Litigation With Financial Institutions “Neither a borrower nor a lender be, For loan oft loses both itself and a friend, And borrowing dulls the edge of husbandry.” - Hamlet Prince of Denmark, Act I, scene iii Curt M. Langley, Partner 1401 McKinney, Suite 1900 Houston, Texas 77010 713.752.4200 telephone 713.752.4221 main facsimile [email protected]www.jw.com Presented at University of Houston Law Foundation Continuing Legal Education Seminar “Advanced Business Litigation” September 9 & 10, 2004 (Double Tree Post Oak Hotel, Houston, Texas) September 23 & 24, 2004 (Cityplace Conference Center, Dallas, Texas)
Transcript
Litigation With Financial Institutions“Neither a borrower nor a lender be,
For loan oft loses both itself and a friend,A nd borrowing dulls the edge of husbandry.”
Presented at University of Houston Law FoundationContinuing Legal Education Seminar
“Advanced Business Litigation”
September 9 & 10, 2004 (Double Tree Post Oak Hotel, Houston, Texas)September 23 & 24, 2004 (Cityplace Conference Center, Dallas, Texas)
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TABLE OF CONTENTS
Litigation With Financial Institutions......................................................................................1
I. OVERVIEW OF THE ARTICLE......................................................................................1
A. Scope of the Article........................................................................................................1
B. Introduction...................................................................................................................1
C. Historical Trends...........................................................................................................1
D. Legislative Response......................................................................................................2
1. The TEXAS FINANCE CODE.................................................................................2
2. The Statute of Frauds. .......................................................................................2
E. Erosion of Statutory Protections...................................................................................3
II. OVERVIEW OF THEORIES OF LIABILITY.................................................................3
A. Lender Liability Claims against Financial Institutions. ..............................................3
B. Borrower’s Compulsory Counterclaims.......................................................................3
III.THE BASIS OF A LENDER’S LEGAL DUTIES. ............................................................4
A. The Legal Duty Owed By A Financial Institution Arises From the Type of Relationship.........................................................................................................................4
B. Hierarchy of Legal Duties Owed by Financial Institutions. ........................................5
IV. NEGLIGENCE AND NEGLIGENT MISREPRESENTATION CLAIMS......................6
A. Failure to Fund..............................................................................................................6
B. Negligent Misrepresentation Claims.............................................................................7
1. No Liability for Future Representations...........................................................8
2. Advising the Client: The Loan Application Process.........................................8
3. Advising the Client: Responses to a Credit Inquiry.........................................9
V. BREACH OF CONTRACT CLAIMS. ..............................................................................9
A. Loan Commitments. .................................................................................................... 10
B. Written Loan Agreements - Statute of Frauds........................................................... 11
C. Use of an Arbitration Clause....................................................................................... 12
D. Accord and Satisfaction. ............................................................................................. 13
E. Damages for Breach of Contract. ............................................................................... 13
F. Advising the Client: Documenting the Loan to Avoid Future Problems. ................. 14
VI. STATUTORY DUTIES AND RELATED CAUSES OF ACTION................................. 15
A. UCC & Statutory “Good Faith”. ................................................................................ 15
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1. The Duty of Good Faith................................................................................... 15
(1) Statutory “Good Faith”........................................................................ 15(2) The New Definition of Statutory “Good Faith”. ................................. 15
2. No “Implied” or Common Law “Duty of Good Faith and Fair Dealing” in a Lender/Borrower Relationship. ...................................................................... 16
3. No Common Law “Duty of Good Faith” in Mortgagor/Mortgagee Relationship. .................................................................................................... 16
(1) The “Special Relationship”. ................................................................. 17(2) Special Relationships Found. ............................................................... 19(3) “Formal” and “Informal” Fiduciary Duty.......................................... 19
B. Statutory Fraud........................................................................................................... 20
1. TEX. BUS. & COM. CODE § 27.01 Fraud in Real Estate and Stock Transactions..................................................................................................... 20
C. DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT (“DTPA”), TEX. BUS. & COM. CODE § 17.41, et seq. ........................................................................................... 21
(1) Financial Services. ................................................................................ 21(2) Mere Loan of Money Still Not a “Good” or “Service”. ...................... 22(3) Safe Deposit Box is “Good” or “Service”. ........................................... 22(4) Financial Institution as a “Consumer”................................................ 22
D. TEXAS PROPERTY CODE............................................................................................... 23
E. Texas State Law Usury................................................................................................ 23
1. The Definition of “Interest”. ........................................................................... 24
2. Spreading and Savings Clauses....................................................................... 25
3. Bona Fide Error Defense................................................................................. 26
4. Curing A Usury Violation. .............................................................................. 26
(1) Usury Liability of Attorneys and Other Third Parties. ...................... 26(a) No “charging” of Interest in a Pleading. .......................................... 26(b) Unfiled Petition Attached to a Demand Is a “Charge”.................... 27(c) Filing a Proof of Claim Is Not a “Charge.”...................................... 27(d) Attorney Demand Letters Can Be a “Charge”................................ 27(e) Practice Note for Collection Attorneys: ........................................... 28(f) Debt Collector Can Commit Usury................................................... 28(g) Usury in Lease Transaction.............................................................. 28(h) Only a Debtor Can Assert Usury. .................................................... 29(i) Guarantors Still Cannot Sue For Usury............................................ 29(j) Usury Defense May Be Waived. ........................................................ 29(k) Usury Counterclaim May Be Waived. ............................................. 29(l) Assuming Debt at Another Bank Not Usury..................................... 30
a. Alamo Lumber Cases.................................................................... 30
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(m) Home Equity Lending Is Distinguished.......................................... 30(n) Loan Fees as “Disquised Interest.” .................................................. 31(o) Common-Law Usury Survives.......................................................... 31(p) Preemption: Federal Usury Laws Prempt State Laws. .................. 32
F. Fair Debt Collection Practices Act Liability. ............................................................. 33
(1) Scope of the Texas Act. ........................................................................ 33(2) Coverage And Applicability................................................................. 33(3) Damages and Penalties......................................................................... 33
2. Federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq. ........... 33
(1) Scope of Federal Act. As a general rule, the Federal Act is less broad than the Texas Act, but provides consumers with more remedies than the Texas Act. 34(2) Coverage And Applicability................................................................. 34(3) Damages and Penalties......................................................................... 34
VII. ADDITIONAL TORT LIABILITY THEORIES........................................... 34
A. Negligence/Negligent Misrepresentation Claims. (See Section VI. above). .............. 35
B. Fraud Claims. .............................................................................................................. 35
1. The Element of Intent...................................................................................... 35
2. Statute of Limitations For Fraud.................................................................... 36
3. Advising the Client: “Consistency.”................................................................ 36
C. Tortious Interference Claims...................................................................................... 36
1. Tortious Interference with Contractual Relations. ........................................ 36
2. Tortious Interference with Prospective Contractual Relations. .................... 37
3. Clarifying the Tort of Tortious Interference. ................................................. 38
4. Affirmative Defenses, Damages, and Limitations. ......................................... 38
(1) Justification Defense............................................................................. 38(2) Statute of Limitations For Tortious Interference. .............................. 38
D. Wrongful Acceleration Claims and Defenses. ............................................................ 39
1. Good Faith Acceleration in the Sale of Goods................................................ 39
2. Good Faith Acceleration in Real Estate Transactions. .................................. 39
(1) Good Faith Acceleration in Residential Real Estate Transactions..... 39E. Duress & Economic Duress Claims and Defenses...................................................... 40
1. Advising the Client: “Honesty.”...................................................................... 40
F. Wrongful Foreclosure and “Chilled Bidding” Claims and Defenses. ....................... 41
(1) “Chilled the bidding.” .......................................................................... 41
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G. Breach of Fiduciary Duty/Special Relationship Claims............................................. 42
