91 A.D.2d 889 (1983)

An account debtor can only assert claims or defenses against an assignee of accounts receivable that the account debtor possesses directly against the assignor, arising from the contract that generated the receivable.

Summary

Bank Leumi, as assignee of accounts receivable from Precision Graphics, sued Seseo Designs to recover payment for goods Seseo purchased from Precision. Seseo argued it could set off Precision’s debt to Collins Sales Service (related to Seseo) against the amount Seseo owed Precision, relying on UCC § 9-318. The court held that Seseo could not assert Collins’ claim against Precision as a defense against Bank Leumi because Seseo’s obligation to Precision was distinct from Precision’s debt to Collins; UCC 9-318 only protects claims the account debtor has directly against the assignor, arising from their contract. Seseo had no such claim.

Facts

Precision Graphics, Inc. owed money to Collins Sales Service, Inc., which shared the same principal officer and shareholder as Seseo Designs, Inc.
Bank Leumi Trust Co. loaned money to Precision, securing the loan with Precision’s accounts receivable.
Precision sold goods to Seseo, creating an $8,000 debt owed by Seseo to Precision.
Precision, Seseo, and Collins agreed that Seseo could offset money owed to Precision against Precision’s debt to Collins.
Bank Leumi, as assignee of Precision’s accounts receivable, sued Seseo to recover the $8,000 debt.

Procedural History

Bank Leumi sued Seseo in the trial court to recover the debt.
Bank Leumi moved for summary judgment, which the trial court granted.
Seseo appealed to the Appellate Division, which affirmed the trial court’s decision.
Seseo appealed to the New York Court of Appeals.

Issue(s)

Whether, under UCC § 9-318, an account debtor (Seseo) can assert a claim that a third party (Collins) has against the assignor (Precision) as a defense against the assignee (Bank Leumi) seeking payment for goods sold to the account debtor by the assignor.

Holding

No, because UCC § 9-318(1)(a) only allows the account debtor to assert claims or defenses arising from the contract between the account debtor and the assignor. Seseo’s attempt to set off Precision’s debt to Collins was based on a separate agreement and not a claim arising from Seseo’s contract to purchase goods from Precision.

Court’s Reasoning

The Court of Appeals affirmed the Appellate Division’s decision, emphasizing the explicit language of UCC § 9-318(1)(a), which states that an assignee’s rights are subject only to those claims or defenses that the account debtor has against the assignor. The court defined the “account debtor” as “the person who is obligated on an account” (§ 9-105, subd [1], par [a]).
The court found that Seseo was the account debtor, and Collins was merely an account creditor of Precision. Therefore, for Seseo to invoke the protection of § 9-318, it had to demonstrate a claim or defense against Precision arising from their contract for the sale of goods.
Seseo’s reason for refusing payment was based on a collateral agreement involving the method of payment of Precision’s obligation to Collins, not a claim or defense arising from the sales contract between Seseo and Precision. The court noted that there were no intercorporate transactions between Seseo and Collins with respect to their dealings with Precision, leading to the conclusion that Collins’ claim against Precision was never assumed by Seseo.
The court distinguished between claims arising from the contract and collateral agreements. Seseo’s defense was based on a payment arrangement, not a defect in the goods or a breach of the sales contract. Therefore, summary judgment was properly granted to Bank Leumi.
The court highlights that the statutory language of UCC 9-318 protects the assignee from claims of third parties against the assignor; it protects the assignee from claims that the *account debtor* has against the assignor, arising from the transaction creating the account. The court emphasizes that the assignee is only subject to “all the terms of the contract between the account debtor and assignor and any defense or claim arising therefrom”. (Uniform Commercial Code, § 9-318, subd [1], par [a]).