Opinion ID: 2759993
Heading Depth: 2
Heading Rank: 1

Heading: Offset Rights

Text: Section 51.003 of the Texas Property Code is “designed to ensure that debtors receive credit when their foreclosed property is sold at an unreasonably low price.” Moayedi, 438 S.W.3d at 6. When real property is sold in foreclosure for less than the unpaid balance of the indebtedness secured by the property, the lender may sue the guarantor to recover the deficiency. See Tex. Prop. Code Ann. § 51.003(a). However, section 51.003(c) entitles the guarantor to an offset against his liability equal to the amount that the property’s fair market value exceeds its sale price. Tex. Prop. Code Ann. § 51.003(c); Moayedi, 438 S.W.3d at 5. The Texas Supreme Court has held that guarantors may, by contract, waive their offset rights under section 51.003. Moayedi, 438 S.W.3d at 6. In Moayedi, the Texas Supreme Court held that the guarantor unambiguously waived his right to an offset through the following language in the guaranty agreement: “Guarantor further agrees that this Guaranty shall not be discharged, impaired or affected by . . . 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.” Id. at 3. 5 Case: 14-10182 Document: 00512866616 Page: 6 Date Filed: 12/11/2014 No. 14-10182 The court in Moayedi acknowledged that “[t]o be effective, a waiver must be clear and specific.” Id. at 6. The court defined “waiver” as the “intentional relinquishment of a known right or intentional conduct inconsistent with claiming that right.” Id. (internal quotation marks and citation omitted). The court nevertheless found that language waiving “any,” “each,” and “every” defense was sufficiently specific to effect a waiver of offset rights under section 51.003. Id. at 8. The court noted that “[j]ust because the waiver is all encompassing does not mean that it is unclear or vague.” Id. The language in Prime’s Guaranty is even more specific than the language in the agreement at issue in Moayedi. The Guaranty provided, in relevant part, that “the liabilities and obligations of Guarantor to Lender hereunder, shall not be reduced . . . by reason of any existing or future offset, claim or defense of Borrower, or any other party, against Lender or against payment of any of the Debt or the Guaranteed Obligations.” Guaranty § 1.4. If language in the Moayedi guaranty waiving “every . . . defense” was sufficiently specific to waive offset rights, so too was language in Prime’s Guaranty waiving “any . . . offset, claim or defense.” See Moayedi, 438 S.W.3d at 7 & n.31 (noting that language in a guaranty agreement that waived the “right of offset” was more specific than the language at issue in Moayedi). 1 1 Prime effectively argues that Moayedi was wrongly decided because the waiver at issue in that case was not sufficiently specific. However, under the Erie doctrine, we are bound to apply principles of contract interpretation articulated by the Texas Supreme Court and to make an informed judgment as to how a Texas court would rule if presented with the same facts. Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938); Quorum Health Res., L.L.C. v. Maverick Cnty. Hosp. Dist., 308 F.3d 451, 458 (5th Cir. 2002) (“Although there is no Texas Supreme Court case involving the exact contract language at issue here, Texas Supreme Court cases applying the applicable rules of contract construction to similar indemnity provisions provide ample guidance for this court to substitute an informed judgment for an informed guess as to how a Texas court would rule if presented with these facts.” (internal quotation marks, alterations, and citation omitted)). Indeed, in an unsuccessful motion to stay the appeal pending the issuance of a decision in Moayedi, Prime acknowledged candidly 6 Case: 14-10182 Document: 00512866616 Page: 7 Date Filed: 12/11/2014 No. 14-10182 Nor do the identities of the parties provide a sufficient basis to distinguish this case from Moayedi. The Moayedi court noted that there was no “indication that Moayedi [the guarantor] was not a sophisticated businessman. After all, he was the president of Villages’ [the borrower’s] general partner.” Id. at 8. Similarly, there is no indication that Prime, an asset management company, is not a sophisticated party. 2 A finding of waiver here is also consistent with our own precedent. In LaSalle Bank National Ass’n v. Sleutel, 289 F.3d 837, 839–42 (5th Cir. 2002), we held that the guarantor waived his section 51.003 rights based on the following language in the guaranty agreement: To the extent allowed by applicable law, Guarantor expressly waives and relinquishes all rights and remedies now or hereafter accorded by applicable law to guarantors or sureties, including, without limitation: . . . any defense, right of offset or other claim which Guarantor may have against Borrower or which Borrower may have against Lender or the Holder of the Note. If a waiver of “any . . . right of offset” in the Sleutel guaranty constitutes a waiver of section 51.003 rights, then so too does language in Prime’s Guaranty that “obligations of Guarantor . . . shall not be reduced . . . by reason of any existing or future offset.” See also Haggard v. Bank of the Ozarks, Inc., 668 F.3d 196, 202 (5th Cir. 2012) (holding that the guarantor waived his offset rights through language providing that the guarantor’s obligation “shall not be impaired or released, without written consent of the Bank, based on: ‘any defenses, set-offs or counterclaims which may be available to Borrower or any other person or entity’”). that the Texas Supreme Court in Moayedi was “considering the very issue which would provide dispositive guidance relevant to this case to this Court, sitting as an Erie court.” 2 The record reflects that Prime had contracts to advise various companies that invested in real estate. 