SMS Financial, Ltd. Liability Co. v. ABCO Homes, Inc.

• Decision Date: 18 February 1999
• Docket Number: No. 98-50117,98-50117
• Citation: 167 F.3d 235
• Parties: 37 UCC Rep.Serv.2d 1200 SMS FINANCIAL, LIMITED LIABILITY COMPANY, Plaintiff-Appellant, v. ABCO HOMES, INC.; Abbott Consolidated Industries, Inc.; Abbott Development Company; H. Eugene Abbott; Richard E, Abbott, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 235

167 F.3d 235

37 UCC Rep.Serv.2d 1200

SMS FINANCIAL, LIMITED LIABILITY COMPANY, Plaintiff-Appellant, v. ABCO HOMES, INC.; Abbott Consolidated Industries, Inc.;

Abbott Development Company; H. Eugene Abbott;

Richard E, Abbott, Defendants-Appellees.

No. 98-50117.

United States Court of Appeals, Fifth Circuit.

Feb. 18, 1999.

James W. Essman, James P. Boldrick, Boldrick, Clifton, Holland & Essman, Midland, TX, for Plaintiff-Appellant.

Robert Keith Whitt, Midland, TX, for ABCO Homes, Inc.

Roy Lee Bell, Odessa, TX, for Abbott Consol. Industries, Inc., Abbott Development Co., H. Eugene and Richard E. Abbott.

Appeal from the United States District Court for the Western District of Texas.

Before SMITH, DUHE and WIENER, Circuit Judges.

DUHE, Circuit Judge:

SMS Financial L.L.C. ("SMS"), sued to recover on a promissory note issued by ABCO Homes, Inc. ("ABCO"), Abbott Consolidated Industries, Inc. ("ACI"), Abbott Development Co. ("ADCO"), H. Eugene Abbott, and Richard E. Abbott (collectively, "Defendants"). SMS appeals on the following grounds the district court's grant of summary judgment for the Defendants: (1) it is the holder and owner of the note; (2) equitable estoppel; (3) limitations; (4) commercially unreasonable disposition of collateral; and (5) no relation back of SMS's amended complaint. Because we hold that SMS is the holder of the note and find that genuine issues of material fact exist concerning the remaining issues raised by the Defendants, we reverse and remand to the district court for further proceedings.

I. Background

This appeal involves a promissory note made by the Defendants payable to the FDIC. ADCO was the maker of a previous note owed to Western State Bank of Midland. The FDIC took over that bank's operations when the bank failed. When ADCO defaulted on that note, the FDIC allowed the Defendants to refinance the debt through the note payable to the FDIC. ¹ In 1993 the FDIC sold its note to SMS in a bulk sale of notes. The FDIC endorsed its note to SMS, but did not physically deliver it to SMS. Subsequently, SMS requested a refund of the purchase price for this note as provided for under the terms of their contract. The FDIC issued a refund check to SMS and requested return of the endorsed note. ² Of course, SMS did not have possession of the note, and therefore could not return it. In 1997, the FDIC sent the note to SMS "in a box" with other documents. ³

SMS sued the Defendants on the note shortly after receiving it. The district court granted the Defendants' Motion For Summary Judgment as to all Defendants on the grounds that SMS was not the owner or holder of the note, as to ABCO on the additional ground of a settlement with the FDIC, and as to ADCO on the additional ground that the debt was discharged in bankruptcy. ⁴

II. Discussion

A. Is SMS the holder or owner of the note?

SMS argues the district court erred in granting the Defendants' Motion for Summary Judgment because a fact issue exists concerning whether SMS is the owner or This court reviews the district court's determination de novo. See La. Bricklayers & Trowel Trades Pension & Welfare Fund v. Alfred Miller Gen. Masonry Contracting Co., 157 F.3d 404, 407 (5th Cir.1998); see also Willis v. Roche Biomedical Laboratories, Inc., 21 F.3d 1368, 1370 (5th Cir.1994). We must determine whether the pleadings and summary judgment evidence demonstrate there is no genuine issue as to any material fact, and whether the Defendants are entitled to judgment as a matter of law. Id. at 1371.

holder of the note. We hold SMS is the holder of the note.

SMS argues it became the note's owner and holder through the FDIC's negotiation of the note in 1997 by delivery of the endorsed note to SMS. Alternatively, SMS contends it is the owner and holder of the note because the Defendants failed to prove the FDIC reacquired the note from SMS through the refund check in 1994. ⁵ SMS asserts the FDIC did not reacquire the note because the FDIC did not strike out the endorsement to SMS even though the FDIC had possession of and had paid for the note. ⁶

The Defendants contend SMS is not the holder or owner of the note because the FDIC reacquired the note through the letter and check dated 1994 discussed above. The Defendants also assert that SMS judicially admitted the FDIC's reacquisition of the note in 1994 and the FDIC's status as holder and owner of the note in 1996 when SMS conceded the correctness of the district court's grant of summary judgment to ABCO. ⁷ The Defendants argue if the FDIC settled with ABCO in 1996 in a dispute concerning the note, then the FDIC must have owned the note in 1996. Finally, the Defendants claim the Plaintiff misstated the FDIC's position through Cynthia Wilkins' affidavit because her affidavit does not constitute the official position of the FDIC.

