Case Name: STARCRAFT COMPANY, A DIVISION OF BANGOR PUNTA OPERATIONS, INC., Plaintiff and Third Party Plaintiff-Appellee, v. C.J. HECK COMPANY OF TEXAS, INC., Robert A. Johnson and Carol H. Johnson, Defendants-Appellees, v. TEMPLE NATIONAL BANK, Third Party Defendant-Appellant
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1984-12-17
Citations: 748 F.2d 982
Docket Number: No. 83-1712
Parties: STARCRAFT COMPANY, A DIVISION OF BANGOR PUNTA OPERATIONS, INC., Plaintiff and Third Party Plaintiff-Appellee, v. C.J. HECK COMPANY OF TEXAS, INC., Robert A. Johnson and Carol H. Johnson, Defendants-Appellees, v. TEMPLE NATIONAL BANK, Third Party Defendant-Appellant.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 748
Pages: 982–996

Head Matter:
STARCRAFT COMPANY, A DIVISION OF BANGOR PUNTA OPERATIONS, INC., Plaintiff and Third Party Plaintiff-Appellee, v. C.J. HECK COMPANY OF TEXAS, INC., Robert A. Johnson and Carol H. Johnson, Defendants-Appellees, v. TEMPLE NATIONAL BANK, Third Party Defendant-Appellant.
No. 83-1712.
United States Court of Appeals, Fifth Circuit.
Dec. 17, 1984.
Rehearing and Rehearing En Bane Denied Jan. 23, 1985.
Timbers, Senior Circuit Judge, sitting by designation, filed dissenting opinion.
Beard •& Kultgen, Pat Beard, David B. Kultgen, Waco, Tex., for third-party defendant-appellant.
Clark, Thomas, Winters & Shapiro, Barry Bishop, Michael R. Klatt, Austin, Tex., for Starcraft Co.
Fletcher F. Rhodes, Temple, Tex., for C.J. Heck, Johnson and Johnson.
Before TIMBERS, POLITZ and RANDALL, Circuit Judges.
Senior Circuit Judge of the Second Circuit, sitting by designation.

Opinion:
RANDALL, Circuit Judge:
In this diversity action, we are called upon to decide whether a drawee bank who has missed the midnight deadline, and is therefore accountable to the payee for the amount of the item under Tex.Bus. & Com.Code Ann. [U.C.C.] § 4.302(1), is liable to the payee when (1) the drawee bank, as a result of an unappealed judgment, has a right of charge back against the maker; and (2) the maker had previously discharged the underlying debt. We hold as a matter of Texas law that the drawee bank, although absolutely liable under § 4.302(1), is equitably subrogated to the maker's right to restitution against the payee for double recovery on a single debt and that the resulting circularity of obligations has the effect of extinguishing the payee's statutory claim against the drawee bank. We, therefore, reverse the judgment of the trial court and remand with instructions that judgment be entered for the drawee bank.
I. Factual and Procedural Background.
Appellees Robert A. Johnson and Carol B. Johnson (the Johnsons) were officers and the sole shareholders of C.J. Heck Company of Texas, Inc. (Heck). Heck was a distributor of recreational vehicles manufactured by appellee Starcraft Company (Starcraft). On or about April 28, 1978, Heck delivered to Starcraft a check, drawn on Heck's account at appellant Temple National Bank (the Bank), to be applied against Heck's open merchandise account with Starcraft. Starcraft deposited the check for collection. It was received for payment by the Bank on May 8, 1978. As a result of disagreements between Heck and Starcraft and at the request of Heck, the Bank stopped payment on the check on May 10, 1978. The Bank, however, failed to return the check to Starcraft by the "midnight deadline," as required by the Texas version of Uniform Commercial Code § 4-302(1), which makes a bank accountable to the payee for the amount of a demand item not acted upon in a timely manner.
On January 31, 1979, Starcraft commenced the instant action in the District Court for the Western District of Texas. Shortly before the trial began on March 23, 1982, the pleadings had emerged so that the following claims were asserted. Star-craft asserted claims, first, against Heck on the debt owed for goods furnished; second, against the Johnsons on a guaranty of Heck's debts; and, third, against the Bank for failure to return to Starcraft the unpaid Heck check by the midnight deadline. The Bank asserted a claim against Heck and the Johnsons for any amount which the Bank might be required to pay Starcraft. Heck and the Johnsons asserted a claim against Starcraft, alleging various wrongs, including breach of warranty, usurious interest, wrongful termination of dealership, and slander. Before the trial began, Star-craft, Heck, and the Johnsons entered into a Stipulation of Partial Dismissal (hereinafter, the "Mutual Release"), pursuant to which these parties mutually released one another of all claims. The Mutual Release acknowledged that the Bank was not a party thereto and that the Mutual Release would not affect any claim asserted by or against the Bank.
