Frost Nat'l Bank v. Burge

• Citation: 29 S.W.3d 580
• Parties: <!--29 S.W.3d 580 (Tex.App.-Houston 2000) FROST NATIONAL BANK, H&H BUILDING INTERESTS, INC., JACK W. HOWETH, AND KENNETH R. HOWARD, Appellants V. CHARLES E. BURGE AND LINDA S. BURGE, Appellees NO. 14-99-00074-CV In The Fourteenth Court of Appeals
• Decision Date: 17 August 2000
• Court: Texas Court of Appeals

Page 580

29 S.W.3d 580 (Tex.App.-Houston [14th Dist.] 2000)

FROST NATIONAL BANK, H&H BUILDING INTERESTS, INC., JACK W. HOWETH, AND KENNETH R. HOWARD, Appellants

V.

CHARLES E. BURGE AND LINDA S. BURGE, Appellees

NO. 14-99-00074-CV

In The Fourteenth Court of Appeals

August 17, 2000.

Rehearing Overruled November 9, 2000.

On Appeal from the 127th District Court Harris County, Texas Trial Court Cause No. 95-058069

[Copyrighted Material Omitted]

[Copyrighted Material Omitted]

[Copyrighted Material Omitted] Panel consists of Justices Yates, Fowler and Edelman.

MAJORITY OPINION

LESLIE BROCK YATES, Justice.

This appeal stems from a defaulted real estate loan. The lender, Frost National Bank, appeals from a summary judgment granted in favor of the loan's surety, Charles E. Burge, on his claims for conversion, breach of contract, and material alteration. The borrowers, H&H Building Interests, Inc., Jack W. Howeth, and Kenneth R. Howard, appeal from a separate summary judgment that was awarded in the Burges' favor on H&H's¹ counterclaims for breach of contract and contribution. For the reasons set out below, we reverse the trial court's judgment.

I. Background

In August of 1993, Charles E. Burge and his wife, Linda S. Burge, agreed to sell a residence that they owned to H&H Building Interests, Inc., for the sum of $375,000. Jack W. Howeth is H&H's president, and Kenneth R. Howard is one of its stockholders. The Burges' residence was located at 326 Blaylock, in the City of Piney Point Village (the "Property"). H&H wanted to acquire the Property for the purpose of tearing down the existing improvements and constructing a new residence for resale on a speculative basis. Burge, a former attorney and a real estate developer, agreed to finance the entire purchase price and, in return, H&H agreed to execute two promissory notes to the Burges, one for $175,000, and another for $200,000. Pursuant to the parties' agreement, the $175,000 note was to be payable within ninety (90) days. The $200,000 note was to be payable in one year, but it was agreed that this note would remain subordinate to the bank loan which H&H needed to finance the new home's construction. On or about September 30, 1993, Burge conveyed the Property to H&H by general warranty deed, and H&H executed and delivered the two promissory notes as agreed.

In December of 1993, H&H obtained a construction loan in the amount of $865,000 from Frost National Bank's predecessor-in-interest, National Commerce Bank (collectively, the "Bank"). As security for the loan, H&H executed a promissory note in the principal amount of $865,000 (the "Note"). As further security, Howeth and Howard executed personal guaranties, in which each agreed to be jointly and severally liable for repayment of the $865,000 loan. The loan was also secured by a "Deed of Trust and Security Agreement" which gave the Bank a lien on the Property. In addition to this security, however, the Bank requested collateral in the amount of $200,000 to further secure the loan.

In negotiating for the loan, H&H evidently agreed to use the loan's profits to pay in full both the $175,000 and the $200,000 promissory notes previously executed to the Burges. In return for such payment, Burge orally agreed to use the $200,000 note payment as the additional collateral requested by the Bank to secure the loan. Pursuant to this agreement, Burge delivered $200,000 to the Bank from proceeds that he received from H&H at the loan's December 29, 1993 closing and used it to purchase a certificate of deposit (the "CD"). Burge then signed an "Owner's Consent to Pledge" the CD (the "Pledge"), also dated December 29, 1993, as additional collateral required for the $865,000 loan. The Pledge was part of a "Security Agreement-Pledge" that the Bank required H&H to sign.

After all of the loan documents had been signed by H&H and Burge, but before the Bank signed the documents, the Bank noticed a clerical error in the Note. That error incorrectly listed the Note's maturity date as December 28, 1995, instead of December 28, 1994, giving the Note two years to mature instead of one. It is undisputed by the Bank and by H&H that the Note was intended to mature after only one year, on December 28, 1994. The Bank notified Howeth that it would not fund the loan until the error was corrected. Howeth corrected the date by striking out the incorrect year and inserting the intended maturity date. Howeth then initialed the correction, and the Bank began to advance funds under the loan. Neither Howeth nor the Bank contacted Burge about the correction made to the Note's maturity date.