VIII. DEVELOPING TRENDS................................................................................ 42
1. Class Actions In Arbitration. .......................................................................... 42
LITIGATION WITH FINANCIAL INSTITUTIONS
I. OVERVIEW OF THE ARTICLE.
A. Scope of the Article.
During the past three decades, the number of lawsuits brought against financial institutions has increased dramatically. This article will primarily focus on the common law origins of so-called “lender liability” law in Texas and the developments and trends over the past few decades. This article is not intended to give a complete history or background of all lender liability law and, furthermore, does not cover every possible lender liability area such as federal statutory and regulatory exposure, securities law, state and federal environmental claims, and UNIFORM COMMERCIAL CODE issues. Designed for the general practitioner, this article will discuss historical origins and trends, provide background and suggestions for issue-spotting, both offensive and defensive arguments and positions, analytical tools for advising a borrower who encounters problems with its lender, advice for lenders, and advice for counsel when dealing with both lenders and borrowers.
B. Introduction.
Following the downturn of the real estate market and multimillion-dollar verdicts against banks in the mid-1980s, there was an explosion of cases dealing with lender liability claims. As a result, financial institutions and their attorneys became increasingly concerned with precluding and defeating such claims. Although the climate has generally improved for lenders, lender liability claims continue to develop and evolve. See John C. Joyce, Lender Liability: The Problem is Still with Us, 115 Banking L.J. 477 (1998). Lawsuits seeking millions of dollars in damages from financial institutions are still being filed and judges and juries are still awarding borrowers substantial damages based upon a lender’s alleged tortious misconduct and/or failure to comply with applicable law. See id. For these reasons, it is essential that financial institutions lenders and their attorneys are aware of how they are can be exposed to claims and lawsuits arising out of their lending activities, and the means that can be employed to defeat such claims and lawsuits. See id. at 478.
C. Historical Trends.
In order to address lender liability issues, it is important to be aware of the origins of the claims, the historical trends, and the more recent developments in that area of the law. Knowledge of the of the legal duties owed by financial institutions and the ways in which liability arises may help prevent incidences of such liability.
Lender liability under Texas state law finds its roots in State National Bank v. Farah Manufacturing Co., Inc., 678 S.W.2d 661 (Tex. App.-El Paso 1984, writ dism’d by
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agr.). Farah is often recognized as the first Texas case to broaden the scope of lender liability beyond basic contract claims and to recognize exposures under traditional tort theories of fraud, duress, and tortious interference. By the late 1980’s, these lender liability theories had been expanded in Texas and elsewhere leading to large recoveries against financial institutions. In the 1990’s, counsel for the borrowers have continued the attempt to expand the scope of lender liability in contract, in tort, and under the so-called “contort” theories of liability.
D. Legislative Response.
1. The TEXAS FINANCE CODE.
The TEXAS FINANCE CODE, effective Sept. 1, 1997, was enacted as a part of the state's continuing statutory revision program, begun by the Texas Legislative Council in 1963 as directed by the legislature in the law codified as Section 323.007, TEXAS
GOVERNMENT CODE. The statutory revision program contemplates a topic-by-topic revision of the state's general and permanent statute law without substantive change. TEX. GOV. CODE § 1.001.
Consistent with the objectives of the statutory revision program, the purpose of the TEXAS FINANCE CODE was to make the law encompassed by the Code more accessible and understandable by: (1) rearranging the statutes into a more logical order; (2) employing a format and numbering system designed to facilitate citation of the law and to accommodate future expansion of the law; (3) eliminating repealed, duplicative, unconstitutional, expired, executed, and other ineffective provisions; and (4) restating the law in modern American English to the greatest extent possible. TEX. GOV. CODE § 1.001.
