                 United States Court of Appeals,

                        Eleventh Circuit.

                              No. 94-9025.

  FIRST NATIONAL BANK OF BOSTON, successor-in-interest of Brown
Transport Corp., Plaintiff-Appellee, Cross-Appellant,

                                    v.

 THOMSON CONSUMER ELECTRONICS, INC., Defendant-Appellant, Cross-
Appellee.

                             May 31, 1996.

Appeals from the United States District Court for the Northern
District of Georgia. (No. 1:92-cv-2739-FMH), Frank M. Hull, Judge.

Before TJOFLAT, Chief Judge, CARNES, Circuit Judge, and FAY, Senior
Circuit Judge.

     TJOFLAT, Chief Judge:

     First National Bank of Boston, having acquired the accounts

receivable of Brown Transportation Corp., a bankrupt motor carrier,

brought this action against Thomson Consumer Electronics, Inc., to

collect for transportation services that Brown had performed for

Thomson.   Thomson   sought    to   avoid   the   entry   of   judgment   by

asserting several claims for recoupment, which, in total, exceeded

the amount that it owed for Brown's services.        The district court,

to which this case was removed from state court,1 allowed some, but
not all, of Thomson's claims for recoupment, and gave the bank

judgment for the difference. We conclude that the applicable state

law required the court to honor all of Thomson's claims.                  We

therefore vacate the court's judgment and remand the case for the

entry of a judgment of no liability in favor of Thomson.


     1
      Diversity of citizenship existed between the parties;
hence, the case was removable under 28 U.S.C. § 1441(a) (1994).
                                       I.

     In March of 1988, Brown and Thomson entered into a one-year

transportation contract, effective April 1, 1988, under which Brown

would provide shipping services for Thomson;               the contract was

later extended for another year, effective April 1, 1989.                 On

December 30, 1988, Brown and the Bank entered into a security

agreement in which Brown granted to the Bank a security interest in

all of its accounts receivable.             The Bank perfected its security

interest on January 3, 1989.       On October 31, 1989, Brown filed a

petition for relief under Chapter 11 of the Bankruptcy Code, see 11

U.S.C. §§ 301, 1101-1174 (1994);        on January 8, 1990, the case was

converted into a Chapter 7 liquidation and a trustee was appointed,

see 11 U.S.C. §§ 701-766, 1112.             On the Bank's application, the

bankruptcy court lifted the automatic stay, see 11 U.S.C. § 362,

thus allowing the Bank to collect Brown's accounts receivable.            On

September 3, 1992, the trustee and the Bank agreed to a settlement,

according to which the Bank would withdraw all of its claims

against the bankrupt's estate in return for, among other things,

Brown's   interest,   if   any,   in    its     accounts   receivable.   The

bankruptcy court approved the settlement agreement on January 28,

1993.

     On October 19, 1992, before the settlement was approved, the

Bank sued Thomson in Georgia state court to recover $205,595.82 in

unpaid shipping invoices Brown had issued to Thomson for over one

thousand shipments made between September 1, 1988, and December 12,

1989.     In its answer to the Bank's complaint, Thomson sought

recoupment under the transportation contract for shipments lost in
transit on November 19 and December 9, 1988, and on June 30, 1989.

As noted, the case was subsequently removed to the district court.

     On July 29, 1994, after a bench trial, the district court

issued its final judgment.         The court found that the Bank had

proven   that   Thomson   owed    it   $99,282.65   for   unpaid   shipping

charges.2   The court also found that Thomson had proven its claims

for lost shipments in the amount of $394,692.44. However, applying

North Carolina law,3 see N.C.Gen.Stat. § 25-9-318(1), the court did

not allow Thomson to recoup the value of shipments that were lost

after January 3, 1989, the date the Bank perfected its security

interest in Brown's accounts receivable.4           The allowable claims,

amounting to $62,242.44, reduced the amount that Thomson owed to

the Bank to $37,040.21.          The court also awarded $15,935.38 in

     2
      The district court reduced the Bank's $205,595.82 claim to
take into account discounts that Brown had awarded Thomson and
unpaid shipping invoices that were issued outside of the statute
of limitations period. See O.C.G.A. § 46-9-5 (three-year
limitation on actions for recovery of intrastate shipping
charges).
     3
      The district court did not determine whether Georgia or
North Carolina law generally applies in this case. However, the
Uniform Commercial Code, as adopted in both states, provides that
in the case of intangible collateral, such as accounts
receivable, "[t]he law (including the conflict of law rules) of
the jurisdiction in which the debtor is located governs the
perfection and the effect of perfection or nonperfection of the
security interest," and that "[a] debtor shall be deemed located
... at his chief executive office if he has more than one place
of business." O.C.G.A. § 11-9-103(3)(b), (d); N.C.Gen.Stat. §
25-9-103(3)(b), (d); see U.C.C. § 9-103(3)(b), (d). The debtor
in this case (Brown) was located in North Carolina. The district
court thus concluded that, by operation of the law of either
state, North Carolina's law governs the Bank's right to collect
the accounts receivable. The parties do not challenge this
conclusion.
     4
      Thomson had proven claims for $62,242.44 that accrued on
December 9 and October 19, 1988, and claims for $332,450 that
accrued on June 30, 1989.
pre-judgment interest, and therefore entered judgment for the Bank

in the amount of $52,975.59.

