Payment-Instruction Imposter Losses Turn on “Ordinary Care” Under Texas UCC § 3.404(d); Repeated Purchase Orders Do Not Create an Installment Contract

1. Introduction

This appeal arises from a commercial relationship between a supplement manufacturer, Progressive Laboratories, Inc. (“Progressive,” Texas), and a supplement seller, Living Fuel, Inc. (“Living Fuel,” Florida). The parties operated through discrete purchase orders: Living Fuel paid a 50% deposit, Progressive later issued shipping notice/invoice, and Living Fuel paid the balance within 30 days.

Two issues drove the litigation:

• Imposter-payment fraud and allocation of loss: Living Fuel’s manager received false wiring instructions (sent from a hacked Progressive email account) and paid an imposter the full amount owed for earlier “Super Green” invoices. The question became whether Living Fuel’s misdirected payment nevertheless satisfied its contractual payment obligation, or whether Living Fuel bore the loss because it failed to exercise reasonable/ordinary care.
• Installment contract vs. separate transactions: Progressive argued that the parties’ repeated purchase-order dealings constituted an “installment contract,” such that Living Fuel’s failure to pay one order affected rights under another.

Procedurally, Living Fuel also asserted counterclaims (including for non-delivery under a later “Super Berry” purchase order and negligence), but the district court treated the counterclaims as abandoned after Living Fuel failed to replead them following Progressive’s amended complaint. After a bench trial, the district court found Living Fuel breached the “Super Green” contract, found no breach by Living Fuel on “Super Berry,” applied a set-off, and entered judgment for Progressive.

2. Summary of the Opinion

The Fifth Circuit affirmed in full. It held:

• The district court correctly assessed liability for the imposter-payment loss under TEX. BUS. & COM. CODE § 3.404(d) and correctly found Living Fuel failed to exercise ordinary care—so Living Fuel remained liable for the unpaid “Super Green” balance despite having paid an imposter.
• The panel declined to reach the “abandonment” ruling because there was an alternative basis to reject Living Fuel’s counterclaim damages beyond the set-off: Living Fuel sought “lost sales” but did not support or advocate those damages in the district court, and the set-off amount ($69,176.25) was already reflected in the judgment.
• The parties’ repeated purchase orders did not create an installment contract. Each purchase order was a separate, unambiguous agreement for a definite quantity, and “expectation of future dealings does not create an installment contract.”
• Incidental damages on “Super Berry” failed because damages require a breach; the district court found Living Fuel did not breach that contract, and the panel did not disturb that finding.

3. Analysis

3.1 Precedents Cited

A. Appellate review framework

The panel anchored its review standard in Guzman v. Hacienda Recs. & Recording Studio, Inc., 808 F.3d 1031, 1036 (5th Cir. 2015), applying clear-error review to bench-trial fact findings and de novo review to legal issues. That posture mattered because:

• The “ordinary care” assessment under § 3.404(d) blends legal standard and factual application; the court treated the governing statutory interpretation de novo and upheld the district court’s factual findings about suspicious email characteristics.
• The “installment contract” question turned largely on statutory definition and unambiguous contract language—legal in nature—thus reviewed de novo.

B. Imposter-payment allocation: persuasive authorities and the UCC

The district court had cited non-binding federal district court opinions:

• J.F. Nut Co. v. San Saba Pecan, LP, No. A-17-CV-405, 2018 WL 7286493, at *3 (W.D. Tex. July 23, 2018)
• Arrow Truck Sales, Inc. v. Top Quality Truck & Equip., Inc., No. 8:14-cv-2052, 2015 WL 4936272, at *5-6 (M.D. Fla. Aug. 18, 2015)

Those decisions were invoked for a general proposition that loss may rest with the party “in the best position to prevent the fraud,” a concept echoed in the Official Comments to U.C.C. § 3-404 (imposter rule), which state a drawer is often best positioned to avoid fraud. The Fifth Circuit, however, emphasized the correct hierarchy: “proposed uniform language does not control. Statutory language does.” It therefore grounded the analysis in Texas’s enacted text, TEX. BUS. & COM. CODE § 3.404(d).

C. Contract interpretation and course of dealing limits

For the installment-contract dispute, the panel relied on core Texas interpretive precedents:

• URI, Inc. v. Kleberg County., 543 S.W.3d 755, 763-64 (Tex. 2018) (courts presume parties intend the words used) (quoting Gilberg Tex. Constr., L.P. v. Underwriters at Lloyd's Lond., 327 S.W.3d 118, 126-27 (Tex. 2010)).
• Frost Nat'l Bank v. L & F Distribs., Ltd., 165 S.W.3d 310, 313 n.3 (Tex. 2005) (when contractual language is clear, course of dealing need not be considered).

Those authorities constrained Progressive’s attempt to use course-of-dealing evidence (TEX. BUS. & COM. CODE § 1.303) to transform discrete purchase orders into a single installment contract.

D. Damages require breach

On incidental damages, the court cited Spicer v. Maxus Healthcare Partners, LLC, 616 S.W.3d 59, 108-09 (Tex. App.—Fort Worth 2020, no pet.) for the uncontroversial but dispositive proposition: even if a category of damages is theoretically available, it still depends on proving a breach.

3.2 Legal Reasoning

A. The imposter-payment problem was treated as a UCC “instrument” loss-allocation question

The critical move in the panel’s reasoning was to tie the fraud to the statutory allocation mechanism in § 3.404(d). That provision does not simply ask “who was hacked” or “who morally should pay,” but instead asks whether a relevant party failed to exercise ordinary care in paying/taking the instrument, and whether that failure contributed to the loss.

