Texas Supreme Court Confirms General Waiver of Section 51.003 in Guaranty Agreements

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On June 13, 2014, the Texas Supreme Court conclusively resolved the issue of whether a guarantor may generally waive his/her/its statutory right of offset under Section 51.003 of the Texas Property Code.  In Moayedi v. Interstate 35/Chisam Road, L.P., 57 Tex. Sup. J. 724 (Tex. 2014), the Supreme Court affirmed the Dallas Court of Appeals' holding that a guarantor may waive his right to offset under Section 51.003 by waiving "any," "each," and "every" defense in the relevant guaranty agreement entered into between the guarantor and the lender. 

Section 51.003 was added to the Texas Property Code in 1991 to protect borrowers and guarantors against the possibility that a lender, as the sole bidder at a foreclosure sale, intentionally bids a low price in order to preserve a deficiency claim against the borrower or guarantor (and, in effect, recover more than the amount actually due the lender).  Sections 51.003 (b) and (c) of the Texas Property Code provide a borrower and/or guarantor the ability to seek a judicial determination of the fair market value of real property sold at a non-judicial foreclosure sale for purposes of establishing whether any deficiency remains.  In particular, if the court determines (after receiving competent evidence of the fair market value via expert testimony, comparable sales, cost or sale, etc.) that the fair market value exceeded the outstanding indebtedness, an offset is applied against the remaining deficiency, such that a creditor would not be entitled to seek a deficiency against the remaining obligors (regardless of the actual price bid at the preceding foreclosure sale). 

In reaching its conclusion in Moayedi, the Texas Supreme Court determined that the statutory right to an offset under Section 51.003 is a defense that can be waived by agreement, just like common law defenses.  Thus, the guarantor’s waiver of "any," "each," and "every" defense included a right to an offset under Section 51.003.  As the Court put it:  "To waive all possible defenses seems to very clearly indicate what defenses are included:  all of them." 

Due to the uncertainty regarding the breadth of a guarantor’s waiver of Section 51.003 prior to Moayedi, many lenders began to include specific, express waivers of various sections of Chapter 51 of the Texas Property Code, including Section 51.003, in addition to the general waivers of “any” defense.  In many cases, this alerted guarantors to their statutory rights under Section 51.003, of which a majority were otherwise aware.  With the Texas Supreme Court's decision in Moayedi, lenders can now rest assured that the general waiver provisions existing in older guaranties, as well as provisions in guaranties going forward, are effective to waive a guarantor's rights to seek a post-foreclosure hearing to determine the fair market value at the time of foreclosure and, in turn, whether a deficiency does, in fact, exist.  On the other hand, borrowers must now request an express carve-out of their rights under Section 51.003 or risk losing those rights via general waivers of their defenses.

Topics:  Guarantors, Guaranty Claims, Lenders

Published In: Civil Procedure Updates, General Business Updates, Finance & Banking Updates, Commercial Real Estate Updates, Residential Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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