## COURT OF APPEALS SECOND DISTRICT OF TEXAS FORT WORTH NO. 02 - 10 - 00289 - CV

WELLS FARGO BANK, N. A. F/K/A WELLS FARGO BANK MIN NESOTA, N.A., AS TRUSTEE FOR THE REGISTERED HOLDERS O F J.P. MORGAN CHASE COMMERC IAL MORTGAGE SECURITIES CORP., COMMERCIAL MORTGAGES PASS

THROUGH CERTIFICATES , SERIES 2003

- PMI, ACTING BY AND THROUG H ORIX CAPI T A L MARKETS, LLC APPELLANT

V. MBS

- THE HILLS, LTD., 310 1 W. NORMANDALE, L.L.C., MICHAEL B. SMUCK, AND EDWIN A. WHITE APPELLEES

---------- FROM THE 17TH DISTRICT COURT OF TARRANT COUNTY

---------- 

### MEMORANDUM OPINION ON EN BANC CONSIDERATION 1

----------

1 See Tex. R. App. P. 47.4.2

Appellant Wells Fargo Bank, N.A. f/k/a Wells Fargo Bank Minnesota, N.A., as Trustee for the Registered Holders of J.P. Morgan Chase Commercial Mortgage Securities Corp., Commercial Mortgages Pass

- Through Certificates, Series 2003

- PMI, acting by and through ORIX Capital Markets, LLC (collectively Wells Fargo) filed a motion for en banc consideration of our opinion and judgment issued December 8, 2011. We deny the motion , but we withdraw our prior opinion and judgment and substitute the following

. I. I NTRODUCTION In two issues, Wells Fargo argues that the tr i a l court erred by interpreting a

n on recourse i ndemnification a greement as an agree ment only to indemnify the
note holder against third

- party claims and erred by entering judgment that Wells Fargo take nothing as to its claims against Appellees Michael B. Smuck and Edwin A. White . We will affirm.
II. B ACKGROUND White and Smuck formed MBS

- The Hills, Ltd. as a special purpose entity to borrow funds and to purchase and hold title to an apart ment property known as ―The Hills

. ‖ Smuck served as director of 3101 W. Normandale, L

. L

. C

. , the general partner of MBS

- The Hills

. MBS

- The Hills borrowed $6.8 million through nonrecourse financing, securing the promissory note with the apartment property. 2 The note limited MBS

- The Hills‘ s liability to the property pledged as

2 The loan was originally obtained from PNC Bank, National Association, but it was later assigned to Wells Fargo.3

collateral, but the note contained nonrecourse exceptions that would establish both MBS

- The Hills and Normandale ‘ s liability under certain defined circumstances . A dditio nally, the lender required Smuck and White to execute a

n on r ecourse i ndemnification a greement, which is the subject of this appeal. MBS

- The Hills defaulted on the note, and Wells Fargo applied to the trial court to appoint a receiver to manage the prope rty. Based on the receiver‘ s assessment of the property, Wells Fargo sued MBS

- The Hills and Normandale , seeking to establish their liability under the note‘ s nonrecourse exceptions. Wells Fargo also sued Smuck and White , seeking to establish their pers onal liability under the n on r ecourse i ndemnification a greement. During discovery, Wells Fargo served MBS

- The Hills and Normandale
with requests for admissions. When MBS

- The Hills and Normandale failed to respond to the requests for admissions, Wells Fargo moved for summa ry judgment against them based on the nonrecourse exceptions contained in the
note , requesting that the trial court deem the request s for admissions admitted under rule of civil procedure 198.2. 3 The trial court granted an interlocuto ry summary judgment in favor of Wells Fargo and against MBS

- The Hills and Normandale in the principal amount of $5,904,537.61 plus prejudgment interest. The dollar amount awarded by the interlocutory summary judgment track ed to the penny the principal amount due on the promissory note after the property

3 MBS

- The Hills and Normandale were represented by counsel, but midway through the case, counsel withdrew. No substitute counsel appeared on their beha lf regarding the summary judgment.4

was foreclosed upon in December 2008, according to the affidavit of Charles Crouch

. 4 Wells Fargo proceeded to a bench trial on its remaining claims against Smuck and White

