Legacy Bank v. Fab Tech Drilling Equip., Inc. - 566 S.W.3d 922 (Tex. App. 2018)

Rule:

Service of a writ of garnishment fixes a lien on the debtor's property or debts due him, subject to prior valid rights and liens against such property or debt. A garnishor acquires no greater rights than the debtor had. When a garnishment writ is served, the garnishor steps into the shoes of the debtor. The garnishor acquires no greater right by service of the writ of garnishment than the judgment debtor would be able to assert and enforce.

Facts:

On October 28, 2011, the debtor, Canyon Drilling Company, executed and delivered a promissory note to Legacy Bank. In exchange, Legacy extended a revolving line of credit to Canyon. Canyon and Legacy also executed a business loan agreement and a commercial security agreement granting Legacy a security interest in, among other things, Canyon's accounts receivable. The security agreement was perfected by a UCC-1 financing statement that Legacy had previously filed in Oklahoma, covering, among other things, all of Canyon's inventory, equipment, accounts, and proceeds then owned or thereafter acquired. Both the business loan agreement and the security agreement contained nonwaiver clauses. Additionally, the note provided that Legacy was entitled to "delay or forego enforcing any of its rights or remedies under [the] Note without losing them" and could "renew or extend (repeatedly and for any length of time) [the] loan." Legacy and Canyon executed additional promissory notes under the security agreement through 2014. Appellees Fab Tech Drilling Equipment and Impulse Electric Ltd. (collectively “appellees”) are trade creditors of Canyon. On December 13, 2012, Appellees obtained a default judgment against Canyon for $1,661,399.45 in Ector County for unpaid services Appellees had provided to Canyon. In an effort to collect the judgment, Appellees filed a writ of garnishment on January 15, 2013, seeking to garnish accounts receivable owed Canyon by garnishees J. Cleo Thompson and James Cleo Thompson, Jr., L.P. (collectively "Thompson"). Upon learning of Appellees' garnishment, Legacy filed a plea in intervention asserting that it held a properly perfected security interest in the garnishees' accounts due and owing to Canyon. Legacy asserted that its security interest was superior to Appellees' judgment and lien because it was perfected prior to the judgment. After Legacy intervened, the garnishees filed an interpleader claim offering to deposit the disputed funds in the court's registry. The trial court subsequently entered an agreed order accepting the garnishees' deposit of the disputed fund into the registry of the court. Legacy subsequently provided a formal notice of default to Canyon on July 19, 2013. Despite Canyon's initial default, Legacy continued to advance funds to Canyon and accepted additional promissory notes from Canyon in hopes that successful operations would ensue. However, Legacy ultimately exercised its foreclosure rights against Canyon after the note became due in April 2014. Legacy sued Canyon in Oklahoma for a judgment on the debt owed under the notes and for confirmation and enforcement of Legacy's prior perfected security interest. The Oklahoma court granted Legacy summary judgment against Canyon, finding that Legacy held "a first priority security interest in all of Canyon's accounts receivable" and that Legacy had "not waived its rights to enforce the Commercial Security Agreements in writing or otherwise." The Oklahoma court entered a final judgment in Legacy's favor on December 2, 2015. Appellees were not a party to the Oklahoma suit. After the jury trial, the trial court entered a final judgment awarding the interpleaded funds to Appellees and ordering Legacy to pay Appellees' attorney's fees.

Issue:

Did Legacy waive its right to recover its security interest over Fab Tech and Impulse Electric?

Answer:

No.

Conclusion:

Following principles of garnishment law, Appellees stepped into the shoes of Canyon by virtue of the garnishment and acquired no greater rights than Canyon would be able to assert or enforce against Legacy with respect to the continued existence of Legacy's security interest. Accordingly, Legacy's security interest in the collateral could not be waived under equitable principles or by operation of law by not being enforced prior to the garnishment. Instead, the Uniform Commercial Code afforded Legacy the opportunity to trace and recapture its prior perfected security interest in the garnished funds even though it did not exercise those rights prior to the garnishment. Legacy's security agreement contained a nonwaiver clause. By its express terms, the nonwaiver provision in the security agreement provided that no delay or omission by Legacy in exercising its rights under the security agreement operates as a waiver of its security agreement. Thus, the security agreement itself precluded an application of the waiver approach. Finally, there was no evidence that Legacy waived its security interest. There was no evidence that Legacy expressly waived its security interest under the security agreement in a writing executed by Legacy as required by the security agreement. Furthermore, there was no evidence that Legacy waived its security interest by implication because there was no evidence that Legacy did anything inconsistent with its security interest. There was also no evidence that Legacy engaged in conduct "unequivocally inconsistent with claiming a known right."