United States District Court, Northern District of Illinois, E.D
April 28, 1982
A.C. DAVENPORT & SON CO., PLAINTIFF,
UNITED STATES OF AMERICA, DEFENDANT.
The opinion of the court was delivered by: Getzendanner, District Judge.
MEMORANDUM OPINION AND ORDER
Plaintiff A.C. Davenport & Son Co. ("Davenport")*fn* brings
this action for the purchase price of products delivered to
the General Services Administration ("GSA"), an agency of
defendant United States. The matter is before the court on the
Government's motion to dismiss for lack of jurisdiction and on
the parties' cross motions for summary judgment. The court
denies defendant's motions to dismiss and for summary judgment
and grants plaintiff's motion for summary judgment.
The parties agree that there is no genuine dispute as to any
material fact and that the following facts are undisputed.
In December, 1975, the GSA contracted with Almark, Inc., of
Arlington, Virginia, for the purchase of bulletin boards. In
early 1976, Almark agreed with Davenport that the latter was
to supply the bulletin boards that Almark was obligated to
deliver under its contract with the GSA. Later that year,
Davenport had reason to question Almark's ability to meet its
payments under the subcontracting agreement and Davenport
insisted on some arrangement to secure these payments. (See
Affidavit of Duane Conwell and Plaintiff's Ex. #2.)
As a result, Almark modified its contract with the GSA,
changing the payment address from "Almark, Inc., 542 So.
23rd Street, Arlington, Virginia 22202" to "Almark, Inc., c/o
Davson, 306 East Helen[sic] Road, Palatine, IL 60067." A
Government Contracting Officer approved and signed this
modification. A few days later, Almark executed a corporate
resolution authorizing the First National Bank to accept for
deposit in a special account checks that were endorsed
"Almark, Inc., c/o Davson." The resolution further authorized
the Bank to pay out funds from this account only in the name
of Davenport by its president, Frank A. Davenport.
Almark executed the contract modification and corporate
resolution pursuant to an agreement with Davenport. The
parties intended that the combined effect of the modification
and resolution would be that Davenport would receive Almark's
checks directly from the Government, that it could then
deposit them in the special account, and that only Davenport,
through its president, could withdraw the proceeds from the
account.[fn**] The purpose of this arrangement was to secure
Almark's payment to Davenport under the subcontracting
Between February and April, 1977, the GSA issued checks
pursuant to its contract with Almark. Despite the contract
modification in effect, the GSA sent these checks to Almark's
Virginia address. On April 4, 1977, Davenport's Account
Manager wrote the Government informing it that Davenport had
not received checks for shipments made in January and
February, 1977, under Almark's contract as modified.
Plaintiff's Ex. #3. The second sheet of this letter bears the
following handwritten note:
(1) All payment gone to Almark by Alton Franklin
(2) Carol Dameron put stop payment on all Almark
The record is not clear on this point, but apparently the stop
order was ineffective as to one or more of the checks sent to
Almark's Virginia address for a total of $11,822.89.
On April 28, 1977, the GSA issued what it terms a
"duplicate" check for the same amount and sent this check to
"Almark, Inc., c/o A.C. Davenport & Son Co." in Palatine,
Illinois. Davenport endorsed and deposited this check in the
special account and withdrew the funds, according to its
agreement with Almark.
For some reason,*fn1 the Government did nothing more until
November, 1977, when it wrote Davenport questioning the
propriety of the latter's endorsement and deposit of the
second Almark check. In July, 1978, the Government sent a
formal demand to Davenport for the $11,822 and indicated that
it would offset amounts due Davenport on totally unrelated
contracts. Portions of this letter are significant:
"It is [the GSA's] opinion that a duplicate
payment was made to Almark, Inc. The first series
of payments totalling $11,822.89 was made to
Almark, Inc. between the period February 2, 1977,
and April 4, 1977. . . . The payment of
$11,822.89 made to Almark, Inc., c/o A.C.
Davenport and Son on April 28, 1977, by Treasury
check No. 1400521, was a duplicate payment to
Almark, Inc. of previously paid invoices."
