                                 ___________

                                 No. 96-2192
                                 ___________



The Boatmen’s National Bank of        *
St. Louis, a National Banking         *
Association,                          *
                                      *   Appeal from the United States
     Plaintiff/Appellant,             *   District Court for the Eastern
                                      *   District of Missouri.
           v.                         *
                                      *
Sears, Roebuck and Company,           *
                                      *
     Defendant/Appellee.              *



                                 ___________

                         Submitted: December 13, 1996

                          Filed: February 5, 1997
                                 ___________

Before WOLLMAN and MURPHY, Circuit Judges, and TUNHEIM,1 District Judge.
                               ___________

MURPHY, Circuit Judge.


     In exchange for a $5,000,000 revolving line of credit, Boatmen’s
National Bank of St. Louis (Boatmen's) took a security interest in the
accounts receivable of Boardman’s Printing Company (BPC).    BPC defaulted
on its loan and Boatmen’s took assignment of BPC's accounts receivable.
At the time of default, Sears, Roebuck and Company (Sears) owed BPC
$909,641.52 for the printing of advertising circulars.    When Boatmen’s
attempted to




  The Honorable John R. Tunheim, United States District Judge
for the District of Minnesota, sitting by designation.
collect the money Sears owed BPC, Sears refused to pay the full amount,
claiming the right to an offset of what it had paid to BPC's paper
suppliers.   The district court entered judgment in favor of Boatmen's,
but in an amount reflecting the offset sought by Sears.    Boatmen's
appeals, and we reverse.


     The parties' positions are based on several contractual
arrangements.   BPC printed advertising circulars for Sears according to
the terms of a Retail Printing Agreement between BPC and Sears.      Under
this arrangement, BPC was authorized to purchase paper only from Sears-
designated paper suppliers.   BPC would then charge Sears for both the
paper and the printing services.   At the same time, Sears had separate
agreements, both written and oral, with the paper suppliers.    In
exchange for designating the paper suppliers as the source of paper for
its orders, the suppliers would issue Sears a partial rebate of the
paper price.    In order to obtain these discounted paper supply
arrangements, Sears agreed with the paper suppliers to be liable to them
if BPC failed to pay them.    BPC was not a party to the agreements
between Sears and the paper suppliers.


     In 1991 BPC and Boatmen's entered into a loan agreement.      In
exchange for extending credit, Boatmen's received and perfected a
security interest in BPC's accounts receivable.    Neither the security
agreement nor the loan agreement gave notice that the accounts of BPC
might be encumbered by the side agreements between Sears and the paper
suppliers.   After BPC's default on the loan, Boatmen's took assignment
of BPC's accounts receivable.   Boatmen's therefore now "stands in the
shoes" of BPC for the purposes of the contract between Sears and BPC.
See, e.g., Doss v. Epic Healthcare Mgmt. Co., 901 S.W.2d 216, 222 (Mo.
Ct. App. 1995).


     The parties differ over the existence of Sears' right to offset
the money it paid the paper suppliers against the money it




                                     2
owed BPC.   Boatmen's argues that Sears does not have a right to offset
and that its security interest entitles it to the full amount Sears owes
BPC's accounts.   Sears counters that the language of its agreement with
BPC provides an express right to offset.    In the alternative, Sears
argues that it possesses a common law right to offset since it assumed
BPC’s obligations to the paper suppliers.


     Boatmen’s filed suit in federal court and both parties moved for
summary judgment.   The district court held that Sears had properly
offset the amount it paid the paper suppliers from the amount it owed
BPC, but that Sears still owed Boatmen's the amount in excess of the
offset.   The district court determined that Sears originally owed BPC
$909,641.52.   After applying the offset payments, it found Sears was
still indebted in the amount of $139,320.97 and ordered judgment entered
for Boatmen's in that amount.   Our standard of review is de novo.    Doe
v. Wright, 82 F.3d 265, 268 (8th Cir. 1996).


     Both parties agree that § 9-318 of the Uniform Commercial Code
(UCC), as codified in the Revised Missouri Statutory Code, controls our
analysis.   Section 9-318 provides that an assignee of accounts
receivable (Boatmen's) has all the rights of the assignor (BPC), subject
to offsets, claims and defenses of an account debtor (Sears).
Specifically, § 9-318 states:


     (1) Unless an account debtor has made an enforceable
     agreement not to assert defenses or claims arising out of a
     sale as provided in section 400.9-206 the rights of an
     assignee are subject to

            (a) all the terms of the contract between the account
            debtor and assignor and any defense or claim arising
            therefrom; and

            (b) any other defense or claim of the account debtor
            against the assignor which accrues before the account
            debtor receives notification of the assignment.