The TEXAS GOVERNMENT CODE provides that a reference in a law to a statute or a part of a statute revised by the Code is considered to be a reference to the part of this Code that revises that statute or part of that statute. TEX. GOV. CODE § 1.003. In other words, the re-codification was done primarily for sake of simplicity and clarity, as opposed to substantive changes in the law.
2. The Statute of Frauds.
After the dramatic increase in lender liability claims in the 1980s and the increased exposure of lenders to claims based upon oral promises or representations, one of the legislative responses was enactment of statues to bring loan agreements within the statute of frauds. See 45 BUSINESS LAWYER 1779, Lender Liability Limitation Amendments To State Statutes of Frauds (1990). By the end of 1989, twenty-five states had amended existing statutes or enacted new statutes barring the enforcement of oral lending agreements. Id. at 1780-1781. In Texas, that statute of frauds is
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located at TEX. BUS. & COM. CODE § 26.02 (loan agreement exceeding $50,000 must be in writing) and TEX. BUS. & COM. CODE (UCC) § 2.201 (contract for the sale of goods of $500 or more must be in writing).
E. Erosion of Statutory Protections.
As discussed below, although the statutory protections were designed to protect both lenders and borrowers, the case law developments have eroded those statutory protections by use of equitable and tort-based theories such as negligent misrepresentation, promissory estoppel, fraudulent inducement and fraud. These legal and equitable theories have, in many instances, created exceptions to the general rule.
II. OVERVIEW OF THEORIES OF LIABILITY.
A. Lender Liability Claims against Financial Institutions.
Lender liability claims may arise under theories based in contract, in tort, in equity, and by statute. For purposes of Texas state law actions filed against lenders, the lender liability lawsuits may be generally classified into three (3) categories or procedural postures:
1. borrower claims seeking recovery of damages;
2. borrower counterclaims file in a collection/foreclosure action; and
3. borrower “first strike” lawsuits filed in anticipation of a lender’s collection/foreclosure action.
The first type of claim usually arises where the borrower or attempted borrower asserts lawsuit for damages based upon a failure to fund a loan or based upon alleged misconduct or overzealous collection efforts. The second and third categories usually arise as a defensive strategy to a collection or foreclosure action filed by the lender. The prevalence of the “counterclaim” and “first strike” type of actions arises from the fact that such claims are often compulsory counterclaims to a suit for collection or foreclosure by the lender. Accordingly, a borrower threatened with an imminent lawsuit will often choose to file first and thereby secure a “Plaintiff” posture in the lawsuit in a favorable venue and forum.
B. Borrower’s Compulsory Counterclaims.
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Lender liability claims are asserted under contract theories, tort theories, equitable theories, and statutory grounds. Such claims are most often asserted by the borrower in a lawsuit brought by the lender for recovery under the loan documents. In fact, courts have held that most “lender liability” claims are compulsory counterclaims in the lender’s suit on a note or to recover a deficiency judgment after foreclosure.
See Williams v. National Mortg. Co., 903 S.W.2d 398, 404 (Tex. App.- Dallas 1995, writ denied); Jones v. First Nat’l Bank of Anson, 846 S.W.2d 107, 109 (Tex. App.-Eastland 1992, no writ) (causes of action for breach of duty of good faith and fair dealing, breach of fiduciary duty, negligent misrepresentation, conversion, estoppel, and violations of the DECEPTIVE TRADE PRACTICES – CONSUMER PROTECTION ACT
are compulsory counterclaims to a suit on a note).
See Lamar Sav. Ass’n v. White, 731 S.W.2d 715, 717-18 (Tex. App.- Houston [1st Dist.] 1987, orig. proceeding) (causes of action for breach of contract, breach of fiduciary duty, usury, duress, estoppel, and tortious interference are compulsory counterclaims to a lender’s foreclosure action).
