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Blue Ridge Bank, Inc. v. City of Fairmont

Supreme Court of West Virginia

November 14, 2017

BLUE RIDGE BANK, INC., Petitioner and Defendant Below
v.
CITY OF FAIRMONT, A West Virginia Municipal Corporation, Respondent and Plaintiff Below

          Submitted: October 31, 2017

         Appeal from the Circuit Court of Marion County The Honorable Patrick N. Wilson, Judge Civil Action No. 12-C-102

          Webster J. Arceneaux, III, Esq. Spencer D. Elliott, Esq. Lewis, Glasser, Casey & Rollins, PLLC Charleston, West Virginia Counsel for the Petitioner.

          S. Sean Murphy, Esq. Morgantown, West Virginia Counsel for the Respondent.

          Kevin V. Sansalone, Esq. Fairmont, West Virginia Counsel for the Respondent.

         SYLLABUS BY THE COURT

         Under W.Va. Code § 46-9-404(a)(1) (2000), an assignee takes an assignment subject to the account debtor's defenses and claims against the assignor. The rights of the assignee are subject to all terms of the agreement between the account debtor and assignor, as well as any defense or claim in recoupment arising from the transaction that gave rise to the contract (unless the account debtor has entered into an enforceable agreement not to assert defenses or claims). It makes no difference whether the defense or claim accrued before or after the account debtor was notified of the assignment.

          Ketchum Justice.

         In this case, the City of Fairmont ("the City") entered into a lease purchase agreement for equipment with Comvest, Ltd. In the agreement, Comvest agreed to pay for the City's acquisition of equipment in exchange for monthly lease purchase payments from the City. Comvest assigned its interest in the lease purchase agreement, including its right to the City's monthly payments, to Blue Ridge Bank ("the Bank"). It was later discovered that Comvest converted money that was designated to pay for the City's equipment. As a result, the City had to independently pay for much of its equipment out of pocket. Comvest is bankrupt and is not a party to this appeal.

         The parties ask this Court whether the City may assert claims and defenses against the assignee Bank based on the assignor Comvest's conversion of funds designated for the purchase of the equipment. Under the Uniform Commercial Code (W.Va. Code §§ 46-1-101 to 10-104), an assignee generally takes an assignment subject to the debtor's claims and defenses against the assignor. We find that the Bank's rights under the assignment of the lease purchase agreement are subject to the City's claims and defenses against Comvest, and the City may assert claims and defenses against the Bank based on Comvest's conversion.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         This case arises from the City's ill-fated attempt to finance a municipal project. Prior to September 2009, the City's water filtration plant could not keep up with demand for potable water. The City sought outside financing - in the form of a lease purchase agreement - to pay for equipment to upgrade its water filtration plant.[1]

         On September 8, 2009, the City entered into a lease purchase agreement with Comvest. Under the agreement, the City was to order equipment from third-party vendors as it upgraded its water filtration plant. Upon delivery and acceptance of the equipment, the City would send the bill to Comvest. The agreement obligated Comvest to pay for the equipment, which was projected to have a total cost of $1, 070, 600.00. The agreement gave Comvest a security interest in the equipment, and it required the City to send Comvest 180 monthly payments of $8, 244.84, totaling $1, 484, 071.20.

         Two days later, on September 10, 2009, Comvest assigned its interest in the lease purchase agreement to the Bank. At the time of the assignment, the City had not yet submitted any bills for Comvest to pay on its equipment. The assignment provided that the Bank would transfer $1, 070, 600.00 to Comvest which Comvest would use to pay the third-party equipment vendors for the equipment when it was received and accepted by the City. In return, the City would send its monthly lease purchase payments to the Bank. Comvest's assignment of the lease purchase agreement to the Bank stated, in pertinent part, and with emphasis added, that:

[Comvest] hereby sells, transfers, delivers, and assigns to [the Bank] . . . all of [Comvest's] right, title, duties, obligations, interest, estate, claims, and demands as lessor (i) in, to, and under the [Lease Purchase] Agreement . . . . and (ii) in and to the Equipment, including any title thereto and security interest therein now owned or hereafter acquired under the [Lease Purchase] Agreement[.]

         Comvest promptly notified the City of the assignment and directed the City to send its monthly $8, 244.84 payments to the Bank.

         After the lease purchase agreement was assigned, Comvest was to use the money it received from the Bank and pay the invoices the City submitted for its equipment. In other words, after the assignment of the lease purchase agreement, the relationship between the City, Comvest, and the Bank was as follows: (1) the City would order equipment from third-party vendors; (2) the City would send Comvest the bill upon delivery and acceptance of the equipment; (3) Comvest would pay the third-party vendor for the equipment using the money provided by the Bank; and (4) the City would send the Bank monthly lease purchase payments.

         From September 2009 to March 2010, the City received and accepted equipment and invoices from third-party vendors for $573, 054.42. Comvest paid the invoices as they were received from the $1, 070, 600.00 it had obtained from the Bank. On March 16, 2010, City officials discovered that Comvest had converted $506, 823.06 of the $1, 070, 600.00 that the Bank sent to Comvest to pay for the City's equipment. Moreover, Comvest declared bankruptcy. The City paid for the rest of its equipment out of pocket.

         The City attempted to renegotiate the amount of its monthly lease purchase payments to the Bank to recoup the $506, 823.06 amount it was forced to independently pay for its equipment out of pocket. Therefore, the City wanted its monthly payments to the Bank reduced from $8, 244.84 to $3, 782.50. The Bank did not consent to the City reducing its monthly payments.

         The City filed a declaratory judgment action seeking an order declaring that it could reduce the amount it owes the Bank to reflect the money it paid out of pocket due to Comvest's conversion. The Bank filed an answer and a counterclaim demanding judgment for the City's missed monthly lease purchase payments in full, attorney's fees, and the cost of any repossession of the City's equipment. The City and the Bank filed competing motions for summary judgment. On April 24, 2016, the trial court issued an order granting summary judgment in the City's favor and denying summary judgment for the Bank. The Bank now appeals the circuit court's order.

         II. STANDARD OF REVIEW

         The Bank requests that we reverse the circuit court's summary judgment order. "We have often stated that we review de novo a circuit court's entry of summary judgment under Rule 56 of the West Virginia Rules of Civil Procedure, and apply the same standard that the circuit courts employ in examining summary judgment motions."[2]That is, summary judgment is proper only when the moving party shows that there is no genuine issue as to any material fact and that he/she is entitled to a judgment as a matter of law.[3]

         III. ANALYSIS

         It is undisputed that Comvest, which is bankrupt and not a party to this appeal, purloined $506, 823.06. As a result, the City had to pay that amount out of pocket to third-party equipment vendors. On the one hand, if the City is not allowed to reduce its monthly lease purchase payments to the Bank, it will effectively have to pay twice for the same equipment. On the other hand, if the City is allowed to reduce its monthly lease purchase payments, the Bank's return on its bargain with Comvest will be approximately halved. Regardless of which party ...


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