Hasse Contracting Co., Inc. v. KBK Financial, Inc.

In February 1994, Hilfiker Systems, Inc. (Hilfiker) granted KBK Financial, Inc. (KBK) (defendant) a security interest in Hilfiker’s then-existing and thereafter-arising inventory, accounts, contract rights, and related proceeds. Hilfiker subsequently contracted with Hasse Contracting Company, Inc. (Hasse) (plaintiff) to supply concrete panels for a highway project on which Hasse was a subcontractor. The Hasse-Hilfiker contract incorporated the terms of the general contract for the highway project, which required contractors and subcontractors to pay their subcontractors and suppliers within seven days of being paid by the preceding party in the payment chain. After Hilfiker signed the contract with Hasse, Hilfiker arranged for Gosney & Sons, Inc. (Gosney) (defendant) to cast the concrete panels and deliver the panels to the highway-project site. Gosney billed Hasse for the panels on January 26, 1995, and completed delivery of the panels in early February. Hilfiker also sent Hasse an invoice for the panels in February 1995. In March 1995, Hilfiker assigned the Hasse invoice to KBK, and KBK notified Hasse that payment for the panels must be mailed to KBK instead of Hilfiker. Hasse thus faced three different demands for payment for the panels: Gosney’s bill, Hilfiker’s invoice, and KBK’s claim. Hasse deposited the amount owed for the panels with a New Mexico state court and filed an interpleader action against Gosney and KBK to determine proper ownership of the funds. The trial court awarded Gosney the funds. On appeal by KBK, the appellate court upheld the trial court’s decision and adopted a public policy that gave suppliers’ claims for payment absolute priority over claims of other secured and unsecured creditors. The New Mexico Supreme Court granted certiorari. On appeal, Hasse and Gosney argued, among other things, that Hilfiker’s failure to pay Gosney was a breach of contract that Hasse could assert as a defense to paying KBK that justified paying Gosney instead. The supreme court first concluded that New Mexico’s materialmen’s-lien statute did not establish an absolute priority for construction-project suppliers over other creditors and then considered whether Hasse had valid defenses against paying KBK, such that Gosney was the correct party to have received the funds.