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Construction Law Group News

April 4, 2013

If your company has received a notice of assignment of a right to payment, you should keep reading...

Contractor Required to Pay $3,822,500 Twice
In a recent Massachusetts Supreme Judicial Court case, the SJC affirmed in part and reversed in part a lower court judgment resulting in Suffolk Construction Company (Suffolk) having to pay Reading Cooperative Bank (Bank) $3,822,500.49, despite the fact that Suffolk already had paid that same amount to its subcontractor Benchmark Mechanical Systems (Benchmark). Reading Cooperative Bank v. Suffolk Construction Company, Inc., 2013 Mass. LEXIS 42 (March 13, 2013). At issue in this case was Suffolk’s obligation to its subcontractor’s bank where the bank had provided Suffolk with notice of the bank’s assignment of the subcontractor’s right to payment from Suffolk.

Summary of Facts
Suffolk entered into a subcontract with Benchmark for construction of a HVAC system on a construction project in Reading, Massachusetts. Benchmark assigned its account receivable on its HVAC subcontract with Suffolk to the Bank. The Bank perfected its security interest under Article 9 and notified Suffolk that Benchmark had assigned its rights to receive payments under the HVAC subcontract to the Bank. Suffolk signed an acknowledgement and assent to the assignment and agreed to make payments directly to the Bank (Acknowledgement and Assent Agreement). Those at Suffolk who had responsibility for making subcontractor payments were not made aware of the assignment or the Acknowledgement and Assent Agreement. As a result, Suffolk issued 12 checks totaling $3,822,500.49 to Benchmark during the course of the project between June 14 and December 30, 2004. Benchmark ceased doing business in 2005 with an outstanding debt to the Bank of $1,499,149. The Bank commenced suit against Suffolk for the full value of the 12 checks mistakenly issued to Benchmark. The Bank alleged violation of G.L. c. 106, § 9-405 and breach of the Acknowledgement and Assent Agreement.

The Decision
The SJC held that Suffolk, having received notice of the assignment by Benchmark to the Bank, was required to make all payments under the HVAC subcontract to the Bank whether or not Suffolk had agreed to make those payments in the Acknowledgement and Assent Agreement. Essentially, Suffolk’s agreement to pay the HVAC subcontract proceeds to the Bank was unnecessary; what mattered was receipt of the notice of assignment. The SJC, relying upon the detailed statutory scheme established in Article 9 of the UCC for the payment of an allocation of funds which have been assigned, dismissed Suffolk’s argument that the Bank was not entitled to receive the full amount of the 12 misdirected payments and instead should be limited to the Bank’s actual damages. The SJC also found Suffolk’s argument that the Bank should have mitigated its damages unpersuasive. “Because an assignee’s actual damages are irrelevant....we conclude that the common-law doctrine of mitigation of damages does not apply to claims brought under G.L. c. 106, § 9-405.”

The Takeaway
A party (for example, a contractor) that receives notice of an assignment of an account receivable from another party (example, a subcontractor) to a third party (example, a bank as assignee) that inadvertently misdirects payments to the wrong party will suffer the harsh result of having to pay the full amount of the misdirected payments to the assignee even if the assignee’s actual damages bear no relation to the amount of the misdirected payments. In this case, Suffolk was obligated to pay six times the Bank’s actual loss as determined by a jury. Beware the uninformed accounts payable department.

If you have any questions about the information contained in this Alert, please contact your Murtha Cullina attorney or any of the members of our Construction Law Group. 

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