South Central Livestock Dealers, Inc. v. Security State Bank of Hedley, Tex.
| Decision Date | 04 April 1980 |
| Docket Number | No. 78-2249,78-2249 |
| Citation | 614 F.2d 1056 |
| Parties | 5 Fed. R. Evid. Serv. 1093 SOUTH CENTRAL LIVESTOCK DEALERS, INC., et al., Plaintiffs, John Dahl Construction Company, Inc., Plaintiff-Intervenor-Appellee Cross- Appellant, v. SECURITY STATE BANK OF HEDLEY, TEXAS, Defendant-Appellant Cross-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
R. A. Wilson, Amarillo, Tex., Curtis L. Frisbie, Jr., Dallas, Tex., for defendant-appellant cross-appellee.
Gibson, Ochsner & Adkins, John Huffaker, Amarillo, Tex., for John Dahl Const.
Appeals from the United States District Court for the Northern District of Texas.
Before WISDOM, POLITZ and SAM D. JOHNSON, Circuit Judges.
John Dahl Construction Co., Inc., (Dahl) intervened in a suit brought by South Central Livestock Dealers, Inc., et al., (the Original Plaintiffs) against Security State Bank of Hedley, Texas, (the Bank) for the Bank's wrongful offset of money held in trust by Donley County Feedlot, Inc., (the Feedlot) in an account at the Bank. The district court rendered summary judgment for the Bank, but this Court reversed and remanded. After remand, the Original Plaintiffs settled with the Bank, but Dahl proceeded to trial. The jury awarded Dahl all its claimed actual damages plus $25,000 in exemplary damages. Modifying only the prejudgment interest awarded by the district court, we affirm the district court judgment for Dahl.
The Feedlot was in the business of fattening for slaughter cattle that belonged to its customers and selling the cattle to meat packers. It was a "custom feedlot," that is, it segregated each customer's cattle in separate pens. The Feedlot would fatten the cattle for between 120 and 190 days, depending on the initial size and sex of the animals. During this period, the Feedlot kept track of the amount of feed that each customer's cattle consumed and the veterinary bills incurred by each customer's cattle. At the end of the feeding period, the Feedlot would sell the fattened cattle to a packing house. It would then remit to the customer whose cattle it had sold the proceeds of that sale less any feed and veterinary bills that customer had incurred, but not paid.
The Feedlot banked at Security State Bank of Hedley, Texas. Initially, the Feedlot had only one account at the Bank. Later, when the Feedlot began to have difficulty keeping its funds and those of its cattle customers separate, the Feedlot and the Bank agreed that the Feedlot needed another account. The Feedlot opened another account, known as the cattle account, to go along with its original, or regular, account. The Feedlot used the cattle account as a custodial account for the sale proceeds from its customers' cattle. The Feedlot used the regular account for its own operating expenses and salaries. When the Feedlot sold cattle for a customer, it would deposit the proceeds in its cattle account. It would then write a check from the cattle account to the regular account to cover the feed and veterinary bills associated with the cattle it had sold. Finally, the Feedlot would write a check on the cattle account to the customer for the net proceeds of the cattle sale. At one point, the Bank severely criticized the Feedlot for overdrawing the cattle account because that account contained other people's money.
The Feedlot also had a number of outstanding loans from the Bank. In July of 1974 the Bank took some drastic measures to protect itself against a possible default by the Feedlot on its loans. On July 12th the Bank offset the entire balance of the Feedlot's regular account, $15,528, against the indebtedness the Feedlot owed the Bank. The Bank also dishonored $29,000 in checks drawn against the cattle account. The Bank took this action without notifying the Feedlot. Three days later, on Monday, the Bank persuaded the Feedlot's vice president to renew a $172,000 note secured by the Feedlot accounts receivable. Then the Bank offset the entire $86,247 balance of the cattle account. This action gave rise to the instant suit. The Feedlot did not learn of the Bank's offsets until Thursday, July 18th. The Bank later sequestered the Feedlot and obtained constructive possession of it. By early August, the Feedlot filed for bankruptcy.
The Original Plaintiffs, who were customers of the Feedlot, sued the Bank claiming wrongful offset of the cattle account and tortious interference with the contractual relations between the Feedlot and its customers. The district court gave the Bank a directed verdict on the grounds that it had the right to offset funds in the cattle account.
