Long v. Turner

United States Court of Appeals,

Fifth Circuit.

No. 96-11468.

James A. LONG, and wife; James A. King, and wife; Raymond King,
and wife; Jerry Pate Long, and wife; Homer L. Long, and wife;
Kelvin King, and wife; Truman Smith, and wife; Sam Fulton, and
wife; David Sweeney, and wife; Jimmy Sweeney, and wife; James
Sweeney; Bob Graves, and wife; John Ratliff, and wife; Dennis
Ratliff, and wife; J.P. Ratliff, and wife, Plaintiffs-Counter
Defendants-Appellees-Cross Appellants,

Gayle Long; Mary Ann King; Minnie Lee King; Susie Long; Ann
Long; Sharon King; Nadaiah Smith; Madge Fulton; Sue Sweeney;
Lynette Sweeney; Mariana Graves; Diana Ratliff; Toni Ratliff;
Mary Blanche Ratliff, Plaintiffs-Counter Defendants-Appellees,

v.

Kenneth T. TURNER, Individually, Defendant-Counter Claimant,

and

Firstrust Corporation, Defendant-Counter Claimant-Appellant-Cross
Appellee.

Feb. 6, 1998.

Appeals from the United States District Court for the Northern
District of Texas.

Before GARWOOD, DUHÉ and DeMOSS, Circuit Judges.

GARWOOD, Circuit Judge:

Plaintiffs-appellees Long, et al., (appellees) brought this

Texas law diversity action against defendant Kenneth Turner

(Turner), individually, and defendant-appellant Firstrust

Corporation (Firstrust) seeking a declaratory judgment, pursuant to

28 U.S.C. § 2201, that appellees had been released from liability

on a judgment by the Resolution Trust Corporation (RTC),

Firstrust's predecessor in interest as owner of the judgment.

Firstrust now appeals the district court's determination that the

1
debt had been released through the issuance of Internal Revenue

Service (IRS) forms 1099A and that Firstrust is not entitled to

attorneys' fees. Appellees cross-appeal the denial of their

attorneys' fees. Concluding that the district court misapplied

Texas law concerning the release of a debt, we reverse the

declaratory judgment, but affirm the court's decision denying

attorneys' fees to both parties.

Facts and Proceedings Below

The current dispute concerns the legal significance of IRS

forms 1099A that were issued by the RTC to appellees, who owed an

outstanding judgment, then owned by the RTC, on an unpaid loan that

they had guaranteed.

The fifteen male appellees guaranteed a loan from MeraBank,

Texas, FSB to I.G.P., Inc. in 1984. When the loan went unpaid,

MeraBank pursued the debt against the eighteen guarantors and the

borrower, I.G.P., and eventually obtained a judgment on August 23,

1990, for the principal of $113,000, plus attorneys' fees and

interest, against appellees jointly and severally.