. A t trial, Wells Fargo offered ten exhibits to support its claims, the trial court admitted those exhibits, and Wells Fargo rested without calling any witnesses. The trial court entered a take

- nothing judgment on Wells Fargo ‘s claims against Smuck and White and the following findings of fact and conclusions of law:

5. Defendants MICHAEL B. SMUCK and EDWIN A. WHITE did not, by the Non

- Recourse Indemnification Agreement of July 16, 2003, or any other instrument presented at trial, guaranty any liability of Defendants M BS

— T HE H IL L S , L TD and/or 3101 W. N ORMANDALE , L.L.C. The agreement was between the defendant individuals and Plaintiff to indemnify Plaintiff, not the defendant bus iness entities, against certain potential liabilities. T he indemnification agreement does not operate as a guaranty of any obligation of the defendant business entities, which were not party to the agreement.

. . . . 6. At trial, Plaintiff introduced no evidence to est ablish any liability of either MICHAEL B. SMUCK or EDWIN A. WHITE. Therefore, Defendants MICHAEL B. SMUCK and EDWIN A. WHITE are not liable to Plaintiff for any damages sustained in connection with the note and attendant security documen ts.
7. Plaintiff provided no evidence at trial that the losses it sustained fall within any of the carve

- out provisions of the promissory note, indemnification agreement, or other loan documents that would make either MICHAEL B. SMUCK or EDWIN

4 Crouch is the Associate Director of ORIX Capital Markets, LLC, the special servicer for the $6.8 million loan transaction.5

A. WHITE l iable. For that reason, MICHAEL B. SMUCK and EDWIN A. WHITE are not liable to it for damages that the plaintiff sustained. Upon Wells Fargo‘s request, the trial court entered the following additional findings and conclusions regarding MBS

- The Hills‘s an d Normandale ‘ s liability :

1. On July 16, 2003, MBS

- The Hills, Ltd. (―MBS

- Hills‖ or ―Borrower‖) executed a promissory note in fav or of [Well Fargo‘s predecessor] evidencing a $6,800,000.00 loan to purchase the Hills A partme nt Homes in Fort Worth, Texas .

. . . The parties agreed that the Note would be non

- recourse as to the Borrower except and unless certain defined non

- recourse exceptions, set forth in paragraph 12 of the Note, were satisfied.
2. Borrower and Normandale are jointly and severally liable under th e Note by reason of and through the non

- recourse liability exceptions of Paragraph 12 of the Note. Wells Fargo is entitled to recover against Borrower and 3101 W. Normandale, LLC for their recourse liability under the No te.

III. S TANDARD OF R EVIEW Find ings of fact entered in a case tried to the court have the s ame force and dignity as a jury‘ s answers to jury questions. Anderson v. City of Seven Points , 806 S.W.2d 791, 79 4 (Tex. 1991). The trial court‘ s findings of fact are reviewable for legal and fa ctual sufficiency of the evidence to support them by the same standards that are applied in reviewing evidence supporting a jury ‘ s

answer. Ortiz v. Jones , 917 S.W.2d 770, 772 (Tex. 1996); Catalina v. Blasdel , 88 1 S.W.2d 295, 297 (Tex. 1994). Conclusions of law may not be challenged for factual sufficiency, but they may be reviewed to determine their correctness based upon the facts. AMX Enters., L.L.P. v. Master Realty Corp. , 283 S.W.3d 506, 519 (Tex. App.

— Fort W orth 2009, no pet.) (op. on re h‘ g); Dominey v.6

Unknown Heirs & Legal Reps. of Lokomski , 172 S.W.3d 67, 71 (Tex. App.

— Fort Worth 2005, no pet.).
IV. C ONSTRUCTION OF THE N ONR ECOURSE I NDEMNIFICATION A GREEMENT In its first issue, Wells Fargo argues that ―the trial court‘ s construction of the hold harmless agreement depends on characterizing the agreement as an agreement to indemnify Wells Fargo against third party liability rather than an agreement to guaranty [ MBS

- The Hills and Normandale‘s ] personal liability under the N ote‘ s non - reco urse exceptions.‖ W ells Fargo cites Joseph Thomas, Inc. v. Graham for the proposition that we must characterize the nonrecourse indemnification agreement as a guaranty because it is ―collateral and secondary to the principal contract that is guarant eed in the secondary contract.‖ 842 S.W.2d 343, 346 (Tex. App.

