South Central Livestock Dealers, Inc. v. Security State Bank of Hedley, Tex.

• Decision Date: 12 May 1977
• Docket Number: No. 75-4164,75-4164
• Citation: 551 F.2d 1346
• Parties: 21 UCC Rep.Serv. 834 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.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1346

551 F.2d 1346

21 UCC Rep.Serv. 834

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.

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 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 certain purposes, relying on Citizens National Bank v. Hill, 505 S.W.2d 246 (Tex.1974), and Hudnall v. Tyler Bank and Trust Co., 458 S.W.2d 183 (Tex.1970). Concluding that Security State had a right to offset funds in the cattle account, the court likewise ruled that Security State could not incur liability for the results of its lawful act.

The district court correctly concluded that under Texas law the described events did not create a "special account" with Security State as trustee or bailee. In a "special account" or "special deposit" arrangement a bank agrees to hold funds or items as a bailee or trustee, distributing the funds or items according to the agreement between the parties. See Citizens First National Bank v. Cinco Exploration Co., 540 S.W.2d 292, 295 (Tex.1976); Citizens National Bank v. Hill, 505 S.W.2d 246, 248 (Tex.1974); Hudnall v. Tyler Bank and Trust Co., 458 S.W.2d 183, 186 (Tex.1970). Texas law requires that to impress the trust or bailee relationship upon a bank so as to create a special account or special deposit, the bank must have agreed to that obligation. Citizens National Bank v. Hill,supra, 505 S.W.2d at 248. See Citizens First National Bank v. Cinco Exploration Co., supra, 540 S.W. at 295; Hudnall v. Tyler Bank and Trust Co., supra, 458 S.W.2d at 186. See also In re Goodson Steel Corp., 488 F.2d 776, 779-80 (5th Cir. 1974). Although the bank was aware of the nature of the cattle account as depository for the proceeds on sales of others' cattle, the evidence does not suggest that Security State agreed to oversee the disbursement of funds in that account. Thus, plaintiffs' special deposit theory fails.

Viewing the evidence in the light most favorable to plaintiffs, ³ however, another line of Texas cases offers more promise to plaintiffs sufficient to render the directed verdict erroneous. Texas has long held that if a bank knows that deposits by a debtor in his own name are in fact held by him in a fiduciary capacity, then the bank may not apply such funds to the individual indebtedness of the debtor. In Steere v. Stockyards National Bank, 113 Tex. 387, 256 S.W. 586, 589-92 (Tex.Com.App.1923, opinion adopted), a livestock commission dealer accepted consignments of cattle from shippers for sale. The dealer's normal practice was to deposit the proceeds of sale in his personal account, then remit the net proceeds to the shippers. The Stockyards National Bank, recipient of the dealer's deposits, knew of the dealer's business procedure. When the dealer created an indebtedness by overdrafting, the bank reduced the overdraft by applying deposited proceeds for the sale of cattle. The Court ruled that since the bank knew or had reason to know that the funds deposited were those of third parties it could not apply them to the debtor's indebtedness. In National Indemnity Co. v. Spring Branch State Bank, 162 Tex. 521, 348 S.W.2d 528, 529 (1961), the bank offset the account of an insurance agent indebted to it. The insurance agent's account included insurance premiums held by the agent pursuant to an express trust provided in the contract between the agent and the insurance company. The Supreme Court of Texas reiterated the Steere rule and went on to hold that even if a bank is unaware that funds in an account are subject to a trust, it may not offset trust funds. See also Security Bank & Trust Co. v. Geren, 288 F. 317 (5th Cir. 1923).

The evidence of Security State's involvement in adjusting the feedlot's financial affairs including the chiding administered when the feedlot overdrew the cattle account, admonishing the feedlot that it was dealing with other people's money suggests that Security State was aware of the fiduciary nature of the funds the feedlot held in the cattle account. If the line of cases we note remains Texas law, the evidence here makes a jury case.

Security State argues, however, that Texas' adoption of the Negotiable Instruments Law (NIL) in 1919, see generally, Tex.Rev.Civ.Stat.Ann. arts. 5932-48 (1962), and its adoption of the Uniform Commercial Code in 1965, see generally Tex.Bus. & Comm.Code (Tex.UCC 1968), have nullified this line of Texas cases. We are not persuaded. It is true that Steere v. Stockyards National Bank, supra, was based on events transpiring in 1917 and 1918, prior to Texas' adoption of the NIL in 1919. Yet the rule of law in Steere was cited with approval in National Indemnity Co. v. Spring Branch State Bank, supra, 348 S.W.2d at 529, after Texas' adoption of the NIL. Further, language in cases from the Texas intermediate appellate courts suggests that the Steere rule, reiterated in National Indemnity, is still good law after passage of the UCC, at least where not explicitly displaced by the UCC. In First National Bank v. Lone Star Life Insurance Co., 524 S.W.2d 525 (Tex.Civ.App., Dallas 1975...