Shortly thereafter, in 1991, MeraBank experienced financial

difficulties of its own, the immediate result of which was that the

Office of Thrift Supervision ordered a pass-through receivership

into a new entity (New MeraBank Texas, FSB) that was placed into

conservatorship with the RTC. As conservator, the RTC assumed

control over New MeraBank's assets, including the I.G.P. loan and

2
the outstanding judgment against appellees.1

In January 1992, while New MeraBank was in conservatorship, an

IRS form 1099A, entitled "Acquisition or Abandonment of Secured

Property," was issued by New MeraBank in its name to each appellee

(in respect to calendar year 1991) reflecting his pro rata share of

the outstanding judgment principal, excluding attorneys' fees and

interest.2 The district court found that the 1099s were issued "so

that the borrower/judgment debtor could report on his or her

[federal income] tax return the event of the forgiveness of the

indebtedness and the benefit conferred."3 Two months later, in

1
As a matter of convenience, we have referred to the RTC as
"owner" of the judgment. That is not technically correct. Since
the RTC was a conservator, rather than a receiver, it merely gained
control, not ownership, of New MeraBank's assets. The assets were
owned by New MeraBank, and thus the transactions at issue in this
case concerning former MeraBank assets were ordered by the RTC but
were ultimately executed by it in New MeraBank's name and on its
behalf.
2
The original judgment of $113,000 was rendered jointly and
severally against eighteen guarantors and I.G.P. It appears from
the record that only sixteen 1099A forms in the amount of $7062.50
each were issued (for a total of $113,000). Each of the male
appellees received one, and the sixteenth 1099A form was sent to a
guarantor who is not a party to the current litigation. The
"Description of Property" block on each form contains the words
"Promissory Note & Guaranty Agreement." There is no reference to
the judgment. The forms are unsigned.
3
The district court found that "[s]ome of the plaintiffs
reported income as a result of the 1099A on their 1991 [federal
income] tax form and some did not." This is the only finding made
as to any income tax payments or reporting by plaintiffs; no
finding is made as to any assessment by the IRS or any actual
liability to the IRS in regard to the subject matter of the 1099As
on the part of any individual plaintiff or plaintiffs collectively.
The only evidence of any income tax payments made (or reported or
assessed as owing) as a result of, or in relation to, the 1099As or
their subject matter, are payments of $1,059.39 each by plaintiffs
Dennis Ratliff and John Ratliff and $1,050 by plaintiff Truman
Smith. In its conclusions of law, the district court opined

3
March 1992, the "Asset Manager" of the RTC, in its capacity as

conservator of New MeraBank, made a request to write off the I.G.P.

promissory note.4 The write-off request was approved by the RTC

Managing Agent on March 17, 1992, and the loan file was transferred

to the RTC's Asset Recovery Division. On April 3, 1992, the New

MeraBank went into receivership, with the RTC acting as receiver.

On November 15, 1992, in its capacity as New MeraBank's

receiver, the RTC sold the outstanding August 23, 1990, judgment.

The RTC executed a "Quitclaim Assignment of Judgment," which

transferred the RTC's rights under the judgment against appellees

to Firstrust Corporation without recourse, representation, or

warranty.

Thereafter, much to the dismay of appellees, Firstrust

attempted to collect on the judgment and initiated a state court

garnishment action. Believing that the judgment debt had been

released by the RTC, as conservator of New MeraBank, appellees

"[w]hen the 1099s were issued, in addition to the indebtedness
being forgiven, each plaintiff recipient had a taxable event. They
became a recipient of income based upon a discharge of the
indebtedness from the judgment creditor.... Whether or not they
paid the IRS what they owed on their 1991 1040 is of a matter
between them and the IRS and is not before the Court." As we hold
that the issuance of the 1099s did not discharge plaintiffs'
liability on the judgment, it follows that they did not thereby
become "a recipient of income based upon a discharge of the
indebtedness from the judgment creditor."
4
In its request, the RTC noted, as "reasons for write off,"
that: I.G.P. and James Sweeney, a guarantor and appellee, were in
bankruptcy; another guarantor, Howard Watson III, had already been
discharged from bankruptcy; H.H. Adams, a guarantor, had passed
away and his estate had settled for $7,000; and the loan amount
was not big enough to warrant asset searches on the fifteen
remaining guarantors. The request asks for permission "to write
the loan balance to zero."

4
brought the instant action, seeking a declaration from the district

court that the debt had been discharged by the issuance to them of

the 1099A forms. Additionally, they also asserted claims of

wrongful garnishment, conversion, unreasonable collection efforts,

and negligence.

The case was tried to the court without a jury in July 1996.

The district court, in its Findings of Fact and Conclusions of Law,

ruled that the RTC, in its capacity as conservator of New MeraBank,

had entirely released appellees of the judgment debt through its

issuance to them of the 1099A forms, and, thus, that the judgment

which Firstrust had subsequently purchased from the RTC was no

longer enforceable against appellees. The court denied appellees'

other claims, found no liability as to Turner individually, and did

not award attorneys' fees to either party.

