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You Be the Judge: Wells Fargo Bank Minn. v BrooksAmerica Mortgage
Corp. 1
Facts: Michael Brooks desperately needed financing for his company, BrooksAmerica, so he agreed to
a sale-leaseback agreement with Terminal Marketing Co. Terminal would pay BrooksAmerica
$250,000, and in exchange would obtain title to BrooksAmerica's computers and office equipment. The
contract included a “hell or high water clause,” stating that BrooksAmerica’s 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 BrooksAmerica's absolute obligation to pay an assignee, despite any defenses
BrooksAmerica might have.
Terminal assigned its rights to Wells Fargo. Terminal never paid any of the $250,000 to
BrooksAmerica. BrooksAmerica refused to make the required payments to Wells Fargo. Wells Fargo
sued. Brooks acknowledged that Wells Fargo paid Terminal for the assignment.
You Be the Judge: Is Wells Fargo entitled to its monthly lease payments despite the fact that
BrooksAmerica never received financing?
Holding: Yes, summary judgment for Wells Fargo affirmed. From the decision:
The hell or high water clause at issue here makes BrooksAmerica's obligation to pay rent
absolute and unconditional. In the context of a finance lease containing a hell or high water
clause, the lessee must make payments regardless of defective performance on the part of the
lessor, that is, “come hell or high water.”
BrooksAmerica's attempt to frame the issue as one of Terminal's non-performance such that
BrooksAmerica's obligations under the lease never arose at all, is unavailing. Non-performance
by the lessor is irrelevant, at least when the lessee was a sophisticated party and the party
asserting the right to rental payments is a good-faith assignee.
BrooksAmerica does not dispute that Wells Fargo purchased the lease assignment in good faith
and for value. Moreover, as a certified mortgage broker with over twenty years' experience,
Michael Brooks is a sophisticated businessman who willingly executed an unambiguous
contract and accompanying documents. This Court will not bail him and BrooksAmerica out
just because they are now unhappy with the contract. Their dissatisfaction is more properly
aimed at Terminal, the alleged wrongdoer.
Question: What is UCC §9-403?
Answer: Under UCC §9-403, an agreement by a buyer (or lessee) that he will not assert against an
Question: How does UCC §9-403 apply to this case?
Answer: BrooksAmerica (the lessee) agreed with Terminal (the lessor) not to assert against Wells
Fargo (the assignee) any claim or defense BrooksAmerica may have against Terminal. Because
Question: What argument does BrooksAmerica make to try to get around UCC §9-403?
Answer: It argues that Wells Fargo should have done a better job investigating the truth of the
Question: Why—was there something wrong with the representations?
1 419 F. 3d 107, Second Circuit Court of Appeals, 2005
Question: Why did BrooksAmerica lie about this?
Question: What did the court think of BrooksAmerica’s argument that Wells Fargo should have
done a better job of discovering that BrooksAmerica was lying?
Delegation of Duties
Most duties are delegable. But delegation does not by itself relieve the delegator of his own liability to
perform the contract.
An obligor may delegate his duties unless
1. delegation would violate public policy, or
2. the original contract prohibits delegation, or
3. the obligee has a substantial interest in personal performance by the obligor.
Novation
A novation is a three-way agreement in which the obligor transfers all rights and duties to a third party.
Case: Rosenberg v. Son, Inc.2
Facts: The Rosenbergs owned a Dairy Queen in Grand Forks, North Dakota. They agreed in writing
to sell the Dairy Queen to Mary Pratt. The contract required her to pay $10,000 down and $52,000
over 15 years, at 10 percent interest. Two years later, Pratt assigned her rights and delegated her duties
under the sales contract to Son, Inc. The agreement between Pratt and Son conta ined a “Consent to
Assignment” clause that the Rosenbergs signed. Pratt then moved to Arizona and had nothing further
to do with the Dairy Queen. The Rosenbergs never received full payment for the Dairy Queen. They
sued Mary Pratt. The trial court gave summary judgment for Pratt, finding that she was no longer
obligated on the original contract. The Rosenbergs appealed.
