Bricks Unlimited, Inc. v. Agee

• Decision Date: 15 April 1982
• Docket Number: No. 81-4346,81-4346
• Citation: 672 F.2d 1255
• Parties: 33 UCC Rep.Serv. 989 BRICKS UNLIMITED, INC. Plaintiff-Appellant, v. Ralph L. AGEE, et al., Defendants-Appellees. Summary Calendar.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1255

672 F.2d 1255

33 UCC Rep.Serv. 989

BRICKS UNLIMITED, INC. Plaintiff-Appellant, v. Ralph L. AGEE, et al., Defendants-Appellees.

No. 81-4346

Summary Calendar.

United States Court of Appeals, Fifth Circuit.

April 15, 1982.

Bennett, Lotterhos & Sulser, Joseph E. Lotterhos, Craig M. Geno, Jackson, Miss., for plaintiff-appellant.

Leon A. Crist, Metairie, La., for defendants-appellees.

Appeal from the United States District Court for the Southern District of Mississippi.

Before GEE, GARZA and TATE, Circuit Judges.

TATE, Circuit Judge:

This interpleader action involves two principal issues. The first issue is whether a holder in due course of a negotiable instrument is entitled to priority of payment over a judgment creditor of the instrument's payee, where, prior to transfer of the instrument to the holder in due course, the creditor has caused a writ of garnishment to be served upon the maker of the instrument. We agree with the district court that, in such a situation, the holder in due course is entitled to priority.

The second issue concerns whether, under Louisiana community property law, the separate property of the wife of a judgment debtor can be garnished to satisfy the husband's judgment creditor. We agree with the district court that the wife's property cannot be garnished. Nevertheless, under the facts of this particular case, we modify the method used by the district court to determine the order of distribution of the interpleaded funds so as to hold the wife liable from her separate property for her own obligation to another claimant to the interpleaded funds.

I. The Factual Background

The facts are undisputed and are not complicated, but they give rise to novel legal issues in a number of fields, including choice of law, negotiable instruments law, community property law, and the law of garnishment in enforcement of judgments. In 1976, Ralph Agee and his wife, Shelby Agee, were domiciled in Louisiana. On April 4, 1976, Ralph Agee executed a demand note in favor of Bricks Unlimited, Inc., a Louisiana corporation. Mr. Agee signed the note individually and as president of Agee Construction Co., Inc.

Some time later, the Agees moved to Mississippi and became domiciliaries of that state. They purchased a home in Jackson, Mississippi. The demand note in favor of Bricks Unlimited, however, was left unpaid.

After amicable demands for payment of the note produced no results, Bricks Unlimited brought a diversity action on the note against Ralph Agee in Mississippi federal district court on October 26, 1978. Bricks Unlimited prevailed in its suit and obtained a final judgment, dated September 26, 1979, in the amount of $17,031.80, plus interest. Agee did not appeal.

On October 31, 1979, shortly after the final judgment was rendered, the Agees sold their Mississippi home to Dena Sutton. As partial consideration for this property, Sutton gave the Agees a $15,000 promissory note (the "Sutton note"), which was secured by a deed of trust on the purchased property. After selling the property to Sutton, the Agees returned to Louisiana, where they have lived ever since.

After recording its judgment in accordance with Mississippi law, Bricks Unlimited caused a writ of garnishment to be served on Dena Sutton on February 6, 1980. ¹ Sutton answered the writ on February 25, 1980. She admitted that she was indebted to Ralph Agee "and (his) wife, Shelby Agee, jointly, in the sum of $15,000 (plus interest), evidenced by a promissory note and deed of trust in said sum payable to said parties."

On February 6, when the writ was served on Sutton, the Sutton note and the deed of trust were in the possession of the Agees. However, on February 15, 1980, prior to the time Sutton answered the writ, the Agees pledged the note and the deed to the Commercial Bank and Trust Company of Metairie, Louisiana (the "Bank"), as security for a $10,000 loan. Ralph and Shelby Agee bound themselves in solido (jointly and severally) to repay this loan. The Bank was not aware of the garnishment at the time it accepted the Sutton note as collateral for this $10,000 loan.

The Sutton note became due on October 31, 1980. On that date, Sutton, noting that the Bank and Shelby Agee were claiming an interest in the garnished debt, interpleaded the full $16,425 due on the note into the registry of the federal district court (as permitted under Mississippi law, see Miss.Code § 11-35-41) in the garnishment proceedings there pending. Bricks Unlimited claimed entitlement to the entire amount in satisfaction of its judgment. Shelby Agee claimed a one-half interest in the proceeds. The Bank claimed an interest to the extent of the unpaid balance on its $10,000 loan to the Agees. ²

On cross-motions for summary judgment, the district court awarded one-half of the deposited funds, plus one-half of the interest accrued while the funds were on deposit, to Shelby Agee. With respect to the remaining half of the deposited funds and accrued interest, the court awarded the Bank $7,466 (the balance remaining on the $10,000 loan), and the court allowed Bricks Unlimited only the residue. Accordingly, the funds were distributed as follows: $8,403.68 to Shelby Agee; $7,466 to the Bank; and $937.67 to Bricks Unlimited.