We reverse the district court's ruling as to the release of

the judgment debt through issuance of the 1099A forms, but affirm

the court's denial of attorneys' fees to both parties.5

Discussion

I. Enforceability of the Judgment

In this appeal, the primary issue we are asked to decide is

whether, under Texas law, a creditor releases a debt by issuing to

the debtor an IRS form 1099A in respect thereto and then writing

the debt off.

The district court found that "the issuance of the 1099A forms

5
No appeal has been taken from the district court's denial of
the other claims.

5
by the RTC evidenced their intent to forgive the debt ... and their

intent to write off the judgment debt." The court also found that

"the write-off of the judgment debt and the issuance of the 1099

forms was inconsistent with the further enforcement of the

judgment" and that "[t]he judgment debt was forgiven." In its

conclusions of law, the court determined that "the RTC released the

judgments when they issued the 1099 forms," "[t]he judgment

involved in this case is not subject to continued enforcement," and

"[t]he judgment being satisfied by the issuance of a 1099, that

event occurring before assignment of the judgment creditor (RTC),

the satisfaction thus bars the assignee (the defendant FirstTrust

Corporation) from enforcing the judgment." The court did not cite

any principle of Texas law that would lend credence to these

conclusions concerning release, satisfaction, or discharge of the

judgment debt. In its judgment, the district court declared "that

the Resolution Trust Corporation released judgments [sic] against

the Plaintiffs ... so that Defendants cannot now collect from

Plaintiffs on those judgments [sic]."

Even if the court was correct that the issuance of a 1099A

form is evidence of an intent in some sense to "forgive" the debt,

we find, as a matter of Texas law, that such an intent alone is

insufficient to release or discharge a debt.6 Furthermore, we hold

that a write-off of a debt on the creditor's books is an accounting

6
Because intent alone is insufficient, we need not reach the
issues of whether there was sufficient evidence that the RTC
intended to "forgive" the debt or whether the issuance of a 1099A
form reflects such an intent as matter of law.

6
practice that does not of itself amount to a discharge or release

of the debt.

A. Release or Discharge of Debt

It is well established in Texas that the mere communicated

intent to forgive, without some further action by the creditor or

debtor, cannot be the basis of a debt release or discharge. The

general principle is that without additional consideration, a

debtor's part-payment of a liquidated debt does not constitute an

accord and satisfaction, even if the creditor and debtor agree that

the debt is thereby discharged. See Jenkins v. Henry C. Beck Co.,

449 S.W.2d 454, 455 (Tex.1969) (setting out the requirements of

accord and satisfaction); Jeanes v. Hamby, 685 S.W.2d 695, 697

(Tex.App.—Dallas 1984, writ ref'd n.r.e) (holding that the payee of

a note who had obtained a judgment against guarantors did not

release the judgment by executing a release in exchange for a

part-payment of the judgment); Mathis v. Bill De La Garza &

Associates, 778 S.W.2d 105, 107 (Tex.App.—Texarkana 1989, no writ)

(holding that "the mere payment and acceptance of a sum of money

less than the amount of an undisputed indebtedness does not

constitute an accord and satisfaction.") (emphasis in original);

1 Tex.Jur.3d Accord and Satisfaction § 11 (1993).

While consideration is not necessary for a debt to be

discharged by gift from the creditor to the debtor, here appellees

did not claim below (in their final amended complaint or in the

pretrial order) that New MeraBank (or the RTC) had made any gift to

them, and the district court made no finding or conclusion that

7
there had been any gift. Nor would the evidence sustain any such

finding. "The person claiming that a gift was made must prove the

gift by clear and convincing evidence." Dorman v. Arnold, 932

S.W.2d 225, 227 (Tex.App.Texarkana, 1996, n.w.h.). "To constitute

a gift inter vivos there must not only be a donative intention, but

also a complete stripping of the donor of all dominion or control

over the thing given." Peterson v. Weiner, 71 S.W.2d 544, 546

(Tex.Civ.App.San Antonio, 1934, writ ref'd) (no gift of note or

debt represented thereby from holder to maker where former retains

note).7 Here there was plainly no "complete stripping" of New

MeraBank "of all dominion or control over" the judgment debt.

