United States Court of Appeals,

Fifth Circuit.

No. 94-20186.

UNITED STATES of America, Plaintiff,

v.

FIRST CITY CAPITAL CORP., Defendant.

U.S. SMALL BUSINESS ADMINISTRATION as Receiver for First City

Capital Corp., Plaintiff-Appellee,

v.

BARRON CONSTRUCTION COMPANY, Bert I. Barron and Brent Barron, et

al., Defendants,

Brent J. Barron, Defendant-Appellant.

May 31, 1995.

App eal from the United States District Court for the Southern

District of Texas.

Before WISDOM, JONES and EMILIO M. GARZA, Circuit Judges.

WISDOM, Circuit Judge:

In this case, the plaintiff/appellee t he Small Business

Administration ("SBA"), as receiver, sought to enforce a guarantee

agreement again st the defendant/appellant Brent J. Barron almost

ten years after the maturity date of the underlying debt. The

district court granted summary judgment in favor of the SBA. The

court found that language in the guarantee agreement made a demand

for payment a condition precedent to suit on the guarantee

agreement, and that, therefore, t he applicable statute of

limitations did not begin to run until a demand was made. Because

we find that the demand for payment was unreasonably delayed, we

conclude that any action to enforce the guarantee agreement is

barred under Texas law. Accordingly, we REVERSE and RENDER.2 I.

On December 28, 1978, the Small Business Investment Company of

Houston, a Texas company that later changed its name to First City

Capital Corporation ("lender"), and Barron Construction Company, a

Texas corporation ("borrower"), executed a written agreement for a

loan of $50, 000 for working capital (the "loan agreement").

Section II-A of the loan agreement specified that the loan would be

evidenced by a promissory note attached as Exhibit "A" to the loan

agreement. The loan agreement specified that this promissory note

would be in the princ ipal sum of $50,000 bearing interest at 14

percent with the interest being paid in monthly installments

beginning February 10, 1979, and continuing monthly thereafter

"until paid in full". The loan agreement further specified that

the principal would be due and payable in monthly installments of

$892.85 each, with the first installment being due and payable on

July 10, 1979, and on the tenth day of each month thereafter "until

July 10, 1983 at which time the entire remaining balance owing on

sa id note will be due and payable". The loan agreement further

specified that the promissory note "shall be guaranteed in its

payment, unconditionally and without reservation, jointly and

severally by all the principals of borrower", and that "this [l]oan

[a]greement is to be construed in accordance with the laws of the

State of Texas".

On the same date, the borrower executed and delivered a

promissory note in the am ount of $50,000 (the "note"). The note

contains the same provisions as the loan agreement except that the3

note does not contain a ny language specifying that the entire

remaining balance will be due and payable on July 10, 1983. The

n ote does expressly state that it shall be governed by Texas law

and that it was executed pursuant to the loan agreement of the same

date.

Also, on the same date, a separate agreement was signed by

Bert I. Barron and Brent J. Barron (the "guarantee agreement"). In

the openin g paragraph of the guarantee agreement, the lender is

identified by name, the borrower is identified by name, and the

p rincipal amount of the note guaranteed is specified as $50,0 00.

The guarantee agreement further provides that the note being

guaranteed "is attached hereto as Exhibit "A' and made a part

hereof for all purposes".

The lender's records reflect that the borrower never made

monthly installments of interest and principal as specified in the

note. The borrower made payments in various amounts at varying

intervals until December 22, 1983, when the last payment was made.

After these payments were applied, there was an outstanding balance

on the note in the principal amou nt of $27,752. Neither the

borrower nor any guarantor made any payments on the note after

December 22, 1983, and there is no evidence in the record of any

ratification, renewal, or extension agreement relating to the note.

On April 7, 1988, the United States of America, as plaintiff,

filed suit in federal district court under 15 U.S.C. § 687 against

the lender, First City Capital Corp., alleging (1) that the lender

v iolated various regulations issued by the Small Busine s s4

Administration ("SBA") under the Small Business Investment Act, 15

U .S.C. § 661 e t seq. (the "Act"); (2) that the lender was in

default on certain subordinated debentures which were guaranteed by

the SBA; (3) that the lender's license and franchise under the Act

should be forfeited; and (4) that the SBA should be appointed as

"permanent receiver of First City for the pur pose of liquidating

all of defendant' s assets and satisfying the claims of creditors

therefrom in the order of priority as determined by this court, and

pursuing all causes of action available to First City against third

parties".