Before the trial began, the court instructed the Bank that it was not to present evidence regarding the values given and received by the parties to the Mutual Release. The court refused to submit to the jury special interrogatories regarding the Mutual Release as requested by the Bank.
Also before trial, the parties stipulated that in 1975 the Johnsons had executed and delivered to the Bank a guaranty agreement pursuant to which the Johnsons guaranteed all of Heck's debts to the Bank. In 1979, the Bank returned to the Johnsons the guaranty agreement, evidently operating under the assumption that all debts of Heck to the Bank had been paid. This redelivery took place after payment had been stopped on the Starcraft check on May 10, 1978.
In response to a special interrogatory, the jury found that the Bank did not return the check before the midnight deadline. On September 15, 1983, the court entered judgment in favor of Starcraft on its claim against the Bank in the amount of $158,-392.15, plus interest, and in favor of the Bank against its customer Heck as a right of charge back in the same amount. The court denied recovery to the Bank on its claim against the Johnsons, stating that the Bank "presented no material evidence and did not request submission of any issues as to relief against [the Johnsons]." The Bank appeals from those portions of the judgment stated above. Heck, presently insolvent although apparently not a party to a bankruptcy proceeding, is not a party to this appeal.
II. Accountability under the Statute.
The Bank contends on appeal that, while Tex.Bus. & Com.Code Ann. § 4.302 imposes a direct obligation on the Bank for missing the statutory midnight deadline, that obligation was discharged by Starcraft's acceptance of the Mutual Release. Section 4.302(1) states:
In the absence of a valid defense such as breach of a presentment warranty (Subsection (a) of Section 4.207), settlement effected or the like, if an item is presented on and received by a payor bank the bank is accountable for the amount of
(1) a demand item other than a documentary draft whether properly payable or not if the bank, in any case where it is not also the depositary bank, retains the item beyond midnight of the banking day of receipt without settling for it or, regardless of whether it is also the ' depositary bank, does not pay or return the item or send notice of dishonor until after its midnight deadline.
This section serves several purposes. First, the provision ensures that the payor or drawee bank will not deliberately act to protect the maker's credit rating to the detriment of the payee. Pecos County State Bank v. El Paso Livestock Auction Co., 586 S.W.2d 183,186 (Tex.Civ.App.1979, writ ref'd n.r.e.); see also Western Air & Refrigeration, Inc. v. Metro Bank, 599 F.2d 83, 90 n. 8 (5th Cir.1979). Second, the section speeds up the collection of checks through the banking system. Id.; see also Chrysler Credit Corp. v. First National Bank & Trust Co., 582 F.Supp. 1436, 1438 (W.D.Penn.1984). Third, the provision, as part of a strict set of rules relied upon by depositary banks to know when a check has been accepted or dishonored, injects certainty into the check collection process. Bank Leumi Trust Co. v. Bank of Mid-Jersey, 499 F.Supp. 1022, 1026 (D.N.J. 1980), aff'd, 659 F.2d 1065 (3d Cir.1981). To effectuate these policies, the Texas courts, along with the majority of jurisdictions across the country, have construed § 4.302 as a strict liability provision. Pecos County State Bank, supra, at 186; Continental National Bank v. Sanders, 581 S.W.2d 293, 295 (Tex.Civ.App.1979, no writ); New Ulm State Bank v. Brown, 558 S.W.2d 20, 25 (Tex.Civ.App.1979, no writ); see generally Annot., 22 A.L.R.4th 10 (1983). In New Ulm State Bank, the Texas court further held that the drawee bank's accountability under the section does not depend upon a showing that the underlying instrument is enforceable:
[The bank's] liability for the late return of an item resulted from the responsibilities imposed upon it under the statute, and a recovery based upon its failure to perform its statutory duty was not dependent upon a showing that the instrument was enforceable against it. 2 Bender, Uniform Commercial Code Service, 7-31, § 7.15(2).