Although the 1099A forms do refer to "Promissory Note & Guaranty

Agreement," the promissory note and guaranty agreement on which the

judgment was based were retained by New MeraBank (until transferred

7
See also, e.g., Cogdill v. First National Bank of Quitaque,
193 S.W.2d 701, 702 (Tex.Civ.App.Amarillo 1946, n.w.h.) ("... to
establish a gift ... it is necessary to prove both the delivery of
the subject matter by the donor to the donee and the intention to
vest in the donee unconditionally and immediately the ownership of
the property delivered"); O'Donnell v. Halladay, 152 S.W.2d 847,
850-51 (Tex.Civ.App., El Paso 1941, ref'd w.o.m.) ("In order that
there be an effective gift ... there must be a delivery to or for
the benefit of the donee.... By "deliver' in this sense is meant
a surrender of possession of the property, or the symbol of the
property, to the donee, with the intention and purpose of then
vesting title in the donee"); Benavides v. Laredo National Bank,
91 S.W.2d 372, 374 (Tex.Civ.App.Eastland 1936, n.w.h.) (no gift
unless donor " "has divested himself absolutely and completely of
the title, dominion, and control of the subject of the gift' ");
Harmon v. Schmitz, 39 S.W.2d 587, 589 (Tex.Com.App.1931) (gift
requires that the donor have effected " "the irrevocable transfer
of the present title, dominion, and control of the thing given, so
that the donor can exercise no further act of dominion or control
over it' "; the required "delivery must be not only of possession,
but also of dominion and control' "; and " "the intention [to make
gift] must be effected by a complete and unconditional delivery'
").

8
to Firstrust) and were not destroyed, endorsed, or marked

"canceled," "released," "discharged" (or "paid"), or the like, and

no express transfer or release of the note or guaranty was ever

executed or delivered. The judgment is not mentioned in the 1099A

forms. No purported transfer (other than to Firstrust),

satisfaction, discharge, cancellation, or release of the judgment

has ever been executed or delivered or noted in the records of the

court entering the judgment or elsewhere.8

There is no evidence that appellees gave consideration in

exchange for a debt forgiveness, or that New MeraBank (or the RTC)

in any way divested itself of control or title to the note and

guaranty and outstanding judgment by issuing the 1099A forms and

writing off the debt. While the issuance of a 1099A form may

reflect an intent in some sense to forgive the debt, it does not on

its own have the legal effect of releasing or discharging the debt.

The fact that the New MeraBank subsequently "wrote off" the

debt on its books (a fact never communicated to appellees) is even

8
Moreover, New MeraBank's issuance of the 1099As—a wholly
unilateral, unsolicited act—does not of itself constitute the
"clear and convincing evidence" necessary to establish the donative
intent required for gift. There is no evidence of any relationship
between appellees and New MeraBank other than that of judgment
debtor-creditor on a business debt, and nothing suggests that
appellees were ever actual or potential customers of New MeraBank.
The 1099As may reflect New MeraBank's business decision not to
thereafter seek to collect any of the debt or deal with it as to
any extent potentially collectible or valuable. However, there is
no clear and convincing evidence that a purpose of issuing the
1099As was to thereby effect a transfer to appellees of title and
ownership of the debt, as opposed to merely complying with what was
thought to be required by IRS or RTC regulations; had more than
the latter been intended doubtless some more customary or formal
method of handling the matter would have been employed.

