Federal Sav. and Loan Ins. Corp. v. Wilson

• Decision Date: 15 September 1989
• Docket Number: Civ. A. No. CA 3-88-0468-G.
• Citation: 722 F. Supp. 306
• Parties: FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for Liberty Federal Savings and Loan Association, Plaintiff, v. Elmo WILSON, Sr., et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

722 F. Supp. 306

FEDERAL SAVINGS AND LOAN INSURANCE CORPORATION, as Receiver for Liberty Federal Savings and Loan Association, Plaintiff, v. Elmo WILSON, Sr., et al., Defendants.

Civ. A. No. CA 3-88-0468-G.

United States District Court, N.D. Texas, Dallas Division.

September 15, 1989.

Jack D. Smith, Dorothy L. Nichols, Mark Gabrellian and Kathy Norcross, Office of Gen. Counsel, Federal Home Loan Bank Bd., Washington, D.C., Walter H. Mizell, Brown, Maroney, Rose, Barber & Dye, Austin, Tex., and Reboul, MacMurry, Hewitt, Maynard & Kristol, New York City, for plaintiff.

Fred A. Silva, Frank C. Damrell, Jr. and Wray F. Ladine, Damrell, Damrell & Nelson, Modesto, Cal., and John R. Elrod, Siloam Springs, Ark., for defendants.

MEMORANDUM ORDER

FISH, District Judge.

This case is before the court on the plaintiff's motion for summary judgment on its claims against defendants Elmo Wilson, Sr.; Bob R. Smith; Kenneth C. Graham; Daniel Cooper; and Elmo Wilson, Jr.; and on the plaintiff's motion to dismiss affirmative defenses and offsets for lack of subject matter jurisdiction. After considering the motions, the court is of the opinion that the motion for summary judgment should be granted. Because this ruling disposes of all issues in the case except attorneys' fees, the court will not reach the motion to dismiss.

I. Background¹

On or about July 31, 1985, the Davis Building, 1926, Ltd., a Texas limited partnership ("principal obligor"), by and through its general partners, Kenneth L. Graham, Robert Cooper and the Jefferson Group, Inc., a Texas corporation, executed as maker and delivered to Liberty Federal Savings and Loan Association ("the S & L") an "All-Inclusive Deed of Trust Note" ("note") dated July 31, 1985. This note, payable to the order of the S & L, was in the original principal amount of $20,800,000.00.² The note was secured in part by an "All-Inclusive Deed of Trust (with Security Agreement and Assignment of Rents)" ("deed of trust") dated July 31, 1985, and covering certain real property located in Dallas County, Texas.³

The purpose of the loan was to purchase and renovate a certain building in Dallas, Texas ("the Davis Building").⁴ The manner and the amount of the disbursements to be made under the note were controlled by the note and a "Construction Loan Agreement" ("loan agreement") referred to in the note and executed as part of the closing papers when the S & L agreed to make the loan.⁵

The principal obligor is insolvent and is not a defendant in this case.⁶ The plaintiff has not demanded payment from the insolvent principal obligor.⁷

On or about August 2, 7, and 8, 1985, the defendants each executed and delivered to the S & L separate but identical written guaranty agreements in which they unconditionally agreed to pay the S & L all principal, interest and collection costs incurred by the S & L on every claim against or indebtedness of the principal obligor related to the note and deed of trust.⁸

The S & L gave value on the note and was the owner and holder of the note until the appointment of the Federal Savings and Loan Insurance Corporation ("FSLIC") as its receiver.⁹ On April 24, 1987, the Federal Home Loan Bank Board ("FHLBB") appointed FSLIC as receiver of the S & L, and FSLIC as receiver took title and possession of all assets of the S & L, including its claims against defendants based on the note and guaranty agreements. 12 U.S.C. § 1464(d).¹⁰ The note has matured by its terms and is now due and payable.¹¹

On or about December 11 and 16, 1987 and January 14 and 15, 1988, with the principal obligor in default on the note for nonpayment of outstanding principal and accrued interest, counsel for FSLIC gave each defendant and N. Alex Bickley as their attorney written notice of the default and demanded payment for the past due installments of principal and interest. FSLIC expressed its intent to file suit to collect on the note and recover its litigation costs and attorneys' fees.¹² Defendants failed and refused, and continue to fail and refuse, to pay the amount due on the note.¹³

As of February 15, 1989, there was due and unpaid on the note the principal amount of $7,883,768.01 and accrued unpaid interest in the amount of $2,377,195.08. The total amount due on that date was $10,260,963.09, with interest continuing to accrue at $2,267.93 per day.¹⁴

II. Analysis

A. Standard for Summary Judgment

The standard for summary judgment is set out in this court's opinion in Brewster v. City of Dallas, 703 F.Supp. 1260, 1263 (N.D.Tex.1988).

