Porter Capital Corporation v Masters

When a commercial running account governed by foreign law must be restated, the court must apply the governing contractual provisions and the relevant foreign-law default rules. Under Connecticut law, absent a contrary agreement or an operative direction, payments are applied first to interest and then to principal. A contractual provision giving a creditor wider appropriation powers after default does not, without more, displace that rule before default.

A restatement may include contractual charge-backs and fees which the creditor was entitled to claim, even if it did not claim them contemporaneously. That entitlement remains subject to any substantive defences available on the taking of the account. Equitable estoppel requires inducement and detrimental reliance; mere reliance on earlier accounts is insufficient.

Porter Capital Corporation sought to enforce a guarantee given by Zulfikar Masters of Cura Pharmaceutical Company Inc.’s liabilities under a commercial financing agreement governed by Connecticut law. The guarantee had been held enforceable, and the matter was remitted for an account after earlier findings that Porter had wrongly charged over-advance interest and compound interest.

The preliminary issues concerned the appropriation of payments, whether unpaid factored invoices could be charged back, whether fees could be revisited, and the approach to legal fees and expenses. The parties agreed the fourth issue. The court therefore determined the three remaining issues governing the preparation of the account.

1. Late true-sale argument. The argument that the financing agreement created true sales of receivables, rather than secured lending, was not open on the preliminary issues as formulated. It raised a fundamentally different issue which should have been identified before the issues were fixed. In any event, on Connecticut law the agreement created secured lending. The substance of the transaction prevailed over labels. Cura retained substantially the risk of non-collection, the agreement contemplated that receipts would exceed advances and be applied to Cura’s overall indebtedness, and several provisions made sense only on a debtor-creditor analysis.

2. Appropriation. The United States Rule applied as the Connecticut-law default rule. Payments were therefore to be appropriated first to interest and then to principal, and the same approach applied to fees. Clause 7 of the financing agreement operated in a wider field and did not positively disapply that rule before default. The absence of express contractual provision left a gap to be filled by the default rule. No operative direction by Cura had been given at or before the time of payment. The fact that payments related to particular receivables did not require their application first to principal.

3. Charge-backs. Porter could include charge-backs when restating the account. The distinction advanced between charge-backs and correcting the quantification of the account was untenable. Cura’s bankruptcy stay did not bar remedies against Masters. Masters could nevertheless raise on the taking of the account any substantive objections concerning notice, waiver, limitation, laches, abuse of process, or the contractual basis for particular charge-backs.

4. Fees. Renewal fees could be included, subject to the same reservation concerning potential account-taking defences. Porter had not waived the right to claim them: there was no written waiver, express conduct indicating an intention permanently to relinquish the right, or sufficient evidence of inducement and detrimental reliance. Increased over-advance fees were a consequence of correcting the account and could likewise be included. Estoppel, waiver, unclean hands and lack of good faith did not prevent their recovery on the evidence.

5. The preliminary issues were decided in Porter’s favour, subject to the stated proviso concerning arguments available on the taking of the account. The parties were directed to agree an order; costs and permission to appeal were reserved.

• Court of Appeal: By an order dated 15 January 2016, following an appeal and cross-appeal, the earlier High Court order was varied in part and the matter was remitted for directions concerning the account.
• High Court (Chancery Division): The present court determined preliminary issues for the taking of that account and decided them in favour of Porter, subject to the stated proviso concerning arguments available on the account.