Opinion issued June 2, 2015
In The
Court of Appeals For The
First District of Texas ———————————— NO. 01-14-00246-CV ——————————— ALLEN L. BERRY, JOSEPH D. MCCORD, AND ROBERT G. TAYLOR, II, Appellants V. ENCORE BANK, Appellee
On Appeal from the 152nd District Court Harris County, Texas Trial Court Case No. 2010-63264
MEMORANDUM OPINION
Allen Berry, Robert Taylor, and Joseph McCord guaranteed a loan from
Encore Bank to BLyn II Holding, LLC, a Texas limited liability company (“Blyn”)
of which Berry, Taylor, and McCord were members. After Blyn defaulted on the
loan, Encore sued the three guarantors, asserting causes of action for breach-of- contract and suit on a guaranty. All parties filed motions for summary judgment.
The district court granted Encore Bank’s two motions and denied the guarantors’
motion. The district court also denied the guarantors’ challenge to Encore Bank’s
summary-judgment evidence.
In five issues, the guarantors contend that the trial court erred by (1) denying
their motion for summary judgment asserting that Encore’s claims are barred by
limitations, (2) granting Encore summary judgment on the guarantors’ defense of
mutual mistake, (3) granting Encore summary judgment on the guarantors’
negligence and negligent misrepresentation counterclaims, (4) granting Encore
summary judgment on its breach-of-contract and suit-on-guaranty claims, and
(5) overruling the guarantors’ objections to Encore’s summary judgment evidence.
We affirm.
Background
This case arises from a default on a loan obtained to finance the
refurbishment of a luxury yacht. The yacht was listed as collateral for the loan.
Three of the businessmen affiliated with the borrower executed personal
guarantees. The collateral was lost to another entity after the lender’s interest in the
collateral was primed 1 by a maritime lien placed on the yacht by the entity that
1 In the context of competing claims to collateral, the claim that takes the highest priority is said to “prime” the lesser claims. See BLACK’S LAW DICTIONARY 1311 (9th ed. 2009).
2 refurbished the yacht. The lender, Encore, then sought judgment against the three
guarantors for the full amount of the loan, without any available offset due to the
loss of the yacht as collateral. The district court granted Encore summary judgment
and entered a final judgment against the guarantors.
A. The refurbishment project
Berry, McCord, and Taylor are personal friends who entered into a series of
business transactions to purchase and renovate a luxury yacht named the Betty Lyn
II. They planned to enter the yacht into the charter market “as a luxury, expedition
style yacht.” The friends formed Blyn and purchased the Betty Lyn II in December
2005.
Blyn selected Crimson Yachts and Horizon Shipbuilding, Inc., in Alabama,
to refurbish the yacht. Contract negotiations began between Blyn and Crimson in
May 2006. The yacht was delivered to Crimson’s shipyard in June or July 2006.
The refurbishment contract between Blyn and Crimson was signed on August 1,
2006, and Crimson began working on the project “on or before August 1, 2006.”
B. Encore makes unsecured and secured loans
In August 2006, Encore made an unsecured loan to Blyn for $400,000 to pay
Crimson’s invoices. Encore made another unsecured loan of $600,000 two months
later to meet Blyn’s subsequent obligations to Crimson.
3 In October 2006 the Blyn members met with Crimson and Encore
representatives to set a total budget for the project and discuss financing. The
October 19 Encore Credit Approval Form notes that Crimson had already begun
work on the yacht.
Blyn executed loan documents for a $6 million loan from Encore on March
28, 2007. Blyn also executed a First Preferred Ship Mortgage, a Promissory Note,
and other “Loan Documents.” The maturity date for the loan was listed as April 15,
2009.
C. The guaranty agreement
The terms of a guaranty agreement determine whether the lender is required
to collect from the borrower or on the collateral before looking to the guarantor to
satisfy the debt. See, e.g., Yamin v. Conn, L.P., No. 14-10-00597-CV, 2011 WL
4031218, at *6 (Tex. App.—Houston [14th Dist.] Sept. 13, 2011, no pet.) (mem.
op.).
The three Blyn members—Berry, McCord, and Taylor—personally
guaranteed the $6 million loan from Encore to Blyn to finance the yacht
refurbishment. Under the terms of their guaranty contract, the three agreed to
“unconditionally guarantee” the prompt payment “when due at maturity” of the
principal amount of $6 million borrowed by Blyn, “including all principal, interest,
charges, and attorneys’ fees” which may become due. The guarantors waived
4 notice of loan renewals, modifications or rearrangements, as well as nonpayment,
default, and demand. The guarantors agreed that, in case of default, the loan could
be “accelerated, extended, modified, amended or renewed . . . [and that] any other
indulgence may be granted with respect” to the loan by Encore.
The guaranty created an independent obligation on the part of the guarantors
to pay the full amount of the note “at maturity.” The guaranty left to Encore’s
discretion, in case of an earlier default, whether to accelerate the obligation. It
further provides that the
rights of Lender are cumulative and shall not be exhausted by its exercise of any of its rights hereunder or otherwise against Guarantor or by any number of successive actions until and unless all indebtedness constituting the Obligations have been paid, and other Obligations have been performed, including each of the obligations of Guarantor hereunder.
The guarantors “expressly waive[d] any right to the benefit of or to require
or control application of any security or collateral or the proceeds” of that
collateral and agreed that Encore had no duty, with respect to the guarantors, to
apply security or collateral to the amount of the loan. The guaranty signed by all
three guarantors states that it is “intended to be an absolute and unconditional
guarantee of payment” and that the guarantors are not relying on any
representations, written or oral, by Encore except those expressly included in the
guaranty. Finally, the guarantors agreed that they were provided an opportunity to
5 obtain legal advice regarding the guaranty and that they fully understand its
implications and ramifications.
D. Default and litigation
In March 2008—two years into the refurbishment—a dispute developed
between Blyn and Crimson regarding the increased cost of and anticipated
completion date for the project. In late March or early April 2008, Blyn stopped
paying Crimson’s invoices. On April 4, 2008, Crimson declared Blyn to be in
default for failure to pay Crimson’s invoices.
