New York Law Review

Tag: Factoring Agreement

  • Danleigh Fabrics, Inc. v. Gaynor-Stafford Industries, Inc., 62 N.Y.2d 678 (1984): Factor’s Right to Charge-Back for Disputed Invoices

    62 N.Y.2d 678 (1984)

    A factor may charge back the full amount of unpaid and disputed invoices to the seller, even if the customer’s dispute relates to both the goods in question and previously paid goods.

    Summary

    Danleigh Fabrics, a textile converter, entered into a factoring agreement with Chemical Bank. When a customer, Gaynor-Stafford, disputed invoices for Style 536 fabric, Chemical Bank charged back the unpaid amount to Danleigh. Danleigh sued, arguing that the dispute partially related to previously paid Style 579 fabric. The court held that Chemical Bank was entitled to the charge-back. The agreement allowed charge-backs for any dispute on unpaid invoices, and the court refused to require Chemical to verify the merits or allocate the dispute across different invoices or goods. The risk of collecting disputed accounts rested with the seller (Danleigh), not the factor (Chemical Bank).

    Facts

    Danleigh Fabrics sold Style 579 fabric to Gaynor-Stafford, factoring the invoices through Chemical Bank. Gaynor-Stafford paid these invoices in full. Later, Danleigh sold Style 536 fabric to Gaynor-Stafford, factoring those invoices through Chemical Bank as well. Gaynor-Stafford failed to pay invoices totaling $161,286.64 for Style 536 shipments. Gaynor-Stafford notified Danleigh that it disputed the quality of the Style 536 goods and would stop all payments to factors.

    Procedural History

    Chemical Bank charged back $161,286.64 to Danleigh’s account. Danleigh sued Chemical Bank and Gaynor-Stafford. Chemical Bank moved to dismiss, arguing its right to charge-back was unconditional when unpaid receivables were disputed. Danleigh cross-moved for summary judgment. Special Term denied both motions. The Appellate Division modified, granting Chemical Bank’s motion. The Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether a factor, under a factoring agreement, has the right to charge back the full amount of unpaid invoices to the seller when the customer disputes the quality of the goods related to those invoices, even if the customer’s dispute also relates to previously paid invoices for different goods.

    Holding

    Yes, because the factoring agreement places the risk of collecting disputed accounts on the seller, not the factor, once a dispute arises concerning the goods that are the subject of the unpaid accounts.

    Court’s Reasoning

    The court distinguished this case from Duobond Corp. v. Congress Factors Corp., 41 N.Y.2d 177 (1977), where the dispute concerned only goods for which the factor had already been paid. Here, the unpaid invoices related to the disputed Style 536 goods. The court stated that neither the factoring agreement nor the Duobond decision required the factor to verify the merits of the dispute or allocate the charge-back. The court emphasized that “[o]nce there is such a dispute concerning goods that are the subject of unpaid accounts, the parties’ agreement places the risk of collecting those accounts on the seller, not the factor.” The court rejected Danleigh’s argument that the charge-back should be limited to the portion of the unpaid invoices directly related to the Style 536 dispute, finding no such limitation in the agreement.

  • Jack L. Inselman & Co. v. FNB Financial Co., 41 N.Y.2d 1078 (1977): Tortious Interference Requires Breach of Contract

    Jack L. Inselman & Co. v. FNB Financial Co., 41 N.Y.2d 1078 (1977)

    A claim for tortious interference with a contract requires proof that the defendant’s actions caused the contracting party to breach the contract.

    Summary

    Jack L. Inselman & Co. sued FNB Financial Company for tortious interference with a contract Inselman had with Guilford Industries. FNB had a factoring agreement with Guilford, guaranteeing certain accounts receivable. Inselman’s credit limit with Guilford was exhausted, and Guilford demanded cash payment for further deliveries, as per their contract. Inselman refused and claimed the contract was canceled. FNB then purchased the goods from Guilford. The New York Court of Appeals held that because Guilford did not breach its contract with Inselman, a necessary element for tortious interference was missing, and dismissed Inselman’s claim.

    Facts

    Guilford Industries and Inselman had contracts for the sale of fabric, with credit terms allowing Guilford to demand cash payment if Inselman’s credit limit was exhausted. Guilford had a factoring agreement with FNB, guaranteeing Guilford’s accounts receivable from credit-approved purchasers, including Inselman, up to $60,000. Inselman purchased $54,300.18 worth of fabric on credit, depleting most of its credit line. Guilford manufactured additional goods worth $76,273.75 but, because FNB refused to extend further credit approval to Inselman, Guilford demanded cash payment before delivery, consistent with the terms of their contract. Inselman refused to pay cash and insisted on immediate delivery on credit. Guilford rejected Inselman’s demand. Subsequently, FNB purchased the goods from Guilford.

    Procedural History

    Inselman sued FNB for tortious interference with its contract with Guilford. FNB counterclaimed for damages resulting from Inselman’s refusal to repurchase the goods and for outstanding invoices assigned to it by Guilford and another company. Special Term denied FNB’s motion for summary judgment dismissing Inselman’s complaint and for judgment on its counterclaims. The Appellate Division reversed, dismissed Inselman’s complaint, and granted judgment on FNB’s counterclaims. Inselman appealed to the New York Court of Appeals.

    Issue(s)

    Whether FNB’s refusal to extend further credit to Inselman, resulting in Guilford’s demand for cash payment as per their contract, and FNB’s subsequent purchase of the goods from Guilford, constituted tortious interference with the contract between Inselman and Guilford.

    Holding

    No, because a cause of action for tortious interference with a contract requires a breach of that contract by the other party, and no such breach occurred here.

    Court’s Reasoning

    The Court of Appeals reasoned that Guilford was entitled to demand cash payment from Inselman once Inselman exhausted its line of credit, as per the credit terms of their agreement. FNB was within its rights to refuse extending further credit and demanding payment of outstanding invoices. FNB’s subsequent purchase of the goods occurred after Inselman had repudiated the contract. The court emphasized that a breach of contract is an essential element of a claim for tortious interference, citing Israel v Wood Dolson Co, 1 NY2d 116, 120; Campbell v Gates, 236 NY 457; and Lamb v Cheney & Son, 227 NY 418. Because Guilford did not breach the contract, Inselman’s claim for tortious interference failed. The court affirmed the dismissal of the complaint and the granting of summary judgment on FNB’s counterclaims, as there was no dispute of liability. The court stated, “In order for the plaintiff to have a cause of action for tortious interference of contract, it is axiomatic that there must be a breach of that contract by the other party…a situation not here present. An essential element of the case against FNB, then, is a breach by Guilford. No such breach had occurred and thus the complaint was properly dismissed.”