— Tyler 1992, no writ). Appellees argue that this is a ―misreading of the case , ‖ and they instead cite Graham for the proposition that we must characterize the non recourse indemnification agreement a s an agreement to indemnify because ―a promise to protect the promisee is an indemnity contract.‖ White focuses exclusively on the uses and variations of the
term ―indemnity‖ throughout the nonrecourse indemnification agreement to support his argument tha t ―a sophisticated lender and servicer of commercial real estate property as well as the sole drafter of all the Loan Documents‖ should have drafted the non recourse agreement to be a ―guaranty‖ if it intended the agreement to operate as a guaranty. Smuck contends that under Graham , the

nonrecourse indemnification agreement does not operate as a guaranty against7

him and White . According to Smuck, ― Graham stands for the proposition that a promise to protect a third party is a guaranty, and a promise to prot ect the promise e is an indemnity contract.‖ Wells Fargo , by assignment, is the promise e on the note. Historically, an indemnification agreement is a promise ―to safeguard or hold harmless the indemnitee against existing or future loss, liability, or both.‖ Nat ’ l City Mortg. Co. v. Adams , 310 S.W.3d 139, 144 (Tex. App.

— Fort Worth 2010, no pet.) (citing Dr esser Indus., Inc. v. Page Petroleum, Inc. , 853 S.W.2d 505, 508 (Tex. 1993) )

. But ―[m]agic is not the quality of nomenclature,‖ and simply because a party calls himself a guarantor or an indemnitor ―does not inevitably make him one.‖ Wood v. Canfield Pap er Co. , 117 Tex. 399, 5 S.W.2d 748, 750 (Tex. 1928) (citing Davis v. Patrick , 141 U.S. 479 , 12 S. Ct. 58 (1891)). Instead, when construing promissory notes, we apply the rules of contract construction. See Fin. Freedom Senior Funding Corp. v. Horrocks , 2 94 S.W.3d 749, 753 (Tex. App.

— Houston [14th Dist.] 2009, no pet.) (citing EMC Mortg. Corp. v. Davis , 167 S.W.3d 406, 413 (Tex. App.

— Austin 2005, pet. denied)). In construing a written contract, the primary concern of the court is to ascertain the true int entions of the parties as expressed in the instrument. Valence Operating Co. v. Dorsett , 164 S.W.3d 656, 662 (Tex. 2005). Courts should examine the entire writing ―to harmonize and give effect to all the provisions of the contract so that none will be re ndered meaningless.‖ Id. Contact terms are given their plain, ordinary, and generally accepted meanings8

unless the contract itself shows them to be used in a technical or different sense. Id. ―We construe contracts  ̳ from a utilitarian standpoint bearin g in mind the particular busines s activity sought to be served,‘ and when possible, we will avoid a construction that ―is unreasonable, inequitable, and oppressive.‖ Frost Nat ’ l Bank v. L & F Distribs., Ltd. , 165 S.W.3d 310, 312 (Tex. 2005) (quoting Reill y v. Rangers Mgmt., Inc. , 727 S.W.2d 527, 530 (Tex. 1987)). We must look at all of the contract‘ s parts together and be ―particularly wary of isolating from its surroundings or considering apart from other provisions a single phrase, sentence, or section of a contract.‖ State Farm Life Ins. Co. v. Beaston , 907 S.W.2d 430, 433 (Tex. 1995). We presume that the parties to a contract intend every clause to have some effect. Heritage Res., Inc. v. NationsBank , 939 S.W.2d 118, 121 (Tex. 1996).
T he financing granted to MBS

- The Hills by Wells Fargo‘ s predecessor

- in

interest was nonrecourse. Thus , MBS

- The Hills‘ liabil ity

— according to the
note

— was only extended ―to the Mortgaged Property and other collateral given to secure the D ebt, and Lender shall not enforce such liability against any other asset, property or funds of Borrower‖ except under six specified conditions immediately identified in subsections (a)

– (f)

