Property located in Louisiana was foreclosed upon in Orleans Parish. Subsequent litigation in Texas about the appropriate credit for that sale was not filed in the right place, waiving that issue: “[Texas Property Code] Section 51.004 . . . provides that any person obligated on the debt, including a guarantor, may bring an action in the district court in the county in which the real property is located for a determination of the fair market value of the real property as of the date of the foreclosure sale.” State Bank v. Granbury Hospitality, No. 05-14-01306-CV (Nov. 20, 2015, mem. op.) (emphasis added).
The guarantors of a construction loan agreement and promissory note sought to avoid a deficiency judgment by disputing a successor bank’s summary judgment evidence that it was the holder of the note. The Dallas Court of Appeals was having none of that oft-repeated claim. In the absence of controverting evidence, affidavit testimony and a copy of the note are sufficient to prove it up for summary judgment purposes, and an affidavit is likewise sufficient to establish ownership or assignment of the note. Because none of the summary judgment evidence contradicted the bank’s affidavit testimony, summary judgment for the deficiency was properly granted. The Court went on to rule that the bank was not required to include a complete history of payment activity on the account as part of its summary judgment evidence, and that the guarantors’ own affidavits did not create a fact issue on the issue of the property’s fair market value.
Cha v. Branch Banking & Trust Co., No. 05-14-00926-CV
A guarantor ignored the efforts of a court-appointed receiver to collect on an agreed judgment and subsequent turnover orders. The debtor eventually paid the judgment, but Frost Bank sought recovery of additional attorney fees incurred in enforcing the judgment. The trial court awarded $160,000 in attorney fees and approved the receiver’s fee of $129,000. The Court of Appeals reversed as to the attorney fees, holding that fees could not be recovered based on the contractual guarantee because the bank’s claims under that instrument were merged with and extinguished by the final judgment. Nor could post-judgment attorney fees be awarded under the turnover statute because the defendant had actually paid the judgment. However, the trial court did not abuse its discretion in approving the receiver’s fee — calculated as 10% of the sale proceeds from the defendant’s stock — as the court had conducted a hearing and determined that the fee was fair, reasonable, and necessary.
Evans v. Frost Nat’l Bank, No. 05-12-01491
After the real estate bubble burst in 2008, borrowers attempted all sorts of ways to get out of their obligations. Most notably, debtors repeatedly challenged the ways that their mortgages had been transferred and recorded (or not) by the banks that had held, swapped, sold, and securitized them. Long story short, it hardly ever worked, as courts across the country mostly (but not always) eschewed technical arguments in favor of the big picture of who owed what to whom. But a new opinion from the Dallas Court of Appeals shows that when the bank doesn’t follow the rules in litigation, the debtors may still escape liability on a loan.
In this instance, a pair of individual guarantors for a $748,000 loan were sued by Wells Fargo after the borrower defaulted. While the case was pending, Wells Fargo allegedly assigned the loan documents to another entity, Apex. Wells Fargo’s attorneys later filed a motion for withdrawal and substitution, which the trial court granted. The motion failed to mention the assignment of the loan documents to Apex. The guarantors then filed for no-evidence summary judgment, pointing out that Wells Fargo had conducted no discovery and that the discovery period was closed. The motion argued that there was no evidence to show who owned the guaranty. When Apex appeared and tried to cure that deficiency, the guarantors objected and moved to strike Apex’s summary judgment evidence. The trial court sustained the objections and granted summary judgment. The Court of Appeals affirmed, holding that it was not an abuse of discretion to exclude Apex’s evidence because it had waited 11 months after acquiring the loan to amend Wells Fargo’s discovery responses by disclosing its ownership. That was not “reasonably prompt,” and it acted as an unfair surprise to the guarantors to have that come out only in response to their summary judgment motion.
LSREF2 Apex (TX) II, LLC v. Blomquist, No. 05-14-00851-CV
In an attempt to collect on a $3.6 million promissory note, Graham Mortgage Corporation filed suit against several parties, including appellant Barbara Mills, who had executed a personal guaranty for up to $1.8 million (half of the total amount). Graham Mortgage successfully moved for summary judgment against Ms. Mills, and the trial court entered a judgment against her for $2.8 million plus interest and attorneys’ fees. Ms. Mills appealed, arguing that the guaranty limited her liability to $1.8 million, plus fees and expenses.
Graham Mortgage did not contest that there was an error in the amount of the judgment, but instead argued that the Court of Appeals could simply modify the amount of the judgment pursuant to Rule of Civil Procedure 46.5, which allows for voluntary remittitur. The Court disagreed, noting that Rule 46.5 “only allows voluntary remittitur after a court of appeals has reversed the trial court’s judgment because of a legal error affecting only part of the damages awarded.”
The Dallas Court of Appeals continues to be a hard place for borrowers and guarantors to claim the statutory right to offset deficiencies when collateral is sold in foreclosure for less than its fair market value. In this instance, the bank sued the guarantor of a $9.5 million loan. After the apartment complex that secured the debt was sold in foreclosure for only $4 million, the bank sought to recover the deficiency. The guarantor argued that the bank should only be permitted to recover the difference between the balance of the loan and the fair market value of the property, not the price realized in the foreclosure sale. See Tex. Prop. Code § 51.003(c). The trial court granted summary judgment for the bank, and the Court of Appeals affirmed. Although the opinion does not cite to the Moayedi case that started off this line of decisions (and that is currently pending before the Texas Supreme Court after oral argument in January), the Court once again held that the parties’ contract validly waived the guarantor’s right to offset. In this particular agreement, the waiver clause referred to “any and all rights or defenses based on suretyship or impairment of collateral” and “any claim of setoff.” Both clauses, the Court held, were sufficient to waive the statutory offset rights.
