Commercial Law - Robert A. Weber, Jr.

• Publication year: 2001

Commercial Lawby Robert A. Weber, Jr.^*

The survey period produced several decisions that should prove of interest to commercial practitioners. In particular, the Georgia Supreme Court decided that a contractual merger clause may bar "post-contractual claims of theft by deception, fraud, or misrepresentation,"¹ and also clarified the manner for calculating time under the Georgia Mechanics and Materialmen's Lien Statute.² The Georgia Court of Appeals issued several decisions that will provide guidance to secured lenders. This Article categorizes the survey period decisions as follows: debtor-creditor issues, contract drafting, bank account management issues, statutes of limitation, and a miscellaneous section.

I. Debtor-Creditor Issues

A. Secured Lenders

The survey period produced three noteworthy decisions addressing the position of a secured lender vis-a-vis third parties. In one decision, an innocent third party was held responsible for conversion of the lender's collateral;³ in another, the lender's conduct resulted in the possibility of subordination of its interest;⁴ and in a third, the court addressed the sufficiency of notice required to perfect an interest in accounts receivable.⁵

In Deere & Co. v. Miller-Godley Auction Co.,⁶ the court of appeals confronted an issue of first impression for courts in the State of Georgia: "[W]hether an auctioneer is liable to a secured creditor for conversion when the auctioneer, without the secured creditor's knowledge or consent, sells goods in which the secured creditor holds a perfected security interest."⁷ Defendant-auction company was in the business of selling farm equipment on a consignment basis from equipment owners, who would verify in writing to defendant that there were no liens against the property to be sold. Time constraints generally prevented defendant from performing a UCC search on items presented for auction. The court noted that common practice among auctioneers in the southeast was to run UCC searches only when they had actual notice of possible lien problems.⁸ Defendant would, however, hold sales proceeds in escrow for ten days to permit the buyer to investigate the equipment, and if an issue as to ownership or a third party's lien rights arose, no money would be disbursed.⁹

Plaintiff had financed two pieces of equipment and properly perfected its security interest by filing a financing statement in the county of the debtor's residence. The debtor subsequently presented the equipment to defendant for auction and gave a false statement that the equipment was unencumbered by any lien. The sale proceeded. Plaintiff did not receive notice that its collateral had been sold for another two years, when its loan to debtor first went into default. Plaintiff sued defendant alleging conversion of its collateral.¹⁰

The court of appeals began its analysis with reference to Georgia agency laws, stating, "an agent may be guilty of conversion even though he has no knowledge of the true owner's title and acts in good faith."¹¹ Because "the relationship between a seller and an auctioneer is that of principal and agent," defendant would be liable under this well-established rule of agency law.¹² The court buttressed its conclusion with citation to a federal district court decision from the Northern

District of Georgia,¹³ which had reached a similar conclusion applying principles of Georgia agency law to an auctioneer who sold cattle in which a third party possessed a security interest.¹⁴ Furthermore, the decision to place responsibility with the auctioneer comported with that reached by a majority of other jurisdictions.¹⁵ Despite defendant's public policy argument—that the court's ruling would create a logistical nightmare for auctioneers—the court reasoned that "[h]olding auction companies liable for conversion will protect, as much as possible, the truly innocent parties: the owner and the purchaser."¹⁶

The court's decision in Deere & Co. demonstrates that once a lender has properly perfected its security interest, others act at their own peril in not exercising due diligence with respect to the lender's rights. However, in F & W Agriservices, Inc. v. UAP/Ga. Ag. Chem., Inc.,¹⁷ the court's decision showed how a lender's actions can imperil its priority position. In this case, debtor obtained a farm operating loan from plaintiff-secured lender, which took a security interest in debtor's cotton crop. Debtor needed additional financing during the growing season and alleged that plaintiff's representative suggested he receive advances from defendant-gin company where debtor sold his cotton. Debtor further alleged that plaintiff's representative orally agreed to permit defendant to deduct from the cotton sale proceeds the amounts advanced, notwithstanding plaintiff's prior security interest in such proceeds. Defendant's president testified that it was his understanding, whether from debtor or his own telephone conversation with plaintiff, that plaintiff had agreed to this arrangement, although he never received written confirmation from plaintiff. Plaintiff's representatives all denied the existence of any such agreement, although, when defendant issued its check payable to debtor and plaintiff jointly for sales proceeds showing a deduction for amounts defendant had advanced, plaintiff did not object. When debtor failed to make payments to plaintiff on his farm loan, plaintiff sued defendant claiming it had converted that portion of the sales proceeds deducted by defendant from its check to debtor and plaintiff.¹⁸

