Principal-agent law tends to evoke some rather odd outcomes in many Texas lawsuits, even those that involve application of the holder-in-due course principle.
In First Natíl Acceptance Co. v. Bishop, 187 S.W.3d 710 (2006) (Tex.App.-Corpus Christi Feb. 9, 2006), Bishop sold her home to the Gonzalezes through a warranty deed with a vendor’s lien in return for a note from the Gonzalezes secured by a mortgage on the property. Bishop then sold the Gonzalez note and mortgage to ANI, which in turn assigned the note and mortgage to FNAC, which was ANI’s principal lender. In buying the Gonzalez note from Bishop, ANI did not disclose to Bishop its relationship with FNAC.
Alas, the risk of insolvency foiled Bishop’s plan to monetize the Gonzalez note. After Bishop transferred the note and mortgage to ANI and ANI had assigned the note and mortgage to FNAC, ANI apparently went bust while owing big bucks to FNAC and before paying funds to Bishop for the note and mortgage (key tip to noteholders — don’t give up possession of the note until you are paid for it). So, Bishop canceled the deal with ANI and demanded the return of the note and mortgage. Of course, FNAC contended that it was a holder-in-due course of the Gonzalez note and mortgage, and refused to return them to Bishop. Meanwhile, FNAC posted the home for foreclosure, which I’m sure surprised the Gonzalezes, who were continuing to pay the note without knowledge of all these behind-the-scenes machinations.
After Bishop and the Gonzalezes filed suit against ANI and FNAC, the trial court concluded that ANI was FNACís agent for the closing on the purchase of the Gonzalez note from Bishop. Thus, the trial court imputed to FNAC all of ANI’s knowledge regarding the closing of that purchase, including notice of ANI’s failure to pay Bishop for the note. As a result, the trial court held that FNAC’s holder-in-due course defense failed, that Bishop was the lawful owner of the note and mortgage, and that the transfer of the note and mortgage from ANI to FNAC was null and void. In the hyperlinked decision above, the appellate court agreed, concluding that sufficient evidence of a principal-agent relationship existed because FNAC had both the right to assign ANI’s task and the right to control the means and details by which ANI accomplished the task of acquiring and purchasing promissory notes.
From purely a commercial law standpoint, the decision is a bad one, although clearly the equities of the situation favored Bishop and the Gonzalezes. FNAC probably would have been better off cutting a deal at least with the Gonzalezes and saving this fight for another day, but the appellate decision is nevertheless a good indicator of how even thin evidence of a principal-agent relationship in Texas courts will trump hard-and-fast rules of commercial law when the equities favor doing so. Hat tip to Greg Duhl for the link to the decision.
an interesting in opinion in that not one word appears about how ANI was compensated. Was it buying the note at one price and selling it at another or was it a fee for service.
second, thankfully, the courts have come to understand that the true test is whether there was anything to the principal. as with title insurance, when the agent does it all (makes the underwriting decision, writes the commitment, closes, waives the conditions on the commitment, and issues the policy) there really is no function of the principal and a finding of agency naturally follows.
last, the FNAC is lucky the plaintiffs hadn’t read the AMPAT case from the 7th cir
As a law student, I think this was a great blog post: interesting area of law, interesting development, written by a thoughtful and experienced pratctitioner. As a Chronicle reader, I have no idea what those guys were thinking when they linked to it! Are they on some kind of a rotation, or in some other system where they just don’t read the material?
It’s probably been months since you wrote something of less general interest 🙂