The Original Plaintiffs and Dahl successfully appealed. In South Central Livestock Dealers, Inc. v. Security State Bank of Hedley, Texas, 551 F.2d 1346 (5th Cir. 1977), this Court reversed the directed verdict and remanded the case for trial. Relying on a strikingly similar case, Steere v. Stockyards National Bank, 113 Tex. 387, 256 S.W. 586 (Tex.Com.App.1923, opinion adopted), Judge Gee set out the Texas law that the district court was to apply on remand. "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 (offset) such funds to the individual indebtedness of the debtor." 551 F.2d at 1349. The Court went on to note that, "(I)t is the bank's knowledge that the debtor has deposited in his account funds belonging to another and thus held in a fiduciary capacity that precludes the offset." Id. at 1350.
The Original Plaintiffs settled with the Bank before the trial on remand. Dahl did not. Instead, it won a complete and total victory at trial, from which the Bank now appeals. The jury first found that the Bank's offset of funds in the cattle account was wrongful because the Bank had knowledge that funds in the cattle account belonged to parties other than the Feedlot. The jury also found for Dahl on another theory of liability, tortious interference with contractual relations. Finally, the jury found the Bank had acted negligently in offsetting funds from the cattle account. Thus, the jury found the Bank liable on all three of the plaintiff's theories. The jury found that the Bank's wrongful acts had damaged Dahl in the amount of $63,595.77. This figure represents the proceeds, after deductions for feed and veterinary bills, from the Feedlot's sale of Dahl's cattle. The parties did not dispute that the Feedlot had deposited the sale proceeds from Dahl's cattle in the cattle account, and that the Bank had offset around $86,247 from the cattle account. The jury further found that the Bank had acted wantonly and maliciously. To punish the Bank, the jury awarded Dahl $25,000 in exemplary damages.
The district court entered judgment for Dahl. The judgment held the Bank liable under the theories of wrongful offset and tortious interference, but not negligence for the full $63,595.77 that the jury found in damages. The trial court awarded prejudgment interest on this sum from the date of offset in July of 1974. Finally, the district court entered judgment on the jury's finding of $25,000 in punitive damages.
The Texas law on a bank's liability for wrongful offset is clear. "(K) nowledge upon the part of a bank that deposits made by a debtor in his own name belong to a third person absolutely precludes the bank from applying such funds to the individual indebtedness of the depositor to it." Steere v. Stockyards National Bank, 113 Tex. 387, 256 S.W. 586, 590 (Tex.Com.1923, opinion adopted), quoting 13 A.L.R. 324. See also National Indemnity Co. v. Springbranch State Bank, 348 S.W.2d 528, 529, 8 A.L.R.3d 268 (Tex.1961). Furthermore, this is the law of the case that this Court set forth in the opinion before remand. See South Central Livestock Dealers, Inc. v. Security State Bank of Hedley, Texas, 551 F.2d 1346 (5th Cir. 1977). Here the jury found that the Bank's offset was wrongful because the Bank knew, or should have known, that funds in the Feedlot's cattle account belonged to parties other than the Feedlot. This Court can reverse the judgment only if the district court erred in not granting the Bank's motions for directed verdict. Reimer v. Short, 578 F.2d 621, 628 (5th Cir. 1978). The district court did not err in denying the Bank's motion for directed verdict if there was evidence that the Bank had knowledge that the funds in the cattle account belonged to someone other than the Feedlot and that evidence was "of such quality and weight that reasonable and fair-minded men in the exercise of impartial judgment might reach different conclusions" about whether the Bank did have knowledge. Boeing Co. v. Shipman, 411 F.2d 365, 374-75 (5th Cir. 1969) (en banc).
The evidence at trial showed that the Bank had knowledge that the funds in the cattle account did not belong to the Feedlot. The evidence showed that representatives of the Feedlot and the Bank met and decided to open the cattle account for the specific purpose of keeping the Feedlot customers' funds separate from the funds of the Feedlot. Furthermore, the president of the Bank at the time of the offset, Melvin Booth, testified that he knew that the Feedlot deposited in the cattle account funds from the sale of its customers' cattle. Finally, there was evidence that when the Feedlot overdrew the cattle account, the Bank chastised it because the account held money belonging not to the Feedlot, but to its customers. The evidence supports the jury's finding that the Bank wrongfully offset the funds in the cattle account because the Bank had knowledge that those funds did not belong to the Feedlot. Accordingly, the district court properly entered judgment for Dahl and against the Bank on the theory of wrongful offset. 1
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