HHH Farms, L.L.C. v. Fannin Bank

Decision Date20 January 2022
Docket Number06-20-00068-CV
Citation648 S.W.3d 387
Parties HHH FARMS, L.L.C., Hartwell Farms, LLC, and Waymon Scott Hartwell, Appellants v. FANNIN BANK, Appellee
CourtTexas Court of Appeals

William L. Wolf, Dylan J. Anderson, Wolf & Henderson, PC, Dallas, for Appellant.

Kimberly M. J. Sims, Palter Sims Martinez PLLC, Dallas, for First United Bank f/k/a American Bank of Texas.

Steven E. Aldous, Forshey & Prostok, LLP, Dallas, for Appellee Fannin Bank.

Before Morriss, C.J., Burgess and Stevens, JJ.


Opinion by Justice Burgess

The disputes in this case involve four agriculture-related loans to Hartwell Farms, LLC (H. Farms), which were guaranteed by Waymon Scott Hartwell (Hartwell) (collectively the Hartwell Parties).1 Two of the loans were made by Fannin Bank (Fannin), and two were made by American Bank (American). The Hartwell Parties defaulted on Fannin's loans but paid off the American loans with proceeds from the sale of their wheat crop.

Fannin sued the Hartwell Parties to recover on its loans to them, and the Hartwell Parties asserted several counterclaims against Fannin. Fannin also sued American to recover the sale proceeds that it argued were covered by a perfected first lien security interest in H. Farms's crops. The trial court granted Fannin's motion for summary judgment on its claims against the Hartwell Parties and on the Hartwell Parties’ claims against Fannin. The trial court also granted American's motion for summary judgment against Fannin relating to ownership of the crop proceeds.

The Hartwell Parties appeal the summary judgment in favor of Fannin, and Fannin appeals the summary judgment in favor of American. In Part I of this opinion, we reverse in part and affirm in part Fannin's summary judgment against the Hartwell Parties on Fannin's claims for relief. In Part II of this opinion, we affirm Fannin's summary judgment on the Hartwell Parties’ counterclaims against Fannin. Finally, in Part III of this opinion, we reverse American's summary judgment against Fannin.

I. Factual and Procedural Background
A. The Fannin Bank Loans

Two of Fannin's loans to H. Farms are the subject of this appeal. The first loan was evidenced by a promissory note and security agreement executed by H. Farms on March 28, 2014, in the original principal amount of $750,000.00, payable to Fannin (Note One). Note One matured on February 15, 2015. To secure the payment and performance of the debt, H. Farms granted Fannin a security interest in all of the property described in Note One's security agreement, including all proceeds and products from the property.2 Note One was a revolving draw loan that was partially guaranteed by the U.S. Farm Service Agency (FSA).3 According to Fannin, as of December 6, 2019, the total outstanding principal on Note One was $617,096.80.

The second loan was evidenced by a promissory note and security agreement executed by H. Farms on August 19, 2014, in the original principal amount of $129,445.73, payable to Fannin (Note Two). Note Two matured on January 31, 2015.4 To secure the payment and performance of the debt, H. Farms granted Fannin a security interest in all of the property described in the security agreement, including all proceeds and products from the property.5 According to Fannin, H. Farms made no payments on Note Two and failed to pay it when it matured.

Hartwell signed both notes in his capacity as president of H. Farms. Hartwell also signed guaranty agreements guaranteeing payment and performance of Notes One and Two. Both notes included language that prohibited H. Farms from granting a security interest in the collateral subject to those notes without Fannin's consent, transferring collateral without Fannin's consent, or creating a new entity without Fannin's consent.6

B. The American Bank Loans

During the same period of time, Hartwell was seeking financing through Fannin, he also had a lending relationship with American. The summary judgment evidence showed that as early as May 2010, both Fannin and American were providing financing to H. Farms and Hartwell. Accordingly, the Fannin and American Loans somewhat overlapped each other. Garrett Adams, American's branch manager, explained the history behind the American loans.