Practice Note: Under TEX. R. CIV. P. 97, compulsory counterclaims are waived if not asserted as counterclaims in the initial lawsuit.
III. THE BASIS OF A LENDER’S LEGAL DUTIES.
A. The Legal Duty Owed By A Financial Institution Arises From the Type of Relationship.
As a general rule, the legal duty owed by a lender to a borrower starts with the same arms-length duty owed under a general negligence standard. However, additional duties may arise based upon written contracts between the parties and applicable Texas statutes. Additionally, where the relationship develops into a long-term relationship of trust and confidence, there are instances in which a lender-borrower relationship will arise to a “special relationship” in which heightened duties are owed by the financial institution. Finally, in certain instances, a fiduciary duty may arise based upon more complex business relationships such as in a loan participation relationship.
The hierarchy of legal duties is illustrated on the following page:
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B. Hierarchy of Legal Duties Owed by Financial Institutions.
IV. NEGLIGENCE AND NEGLIGENT MISREPRESENTATION CLAIMS.
A. Failure to Fund.
One common problem with respect to banks is whether or not the bank becomes liable for failure to fund a loan or to lend money even before an enforceable written loan agreement of some form has been consummated. Usually, a statute of frauds defense will prevent recovery in this situation. However, theories of promissory estoppel or negligent misrepresentation provide a possible source of recovery against the financial institution despite the statutory (statute of frauds) protection. See, e.g., Federal Land Bank Assn. of Tyler v. Sloane, 825 S.W.2d 439 (Tex. 1991) and Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164 (Tex. App.-Austin 1996, no writ).
In Federal Land Bank Assn. of Tyler v. Sloane, 825 S.W.2d 439 (Tex. 1991), the plaintiff brought suit for negligent misrepresentation alleging that the bank represented to Sloane that it would loan him money to renovate his chicken farm. Relying upon this representation, Sloane incurred expenses upgrading his chicken coups. The bank later refused to loan the money and Sloane brought suit. In order to avoid the bank’s statute of frauds defense, Sloane relied upon a theory of negligent misrepresentation and the Texas Supreme Court agreed holding:
The Sloanes do not claim that the bank agreed to loan them money and then breached that agreement; rather, they claim that the bank did not agree to loan them money, yet negligently misrepresented that it had made such an agreement ... Although a claim of negligent misrepresentation may not be used to circumvent the statute of frauds, under the circumstances of this case, the Sloane’s claim does not fall within the statute of frauds. Id. at 442.
Following the path laid out for them in Sloane, the plaintiff in Maginn v. Norwest Mortgage, Inc. successfully avoided a statute of frauds by alleging promissory estoppel and/or negligent misrepresentation. The court dismissed the Plaintiff’s contract and DTPA claims, but remanded the promissory estoppel and negligent misrepresentation claims holding that “When a party makes an oral promise to sign a written instrument complying with the statute of frauds, the promise will be enforced, provided the promissor should have expected that the promissee would detrimentally rely on such promise.” Maginn v. Norwest Mortgage, Inc., 919 S.W.2d at 167-168; Cobb v. West Texas Microwave Co., 700 S.W.2d 615, 616 (Tex. App.-Austin 1985, writ ref’d n.r.e.).
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See also Burleson State Bank v. Plunkett, 27 S.W.3d 605 (Tex. App.–Waco 2000, pet. denied), where the lender was found liable for bank fraud and negligent misrepresentation despite the fact that a “notice of final agreement” under statute of frauds TEX. BUS. & COM. CODE § 26.02(e) was executed by the borrower.
But see Ford v. City State Bank of Palacios, 44 S.W.3d 121 (Tex. App.–Corpus Christi 2001, n.w.h.) (upholding statute of frauds defense).
See also The Mark Andrew of the Palm Beaches, Ltd. v GMAC Commercial Mortgage Corp., ___ F. Supp. ___ (S.D. N.Y. July 3, 2003) (applying the Florida statute of frauds to defeat a borrower’s claims for promissory estoppel, fraud, negligent misrepresentation, and bad faith).
