The Illinois Appellate Court recently followed the weight of foreign authority to narrowly define “claim accrual” under Section 9-404(a)(2) of the Uniform Commercial Code (“UCC”). (810 ILCS 5/9-404(a)(2)). Specifically, the Court held a claim does not accrue until a cause of action has accrued. The case is: Puritan Finance Corp. v. Bechstein Construction Corp., 2012 IL App (1st) 112261 (June 4, 2012).
In 2008 Granite Cartage Company (“Granite”) filed for bankruptcy. At the time of Granite’s bankruptcy, Plaintiff Puritan Finance Corporation (“Puritan”) held a secured lien on Granite’s accounts receivable. It was without question the accounts receivable were assigned to Puritan in the course of Granite’s bankruptcy. Granite’s invoices showed approximately $22,000 due from Defendant Bechstein Construction Corporation (“Bechstein Construction”). Bechstein Construction did not dispute the accuracy of the debt, but instead asserted the debt was subject to setoff pursuant to a course of dealing because it and Granite performed services for one another and would periodically swap checks to settle outstanding invoices. At the time Granite’s accounts receivable were assigned to Puritan, the amount Granite owed Bechstein Construction exceeded the amount Defendant owed to Granite.
At trial a Bechstein Construction employee testified regarding the parties’ arrangement and produced invoices showing the amount due and owing from Granite. Nonetheless, the trial court entered judgment in favor of Puritan. Bechstein Construction appealed arguing its liability on the indebtedness should have been setoff by Granite’s debt to it.
The Bechstein Court found “[t]he interpretation of the relevant statutes and common law present us with a question of law to be reviewed de novo.” The Court noted there are two Illinois statutes pertaining to setoffs asserted against assignees: Section 2-403(a) of the Illinois Code of Civil Procedure (“Code”) (735 ILCS 5/2-403(a)) and Section 9-404(a) of the UCC.
The Court speedily rejected the applicability of Section 2-403 of the Code because Illinois case law precedent previously determined a setoff under section 2-403(a) could not be based on a contract separate from the assigned contract. Citing R.A.N. Consultants, Inc. v. Peacock, 201 Ill. App. 3d 67 (1990). In this case, Defendant’s requested setoff was based on a contract or other indebtedness separate from the debts assigned to Puritan. Thus the Bechstein Court reasoned, Section 2-403(a) of the Code conferred no right to setoff.
As for Section 9-404(a)(2) of the UCC, the Bechstein Court noted the parties were asking whether the UCC allowed Bechstein Construction to assert a setoff against Puritan, the assignee, based on an unrelated debt owed by Granite, the assignor. That is, whether Defendant’s unrelated debt constituted “any other defense or claim *** against the assignor which accrued” before Bechstein Construction learned Granite’s accounts receivable had been assigned to Puritan.
Plaintiff asserted Bechstein Construction was not entitled to a setoff because it only had the right to collect on the debt – and not a legal cause of action or viable legal claim. Bechstein Construction argued Granite’s unpaid debt amounted to a claim even if no cause of action had accrued on the indebtedness.
Finding no Illinois precedent, the Bechstein Court looked to non-Illinois authority in determining whether Section 9-404(a)(2) allows setoffs for accumulated but unrelated debt, or whether the section applies only if a full cause of action accrued prior to notice of the assignment. The Court focused on case law from Oregon and Kansas concluding a claim does not accrue under Section 9-404(a)(2) of the UCC until a cause of action has accrued.
In Seattle-First Natl. Bank v. Oregon Pacific Industries, Inc., 500 P.2d 1033 (Or. 1972)(en banc), the Oregon Supreme Court observed that the UCC’s requirement that a setoff be limited to “any other defense or claim *** against the assignor which accrued” before notice, was intended to strike a balance between the interests of the assignee and the obligor. Id. at 1034. The Seattle-First Court examined statutory language for guidance in determining the accrual cutoff point. “ ‘Accrue’ aside from its fiscal use, generally is used in the law to describe when a cause of action comes into being. Its chief use is to determine when the statute of limitation commences *** that is, a claim or setoff accrues when a cause of action exists.” Id. at 1035.
In Bank of Kansas v. Hutchinson Health Services, Inc., 773 P.2d 660 (Kan. Ct. App. 1989), the court looked to Seattle-First but articulated a slightly different standard. According to Bank of Kansas, a claim accrues (1) when the obligation to pay is incurred, or (2) when the obligation is actually due and payable. Bank of Kansas noted the first definition reflects a fiscal view, while the second definition reflects that a claim or setoff accrues when a cause of action exists. “The policies of simplicity and commercial uncertainty underlying the UCC favor the second definition. [Citation]. Under the first definition, the value of accounts assigned as security could never be accurately determined because the accounts would always be subject to an independent claim arising against the assignor after the assignment is made, but accruing beforehand. Under the second definition, the value of the accounts can be determined with reasonable certainty at the time of the assignment.” Id. at 665.
Defendant argued the Kansas and Oregon interpretations must be rejected because any interpretation foreclosing setoff would render Section 9-404(a)(2) of the UCC meaningless. The Bechstein Court disagreed noting Section 9-404(a)(1) allowed setoffs arising out of the same transaction which gave rise to the assigned asset, while Section 9-404(a)(2) allows setoffs based on matters extrinsic to the assigned asset, and, to protect the assignee and debtor alike, adds the limitation that such matters may amount to a set-off only if they accrue before notice of the assignment. Thus, the Court noted adoption of the Kansas and Oregon interpretations did not make Section 9-404(a)(2) meaningless and affirmed the trial court’s judgment in favor of Puritan.