     Thomson appeals the denial of its claims for recoupment that

accrued after January 3, 1989.     The Bank cross-appeals, arguing

that Thomson suffered no damage from the lost shipments and should

not prevail on any of its claims for recoupment.     We address both

of these appeals in turn.

                                 II.

     The Bank asserts that it has a perfected security interest in

the subject accounts receivable that gives it priority over any

subsequent recoupment claims of a third party by virtue of the

general priority rules of Article 9 of the Uniform Commercial Code,

as adopted in North Carolina.          See N.C.Gen.Stat. § 25-9-201.

Thomson, however, argues that the applicable rules are found in

N.C.Gen.Stat. § 25-9-318(1), which deals specifically with the

rights of an "assignee" against those of an "account debtor."

Section 25-9-318(1) provides as follows:

          Unless an account debtor has made an enforceable
     agreement not to assert defenses or claims arising out of a
     sale as provided in [N.C.Gen.Stat. §] 25-9-206 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.

N.C.Gen.Stat. § 25-9-318(1)(a)-(b). Thomson is clearly an "account

debtor," which is defined as a "person who is obligated on an

account."   N.C.Gen.Stat. § 25-9-105(1)(a).     The accounts in this

case are the accounts receivable that were created by Thomson's
obligation to pay Brown for services Brown rendered as a motor

carrier.   See N.C.Gen.Stat. § 25-9-106.       Provided that the Bank is

an   "assignee,"   the   Bank's   right   to   recover   on   the   accounts

receivable is subject to "all the terms of the contract between the

account debtor and assignor and any defense or claim arising

therefrom" and "any other defense or claim of the account debtor

against the assignor which accrues before the account debtor

receives notification of the assignment."          N.C.Gen.Stat. § 25-9-

318(1)(a)-(b).

      The Bank argues that section 25-9-318 does not apply because

it is not an assignee of Brown's accounts receivable, but rather a

secured party with a perfected security interest therein.            Thomson

claims that the district court was correct in finding that section

25-9-318 applies, but that the district court erred in applying

subsection (1)(b) rather than subsection (1)(a).

                                    A.

       We take the Bank's argument first.         It is not clear to us

that the Bank remains a secured party, since, with the approval of

the settlement agreement, the underlying debt has been extinguished

and the collateral—the accounts receivable—is no longer owned by

the debtor.   See, e.g., In re Advanced Aviation, Inc., 101 B.R.

310, 313 (Bankr.M.D.Fla.1989).      But we need not decide whether the

Bank does or does not remain a secured party, since section 25-9-

318 applies in either case.

      The instrument that gave the Bank its security interest in the

accounts receivable also, by its very terms, assigned the accounts

receivable to the Bank.     The security agreement read, in part, as
follows:

           § 1. GRANT OF SECURITY INTERESTS, ETC. [Brown] hereby ...
      pledge[s] and assign[s] to the [Bank] ... and grant[s] to the
      [Bank] ... a continuing security interest in and lien on all
      of the accounts of [Brown], and all the proceeds and products
      thereof....

Brown clearly assigned to the Bank all of its accounts, including

its accounts receivable, making the Bank an "assignee" within the

meaning of section 25-9-318.           Had the security agreement not

provided for an assignment, however, the Bank surely became the

assignee of the accounts receivable by virtue of its settlement

with the trustee of the bankruptcy estate, when all of the accounts

of the bankrupt and the proceeds thereof were turned over to the

Bank.

        If, as the Bank claims, it has only a perfected security

interest in the accounts receivable, it is nevertheless still an

"assignee" within the meaning of section 25-9-318.             "For purposes

of   [U.C.C.   §   9-318],    the   courts   and   the   UCC   have   made   no

distinction between a party with a security interest in a debtor's

accounts receivable and a party who is an assignee of a debtor's

accounts receivable."        Bank of Waunakee v. Rochester Cheese Sales,

Inc., 906 F.2d 1185, 1190 (7th Cir.1990) (applying Wisconsin's

identical version of U.C.C. § 9-318).              It seems clear that "a

secured party with a security interest in accounts or general

intangibles is the assignee under [U.C.C.] § 9-318."            In re Otha C.