. Af ter listing the six exceptions , the note states the following: Items (a) throu gh (f) above are collectively the ―Non

- Recourse Exceptions‖. To the extent Borrower is a general partnership and Lender is required under applicable law to pursue its remedies against the persons or entities constituting Borrower, each reference to the ph rase ―(including Borrower)‖ in the Non

- Recourse Exceptions shall be deemed to read ―(including Borrower or any person or entity9

con stituting Borrower)‖. Borrower’ s liability under the Non Recourse Exceptions

. . . shall be limited to the amount of any losses or damages sustained by Lender in connection with such Non - Recourse Exception s

. [ 5 ] [Emphasis added

. ] The particular business activity sought to be served here is nonrecourse , commercial financing, so we must construe the non recourse indemnification agreement in a reasonable and equitable manner in accord ance with that purpose. The borrower in this case (MBS

- The Hills) was a limited partnersh ip, so only the general partner‘ s liability was at risk. But the general partner (Normanda le) was a limited liability corporation, so the entity ― constituting Borrower ‖ was another business ent ity with limited l iability. Therefore, Wells Fargo ‘ s predecessor

- in

- interest had Smuck and White sign the n on r ecourse indemnification a greement , seeking indemnification from Smuck and White if the

nonrecourse exce ptions under the note were triggered. Specifically, t he

non recourse indemnification agreement limits Smuck‘s and White‘s personal liability to that ―which Borrower at any time may be pers onally liable pursuant to the non

- recourse exceptions (as defined in paragraph 12 of the note)

. ‖ Accordingly, t he note limit s the lender‘ s recourse to the collateral used to secure the debt, but under six circumstances, the lender has recourse against MBS

- The Hills and Normandale for ―the amount of any losses or damages sustained by L ender in connection with such N on - R ecourse E xceptions .‖

5 Section 12(a) mirrors this language. It provides that Wells Fargo may ―obtain personal, recours e judgments against any person or entity

. . . relating to any losses sustained by [Wells Fargo] in connection with any

. . . waste .‖ [Emphasis added.]10

[Emphasis added

. ] This means that Wells Fargo may obtain a judgment against MBS

- The Hills and Normandale for dama ges resulting from , among other things , waste. The note does not give Wells Fargo full recourse against MBS

- The Hills and Normandale for the entire amount , if any, due and owing under the
note in the event MBS

- The Hills and Normandale‘s liability is established under

one or more of the nonrecourse exceptions. In other words, waste triggers liability for damages resulting from waste; waste does not trigger liability for damages equaling amounts remaining due and owing on the note. 6 Wells Fargo contended in its interlocutory motion for summary judgment that the following two requests for admission s were deemed admitted as a matter of law against MBS

- The Hills and Normandale:

22. Borrower and Normandale are jointly and severally liable for the full principal amount due on the Note , plus any associated interest, cost and fees.

. . . 23. Smuck and White are jointly and severally liable for the full principal amount due on the Note , plus any associated interest, cost and fees.

. . . [Emphasis ad ded.]
T hese requests for admission s misconstrue the terms of the note, which limit s liability to damages resulting from , among other things, waste. To the extent that Wells Fargo argues that it is entitled to recover the full amount due and owing under the note as a result of these inaccurate admission s being deemed admitted as a matter of law , it is wrong

— we fail to see how a deemed admissio n

6 We also note that all parties to this out

- of

- the

- ordinary loan transaction were represented by counsel. Certainly, the parties could have identified the indemnification agreement as a guaranty agreement if that was their intention.11

can unilaterally modify the terms of a bargained

- for agreement , the construction of which is a matter of law

. See Arthur J. Gallagher & Co. v. Dietrich , 270 S.W.3d 695, 701

– 02 (Tex. App.

— Dallas 2008, no pet.) (reasoning that contract modification must s atisfy traditional requirements of a contract

— a meeting of the minds supported by consideration) ; Boulet v. State , 189 S.W.3d 833, 838 (Tex. App.