The court of appeals began its analysis by stating that the legal order of priority between competing lien claimants may be modified by either written or verbal agreement. And, even in the absence of a specific agreement, '"there may be facts and circumstances which would indicate an intention to make one of two [claims] prior to the other.'"¹⁹ Applying the facts to these rules, the court found the evidence sufficient to create a question of fact as to whether plaintiff had effectively subordinated its lien to defendant's claim. Specifically, the court focused on three pieces of evidence: (1) debtor's testimony that plaintiff's representative had suggested he approach defendant for additional financing; (2) evidence that plaintiff authorized debtor to receive the funds advanced by defendant directly, instead of jointly, with plaintiff; and (3) plaintiff's failure to object when it reviewed the check for sales proceeds plainly showing that funds had been deducted to repay defendant's advances.²⁰ In remanding for a trial on the issues, the court rejected plaintiff's argument that defendant's lack of a security interest prevented it from assuming a position superior to plaintiff.²¹ Citing section 11-1-209 of the Official Code of Georgia Annotated ("O.C.G.A."),²² the court demonstrated that any creditor, secured vel non, may subordinate to any other creditor.²³

In Deere & Co., the secured lender, which had not taken any affirmative action with respect to its collateral other than to file its financing statement, was protected from the actions of a third party with respect to the collateral, notwithstanding the third party's good faith.²⁴ The decision in F & W Agriservices, however, demonstrated that when a secured lender's conduct (or failure to object to conduct of a third party of which it has knowledge) causes a third party to act in reliance thereon, the possibility exists that such conduct will be deemed a subordination.²⁵ Somewhere between these two extremes on the spectrum of creditor conduct lies the case of Fulton County v. American Factors of Nashville, Inc. ,²⁶ in which the secured lender acted "just right."

A typical source of financing for a business that generates a significant volume of accounts receivable is to "factor" its receivables to a lender that will extend credit against the future stream of revenue represented by the accounts. To protect its security interest in a debtor's receivables, a lender is well advised to file a financing statement covering the receivables.²⁷ The lender may further, as a practical matter, protect its rights by insisting on a "lock box" arrangement, when the debtor advises its account debtor to forward payments to a post office box under the lender's control. To ensure the maximum protection, however, a lender will advise the account debtor of the assignment, a tactic expressly authorized by O.C.G.A. section 11-9-406.²⁸

Plaintiff-secured creditor in American Factors chose the method designed to provide it the highest level of protection and forwarded to the account debtor a notice with each invoice from the debtor. The notice explicitly advised that payment should only be made to the secured lender. The notice stated:

NOTICE

This account has been sold, assigned and is payable at [city, state] to

[creditor name and address]

Remittance to other than [secured creditor] does not constitute payment of this Invoice. [Secured creditor] must be given notification of any claims agreements or merchandise returns which would affect the payment of all or part of this Invoice on the due date.

[Secured creditor phone number]²⁹

The notice and invoice were further accompanied by a cover sheet containing identification information regarding the subject invoice and a certification by plaintiff that the subject invoice had been assigned. When defendant-county made payments on the invoice directly to debtor, plaintiff sued.³⁰

Defendant-county's principal objection was that its contract with the debtor prohibited assignment of contract rights unless authorized in writing by defendant. The court summarily rejected this contention on the basis of O.C.G.A. section 11-9-318(4), which provides:

A term in any contract between an account debtor and an assignor, including any contract for the assignor to provide services to the account debtor, is ineffective if it prohibits assignment of an account or prohibits creation...