784 F.2d 1300 (5th Cir. 1986), 85-2098, Energetics, Inc. v. Allied Bank of Texas

Docket Nº:85-2098.
Citation:784 F.2d 1300
Party Name:ENERGETICS, INC., Plaintiff-Appellee, v. ALLIED BANK OF TEXAS, Defendant-Third Party Plaintiff-Appellant, v. CREDIT SUISSE, Third Party Defendant-Appellant.
Case Date:March 21, 1986
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 1300

784 F.2d 1300 (5th Cir. 1986)

ENERGETICS, INC., Plaintiff-Appellee,

v.

ALLIED BANK OF TEXAS, Defendant-Third Party Plaintiff-Appellant,

v.

CREDIT SUISSE, Third Party Defendant-Appellant.

No. 85-2098.

United States Court of Appeals, Fifth Circuit

March 21, 1986

Rehearing Denied April 17, 1986.

Page 1301

Louis H. Salinas, Jr., Kevin R. Risley, Houston, Tex., for Allied Bank of Texas.

Pamela A. Prestridge, Houston, Tex., for Credit Suisse.

B. Lawrence Theis, Walter & Theis, Denver, Colo., for Energetics, Inc.

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

Before CLARK, Chief Judge, POLITZ and WILLIAMS, Circuit Judges.

JERRE S. WILLIAMS, Circuit Judge:

In this diversity suit, a lender bank appeals a judgment declaring that from a depositor's account it wrongfully offset money which belonged to a third party. We find that the bank wrongfully offset the funds, but the district court's judgment did not state the correct amount. We reverse the district court judgment of $604,597.97 and remand for entry of judgment in the sum of $428,362.70.

Appellant Allied Bank of Texas made approximately $20,000,000 in loans to an oil and gas contractor, Republic Drilling & Service, Inc. Republic also maintained a regular deposit account at the bank. Funds in this account were deposited as "prepayment" drilling expenses by appellee Energetics, Inc., the operator in an oil and gas venture with Republic. 1 The account was designated "Well Account-Energetics." 2 Republic defaulted on the bank loans. The bank then took control of the funds in Republic's deposit account as an offset against the defaulted loans. At the

Page 1302

time of the offset, the amount in Republic's deposit account was $604,597.97. 3

Energetics filed this suit claiming that the bank had wrongfully offset the account because the money not yet expended for drilling costs by Republic still belonged to Energetics. The district court agreed, and ordered the bank to return the $604,597.97 to Energetics. The district court ruling in favor of Energetics was based upon the "equitable exception" to the bank's right of offset. 4 The district court also held that the trustee in bankruptcy of Republic 5 was entitled to $176,797.94 of the $604,597.97 provided that he file a claim for the funds. This ruling in favor of the trustee was made because there was testimony that Energetics owed an outstanding $176,797.94 debt to Republic.

On appeal to this Court, the bank argues: (1) the equitable exception to offset should not have been applied to the facts of this case; and (2) if the exception is applied, the recovery by Energetics was excessive and the judgment is invalid because it awards $176,797.94 to the trustee in bankruptcy of Republic, who is not a party before the court. We find that the equitable exception to offset does apply but that Energetics' recovery should be limited to $428,362.70. We remand for the entry of judgment in accordance with this conclusion.

I. EQUITABLE EXCEPTION TO OFFSET

The law of Texas has long recognized that a bank has the right to offset funds in a depositor's account against indebtedness owed by the depositor to the bank. Elizarraras v. Bank of El Paso, 631 F.2d 366, 371 (5th Cir.1980). Energetics brought this action claiming the "equitable exception" to the bank's right of offset. This equitable exception is also well established in Texas law. As adopted or recognized by the Texas Supreme Court in National Indemnity Co. v. Spring Bank State Branch, 162 Tex. 521, 348 S.W.2d 528 (Tex.1961), it provides that a bank cannot apply funds on deposit to the individual debt of the depositor when the funds belong to a third party and are held in trust for that third party by the depositor, "if there has been no change in the bank's position to its detriment." Id. 348 S.W.2d at 529. The equitable exception is not limited to funds held pursuant to an express trust but applies to any funds "held in a fiduciary capacity." South Central Livestock v. Security State Bank, 551 F.2d 1346, 1350 (5th Cir.1977), modified on other grounds and aff'd, 614 F.2d 1056 (1980).

Allied Bank argues that the equitable exception was erroneously applied to the facts of the present case because: (1) the bank had no knowledge that the funds belonged to Energetics; (2) Energetics did not own the funds; and (3) Energetics failed properly to trace the funds. We reject each of these contentions.

First, Allied Bank argues that the equitable exception to the bank's right of offset should not be applied because the bank had no knowledge that the funds were held in a fiduciary capacity at the time that it took the offset. The bank argues that the National Indemnity rule did not survive the adoption of the Uniform Commercial Code in Texas.

The adoption of the Uniform Commercial Code in Texas, however, did not abolish the...

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