Opinion
No. 4:01-CV-0706-A
February 15, 2002
MEMORANDUM OPINION and ORDER
Came on for consideration the motion of defendant, Dublin National Bank, for summary judgment. The court having considered the motion, the response of plaintiffs, James A. Van Hattem and Julia H. Van Hattem, the reply, the record, the summary judgment evidence, and applicable authorities, finds that the motion should be granted.
I. Plaintiffs' Claims
On August 16, 2001, plaintiffs filed their original complaint in this action. They allege:
On or about October 31, 1994, Steven A. Van Hattem ("Steven") executed a promissory note in the principal amount of $75,645.60 payable to plaintiffs. To secure repayment of the note, Steven granted plaintiffs a security interest in livestock owned by him. On or about December 6, 1995, plaintiffs perfected their security interest by filing a financing statement with the Texas Secretary of State. On or about October 22, 1999, defendant caused Steven's cattle to be repossessed and sold at auction. Defendant received in excess of $102,000 from the sale, but has failed and refused to pay plaintiffs the proceeds from the sale.
Plaintiffs sue defendant for conversion and for violation of the Texas Uniform Commercial Code ("UCC").
II. Grounds of the Motion
Defendant seeks summary judgment on the grounds that plaintiffs did not have an enforceable security interest in the livestock or proceeds therefrom and that, even if plaintiffs had a security interest, their security interest was unperfected and subordinate to defendant's perfected security interest. Moreover, proceeds received by defendant were in the form of negotiable instruments that defendant took as a holder in due course, free of any claim of plaintiffs. There was no conversion of the proceeds. And, the default provisions of the UCC are inapplicable because defendant did not take possession of, sell, or otherwise dispose of any collateral.
III. Applicable Summary Judgment Principles
A party is entitled to summary judgment on all or any part of a claim as to which there is no genuine issue of material fact and as to which the moving party is entitled to judgment as a matter of law. FED. R. Civ. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). The moving party has the initial burden of showing that there is no genuine issue of material fact. Anderson, 477 U.S. at 256. The movant may discharge this burden by pointing out the absence of evidence to support one or more essential elements of the non-moving party's claim "since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial."Celotex Corp. v. Catrett, 477 U.S. 317, 323-25 (1986). Once the moving party has carried its burden under Rule 56(c), the non-moving party must do more than merely show that there is some metaphysical doubt as to the material facts. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The party opposing the motion may not rest on mere allegations or denials of pleading, but must set forth specific facts showing a genuine issue for trial. Anderson, 477 U.S. at 248, 256. To meet this burden, the nonmovant must "identify specific evidence in the record and articulate the `precise manner' in which that evidence support[s] [its] claim[s]." Forsyth v. Barr, 19 F.3d 1527, 1537 (5th Cir. 1994). An issue is material only if its resolution could affect the outcome of the action. Anderson, 477 U.S. at 248. Unsupported allegations, conclusory in nature, are insufficient to defeat a proper motion for summary judgment. Simmons v. Lyons, 746 F.2d 265, 269 (5th Cir. 1984)
The standard for granting a summary judgment is the same as the standard for a directed verdict. Celotex Corp., 477 U.S. at 323. If the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial.Matsushita, 475 U.S. at 597.
IV. Undisputed Evidence
The following is an overview of evidence pertinent to the motion for summary judgment that is undisputed in the summary judgment record:
Steven and his wife, Pamela N. Van Hattem ("Pamela"), operated a dairy farm near Stephenville, Erath County, Texas. Steven and Pamela first became loan customers of defendant in August 1994, when defendant made a loan to them to finance their purchase of dairy cattle.
Steven is the brother of plaintiff James A. Van Hattem. Starting in 1979, plaintiffs loaned Steven and Pamela money for various purposes, including dairy farm operations. On or about October 31, 1994, Steven executed a promissory note, titled "Note Secured by Second Security Interest in Dairy Cows, payable to plaintiffs in the principal sum of $75,645.60 (the "note"). The note bore a signature line for Pamela, but was not signed by her or by anyone else on her behalf. The note stated: "This note is secured by a second security interest in the dairy cows owned by Steven A. and Pamela N. Van Hattem." Def.'s App. at 2. Steven also signed a UCC-1 financing statement, which was filed with the Secretary of State of Texas on December 6, 1995. The financing statement likewise listed Steven and Pamela as debtors and had places for each of them to sign. Only Steven's signature appears on the financing statement. Id. at 3.