Defendant's Ex. #9. Notwithstanding its clear admission that
the duplicate payment was made to Almark, the Government
proceeded to withhold payments due Davenport on the unrelated
contracts, as setoffs of the amount the Government claimed
Davenport owed it under the Almark contract. Davenport brought
this action to recover some $5,000 owed on one of the
The Government argues that it has offset sums totalling more
than $10,000. As a result, it contends that the amount in
controversy between it and Davenport exceeds the
jurisdictional limit provided by 28 U.S.C. § 1346(a), and that
the case properly belongs in the Court of Claims.*fn2
Davenport contends that separate and distinct contracts
constitute separate and distinct causes of action, United
States v. Louisville & Nashville Railroad Co., 221 F.2d 698,
702 (6th Cir. 1955), and that it may sue on one contract
involving less than $10,000 even though the aggregate of all
the sums involved in all the contracts exceeds $10,000. See
Fitzgerald v. Staats, 429 F. Supp. 933, 935 (D.D.C.), aff'd,
578 F.2d 435 (D.C. Cir. 1977), cert. denied, 439 U.S. 1004, 99 S.Ct.
616, 58 L.Ed.2d 680 (1978), where the court stated that the
fact that a party has two or more claims for $10,000 or less,
but aggregating more than $10,000, does not deprive the
district court of jurisdiction.
The court agrees with Davenport's position and denies
defendant's motion to dismiss.
Assignment of Claims Act
In their briefs, the parties concentrate on arguing whether
or not the agreement between Davenport and Almark, which
resulted in the contract modification and corporate resolution
giving Davenport the exclusive right to withdraw funds
deposited in the special account, amounted to an assignment in
violation of the Assignment of Claims Act, 31 U.S.C. § 203, and
if so, whether or not the Government waived compliance with the
Act.*fn3 Frankly, the
court considers that these issues are nothing more than "red
herrings." Either the agreement between Davenport and Almark
was not an assignment or, if an assignment was attempted, it
failed. In either case, it is clear that there is no valid
assignment here. This conclusion, however, does not aid the
court in resolving the crucial issue in this case, which is,
can the Government compel Davenport to refund a duplicate
payment that it made to Almark?
The Government seems to assume that the lack of a valid
assignment between Almark and Davenport necessitates a
decision in its favor. Even without a valid assignment,
however, the Government must establish some legal basis for
claiming the $11,822 that Almark turned over to Davenport. The
Government cannot claim a contractual basis, as there was no
privity of contract between the GSA and Davenport with regard
to the $11,822; the contract ran between the GSA and Almark.
Because there was neither a contractual relationship nor an
assignment, Davenport could not have sued the Government had
it refused to pay the $11,822, nor could Davenport have sued
the Government had it sent only one check and that to Almark
in Virginia. See United States v. Smith, 393 F.2d 318 (5th Cir.
1968). In Smith, a wife was awarded one-half of her serviceman
husband's pay as property settlement in a divorce action. The
husband then wrote an "irrevocable" letter directing his pay be
deposited in an escrow for division, which letter, however, he
later revoked. The court held that the wife had no claim
against the United States for her share of the pay, in part
because the "irrevocable" letter was not a valid assignment.
The Government analogizes Davenport's position to that of
the wife in Smith. From this, the Government argues that it is
entitled to compel Davenport to refund the amount of the second
check. Because Davenport could not force the GSA to pay it, the
Government reasons, it has no right to the proceeds of the
second check, and therefore the Government can compel Davenport
to refund it by imposing setoffs.
The flaw in the Government's reasoning is its conclusion
that, because Davenport could not compel the GSA to issue the
check in the first instance, it had no right to the proceeds
of the check. This ignores the indisputable fact that
Davenport's right to the check did not originate from the
Government, but from Almark. Davenport, in essence, received
the check from Almark. The Government has admitted as much, as
it has consistently taken the position that the contract
modification was no more than a change in the payee's address
and not a change in the payee.
Even though Almark did not assign its contact with the GSA
to Davenport, this would not automatically render the
agreement between Almark and Davenport null and void. In
Segal v. Rochelle, 382 U.S. 375, 384, 86 S.Ct. 511, 517, 15
L.Ed.2d 428 (1966), the Supreme Court stated that despite the
broad language of the Assignment of Claims Act, it "`must be
interpreted in the light of its purpose to give protection to
the Government' so that between the parties effect might still
be given to an assignment that failed to comply with the
statute," quoting Martin v. National Surety Co., 300 U.S. 588,
596, 57 S.Ct. 531, 534, 81 L.Ed. 822 (1937). See also Kolb v.
Berlin, 356 F.2d 269, 270 (5th Cir. 1966); 3A Moore, Federal
Practice, ¶ 17.09 [1-2] at 17-101. The Government, in fact, has
not disputed here that Davenport was in fact entitled to
payment from Almark.