Applying that framework, the panel affirmed the district court’s finding that Living Fuel failed to exercise reasonable care, emphasizing specific “red flags”:

• The fraudulent email contained “several typographical errors” and “oddly phrased language.”
• The payment instructions differed from prior payments.
• Progressive “always accepted physical checks,” yet the fraud demanded a wire to an out-of-state account labeled as a “hedge fund.”

With those facts, the panel agreed Living Fuel was “in a better position than Progressive Laboratories to avoid the loss,” satisfying the statutory ordinary-care analysis as applied. The practical consequence: Living Fuel’s payment to an imposter did not discharge its payment obligation to Progressive for the “Super Green” invoices.

B. Counterclaims were not revived by conclusory damages assertions

Although the district court dismissed Living Fuel’s counterclaims as “abandoned” (after failure to replead), the Fifth Circuit bypassed that issue, stating it “will not consider the issue of abandonment because there is an alternative basis for dismissal.”

That alternative basis was narrow but important: the only concrete monetary credit Living Fuel substantiated was the set-off already incorporated into the final judgment ($69,176.25, representing the deposit paid on “Super Berry” minus the value of goods actually delivered). Living Fuel’s additional “lost sales” request failed because it “failed to support, explain, or advocate for these damages in the district court.” In effect, the panel treated the counterclaim damages theory as forfeited/unsupported on the merits even aside from pleading abandonment.

C. No installment contract: separate purchase orders, definite quantities, unambiguous terms

Texas defines an installment contract as one requiring or authorizing delivery in separate lots to be separately accepted. TEX. BUS. COM. CODE § 2.612(a). Progressive argued that the parties’ relationship and repeated dealings (course of dealing under § 1.303) established such a contract.

The panel rejected that position for three linked reasons:

• Text-first contract construction: Under URI, Inc. v. Kleberg County. and Gilberg Tex. Constr., L.P. v. Underwriters at Lloyd's Lond., courts enforce what the contract says, not after-the-fact asserted intent.
• Definite, stand-alone purchase orders: “each individual purchase order referenced a definite quantity and did not contemplate future transactions.”
• Course of dealing cannot override clarity: Under Frost Nat'l Bank v. L & F Distribs., Ltd., course of dealing need not be consulted where the language is clear.

The panel’s summative statement—“expectation of future dealings does not create an installment contract”—captures the doctrinal boundary: repeat business alone does not merge separate sales into a single UCC installment contract absent contractual language authorizing/mandating deliveries in separate lots under one contract.

D. Incidental damages: availability is irrelevant without breach

Progressive sought incidental damages under the “Super Berry” contract. The panel accepted the general proposition that incidental damages do not require an installment contract, but it affirmed denial because “all damages require the existence of a breach,” citing Spicer v. Maxus Healthcare Partners, LLC. Because the district court found Living Fuel did not breach “Super Berry,” there was no predicate for awarding Progressive incidental damages on that agreement.

3.3 Impact

• Commercial fraud (spoofed invoices/wiring instructions): The opinion signals that Texas courts (and federal courts applying Texas law) may analyze invoice/wire fraud through the UCC’s enacted “ordinary care” allocation mechanism, not merely through generalized “best position to prevent” rhetoric from UCC comments or persuasive cases. Parties that ignore obvious anomalies in payment instructions risk being held responsible for the loss.
• Contract structuring for repeat vendor relationships: Businesses that operate through serial purchase orders should not assume an installment-contract overlay. If the parties want cross-default, netting, linkage between orders, or installment-contract treatment, they should draft it expressly (master supply agreement; cross-references; integration; separate-lot delivery terms).
• Litigation discipline on damages: Even where a party conceptually pleads damages (e.g., “lost sales”), failure to develop the theory with evidence and argument in the district court can be fatal on appeal—particularly after a bench trial where the record is fixed.

4. Complex Concepts Simplified

• “Ordinary care” (UCC): A baseline standard of reasonable prudence in commercial conduct. Here, it meant noticing and investigating red flags in payment instructions (unusual wording, typos, change from prior payment method, suspicious recipient account).
• “Instrument” and UCC § 3-404(d): UCC Article 3 governs negotiable instruments (like checks). Section 3-404 addresses imposter scenarios and, in subsection (d), allows shifting loss when someone fails to exercise ordinary care and that failure contributes to the loss. The panel treated the fraud-loss dispute as fitting this statutory allocation approach.
• “Course of dealing” (TEX. BUS. & COM. CODE § 1.303): Prior conduct between parties that can help interpret ambiguous terms. It generally cannot rewrite clear, unambiguous contractual text.
• “Installment contract” (TEX. BUS. COM. CODE § 2.612(a)): A single contract that contemplates delivery in separate lots, each separately accepted. Multiple separate purchase orders are not automatically one installment contract.
• “Incidental damages”: Out-of-pocket expenses caused by a breach (e.g., costs of cover, transportation, care/custody). They are recoverable only if there is an underlying breach to trigger damages.

5. Conclusion

Progressive Laboratories v. Living Fuel affirms two commercially significant rules under Texas law as applied by the Fifth Circuit: (1) loss from imposter payment instructions may be allocated under TEX. BUS. & COM. CODE § 3.404(d) based on whether a party failed to exercise ordinary care, and (2) repeated, successful dealings via separate purchase orders do not, without more, create an installment contract—clear contract text controls over course-of-dealing arguments. The decision also underscores a practical litigation lesson: damages theories must be supported and developed in the trial court record, not asserted in the abstract.