Court Opinion

ID: 4766121
Source: CourtListenerOpinion
Date Created: 2021-08-16 22:01:35.545614+00
Date Added: 2024-06-11T08:09:15.848248
License: Public Domain

Case: 20-40324    Document: 00515979881         Page: 1   Date Filed: 08/16/2021

          United States Court of Appeals
               for the Fifth Circuit                            United States Court of Appeals
                                                                         Fifth Circuit

                                                                       FILED
                                                                 August 16, 2021
                                No. 20-40324                      Lyle W. Cayce
                                                                       Clerk

   Lockwood International, Incorporated,

                                                                         Plaintiff,

                                    versus

   Wells Fargo, National Association; Trustmark
   National Bank,

                                Defendants -Third Party Plaintiffs—Appellees,

                                    versus

   Michael F. Lockwood,

                                             Third Party Defendant—Appellant.

                 Appeal from the United States District Court
                     for the Southern District of Texas
                           USDC No. 3:17-CV-365

   Before Stewart, Costa, and Willett, Circuit Judges.
Case: 20-40324     Document: 00515979881          Page: 2    Date Filed: 08/16/2021

                                   No. 20-40324

   Gregg Costa, Circuit Judge:*
          Two lenders seek to collect more than $58 million from Michael
   Lockwood. How did Lockwood find himself on the hook for that eye-popping
   sum? He is the sole owner of several companies that took on a $90 million
   revolving line of credit with Wells Fargo and Trustmark National Bank.
   Lockwood’s personal liability arose after his companies began breaching a
   number of the loans’ financial covenants. To avoid acceleration—through
   which the entire loan amount would come due at once—Lockwood himself
   guaranteed the companies’ outstanding debt. The district court held that
   Lockwood breached the guaranty. We agree.
                                         I.
          Lockwood’s companies—Lockwood International, Inc. and its
   affiliates Lockwood Enterprises, Inc., LMG Manufacturing, Inc., and Piping
   Components, Inc.—service the petrochemical, oil and gas, and construction
   industries. These businesses entered into two revolving credit notes in
   September 2015, borrowing $70 million from Wells Fargo and $20 million
   from Trustmark.
          By the following year, Lockwood’s companies had already breached
   some of their obligations. The lenders had also grown concerned about the
   borrowers’ “cash burn,” “collateral deterioration,” and “poor accounting
   controls.” To address these issues, the parties modified the loan obligations
   and reduced the total debt to $72 million.
          The same day that the lenders and companies amended their credit
   agreement, Lockwood executed a personal guaranty of the debt his

          *
            Pursuant to 5th Circuit Rule 47.5, the court has determined that this
   opinion should not be published and is not precedent except under the limited
   circumstances set forth in 5th Circuit Rule 47.5.4.

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   companies had assumed. The lenders required this guaranty to ensure that
   Lockwood, who had “committed to fully re-engage in the business after an
   extended leave of absence,” retained “skin in the game.” At the lenders’
   recommendation—or insistence, as Lockwood maintains—the borrowers
   also brought on a chief restructuring officer (CRO) to help turn the
   companies around.
           But the situation at Lockwood’s companies did not improve. They
   continued to default on loan obligations. And although the borrowers had
   hired a CRO, Wells Fargo was unhappy that they had not granted him “full
   authority to operate the Borrowers” or “to right-size their businesses.” The
   lenders therefore issued an ultimatum: give the CRO such authority within
   48 hours or face possible repossession of collateral and acceleration of the
   loans. Rather than risk acceleration of the sizable debt he had personally
   guaranteed, Lockwood handed over “full authority” to the CRO. But the
   borrowers remained in default, missing a required $5 million loan payment. 1
           To avoid acceleration, Lockwood and the borrowers executed a
   forbearance agreement with the lenders that imposed financial, operational,
   and reporting obligations on the borrowers. In it, Lockwood acknowledged
   that he owed the debt set out in the amended credit agreement, that the debts
   were “legal, valid, and binding Obligations, enforceable in accordance with
   their respective terms,” and that he had “no valid defense to the
   enforcement of such Obligations.”                 The forbearance agreement also
   contained a waiver and release of all “setoffs, counterclaims, adjustments,

           1
            Lockwood argues that the CRO, who then had full control of his companies,
   should have directed payment of the $5 million owed. The lenders explain in response that
   the money Lockwood claims was available for the periodic payment actually constituted
   proceeds from the fire sale of the lenders’ collateral, which the lenders applied to the debt
   instead.