New Ulm State Bank, supra, at 25; see also Northwestern National Insurance Co. v. Midland National Bank, 96 Wis.2d 155, 165, 292 N.W.2d 591, 597 (1980) (liability under the section "is not premised on the instrument itself").
Notwithstanding the above stated principles, however, it is clear that the drawee bank's liability must have some connection with the underlying debt. Section 4.302 does not impose, for example, a fine on the drawee bank for violating the statute. Rather, for failing to act before the midnight deadline, the drawee bank is required to pay the debt evidenced by the check. Indeed, only because the bank is held liable for the actual debt is the bank justly entitled to recover the funds from the original maker. If the bank's payment of the face amount of the check were merely to constitute satisfaction of a fine, the payee would be able to recover an identical amount from the maker. This result surely was not intended by the drafters of the U.C.C. or the Texas legislature when it enacted the statute.
The language of § 4.302 supports this interpretation. Section 4.302 states that the bank will be held "accountable" for the amount of the demand item if the bank misses its midnight deadline. While the Texas courts in other factual contexts have interpreted the statutory term "accountable" to mean merely "liable," the phrase in this context has additional connotations. "Accountable" implies a preexisting object. A person who is accountable is answerable for property (including a debt) that predates the accounting. While a person can be liable for a fine, he can be accountable only for property. See Met Frozen Food Corp. v. National Bank, 89 Misc.2d 1033, 393 N.Y.S.2d 643 (1977) ("A person accounts for property that is not his own."). Thus, because under § 4.302 the Bank is strictly "accountable" for the amount of the check as a result of missing the midnight deadline, the effect of payment by the Bank would be to honor a check drawn by Heck to satisfy a debt that has already been released.
This characterization of the obligation imposed by § 4.302 is also consistent with Texas cases such as New Ulm State Bank, supra. As noted above, the court in that case held that, to maintain an action under § 4.302 against a drawee bank, a payee did not have to show that the underlying instrument was enforceable. Id. at 25; see also Templeton v. First National Bank, 47 Ill.App.3d 443, 5 Ill.Dec. 720, 724, 362 N.E.2d 33, 37 (1977) (ruling that the maker's counterclaims against the plaintiff were "totally irrelevant to plaintiff's action against the bank"). This holding, however, indicates only that the bank's liability derives from the violation of the statute and not from the debt or duties of the debtor. The court in New Ulm State Bank did not regard the nature of the liability imposed by the section as that of a fine. While a bank that misses the midnight deadline is, under the statute, primarily and not secondarily accountable, that accountability is for the item itself. Thus, by satisfying its statutorily imposed liability, the bank would discharge the debt represented by the check.
III. The Equitable Rights of the Maker.
As noted above, Heck's indebtedness to Starcraft has already been released. Because Heck, pursuant to the unappealed judgment of the district court, is liable to the Bank for its payment of the check's amount to Starcraft, Heck is effectively being required to discharge its debt twice, with the Bank itself, at least theoretically, not having to suffer a loss. Heck, therefore, should have a counterclaim against Starcraft for the amount of the check based upon firmly established principles of restitution. Indeed, as Professor Palmer has stated, restitution "usually is granted almost as a matter of course" when a debt is satisfied a second time. III G. Palmer, Law of Restitution § 14.8, at 174 (1978). Although the second payment to the creditor usually results from mistake of law or fact, the essential question is whether there is "the unjust retention of benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience. A right of recovery under unjust enrichment is essentially equitable and does not depend upon the existence of a wrong." Fun Time Centers, Inc. v. Continental National Bank, 517 S.W.2d 877, 884 (Tex. Civ.App.1974, writ ref'd n.r.e.). Lack of mistake should not preclude recovery by Heck since Starcraft, after receiving consideration for the release, was in no way entitled to recover a second time for the same debt. Heck's payment to Starcraft by way of the Bank as middleman would clearly result in Starcraft's unjust enrichment.
