First Interstate Bank of Arizona, N.A. v. Interfund Corp., 90-8188
| Decision Date | 28 February 1991 |
| Docket Number | No. 90-8188,90-8188 |
| Citation | 924 F.2d 588 |
| Parties | 14 UCC Rep.Serv.2d 247 FIRST INTERSTATE BANK OF ARIZONA, N.A., Plaintiff-Appellee, v. INTERFUND CORPORATION, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Lawrence B. Shallcross, Jr., San Antonio, Tex., for defendant-appellant.
Aubrey R. Williams, Pakis, Cherry, Beard & Giotes, Waco, Tex., for plaintiff-appellee.
Appeal from the United States District Court for the Western District of Texas.
Before GOLDBERG, KING and DUHE, Circuit Judges.
Interfund Corporation ("Interfund") appeals a judgment entered against it in the amount of $200,000, in favor of First Interstate Bank of Arizona, N.A. ("First Interstate"). Interfund and First Interstate are competing creditors of Bentwood Farms, Inc. ("Bentwood"), a large Arabian horse farm near Waco, Texas. First Interstate sued Interfund for conversion and unjust enrichment, after First Interstate sent Interfund a promissory note and a horse registration certificate because Interfund was considering purchasing the note. Interfund declined to purchase the paper, but instead of returning these documents to First Interstate, it retained the paper as additional security for under-secured paper it had previously purchased from Bentwood. The jury found that this act constituted conversion and unjust enrichment. We affirm the judgment of the district court.
In the early and mid-eighties, First Interstate was one of the largest lenders to the Arabian horse industry in the United States. In November 1984 First Interstate entered into a loan agreement with Bentwood. This agreement originally included a six million dollar line of credit documented by a six million dollar promissory note and a security agreement (the "General Security Agreement"). The General Security Agreement granted First Interstate a security interest in, among other things, Bentwood's chattel paper and inventory, including its horses. 1
In conjunction with this loan agreement, Bentwood executed several financing statements which were originally filed with the Texas Secretary of State and the McLennan County Clerk on December 10, 1984. Subsequent financing statements were filed on January 24, 1986 and December 12, 1986. All of these financing statements covered Bentwood's chattel paper and horses, and they specifically listed any horses which were excluded from First Interstate's security base.
When Bentwood sold a horse, the buyer always signed three documents simultaneously: a purchase and sale agreement, a promissory note, and a security agreement. By virtue of its General Security Agreement, First Interstate had a security interest in these documents. As horses were sold and chattel paper executed, Bentwood assigned and sent this chattel paper to First Interstate, requesting an advance of funds according to a set formula contained in the loan documents. First Interstate would then advance funds on some, but not all, the contracts. The loan agreement between Bentwood and First Interstate established the criteria for such "eligible" contracts. The remaining, ineligible contracts were nevertheless also held by First Interstate as additional collateral for the money First Interstate advanced to Bentwood.
In November 1986 Bentwood Farms entered into a contract with William H. Crook (the "Crook Contract") whereby Crook agreed to purchase the horse AK Kadira, one of the horses in which First Interstate had a perfected security interest, for $100,000. The Crook Contract is the subject of this lawsuit. In conjunction with the purchase of AK Kadira, Crook signed a purchase and sale agreement, a promissory note and a security agreement. By virtue of its General Security Agreement and financing statements, First Interstate had a first lien security interest in the Crook chattel paper. Therefore, Bentwood assigned the Crook chattel paper to First Interstate on December 2, 1986. Under the loan agreement, the Crook contract was an "ineligible" contract so First Interstate did not advance Bentwood any funds at this time.
On December 1, 1986, Bentwood filed the security agreement it received from Crook, which specifically granted Bentwood a security interest in AK Kadira. On January 2, 1987, Bentwood filed a UCC-3, assigning this interest to First Interstate. First Interstate simultaneously released its general security interest in AK Kadira.
Before the Crook Contract was executed, Bentwood was in technical and financial default to First Interstate, owing First Interstate approximately fourteen million dollars. As part of its attempt to help Bentwood repay its debt, First Interstate suggested that Bentwood sell its ineligible contracts to third parties. Therefore, in the summer of 1986, Bentwood contacted Interfund, a specialty finance company which was organized for the primary purpose of funding equine operations by acquiring purchase money security interest contracts.