Despite being in default on its obligations to Crimson, Blyn continued to
meet its payment obligations to Encore by making interest payments as they
became due. Blyn executed a note modification agreement on the original maturity
date—April 15, 2009—extending the maturity date on the loan to March 15, 2010.
The parties entered into a second note modification agreement on March 15, 2010,
that extended the maturity date again to March 15, 2012. That same day, the
guarantors executed a consent of guarantors, agreeing to the extension of the loan
maturity date.
Crimson filed an in rem action against the yacht in June 2008 in the United
States District Court for the Southern District of Alabama. Crimson asserted that it
obtained a maritime lien on the yacht as soon as it began refurbishing the vessel
and, as a result of Blyn’s failure to pay its invoices, that it had the legal right to
6 arrest the vessel and sell it to pay the lien. Following an appeal and remand, that
court concluded that Crimson’s maritime lien primed Encore’s mortgage. Crimson
Yachts v. M/Y Betty Lyn II, No. 08-0334-WS-C, 2010 WL 2104524, at *1–2 (S.D.
Ala. May 25, 2010). Crimson then sold the yacht for less than the amount due and
applied those funds towards Blyn’s debt, which left no collateral to satisfy Blyn’s
obligations to Encore or to offset the guarantors’ individual liability.
Litigation between Crimson and Blyn continued. The suit was transferred
from Alabama to federal court in Texas. In early 2013, after the United States
District Court for the Southern District of Texas entered an order awarding
damages to Crimson with an offset for poor custodial care of the yacht, Blyn
appealed to the Fifth Circuit, but the appeal was later dismissed. Horizon
Shipbuilding Inc. v. BLyn II Holding LLC, No. C-12-60, 2012 WL 2911918 (S.D.
Tex. July 16, 2012), appeal dism’d Jan. 3, 2013.
In the interim, Encore began litigation against the guarantors. On September
10, 2010—which was approximately four months after the federal court ruled that
Crimson’s maritime lien primed Encore’s interest in the yacht—Encore sued the
guarantors. Although the loan-maturity date had not yet passed, Encore asserted
that Blyn was in non-monetary default on its loan by failing to meets its
contractual obligations to Crimson. The guarantors were not served. They
continued to make all required interest payments on the Blyn loan. The loan
7 matured on March 15, 2012, at which point the full amount of the loan became
due, but neither Blyn nor the guarantors paid the loan balance. The guarantors were
served with suit shortly after the loan maturity date passed.
The Parties’ Competing Motions for Summary Judgment
Encore filed two summary-judgment motions, asserting both no-evidence
and traditional summary-judgment points.2 In addition to seeking to recover on the
guaranty, it also sought judgment on the guarantors’ counterclaims and affirmative
defenses.
The guarantors filed a single response to both of Encore’s summary-
judgment motions. The guarantors also filed objections to the affidavit of John
Lingor, Encore’s custodian of records, and other summary-judgment evidence. In
addition to responding to Encore’s two summary-judgment motions, the guarantors
filed a cross-motion for summary judgment on their limitations affirmative
defense.
The trial court granted Encore’s two summary-judgment motions and
denied the guarantors’ summary-judgment motion. The trial court then entered a
final judgment for Encore, awarding it $3.6 million for the outstanding principal
balance on the note, as well as prejudgment interest, late fees, attorney’s fees and
post-judgment interest.
2 Through its traditional summary-judgment motion, Encore established its right to enforce the guaranty as a matter of law.
8 The guarantors appeal the orders denying their summary-judgment motion,
granting Encore’s two summary-judgment motions, and overruling in part their
objections to summary-judgment evidence.
A. Standard of review
We review the district court’s summary judgment de novo. Valence
Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005); Provident Life &
Accident Ins. Co. v. Knott, 128 S.W.3d 211, 215 (Tex. 2003). “When reviewing a
summary judgment, we take as true all evidence favorable to the nonmovant, and
we indulge every reasonable inference and resolve any doubts in the nonmovant’s
favor.” Dorsett, 164 S.W.3d at 661; Knott, 128 S.W.3d at 215; accord Sci.
Spectrum, Inc. v. Martinez, 941 S.W.2d 910, 911 (Tex. 1997). Summary judgment
is proper when there are no disputed issues of material fact and the movant is
entitled to judgment as a matter of law. TEX. R. CIV. P. 166a(c); Knott, 128 S.W.3d
at 215–16. When, as here, both parties move for summary judgment and the
district court grants one motion and denies the other, we review the summary-
judgment evidence presented by both sides, determine all questions presented, and
render the judgment the district court should have rendered. Tex. Workers’ Comp.
Comm’n v. Patient Advocates of Tex., 136 S.W.3d 643, 648 (Tex. 2004); FM
Props. Operating Co. v. City of Austin, 22 S.W.3d 868, 872 (Tex. 2000).
9 B. Statute of limitations defense
Encore sued to collect on the personal guaranty executed by the three Blyn
members. The trial court granted Encore summary judgment, holding that the
guarantors’ defenses and counterclaims were unavailing. Before reaching the
merits of the competing claims or construing the loan documents, we address the
guarantors’ first issue: whether the trial court erred in denying their statute of
limitations defense.
Generally, breach-of-contract claims must be brought within four years.
TEX. CIV. PRAC. & REM. CODE ANN. § 16.004(a)(3) (West 2002). When a claim
accrues is a question of law reviewed de novo. See Moreno v. Sterling Drug, 787
S.W.2d 348, 351 (Tex. 1990). “A claim generally accrues when facts come into
existence that authorize a claimant to seek a judicial remedy.” Sowell v. Int’l
Interests, LP, 416 S.W.3d 593, 598 (Tex. App.—Houston [14th Dist.] 2013, pet.
denied).
