Texas Case Update – UCC Financing Statements Protected Free Speech Under the Texas Citizens Participation Act

Texas Case Update – UCC Financing Statements Protected Free Speech Under the Texas Citizens Participation Act

by Erick Escamilla

In Quintanilla v. West, No. 04-16-00533-CV, 2017 WL 1684832 (Tex. App. – San Antonio Apr. 26, 2017, no pet. hist.), apparently a case of first impression in Texas, the San Antonio Court of Appeals held that a creditor exercised his right to free speech when he filed UCC financing statements in the public records to perfect a security interest in assets pledged as collateral, and the statements were therefore protected activity under the Texas Citizens Participation Act (“TCPA”), Tex. Civ. Prac. & Rem. Code §27.001 et seq.

The basic facts were undisputed. Plaintiff-borrower West served as president and CEO of several businesses that defendant-creditor Quintanilla owned in whole or part. The suit arose out of a dispute involving oil and gas commodity trading accounts that West managed for Quintanilla. West conducted trades on the accounts and Quintanilla provided capital investment. The parties first entered into a commodity trading agreement (the “CTA”) making West liable to Quintanilla for 50% of any losses, while obligating Quintanilla to pay West 50% of any profits. To effectuate the CTA, they also entered into a promissory note and security agreement, under which all losses that West incurred in the accounts were automatically deemed borrowed, the note was automatically in default if its balance exceeded $5 Million, and Quintanilla was granted the right to perfect a security interest in the assets that West pledged.

Due partly to falling oil prices in 2014, the trading accounts incurred heavy losses, resulting in the parties subsequently entering into an asset purchase agreement (the “Purchase Agreement”), under which West conveyed various assets and equipment in exchange for Quintanilla’s payment of certain of West’s debts. The gravamen of the dispute underlying the suit was whether the Purchase Agreement included the debt that West owed under the note.

West was terminated from all Quintanilla businesses in January 2016. Feeling that litigation with West was imminent, Quintanilla filed a UCC-1 financing statement with the Texas Secretary of State, and a memorandum of the security agreement (collectively, “Financing Statements”) in the county real property records, to perfect his security interest in West’s pledged accounts.

West then sued for a declaratory judgment that the Purchase Agreement satisfied his debt obligations, and, alleging that Quintanilla made false or fraudulent statements by filing the Financing Statements, brought claims against Quintanilla for slander of title and fraudulent liens. Quintanilla moved to dismiss those claims under the TCPA, asserting that they were improper retaliation for exercise of his rights to free speech and to petition in violation of the TCPA. The trial court denied the motion, holding that while Quintanilla met his burden to show that the claims were within the TCPA’s scope, West established a prima facie case on each element of his claims and Quintanilla failed to establish his defenses by a preponderance of the evidence.

The Court of Appeals agreed that the TCPA applied to West’s claims, but reversed on finding West failed to establish a prima facie case. Regarding TCPA applicability to the Financing Statements, the Court of Appeals, reviewing the evidence and noting that the statute defines free speech as “a communication made in connection with a matter of public concern” and that the parties agreed that the Financing Statements constituted “communications” as defined in the statute, found that because the filings provided notice to the public of an encumbrance on West’s mineral interests offered for sale in the public marketplace, and were made “in connection with … issues related to” real property offered for sale in the public marketplace, they therefore related to a “matter of public concern” under the statute. Accordingly, the Court of Appeals specifically held that Quintanilla’s filing of the Financing Statements constituted the exercise of his right to free speech under the statute, and that they were “protected activity” within the TCPA. Additionally, in the “interest of completeness,” the Court of Appeals further addressed whether the filing of the Financing Statements fell within the scope of the TCPA’s right to petition. Noting that the statute defines the exercise of the right to petition as a “communication in or pertaining to … a judicial proceeding”, the Court of Appeals determined that, while there was no suit pending at the time Quintanilla filed the Statements, because he had presented evidence that he filed the statements in anticipation of imminent litigation with West over the debt, they were made in exercise of his right to petition under the TCPA.

No information in this article is intended to constitute legal advice.  For specific legal advice, please contact an attorney.

If you have questions about the UCC or Protected Free Speech Under the Texas Citizens Participation Act, please contact Rupert F. Barron at rbarron@hirschwest.com or 713.220.9172.