Only Bricks Unlimited has appealed. We find that the Bank's claim is superior to Bricks Unlimited's claim, and we affirm the district court's judgment to this effect. However, because the Agees were liable to the Bank in solido, we find that Shelby Agee is only entitled to one-half of the fund after deduction of the Bank's $7,466 share. She is not entitled to one-half of the fund "off the top", as the district court decreed. Accordingly, in this respect, we modify the lower court's judgment.

II. The Bank, as a Holder in Due Course, is Entitled to First Priority With Respect to the Interpleaded Funds

The Bank claims that the Sutton note is a negotiable instrument and that, as a holder in due course of this instrument, it is entitled to priority of payment over Bricks Unlimited, the garnishing creditor. We agree.

The litigants disagree as to whether Louisiana or Mississippi law governs this aspect of the action, but we need not decide this issue, because both states have adopted article 3 of the Uniform Commercial Code ("UCC"), which governs negotiable instrument law. See La.R.S. §§ 10:3-101 et seq.; Miss.Code §§ 75-3-101 et seq. The Louisiana and Mississippi negotiable instruments provisions are identical.

It is undisputed that the Sutton note was a negotiable instrument. The issue is whether the Bank was a holder in due course of this instrument.

The Bank undisputedly was a "holder" of the Sutton note, because the instrument was delivered to the Bank with the necessary endorsements of both Ralph and Shelby Agee. See UCC § 3-202(1). Under the UCC, a holder in due course is a holder who takes a negotiable instrument: 1) for value, 2) in good faith, and 3) without notice that it is overdue or has been dishonored or of any defense against or claim to it on the part of any person. UCC § 3-302. The Bank took the note "for value," because a holder who takes a negotiable instrument as collateral for a loan takes "for value" within the meaning of the UCC. See UCC § 3-303(a); Millman v. State Nat'l Bank, 323 A.2d 723, 725, 15 UCC Rep.Serv. 413 (D.C.App.1974). ³ And the bank took in good faith and without notice of any claims, because it is undisputed that the Bank was not aware of the Bricks Unlimited claim at the time the Agees negotiated the note to the Bank. Therefore, the Bank was a holder in due course of the Sutton note, so it took the instrument "free from all claims to it on the part of any person." UCC § 3-305(1).

Bricks Unlimited claims that the Bank is not a holder in due course, because the Sutton note was secured by a deed of trust on real property in Mississippi. Thus, according to Bricks Unlimited, the Bank should have checked the title to the real property by examining the Mississippi public records. Had the Bank made such a title examination, Bricks Unlimited argues, the Bank would have discovered the recorded judgment against Ralph Agee.

This argument might have some validity if the Bank were now claiming some interest in the real property. However, the negotiability of a note is in no way affected by the existence of collateral security. See UCC § 3-112(1)(b). The Bank does not lose its status as a holder in due course because it failed to check the public records. See UCC § 3-304(5). The rule under the UCC is that, in the absence of anything to warn him to the contrary, one who takes a negotiable instrument may assume that the persons with whom he deals are acting honestly and in good faith. The imposition of a duty to make inquiry as to all possible claims "would so burden such transactions as to create insuperable impediments to the free exchange of negotiable paper, an indispensable part of modern business." Jaeger & Branch, Inc. v. Pappas, 20 Utah 2d 100, 433 P.2d 605, 607-08, 4 UCC Rep.Serv. 950 (1967). See also General Investment Corp. v. Angelini, 58 N.J. 396, 278 A.2d 193, 197, 9 UCC Rep.Serv. 1 (1971) (failure to inquire precludes holder in due course status only if circumstances reveal a deliberate desire on the part of the holder "to evade knowledge because of a belief or fear that investigation would disclose a defense (or claim)"); Corporacion Venezolana de Fomento v. Vintero Sales, 452 F.Supp. 1108, 1119-20 (S.D.N.Y.1978), remanded mem., 607 F.2d 994 (2d Cir. 1979).

Bricks Unlimited next argues that the Bank is "estopped" from asserting holder in due course status because the Bank, after learning of Bricks Unlimited's claim, executed two renewal notes with respect to the $10,000 loan to the Agees, which itself was secured by the Sutton note. In addition, the Bank changed the interest rate on the loan, accepted payments in reduction of the indebtedness, and required the Agees to obtain the signature of...