The guarantors contend that Encore’s claim accrued against them either on
the closing date for the loan or one year later, on March 26, 2008, when Blyn
stopped paying Crimson’s invoices. The guarantors argue that, based on that date,
the four-year statute of limitations expired no later than March 26, 2012, and,
because they had not been served process by that date, the statute of limitations ran
on Encore’s claims against them.
10 In response to the guarantors’ summary-judgment motion, Encore argued
that all interest payments required under the terms of Blyn’s note were paid timely
until the March 15, 2012 maturity date, at which point, neither Blyn nor the
guarantors paid off the obligations. Encore pointed to its August 2012 second
amended petition in which it asserted that the parties’ note modification agreement
extended the loan-maturity date to March 15, 2012. It attached to the amended
petition the two note modification agreements, extending the maturity date first to
March 15, 2010, and then to March 15, 2012, as well as a consent of guarantors,
signed by all three guarantors on March 15, 2010, acknowledging and consenting
to the loan modification. Encore argued that its breach-of-contract and suit on
guaranty claims did not accrue until the guarantors failed to pay off the loan on the
maturity date—March 15, 2012.
We look first to the parties’ contracts to determine their rights and
obligations. When construing a guaranty agreement, our primary goal is to
ascertain and give effect to the parties’ intent. Coker v. Coker, 650 S.W.2d 391,
393 (Tex. 1983); Hasty v. Keller HCP Partners, L.P., 260 S.W.3d 666, 670 (Tex.
App.—Dallas 2008, no pet.). The best guide to the parties’ intent is the language of
the guaranty, and where the language is clear and unambiguous, we may not look
outside of that document to give it a different construction. See Univ. Sav. Ass’n v.
Miller, 786 S.W.2d 461, 462–63 (Tex. App.—Houston [14th Dist.] 1990, writ
11 denied); Sw. Sav. Ass’n v. Dunagan, 392 S.W.2d 761, 767 (Tex. App.—Dallas
1965, writ ref’d n.r.e.).
The guaranty states that each guarantor “irrevocably, absolutely, and
unconditionally guarantees to Lender the prompt payment when due at maturity of
the [note]” and all other amounts due. Paragraph three of the guaranty allows
Encore to seek payment from the guarantors without any requirement that it first
sue Blyn:
Guarantor shall be liable as a primary obligor for the payment and performance of the Obligations. Guarantor specifically agrees that, except as otherwise provided in the Loan Documents, it shall not be necessary or required, in order to enforce Guarantor’s obligations under this Guaranty, that Lender have made demand for payment upon Borrower or any other person or entity liable thereon or have made protest thereof or have given notice to Borrower or any other party liable thereon of maturity or nonpayment of the Obligations.
Thus, to the extent the statute of limitations ran against the underlying borrower—
between the date Blyn defaulted and the date Encore served the guarantors with
suit on the guaranty—that defense is unavailable to the guarantors. See Yamin,
2011 WL 4031218, at *6 (“Whenever a creditor is permitted to sue a guarantor
without first suing the principal, the guarantor cannot defend an action to recover
on a promise to pay by showing that the claim against the principal is barred by the
statute of limitations.”); Wiman v. Tomaszewicz, 877 S.W.2d 1, 5 (Tex. App.—
Dallas 1994, no writ) (same).
12 The guaranty created an independent obligation on the guarantors to pay the
full amount of the note “at maturity,” here, March 15, 2012. Paragraph 13 of the
guaranty left to Encore’s discretion, in case of default, whether to accelerate the
obligation. Paragraph 19 further provides that the “rights of Lender are cumulative
and shall not be exhausted by its exercise of any of its rights hereunder or
otherwise against Guarantor or by any number of successive actions until and
unless all indebtedness constituting the Obligations have been paid, and other
Obligations have been performed, including each of the obligations of Guarantor
hereunder.”
We reject the guarantors’ contention that the statute of limitations ran on
Encore’s claims against the guarantors, given that the guarantors renewed their
obligations under that contract within the two preceding years. TEX. CIV. PRAC. &
REM. CODE ANN. § 16.004(a)(3) (establishing a four-year statute of limitations).
We conclude that the trial court did not err in denying the guarantors’ summary-
judgment motion on the defense of limitations.
Accordingly, we overrule the guarantors’ first issue.
C. Mutual mistake defense
In their second issue, the guarantors argue that the guaranty is voidable due
to a mutual mistake of fact. They contend the parties mistakenly believed that
Encore had a primary lien on the vessel and did not realize that Crimson already
13 had a preferred, maritime lien on the vessel when the guaranty contract was
executed. It is this superior lien position that allowed Crimson to take possession
of and sell the yacht, denying Blyn and the guarantors the benefit of the collateral
to offset their obligations to Encore.
We consider first the manner in which a maritime lien comes into existence
and the extent to which the parties may have been mistaken about Crimson’s lien.
1. Maritime liens
A maritime lien is “a unique security device, serving the dual purpose of
keeping ships moving in commerce while not allowing them to escape their debts
by sailing away.” Equilease Corp. v. M/V Sampson, 793 F.2d 598, 602 (5th Cir.
1986); see Governor & Co. of Bank of Scot. v. Sabay, 211 F.3d 261, 267 (5th Cir.
2000).
“The maritime lien developed as a necessary incident of the operation of
vessels.” Piedmont & George’s Creek Coal Co. v. Seaboard Fisheries Co., 254
U.S. 1, 9, 41 S. Ct. 1, 3 (1920); see Effjohn Int’l Cruise Holdings, Inc. v. A&L
Sales, Inc., 346 F.3d 552, 556 (5th Cir. 2003). “The purpose of maritime liens is
‘to enable a vessel to obtain supplies or repairs necessary to her continued
operation by giving a temporary underlying pledge of the vessel which will hold
until payment can be made or more formal security given.’” Lake Charles
Stevedores, Inc. v. Professor Vladimir Popov MV, 199 F.3d 220, 223 (5th Cir.