The Texas Supreme Court has recently had opportunity to consider whether a claim for restitution would still be cognizable under state law. The court concluded that "a common law right to restitution still exists." Bryan v. Citizens Bank, 628 S.W.2d 761, 769 (Tex.1982). In Bryan, the maker of a check ordered the bank to stop payment on a cheek given to the payee. The bank nonetheless honored the check and paid the payee its face value. The bank then brought suit against the payee for restitution. The Supreme Court of Texas held that Tex.Bus. & Com.Code Ann. [U.C.C.] § 4.407, which allows the bank to be subrogated to the rights of the payee against the maker in such a situation, does not supplant the common law right to restitution under § 1.103. The court, however, held further that the purpose of restitution "is to prevent unconscionable loss to the party paying out the funds and unjust enrichment to the party receiving the payment." Because the bank had failed to show that it was precluded from recovering the funds through use of the § 4.407 remedy, unconscionable loss had not been demonstrated. The bank, therefore, was not entitled to restitution.
In the instant ease, as a result of the Bank's accountability under § 4.302 and the unappealed judgment against Heck for charge back, Heck will bear ultimate responsibility for the payments to Starcraft, which will enjoy payment for a debt already discharged. The Texas version of the Uniform Commercial Code, unlike in Bryan, provides Heck with no remedy with which to avoid its potential loss. Thus, under the principle of restitution announced in Bryan, Heck is entitled to restitution for its "unconscionable loss" and Starcraffs unjust enrichment. See also Capital National Bank v. Wooten, 369 S.W.2d 475, 477 (Tex.Civ.App.1963, writ dism'd) ("Restitution should be made unless some inexorable rule of law intervenes.").
IV. Circularity of Obligations.
Thus, Starcraft is entitled to recover the amount of the check from the Bank who is entitled to the same amount from Heck. Heck in turn is entitled to reclaim its payment from Starcraft based upon principles of restitution. Texas courts have characterized such a series of claims as a "useless circuity of action." Phillips Pipe Line Co. v. McKown, 580 S.W.2d 435, 440 (Tex.Civ.App.1979, writ ref'd n.r.e.); Panhandle Gravel Co. v. Wilson, 248 S.W.2d 779, 785 (Tex.Civ.App.1952, no writ). In these cases, the Texas courts have held that, when a circular pattern of indemnity develops, the plaintiff's cause of action is extinguished. Phillips Pipe Line Co., supra, at 443; Panhandle Gravel Co., supra, at 784-85. See also Moore v. Southwestern Elec. Power, 737 F.2d 496, 501 (5th Cir.1984) (finding plaintiff's action extinguished under Texas law as a result of a circular pattern of indemnity). Because Starcraffs claim against the Bank likewise triggers a "circuity of action," we hold that Starcraffs claim is deemed extinguished.
V. Equitable Subrogation.
Heck, probably because its insolvency renders the issue academic, at least as to itself, did not assert its equities or the defense of circuity of action in dis trict court and is presently not a party to this appeal. Starcraft argues that, since the Bank has no claim for restitution and is not a party to the Mutual Release, the Bank is not entitled to assert discharge of the debt as a defense to liability under § 4.302. As noted above, § 4.302 is a strict liability provision under which the drawee bank is accountable for the item regardless of the item's enforceability. Under these principles, therefore, the Bank is certainly not entitled to assert the defense of circuity of action in its own right.' The Bank, however, claims that, under the particular and in some ways peculiar factual circumstances presented here, it is entitled to rely on Heck's equities and defenses. Applying Texas principles of equitable subrogation, we find for the reasons set forth below that the Bank in this case is entitled to assert Heck's equities and defenses to extinguish Starcraft's claim.
Equitable subrogation is "the substitur tion of one person in the place of another . so that he who is substituted succeeds to the rights of the other in relation to the debt or claim." 53 Tex.Jur.2d Subrogation § 1. Subrogation, an equitable remedy, can be characterized as "the purest of equities." Yonack v. Interstate Sec. Co., 217 F.2d 649, 651 (5th Cir.1955). In Yonack, we observed that "[t]he courts of Texas have been peculiarly hospitable to the right of subrogation and have been in the forefront in upholding the right to it." Id. See generally McBroome-Bennett Plumbing, Inc. v. Villa France, Inc., 515 S.W.2d 32, 36 (Tex.Civ.App.1974, writ ref'd n.r.e.).