                                    3
Mo. Rev. Stat. § 400.9-318.


       Boatmen's contends on appeal that neither subsection (a) nor (b)
provide Sears a right of offset to the amount it owed BPC.   Subsection
(a) does not apply it says because Sears is asserting rights arising
from third party agreements, rather than the terms of its contract with
BPC.   Subsection (b) does not apply because Sears' claim against BPC for
payments to the paper suppliers, which it made after it had received
notification of the assignment of BPC's assets to Boatmen's, did not
accrue before such notice.


       Sears, on the other hand, argues that its payments to the
suppliers were permissible offsets under (a) because they were made
pursuant to its contract with BPC.   In addition, Sears argues that it
could offset the payments under (b) because it had a claim against BPC
for anticipatory breach of contract prior to receiving notice of the
assignment of BPC's accounts to Boatmen's.


       Each party argues that paragraph 19 of the Sears agreement with
BPC supports its position regarding subsection (a).   Paragraph 19 reads:


       Under no circumstance will Contractor [BPC] make any
       purchases or incur any obligation or expense of any kind in
       the name of Sears. Contractor [BPC] shall promptly pay all
       the obligations of Contractor [BPC] including those for labor
       and material and will protect, defend and hold Sears free and
       harmless from any and all claims and liabilities incurred by
       Contractor [BPC] in the conduct and operation of Contractor’s
       [BPC’s] business. Contractor [BPC] will allow no lien to
       attach to Sears [sic] property for failure to pay any such
       amounts.


Sears believes that BPC’s promise in this paragraph to hold Sears




                                     4
free and harmless from all liabilities means that this contract
obligated BPC to indemnify Sears for the claims of the paper suppliers.
Boatmen’s argues that Sears’ obligation to the paper suppliers did not
arise from paragraph 19, but out of separate agreements with those
companies.    Since Sears' payments to the suppliers were not made
pursuant to "the terms of the contract" between Sears and BPC, Boatmen's
contends § 9-318(1)(a) does not apply and does not provide support for
the offset.


      Paragraph 19 does not support Sears' claim to an express right to
offset.   The language is not broad enough to put BPC on notice that
Sears would offset any payments it made to the paper suppliers.      In
contrast, Boatmen's points to a similar case where the disputed contract
included a clause with an express right of offset:


      [account debtor] reserves the right to make any payments
      directly to materialman, subcontractors or laborers, and
      deduct said amounts from the balance owing to [the assignor].


Business Fin. Servs., Inc. v. AGN Dev. Corp., 694 P.2d 1217, 1221 (Ariz.
1985).    Sears drafted the contract with BPC and had opportunity to
negotiate for an express offset clause.   Boatmen's argues that the
failure of Sears to protect itself with such a clause should not be
rectified by implying a right to offset from the language of paragraph
19.


      Sears' payments to the suppliers were not made pursuant to the
terms of the contract between Sears and BPC.   Paragraph 19 does not
impose any liability on Sears to BPC's paper suppliers, nor does it give
any notice to BPC or its secured creditor, Boatmen’s, of any separate
contracts Sears had with third parties such as the paper suppliers.
Since Sears does not point to any other section of the contract giving
it the right to offset its payments to the paper suppliers, its claim to
offset is not based




                                     5
on its contract with BPC and § 9-318(1)(a) does not apply.


      Sears also argues that it has a common law right of offset which
constitutes a defense arising from its contract with BPC and fits within
§ 9-318(1)(a).   It cites in support Citizens Bank of Maryland v.
Strumpf, 116 S. Ct. 286 (1995), a case allowing a creditor to withhold a
payment owed a debtor who had filed bankruptcy.   In Strumpf, the Supreme
Court noted that "[t]he right of set off (also called off set) allows
entities that owe each other money to apply their mutual debts against
each other, thereby avoiding the absurdity of making A pay B when B owes
A."   Id. at 289 (citation omitted)(internal quotations omitted).   In
general, "to warrant a off set, the demands [of the parties] must be
mutual and subsisting between the same parties and must be due in the
same capacity or right."   Mercantile Trust Co. v. Mosby, 623 S.W.2d 22,
24 (Mo. Ct. App. 1981) (citation omitted) (internal quotation omitted).