This being the case, that the Government gave Almark two
checks and that Almark gave one of those checks to Davenport
while keeping the other, the Government must establish some
basis for following the payment made to Almark into
Davenport's hands. This the Government has completely failed
to do, and the court's own research*fn4
indicates that the Government cannot do so in the
circumstances of this case.
Government's Right to Recovery
The Government clearly has the right, existing at common law
independent of any statute, to recover a duplicate payment
made by mistake. "The Government by appropriate action can
recover funds which its agents have wrongfully, erroneously,
or illegally paid." United States v. Wurts, 303 U.S. 414, 415,
58 S.Ct. 637, 638, 82 L.Ed. 932 (1938). And this right is a
federal right, United States v. A&C Investments, Inc.,
513 F. Supp. 589 (N.D.Ill. 1981). It is equally evident that the
Government could seek to recover the duplicate payment from
Almark, either on the basis of privity of contract or under a
theory of unjust enrichment. But the Government's right to
proceed against Davenport is more problematic, there being no
privity of contract between them nor unjust enrichment on
When the Government sent the first check or checks to Almark
in Virginia, it discharged its obligation under the contract
and Davenport could not legally have compelled the Government
to issue another check.*fn5 See United States v. Smith, supra,
pg. 733. When the Government sent the second check to Almark
c/o Davenport, it was presumably operating under a mistake of
fact, believing that payment on the first check or checks had
been stopped. Cf. In re Sabre Shipping Corp., 299 F. Supp. 97,
101 (S.D.N.Y. 1969) (duplicate payment a mistake of fact).
Under general legal principles, the Government could not
recover the mistaken duplicate payment from Davenport.
"Where A, under a mistaken belief in his
liability to B, on direction of the latter pays C
a claim which C has against B, A cannot recover
the payment from C. If the payment was
voluntarily and intentionally paid by A to C to
satisfy the latter's claim against B, and C had a
genuine claim against B, it seems clear no
recovery should be allowed. C is a purchaser of
the money for value and in good faith."
13 Williston, Contracts § 1574 at 495.*fn6 Here, the
Government, mistakenly believing it had stopped payment on the
first check or checks, sent a second check to Davenport
pursuant to Almark's direction, to satisfy Davenport's genuine
claim against Almark and to insure Davenport's continued
performance of its subcontracting agreement with Almark. In
these circumstances, the Government should not be able to pass
on to Davenport the consequences of its own mistake.
The equities in this case overwhelmingly favor Davenport. It
strikes the court that there is something inherently
inequitable in imposing the loss in this case on the only
party who has performed without fault. The problem of the
double payment arose due to the Government's own error and the
only reason, as far as the court can determine, that it is now
seeking recovery from Davenport rather than Almark is because
Almark is bankrupt. Yet, Davenport is not answerable for
either the Government's mistake or Almark's insolvency.
The court does not need to rely on general legal principles,
however. The court concludes that under Illinois law Davenport
took the second check as a holder in due course and thus took
it free of any defenses,
such as duplicate payment, that the payor (the Government) may
have had against the payee (Almark).*fn7 Because Davenport
was entitled to the proceeds of the check, the Government may
not offset the amount of the check against its outstanding
debts to Davenport.
Holder in Due Course
The court begins its analysis by examining the significance
of the contract modification. It was not an assignment, so
Almark remained the payee under the Almark-GSA contract even
after the modification took effect. By means of the
modification, Almark transferred or delivered its check to
If this were all, if Davenport merely took possession of the
check as a transferee, the Government would be entitled to
recover the proceeds of the check from Davenport. As a
transferee, Davenport would only take such rights to the check
as its transferor, Almark, had, Ill.Rev.Stat. ch. 26, ¶
3-201(1), and Almark had no rights to the second check because
it had received and cashed the first check or checks. If,
however, the second check was negotiated by Almark to
Davenport, then Davenport would be a holder and entitled to the
rights of a holder.
Looking to the pertinent Illinois statute, Ill.Rev.Stat. ch.
26, ¶ 3-201(3), provides:
Unless otherwise agreed any transfer for value of
an instrument not then payable to bearer gives
the transferee the specifically enforceable right
to have the unqualified indorsement of the
transferor. Negotiation takes effect only when
the indorsement is made. . . .
There is no dispute that the transfer of the second check to
Davenport was for value, as Davenport was supplying the
bulletin boards that Almark had contracted to deliver to the
GSA. Davenport was thus entitled to Almark's endorsement.