B. Elements of Plaintiff's Claims

The only issue of law in this case is whether FSLIC, as receiver of the S & L, is entitled to a judgment on the note and guaranties. Generally, suits to enforce promissory notes are among the most suitable classes of cases for summary judgment. Lloyd v. Lawrence, 472 F.2d 313, 316 (5th Cir.1973); North Denver Bank v. Freeby, 285 F.Supp. 74, 77 (N.D.Tex.1967), aff'd, 394 F.2d 149 (5th Cir.1968). The elements of proof necessary to recover on a negotiable instrument are straightforward. Lloyd, 472 F.2d at 316. Under § 3.307(b) of the Texas Business and Commerce Code, "when signatures are admitted or established, production of the instrument entitles a holder to recover on it unless the defendant establishes a defense." Tex. Bus. & Com.Code § 3.307(b) (Vernon 1968). Under § 3.307, a cause of action against the maker of a promissory note is established if the plaintiff proves that:

(1) plaintiff is the holder of the note on which he sues;

(2) defendant signed the note;

(3) the note became due and payable; and

(4) defendant has not paid the amount due and owing.

See Little v. Business Data Center, Inc., 550 S.W.2d 406, 407 (Tex.Civ.App. — San Antonio 1977, no writ).

Unless the defendant denies execution or properly raises an affirmative defense, the plaintiff will prove its cause of action and be entitled to summary judgment by submitting a sworn affidavit based on personal knowledge of the appropriate corporate official which (1) identifies the note signed by the defendant maker; (2) avers that the plaintiff is the holder of the note; and (3) sets forth the sum owing on the note. Little, 550 S.W.2d at 407.

C. The Merits of the Defendants' Affirmative Defenses and General Claims to Offsets¹⁵

In their amended answer, the defendant guarantors allege the following affirmative defenses and offsets: (1) breach of contract, (2) breach of duty of good faith and fair dealing, (3) failure of consideration, and (4) fraud. Beyond the defenses raised in the amended answer, defendants Elmo Wilson, Jr. and Bob R. Smith argue (5) reliance on advice of counsel (representing to them that they would not be liable on the note),¹⁶ while Elmo Wilson, Sr. argues (6) mental incapacity.¹⁷ The court will address each of these defenses in turn.

1. Breach of Contract¹⁸

Defendants argue that the S & L breached the loan agreement by refusing to disburse the amount of the loan in accordance with its terms.¹⁹ They maintain that this breach defeated their ability to complete the renovation of the Davis Building according to plan and thereby precludes the plaintiff from collecting on the note.²⁰

The note specifically refers to the loan agreement, "which contain sic certain conditions upon which the indebtedness represented by this Note may be accelerated and become due and payable in full prior to the maturity stated herein."²¹ The note also refers to the deed of trust, which creates some of the liens and security interests securing the note.²² The deed of trust in turn refers to the loan agreement as the document controlling the manner in which the principal amount of the loan²³ was to be disbursed.²⁴

In or around May 1986, the S & L stopped funding the loan. The plaintiff argues that this conduct was authorized by § 2.06 of the loan agreement, which allowed the S & L to vary the amounts of its disbursements under the note from the amounts allocated in the approved budget to protect its collateral or insure a borrower's or guarantor's performance.²⁵ There is testimony that in May 1986 the principal obligor requested a revision in the budget so that it would not exceed its allocation for interest.²⁶ It was a written request.²⁷ Neither party addresses this point, but it would appear that the request was proper pursuant to § 7.03 of the loan agreement, entitled "Modifications."²⁸ There is no evidence that the principal obligor exceeded the budget without approval. The court is reluctant, in the context of the loan agreement as a whole, to read § 2.06 as broadly as the plaintiff reads it without some showing that the principal obligor failed to meet a condition or committed an event of default under § 2.05 and Article V of the loan agreement.²⁹

It is the defendants' burden, however, to prove the breach as an estoppel of the plaintiff's claim. Frye v. Appleby Water Supply Corporation, 608 S.W.2d 798, 803 (Tex.Civ.App. — Tyler 1980, writ ref'd n.r.e.). See Blackstock v. Gribble, 312 S.W.2d 289, 293-95 (Tex.Civ.App. — Eastland 1958, writ ref'd n.r.e.). See also Matter of Texas Mortgage Services Corporation, 761 F.2d 1068, 1074-75 (5th Cir.1985). Not only have the defendants failed to offer any evidence of a breach, but they seem to agree that the loan agreement and legal lending limits³⁰ authorized the S & L's conduct.³¹See Celotex Corporation v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986) (once moving party has pointed out the absence of a genuine issue of material fact which the non-movant has the burden of proving at trial, the non-movant's failure to carry that burden in its response will support summary judgment).

Also, the loan agreement was between the S & L and the principal obligor, not the guarantors, who unconditionally guaranteed the payment of the note and waived "any defense or rights of set-off or counterclaim which the principal obligor may have or assert...."³²

2. Breach of Duty of Good Faith and...