Opinion ID: 1760157
Heading Depth: 1
Heading Rank: 13

Heading: Collection Efforts Against Red

Text: The court of appeals also cited INA's collection efforts against Red as unconscionable on the basis that Red, by prepaying her notes, had not defaulted on them. That holding assumes that Red was not in default to the holder of the notes. The record does not support that assumption. The promissory notes signed by each of the Investors explicitly provided for a right of prepayment. The notes also directed that payments were to be sent to the partnership address or at such other place as may be designated in writing by the holder of this note. In January, 1985, Red received a letter from Commonwealth informing her that her Overlord III promissory note had been assigned to a lender. The letter directed her to make future installments payable to that lender and to mail them to the Bank's New York address. However, the letter also told Red to contact John Meatte at his Commonwealth office if she had any questions about the assignment or her obligations thereunder. In December 1985, Red called the Commonwealth office to ask how she could prepay the remaining $44,635.99 in principal and interest owed on her three note obligations. A Commonwealth employee told Red that the lenders to which the notes had been assigned did not permit prepayment and advised her to wire the money to an escrow agent. Commonwealth promised that withdrawals would be made from the interest-bearing escrow fund to pay the installment obligations as they came due. So advised, Red wired the money and received a signed confirmation from Commonwealth's attorney that full payment of her notes had been received. Red's escrow funds were never properly applied to her debt; the record does not indicate how they were misapplied. Suffice it to say that Crossland Savings and Credit Lyonnais, the assignees of Red's notes, did not receive payment. Crossland and Lyonnais first notified INA on January 15 and February 12, 1987, respectively, that Red had defaulted on her Overlord III and IV notes. INA denied Crossland's first demand because it was untimely; however, it honored all of Lyonnais' demands and Crossland's subsequent demands without making any inquiry to confirm the defaults. Red alleges that because she did not default on her notes, Crossland and Lyonnais had no right under the surety bond contract to demand payment from INA. By honoring their demands for payment without investigating whether or not Red had in fact defaulted, Red claims that INA acted unconscionably. Red's argument fails, however, because Red was technically in default, although through no fault of her own. Crossland and Lyonnais were holders in due course of Red's notes; their right to receive payment from Red was not extinguished by Red's attempted prepayment into a Commonwealth escrow account. TEX. BUS. & COM.CODE §§ 3.302 & 3.305; see Guaranty Fed. Sav. Bank v. The Horseshoe Operating Co., 793 S.W.2d 652, 656 (Tex.1990). Accordingly, when these lenders ceased receiving the note installments after Red's escrowed funds were misappropriated, Red was in default, notwithstanding her good faith attempt at prepayment. Crossland and Lyonnais were entitled to demand payment from Red's surety, INA, and INA was contractually obligated to honor those demands. In Universal Metals and Machinery, Inc. v. Bohart, 539 S.W.2d 874, 877 (Tex.1976), we held that when the parties waive[] any requirement that the holder of the note must exhaust its rights or take action against the maker .... the court should not again write those conditions into the note. We should interpret the instrument by the standard of performance upon which the parties agreed. Accordingly, INA did not commit any unconscionable acts by honoring these demands. Red further argues that even if INA was obligated to honor the lenders' demands, INA acted unconscionably in its collection efforts against her. In December 1986, INA entered into a joint collection agreement with Commonwealth, initiated collection efforts against Red, and persisted in these attempts even after learning of Red's prior payment. Red claims that when it jointly established collection procedures with Commonwealth, INA should have obtained information from Commonwealth that Red had prepaid her note. By doing so, Red claims, the escrowed money might have been protected and applied to pay Red's notes. According to the terms of the Collection Procedure Agreement between INA and Commonwealth, Commonwealth was required to notify INA on the day following any installment date for any Partnership notes bonded by INA ... with a list of delinquent accounts. However, there is no evidence that Commonwealth provided INA with any notice or records of Red's prepayment into an escrow account. Nor is there any evidence that had INA received such notice in December 1986 Red's escrow funds could have been protected. The record reflects that Crossland reported that Red first defaulted on her Overlord III promissory note on October 30, 1986, indicating that Red's escrow funds had been misapplied before INA ever entered into the collection agreement with Commonwealth. The record also reflects that INA was not notified of possible fraud until the summer of 1987. Red simply presented no proof that INA's joint collection agreement with Commonwealth, into which INA entered prior to learning of Commonwealth's fraud, was unconscionable and a producing cause of damages.