      Sears does not have a common law right to setoff because there is
no mutuality of obligation and the parties are not the same.    Sears
argues that its separately contracted debt to the paper suppliers
excuses its debt to Boatmen's, as assignee of BPC's accounts.    This is
different from the situation in Strumpf where A owed B and B owed A.
Here, A (Sears) claims its independent contractual payment to B (the
paper suppliers) excuses its obligation to C (Boatmen's).    Strumpf is
different from this case and Sears cannot rely on a common law right to
offset as a claim under § 9-318(1)(a) to defeat the rights of Boatmen's.



      Finally, Sears' claim to offset under § 9-318(1)(a) would not
further the policy and goals of Article 9 of the UCC.   There was no
notice in the contract between BPC and Sears of other agreements.     Any
obligation of Sears to the paper suppliers is based on the separate
agreements Sears had with them.   These side




                                    6
agreements, to which BPC was not a party and about which Boatmen’s would
have had no notice, should not be allowed to defeat the perfected
security interest held by Boatmen’s in BPC’s accounts receivable.   A
fundamental purpose of Article 9 is "to create commercial certainty and
predictability by allowing [creditors] to rely on the specific
perfection and priority rules that govern collateral within the scope of
Article 9.”   Carlson v. Tandy Computer Leasing, 803 F.2d 391, 394 (8th
Cir. 1986).   This goal would be undermined by allowing undisclosed side
agreements, such as the agreements between Sears and the paper
suppliers, to defeat an otherwise valid security interest.


     Under § 9-318(1)(b), Boatmen’s rights would be subject to any non-
contractual defense or claim Sears had against BPC, provided that the
claim or defense accrued before Sears received notice of the assignment
of BPC's accounts to Boatmen's.   Boatmen’s argues that any claim Sears
may have had to an offset under § 9-318(1)(b) could not have accrued
until after February 15, 1994, the date that Sears made the payments to
the paper suppliers.    Since Sears had notice of the assignment of BPC's
assets to Boatmen's before February 15, 1994, § 9-318(1)(b) is
inapplicable.


     Sears counters that when BPC defaulted on its loan from Boatmen’s
on January 8, 1994, Sears had a claim for anticipatory breach of
contract against BPC.   Sears reasons that BPC’s default on the loan
meant that BPC would default on its obligations to the paper suppliers,
and under paragraph 19 of its contract with Sears, BPC was obligated to
pay its suppliers promptly.   This breach of the contract between Sears
and BPC would make Sears responsible for paying the paper suppliers, and
Sears would therefore be justified in offsetting its debt to BPC.


     It is not clear that Sears' anticipatory breach of contract theory
is properly raised under § 9-318(1)(b).   Section 9




                                     7
318(1)(a) subjects the assignee to "all the terms of the contract
between the account debtor and assignor and any defense or claim arising
therefrom. . . ."     Section 9-318(1)(b) applies to "any other defense or
claim. . . ."   Subsection (b), therefore, appears to cover only non-
contractual claims of the account debtor.     See Mo. Rev. Stat. § 400.9-
318 cmt. 1. (1994).    Sears' claim for an anticipatory breach of contract
is necessarily a claim based on its contract with BPC, and as such,
should not be raised under subsection (b).2


      Sears' anticipatory breach of contract theory also requires
reading the side agreements into the terms of the contract between BPC
and Sears.   In order to justify its offset, Sears argues it was required
by BPC's potential breach to pay the paper suppliers.     But, as discussed
above, any liability of Sears to the paper suppliers is based on its
side agreements, not the contract between BPC and Sears.     Since its
liability arises from the side agreements, Sears cannot argue its offset
is justified by BPC's potential breach of the contract with Sears.


      We conclude that Boatmen’s rights are not limited by either the
terms of the contract between Sears and BPC, or by any claim Sears had
before it received notice of the assignment of BPC's accounts to
Boatmen's.   We therefore need not reach points raised by Boatmen's
regarding the calculation of the offsets, Sears’ oral guarantee to one
paper supplier, or other factual questions about the paper purchases.


      Accordingly, we reverse and remand for entry of judgment in




  2
   Even if the argument is considered under subsection (b), it
appears that Sears' claim for anticipatory breach of contract
accrued at the same time it received notice of the assignment of
BPC's accounts to Boatmen's. In that case, Sears' anticipatory
breach of contract claim would fail under subsection (b) because
it would not have accrued before notice of the assignment.

                                      8
favor of Boatmen's for the total amount of Sears' debt to BPC.



A true copy.


     Attest:


           CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT




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