Michael Smuck and Edwin White wanted to purchase an apartment complex known as “The Falls,” located generally in the southeast quadrant of I-30 and Loop 820 in Fort Worth. They formed a special purpose entity (SPE) called MBS-The Falls, Ltd. for that purpose, and yet another SPE to serve as the general partner of MBS-The Falls.
To acquire the apartments, MBS-The
Falls signed a $9 million note, deed of trust, security agreement and other
loan docs pledging the real estate. Wells Fargo Bank became the owner of the loan
docs through an assignment.
The loan provided for non-recourse
financing. As such, the liability of MBS-The Falls was limited to its equity in
the apartment complex, unless a non-recourse exception was triggered. The
non-recourse exceptions that could impose liability upon MBS-The Falls were
listed in the Note.
MBS-The Falls defaulted on the Note,
and Wells Fargo foreclosed. Wells Fargo filed suit in Tarrant County alleging
waste and that the owner allowed liens to be filed against the property, which
impaired the value of Wells’ collateral.
At trial in Tarrant County, Wells
Fargo obtained a judgment against MBS-The Falls for $10+ million. With that
judgment in hand, Wells Fargo then sued Messrs. Smuck and White in Harris
County for that amount. Wells Fargo claimed that Smuck and White were 100%
liable for the judgment obtained in Tarrant County against the owner of the
The basis for Wells’ Harris County
lawsuit is contained in a document signed personally by Smuck and White
captioned “Non-Recourse Indemnification Agreement.” In that agreement
both Smuck and White agreed to indemnify the lender for all losses incurred.
Smuck argued that he would be liable
to Wells Fargo only if a third-party asserted a claim, and not merely if Wells
Fargo had incurred losses.
White claimed that the judgment
rendered in Tarrant County was not based on the non-recourse exceptions, and
further that Wells Fargo failed to establish that any non-recourse exceptions
had been triggered.
The Harris County court agreed with
Smuck and White. Wells Fargo appealed.
The Harris County Court of Appeals
first looked at the Indemnification Agreement. Despite the terminology of “Indemnity,” the Court had little problem
concluding that it was essentially a “Guaranty,”
for which Smuck and White were jointly and severally 100% liable for all losses
suffered by Wells Fargo.
And from there it wasn’t difficult
for the Court of Appeals to toss out all the secondary arguments used by Smuck
The Harris County Court of Appeals
reversed the trial court’s judgment. Wells Fargo won; Smuck and White lost.
See Wells Fargo Bank, N.A. v. Smuck and White;
No. 14-12-00574-CV; Texas 14th Court of Appeals, July 9, 2013.
easy to be lazy and not carefully read loan docs, leases and contracts;
goodness knows they are as boring as watching a little league baseball game. In
August. In Texas. With a 4p start time. The only surprise here is that Smuck
and White were able to convince a trial court that the Indemnity Agreement they
signed did not impose liability on them for Wells Fargo’s substantial losses.
assume that non-recourse means no liability can be imposed. There is a new
theory being used across the nation right now that even diminishment in value
caused by recessionary market conditions can impose personal liability. Most of
us don’t think that was the real purpose of non-recourse, “bad boy” or “carve
out” provisions but at least some Courts do not agree.
see me at the NTCAR Commercial Real Estate Expo on August 28 at the Sheraton in
downtown Dallas, and tell me how I can approve these articles and what I should
write about. I’ve got a booth!
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.