TEXAS SUPREME COURT UPHOLDS BROAD WAIVER OF GUARANTY DEFENSES

Broad Waiver of All Defenses Found to Include Waiver of Guarantor’s Post-Foreclosure Fair Market Value Deficiency Offset

June 25, 2014

*Roger Cox

The Headline:

The Texas Supreme Court has upheld a broad form waiver of all defenses by a guarantor. This was found to include a guarantor’s right of offset under the Texas deficiency statute found at Section 51.003 of the Texas Property Code. Moayedi v. Interstate 35/Chisam Road, L.P., _____ S.W.3d _____, 2014 WL 2619524 (Tex. 2014).

The Facts:

Lender financed a borrower, secured by a deed of trust covering real property in Denton County. The borrower’s president signed a limited guaranty. The guaranty included the following waiver of defenses:

Guarantor further agrees that this Guaranty shall not be discharged, impaired or affected by (a) the transfer by the Borrower of all or any portion of the real estate or improvements thereon, or of any security or collateral described in the Deed of Trust or in any other security document, or (b) any defense (other than the full payment of the indebtedness hereby guaranteed in accordance with the terms hereof) that the Guarantor may or might have as to Guarantor’s respective undertakings, liabilities and obligations hereunder, each and every such defense being hereby waived by the undersigned Guarantor.

The borrower defaulted, and a non-judicial foreclosure sale of the real property followed. The lender was the sole bidder, bidding $487,200.00, which left a substantial deficiency. It was undisputed that the fair market value of the property at the time of the foreclosure was $840,000.00 – in other words, substantially more than the underlying debt (and nearly double the amount bid at the sale).

The lender filed suit against the guarantor to recover the deficiency. The guarantor asserted the affirmative defense found in Section 51.003 of the Texas Property Code to the effect that any deficiency would be offset by the difference between the fair market value of the property and the foreclosure price. The trial court granted summary judgment in favor of the guarantor because the fair market value was more than enough to satisfy the underlying debt. The court of appeals, however, reversed, holding that the broad form waiver quoted above waived the guarantor’s rights under Section 51.003.

The Supreme Court Upholds the Waiver of All Defenses:

The Texas Supreme Court affirmed the Court of Appeals, effectively holding that just because the waiver was quite broad, that did not render it meaningless or even ambiguous. The waiver was an effective waiver and “though broad, is not without meaning and is intended to include all defenses.”

In its analysis, the Texas Supreme Court noted that a guaranty agreement would be construed similarly to any other contract, noting the narrow exception that if the terms of a guaranty agreement are uncertain, “its terms should be given a construction which is most favorable to the guarantor.” Moayedi, ___ S.W.3d at ___, quoting Coker v. Coker, 650 S.W.2d 391 (Tex. 1983).

That said, under normal contract construction, “the primary concern of the court is to ascertain the true intentions of the parties as expressed in the instrument.” Id, citing J.M. Davidson v. Webster, 128 S.W.3d 223 (Tex. 2003). And when a contract, even a guaranty, is unambiguous, interpretation is a question of law for the court. Applying common concepts regarding waiver, the court found that the breadth of the waiver did not impair its unambiguous meaning:

Just because the waiver is all encompassing does not mean that it is unclear or vague. To waive all possible defenses seems to very clearly indicate what defenses are included: all of them. Indeed, a waiver provision such as this one may be more descriptive to a layperson than a waiver referencing Property Code section numbers.

Moayedi, ___ S.W.3d at ____.

Analysis:

Policy considerations aside, this opinion seems straightforward. Two sophisticated parties have the freedom to contract with each other, and contracts that are not ambiguous (even guaranty agreements) should be enforced under their plain meaning.

If the legislature intended to make the anti-deficiency statute non-waiveable, then that should have been done legislatively. When a statute like Section 51.003 is silent, however, there is no reason why two sophisticated commercial parties should be artificially precluded from waiving its terms.

In the absence of an amendment to the statute, we are likely to see broad waiver language in most guaranty forms. Workout or forbearance situations may also present opportunities for lenders to seek similar broad waivers as a condition to restructuring or forbearance. Like any other contract term, however, this will remain the subject of negotiation between sophisticated parties.

Drafting note: As noted by the Supreme Court, sometimes broad is better (and simpler) than trying to be overly specific. While the clause in question is a bit cumbersome (a long-winded way of saying, in plain English, “guarantor waives all defenses”), the lender was well served by the broad waiver, rather than a long list of statutes, with something sure to be left out. Wherever possible, simpler is better.

*Roger Cox, a shareholder resident in Underwood’s Amarillo office, is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization. Mr. Cox is a co-author of Bankruptcy Road Map (State Bar of Texas), and a former long time contributor to the SMU Law Review. Underwood has offices in Amarillo, Fort Worth, Lubbock, Hereford, and Pampa. This article is for general and academic information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.

Roger S. Cox

UnderwooD

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