Nussbaum v. OneWest Bank, FSB, No. 05-13-00081-CV
In 1986, Summers Electric Company extended credit to Stuart Electric, Inc., which backed its credit application with the personal guaranty of its owners, Barry and Zac Stuart. The guaranty was in favor of Summers or its assigns, for all money that may come to be due to Summers by Stuart Electric. Although Summers’ ownership and name changed over the years, Stuart continued to do business with the company. In 2008, Barry and Zac sold Stuart Electric. The new ownership group continued to purchase materials from Summers, but failed to pay up. Summers turned to the Stuarts to make good on their 22-year-old written guaranty, which they refused. Summers then filed suit, obtaining a default judgment against Stuart Electric and a summary judgment against Barry and Zac.
On appeal, the Court of Appeals first sustained the trial court’s decision not to strike the Stuarts’ affidavits, in which they testified that Summers’ employees had told them they were no longer on the company’s account and were not responsible for any purchases made by Stuart Electric. Although the Stuarts were interested witnesses, their affidavits were still admissible because they were sufficiently “clear, positive, and direct, free from contradictions or inconsistencies, and could have been readily controverted.” Tex R. Civ. P. 166(a)(c). That affidavit testimony also supported each of the elements of the Stuarts’ promissory estoppel defense, which precluded the trial court’s grant of summary judgment against them. The Court therefore reversed and remanded for further proceedings.
Stuart v. Summers Group, Inc., No. 05-12-00489-CV
Readers of the blog will probably be familiar with our “Waive Goodbye” series of posts on the Dallas Court of Appeals’ recent line of cases holding that borrowers and guarantors can contractually waive their statutory right to offset any deficiency if foreclosed property is sold for less than its fair market value. The Texas Supreme Court has now granted the petition for review in the first of those cases, Interstate 35/Chisam Road L.P. v. Moayedi, 377 S.W.3d 791 (Tex. App.–Dallas 2012, pet. granted). Oral argument has been set for January 8, and we will continue to keep our eyes on the issue.
The Court of Appeals has once again ruled that a contractual waiver prevents a guarantor from invoking its statutory right to offset if the foreclosed property was sold for less than its fair market value. This is the seventh time the Court has made that ruling in a little over a year, dating back to August 2012 in the case of Interstate 35/Chisam Road, L.P. v. Moayedi, and as recently as August 2013 in Compass Bank v. Manchester Platinum Mgmt. In this particular instance, the parties actually stipulated that the two homes at issue had fair market values in excess of the amounts owed under the promissory notes, even though they were sold for $582,623.07 less than those stipulated values. The Court further held that the broad waiver of “any statute or limitations or other defenses affecting [the guarantor’s] liability hereunder” was sufficiently specific to include a waiver of the offset defense provided by section 53.001 of the Texas Property Code. The Court therefore reversed the trial court and rendered judgment for the deficiency in favor of the lender.
Given the importance of this recurring issue to borrowers, lenders, and guarantors, it would not be surprising to see the Texas Supreme Court weigh in. The petition for review in the Moayedi case has proceeded to briefing on the merits.
Compass Bank v. Goodman, No. 05-13-00447-CV
Cleveland Partners, L.P. took out a $520,000 loan from Live Oak State Bank to finance the purchase of an apartment building. The loan was personally guaranteed by the defendant in this case, Josiah Cleveland. The guaranty included a waiver of virtually all of the borrower’s defenses on the debt, including “any setoff available” against the lender. The borrower defaulted, and the bank purchased the property for $415,000 at the resulting foreclosure sale. The bank then sued the guarantor for the deficiency, with the guarantor arguing that the property sold for less than its fair market value. The trial court granted summary judgment for the bank.
On appeal, the guarantor argued that the waiver was “massively overbroad . . . unconscionable and unenforceable.” That issue was easily dispatched, with the court citing three of its four recent opinions holding that borrowers can validly waive their right to claim offset under Chapter 51 of the Texas Property Code. See Interstate 35/Chisam Road, L.P. v. Moayedi, 377 S.W.3d 791 (Tex. App.-Dallas 2012, pet. filed); King v. Park Cities Bank, 2012 WL 3144881 (Tex. App.-Dallas 2012, no pet.); Toor v. PNC Bank, N.A., 2012 WL 3637284 (Tex. App.-Dallas 2012, no pet.); see also Smith v. Town North Bank, 2012 WL 5499406 (Tex. App.-Dallas 2012, pet. denied). Bound by those precedents, the court concluded that Cleveland had validly waived his right to offset the difference between the foreclosure price and the fair market value of the property, rendering irrelevant his claim that he had raised a fact issue as to the property’s fair market value.
Perhaps notably, the petition for review in the Moayedi decision has already drawn some amicus support. If there are any further developments in this area, we’ll keep you updated.
Cleveland v. Live Oak State Bank, No. 05-11-00665-CV