In determining the applicability of the doctrine of subrogation, Texas courts have stated: "Equitable subrogation may be invoked to prevent unjust enrichment when one person confers upon another a benefit that is not required by legal duty or contract. A right to subrogation is often asserted by one who pays a debt owed by another." Smart v. Tower Land & Inv. Co., 597 S.W.2d 333, 337 (Tex.1980). Con-cededly, the Bank has a legal duty to pay Stareraft the amount of Heck's check. In this case, however, the mere existence of a legal duty does not by itself prevent Star-craft from being unjustly enriched, because, as discussed earlier, the purpose of the duty is not the payment of the debt but the primary accountability of the bank in order to ensure the quick process of checks through the system. Indeed, the fact that a bank under § 4.302 may not even assert in its own defense the unenforceability of the item is evidence that the actual payment of the debt is almost a collateral consequence of the accounting. Moreover, the mere existence of a legal duty cannot be regarded as a per se bar against the recovery of restitution in light of the Texas courts' pronouncement that equitable sub-rogation is not to be applied according to rigid rules of application but that, "where purely equitable subrogation is an issue, each case must be controlled by its own facts." Reliable Life Ins. Co. v. Brown & Root, Inc., 607 S.W.2d 621, 630-31 (Tex. Civ.App.1980, writ ref'd n.r.e.); see also McBroome-Bennett Plumbing, Inc., supra, at 36 ("doctrine of subrogation is always given a liberal interpretation and is broad enough to include every instance in which one person . has paid a debt for which another was primarily liable and which in equity and good conscience should have been discharged by the latter").
By paying the amount of the check, the Bank would unjustly enrich Stareraft for a debt that has already been discharged. Further, since the Bank is entitled to recover back from Heck the amount for which the Bank is liable to Stareraft, and since the insolvency of Heck has resulted in its failure to defend itself against its own liability, additional equities favor permitting the Bank to stand in the shoes of Heck and assert Heck's defense to extinguish Star-craft's claim. We therefore hold that the Bank is equitably subrogated to Heck's equities and defenses, thus making the action circuitous and extinguishing Star-craft's claim.
We note, finally, that only rarely will the equities permit the application of equitable subrogation in a case governed by § 4.302. The mere fact that a check is unenforceable, for example, would be insufficient to justify permitting a bank to evade its statutory accountability. We base the application of equitable subrogation in this case on the policy permeating Texas law against unjust enrichment resulting from the double discharge of a debt and on the drawee's own inability to assert its equitable defense that would extinguish the payee's claim. Absent the existence of these or other compelling equities, a drawee bank under current Texas law will not be deemed the equitable subrogee of the maker on the ground that the maker has a valid defense to the debt evidenced by the check. See generally Annot., supra.
VI. Conclusion.
In sum, we hold that, because the underlying debt between Heck and Starcraft has already been discharged and Heck is liable in an unappealed judgment for the amount to be paid by the Bank, the Bank, although strictly accountable under § 4.302, is equitably subrogated as a matter of Texas law to the right of Heck to restitution from Starcraft. This makes Starcraft's action circuitous, which under Texas law extinguishes Starcraft's claim. We therefore reverse the judgment of the district court and remand for judgment in favor of the Bank.
REVERSED and REMANDED.
. The Mutual Release provided in pertinent part:
This Mutual Release and Settlement Agreement, by and between Starcraft Company, a division of Bangor Punta Corporation, and C.J. Heck Company of Texas, Inc., Robert A. Johnson and Carol H. Johnson, provides as follows:
. The parties to this agreement have agreed to compromise and settle all claims as between them, the condition of such settlement being that Starcraft Company releases and waives all claims it may have or could assert against C.J. Heck Company of Texas, Inc., Robert A. Johnson and Carol H. Johnson; and C.J. Heck Company of Texas, Inc., Robert A. Johnson and Carol H. Johnson release and waive all claims they may have or could assert against Starcraft Company. Accordingly, in consideration of the mutual covenants set forth herein, the parties hereby mutually release, discharge and acquit one another of any and all claims, demands and causes of action, whether or not asserted in the above-referenced litigation, and whether known or unknown. The parties shall pay their own costs of court. It is acknowledged and understood that Temple National Bank is not a party to this agreement, and this agreement shall not affect any claims asserted by or against Temple National Bank by the parties hereto.
. The court did receive in evidence the stipulation which notified the court of the Mutual Release. The stipulation did not contain information regarding the value of the claims.
. In this opinion we use the term "special interrogatories" as provided for in Fed.R.Civ.P. 49, although the term "special issues" appears in the instant record.