On August 1, 1986, Bentwood and Interfund executed a Master Assignment Agreement (the "Interfund Master Assignment Agreement"). The Interfund Master Assignment Agreement defined the manner in which Bentwood could sell contracts to Interfund. It also allowed Interfund to retain additional Bentwood property to secure Bentwood's debt to Interfund. Shortly after signing this agreement, Interfund purchased the Crosson Contract from Bentwood for $191,000. The Crosson Contract evidenced the sale of an Arabian horse, AK Nariffa, to Thomas and Maggie Crosson for $228,000. AK Nariffa was one of the horses specifically excluded from First Interstate's General Security Agreement.
After Interfund purchased the Crosson Contract, the Crossons repudiated the contract. In February 1987, Bentwood resold AK Nariffa to two Canadians. Interfund agreed to substitute the Canadian's Contract for the Crosson Contract. Due to the problems with the original Crosson Contract, Bentwood guaranteed the Canadians' performance. Subsequently, the Canadians also defaulted on their contract.
On January 7, 1987, Bentwood requested that First Interstate return the Crook note so that Bentwood could forward it to Interfund, who was interested in purchasing the Crook chattel paper. After First Interstate returned the Crook note, Bentwood forwarded it to Interfund. When Bentwood forwarded the note to Interfund, it was still endorsed to First Interstate. This exchange of chattel paper was apparently in accord with industry custom and practice.
On January 23, 1987, First Interstate sent a letter to Interfund, together with the original certificate of registration from the Arabian Horse Registry of America ("AHR"), regarding AK Kadira. This letter described First Interstate's understanding that Interfund planned to purchase the Crook chattel paper, and asked that if Interfund did not do so, that it return the Crook documents.
In a subsequent letter dated February 23, 1987, First Interstate sent Interfund an unrecorded UCC-3 by which Interfund could release First Interstate's interest in AK Kadira. This UCC-3 was necessary to release the interest that First Interstate acquired in AK Kadira when Bentwood assigned its interest to First Interstate on January 2, 1987. In its cover letter, First Interstate reiterated its understanding that Interfund was purchasing the Crook Contract, and requested that Interfund return all of the Crook documents to First Interstate if the purchase was not completed by March 4, 1987.
On March 31, 1987, during a telephone conversation, a representative of First Interstate informed Interfund that in order to complete the purchase of the Crook chattel paper, Interfund would need First Interstate to endorse and assign the Crook note to Interfund. Therefore, Interfund sent the Crook note to First Interstate so that First Interstate could endorse the note over to Interfund. First Interstate endorsed the note without conditions and returned it to Interfund on April 3, 1987, together with a cover letter indicating that First Interstate understood that Interfund would be purchasing the Crook Contract.
On April 24, 1987, First Interstate sent Interfund a letter formally requesting the return of the original AHR certificate on AK Kadira, the unrecorded UCC-3, and the Crook note, endorsed back over to First Interstate. Interfund did not directly respond, but instead on May 4, 1987, Interfund recorded the UCC-3 assigning First Interstate's interest in AK Kadira to Interfund. On May 6, 1987, First Interstate sent Interfund another letter requesting return of the original Crook documents. Instead of responding to this letter, on May 8, 1987, Interfund sent the original registration certificate concerning AK Kadira to the Arabian Horse Registry of America, which then issued a new certificate showing Interfund as the owner of record.
Interfund never purchased the Crook Contract, but it also never returned any of the Crook documents, despite First Interstate's repeated requests for their return. Indeed, after obtaining the documents, Interfund never responded to First Interstate's correspondence. At trial, Interfund maintained that all documents were held pursuant to the unrecorded Interfund Master Assignment Agreement, as additional collateral due to the Canadians' default on the Crosson Contract.
In October 1988, First Interstate filed this suit, alleging conversion and unjust enrichment, and seeking actual and punitive damages. The jury found for First Interstate and awarded $100,000 in actual and $100,000 in punitive damages. Interfund now appeals this decision.
Interfund's arguments in this case are tied to the factual record. It contends that the jury reached its conclusions based on insufficient evidence. We must first consider the scope of our review.
The judgment in this case...
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