The U.S. District Court for the Northern District of Georgia has held that an account debtor did not have an affirmative right to sue a contract assignee of account receivables under a factoring agreement. See Novartis Animal Health US, Inc. v. Earle Palmer Brown, LLC, 424 F. Supp. 2d 1358 (D. Ga. 2006)

The dispute arose out of the alleged misappropriation of funds by defendant Earle Palmer Brown, LLC (“EPB”), which were provided by Novartis Animal Health US, Inc. (“Novartis”), to pay for an advertising campaign. Novartis, a provider of pharmaceutical products and services to the animal health industry, and EPB, an advertising agency, entered into an advertising agreement for the provision of general advertising services.

Pursuant to the agreement, Novartis and EPB agreed to an advertising plan that provided a budget of $9.4 million to pay various media outlets for the planned advertisements (the “Media Placement Money”). Novartis and EPB agreed to an advance billing schedule under which EPB issued three invoices to Novartis totaling $9.4 million (the “Media Placement Invoices”). Novartis issued several checks in payment of the Media Placement Invoices.

Defendant Panoramic Communications, LLC (“Panoramic”), EPB’s parent, had entered into a factoring agreement with defendant UPS Capital Corporation (“UPSC”), under which Panoramic assigned all of its accounts receivable, including the Media Placement Invoices, to UPSC. Novartis claimed that Panoramic and UPSC conspired with EPB to misappropriate the Media Placement Money.

UPSC contended that the provisions of Article 9 of the Uniform Commercial Code governing factoring preclude Novartis’s claims and entitle it to summary judgment. Specifically, UPSC argued that under UCC § 9-404, account debtors such as Novartis cannot recover payments made to contract assignees such as UPSC. UPSC also pointed to the explicit language of UCC § 9-404, which states that “the claim of an account debtor against an assignor may be asserted against an assignee…only to reduce the amount the account debtor owes.” O.C.G.A. § 11-9-404(b).

In response, Novartis argued that because Novartis did not assert any claims against UPSC under the UCC, UPSC’s argument is irrelevant. Novartis also argued that the evidence showed that UPSC took the assignment of the Media Placement Invoices in bad faith because it knew the Media Placement Money did not belong to EPB. Because UPSC was not an innocent assignee, Novartis argued, Novartis’s claims for an affirmative recovery against UPSC are not dependent on any rights or causes of action provided under the UCC, but are based instead on UPSC’s knowing and unlawful participation in EPB’s fiduciary fraud.

The court found that “(1) Article 9 of the UCC applies to the factoring of the Media Placement Invoices; (2) Article 9 does not permit an account debtor like Novartis to make an affirmative recovery from an assignee like UPSC; and (3) the evidence does not support Novartis’s claim that UPSC acted in bad faith.” Accordingly, the court concluded that UPSC was entitled to summary judgment.