. It is undisputed that § 4.302(1) applies in this case. Heck's check is clearly a "demand item other than a documentary draft," see Tex.Bus. & Com.Code Ann. § 4.104, and the Bank is a "payor bank" under the section. Tex.Bus. & Com. Code Ann. § 4.105.
. We therefore agree with the dissent that "§ 4-302 does not refer to, nor does it assume, the existence of a debt." By violating the statutory provision, a bank becomes primarily liable for the full amount of the check, regardless of the obligatory nature of the maker's attempted transfer to the payee. We merely hold here that this liability is not in all regards independent of the debt, should one exist. Rather, an ancillary consequence of satisfying § 4.302 liability in such a context is the payment of the debt. If this were not so, the bank would have no right of charge back against the payee.
. Starcraft, joined by the dissent, asserts on appeal that the Mutual Release constituted only a release and not an accord and satisfaction. Starcraft points out that Texas courts hold that a release is simply the surrender of a claim against an individual defendant, while an accord and satisfaction constitutes full compensation for the injuries. See Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 422 (Tex.1984); Rexroat v. Prescott, 570 S.W.2d 457, 459 (Tex.Civ.App.1978, writ ref'd n.r.e.). Thus, Starcraft and the dissent argue, the Mutual Release did not have the effect of paying Starcraft the money owed and does not protect Heck from the Bank's claim for charge back. See Knutson v. Morton Foods, Inc., 603 S.W.2d 805 (Tex.1980). We reject this argument for two reasons. First, in Knutson, the Texas Supreme Court, in holding that the release of an employee does not bar an action against the employer on the ground of respondeat superior, suggested that, if the employer subsequently obtained indemnification from the employee, the employee would be entitled to recover the money it paid to the claimant in consideration for the release. Id. at 807. The ability of the employee to receive restitution indicates that a release has a direct effect on the debt underlying the claim, at least in regard to that tortfeasor. If a release were completely separate from the underlying debt, the consideration paid for the release could not go to compensate the claimant for his substantive claims. The employee, once having indemnified the employer, would have no recourse against the claimant in unjust enrichment since the claimant would have been paid once for the release and once for his claim, with no overlap between the two.
Second, the distinction drawn by Starcraft between a release and an accord and satisfaction simply is not pertinent to the instant case dealing with liability under § 4.302. We do not hold here that the Mutual Release extinguished Starcraft's claim against the Bank under § 4.302. We merely hold that the Mutual Release ended Starcraft's claim against Heck. As noted above, the Bank's liability under § 4.302 in no way is dependent upon or derived from the enforceability of the underlying instrument; rather, it is premised on the violation of the statute. See New Ulm State Bank, supra. Thus, the termination of the claim, whether by release or an accord and satisfaction, has absolutely no effect on the narrow issue of the Bank's accountability under § 4.302. It does, however, serve as the basis of a claim for restitution since, by being obligated to indemnify the Bank for its payment to Starcraft, Heck is indirectly being required to satisfy a debt that has already been released.
. Heck's claim for restitution against Starcraft would not be subject to the Mutual Release since the claim would have accrued after the parties entered into the release. Although the release discharged all claims whether known or unknown, it did not purport to release claims that might arise in the future. See supra note 1.
. The dissent argues that Starcraft entered into the Mutual Release merely to save "the time, trouble and expense of litigating against parties who were judgment proof" and never did recover any payment for the debt itself. We addressed this argument supra note 6. We pause here merely to note that Starcraft could have saved itself "the time, trouble and expense of litigating" against Heck and the Johnsons by simply not suing them. The dissent's characterization of the contract ignores both that the Bank's liability was primary and the mutuality of the release.
. Tex.Bus. & Com.Code Ann. [U.C.C.] § 4.407 provides:
If a payor bank has paid an item over the stop payment order of the drawer or maker or otherwise under circumstances giving a basis for objection by the drawer or maker, to prevent unjust enrichment and only to the extent necessary to prevent loss to the bank by reason of its payment of the item, the payor bank shall be subrogated to the rights
(1) of any holder in due course on the item against the drawer or maker; and
(2) of the payee or any other holder of the item against the drawer or maker either on the item or under the transaction out of which the item arose; and
(3) of the drawer or maker against the payee or any other holder of the item with respect to the transaction out of which the item arose.