Jean & Assocs., Inc., 152 B.R. 219, 222-23 (Bankr.E.D.Tenn.1993)

(applying Tennessee's identical version of U.C.C. § 9-318).              This

interpretation is in accord with the purpose of section 25-9-318,

which is to govern the third-party rights that arise when contract
rights are assigned as part of a secured transaction. The district

court was thus correct in applying the rules of section 25-9-318 to

determine     the    Bank's    rights    as   an   assignee    of   the   accounts

receivable.

                                         B.

          The district court was not correct, however, when it applied

subsection     (1)(b)    of    section   25-9-318     rather   than   subsection

(1)(a).      Subsection (1)(a) makes the assignee of a contract right

subject to "all the terms of the contract between the account

debtor and assignor and any defense or claim arising therefrom."

Subsection (1)(b) makes an assignee subject as well to "any other

defense or claim," but only if those defenses or claims accrue

"before      the    account     debtor     receives      notification     of    the

assignment."        The district court found that Thomson's recoupment

claims arose out of the transportation contract between Thomson

(the account debtor) and Brown (the assignor).5                Nonetheless, the

court allowed Thomson to assert only those recoupment claims that

accrued before the perfection of the Bank's security interest, that

is,   before       Thomson    supposedly      received   notification      of   the



      5
      The Bank continues to argue on appeal that the only
contracts between Brown and Thomson were the individual freight
bills for each of the more than one thousand shipments involved
in this case. According to the Bank, none of these so-called
contracts provides a basis for a recoupment claim. The district
court, however, found that "while the shipments are evidenced by
the freight bills, the shipments were made pursuant to the terms
of the overall [Brown-Thomson] contract" and that Thomson's
recoupment claims for the lost shipments "relate equally to and
arise equally from the same contract between [Thomson] and Brown
and not separate, unrelated contracts." Nothing in the evidence
or in the Bank's argument on appeal persuades us to disturb this
finding.
assignment. 6      This would have been an appropriate holding if the

claims were "any other" claims within the meaning of subsection

1(b).      But    Thomson's    claims    arose   out     of   the   terms    of   the

transportation contract within the meaning of subsection 1(a), and

thus all of them should have been allowed.               Cf. Equitable Factors

Co. v. Chapman-Harkey Co., 43 N.C.App. 189, 258 S.E.2d 376, 378-79

(1979) (applying N.C.Gen.Stat. § 25-9-318(1)(a)), cert. denied, 298

N.C. 805, 262 S.E.2d 1 (1979).

     The district court explained that its decision to disallow

Thomson's post-perfection recoupment claims was necessary in order

to take into account the Bank's "dual role as a perfected security

holder."     We find no principled reason not to follow the explicit

language     of    section    25-9-318    when    that    section     is    squarely

applicable.       As the official comment to section 25-9-318 makes

clear, "[w]hen the account debtor's defenses on an assigned claim

arise from the contract between him and the assignor, it makes no

difference whether the breach giving rise to the defense occurs

before or after the account debtor is notified of the assignment."

N.C.Gen.Stat. § 25-9-318 comment 1.                We therefore reverse the

decision of the district court and hold that the Bank's right to

recover on the accounts receivable is subject to all of Thomson's

claims   for      recoupment    that    arise    out   of     the   transportation

contract.7

     6
      Because we hold that § 25-9-318(1)(b) does not apply to the
claims involved in this case, we need not address the question of
whether the perfection of a security interest is sufficient
"notification" within the meaning of subsection (1)(b).
     7
      The claims for recoupment are not claims for affirmative
relief. Rather, Thomson merely seeks to set off against the
                               III.

     In its cross-appeal, the Bank argues that Thomson cannot make

claims for recoupment because the General Electric Company (and not

Thomson) was the party damaged by the lost shipments.8    This is a

question of fact.    The district court found that Thomson was a

party to the transportation contract with Brown and that Thomson

was both the party liable on the contract for the shipping charges

and the party entitled to assert claims under the contract for the

lost shipments.    We have reviewed the evidence relied on by the

court and have considered the Bank's arguments on this issue;    we

hold that the district court's finding is not "clearly erroneous."

See Fed.R.Civ.P. 52(a).   We therefore affirm the court's decision

that Thomson was the injured party and could validly make claims

for recoupment under the transportation contract.

                                IV.

     The district court found that Thomson's claims for recoupment,

which we now allow in full, amount to $394,692.44.       The Bank's

total claim against Thomson for the unpaid shipping charges, which

is undisturbed by this appeal, is $99,282.65.   Because the amount

of Thomson's recoupment claims exceeds the amount of the Bank's

claim, we VACATE the district court's judgment and REMAND the case

for the entry of judgment in favor of Thomson on the Bank's claim.

     SO ORDERED.




Bank's claim an amount equal to that claim.
     8
      Thomson acquired the consumer electronics business of
General Electric on January 1, 1988.
