631 F.2d 366 (5th Cir. 1980), 78-2428, Elizarraras v. Bank of El Paso

Docket Nº:78-2428.
Citation:631 F.2d 366
Party Name:Francisco ELIZARRARAS, Plaintiff-Appellee, v. BANK OF EL PASO, Defendant-Appellant.
Case Date:November 24, 1980
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit

Page 366

631 F.2d 366 (5th Cir. 1980)

Francisco ELIZARRARAS, Plaintiff-Appellee,


BANK OF EL PASO, Defendant-Appellant.

No. 78-2428.

United States Court of Appeals, Fifth Circuit

November 24, 1980

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[Copyrighted Material Omitted]

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Frank H. Hunter, Crawford S. Kerr, Jr., El Paso, Tex., for defendant-appellant.

Mario J. Martinez, Atty., El Paso, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Texas.

Before COLEMAN, Chief Judge, KRAVITCH and GARZA, Circuit Judges.

KRAVITCH, Circuit Judge.

In a jury trial, appellee Elizarraras was awarded damages of $89,800 due to appellant bank's failure to honor appellee's check. The bank appeals the denial of its motions for a directed verdict and a new trial. The principal issues raised, inter alia, are whether a bank can have the right of setoff: (1) against a contingent debt, (2) as a subrogee of another's claim where it has neither paid the party whose rights it claims to be subrogated to nor proved those rights, and (3) without notice where it has previously indicated to the depositor it will not exercise its right of setoff. We answer these three questions in the negative and affirm on the issue of liability. Because, however, we find insufficient evidence to support the award of damages, we reverse the judgment and remand for a new trial solely on the issue of damages.


On April 2, appellee, a citizen and resident of Mexico, issued a check for $12,000 to Joe Rey as partial payment for a tractor. The check was written on appellee's account at the Bank of El Paso, appellant herein. On April 5, Rey, also a depositor at the Bank of El Paso, presented the check for payment. The bank applied $1,115.07 to one note owed to the bank by Rey and $7,539.04 to another note which it marked "paid" and delivered to Rey. 1 The balance, $3,345.89, was deposited by the bank in Rey's account. On the same day, the appellee delivered to the bank a stop payment order, which, on a form provided by appellant, included an agreement by appellee to indemnify appellant for all expenses and costs resulting from appellant's honoring the stop payment order. 2 On either April 5 or April 6, 3 appellant reversed the entries it had made with respect to Rey. On April 6, appellee issued a check for $64,000, which he believed to be the amount he had on deposit in the Bank of El Paso, payable to Financiera Del Norte, S.A., a Mexican financial institution which we will refer to for convenience as a Mexican bank. On April 15, Rey filed suit against appellee and appellant, alleging that appellee wrongfully stopped payment on the check and that appellant wrongfully reversed the entries it

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had made. On April 26, Pedro Jurado, vice president of the Bank of El Paso "acting as a commercial loan and regular installment loan officer," notified appellee that there was a shortage of $756.68 in his account. Appellee immediately deposited the $756.68. Appellee testified that he emphasized to Jurado that it was important that the $64,000 check not be returned for insufficient funds, since such a return would have serious repercussions in Mexico, including a penalty and loss of credit. According to appellee, Jurado assured him that there would be no problem covering the $64,000 check. On April 30, without giving notice to appellee, appellant returned the $64,000 check to the Mexican bank for insufficient funds and deposited $12,000 from appellee's account into the federal court in which Rey's suit was pending, interpleading Rey and appellee. When Rey's suit was subsequently dismissed for lack of subject matter jurisdiction and Rey sued in state court, the appellant interpled the money into state court.

Appellee subsequently filed suit in federal district court alleging that the wrongful dishonor of the $64,000 had damaged him in Mexico. Appellee prevailed in a jury trial. The jury awarded damages in the amount of $89,800: $75,000 for loss of credit and damage to reputation, $12,800 for the penalty the Mexican bank charged appellee, and $2,000 for interest on the $64,000 still owed to the Mexican bank.