Pursuant to the corporate resolution and the agreement between
Almark and Davenport, the necessary endorsement was supplied
by affixing "Almark, Inc., c/o A.C. Davenport & Son" on the
back of the check,*fn8 and Davenport was empowered to so
endorse the check.*fn9 The check was endorsed; at that point
it was negotiated and Davenport became a holder.
A holder becomes a holder in due course if he takes the
instrument for value, in good faith and without notice of any
defense or claim against it on the part of any person.
Ritz v. Karstenson, 39 Ill. App.3d 877, 350 N.E.2d 870 (2d
Dist. 1976); Ill.Rev.Stat. ch. 26, ¶ 3-302(1). Again, there can
be no dispute that Davenport took the second check for value
and in good faith, but the court must consider carefully
whether it took the check without notice of any defense on the
part of the Government.
A person has notice of a fact when he has actual knowledge
of it or when from all the facts and circumstances known to
him at the time he has reason to know of it. Ill. Rev.Stat.
ch. 26, ¶ 1-201(25). There is nothing in the record to indicate
that at the time Davenport received the second check which was
dated April 28, 1977, it had actual knowledge that the
Government had paid the first check or checks, thereby
discharging its obligation under the Almark contract.
Prior to receiving the second check, however, Davenport did
know that the GSA had sent checks directly to Almark, but it
also knew that the GSA had put a stop payment order on the
checks. The question is whether, knowing this, Davenport had
reason to know that the April 28th check was an erroneous
duplicate payment. The court concludes that Davenport did not
to know that the check it received was a mistake, because
there is nothing in the record to indicate that Davenport knew
or suspected that the stop order had not been effective.
The burden is upon the Government to establish that, at the
time it took the check, Davenport knew or should have known
that it was a double payment. In Bank of North Carolina v. Rock
Island Bank, 630 F.2d 1243 (7th Cir. 1980), the Court examined
Illinois law, Ill.Rev.Stat. ch. 26, ¶ 3-307, to determine the
allocation of the burden of proof on the holder in due course
issue. The court held:
"Section 3-307 provides that if the holder of a
negotiable instrument produces the instrument and
the signatures are not in dispute, the holder may
recover under the instrument unless a defense is
established. It is only after a defense is shown
to exist that the holder bears the burden of
proving that it is a holder in due course."
Id. at 1246. Because the defendant failed to establish a valid
defense to the negotiable instrument in that case, the Court
directed the district court to enter judgment in the
plaintiff's favor. Accord Ritz v. Karstenson, 39 Ill. App.3d 877,
883, 350 N.E.2d 870, 874 (2d Dist. 1976).
Similarly, here the Government has not shown that at the
time Davenport took the check it knew or should have known
that the stop order had been ineffective and that the
Government had already paid the $11,822. As the Government had
the burden of proof on that issue, Davenport need not
establish affirmatively that it had no notice. The
Government's failure to come forward with some proof of a
valid defense mandates a finding that Davenport was a holder
in due course.
Being a holder in due course, Davenport took the check free
from all defenses of any party to the check with whom it had
not dealt, Ill.Rev.Stat. ch. 26, ¶ 3-305. Davenport did not
"deal" with the Government with regards to the check because it
did not take the check as a payee or an assignee of the payee
or as a result of any other immediate transaction with the
Government; it took the check by negotiation from Almark. Cf.
Chicago Title & Trust Co. v. Walsh, 34 Ill. App.3d 458, 468-69,
340 N.E.2d 106, 113-14 (1st Dist. 1975).
In Chicago Title, the court reasoned that in order for the
payees to have dealt with the drawer-bank within the meaning of
the statute, the payees must have participated in the exchange
of forged cashier's checks for the bank drafts in dispute; that
the payees had dealt with the bank as escrowee was
insufficient. The court concluded that the statute was not
meant to reach everyone who was a party to the underlying
transaction. Here, Davenport's cooperating with the GSA as a
subcontractor to Almark does not constitute "dealing" within
the purview of ¶ 3-305.
Because Davenport took the check free and clear of the
defense of double payment, the Government cannot claim that
Davenport had no right to the check or its proceeds. As
Davenport had a right to the check, the Government cannot
offset the amount of the check against the amount it owes
Davenport on unrelated contracts. Moreover, the Government has
conceded that it has no other defenses to the payment of the
purchase prices due Davenport at issue in this case, and thus
Davenport is entitled to the amounts due and owing.
Accordingly, Davenport's motion for summary judgment is
granted, the Government's motions to dismiss and for summary
judgment are denied, and the case is dismissed.