contract out of which the receivable was created. 8ee Gilmore, “The Assignee of Contract Rights and His Precarious Security,” 74 Yale L. J. 217, 230 (1964).

It is immaterial whether the contract defenses or claims arose before or after notice of the assignment. This situation is to be differentiated from the one in which the account debtor’s defenses are not predicated upon the contract terms. Cf. N. J. S. A. 2A:25-1. Where that is so, such defenses are limited to those which accrue before the account debtor is notified of the assignment. N. J. S. A. 12A:9-318(1) (b).

The New Jersey Study Comment to N. J. S. A. 12A:9-318(1) (b) points out:

[W]hen the rights of the account debtor arise on tae contract between the debtor and the assignor it makes no difference whether those rights accrued before or after notification — such rights may be asserted against the assignee. Where, however, the claims against the assignor arise independently of the contract, which is the subject of the assignment, the assignee takes free of those claims which arise subsequent to notification of the account debtor of the assignment to the assignee.²

Accord Ertel v. Radio Corporation of America, 261 Ind. 573, 307 N. E. 2d 471 (Sup. Ct. 1974); Farmers Acceptance Corp. v. DeLozier, 178 Colo. 291, 496 P. 2d 1016 (Sup. Ct. 1972); Gateway Nat’l Bank of Chicago v. Saxe, Bacon & Bolan, 40 A. D. 2d 653, 336 N. Y. S. 2d 668 (Sup. Ct., App. Div. 1972).

The drop-in-price clause in the defendant’s agreement with Remco was clearly a “term of the contract” and since the liquidation of Remco’s inventory at prices below those fixed in the purchase orders constituted a breach of that term, the plaintiff Talcott’s claim was subject to the claim arising out of that breach.

The purchase order provided that Eemco agreed to reimburse the defendant “for total gross purchases retroactive to time of first purchase for such decrease at once.” Since the guarantee against a drop in price was for a 12-month period and the distress sales occurred in February 1974, the defendant asserts that it is entitled to a set-off of $65,842, the amount of its purchases between February 1973 and February 1974. The plaintiff contends that such a construction is inequitable because the defendant had sold all the toys except for $15,150.

We must ascertain the parties’ intention from a consideration of all the surrounding circumstances. Atlantic Northern Airlines, Inc. v. Schwimmer, 12 N. J. 293 (1953). Did the parties intend that the buyer would receive from the seller an amount equal to the total gross purchases for a 12-month period irrespective of the unsold amount in the buyer’s hands? If the buyer had bought and sold all its purchases within a month and 11 months later the seller violated the drop-in-price provision, did the parties intend that the buyer would be entitled to recover an amount equal to the total gross purchases? We believe not. Such a result would constitute a penalty discordant with plaintiff’s actual loss due to the drop in price.³ Barr & Sons, Inc. v. Cherry Hill Center, Inc., 90 N. J. Super. 358 (App. Div. 1966). We consider the plaintiff’s interpretation of the agreement, namely that “total gross purchases” refers to the total unsold gross purchases, to be consonant with the parties’ true understanding. Such a construction is “most equitable” and “will not give one [party] an unfair or unreasonable advantage over the other.” 9 Williston, Contracts, § 46 at 65 (footnote omitted) (Rev. ed. 1945). Washington Construction Co., Inc. v. Spinella, 8 N. J. 212 (1951). Justice Oliphant in Tessmar v. Grosner, 23 N. J. 193 (1957), stated the principle in the following manner:

Even where the intention is doubtful or obscure, the most fair and reasonable construction, imputing the least hardship on either of the contracting parties, should be adopted, International Signal Co. v. Marconi Telegraph Co. of America, 89 N. J. Eq. 319 (Ch. 1918), affirmed 90 N. J. Eq. 271 (E. & A. 1919), so that neither will have an unfair or unreasonable advantage over the other. [Id. at 201]

The judgment is modified and cause remanded for entry of judgment in favor of the plaintiff in the sum of $20,850 plus interest and costs.

1 It should be noted, however, that N. J. S. A. 2:210(4) reverses the presumption, expressed in Falhenstern, that an assignment of rights does not include a delegation of duties.

2 The Uniform Commercial Code Comment has a comparable statement :

1. Subsection (1) makes no substantial change in prior law. An assignee has traditionally been subject to defenses or set-offs existing before an account debtor is notified of the assignment. When the account debtor’s defenses on an assigned account, chattel paper or a contract right arise from the contract between him and the assignor it makes no difference whether the breach giving rise to the defense occurs before or after the account debtor is notified of the assignment (subsection (1) (a)). The account debtor may also have claims against the assignor which arise independently of that contract; an assignee is subject to all such claims which accrue before, and free of all those which accrue after, the account debtor is notified (subsection (1) (b)). ■* * *. [U. O. C. § 9-318, comment 1]

3 The dissent relies in part on the general assertion that Corenzwit had a similar exposure because of the same drop-in-price clause in its contracts with retailers. However, Corenzwit did not claim or establish that, as a result, it had in fact suffered any losses.

The dissent’s approval of the clause in effect constitutes a sanctioning of a liquidated damage provision which is not reasonably related to actual loss. See Westmount Country Club v. Kameny, 82 N. J. Super. 200 (App. Div. 1964), which held that “[a] provision in a contract * * * which provides that the full contract price is recoverable in the event of a breach — absent evidence that the parties fixed the amount as a reasonable forecast of just compensation for the harm caused by a breach and that such harm is incapable or very difficult of accurate estimation ■— bears no reasonable relation to actual damages and cannot be considered as liquidated damages.” [id. at 207]. See N. J. S. A. 12A:2-718(1). The parties certainly could have reasonably anticipated that the buyer would suffer no loss as to goods sold within the 12-month period before the breach, which goods had, in turn, been sold by the buyer’s customers.