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Wells Fargo Bank Minnesota v BrooksAmerica Mortgage Corporation

Question: You Be the Judge: Is Wells Fargo entitled to its monthly lease payments despite the fact that BrooksAmerica never received financing?

Facts: Michael Brooks desperately needed financing for his company, BrooksAmerica, so he agreed to a saleleaseback agreement with Terminal Marketing Company. Terminal would pay BrooksAmerica $250,000, and in exchange it would obtain title to BrooksAmericas computers and office equipment. BrooksAmerica would then lease the equipment for three years, for $353,000. The equipment would never leave BrooksAmericas offices. The contract included a hell or high water clause stating that BrooksAmericas obligation to pay was absolute and unconditional. Another clause permitted Terminal to assign its rights without notice to BrooksAmerica and stated that the assignee took its rights free from all defenses, setoffs, or counterclaims. Brooks also signed a Delivery and Acceptance Certificate stating that BrooksAmerica had received the $250,000 (even though no money had yet changed hands) and reaffirming BrooksAmericas absolute obligation to pay an assignee, despite any defenses BrooksAmerica might have. Terminal assigned its rights to Wells Fargo, which had taken about 2,000 other equipment leases from Terminal. Terminal never paid any portion of the promised $250,000. Brooks refused to make the required payments (about $10,000 per month) and Wells Fargo sued. Brooks acknowledged that Wells Fargo paid Terminal for the assignment. Both parties moved for summary judgment. The trial court ruled in favor of Wells Fargo, and Brooks appealed. The trial court penalized BrooksAmerica for acting in good faith. Mr. Brooks signed the Delivery Certificate assuming that any reasonable company would promptly deliver the money it had promised. Unfortunately, Terminal does not operate at the same ethical levela fact that Wells Fargo should know from its earlier assignments.

Argument for BrooksAmerica: We acknowledge the general validity of UCC 9-403. However, in this case, Wells Fargo makes an absurd argument. Neither Terminal nor any assignee has a right to enforce a financing contract when Terminal failed to deliver the financing. There is no valid contract to enforce here because Terminal never paid the $250,000 owed to BrooksAmerica. Good faith required Wells Fargo to make sure that Terminal had performed. A simple inquiry would have informed Wells Fargo that Terminal was entitled to no money. This entire transaction is a sham, and 9-403 was never drafted to encourage financial swindles.

Argument for Wells Fargo: Under UCC 9-403, an assignee such as Wells Fargo may enforce a waiver of defenses clause if the assignment was taken in good faith, for value, and free of knowledge of any claims or defenses. Wells Fargo meets that test. The simple inquiry argument has two flaws. First, 9-403 does not require one. The UCC requires good faith, not an investigation. Second, Wells Fargo did investigate by checking the contract and the Delivery Certificate. We have done more than required. We have taken thousands of equipment leases as assignees. In this case, we examined the contract and the Delivery Certificate, and assumed that BrooksAmerica had received its money. If Terminal had not paid, why did Mr. Brooks sign a certificate stating he had received his cash? We are entitled to payment. Any dispute between BrooksAmerica and Terminal is for those parties to resolve.