— Houston [1st Dist.] 2006, no pet.) (reasoning that rule regarding requests for admissions does not contemplate or authorize admissions to questions involving points of law); see also MCI Telecomms. Corp. v. Tex. Utils. Elec. Co. , 995 S.W.2d 647, 650

– 51 (Tex. 1999) (reasoning that construction of unambiguous contract is question of law for court). C onsidering the non recourse indemnification agreem e nt ‘s limiting of Smuck and White‘s personal liability to that ―which Borrower at any time may be personally liable pursuant to the non

- recourse exceptions ,‖ t he n on r ecourse indemnification a greement therefore gives Wells Fargo recourse against Smuck and White for ―the amount of any losses or damages sustained by the lender in connection with such N on - R ecourse E xceptions

. ‖ [Emphasis added

. ] A s with MBS

- The Hills under the note, t he nonrecourse indemnification agreement does
not give Wells Fargo full recourse against Smuck and White for the entire
amount , if any, due and owing under the note in the event MBS

- The Hills and Normandale‘s liability is triggered under one or more of the nonrecourse exceptions

.12

We hold that t he evidence supports the trial court ‘s ― finding ‖ that the

n on r ecourse indemnification a greement did not operate as a guaranty of any obligation of MBS

- The Hills and Normandale . We overrule Wells Fargo‘s first issue.
V. P ERSONAL L IABILITY OF S MUCK AND W HITE In its second issue, Wells Fargo argues that Smuck and White‘s personal liability is conditioned on the liability of MBS

- The Hills and Normandale , so by establishing MBS

- The Hills and Normandale‘s liability via the interlocutory motion for summary judgment , Wells Fargo established Smuck and White‘s personal liability. Because Smuck and White ‘s personal liability is commensurate with the liability of MBS

- The Hills and Normandale under the nonrecourse exceptions, w e must review Wells Fargo‘s motion for interlocutory summary judgment to determine whether it indeed sought to establish MBS

- The Hills and Normandale ‘s liability under one or more of the note‘s nonrecourse exceptions. Wells Fargo made the following relevant statements in i ts motion for interlocutory summary judgment against MBS

- The Hills and Normandale: •―This Motion establishes as a matter of law that the Defendants are jointly and severally liable for the balance due on a promissory note . . . .‖ [Emphasis added.]

• ― The Defendants‘ failure to respond to Wells Fargo‘s Requests for Admissions results in those matters being deemed admitted as a matter of law. •―Wells Fargo has satisfied all the elements for recovery on the Note .‖ [Emphasis added.] •―Although Wells Far go meets the elements for recovery under a promissory note as detailed above, the obligations of MBS

- Hills and Normandale are generally13

non - recourse unless certain exceptions exist. Exceptions do exist [, including waste and impairment of Plaintiff‘s righ t to foreclose on the property.]‖ [Emphasis added.] •―The Defendants‘ commission of waste on the Property triggers full recourse liability .‖ [Emphasis added.] • ―The Defendants‘ allowing liens to remain on the Property impaired Wells Fargo‘s right to foreclose and triggers [full] recourse liability .‖ [Emph asis added.] Additionally, Wells Fargo attached the affidavit of Charles Crouch to the motion. In the affidavit, Crouch testified th at ―[t]he property was foreclosed upon on December 2 , 2008, leaving a deficiency amount in excess of $5,904,537.61.‖ Wells Fargo did not attach to the motion any evidence of damages for waste or for impairment of its right to foreclose the property. The trial court awarded Wells Fargo $5,904,537.61, an amount identical to the deficiency owed on the note , excluding interest, as of the December 2008 foreclosure

. At the final trial on Wells Fargo‘s claims against Smuck and White, Wells Fargo offered several exhibits into evidence, including the note and the nonrecourse indemnification agreement, and rested. It did not offer any testimony or evidence of any amounts of damages resulting from waste. A review of the entire motion for interlocutory summary judg ment thus reveal s that Wells Fargo did not move for summary judgment to recover damages for waste or for impairment of its right to foreclose on the property

. Instead, Wells Fargo (inconsistent with the terms of the note ) argued that because MBS

- The Hills and Normandale had committed waste or impaired Wells Fargo‘s right to foreclose on the property, it was therefore entitled to14

recover the full balance due on the note

. Those are two separate grounds for summary judgment

— the former seeks to recov er damages for waste or foreclosure impairment while the latter relies upon waste or foreclosure impairment to justify recovering the balance due on the note. The difference is significant because t he former implicates White and Smuck‘s personal liability under the nonrecourse indemnification agreement , but the latter does not. This court has recently issued two other opinions involving White and similar notes and nonrecourse indemnification agreement s

. In White v. MLMT
2004

- BPC1 Carlyle Crossing, LLC , the appellee sued MBS

- Carlyle Crossing, Smuck, and White under a $5.5 million promissory note and a nonrecourse indemnification agreement. No. 02

- 10

- 00233

- CV, 2011 WL 3672022, at *1 (Tex. App.