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   recoupments, defenses, claims, causes of action, actions or damages of any
   character or nature” against the lenders.
          As the agreement was set to expire, and the threat of acceleration
   loomed once again, Lockwood and the borrowers signed another forbearance
   agreement recognizing their continued defaults.      Lockwood once again
   acknowledged that he owed the listed debt, retained no defenses to payment,
   and waived all claims and defenses against the lenders.
          When the second forbearance agreement expired and the borrowers’
   defaults remained uncured, the lenders finally followed through on their
   threats of acceleration.
          Litigation immediately followed. Lockwood International sued Wells
   Fargo and Trustmark in Galveston federal court, seeking more than $1.5
   billion in damages for negligence, fraud, conversion, and a host of other
   business torts. The lenders counterclaimed and impleaded Lockwood and
   the remaining borrowers and guarantors, alleging breach of contract and
   breach of guaranty. Those third-party defendants, in turn, counterclaimed
   against the lenders, asserting the same tort claims initially lodged by
   Lockwood International.
          After much ado—a tangled trip through federal, state, and bankruptcy
   courts—nothing ultimately came of the borrowers’ tort claims against the
   lenders.    But the lenders’ breach of guaranty claim against Lockwood
   survived, and the lenders moved for summary judgment. In response,
   Lockwood asserted that fact issues remained as to four of his affirmative
   defenses: fraudulent inducement, duress, unclean hands, and equitable
   estoppel.
          The district court granted the lenders’ motion for summary judgment.
   It noted that the underlying breach of guaranty was “not contested,” then
   went on to evaluate Lockwood’s defenses. The court held that the waivers

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                                    No. 20-40324

   and releases Lockwood signed as part of the two forbearance agreements
   foreclosed any claim that he was fraudulently induced into signing the earlier
   guaranty. It also determined that Lockwood’s allegations of intense business
   pressure fell short of establishing duress. Lockwood’s remaining defenses
   failed because they related only to equitable relief no longer at issue. The
   district court ordered Lockwood to pay $58,710,456.26, plus interest,
   attorneys’ fees, and costs.
                                         II.
          To avoid enforcement of the guaranty, Lockwood needs a hat trick:
   He must show that the guaranty, the first forbearance agreement, and the
   second forbearance agreement are all voidable. Lockwood attempts to do so,
   arguing that in each case, the lenders obtained his signature by fraudulent
   means or by taking advantage of his dire financial straits.
          Lockwood cannot escape his promise to guarantee the debt. Even if
   the guaranty itself is voidable—something we doubt but need not
   resolve—the first forbearance agreement ratified its terms.
          Ratification occurs when “a party by its conduct recognizes a contract
   as valid, having knowledge of all relevant facts.”              Barrand, Inc. v.
   Whataburger, Inc., 214 S.W.3d 122, 146 (Tex. App.—Corpus Christi 2006,
   pet. denied) (citations omitted). A guaranty otherwise voidable due to
   fraudulent inducement or duress cannot be avoided once ratified. See Harris
   v. Archer, 134 S.W.3d 411, 427 (Tex. App.—Amarillo 2004, pet. denied)
   (citing Rosenbaum v. Tex. Bldg. & Mortg. Co., 167 S.W.2d 506, 508 (Tex.
   1943)) (recognizing ratification as a defense to fraudulent inducement); Lee
   v. Wal-Mart Stores, Inc., 943 F.2d 554, 560 n.11 (5th Cir. 1991) (“Ratification
   is a defense to a claim of economic duress.” (citing First Tex. Sav. Ass’n of
   Dall. v. Dicker Ctr., Inc., 631 S.W.2d 179, 186 (Tex. App.—Tyler 1982, no
   writ))). Ratification “may be determined as a matter of law if the evidence is

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   not controverted or is incontrovertible.”            Barrand, 214 S.W.3d at 146
   (citation omitted).
            The first forbearance agreement ratified the guaranty in no uncertain
   terms.       It provides: “The Obligors hereby acknowledge, ratify, and
   confirm . . . the Guaranties . . . and all of their respective debts and obligations
   to Credit Parties thereunder.” So unless Lockwood can invalidate the first
   forbearance agreement, he is bound by the ratified guaranty.
                                             A.
            In district court, Lockwood argued that the first forbearance
   agreement was voidable because the lenders fraudulently induced him into
   signing it. He contends that when he executed that agreement, “he was not
   yet fully aware of the full extent of [the lenders’] bait-and-switch scheme,”
   by which they promised him control over his companies and then, guaranty
   in hand, stripped him of power in favor of the CRO. 2
            The district court detected a glaring problem with this theory: the
   timeline of events refutes it. Lockwood learned of the purported fraud—the
   supposed scheme to replace him with the CRO—before he ratified the
   guaranty. By the time Lockwood executed the first forbearance agreement,
   he understood that he would not be in charge of his companies’ operations,
   as he had already relinquished “full authority” to the CRO. By ratifying his
   guaranty via the forbearance agreement after learning of the alleged fraud,

            2
            It does not appear that the lenders ever represented that Lockwood would remain
   in charge of his companies. The lenders testified that they asked for a guaranty because
   they “wanted [Lockwood] tied to the business personally” and “wanted [Lockwood] to
   have skin in the game.” But neither statement promises that Lockwood would retain full
   control.