9
less significant than the 1099A forms. A write-off is merely an

accounting practice or convention for reducing to zero the value of

an asset as shown on a balance sheet. See A Dictionary of

Accounting 343 (R. Hussey ed., 1995) (defining "write-off"). A bad

debt that has been written off may still be recovered in the future

and written back on the books again. Id. at 39 (defining "bad debt

recovered"). Thus, writing off a bad debt merely reflects the

creditor's determination at the time that none of the debt is then

either collectible or has any likelihood of ever becoming so, or

that any collection expenses will likely exceed receipts, but it

does not constitute a legally effective discharge or release of the

indebtedness and it does not imply that the creditor intends to

thereby legally divest himself of ownership of the debt or to

legally preclude any further efforts to collect.

Since there was neither an accord and satisfaction nor a

completed gift, it would be anomalous for us to uphold the district

court's finding that the RTC released the debt without receiving

any payment or relinquishing title to or control over the note,

guaranty, or judgment. To hold otherwise would be a dramatic

departure from settled Texas law.

B. Estoppel

As they did below, appellees invoke the somewhat amorphous

doctrine of quasi-estoppel. This form of estoppel does not, at

least normally, require either misrepresentation by the party to be

estopped or detrimental reliance by the party invoking the

estoppel. See Stimpson v. Plano Indep. School Dist., 743 S.W.2d

10
944, 946 (Tex.App.—Dallas 1987, writ denied). Cf. Matter of

Davidson, 947 F.2d 1294, 1297 (5th Cir.1991) ("[a]lthough

detrimental reliance is not a necessary element of quasi-estoppel,

we find that the existence of detrimental reliance in this case is

an important factor" in determining to apply quasi-estoppel).

Appellees rely on general statements in Texas intermediate

appellate court opinions to the effect that quasi-estoppel "applies

when it would be unconscionable to allow a person to maintain a

position inconsistent with one in which he acquiesced, or of which

he accepted a benefit," Vessels v. Anschutz Corp., 823 S.W.2d 762,

765-66 (Tex.App.—Texarkana 1992, writ denied), or "precludes a

party from asserting, to another's disadvantage, a right

inconsistent with a position previously taken by him." El Paso

Nat. Bank v. S.W. Numismatic Inv. G., 548 S.W.2d 942, 948

(Tex.Civ.App.—El Paso 1977, n.w.h.). But these overly general

statements cannot be taken entirely literally, else every promise

or assertion made would be judicially enforceable even though

wholly unsupported by any consideration or reliance whatever and

even though no benefit to the promisor or assertor, nor detriment

to the other party, accrued by reason of the making of the promise

or assertion. Actually, quasi-estoppel was not applied in either

Vessels or El Paso Nat. Bank. Indeed, Vessels goes on to explain

that "one who retains benefits under a transaction cannot avoid its

obligations and is estopped to take an inconsistent position." Id.

at 766, citing Theriot v. Smith, 263 S.W.2d 181, 183

(Tex.Civ.App.—Waco 1953, writ dism'd) ("[o]ne who retains benefits

11
under a transaction cannot avoid its obligations, and is estopped

to take a position inconsistent therewith"). This seems to be more

a precise description of the core basis of equitable estoppel.