. Tex.Bus. & Com.Code Ann. [U.C.C.] § 1.103 provides:
Unless displaced by the particular provisions of this title, the principles of law and equity, including the law merchant and the law relative to capacity to contract, principal and agent, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating or invalidating cause shall supplement its provisions.
. Although the Bank erroneously described the relationship between itself and Heck as being one of surety and principal and not one of subrogation, the Bank asserted that the discharge of Heck's liability entitled the Bank to rely on Heck's equities and defenses. According to Federal Rule of Civil Procedure 8(f), "[a]ll pleadings shall be so construed to do substantial justice." See Allied. Chem. Corp. v. Mackay, 695 F.2d 854, 856 (5th Cir.1983) (explicitly construing rules "to do substantial justice"). The Bank was not required to state certain magic words in order to assert a successful defense. The Bank was only required to give Starcraft fair notice of the nature of its assertions. C. Wright & A. Miller, Federal Practice and Procedure: Civil § 1274. We hold that the Bank met this requirement here.
We recognize moreover that the defense of circuitous action is an affirmative defense since by asserting it a defendant must assume his own liability and rely on new matters to extinguish the plaintiff's claim. See Maryland Cas. Co. v. Employers Mut. Liability Ins. Co., 208 F.2d 731 (2d Cir.1953) (characterizing the defense of circuitous action as an affirmative defense); J. Moore, Moore's Federal Practice § 8.27[3], Failure to assert an affirmative defense in a responsive pleading usually results in a waiver. See Funding Sys. Leasing Corp. v. Pugh, 530 F.2d 91, 95 (5th Cir.1976); C. Wright & A. Miller, Federal Practice and Procedure: Civil § 1278. We have held, however, that "[wjhere the matter is raised in the trial court in a manner that does not result in unfair surprise . technical failure to comply precisely with Rule 8(c) is not fatal." Allied Chem. Corp. v. Mackay, supra, at 856. In the instant case, the defense did not accrue until after the responsive pleadings were filed. The Bank's assertion of the defense in a trial motion and memorandum instead Qf in an amended pleading did not prejudice Starcraft in its ability to respond. Thus, because Starcraft was not unfairly surprised by the manner in which the Bank asserted the defense, we hold it was not waived.
. Although § 4.302 does not expressly grant a right of subrogation in the drawee bank, we think such a right is available through § 1.103, which provides that principles of law and equity supplement the provisions of the Code. See supra note 4. The dissent argues that the application of equitable principles to this particular case is contrary to "the very purpose behind § 4-302 — promoting certainty in the bank collection process." We disagree. As discussed below, the instances in which the factual circumstances would warrant the applicátion of the principles applied in this opinion would be few. The certainty necessary for the smooth operation of the bank collection process, therefore, is not compromised in any significant way by our holding in this case. Moreover, the possibility — we think slight — that the reasoning used herein will be misused in the future does not seem to us to be a sufficient justification for not arriving at a just and equitable solution in the case at hand. The inclusion of § 1.103 in the Texas Commercial Code reflects an explicit legislative judgment that statutory obligations should not control to the exclusion of traditional principles of equity when the application of those principles would not undermine the purpose of relevant statutory provisions but would result in justice between the parties.
. Contrary to the contentions of the dissent, we do not hold that a bank under these circumstances is subrogated to all claims the maker may have against the payee. The Bank here is subrogated only to Heck's right of restitution arising from its obligation to indemnify the Bank for its payment of Heck's debt, which has already been the subject of an executed release.
. For instance, the equities in the instant case are simply not present in New Ulm State Bank, supra, in which the Texas court held that under § 4.302 a payor bank's liability was not dependent upon a showing that the instrument was enforceable. New Ulm State Bank did not deal with a debt that had already been satisfied and that would have been paid a second time if the payee recovered. Nor did New Ulm State Bank involve a drawer who was insolvent and effectively out of business. Rather, in New Ulm State Bank, the bank refused to honor the check because there were insufficient funds in the drawer's account. The evidence in that case in addition showed that the bank actively tried to protect the drawer of the check against the drawee. New Ulm State Bank, supra, at 23. The drawer of the check, finally, had no equitable claim against the drawee for unjust enrichment and no defense of circuitous action.
Since we find that Starcraft's claim against the Bank is extinguished, we do not reach the issue of the Bank's right to recover from the Johnsons the amount paid to Starcraft.