Bandy v. First State Bank, Overton, Tex.

• Decision Date: 10 June 1992
• Docket Number: No. D-0946,D-0946
• Citation: 835 S.W.2d 609
• Parties: Robert M. BANDY, Administrator of the Estate of Leport Walton, Deceased, Petitioner, v. FIRST STATE BANK, OVERTON, TEXAS, Respondent.
• Court: Texas Supreme Court

Page 609

835 S.W.2d 609

Robert M. BANDY, Administrator of the Estate of Leport Walton, Deceased, Petitioner, v. FIRST STATE BANK, OVERTON, TEXAS, Respondent.

No. D-0946.

Supeme Court of Texas.

June 10, 1992.

Rehearing Overruled Sept. 9, 1992.

Robert M. Bandy, pro se.

Dean W. Turner, Henderson, M. Keith Dollahite and James Hedrick, Tyler, for respondent.

OPINION ON MOTION FOR REHEARING

CORNYN, Justice.

The Petitioner's Motion for Rehearing is granted. Our opinion and judgment of April 22, 1992, are withdrawn and the following is substituted therefor:

This case requires us to decide whether a bank which is both a creditor and a debtor of a deceased person's estate has an equitable right to setoff the assets of the estate against the estate's debts without following the claim procedures found in the Texas Probate Code. The trial court found that such acts constituted conversion and awarded the estate actual and consequential damages of $61,118.66, punitive damages of $140,572.92, prejudgment interest, and attorney's fees. The court of appeals reversed the trial court's judgment and remanded the cause for a new trial, holding that the bank had exercised its equitable right to setoff the deceased person's assets against his debts. We affirm the judgment of the court of appeals.

I.

LePort Walton died intestate on October 20, 1986. He had been the owner of two clubs (the "Climax Club" in Tyler and the "Corner Club" in Owentown), a grocery (the "Walton Grocery" in Tyler), and two farms. Walton had been a customer of the First State Bank, Overton, Texas (the "Bank") for some years. At Walton's death, his debt to the Bank was evidenced by six promissory notes. Walton had signed four of the notes as maker and co-signed the other two as co-maker. At his death, Walton had funds on deposit at the Bank in the form of a checking account and eight certificates of deposit (CDs).

Seven days after Walton's death the County Court of Smith County issued letters of administration to Lois Walton Henson and Joy Walton Moore as temporary co-administratrices of Walton's estate. The court order establishing the temporary administration limited the authority of the co-administratrices as follows:

1. To take charge and possession of decedent's businesses described and located as follows:

a. Climax Club--South of Tyler

b. Corner Club--Owentown

c. Walton Grocery--Rt. 3, Tyler

d. Two farms

(Including all of the assets of the businesses).

2. To conduct the businesses, including the usual and customary operations such as, but not limited to, sales of goods, collection of accounts receivable, payment of accounts payable and other debts as due, payment of employee's [sic] salaries, purchase and payment for additional equipment and supplies, and other acts necessary to the general operation of the business pending further order of this Court.

3. To take possession of all cash on hand and on deposit in the name of the business, or in the name of the decedent, to be authorized to make deposits and withdrawals from all such accounts as may be necessary for the operation of the business, and to borrow money necessary for the operation of the business, pledging assets of the business if necessary to secure payment of the loans.

4. To execute instruments necessary to operate the business, to deal with regulatory agencies as necessary, to hire, supervise, and terminate employees, to employee [sic] attorney's [sic] and accountant's [sic] necessary for the operation of the business, and for this temporary administration, to bring and defend lawsuits if necessary, to exercise all rights necessary to protect the businesses and the assets of the estate, and to pay court costs and necessary expenses and attorney's fees.

On November 24, 1986, Mrs. Henson and Mrs. Moore presented their letters of temporary administration to the Bank and inquired as to the amount Walton owed the Bank and the amount Walton had on deposit. They then indicated that they wanted to use the funds Walton had on deposit in the Bank to pay the amount due on Walton's notes. In response, the Bank produced CD 10021, payable to Laura W. Walton or Leport Walton with a face value of $11,537.93. Mrs. Henson endorsed the CD to the Bank, which applied the proceeds to pay the approximately $14,000 due on note number 97670.