On July 24, 2013—which was before Hartwell had obtained the first Fannin loan—American loaned H. Farms $136,000.00 for seed and fertilizer. The promissory note for this loan was signed by Hartwell on behalf of H. Farms. Hartwell then applied for the first Fannin loan, but because it can take several months to complete and fund an FSA guaranteed loan, Hartwell approached American for a second seed and fertilizer loan. Amlin became aware that H. Farms was in the process of obtaining an FSA guaranteed loan through Fannin, so he emailed Allen Sanderson, Fannin's president, on February 18, 2014, inquiring as to the status of the first FSA guaranteed loan at Fannin and asking if Fannin would pay off the seed and fertilizer loans if American advanced the funds. Based on Sanderson's response to Amlin's email, and based on the parties’ prior course of dealing, Amlin understood that American's seed and fertilizer loans could be paid off from the Fannin funds once the FSA guaranteed loan was funded. American then loaned H. Farms $100,000.00 on February 21, 2014. That note was likewise signed by Hartwell on behalf of H. Farms.7

C. Sale of the Wheat Crop

On August 18, 2014, Hartwell took his wheat crop to Wolfe City to sell. In return, Wolfe City issued a check to Hartwell in the amount of $272,855.57. On the same day, Hartwell deposited the check issued by Wolfe City into the H. Farms checking account at American and issued a check to American from the H. Farms checking account in the amount of $237,395.95 to pay off the two seed and fertilizer loans.8 American accepted the funds and applied them to the two H. Farms seed and fertilizer loans: (1) the July 24, 2013, $136,000.00 loan and (2) the February 21, 2014, $100,000.00 loan. Hartwell testified that he was not aware that Fannin expected him to pay down his line of credit at Fannin with the proceeds from his crop sales.

Cheryl Darwin, a mortgage loan officer for Fannin, testified that she sent notices of Fannin's security interest to Wolfe City in September 2014, but later learned that the money for the H. Farms crops had already been disbursed.

D. The Formation of HHH Farms, LLC

After Notes One and Two were executed, Hartwell formed a new entity called HHH Farms, LLC (HHH), on September 8, 2014. Hartwell testified that he established HHH for the purpose of buying and selling farm equipment financed through American. Hartwell further testified that, at the time, he was farming only under HHH and that H. Farms did not do any farming. Hartwell testified that he started farming through HHH because that was the only way he could get crops in the ground. Hartwell borrowed money from American for his farming operations through HHH, which did business solely with American. Hartwell, who was the sole member of HHH and H. Farms, did not inform Fannin that he was going to continue his farming only under HHH.

E. Fannin's Initial Lawsuit

Fannin initially sued Hartwell and H. Farms on May 1, 2015, alleging that H. Farms defaulted on Notes One and Two and that Hartwell defaulted on his guaranties of those notes. Fannin sought a temporary restraining order enjoining H. Farms and Hartwell from alienating Fannin's collateral. In an affidavit attached to the petition, Fannin alleged that Hartwell and H. Farms sold crops in which Fannin held a security interest and failed to use the proceeds to pay down the debt to Fannin. The trial court granted Fannin's application for a temporary restraining order, concluding that Hartwell and H. Farms did not have sufficient assets to repay the debt to Fannin without foreclosure on the collateral. The trial court set a hearing date of May 7, 2015.

F. The H. Farms Bankruptcy

On May 7, 2015, Hartwell, on behalf of H. Farms, filed a certificate of resolution indicating that the members of H. Farms resolved to file Chapter 11 bankruptcy. The bankruptcy filing's list of equity shareholders in H. Farms lists Hartwell as the sole member. In response to Fannin's motion for relief from the automatic stay, H. Farms stated that it had no ownership interest in any crops described as collateral in Notes One and Two. Instead, it claimed that HHH was the owner of any and all crops on all agricultural leases. Fannin and H. Farms ultimately entered into an agreed order granting Fannin's motion for relief from the automatic stay. Among other things, the agreed order specifically stated that all proceeds from wheat sales had to be deposited in H. Farms's bank pending further determination of the parties’ respective rights and obligations with regards to such proceeds. Fannin thereafter filed a motion for entry of an order to show cause why sanctions should not be imposed against H. Farms, alleging that Hartwell spent proceeds from wheat sales in violation of the agreed order. The parties entered into an agreed order granting Fannin's motion that required Hartwell and H. Farms to deposit $97,760.01 into the Interest on Lawyers’ Trust Account (IOLTA) of Fannin's attorneys. The agreed order dismissing the case stated that the funds in the IOLTA must remain there pending adjudication of Fannin's and HHH's rights to the proceeds by a court of competent jurisdiction or written agreement of the parties.

G. Fannin's Second Lawsuit

While H. Farms was in bankruptcy, Fannin brought a new lawsuit against HHH, Wolfe City, and American on June 29, 2015, alleging claims of conversion of its collateral against all defendants and tortious interference with contract based on Wolfe City's and American's alleged interference with Notes One and Two. Fannin sought a declaration that its security interests in the collateral securing Notes One and Two...

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