On May 1, 1997, defendant made a $390,500 loan to Steven and Pamela under a United States Department of Agriculture program pursuant to which 90% of the principal amount of the loan was guaranteed by the Farm Service Agency, an agency of the United States government. In connection with that loan, Steven and Pamela each executed a promissory note, a commercial security agreement, a security agreement supplement, a UCC-1 financing statement, a disbursement request and authorization, and a notice of final agreement. Defendant filed its financing statement on May 16, 1997, with the Texas Secretary of State. In their financial statement as of date of loan application, Steven and Pamela did not list any debt owed to plaintiffs. Pursuant to the terms of the 1997 loan and security agreement, Steven and Pamela granted defendant a security interest in all dairy cattle and other livestock owned or thereafter acquired by them.
A statement of profit and loss for Steven, dated December 31, 1996, contained in defendant's file listed a note payable to "Jim Van Hattem (Pico dairy)" in the amount of $68,081.67.
On October 22, 1999, Steven and Pamela caused their dairy cattle to be sold at auction. Defendant was not aware that the cattle were going to be sold. Prior to the sale, defendant had not made any demand on Steven and Pamela or commenced any sort of default proceedings. After the sale, the auction house called defendant to find out how the proceeds should be paid. Pursuant to defendant's instructions, proceeds of the sale were paid by three checks made payable to defendant and Steven. Steven endorsed the checks and delivered them to defendant. The total amount of the sale checks was $109,774.30. Defendant credited that amount against the debt owed by Steven and Pamela.
At the time defendant received and processed the checks, it did not know that Steven and Pamela, or either one of them, owed any debt to plaintiffs. Defendant's file contained a June 5, 1997, letter from the Secretary of State reflecting that, as of May 26, 1997, three financing statements had been filed showing Steven as a debtor. One of the financing statements listed was that filed by plaintiffs. But, defendant had received another report of Uniform Commercial Code filings made in the office of the Secretary of State of Texas which showed that, as of September 28, 1999, only defendant's financing statement reflecting Steven and Pamela's debt was on file.
V. Law Applied to the Facts
A. Enforceability of Plaintiffs' Security Interest.
Defendant contends that plaintiffs' security interest is unenforceable because Pamela did not sign the note or financing statement. See Vallone v. Miller, 663 S.W.2d 97 (Tex.App.-Houston [14th Dist.] 1983, writ ref'd n.r.e.). Plaintiffs argue that Steven was authorized to sign the documents on behalf of Pamela. The cases they cite, however, are inapposite, since Steven did not purport to sign the agreements on Pamela's behalf. See Little v. Clark, 592 S.W.2d 61, 63 (Tex.Civ.App. — Fort Worth 1979, writ ref'd n.r.e.) (wife signed her own name and her husband's name to contract); Stafford v. Shewmake, 455 S.W.2d 810, 811 (Tex.Civ.App.-Waco 1970, no writ) (same). Here, the documents were clearly drawn for Pamela's signature, but no signature appears above her name on either document. Nevertheless, the court cannot find as a matter of law that the documents were unenforceable as to the interest capable of being conveyed by Steven. Here, the property in which the interest is conveyed is not homestead, as in Vallone, but what appears to be joint management community property. See Tex. Fam. Code Ann. § 3.202(c) (Vernon 1998).
The next question is the extent of the security interest created by execution of the note. A requirement for the creation of a valid security interest is that the collateral be adequately described. Id. A description is sufficient if it "reasonably identifies what is described." Id. § 9.110. When the descriptions in a security agreement and a financing statement differ, the description in the security agreement controls. Landen v. Prod. Credit Ass'n of Midlands, 737 P.2d 1325, 1328 (Wyo. 1987); Tri-County Livestock Auction Co. v. Bank of Madison, 185 S.E.2d 393, 395-96 (Ga. 1971). Here, the note given to plaintiffs describes the collateral as "dairy cows owned by Steven A. and Pamela N. Van Hattem." Def.'s App. at 2. The financing statement describes the collateral as "ALL farm products, inventories, accounts receivable and livestock (including all increases and supplies) including but not limited to all livestock, now owned or hereafter acquired, and all proceeds thereof." Id. at 3. Because the descriptions vary, the more limited grant of the note (security agreement) controls. Landen, 737 P.2d at 1328; Tri-County, 185 S.E.2d at 395-96. In any event, a security agreement covering livestock does not reach after-acquired livestock unless the security agreement expressly so provides. Tri-County at 395-96. The cases plaintiffs cite regarding inventory are not in point. Even if they were, there is no summary judgment evidence to the effect that dairy cattle are inventory. Thus, plaintiffs' security interest was limited to the cattle owned by Steven and Pamela at the time the interest was created. Plaintiffs have not come forward with any summary judgment evidence, however, to prove that the cattle sold at auction were the cattle in which they had any interest.
