Background and Procedural History

First National Bank of Weatherford brought suit against a partnership and its partners—Leon Christian, Earl Ellis, C.W. Webb, and Calvin Reynolds—seeking a deficiency judgment on three promissory notes. The Bank had repossessed collateral and sold it at private sale before filing suit. The District Court of Parker County rendered judgment in favor of the Bank after directing a verdict, and the defendants appealed.

The Limitations Defense Dispute

The central procedural issue arose when defendants filed their second amended original answer asserting various offsets, credits, and counterclaims challenging the Bank's handling of the collateral sale and application of payments. The trial court directed a verdict for the Bank, concluding that the defensive pleadings and Christian's cross-action were barred by the statute of limitations. The defendants appealed, arguing the Bank had waived any limitations defense by failing to affirmatively plead it.

The Court of Civil Appeals agreed with the defendants on this critical procedural point. Applying Texas Rules of Civil Procedure 65 and 94, the court held that

where plaintiff bank seeking to recover deficiency judgment on promissory notes failed to affirmatively plead statute of limitations as defense to defensive pleadings set out in defendants' second amended original answer, statute of limitations was not available to bank.

where there are mutual debts held by respective parties, and defendant's debt is not barred by limitations at time plaintiff's suit is instituted, defendant may oppose his debt as offset to plaintiff's demand, even though it might be barred as basis of independent suit at time answer was filed.

The court held that defenses of offsets, credits, and payments were not barred by the statute of limitations to the extent that such defenses did not exceed the amount of debt to the Bank, notwithstanding the fact that such defenses would have been barred at the time the answer specifically pleading such defenses was filed.

Commercial Reasonableness and Fiduciary Duty

Beyond the limitations issues, the court addressed the substantive question of whether defendants could challenge the commercial reasonableness of the Bank's private sale of repossessed collateral. The court found that evidence of the commercial reasonableness of the Bank's private selling of property repossessed from defendants was sufficient for a jury to consider. The court also found that evidence of misapplication by the Bank of certain of the defendants' funds was sufficient for jury consideration.

The court held that defendants were not prohibited from raising the issue that collateral repossessed by the Bank was not sold in a commercially reasonable manner. Additionally, the court held that the Bank's cross-action regarding alleged wrongful repossession of property belonging to third parties was governed by rules of law applicable to conversion, and the statute of limitations was not a bar to such alleged wrongful repossession when pleaded and proved as a defense to the Bank's cause of action.

Disposition

The Court of Civil Appeals affirmed the judgment in part and reversed and remanded in part, finding that the trial court erred in directing a verdict on the limitations issues and that fact questions existed regarding the commercial reasonableness of the sale and misapplication of funds.