14 1999) (quoting The Everosa, 93 F.2d 732, 735 (1st Cir. 1937)); see Piedmont &
George’s Creek Coal Co., 254 U.S. at 9, 41 S. Ct. at 3 (“Since she is usually absent
from the home port, remote from the residence of her owners and without any large
amount of money, it is essential that she should be self-reliant—that she should be
able to obtain upon her own account needed repairs and supplies.”); Veverica v.
Drill Barge Buccaneer No. 7, 488 F.2d 880, 883 (5th Cir. 1974) (“The very
purpose of maritime liens is to encourage necessary services to ships whose
owners are unable to make contemporaneous payment.”).
“The lien arises when the debt arises, and grants the creditor the right to
appropriate the vessel, have it sold, and be repaid the debt from the proceeds.”
Equilease Corp., 793 F.2d at 602. Thus a maritime lien is “a property right that
adheres to the vessel wherever it may go. Such a lien has been held to follow the
vessel even after it is sold to an innocent purchaser.” Id.; see Sabay, 211 F.3d at
267–68 (quoting Equilease Corp., 793 F.2d at 602). A maritime lien gives the lien-
holder the ability to recover against the value of the vessel in an in rem action. See
Effjohn Int’l Cruise Holdings, 346 F.3d at 556. “Maritime liens have priority over
non-maritime liens and priority over other maritime liens in reverse chronological
order . . . .” Crimson Yachts v. Betty Lyn II Motor Yacht, 603 F.3d 864, 870 (11th
Cir. 2010) (in related litigation involving same yacht, holding that yacht meets
15 definition of “vessel” to subject it to admiralty jurisdiction and allow Crimson to
benefit from maritime lien).
Federal courts that have addressed the issue concur that maritime liens do
not need to be recorded to be enforced. See, e.g., P.R. Ports Auth. v. BARGE
KATY–B, 427 F.3d 93, 104 (1st Cir. 2005); Luis A. Ayala-Colon Sucres., Inc. v.
Break Bulk Servs., LLC, 925 F. Supp. 2d 199, 204 (D. P.R. 2013) (citing
Vandewater v. Mills, Claimant of Yankee Blade, 60 U.S. 82, 89 (1856)); L & L
Elecs., Inc. v. M/V Osprey, 764 F. Supp. 2d 270, 274 (D. Mass. 2011). They,
therefore, have been described as “silent” and “secret.” See, e.g., Sembawang
Shipyard, Ltd. v. Charger, Inc., 955 F.2d 983, 988 (5th Cir. 1992); Merchs. &
Marine Bank v. The T. E. Welles, 289 F.2d 188, 194 (5th Cir. 1961); P.R. Ports
Auth., 427 F.3d at 104; L & L Elecs., 764 F. Supp. 2d at 274.
2. All parties were aware repairs began before loan was executed
All parties were aware that the Betty Lyn was already in Crimson’s Alabama
shipyard undergoing repairs as part of a large-scale refurbishment before (1) Blyn
executed the loan documents giving Encore a security interest in the yacht and
(2) the Blyn members executed the personal guarantees. There was no mistake of
fact concerning the chronology of the repairs and the loan.
16 Crimson began repairing the Betty Lyn II by August 1, 2006. Crimson held a
maritime lien on the vessel 3 as of that date and had the legal right to bring an in
rem action to enforce its lien, if necessary, from that date forward. See Equilease
Corp., 793 F.2d at 602; Effjohn Int’l Cruise Holdings, 346 F.3d at 556. The Blyn
members’ interest in the yacht was subject to the maritime lien before Blyn sought
to grant a security interest in the yacht to its lender, Encore.
3. The guarantors contractually assumed risk of a mistake of fact
The guarantors contend that neither they nor Encore realized that Crimson
obtained a maritime lien on the yacht it was repairing as soon as the repairs began.
According to the guarantors’ expert, the parties “all mistakenly believed the
Bank’s FPSM was a first priority preferred ship mortgage entitled to the preferred
status granted by the Ship Mortgage Act and not subject to any preferred
maritime liens, including any shipyard maritime liens . . . .” He asserts that “[a]n
ordinary bank using ordinary prudence in the same or similar circumstances would
have obtained a subordination agreement from the shipyard before the loan was
funded.” One of the three guarantors, McCord, confirms in his affidavit that he
“relied on Encore to seek consultation from counsel on maritime issues” and
3 During earlier litigation concerning the Betty Lyn II, a federal district court held that the yacht was a “vessel” during the repair period, thus allowing Crimson to obtain a maritime lien for its repair work. Crimson Yachts v. M/Y Betty Lyn II, No. 08-0334-WS-C, 2010 WL 2104524, at *1–2 (S.D. Ala. May 25, 2010) (recognizing Crimson’s maritime lien and declaring that lien was first-in-time with priority over Encore’s rights).
17 asserts that “Encore and its lawyers knew or should have known that Crimson had
a maritime lien on the Vessel before the Loan Documents, including the FPSM,
were executed.”
The guarantors argue that there was a mutual mistake of fact regarding the
shipyard’s existing maritime lien. Neither side realized the maritime lien existed.
As such, the guarantors contend that their contractual obligations under the
personal guarantees are voidable.
While we agree that a mutual mistake of fact can provide a basis for
avoiding a contractual obligation, see N.Y. Party Shuttle, LLC v. Bilello, 414
S.W.3d 206, 212 (Tex. App.—Houston [1st Dist.] 2013, pet. denied), that right can
be overridden by the parties’ agreement: “A person who intentionally assumes the
risk of unknown facts cannot escape a bargain by alleging mistake or
misunderstanding.” Geodyne Energy Income Prod. P’ship I-E v. Newton Corp.,
161 S.W.3d 482, 491 (Tex. 2005); accord Williams v. Glash, 789 S.W.2d 261, 264
(Tex. 1990). In Geodyne, the Texas Supreme Court rejected the assertion of mutual
mistake in light of section 154 of the Restatement, which provides that a party
bears the risk of a mistake when
(a) the risk is allocated to him by agreement of the parties, or
(b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient . . . .
18 See Geodyne, 161 S.W.3d at 491 (citing RESTATEMENT (SECOND) OF CONTRACTS
§ 154 (1981)). “Just as a party may agree to perform in spite of impracticability or
frustration that would otherwise justify his non-performance, he may also agree, by
appropriate language or other manifestations, to perform in spite of mistake that
would otherwise justify his avoidance.” RESTATEMENT (SECOND) OF CONTRACTS
§ 154, cmt. b; see Geodyne, 161 S.W.3d at 491.
Here, the guarantors assumed the risk that Encore’s acts or omissions would
leave the parties without collateral to offset their obligations. Paragraph five of the
guaranty agreement provides as follows:
Guarantor specifically agrees that . . . Guarantor shall not be entitled to require, that Lender . . . make any effort at collection of the Obligations from Borrower, or foreclose against or seek to realize upon any security or collateral now or hereafter existing for the Obligations, or . . . exercise or assert any other right or remedy to which Lender is or may be entitled in connection with the Obligations or such security or collateral . . . . Guarantor specifically agrees that Guarantor shall not have any recourse or action against Lender by reason of any action Lender may take or omit to take in connection with the Obligations, the collection of any sums or amounts herein mentioned, or in connection with any security or collateral or any other guaranty at any time existing therefor.
Again, in paragraph 7, the guarantors “absolutely and unconditionally”
agreed that
if all or any part of the Obligations (or any instrument or agreement made or executed in connection therewith) is for any reason found to be invalid, illegal, unenforceable, uncollectible or legally impossible, for any reason whatsoever . . . then in any such case Guarantor shall pay and perform the Obligations as herein provided and that no such
19 occurrence shall in any way diminish or otherwise affect Guarantor’s obligation hereunder.
We conclude that the guarantors contractually assumed the risk of a mistake
that would leave the parties without access to the collateral. See Geodyne, 161
S.W.3d at 491. Accordingly, they may not avoid their contractual obligations by
asserting a mutual-mistake defense. We overrule the guarantors’ second issue.
D. Material alteration of contract as defense
In their third issue, the guarantors argue that Encore’s failure to obtain a
security right superior to Crimson’s materially altered the terms of their agreement,
discharging them of their obligations under the guaranty.
We determine the rights of the guarantors from the contract’s terms. United
States v. Little Joe Trawlers, Inc., 776 F.2d 1249, 1254 (5th Cir. 1985); Hopkins v.
First Nat’l Bank at Brownsville, 551 S.W.2d 343, 345 (Tex. 1977); McKnight v.
Va. Mirror Co., Inc., 463 S.W.2d at 430. A guaranty agreement may not be
extended beyond its precise terms by construction or implication. Reece v. First
State Bank, 566 S.W.2d 296, 297 (Tex. 1978); FDIC v. Attayi, 745 S.W.2d 939,
943 (Tex. App.—Houston [1st Dist.] 1988, no writ). Because courts strictly
construe guarantees, a guarantor may be discharged by the material alteration of a
contract between the principal debtor and the creditor. Vastine v. Bank of Dallas,
808 S.W.2d 463, 464 (Tex. 1991); Old Colony Ins. Co. v. City of Quitman, 352
S.W.2d 452, 455 (Tex. 1961); Attayi, 745 S.W.2d at 944.
20 A material alteration of a contract is one that either injures or enhances the
guarantor’s risk of injury. United Concrete Pipe Corp. v. Spin–Line Co., Inc., 430
S.W.2d 360, 365–66 (Tex. 1968); Attayi, 745 S.W.2d at 944. Material alteration is
an affirmative defense. Attayi, 745 S.W.2d at 944; Bullock v. Kehoe, 678 S.W.2d
558, 559 (Tex. App.—Houston [14th Dist.] 1984, writ ref’d n.r.e.). To prevail on
the defense, the guarantor must establish 1) a material alteration of the underlying
contract; 2) made without his consent; 3) which is to his detriment, meaning it is
prejudicial to his interest. Vastine, 808 S.W.2d at 464–65; Attayi, 745 S.W.2d at
944.
Under the terms of the guaranty, the guarantors agreed to be “liable as a
primary obligor for the payment and performance of the Obligation.” They further
agreed that they “shall not have any recourse or action against Lender by reason of
any action Lender may take or omit to take . . . in connection with any security or
collateral.” Moreover, they “absolutely and unconditionally” agreed that, “if all or
any part of . . . any instrument or agreement made or executed in connection [with
the loan] is for any reason found to be . . . unenforceable, uncollectible or legally
impossible, for any reason whatsoever . . . then in any such case Guarantor shall
pay and perform the Obligations as herein provided and that no such occurrence
shall in any way diminish or otherwise affect Guarantor’s obligation hereunder.”
21 We hold that Encore was entitled to summary judgment on the guarantors’
material-alteration affirmative defense. The loss of collateral cannot be viewed as a
detriment to the guarantors to satisfy the third element of their material-alteration
defense because, under the terms of the guaranty, Encore was not obligated to take
action on the collateral before asserting a claim against the guarantors to satisfy the
debt. Accordingly, we overrule the guarantors’ third issue.
E. Counterclaims and other defenses
In their fourth issue, the guarantors generally assert that fact issues exist to
prevent summary judgment for Encore on their many defenses. In their brief, they
limit their argument to two of their counterclaims, that Encore: (1) negligently
misrepresented loan information to them and (2) negligently failed to secure a
superior lien. Any argument that summary judgment was improper as to their other
pleaded defenses is waived. TEX. R. APP. P. 38.1(i).
1. Negligent misrepresentation
Texas follows section 552 of the Restatement (Second) of Torts on
information negligently supplied for the guidance of others, which reads:
One who, in the course of his business, profession or employment, or in any other transaction in which he has a pecuniary interest, supplies false information for the guidance of others in their business transactions, is subject to liability for pecuniary loss caused to them by their justifiable reliance upon the information, if he fails to exercise reasonable care or competence in obtaining or communicating the information.