To recover on a promissory note, the plaintiff must prove: (1) the existence of the note in question; (2) that the party sued signed the note; (3) that the plaintiff is the owner or holder of the note; and (4) that a certain balance is due and owing on the note. Bean v. Bluebonnet Savings Bank FSB, 884 S.W.2d 520, 522 (Tex.App.--Dallas 1994, no writ). " 'Negotiation' means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder." Tex. Bus. & Com.Code § 3.201(a) (Vernon Supp.1999). "[I]f an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder." Id. § 3.201(b). When an instrument is payable to an identifiable person, the "holder" is the person in possession if he is that identified person. See Tex. Bus. & Com.Code § 1.201(20) (Vernon Supp.1999). When a holder indorses an instrument, whether the instrument is payable to an identified person or payable to bearer, and "the indorsement identifies a person to whom it makes the instrument payable," it is a "special indorsement." Tex. Bus & Com.Code § 3.205 (Vernon Supp.1999). "When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person." Id. (emphasis added). A "person entitled to enforce" an instrument includes the holder of an instrument. See Tex. Bus. & Com.Code § 3.301 (Vernon Supp.1999).

The district court did not recognize the distinction between the status of holder and owner under the Uniform Commercial Code. The district court relied on an outdated version of the Texas Business and Commerce

                Code. 8  SMS is a holder of the note as defined in § 3.201 because it is in possession of a note which is payable to itself.  SMS became a holder when the FDIC negotiated the note to it through the endorsement and delivery of the note in 1997.  See Tex.  Bus. & Com.Code § 3.201 (Vernon Supp.1999).  SMS is the holder of the note even if the FDIC's delivery of the note was inadvertent.  As holder of the note, SMS is also a person entitled to enforce the instrument under § 3.301.  See Tex.  Bus. & Com.Code § 3.301 (Vernon Supp.1999).  Whether SMS is the owner of the note is a separate question which does not affect whether it is the holder of the note.  Whether the FDIC reacquired the ownership of the note by refunding the purchase price of the note to SMS is irrelevant to the issue of whether SMS is the holder of the note
                

B. The Defendants' alternative grounds for summary judgment.

The Defendants contend we could also affirm the district court's grant of their Motion For Summary Judgment on these alternative grounds: (1) equitable estoppel; (2) limitations; (3) commercially unreasonable disposition of collateral; and (4) no relation back of SMS's amended complaint.

1. Equitable Estoppel

The Defendants argue the FDIC falsely represented to them during settlement negotiations in a 1996 lawsuit that it did not own the note and that they relied to their detriment on that false statement because they would have asked for a release from the note in the settlement had they known the truth. The Plaintiff did not address the Defendants' promissory estoppel theory on appeal. ⁹

We find a genuine issue of material fact exists concerning whether the FDIC falsely represented that it did not own the note in these negotiations. See Edwin M. Jones Oil Co. v. Pend Oreille Oil & Gas Co., 794 S.W.2d 442, 447 (Tex.App.-Corpus Christi 1990, writ denied) (false representation is an element of the defense of estoppel). The Defendants' argument that the FDIC's representation was false is apparently based on their belief that the FDIC reacquired the note through the letter and refund check sent by the FDIC to SMS in 1994. SMS argued in its Response to Defendants' Motion for Summary Judgment that the FDIC's statement was not false because the FDIC sold the note to SMS in 1993. There is conflicting evidence in the record concerning the ownership of the note. ¹⁰ Because we find a genuine issue of material fact exists concerning this issue, we cannot affirm on this ground.

2. Limitations

The Defendants argue limitations also bars the Plaintiff's suit. The note matured on February 15, 1991. In April and May of 1991, Fairmont Park Lanes Bowling Center made two payments on the note. At that time, ABCO operated the bowling alley and owned the bowling alley's equipment but leased the land and building where the bowling alley was located from ADCO. On July 30, 1991, H. Eugene Abbott sent a letter to the FDIC requesting an extension of time on the note, offering a reduced monthly payment, and assuring that "they" anticipated Both 28 U.S.C.A. § 2415(a) and 12 U.S.C.A. 1821(d)(14) on their face apply to this action. Section 2415 provides the limitations period for actions on contracts brought by the United States or its agencies. See 28 U.S.C.A. § 2415(a) (West 1994). Section 1821 was enacted as part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and...