There was a foreclosure procedure used by lenders in
Texas that increased leverage against borrowers. At foreclosure sales, some
would offer a bid that was not only substantially less than the debt, but also
significantly less than the property’s value. This created a deficiency
balance. Lenders then decided to pursue the deficiency balance against the
party that signed the Note. And, if / when applicable, the Guarantor.
Borrowers
were unhappy. So, they lobbied their legislators. A fix was provided a few
years ago. Our own Texas Property Code (yes THAT
TPC – the one I am writing about constantly) was amended to provide some relief
in the form of a fair market value offset. Check out 51.003 of the TPC.
Stated
in its most simple manner, a debtor (borrower or guarantor) can complain that
the lender bid an artificially low amount at the foreclosure sale, and created
an inequitable deficiency balance. If the debtor is right, then through
operation of TPC 51.003, the foreclosure sale bid is essentially increased to
equal the property’s FMV as of the date of foreclosure.
And with
that bit of introduction, here is today’s case.
Interstate
35/Chisam Road, LP and Malachi Development Corp loaned Villages LP $696,000.
The Note was secured by a Deed of Trust on a Denton County property. Further
securing the Note was a Guaranty signed by Mehrdad Moayedi.
When the
gravy train . . . err umm the debt payments stopped, Villages foreclosed and
bid $487,200. Villages then pursued Moayedi for $266,748 plus attorney’s fees
and related expenses.
Moayedi
defended the claim by citing the new provisions of the Texas Property Code and
tendering evidence that the property had a FMV on the date of foreclosure of
$840,000. I-35 responded by claiming that Moayedi had waived his right to rely
on the Texas Property Code.
Moayedi
had of course signed a Guaranty. The Guaranty did of course contain a waiver
clause. However, the waiver clause did not specifically cite Section 51.003 of
the TPC. And so – what lawyers dream about – a lawsuit was born.
The
trial court sifted through most (maybe all) of this, and rendered a Judgment
for Moayedi that since the Guaranty did not specifically waive his rights under
51.003, he was not liable for the uber-deficiency.
I-35
appealed.
The
Dallas Court of Appeals evaluated the Note, property value, FMV, evidence,
Texas laws, Texas cases and the potential that the Rangers might yet go to the
World Series again. (That last part was a reading test.)
The
Appellate Court concluded that the Guaranty did not need to specifically state
“I WAIVE 51.003.” It was
enough that Moayedi’s Guaranty Agreement waived “. . . any defense” and “. . . each
and every defense . . .”
The
trial court’s Judgment was reversed. I-35 wins. Moayedi loses.
See Interstate 35/ Chisam Road LP v. Moayedi;
No. 05-11-00209-CV; Texas 5th Court of Appeals; August 8, 2012.
Lessons learned:
1. There
are Texas laws to protect borrowers and guarantors against too-low foreclosure
bids.
2. The
protections offered by those laws can be waived, at least in a commercial
context.
3. Don’t
conclude that there is no waiver in place just because the loan documents do
not specifically reference TPC 51.003.
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