Under the terms of the corrected instrument, the Note matured on December 28, 1994. The Bank called Burge on January 24, 1995, to inform him that the Note "had matured." Burge also received a letter from the Bank, dated February 2, 1995, notifying him that, as surety, he would have ten days to cure any default on the loan by H&H. H&H failed to make the loan payments that were due and, in turn, defaulted on the Note. Although the Bank renewed the loan to give H&H additional time to pay, H&H was unable to make the required payments and fell into default again on April 17, 1995. In a letter dated June 5, 1995, the Bank served Burge with formal notice of H&H's default. Burge did not respond to the notice and did not cure that default. On June 20, 1995, the Bank foreclosed upon the $200,000 CD and credited that amount toward the Note's unpaid balance. On February 6, 1996, the Property was sold at a public auction to the highest bidder, the Bank, for $600,000.

II. Procedural History

On November 29, 1995, Burge filed suit against H&H for assumpsit, subrogation, and contribution for the damages resulting from the Bank's foreclosure on the $200,000 CD.² In a separate action, the Bank sued Howeth and Howard, as the Note's guarantors, for the deficiency between the Property's sale price and the amount remaining due on the Note. On April 1, 1996, the Burges amended their petition in the suit against H&H to add the Bank as a defendant and to seek damages from that entity for its foreclosure on the CD. In particular, the Burges complained that the Note was materially altered by Howeth's correction to the maturity date, at the Bank's request, after Burge had already signed the Pledge. The Burges argued therefore that the Bank wrongfully converted the CD and breached its contract with them. The two lawsuits were consolidated on August 9, 1996.

The Bank filed a motion for summary judgment on the Burges' claims, and the Burges filed a cross-motion for summary judgment. At a hearing on May 12, 1997, the trial court denied the Bank's motion and entered an "Interlocutory Judgment Order Granting Summary Judgment" in the Burges' favor [the "Interlocutory Judgment"] without stating the grounds for that decision. In the Interlocutory Judgment, the trial court ordered the Bank to pay $200,000 in damages to the Burges, plus pre- and post-judgment interest, reasonable attorneys' fees, and costs of court.

Following the trial court's ruling, the Bank filed cross-claims against H&H to recover the deficiency due on the Note in addition to its efforts to seek repayment under the guaranties executed by Howard and Howeth. The Bank also sought contribution and indemnity from those defendants for any amount that it would have to pay to the Burges. The Bank filed a motion for summary judgment on its cross-claims against H&H, claiming that Howard and Howeth impaired the loan's collateral by failing to obtain Burge's consent before correcting the Note's maturity date. On March 12, 1998, the trial court granted the Bank's motion for summary judgment, in part, finding H&H liable for the balance due on the Note. The trial court further found that Howeth and Howard were jointly and severally liable for the deficiency owed as "makers and guarantors" of the Note.

H&H then filed counterclaims against the Burges for breach of contract, stemming from Burge's purported "repudiation of his agreement to subordinate the CD to the Note," and for contribution of his "proportionate share" of liability, if any, to the Bank. The Burges filed a motion for summary judgment on the counterclaims asserted against them by H&H, arguing that H&H's new allegations were barred by the statute of frauds, the doctrines of collateral estoppel and res judicata, and principles of equity. The trial court granted the Burges' motion and dismissed H&H's counterclaims.

On December 30, 1998, the trial court entered a "Final Judgment" on the claims covered by the Burges' motion for summary judgment against the Bank, as set out in the May 12, 1997 Interlocutory Judgment, and the Burges' motion for summary judgment against H&H. That order dismissed all claims brought against H&H, Howeth, and Howard by the Burges, originally, because the Burges were deemed to have "obtained all the relief that they sought in this case by the summary judgment against" the Bank. On that same date, the trial court signed the parties' "Agreed Order for Severance" of the claims on which the court had already entered interlocutory judgments, from the claims which remain pending, to date, between the Bank, H&H, Howeth, and Howard. This appeal followed.

III. Issues Presented

In this appeal, the Bank contends that the trial court erred in granting Burges' motion for summary judgment, and in denying the motion filed by the Bank. The Bank has raised the following issues in support of this contention: (1) there is a genuine issue of material fact on Burge's material alteration defense; (2) Burge consented to the alteration of the Note's maturity date; (3) there is a genuine issue of material fact on Burge's claim that the Bank converted the CD pledged to secure the Note; (4) there was no contract between Burge and the Bank; (5) there is a genuine issue of material fact on Burge's claim that the Bank breached any contract that existed between Burge and the Bank; ...