“Never blindly rely on forms and boilerplate terms – negotiating contracts is much more than just defending forms, even if you’re dealing with a “repeat” transaction“. In my few months as a secondee with Reed Smith’s Houston office, this is some of the best advise I’ve received from the partners with whom I work.
The issue of deficiency offset waivers in connection with foreclosure proceedings, as demonstrated by Moayedi v. Interstate 35 / Chisam Road LP et al., case number 12-0937, currently pending before the Supreme Court of the State of Texas, is but a great example of how sound this advise actually is.
Sections 51.003 and 51.005 of the Texas Property Code contain an affirmative defense, that of a deficiency suit to seek a determination of the fair market value of the property that serves as collateral for the loan. Lenders in real estate finance transactions have long sought to obtain a waiver of such defense, and they would normally do so in the context of a “catch-all” general defense waiver in the loan documentation.
Mehrdad Moayedi, a guarantor under a promissory note which is currently in default, argues that the waiver of “any” defense contained in the guaranty he executed is too generic, and as such only covers ordinary contractual defenses like laches and estoppel and does not include a waiver of the above mentioned statutory offset rights, which would require a specific waiver. Indeed, there is sufficient case law out there for a guarantor to make a case that a generic statement that the guarantor or borrower “waives all defenses” is not sufficient to evidence an intent to waive the protections afforded by Sections 51.003 and 51.005 of the Texas Property Code (see, for example, Segal v. Emmes Capital, L.L.C., 155 S.W.3d 267, 279, and LaSalle Bank Nat’l Ass’n v. Sleutel, 289 F.3d 837, 842).
On the flip side, in its response brief on the merits, Interstate 35 points out that the history of Chapter 51 cases suggests that there is no need to extend “elevated specificity” to Section 51.003 waivers. It would seem that reasonable reading of the guaranty at issue, supports a conclusion that the Fifth District Court of Appeals’ opinion “got it right” in determining both of Interstate 35’s issues in the affirmative.
Oral arguments were made on January 8, but the court generally takes four to six months to announce its decision on the merits. And while we are eagerly awaiting the court’s ruling on this, one thing has become clear: Lenders who do not wish to be dragged into lengthy court proceedings to find out if their standard “catch-all” defense waivers will be held specific enough to capture the fair market value defense, should consider revising their loan documentation with explicit deficiency offset waivers. Being precise, and to the point, may save them time and money in the future.