Mrs. Henson and Mrs. Moore made two more visits to the Bank. On December 15, 1986, Mrs. Moore endorsed to the Bank CD 9281, which was payable to Leport Walton and the Bank with a face value of $5,833.04, and CD 9372, which was payable to Leport Walton with a face value of $6,432.70. The Bank applied the proceeds plus Mrs. Henson's check for $752.00 to pay the amount due on a note for $16,500.00 which came due on November 24, 1986. On December 24, 1986, Mrs. Moore endorsed to the Bank CD 4303, which was payable to Leport Walton d/b/a Climax Club and had a face value of $4,500.00, and CD 9618, which was payable to Leport Walton and the Bank and had a face value of $6,827.43. The Bank applied those proceeds to pay the amount due on a note for $17,443.23 which was to come due on January 7, 1987. Henceforth, we will refer to the five CDs signed by Mrs. Henson during the temporary administration as the "temporary administration CDs."

The temporary administration expired on December 30, 1986 and was not renewed. Subsequently, on January 19, 1987, Robert M. Bandy was appointed administrator. Between those dates, when the estate had no administrator, the Bank setoff Walton's checking account to pay the amount due on a note for $8,244.28 (the Anders note) which Walton had co-signed with a third party. The note, which was secured by 34 head of cattle, had come due on November 7, 1986.

On January 27, 1987, shortly after being appointed administrator, Bandy requested that the Bank release funds on deposit in Walton's checking accounts. In response, the Bank issued to Bandy three cashier's checks totalling $27,101.86.

A few days later, on February 2, 1987, Mrs. Henson endorsed CD 12229 with a face value of $2000.00 and the Bank paid the full amount due to Mrs. Henson. CD 12229 was payable to either Walton or Mrs. Henson.

On March 13, 1987, Bandy discovered that the Bank was holding two CDs payable to Walton and filed an application with the County Court for authority to withdraw those CDs. The court issued an ex parte order directing the Bank to release to Bandy CD 10206, CD 9355, and any other assets of Walton's estate that it had on deposit. Armed with the ex parte order, Bandy demanded that the Bank release the two CDs. There is some dispute as to how Bandy made his demand. Bandy claims that he sent a copy of the ex parte order to the Bank. The Bank denies ever receiving the ex parte order and claims that Bandy only made an oral demand by telephone. In any case, the Bank refused to comply with Bandy's demand.

The Bank again exercised its claimed right of setoff when another note (the land note) came due. Walton had given the Bank a note for $45,000.00 which was payable in six semi-annual payments of $7,500.00 beginning in February, 1984. The note was secured by a deed of trust on a parcel of land. When the estate failed to make the last payment due on February 8, 1987, the Bank setoff a portion of CD 9355 to make the last payment. The Bank issued CD 13294, payable to the estate of Leport Walton, for the balance remaining in CD 9355 after the setoff.

The Bank performed all of these actions without submitting any claims to the estate or the County Court. Finally, on May 6, 1987, the Bank submitted two sworn claims to Bandy as administrator of Walton's estate. One claim sought retroactive approval for its April 10th setoff of CD 9355. The other requested payment of a loan that Walton had co-signed and on which the debtor had recently gone into default. On June 5, 1987, Bandy rejected both claims.

Some time later, the Bank again exercised its claimed equitable right of setoff to satisfy the deficiency on the note that Walton had co-signed and which was the subject of one of the claims that Bandy had rejected (the Jarmon note). The setoff was precipitated when the Bank repossessed the collateral, a truck, and sold it for less than the amount due on the note. To pay off the deficiency, the Bank setoff a portion of CD 10206. The Bank incurred $2,250.72 in attorney's fees to perform the repossession and sale of the collateral.

On October 13, 1987, Bandy filed with the County Court an application to sell the estate's land where Walton's Grocery was located. Bandy stated that the sale of the property was necessary to secure funds to pay expenses of administration and debts of the estate. On October 28, 1987, the court ordered the sale of the property.

On October 30, 1987, Bandy sold the property at a private sale for $68,600.00. At trial, Bandy testified, over the Bank's objection, that the land's fair market value was $100,000.00. Bandy also testified, again over the Bank's objection, that the sale was necessary because of cash flow problems caused by the Bank's unauthorized setoffs.

Bandy sued the Bank in the County Court at Law of Smith County, claiming that the Bank had converted the eight CDs that were payable to Walton at his death. Bandy also claimed damages associated with the below-market-value sale of the land where the grocery store was situated and punitive damages. In its original answer, which was filed before the sale of the land and the setoff of CD 10206, the Bank claimed that the temporary administration CDs had been "duly endorsed by the legal representatives of the Estate of Leport Walton, Deceased, and were applied toward the indebtedness of the said Leport Walton, Deceased, to said Bank." The Bank further claimed that Mrs. Henson, the joint owner of CD 12229, had indorsed CD 12229 and it was properly payable to her as joint owner. Additionally, the Bank claimed the equitable right to setoff CD 9355 against a debt owed by Leport Walton to the...