7 Case: 14-10182 Document: 00512866616 Page: 8 Date Filed: 12/11/2014 No. 14-10182 However, our analysis does not end with section 1.4 of the Guaranty; we must look to the entire contract to determine the parties’ intent. See Moayedi, 438 S.W.3d. at 8. Prime points to the following language in the Guaranty: “Guarantor WAIVES each and every right to which it may be entitled by virtue of any suretyship law, including any rights it may have pursuant to . . . Section 51.005 of the Texas Property Code.” 3 Guaranty § 5.13. Prime argues that the express waiver of section 51.005 rights, compared to the absence of an explicit reference to section 51.003, indicates that the parties did not intend for Prime to waive its offset rights under section 51.003. See CKB & Assocs., Inc. v. Moore McCormack Petrol., Inc., 734 S.W.2d 653, 655 (Tex. 1987) (relying on the rule of contract construction “expressio unius est exclusio alterius, meaning that the naming of one thing excludes another”). However, the words “any” and “including” indicate that the list of waived rights in section 5.13 of the Guaranty is illustrative, and not exhaustive. See Tex. Prop. & Cas. Ins. Guar. Ass’n/Sw. Aggregates, Inc. v. Sw. Aggregates, Inc., 982 S.W.2d 600, 608 (Tex. App. 1998) (“It is hornbook law that the use of the word including indicates that the specified list . . . is illustrative, not exclusive.” (alteration in original) (internal quotation marks and citation omitted)); cf. Tex. Gov’t Code Ann. § 311.005(13) (providing that in the context of statutory construction, “‘[i]ncludes’ and ‘including’ are terms of enlargement and not of limitation or exclusive enumeration, and use of the terms does not create a presumption that components not expressed are excluded”). In addition, the expressio unius canon is only “an aid to the resolution of ambiguities,” and does not trump the 3Section 51.005 of the Texas Property Code provides for offset rights if the foreclosure sale takes place after the debt holder obtains a judgment against the guarantor. See Tex. Prop. Code Ann. § 51.005(a). Because the foreclosure sale of the Farmers Branch property took place before Hometown obtained a judgment against Prime, section 51.005 does not apply to their dispute. 8 Case: 14-10182 Document: 00512866616 Page: 9 Date Filed: 12/11/2014 No. 14-10182 Guaranty’s clear language precluding “any existing or future offset, claim or defense.” Guaranty § 1.4. See Smith v. Stonebridge Life Ins. Co., 217 F. App’x 360, 361 (5th Cir. 2007) (“Smith argues that we should apply the canon expressio unius est exclusio alterius, but that canon is only an aid to the resolution of ambiguities. Here there is no ambiguity.” (citation omitted)); Keystone Equity Mgmt. v. Thoen, 730 S.W.2d 339, 340 (Tex. App. 1987) (declining to apply the expressio unius canon where the plain meaning of a contract supported the opposite interpretation). Prime further argues that the Deed of Trust establishes that Prime did not waive offset rights in the Guaranty. The Deed of Trust provides a mechanism for determining the fair market value of the Farmers Branch property in the context of a deficiency action. Deed of Trust § 23.17. However, the mechanism provided by the Deed of Trust differs from and replaces the procedure that section 51.003 provides for calculating fair market value. Given that Prime moved in the district court for a determination of fair market value under section 51.003, Prime cannot now assert that it is bound by—and may benefit from—the procedure outlined in the Deed of Trust. In addition, while Prime, under the Guaranty, assumed the Borrower’s obligations set forth in the Deed of Trust, see Guaranty §§ 1.1, 1.2, the Guaranty does not entitle Prime to assert the Borrower’s defenses, including the defense of offset. Indeed, the Guaranty provides: Guarantor hereby . . . waives any common law, equitable, statutory or other rights . . . which Guarantor might otherwise have . . . in connection with any of the following: [inter alia,] [t]he invalidity, illegality or unenforceability of all or any part of the Loan or the Guaranteed Obligations . . . including without limitation the fact that . . . the Borrower has valid defenses, claims or offsets . . . which render the Loan or the Guaranteed Obligations wholly or partially uncollectible from Borrower . . . it being agreed that Guarantor 9 Case: 14-10182 Document: 00512866616 Page: 10 Date Filed: 12/11/2014 No. 14-10182 shall remain liable hereon regardless of whether Borrower or any other person be found not liable on the Loan . . . . Guaranty § 2.4. The Guaranty therefore precludes Prime from enforcing the offset rights to which the Borrower is entitled under the Deed of Trust. Section 2.12 of the Guaranty further corroborates Prime’s intent to waive offset rights. That section provides: “it is the unambiguous and unequivocal intention of Guarantor that Guarantor shall be obligated to pay the Guaranteed Obligations when due, notwithstanding any occurrence, circumstance, event, action, or omission whatsoever, whether contemplated or uncontemplated, and whether or not otherwise or particularly described herein, which obligation shall be deemed satisfied only upon the full and final payment and satisfaction of the Guaranteed Obligations.” Guaranty § 2.12 (emphasis added). The Texas Court of Appeals, in an analysis cited approvingly by the Texas Supreme Court, found that Moayedi’s promise to “‘unconditionally’ . . . guarantee[] payment of [the] debt” corroborated his intent to waive offset rights under section 51.003. Interstate 35/Chisam Rd., L.P. v. Moayedi, 377 S.W.3d 791, 800 (Tex. App. 2012), aff’d, 438 S.W.3d 1, 8 (Tex. 2014) (“We agree with Moayedi that the meaning of the waiver in paragraph 7 depends on the rest of the agreement, but we agree with the court of appeals that these provisions indicate an intent that the guaranty would not be subject to any defense other than full payment.”). Prime’s guarantee of “full . . . payment” therefore further corroborates Prime’s clear waiver, in section 1.4 of the Guaranty, of its offset rights under section 51.003 of the Texas Property Code. It was therefore proper for the district court to deny Prime’s motion for a determination of the fair market value of the property sold in foreclosure. 10 Case: 14-10182 Document: 00512866616 Page: 11 Date Filed: 12/11/2014 No. 14-10182