The appellant contends that the trial court erred in several respects. First, it maintains that the stop payment order was ineffective, because it was delivered after final payment. See Tex.Bus. & Com. Code Ann. tit. 2 §§ 4.403, 4.303(a)(3), 4.301, 4.213 (Vernon) (hereinafter all references to § 4.403, § 4.407, § 4.213, § 4.402, § 4.301, or § 4.303 will be to those sections in this title). Thus appellee was not entitled to the $12,000 at issue, which would mean the dishonor of the $64,000 check would not be wrongful under § 4.402. Second, even if the stop payment order was valid, the indemnification agreement created a contingent debt from appellee to appellant. Appellant contends that contingent debts generally can be set off in Texas; specifically, setoff is permitted when a nonresident depositor attempts to withdraw all his funds from the bank. This right to setoff, appellant urges, justifies the dishonor. Alternatively, the appellant argues that under § 4.407, appellant was subrogated to Rey's claim against the appellee for $12,000 which validated the setoff. The appellant also contends that the use of interpleader was the appropriate action for it to take under the circumstances.

Appellant also questions the proof of damages. It maintains that the trial court's admission of appellee's testimony as to the penalty and interest he paid the Mexican bank was error in that such admission violated the best evidence and hearsay rules. Finally, appellant argues that there was insufficient evidence to allow the jury to award any damages for loss of credit and or reputation.


The Stop Payment Order

The first contention of the appellant is that the stop payment order was not binding on the bank. Section 4.403 states that to be effective the order must be received "at such a time and in such a manner as to afford the bank a reasonable opportunity to act on it prior to any action by the bank with respect to the item described in Section 4.303." Section 4.303 provides, inter alia, 4 that if the item has been paid in cash or settled irrevocably, a stop order subsequently received will be ineffective. 5 The appellant contends that stamping one of

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Rey's notes "paid" and giving it to him 6 was the equivalent of payment in cash, and, if we construe its brief liberally, that it was an irrevocable settlement.

Appellant did not raise this issue at trial. 7 In its motion for an "instructed verdict," the appellant maintained that the appellee did not prove the "fact and amount of loss resulting from the payment of an item contrary to a binding stop order." § 4.403(c). This motion, using Section 4.403(c), deals with damages, not the validity of the stop order; appellant's supporting reasons reflect this interpretation. Appellant does not mention § 4.303 or its requirements elsewhere in his motion for an instructed verdict. Furthermore, although the judge's instructions failed to mention the fact that an irrevocable settlement renders subsequent stop payment orders ineffective, the appellant did not object to this omission nor did he request any instructions on how marking a note "paid" constituted final payment. Finally, the appellant did not advance his § 4.303 theory in his motion for a new trial. 8 This court should not consider a point raised for the first time on appeal unless it is a pure question of law and a refusal to consider it would result in a miscarriage of justice. Delancey v. Motichek Towing Service, Inc., 427 F.2d 897 (5th Cir.1972); Patton v. Archer, 590 F.2d 1319 (5th Cir.1979). The error here, if any, was not so fundamental that it would result in a miscarriage of justice. 9

Setoff on a Contingent Debt

The appellant next argues that even if the stop payment order was valid, it was entitled to a setoff of $12,000. 10 This contention is based on the fact that the indemnification agreement created a contingent debt from appellee to appellant: if Rey recovered a judgment for the $12,000 against the appellant, the appellee would have to indemnify the appellant.

Appellee contends that the indemnification agreement is void since there was no consideration flowing to the appellee, citing Central National Bank v. Martin, 396 S.W.2d 218 (Tex.Civ.App.1965). We note that appellee did not raise this issue at trial; the question, therefore, is not before us. See Delancey ; Patton. We must assume the agreement to be valid.

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Appellant contends that a bank may set off a contingent debt, citing Security State Bank and Trust v. Texas Bank & Trust Co. of Dallas, 466 S.W.2d 590 (Tex.Civ.App.1971) as its authority. We do not read Security State Bank so broadly; thus we reject this contention. First, the language relied on in Security State Bank is dicta; the debt in Security State Bank had matured. Second, under a long line of Texas cases, a setoff may only be used against a matured debt unless the debtor is insolvent in which case the bank can set off against an unmatured claim. See, e. g., Baldwin v. Peoples National Bank, 327 S.W.2d 616 (Tex.Civ.App.1959); McCollum v. Parkdale State Bank, 566 S.W.2d 670 (Tex.Civ.App.1978); Northshore Bank v. Palmer, 525 S.W.2d 718 (Tex.Civ.App.1975) (dicta); Bank of El Paso v. Powell, 550 S.W.2d 383 (Tex.Civ.App.1977) (no setoff springing from an indemnity agreement until actual payment by bank, so depositor entitled to interest on funds withdrawn from his account). Moreover, the rule proposed by appellant would create enormous uncertainty for depositors. Contingent liability is common: co-signing a check or note is one of many ordinary examples. If the bank could set off against these debts, depositors would be forced to...

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