22 RESTATEMENT (SECOND) OF TORTS § 552 (1977); see Fed. Land Bank Ass’n of
Tyler v. Sloane, 825 S.W.2d 439, 442 (Tex. 1991) (applying Restatement). Thus,
the elements of a cause of action for negligent misrepresentation are:
(1) the representation is made by a defendant in the course of his business, or in a transaction in which he has a pecuniary interest;
(2) the defendant supplies ‘false information’ for the guidance of others in their business;
(3) the defendant did not exercise reasonable care or competence in obtaining or communicating the information; and
(4) the plaintiff suffers pecuniary loss by justifiably relying on the representation.
Henry Schein, Inc. v. Stromboe, 102 S.W.3d 675, 686 n.24 (Tex. 2002); Sloane,
825 S.W.2d at 442.
A party to a transaction may contractually agree to waive reliance on another
party’s statements. Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am.,
341 S.W.3d 323, 332 (Tex. 2011); Coastal Bank SSB v. Chase Bank of Tex., N.A.,
135 S.W.3d 840, 843 (Tex. App.—Houston [1st Dist.] 2004, no pet.). “A contract
and the circumstances surrounding its formation determine whether the disclaimer
of reliance is binding.” Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171,
179 (Tex. 1997); Coastal Bank, 135 S.W.3d at 843. To be enforceable, a
contractual disclaimer of reliance must contain language that is clear and
unequivocal. Italian Cowboy Partners, 341 S.W.3d at 331, 333, 334, 336;
23 Swanson, 959 S.W.2d at 179–81. This is a threshold requirement; if it is not
satisfied, the disclaimer is invalid. Italian Cowboy Partners, 341 S.W.3d at 331–36
& n.8; Allen v. Devon Energy Holdings, L.L.C., 367 S.W.3d 355, 377 (Tex. App.—
Houston [1st Dist.] 2012, pet. granted, judgm’t vacated w.r.m. 4). If the clarity
requirement is satisfied, four extrinsic factors are considered: whether (1) the terms
of the contract were negotiated or boilerplate, (2) the complaining party was
represented by counsel, (3) the parties dealt with each other at arms’ length, and
(4) the parties were knowledgeable in business matters. Forest Oil Corp. v.
McAllen, 268 S.W.3d 51, 60 (Tex. 2008); see also Tex. Standard Oil & Gas, L.P.
v. Frankel Offshore Energy, Inc., 394 S.W.3d 753, 763 (Tex. App.—Houston [14th
Dist.] 2012, no pet.); Devon Energy Holdings, 367 S.W.3d at 383.
Regarding the clarity requirement, the guaranty agreement clearly states that
the guarantors are not relying on representations by the bank regarding the
collateral:
Guarantor is . . . familiar with the value of any and all collateral intended to be created as security for the payment of the Obligations; however, Guarantor is not relying on . . . the collateral as an inducement to enter into this Guaranty. . . . Guarantor acknowledges and agrees that neither Lender, nor any other party has made any representation, warranty or statement to Guarantor in order to induce Guarantor to execute this Guaranty.
4 See TEX. R. APP. P. 56.3 (noting that intermediate appellate opinions retain precedential value even if case is dismissed as result of settlement following filing of petition for discretionary review, unless order of Texas Supreme Court specifically provides otherwise).
24 The guaranty further provides:
Guarantor acknowledges and agrees that this Guaranty accurately represents and contains the entire agreement between Guarantor and Lender with respect to the subject matter hereof, that Guarantor is not relying, in the execution of this Guaranty, on any representations (whether written or oral) made by or on behalf of Lender except as expressly set forth in this Guaranty, and that any and all prior statements and/or representations made by or on behalf of Lender to Guarantor (whether written or oral) in connection with the subject matter hereof are merged herein.
Thus, the terms of the guaranty clearly and unequivocally state that the guarantors
waive reliance.
The first extrinsic factor is whether the terms of the guaranty were
negotiated. There is no indication in the record that they were. This factor weighs
in favor of the guarantors.
The next factor asks whether the guarantors were represented by counsel. At
least one of the three guarantors is a licensed attorney. That experience would have
informed him of the benefits that counsel can provide to a party contemplating a
large transaction. Relatedly, the size of this transaction and the amount of the
guarantees that were executed would suggest that each of these guarantors was in a
financial position to retain counsel, had each chosen to seek legal advice. Further,
the guarantors confirmed in the guaranty that they had the ability to seek legal
advice:
Guarantor acknowledges that Guarantor has been afforded the opportunity to receive the advice of legal counsel of its own choice in
25 connection with the preparation and negotiation of this Guaranty, and Guarantor fully understands the implications and ramifications of the agreements herein made by Guarantor.
Given that one of the three was an attorney and they knowingly elected not to
retain additional, outside counsel, this factor favors a determination that reliance
was waived.
Next we consider whether this contract resulted from an arms’ length
transaction. Each of the guarantors was an experienced businessperson or lawyer.
This was a $6 million transaction with an established bank. All aspects of this
transaction were consistent with an arms’ length relationship. This factor weighs
in favor of enforcement.
The final factor is whether the guarantors were knowledgeable in business
matters. As noted in a related federal-court opinion, the guarantors were
experienced, successful businessmen, though without experience in this type of
endeavor:
The vessel’s owner, BLyn, is comprised of . . . businessmen . . . . But none of the businessmen had any experience with refitting a vessel, much less refitting one that was old and in disrepair, with the end goal of producing a luxurious yacht. They did not understand the scope of the project and started down the refit road without a clear idea of their destination. It seems that there are quite a few optional details in yacht-building—expensive details. Despite their success in other endeavors, the BLyn members did not know how to manage this project.
Horizon Shipbuilding, 2012 WL 2911918, at *1.