On the same day, a stipulation of settlement was filed between

the United States and the lender, and an order was entered by the

district court granting the relief sought in the original

complaint. Some 15 months later, on July 31, 1989, the SBA, as

receiver of the lender, sent a letter by certified mail to Brent J.

Barron demanding payment of the principal balance of the note in

the amount of $27,750 and an additional sum of about $95,000 of

accrued interest thereon. There is nothing in the record to

indicate Brent J. Barron responded to this demand letter.

Three years and eight months later, on April 9, 1993, the

plaintiff SBA, as receiver, filed a complaint in d istrict court

against Barron Construction Co., Bert I. Barron and Brent J.

Barron, as an ancillary proceeding to the original civil action

under which the SBA was appointed receiver. There was no service

of process served on Barron Construction Co. or Bert I. Barron.

The defendant Brent J. Barron was served and filed his answer on5

May 3, 1993. Subsequently, both parties filed motions for summary

judgment.

In its motion for summary judgment, the SBA argued that the

app licable statute of limitations had not run against Barron's

obligation on the guarantee agreement. The SBA argued that the

guarantee agreement contained a provision which made a demand for

payment a condition precedent to bri nging suit on the guarantee

agreement. The SBA contends that, because of this condition

precedent, the applicable statute of limitations did not start to

run until the demand letter of July 31, 1989 was received. In

making this contention, the SBA relies on the following language in

the Guarantee Agreement:

If t he promissory note above described shall become due and

remain unpaid, in whole or in part, the Guarantors, jointly

and severally, will, on demand (and without further notice of

dishonor, and without any notice having been given to the

Guarantors previous to such demands, of the acceptance by the

lender of this guaranty) pay to the Lender its successors or

assigns, at its office in Harris County, Te xas, the full

amount due and owing on said pro missory note ... (underline

added).

Barron, in his motion for summar y judgment, argued that the

above language did not make a demand a condition precedent to suit,

and therefore, the applicable statute of limitations began to run

on July 10, 1983, the date the note was due and payable. Barron,

alternatively, argued that, even if a demand was a condition

precedent to suit on the guarantee agreement, the action was barred

under Texas law because the demand for payment was unreasonably

delayed.

The district court denied Barron's motion for summary1 Berry v. Armstrong Rubber Co., 989 F.2d 822, 824 (5th

Cir.1993), cert. denied, --- U.S. ----, 114 S.Ct. 1067, 127

L.Ed.2d 386 (1994).

6 jud gment. The court found that the language in question made a

demand a condition precedent to suit on the guarantee agreement,

a nd that, therefore, the statute of limitations began running on

July 31, 1989, the date the demand was made. The district court,

however, made no finding regarding whether the demand had been made

within a reasonable time. The district court then granted the

SBA's motion for summary judgment and awarded the SBA $62,919, the

original $27,752 plus accrued inter est. Barron appeals the

district court's decision.

II.

We review the district court's denial of summary judgment de

novo. 1 In this case, we need not decide the issue whether the

language in the guarantee agreement is sufficient under Texas law

to create a condition precedent to suit on the guarantee agreement.

We find that, even if the above language makes a demand a condition

precedent to suit, the demand was unreasonably delayed, and,

therefore, under Texas law any action on the guarantee agreement is

barred.

Texas Law is the determinative law. All of the documents were

executed and delivered in Texas between corporations organized

under the laws of Texas and d oing business in Texas. The loan

agreement and the note expressly made Texas law applicable, and the

loan agreement had a copy of the note attached thereto as Exhibit

"A" and incorporated therein for all purposes. Accordingly, the2 Tex.Civ.Prac. & Rem.Code § 16.004(a)(3).

3 Neal v. Hardee's Food Systems, Inc., 918 F.2d 34, 37 (5th

Cir.1990).

7 applicable statute of limitations is Texas's four year statute of

limitations. 2

In determining the reasonableness of a demand for payment on

the guarantee agreement under Texas law, the maturity date of the

underlying note is important. As indicated previously, the note in

this case states no final maturity date, but the loan agreement

specified that on July 10, 1983, "the entire remaining balance

owing on said note will be due and payable". On what date then was

t he note due and payable? Under Texas law, when a guarantee

agreement is issued in connection with a promissory note, which is

attached to and made part of the guarantee agreement pursuant to a

loan agreement calling for the issuance of such documents, a Texas

court would construe all three documents together and utilize

portions of one document to explain and cla rify any ambiguities

which may exist in another document. 3 Because the note had no

final maturity date, we think that a Texas court faced with

resolving the ambiguity between the two instruments would construe

th e language of the loan agreement as controlling and recognize

t hat the parties intended that all unpaid principal would become

due and owing on July 10, 1983. It is apparent, therefore, that

the note was due and payable on July 10, 1983, the final maturity

date in the loan agreement.