Issue: Did Pratt obtain a novation relieving her of her duties under the original sales contract?
Holding: Judgment for Pratt reversed and remanded. The agreement between Pratt and Son was an
assignment, not a novation. The agreement made no mention of discharging Pratt from her duties.
Although the Rosenbergs signed the agreement, they were merely consenting to an assignment, not a
novation. A creditor is free to consent to an assignment without releasing the original obligor.
Question: What should Pratt have done to avoid being sued for a debt she thought was behind
her?
Answer: When Pratt delegated her duties to Son, Inc., she should have included a novation, in
Additional Case: Braka v Travel Assistance International3
Facts: David Braka purchased traveler's emergency protection before embarking on his extended
around-the-world honeymoon. The agreement between Braka and TAI provided, among other benefits,
$ 1,000,000 coverage in the event of emergency medical evacuation. On or about July 31, 2001,
2 491 N.W.2d 71, 1992 N.D. LEXIS 202 Supreme Court of North Dakota, 1992
3 2005 NY Slip Op 50665U; 7 Misc. 3d 1019A; 2005 N.Y. Misc. LEXIS 876 Supreme Court of New York, New
York County, 2005
plaintiff and his wife were seriously injured in a car accident while vacationing in Fiji. Upon learning
of the accident, Braka’s parents flew to Fiji. After his parents arrived, there was a determination made
that Braka was not receiving adequate medical treatment and needed transport via air ambulance back
to the United States for treatment. His parents paid for the transportation at a cost of approximately
$350,000. A few months after the accident, Braka wrote a letter to his father stating his intention to
repay the monies his father advanced on his behalf. To formalize this promise, Braka requested in the
letter that his father sign same. Thereafter, Braka submitted a claim for reimbursement of his travel
expenses. The defendants denied the claim and Braka commenced this action.
The defendants argue that because Braka's parents paid this obligation, he has no damages and,
thus cannot maintain this suit. Specifically, the defendants contend that the letter that Braka wrote to
his father does not constitute an enforceable note and, as such, plaintiff has no obligation to repay his
father.
Issue: Did Braka’s parents’ payment of his emergency transportation costs constitute a novation and
relieve defendants of their obligation under the traveler’s emergency protection policy?
Holding: The court does not agree with defendants and denies their motion to dismiss this action.
The defendants' arguments focus exclusively on the fact that plaintiff did not pay the approximately
$350,000 himself and, therefore, they allege he has no damages. The issue in this case is not that
plaintiff's parents, rather than plaintiff, paid for the medical evacuation. This expense was clearly
undertaken on plaintiff's behalf in what is alleged as an emergency situation. Under such
circumstances, an insurer is not relieved of its obligation to provide coverage for said medical expenses
if the appropriate procedures relative to the policy have been fulfilled.
A creditor's acceptance of the obligation of a third person constitutes a novation where it is agreed
or intended by the parties that the third person is to be substituted in place of the original debtor. There
was clearly no arrangement between the parties that would have discharged the defendants' obligation
upon the plaintiff's parents paying for his medical evacuation.
Multiple Choice Questions
1. CPA QUESTION Yost contracted with Egan for Yost to buy certain real property. If the contract is
otherwise silent, Yost’s rights under the contract are:
(a) Assignable only with Egan’s consent
(b) Nonassignable because they are personal to Yost
(c) Nonassignable as a matter of law
(d) Generally assignable
2. CPA QUESTION One of the criteria for a valid assignment of a sales contract to a third party is
that the assignment must:
(a) Not materially increase the other party’s risk or duty
(b) Not be revocable by the assignor
(c) Be supported by adequate consideration from the assignee
(d) Be in writing and signed by the assignor
3. Amanda agrees to pay Jennifer $300 for a pair of tickets to see Jerry Seinfeld. "Seinfeld is my
boyfriend Octavio's favorite comedian, and the tickets will be a great birthday present for him," she
tells Jennifer. Amanda pays up and tells a delighted Octavio about the tickets, but Jennifer never
delivers them. Octavio is a(n) ____ beneficiary of the agreement, and as such, he ____ have a
right to enforce the contract himself.