26 Even without experience in maritime matters or yacht refurbishments in
particular, these were experienced businessmen who were entering into an arm’s
length transaction involving a significant loan and personal guaranty. “A party to
an arm’s length transaction must exercise ordinary care and reasonable diligence
for the protection of his own interests, and a failure to do so is not excused by mere
confidence in the honesty and integrity of the other party.” Coastal Bank, 135
S.W.3d at 843; see Thigpen v. Locke, 363 S.W.2d 247, 251 (Tex. 1962). Under
these circumstances, it would have been unreasonable for the guarantors to have
relied on the lender to educate them on the maritime-lien priority system or to
protect their rights to the collateral over the rights of third parties. See Swanson,
959 S.W.2d at 180–81 (noting that, in context of tort claim based on assertion of
fraudulent non-disclosure of pertinent information, there is no duty to disclose
absent evidence of partnership or confidential relationship). This factor favors
enforcement.
Three of the four Forest Oil extrinsic factors favor enforcement. Thus, we
conclude that the guarantors contractually disclaimed reliance on any extrinsic
statements made by Encore regarding lien priority or the possibility of offsetting
Blyn’s or the guarantors’ obligations with the collateral. Accordingly, the trial
court did not err in granting summary judgment to Encore on this issue.
27 2. Negligence
The guarantors contend that Encore was negligent in its handling of the Blyn
loan and collateral: “Encore’s negligent failure to obtain a subordination
agreement, perfected UCC liens and a first mortgage on the Vessel increased the
risk of harm to the [guarantors]. The [guarantors] relied on Encore . . . and
Encore’s failure to act with ordinary care . . . has caused financial harm to [them].”
Encore moved for summary judgment on the counterclaim—characterizing it as a
breach-of-contract claim repackaged into a tort claim—and argued that the
economic loss rule applied. According to Encore, the guarantors neither
established that Encore owed them a duty nor provided any evidence of the
remaining negligence elements. The trial court granted summary judgment in the
bank’s favor on the guarantors’ negligence counterclaim.
We conclude that, for two reasons, the trial court did not err in granting
summary judgment to Encore on this issue. First, any damages that might have
resulted from Encore’s failure to collateralize the loan properly were economic
losses arising from the contract. The economic loss rule generally precludes
recovery in tort for economic losses resulting from a party failing to perform under
a contract. Lamar Homes, Inc. v. Mid–Continent Cas. Co., 242 S.W.3d 1, 12 (Tex.
2007); Sw. Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 495 (Tex. 1991); Acad. of
Skills & Knowledge, Inc. v. Charter Schs., USA, Inc., 260 S.W.3d 529, 541 (Tex.
28 App.—Tyler 2008, pet. denied). “The focus of the rule ‘is on determining whether
the injury is to the subject of the contract itself.’” Acad. of Skills & Knowledge,
260 S.W.3d at 541 (quoting Lamar Homes, 242 S.W.3d at 12). This is because,
“[w]hen the injury is only the economic loss to the subject of a contract itself, the
action sounds in contract alone.” Jim Walter Homes, Inc. v. Reed, 711 S.W.2d 617,
618 (Tex. 1986). The economic loss rule restricts contracting parties to contractual
remedies for their economic losses, even when the breach might reasonably be
viewed as a consequence of the contracting party’s negligence. Lamar Homes, 242
S.W.3d at 12–13. “If the action depends entirely on pleading and proving the
contract in order to establish a duty, the action remains one for breach of contract
only, regardless of how it is framed by the pleadings.” OXY USA, Inc. v. Cook, 127
S.W.3d 16, 20 (Tex. App.—Tyler 2003, pet. denied).
For a contracting party to be held liable under a tort theory, the liability must
arise independently of the existence of a contract between the parties; the
defendant must breach a duty imposed by law rather than by the contract. See
DeLanney, 809 S.W.2d at 494. Here, the guarantors allege that their business
dealings with Encore required the bank to collateralize the loan properly and its
failure to do so caused the guarantors to lose the collateral, thereby increasing their
financial liability under the guaranty. This is a breach-of-contract claim seeking to
recover economic losses.
29 Second, the guaranty agreement specifically stated that Encore would not be
liable to the guarantors for failing to secure or apply the collateral against the
guarantors’ obligation: “Guarantor specifically agrees that . . . Guarantor shall not
be entitled to require, that Lender . . . make any effort . . . to realize upon any
security or . . . exercise or assert any other right or remedy to which Lender is or
may be entitled in connection with . . . such security or collateral . . . .” Further,
“Guarantor specifically agrees that Guarantor shall not have any recourse or action
against Lender by reason of any action Lender may take or omit to take in
connection with . . . any security or collateral or any other guaranty at any time
existing therefor.” The guarantors also “absolutely and unconditionally” agreed
that if any part of the agreement “is for any reason found to be invalid, . . .
uncollectible or legally impossible, for any reason whatsoever . . . that no such
occurrence shall in any way diminish or otherwise affect Guarantor’s obligation
hereunder.” Thus, under the terms of the agreement, Encore did not owe any duty
to the guarantors to secure the collateral or apply it against the guarantors’
obligations.
We overrule the guarantors’ fourth issue.
F. Taylor’s Duress Defense
One of the guarantors, Taylor, separately contends that Encore took a “sign
it or else” position with him when it presented him with the original loan
30 documents and required him to sign them immediately without permitting him time
to have counsel review them. Taylor argues that a fact issue exists related to his
duress defense, which prevents summary judgment in Encore’s favor.
This claim fails as a matter of law because a defense of duress is not
available unless evidence supports the conclusion that the party against whom the
defense is asserted is the same party that created the duress: “Economic duress
must be based on the acts or conduct of the opposite party and not merely on the
necessities of the purported victim, or on his fear of what a third person might do.”
Brown v. Cain Chem., Inc., 837 S.W.2d 239, 244 (Tex. App.—Houston [1st Dist.]
1992, writ denied); see First Tex. Sav. Ass’n of Dall. v. Dicker Ctr., Inc., 631
S.W.2d 179, 185–86 (Tex. App.—Tyler 1982, no writ) (“[E]conomic duress may
be claimed only when the party against whom it is claimed was responsible for
claimant’s financial distress.”).