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                                    No. 20-40324

   Lockwood “waive[d] any right to assert the fraud as basis to avoid the
   agreement.” Harris, 134 S.W.3d at 427 (citation omitted).
          The fraudulent inducement defense to the first forbearance
   agreement fails.
                                         B.
          On appeal, Lockwood focuses not on his temporally challenged fraud
   defense but instead on his defense of duress. Lockwood argues that economic
   duress compelled him to enter into all three agreements. For the first
   forbearance agreement we are discussing, he says that duress came about
   when the lenders improperly threatened him with loan acceleration, which
   would subject his companies to “financial ruin,” if he did not turn over “full
   authority” to the CRO.
          No doubt Lockwood feared the looming prospect of the banks’
   demanding the tens of millions of dollars that he and his companies owed.
   The banks used that leverage to seek something they wanted: a transfer of
   authority to the CRO. But using leverage is what negotiation is all about.
   And difficult economic circumstances do not alone give rise to duress. See
   Dicker Ctr., 631 S.W.2d at 186. If they did, then many loans would be
   voidable. People and businesses often need loans because they are facing
   financial challenges. Borrowers who seek to modify their loan agreements
   after failing to make payments are even more likely to be feeling the squeeze.
   Opportunities to modify—and potentially stave off financial disaster—would
   be few and far between if a borrower could later void the modification because
   of the economic pressure that prompted it in the first place.
          Duress requires more. Wright v. Sydow, 173 S.W.3d 534, 544 (Tex.
   App.—Houston [14th Dist.] 2004, pet. denied) (“The victim’s plight alone
   will not suffice; it must be coupled with the bad acts of the transgressor.”
   (citation omitted)). It exists only when a party can prove three things: “(1) a

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                                         No. 20-40324

   threat to do something a party has no legal right to do, (2) an illegal exaction
   or some fraud or deception, and (3) an imminent restraint that destroys the
   victim’s free agency and leaves him without a present means of protection.”
   Id. To overcome summary judgment, Lockwood must show a fact issue on
   each of these elements. Id.
           Lockwood’s duress defense falters at the first step because he has not
   proven that the lenders threatened to take any unauthorized action. Id.; see
   Windham v. Alexander, Weston & Poehner, P.C., 887 S.W.2d 182, 185 (Tex.
   App.—Texarkana 1994, writ denied) (“Implicit in the term duress is that the
   threat is unlawful, improper, or unjust.”). The compiled credit agreement
   permitted the lenders to accelerate the loans upon the borrowers’ default. 3
   In the June 2017 notice of default, the lenders communicated to Lockwood
   that they would consider exercising this right unless he acted within 48 hours
   to give full control of his companies to the CRO. Lockwood has not shown
   that the lenders had “no legal right” to demand he empower the CRO.
   Wright, 173 S.W.3d at 544. Nor are we aware of anything that bars a lender
   from seeking a change in management as a condition of a loan modification.

           3 Lockwood argues for the first time on appeal that because the compiled credit
   agreement in the summary judgment record is redlined and unsigned, a fact issue exists on
   whether the lenders had authority to accelerate the borrowers’ debt in the manner or
   amount they threatened. This argument is forfeited because it was not raised in the district
   court. Stewart Glass & Mirror, Inc. v. U.S. Auto Glass Discount Ctrs., Inc., 200 F.3d 307,
   316–17 (5th Cir. 2000). Regardless, the compiled credit agreement setting out the debt that
   Lockwood guaranteed was amended several times and appears in the record as Annex A to
   the February 27, 2017 amendment. Because the borrowers signed the February
   amendment, and that amendment “plainly refers” to the compiled credit agreement
   attached as Annex A, it does not matter that Annex A was unsigned. Owen v. Hendricks,
   433 S.W.2d 164, 166 (Tex. 1968); id. (“It is uniformly held that an unsigned paper may be
   incorporated by reference in the paper signed by the person to be charged.”).

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         Lockwood has not established that the lenders perpetrated any “bad
   acts” to obtain his signature on the first forbearance agreement. Id. at 544.
   The duress defense fails.
                                       ***
         Because Lockwood cannot invalidate the first forbearance agreement
   on the grounds of fraudulent inducement or duress, his ratification of the
   personal guaranty stands.       The judgment of the district court is
   AFFIRMED.

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