## Facts

- In 2011, ARA Incorporated (ARA), a factoring company, signed a factoring agreement with JG Staffing under which ARA purchased JG Staffing’s accounts receivable.
- The 2011 factoring agreement did not include an after-acquired-property clause extending ARA’s rights to accounts created in the future.
- The agreement contained a Minnesota choice-of-law provision for disputes under the factoring agreement.
- In 2015, ARA sued JG Staffing for breach of the factoring agreement and obtained a judgment of about $700,000.
- Later in 2015, JG Staffing entered into a new staffing contract with the City of Glendale under which Glendale would pay JG Staffing for staffing services.
- After learning of the Glendale contract, ARA contacted Glendale and informed the city about the factoring agreement with JG Staffing, asserting that ARA was entitled to payment.
- Glendale declined to pay ARA directly and continued making payments in line with its contract with JG Staffing.
- ARA sued Glendale, alleging that Glendale violated the Uniform Commercial Code (UCC) by refusing to redirect payment to ARA after receiving notice.

## Issues

1. Did ARA’s 2011 factoring agreement (which lacked after-acquired-property language) give ARA rights in receivables that arose later under JG Staffing’s 2015 staffing contract with Glendale?
2. If ARA lacked rights in those later receivables, did Glendale nevertheless have a UCC duty to pay ARA rather than JG Staffing after receiving ARA’s notice?

## Decision

- The court granted Glendale’s Rule 12(b)(6) motion to dismiss.
- The court concluded that ARA did not plausibly allege that the 2011 factoring agreement transferred to ARA the right to payments generated by the later Glendale staffing contract.
- Because ARA did not plausibly allege a valid assignment or attached Article 9 interest in the specific receivables owed by Glendale, Glendale had no UCC-based obligation to pay ARA instead of JG Staffing.

## Legal Principles

- A party seeking to collect from an account debtor under UCC assignment rules must first show that the payment right at issue was actually assigned (or that a security interest attached to that account).
- A factoring or security agreement that does not include after-acquired-property language generally does not reach accounts that come into existence later from separate, future contracts.
- Notice to an account debtor does not create a duty to pay the claimant where the claimant has not obtained rights in the account being collected.
- A choice-of-law clause in a contract may govern disputes between the contracting parties, but it does not, by itself, impose payment duties on a nonparty account debtor.

## Conclusion

The court dismissed ARA’s UCC claim against Glendale because ARA’s 2011 factoring agreement with JG Staffing, as alleged, did not extend to receivables created later under JG Staffing’s separate 2015 staffing contract with Glendale, and without a valid assignment or attached interest in those specific city-contract receivables, Glendale was not required to pay ARA after receiving notice.


ARA Incorporated v. City of Glendale, 2018 WL 1411787 (D. Ariz. 2018)