As a general rule of cont ract law, where a demand is a4 Aetna Casualty & Surety Co. v. State, 86 S.W.2d 826, 831

(Tex.Civ.App.—Fort Worth 1935, writ dism'd).

5 Gabriel v. Alhabbal, 618 S.W.2d 894 (Tex.Civ.App.—Houston

[1st Dist.] 1981 writ ref'd n.r.e.); Foreman v. Graham, 363

S.W.2d 371 (Tex.Civ.App.—Beaumont 1962, no writ); Dunn v.

Reliance Life and Accident Insurance Company of America, 405

S.W.2d 389 (Tex.Civ.App.—Corpus Christi 1966, writ ref'd n.r.e.).

8 condition precedent to bringing suit on a guarantee agreement, the

statute of limitation does not begin to run until a demand is made.

The demand, however, must be made within a reasonable time.

Where a demand is a condition precedent to suit, the plaintiff

may not, by failing or refusing to perform the condition, toll

the running of the statute and reserve to himself the right to

sue within the statutory period from such time as he decides

to make a demand. On the contrary, it is the general rule

that in such a case a demand must be made within a reasonable

time after it may lawfully be made. 4

In this case, the demand for payment on the guarantee

agreement could have been made any time, within a reasonable time,

after July 10, 1983. The demand did not come until July 31, 1989.

Under Texas law, where a demand is a condition precedent to suit on

a guarantee agreement, the demand must be made within a period

coincident with the statute of limitations on the underlying note. 5

In this case, we have concluded the note was due and payable on

July 10, 1983. The applicable four year statute of limitations for

suit on the note ther efore ran until July 10, 1987. Under Texas

law, this coincident four year statute of limitations established

the reasonable period of time in which a demand for payment could

have been made on the guarantee agreement. Because the demand was

not made within this reasonable period of time, any action on the

guarantee agreement is barred under Texas law. Accordingly, we1 See also Martin v. Ford, 853 S.W.2d 680, 682

(Tex.App.—Texarkana 1993, writ denied); Cummins & Walker Oil Co.

v. Smith, 814 S.W.2d 884, 886-87 (Tex.App.—San Antonio 1991, no

writ); Intermedics, Inc. v. Grady, 683 S.W.2d 842, 845

(Tex.App.—Houston [1st Dist.] 1985, writ ref'd n.r.e.); Gabriel

v. Alhabbal, 618 S.W.2d 894, 896 (Tex.Civ.App.—Houston [1st

Dist.] 1981, writ ref'd n.r.e.); Dunn v. Reliance Life &

Accident Ins. Co., 405 S.W.2d 389, 391 (Tex.Civ.App.—Corpus

Christi 1966, writ ref'd n.r.e.).

9 VACATE the final order of the district court in favor of SBA as

receiver, and REVERSE the dec ision of the district court denying

summary judgment in favor of Brent Barron, and we now RENDER

judgm ent that the SBA as receiver take nothing against the

defendant Brent Barron.

EMILIO M. GARZA, Circuit Judge, concurring in part and

dissenting in part:

I concur in the majority opinion except its holding that:

Under Texas law, this coincident four year statute of

limitations established the reasonable period of time in which

a demand for payment could have been made on the guarantee

agreement. Because the demand was not made within this

reaso nable period of time, any action on the guarantee

agreement is barred under Texas law.

Maj. op. at ----. The majority misconstrues the issue: This is

not a question of limitations, but rather the reasonableness of the

delay in making a demand for payment.

Under Texas law:

[The] demand must be made within a reasonable time, which

depends upon the circumstances of each case, and ordinarily is

a question of fact for the jury. In the absence of mitigating

circumstances, a time coincident with the running of the

statute will be deemed reasonable, and if the demand is not

made within that period the action will be barred.

Foreman v. Graham, 363 S.W.2d 371, 372 (Tex.Civ.App.—Beaumont 1962,

no writ). 110

The di strict court decided this case on cross-motions for

summary judgment. To support a finding that the SBA's demand "was

not made within [a] reasonable period of time," maj. op. at ----,

and in order to implicate the four-year statute of limitations as

a matter of law, Barron had to make at least a preliminary showing

that there is no genuine issue of material fact on the "absence of

mitigating circum stances." Barron submitted no evidence on this

issue. Accordingly, the question of reasonableness remains a

question of fact for the jury to decide, and I respectfully

dissent.