See, e.g., Atkinson Gas Co. v. Albrecht, 878 S.W.2d 236, 240

(Tex.App.—Corpus Christi 1994, writ denied) ("... quasi-estoppel

forbids a party from accepting the benefits of a transaction or

statute and then subsequently taking an inconsistent position to

avoid corresponding obligations or effects"); Mexico's Industries,

Inc. v. Banco Mexico Somex, 858 S.W.2d 577, 581 n. 7 (Tex.App.—El

Paso 1993, writ denied) (same); Matter of Davidson, 947 F.2d 1294,

1297 (5th Cir.1991) (same); Turcotte v. Trevino, 499 S.W.2d 705,

712 (Tex.Civ.App.—Corpus Christi 1973, n.r.e.) (by virtue of

estoppel "[w]here one having the right to accept or reject a

transaction takes and retains benefits thereunder, he ordinarily

... cannot avoid its obligation or effect by taking a position

inconsistent with it at a later time"). Here, there was never any

transaction between or involving appellees and New MeraBank and the

issuance of the 1099As was the entirely unilateral, unsolicited act

of New MeraBank for or in relation to which New MeraBank received

nothing from appellees (or anyone else). Indeed, there is no

finding or evidence that New MeraBank received any benefit whatever

from the issuance of the 1099As, either insofar as they may have

reflected some character of forgiveness of the debt or even insofar

as they may merely have reflected New MeraBank's determination that

the debt was worthless. Quasi-estoppel has been held inapplicable

where the conduct allegedly giving rise to the estoppel is not

12
shown to have benefited the party sought to be estopped. Stimpson

at 946. Indeed, even where some benefit has been received from the

opposite party, quasi-estoppel is not always applied. Atkinson Gas

Co. at 240. We hold that quasi-estoppel is inapplicable here.

All this is not to say that in analogous circumstances those

in a position generally similar to that of appellees would

necessarily be without any recourse. In such a situation,

equitable estoppel may likely afford relief, as may also a claim

for negligent misrepresentation, provided in each case that there

is a showing of, inter alia, detrimental reliance. See, e.g.,

Federal Land Bank v. Sloane, 825 S.W.2d 439, 442 (Tex.1991)

(negligent misrepresentation claim requires detrimental reliance);

Gulbenkian v. Penn, 151 Tex. 412, 252 S.W.2d 929, 932 (1952)

(equitable estoppel requires detrimental reliance). Here, however,

there is no evidence or finding of any detrimental reliance

whatever by any of the appellees other than Dennis Ratliff, John

Ratliff, and Truman Smith (see note 3, supra). Hence, none of the

appellees other than these three is entitled to any relief

whatever. Appellant at oral argument advised that it had no

objection to awarding Dennis Ratliff, John Ratliff, and Truman

Smith a credit on their liability on the August 1990 judgment to

the extent of the federal income taxes they paid in reliance on the

1099As ($1,059.39 each for Dennis Ratliff and John Ratliff and

$1,050 for Truman Smith), and we thus hold those three appellees

are entitled to such a credit. Because this is the extent of the

detriment shown to be suffered by each of these three, none is

13
entitled to any further relief or to complete cancellation of the

indebtedness. See, e.g., Sloane at 443 (negligent

misrepresentation damages limited to reliance damages); Sun Oil

Co. v. Madeley, 626 S.W.2d 726, 734 (Tex.1981) ("The damages

recoverable by a party claiming estoppel ... are limited to the

amount necessary to compensate that party for a loss already

suffered"); Keado v. United States, 853 F.2d 1209, 1218 (5th

Cir.1988) ("Recovery under an estoppel theory is limited to the

amount necessary to compensate for the loss suffered" and " "One

recovering under promissory estoppel should not ... experience a

windfall' ").

II. Attorneys' Fees

Appellant and appellees (by cross-appeal) each complain of the

district court's denial of their respective requests for an award

of attorneys' fees. We reject all these contentions, concluding

that neither appellant nor appellees have demonstrated reversible

error in the district court's rulings in this respect.

Conclusion

We conclude that the district court erred by granting any

relief to appellees other than Dennis Ratliff, John Ratliff, and

Truman Smith, and that as to said three appellees no relief should

be awarded other than a credit on their liability on the principal

amount of the August 1990 judgment in the amount of $1,059.39 each

for Dennis Ratliff and John Ratliff and $1,050 for Truman Smith

(said credit in each case to be as of the date each of said parties

respectively paid said amounts to the IRS in respect to the 1099As

14
issued them by New MeraBank).

Accordingly, the judgment of the district court is affirmed in

part and reversed in part, and the cause is remanded for entry of

judgment in conformity herewith.

AFFIRMED in part; REVERSED in part; CAUSE REMANDED with

instructions.

15