UCC Article 9 Damages Provisions Displace Common Law

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In a case handed down just last month, the Supreme Judicial Court reinforced the long-standing rule that provisions of the Uniform Commercial Code (the "UCC") displace common law principles that would otherwise apply in contexts not governed by the UCC.

In Reading Co-Operative Bank v. Suffolk Construction Co., Inc., 464 Mass. 543 (2013), the Court held that the plaintiff (the "Bank") could recover the amount of twelve payments totaling $3.8 million made by Defendant Suffolk Construction Co., Inc. ("Suffolk") to its subcontractor after Suffolk was notified by the subcontractor that the subcontractor's right to receive the payments had been assigned to the Bank as collateral for the subcontractor's line of credit.

The Bank sued Suffolk after the subcontractor ceased operations - leaving behind a debt of $1.5 million on its line of credit with the Bank. Although the jury calculated the Bank's actual damages at $533,348.62, the Court awarded the Bank the face value of ten out of the twelve misdirected checks - approximately $3 million - based on various provision of the UCC's Article 9. The SJC upheld the award, and added to it the amount of the two additional checks.

In upholding the trial court's rejection of Suffolk's common law mitigation of damages theory, the SJC wrote that Article 9 "contains a comprehensive scheme for enforcement of rights and allocation of losses" regarding secured transactions. See Reading Cooperative, 464 Mass. at 549. Moreover, "[l]egislative intent to displace the common law measure of damages may be inferred from explicit language mandating an alternate measure of damages, or from the establishment of a comprehensive framework that would be undermined by application of common law principles." See id., 464 Mass. at 551-52.

Accordingly, the Court held that the provisions of UCC Article 9 displace the common law of damages, and the "value of all payments wrongfully misdirected" is the proper measure of recovery where an account debtor (here, Suffolk) receives notification of an assignment of the relevant debt but nevertheless fails to make payment to the assignee (here, the Bank). Id. at 552-53.

As to the two checks for which the Bank received no award at the trial level, the SJC rejected Suffolk's estoppel defense on the ground that the evidence was insufficient to support it.

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