B. Defendant as Holder in Due Course.
As discussed in the preceding subsection of this memorandum opinion and order, plaintiffs cannot show that they had an enforceable security interest in the proceeds from the sale of Steven and Pamela's livestock. Even if they did, defendant contends that it took the sales proceeds, in the form of three negotiable instruments, as a holder in due course, i.e., free from any claim of plaintiffs. A holder in due course is one who takes an instrument for value, in good faith, and 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. TEX. Bus. COM. CODE ANN. § 3.302(a) (Vernon 1994). That defendant took the checks for value is undisputed, since the checks were taken in payment of an antecedent debt. Id. § 3.303. The "good faith" and "without notice" requirements are likewise met. Objective, rather than subjective, intent controls.Dallas Bank Trust Co. v. Frigiking, Inc., 692 S.W.2d 163, 166 (Tex.App.-Dallas 1985, writ ref'd n.r.e.). Good faith is defined as "honesty in fact in the conduct or transaction concerned." TEX. Bus. COM. CODE ANN. § 1.201(19) (Vernon Supp. 2002). "It is not sufficient that [defendant] had knowledge that would put a reasonable person on inquiry which would lead to discovery. There must be actual knowledge of facts and circumstances which amounted to bad faith." Dallas Bank Trust Co., 692 S.W.2d at 166. Here, there is no summary judgment evidence of bad faith on the part of defendant. Finally, plaintiffs' filing of their UCC-1 financing statement does not of itself constitute notice sufficient to defeat the rights of a holder in due course. Id. at 166-167. See also Allstate Fin. Corp. v. Financorp, Inc., 934 F.2d 55, 60 (4th Cir. 1991). As provided in chapter 9 of the UCC in effect at the time:
Nothing in this chapter limits the rights of a holder in due course of a negotiable instrument (Section 3.302) . . . and such holders or purchasers take priority over an earlier security interest even though perfected. Filing under this chapter does not constitute notice of the security interest to such holders or purchasers.
TEX. Bus. COM. CODE ANN. § 9.309 (Vernon 1991).
C. Conversion.
One of plaintiffs' two causes of action is for conversion. The Texas Supreme Court has defined conversion as the "unauthorized and wrongful assumption and exercise of dominion and control over the personal property of another, to the exclusion of or inconsistent with the owner's rights." Waisath v. Lack's Stores, Inc., 474 S.W.2d 444, 447 (Tex. 1971). Plaintiffs have not raised a genuine fact issue as to their ownership of the three checks alleged to have been converted. As discussed supra, plaintiffs have not shown that they had a perfected security interest in the proceeds from the sale of the dairy cattle. The proceeds, like the cattle, were the property of Steven and Pamela and they chose to deliver the proceeds to defendant.
D. Violation of the UCC.
Plaintiffs' second cause of action is for violation of the UCC. Plaintiffs allege that defendant violated the requirements of chapter 9 of the UCC by failing to give notice to plaintiffs before disposing of Steven and Pamela's cattle. There is no summary judgment evidence, however, that defendant participated in the disposition of the dairy cattle. Plaintiffs can only speculate that because defendant foreclosed on some farming equipment at the same time the cows were sold, it must have participated in the sale of the cattle. See TIG Ins. Co. v. Sedgwick James of Washington, 276 F.3d 754, 759 (5th Cir. 2002) ("Conclusional allegations and denials, speculation, improbable inferences, unsubstantiated assertions, and legalistic argumentation do not adequately substitute for specific facts showing a genuine issue for trial."). In any event, an agreed sale is not a sale after default governed by § 9.504 of the UCC. Adcock v. First City Bank of Alice, 802 S.W.2d 305, 307 (Tex.App.-San Antonio 1990, no writ).
VI. ORDER
For the reasons discussed herein,
The court ORDERS that defendant's motion for summary judgment be, and is hereby, granted; that plaintiffs take nothing on their claims against defendant; and that such claims be, and are hereby, dismissed with prejudice.