“[T]he mere fact that a person enters into a contract with reluctance, or as a
result of the pressure of business circumstances, financial embarrassment, or
economic necessity, does not, of itself, constitute business compulsion or economic
duress invalidating the contract.” Dicker Ctr., 631 S.W.2d at 186. “Stress of
business conditions will not constitute duress unless the defendant was responsible
for that condition.” Id.
31 Taylor claims that Encore pressured him into signing the original loan
documents quickly and that he feared Blyn would default on its obligations to
Crimson if the loan was not approved. There is no evidence that Encore was
responsible for the economic pressure Taylor felt when he signed the loan
documents. Choosing to begin a large-scale refurbishment project before funding
had been secured was Blyn’s decision; there is no evidence of coercion or duress
by Encore to pursue these activities or to do so in this order.
Moreover, a party may ratify a contract that he previously had a right to
repudiate. Thomson Oil Royalty, LLC v. Graham, 351 S.W.3d 162, 165–66 (Tex.
App.—Tyler 2011, no pet.); see Fortune Prod. Co. v. Conoco, Inc., 52 S.W.3d
671, 676–77 (Tex. 2000); see also Sawyer v. Pierce, 580 S.W.2d 117, 122 (Tex.
App.—Corpus Christi 1979, writ ref’d n.r.e.). “Ratification occurs when one,
induced by fraud to enter into a contract, continues to accept benefits under the
contract after he becomes aware of the fraud, or if he conducts himself in such a
manner as to recognize the contract as binding.” Sawyer, 580 S.W.2d at 122; see
Cordero v. Tenet Healthcare Corp., 226 S.W.3d 747, 751–52 (Tex. App.—Dallas
2007, pet. denied); Dicker Ctr., 631 S.W.2d at 186. When a defrauded party
ratifies a contract, it “waives any right to seek rescission.” Sawyer, 580 S.W.2d at
122; Dicker Ctr., 631 S.W.2d at 186.
32 After he executed the loan documents in 2008, Taylor twice renewed his
obligations under the guaranty by extending the maturity date on the loan and
contractually binding himself to additional interest payments and, ultimately, the
full amount of principal due. “When a note is made in renewal of a prior obligation
known by the maker to be fraudulent or without consideration, the renewal note
constitutes a waiver of the defense.” Roquemore v. Nat’l Commerce Bank, 837
S.W.2d 212, 214–15 (Tex. App.—Texarkana 1992, no writ) (citing City of
Houston v. Lyons Realty, Ltd., 710 S.W.2d 625, 629 (Tex. App.—Houston [1st
Dist.] 1986, no writ)); see Cordero, 226 S.W.3d at 751–52 (affirming summary
judgment for corporation because employee ratified agreement after learning of
alleged fraud). Thus, Taylor may not rely on a duress defense to avoid his
obligations under the guaranty agreement.
We overrule the issue raised in Taylor’s supplemental brief.
Objection to Encore’s Summary-Judgment Evidence
In their fifth and final issue, the guarantors contend that the trial court erred
by overruling various objections to Encore’s summary-judgment evidence. In
particular, they argue that the affidavit of John Lingor contained conflicting and
conclusory statements.
Evidentiary rulings are committed to the trial court’s sound discretion. City
of Brownsville v. Alvarado, 897 S.W.2d 750, 753 (Tex. 1995); Simien v. Unifund
33 CCR Partners, 321 S.W.3d 235, 239 (Tex. App.—Houston [1st Dist.] 2010, no
pet.). A trial court abuses its discretion when it rules “without regard for any
guiding rules or principles.” Alvarado, 897 S.W.2d at 754. An appellate court must
uphold the trial court’s evidentiary ruling if there is any legitimate basis for the
ruling. See State Bar of Tex. v. Evans, 774 S.W.2d 656, 658 n.5 (Tex. 1989).
Moreover, an erroneous evidentiary ruling will not be reversed unless the error
probably caused the rendition of an improper judgment. See TEX. R. APP. P.
44.1(a); Owens-Corning Fiberglas Corp. v. Malone, 972 S.W.2d 35, 43 (Tex.
1998).
The guarantors contend that Lingor’s affidavit conflicts with his deposition
testimony and his various other affidavits, thus creating a fact issue. If summary-
judgment evidence demonstrates that a genuine issue of material fact exists,
summary judgment should be denied. See TEX. R. CIV. P. 166a(c). But the conflicts
identified in Lingor’s affidavit are immaterial. The guarantors complain that
Lingor failed to identify the FPSM as a “loan document.” While that is true,
Encore conceded in its petition that the FPSM was a loan document, and it never
argued to the contrary.
Additionally, the guarantors complain that Lingor alternatively describes the
guarantee as “primary security” or “additional security” but offers no explanation
why this semantic distinction constitutes a material fact issue. Therefore, any
34 conflict in Lingor’s affidavit does not demonstrate a genuine issue of material fact.
See id.
The guarantors further complain that Lingor’s affidavit contained
“conclusory statements.” We disagree. “A conclusory statement is one that does
not provide the underlying facts to support the conclusion.” Rizkallah v. Conner,
952 S.W.2d 580, 587 (Tex. App.—Houston [1st Dist.] 1997, no writ); Contractors
Source, Inc. v. Amegy Bank Nat’l Ass’n, No. 01-13-01000-CV, 2015 WL 505195,
at *2 (Tex. App.—Houston [1st Dist.] Feb. 5, 2015, no pet.). Here, the objected-to
statements summarize the business transactions plainly evidenced by business
records. Therefore, the statements are not conclusory.
We overrule the guarantors’ issue related to the affidavit.
Conclusion
Having overruled all issues presented in the guarantors’ briefs, we affirm the
judgment of the trial court.
Harvey Brown Justice
Panel consists of Justices Keyes, Higley, and Brown.