(a) donee; does
(b) donee; does not
(c) incidental; does
(d) incidental; does not
4. A novation completely releases an ____ from any further liability. To be effective, it ____ require
the agreement of both the obligor and obligee.
(a) obligor; does
(b) obligor; does not
(c) obligee; does
(d) obligee; does not
5. Will misses three straight payments on his SUV, and his bank repossesses it. The right to repossess
____ a security interest. Security interests are governed by Article ____ of the Uniform
Commercial Code.
(a) is; 2
(b) is; 9
(c) is not; 2
(d) is not; 9
Case Questions
1. Intercontinental Metals Corp. (IMC) contracted with the accounting firm of Cherry, Bekaert &
Holland to perform an audit. Cherry issued its opinion about IMC, giving all copies of its report
directly to the company. IMC later permitted Dun & Bradstreet to examine the statements, and
Raritan River Steel Co. saw a report published by Dun & Bradstreet. Relying on the audit, Raritan
sold IMC $2.2 million worth of steel on credit, but IMC promptly went bankrupt. Raritan sued
Cherry, claiming that IMC was not as sound as Cherry had reported, and that the accounting firm
had breached its contract with IMC. Comment on Raritan’s suit.
Answer: Raritan was hoping to be a third-party beneficiary of the contract between IMC and
Cherry, Bekaert. But the court was unpersuaded. It found that the accountants had no intention of
2. Woodson Walker and Associates leased computer equipment from Park Ryan Leasing. The lease
said nothing about assignment. Park Ryan then assigned the lease to TCB as security for a loan.
Park Ryan defaulted on its loan, and Walker failed to make several payments on the lease. TCB
sued Walker for the lease payments. Was the assignment valid, given the fact that the original
lease made no mention of it? If the assignment was valid, may Walker raise defenses against TCB
that it could have raised against Park Ryan?
Answer: The assignment was valid. Nothing in the contract prohibited it, and there is no common
law rule against assigning leases. The obligor is generally entitled to raise defenses against the
assignee that it could have maintained against the assignor. The assignor may demand that the
3. Darin bought his fiancée Sarah a 3-carat diamond ring for $43,121 from Mandarin Gems. Later,
Mandarin supplied Erstad with a written appraisal valuing the engagement ring at $45,500. Years
later, the couple divorced and Sarah kept the ring. When she had the ring reappraised, another
gemologist assessed its value at only $20,000.
Sarah sued Mandarin for breach of contract, but the jeweller defended by saying that it had never
made a contract with her. Does Sarah have contract rights against Mandarin?
Answer: The court held that Sarah was an intended done beneficiary. At the time of purchasing
4. You Be the Judge: WRITING PROBLEM David Ricupero suspected his wife Polly
of having an affair, so he taped her phone conversations and, based on what he heard, sued for
divorce. David’s lawyer, William Wuliger, had the recorded conversations transcribed for use at
trial. The parties settled the divorce out of court and signed an agreement that included this clause:
Except as herein otherwise provided, each party hereto completely and forever releases the other
and his attorneys from any and all rights each has or may have . . . to any property, privileges, or
benefits accruing to either by virtue of their marriage, or conferred by the Statutory or Common
Law of Ohio or the United States of America.
After the divorce was final, Polly sued William Wuliger for invasion of privacy and violation of
federal wiretapping law. Wuliger moved to dismiss the case based on the clause quoted. Polly
argued that Wuliger was not a party to the divorce settlement and had no right to enforce it. May
Wuliger enforce the waiver clause from the Ricuperos’ divorce settlement? Argument for
Wuliger: The contract language demonstrates that the parties intended to release one another and
their attorneys from any claims. That makes Wuliger an intended third-party beneficiary, and he is
entitled to enforce the agreement. If Polly did not want to release Wuliger from such claims, she
was free not to sign the agreement. Argument for Polly Ricupero: A divorce agreement settles the
affairs between the couple. That is all it is ever intended to do, and the parties here never intended
to benefit a lawyer. Wuliger is only an incidental beneficiary and cannot use this contract to paper
over his violation of federal wiretapping law.
