The Massachusetts Supreme Judicial Court has held that Article 9 of the Uniform Commercial Code (“UCC”), and not common law, determines the measure of a secured creditor’s recovery under Section 9-405 of the UCC. The March 13 ruling clarified that certain common law principles may not be applied to reduce the amount a lender may recover under Article 9 of the UCC when a borrower defaults and the lender must collect on accounts receivable assigned to the lender as security. The case involved a general contractor that had contracted with a subcontractor for part of a large construction project. The subcontractor assigned to its bank the subcontractor’s right to receive payment under the construction contract as security for the subcontractor’s revolving line of credit from the bank. The general contractor received notification of the assignment and agreed to make payments directly to the bank. However, the general contractor instead made 12 payments to the subcontractor. The subcontractor subsequently ceased business operations and defaulted on the outstanding debt under the line of credit. The bank, represented by Nutter, brought suit against the general contractor for breach of contract and violation of Section 9-405 of the UCC to recover the total value of the 12 payments made to the subcontractor.
Nutter Notes: At trial, the general contractor argued that its liability should be limited, according to common law principles, to the bank’s actual damages, a much smaller sum in this case than the full amount of the assigned security, and that no additional liability existed under Article 9 of the UCC. Representing the bank, Nutter argued that Article 9 of the UCC required the general contractor to pay over the full amount of the assigned security. The bank acknowledged that Article 9 would require the bank, in accordance with Sections 9-607 and 9-608, to distribute the amounts recovered in a way that ensured that the bank would not retain any surplus. The trial court agreed with the bank that the UCC, not the common law, provided the measure of damages on the bank’s Article 9 claim. The general contractor appealed, arguing that common law principles reduce the general contractor’s liability by the amount of a separate guaranty that also secured the bank’s loan to the subcontractor, and that the trial court erred in awarding the bank the full amount of the assigned security. The Supreme Judicial Court agreed with the bank on all counts, affirming the trial court’s conclusion that Article 9 provides a remedy distinct from the common law. The court also affirmed that the bank’s Article 9 damages were not reduced by the separate guaranty. The court noted that the general contractor might seek to recover its losses from the subcontractor.