— Fort Worth Aug. 18, 2011, pet. denied) (mem. op.). The tri al court rendered a judgment in favor of MLMT for $1,766,355.52 for damages resulting from waste, and this court reviewed the legal and factual sufficiency of the evidence to support that award. Id. at *1

– 6. The noteholder there presented evidence and pr oved damages attributable to waste. Id. at *4.
In White v. JPMC 2004

- C3 Trails Apartments LLC , JPMC sued MBS

- The Trails, Smuck, White, and White‘s wife under a $3.7 million promissory note and a nonrecourse indemnification agreement for waste to an apa rtment complex property . No. 02

- 12

- 00164

- CV, 2012 WL 6632776, at *1 (Tex. App.

— Fort Worth Dec. 21, 2012, no pet. ) (mem. op.). The trial court rendered judgment against MBS

- The Trails, Smuck, and White for $1,507,506.59, and White appealed. Id.15

In add ressing White‘s argument involving the express negligence rule, this court observed that ―White did not challenge any of the findings concerning waste and the damages related thereto . Because the record contains evidence to support all of these unchalleng ed findings, they are binding on this court.‖ Id. at *2. Thus, in both MLMT and JPMC , the appellees presented evidence and proved damages attributable to waste. Unlike in this case , neither appellee in those cases relied upon the borrowing entity‘s commission of waste to justify recovering the remaining balance of principal and interest due on the note

. In yet another recent case involving Wells Fargo, Smuck, White, and a similar financing arrangement, Wells Fargo obtained an interlocutory summary judgment against the borrowers but failed to prevail on its claims against Smuck and White under the indemnification agreement. See Wells Fargo Bank, N.A. v. Smuck , No. 14

- 12

- 00574

- CV, 2013 WL 3422888, at *1

– 2 (Tex. App.

— Houston [14th Dist.] July 9, 2013, no pet. h.). Although the court of appeals reversed the trial court‘s take

- nothing judgment and rendered judgment in favor of Wells Fargo, it contrasted the facts of its case with those in our previous opinion issued
in this cause. Id. at *10. The court specifically pointed out that unlike in our cause, the interlocutory summary judgment that Wells Fargo obtained in its case was for damages susta ined in connection with the non recourse waste exception. Id. at *10

– 11. Th us , i n making that observation, the court of appeals implicitly acknowledged that Wells Fargo would not have been entitled to recover under the indemnification agreement had the interlocutory summary judgment that it16

obtained against the borrowers not s ought to establish damages sustained in connection with the borrowers‘ waste. That is the precise point that we are attempting to convey here: Wells Fargo did not seek

— and therefore did not obtain

— a summary judgment on the ground that MBS

- The Hills and Normandale were liable under one or more of the note‘s nonrecourse exceptions because Wells Fargo made absolutely no attempt to prove that it sustained damages in connection with waste

. Wells Fargo instead proved that it sustained damages in connection w ith MBS

- The Hills and Normandale‘s breach of the
note. We reject each of the dissent‘s contentions. Accordingly, because Wells Fargo did not obtain an interlocutory summary judgment establishing that it had sustained damages in connection with the nonrecourse exceptions

— specifically, for waste or for foreclosure impairment

— Wells Fargo failed to demonstrate White and Smuck‘s personal liability

. We overrule Wells Fargo‘s second issue.17 VI
. C ONCLUSION Having overruled both of Wells Fargo‘s issues , we affirm the trial court‘s judgment.

BILL MEIER JUSTICE
PANEL: LIVINGSTON, C.J.; MEIER and GABRIEL, JJ. GABRIEL, J. filed a dissenting opinion.
DELIVERED: August 8 , 201 3