Answer: Wuliger wins. David intended that Wuliger benefit from Polly's promised release. The
contract expressly included the attorneys in the release. Further, Polly's divorce attorney indicated
5. Judith and John Brooks hired Wayne Hayes to build a house. The contract required Hayes to
“provide all necessary labor and materials and perform all work of every nature whatsoever to be
done in the erection of the residence.” Hayes hired subcontractors to do all of the work. One of
Hayes’s employees checked on the work site daily, but neither Hayes nor any of his employees
actively supervised the building. The Brookses were aware of this working arrangement and
consented to it. The mason negligently installed the fireplace, ultimately leading to a serious fire.
The Brookses sued Hayes for breach of contract. Hayes contended that when the Brookses
approved of his hiring of subcontractors to do all work, that created a novation, relieving him of
any liability. Discuss.
Answer: Hayes loses. He has indeed delegated his duties, but that in itself does not remove his
own contractual liability. To establish a novation he had to demonstrate that the Brookses had
Discussion Questions
1. A century and a half ago an English judge stated: “All painters do not paint portraits like Sir Joshua
Reynolds, nor landscapes like Claude Lorraine, nor do all writers write dramas like Shakespeare or
fiction like Dickens. Rare genius and extraordinary skill are not transferable.” What legal doctrine
is the judge describing? What is the ethical basis of this rule?
Answer: The judge is giving examples of why a party may not delegate his duties if the obligee
has a substantial interest in personal performance by the obligor. It is only fair that if someone
contracts with another party who possesses special talent, and pays for that talent, the contracting
2. Nationwide Discount Furniture hired Rampart Security to install an alarm in its warehouse. A fire
would set off an alarm in Rampart’s office, and the security company was then supposed to notify
Nationwide immediately. A fire did break out, but Rampart allegedly failed to notify Nationwide,
causing the fire to spread next door and damage a building owned by Gasket Materials Corp.
Gasket sued Rampart for breach of contract, and Rampart moved for summary judgment.
Comment.
Answer: Rampart's motion was allowed. Gasket was merely an incidental beneficiary of the
3. If a person promises to give you a gift, there is usually no consideration. The person can change his
mind and decide not to give you the present, and there is nothing you can do about it. But if a
person makes a contract with someone else and intends that you will receive a gift under the
agreement, you are a donee beneficiary and you do have rights to enforce the deal. Are these rules
unacceptably inconsistent? If so, which rule should change?
4. In response to the subprime mortgage crisis, the federal government created the Home Affordable
Modification Program (HAMP) to help struggling homeowners refinance their mortgage debt,
thereby reducing the foreclosure rate. HAMP facilitates contracts between the U.S. Treasury and
mortgage lenders, who modify eligible homeowners’ mortgage loans in return for incentive
payments. The Mackenzies applied for a HAMP modification of their home. Although they were
eligible, Flagstar bank foreclosed on their Massachusetts home. The Mackenzies sued Flagstar for
breach of contract, claiming they were intended third-party beneficiaries of the lender’s contract
with the government. Will the Mackenzies succeed on this theory?
5. In our society, a person can buy and sell almost anything. But as the chapter describes, you cannot
sell personal injury claims. Should you be able to? Imagine that you are injured in a car wreck.
You are told that you might eventually win $100,000 in a lawsuit, but that you might not receive
payment for years, and you might also lose the case and recover nothing. If someone is willing to
pay you $20,000 cash-on-the-barrelhead today for the rights to your claim, is it fair that public
policy concerns prohibit you from taking the money?
