551 F.2d 1346 (5th Cir. 1977), 75-4164, South Central Livestock Dealers, Inc. v. Security State Bank of Hedley, Tex.

Docket Nº:75-4164.
Citation:551 F.2d 1346
Party Name:SOUTH CENTRAL LIVESTOCK DEALERS, INC., et al., Plaintiffs-Appellants, v. SECURITY STATE BANK OF HEDLEY, TEXAS, Defendant-Appellee, v. JOHN DAHL CONSTRUCTION COMPANY, Intervenor-Appellant.
Case Date:May 12, 1977
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 1346

551 F.2d 1346 (5th Cir. 1977)

SOUTH CENTRAL LIVESTOCK DEALERS, INC., et al., Plaintiffs-Appellants,

v.

SECURITY STATE BANK OF HEDLEY, TEXAS, Defendant-Appellee,

v.

JOHN DAHL CONSTRUCTION COMPANY, Intervenor-Appellant.

No. 75-4164.

United States Court of Appeals, Fifth Circuit

May 12, 1977

Page 1347

John Huffaker, Wayne P. Sturdivant, Amarillo, Tex., for John Dahl const. co.

Thomas W. Kendrick, Amarillo, Tex., for South Central Livestock et al.

John T. Forbis, Childress, Tex., for defendant-appellee.

Appeals from the United States District Court for the Northern District of Texas.

Before WISDOM and GEE, Circuit Judges, and BOOTLE [*], District Judge.

GEE, Circuit Judge:

In this diversity action, a number of out-of-state cattle investors 1 at the now-defunct Donley County Feedlot located near Hedley, Texas, appeal the district court's grant of a directed verdict to the Security State Bank of Hedley, Texas, on their claims of wrongful offset and tortious interference with contractual relations. Concluding that a line of Texas cases gives credence to plaintiffs' claims, we reverse.

Charles Payne founded the Donley County Feedlot (the feedlot) as his personal business in 1968, incorporating it in 1969. The feedlot fed cattle to order for third persons, purchasing cattle for customers, fattening the cattle and then selling them to meat packers. The customers received the proceeds from those sales, less deductions for accrued feed and veterinary bills. The parties disagree about the nature of the relationship between the feedlot and its customers, but for the purpose of this appeal it

Page 1348

is sufficient that the feedlot acted at least as an agent for cattle investors such as plaintiffs. 2

The feedlot did its financing through the defendant Security State Bank of Hedley, Texas (Security State). The feedlot started with only one account at Security State, the regular account. As the feedlot's business grew, Payne had difficulty keeping the feedlot's funds and those of cattle customers separated. Payne discussed this problem with Melvin Boothe, President of Security State, who agreed there was a need for separate accounts; and that day Payne opened a new account, the cattle account. The feedlot used the regular account for its operating expenses and salaries and the cattle account as a custodial account for the proceeds of sales of customers' cattle. The feedlot would write a check on the cattle account payable to the regular account to cover accrued feed and veterinary bills. Then the feedlot would write a check on the cattle account payable to the customer for the remainder of the proceeds. Although the parties disagree, we assume for purposes of this appeal that Security State at all times was aware of how the feedlot conducted its business. In fact, Payne testified that on at least one occasion the feedlot had overdrawn the cattle account when it wrote a check to purchase cattle for its customers before it received reimbursement and that Security State severely criticized the feedlot for overdrawing the cattle account when that account involved the handling of other people's money.

The events generating this lawsuit occurred in the early summer of 1974 when Security State, fearful of the feedlot's financial stability, began on Friday, July 12, 1974, to take steps to protect itself. On that date, without notifying the feedlot, the bank offset i. e., applied funds in a debtor's account against indebtedness to the bank the feedlot's regular account in the amount of $15,528.73. It also dishonored several checks totaling $29,751.01 drawn against the cattle account, including a check for $16,851.01 payable to plaintiff Clarence Stuard. The next day, Saturday, Security State informed the feedlot that it would no longer loan funds, without telling the feedlot that Security State already had begun offsetting the feedlot's accounts. On Monday, while Payne was attempting to sell feedlot corporate stock in California to obtain additional operating capital, Security State persuaded Billy Clubb, Vice President of the feedlot, to renew a $172,000 note secured by the feedlot's accounts receivable. On Monday and Tuesday, July 15 and 16, Security State offset the entire balance of the cattle account, some $86,247.62. The feedlot did not learn of Security State's actions until Thursday, July 18, when Mr. Clubb went to the bank to deposit cattle sales proceeds and discovered that the bank had appropriated the entire cattle account. Later, Security State obtained constructive possession of the feedlot by sequestration. It then advised meat packers to pay it, not the feedlot or its customers, for cattle sold. By early August, the feedlot was in bankruptcy.

Plaintiffs brought suit alleging that the bank had wrongfully offset the cattle account and tortiously interfered with contractual relations between the feedlot and its customers. The district court granted Security State's motion for directed verdict on the ground that the plaintiffs had failed to show that Security State agreed to hold plaintiffs' funds as a trustee and to restrict the use of those funds to...

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