B. Negligent Misrepresentation Claims.
As set forth above, in Federal Land Bank Assn. of Tyler v. Sloane, 825 S.W.2d 439 (Tex. 1991), the plaintiffs claimed that it had been represented to them that the bank would lend money, and upon reliance, they began construction and improvements on real property to their detriment. The case was submitted to a jury on the issue of whether or not there had been a negligent misrepresentation by the bank officer. The court distinguished this allegation from the contract to lend money, which would be covered under TEX. BUS. & COM. CODE § 26.01 (the statute of frauds). The Court found that where the bank officer had, in fact, made representations with the knowledge that the plaintiffs were incurring indebtedness and otherwise being damaged by his representations, a claim for negligent misrepresentation was made and proved.
To establish a negligent misrepresentation claim, the representation had to be (1) made by the defendant in the course of his business, or in a transaction in which he had 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 retaining or communicating the information; and (4) the plaintiff suffers pecuniary loss by justifiably relying upon the representation. Damages in such a case are limited to pecuniary loss (relying upon RESTATEMENT (SECOND) OF TORTS §552 (1977)). The court specifically held that mental anguish was not recoverable.
See also Burleson State Bank v. Plunkett, 27 S.W.3d 605, 616-617 (Tex. App.–Waco 2000, pet. denied); Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164 (Tex. App.-Austin 1996, no writ).
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1. No Liability for Future Representations.
Unlike common law fraud, negligent misrepresentation does not require knowledge of the falsity or reckless disregard of the truth or falsity of the representation at the time it was made. However, to prevail on a claim for negligent misrepresentation, the plaintiff must prove that the defendantmisrepresented an existing fact.
For example, in Alpha Road v. NCNB Texas Nat’l Bank, 879 F. Supp. 655, 665 (N.D. Tex. 1995), the court held that a bank officer’s representation that he needed additional authority, but the loan was a “done deal” and it would be renewed at the end of four months, referred to the bank’s future performance and was therefore not actionable under a theory of negligent misrepresentation.
See also Perez v. Servicios Especializados de Comedores Industriales, 969 F. Supp. 991, 1008 (N.D. Tex. 1997) (holding that negligent misrepresentation does not occur when a defendant simply makes a guess as to a future, unknown event).
Note: When advising a lender or borrow regarding a failure to fund situation, the practitioner should be aware that while the statute of frauds may avoid liability for an agreement to lend money; the doctrines of promissory estoppel, negligent misrepresentation, fraud, and fraudulent inducement are very much alive and can provide a source of recovery against a financial institution despite waivers and disclaimers in the loan documents and despite compliance with the statute of frauds.
2. Advising the Client: The Loan Application Process.
Lenders may be liable for damages resulting from negligently approving or disapproving an application for credit. See John C. Joyce, Lender Liability: The Problem is Still with Us, 115 Banking L.J. 477, 478 (1998). Lenders have a duty to use reasonable care in processing loan applications. See id. Here are some suggestions for reducing potential liability:
(1) Provide training for the staff in processing, approving, and rejecting loan applications.
(2) Don’t overstate or “oversell” the likelihood of loan approval.
(3) Use a “noncommitment” statement during negotiations over loan terms.
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(4) Follow guidelines for approval in the Credit Policy Manual and be consistent in reasons for approval or rejection.
(5) Document the file regarding the reasons for approval or rejection.
3. Advising the Client: Responses to a Credit Inquiry.
The lender may also be held liable for any material misrepresentation or omission in its response to a credit inquiry. See id. at 481. By responding to such inquiries, the lender obligates itself to provide accurate and complete information. See id. If the lender reports suspicious activity or possible fraud, both incriminating and mitigating information must be disclosed to the authorities. See id. at 482. Here are some suggestions for reducing potential liability:
(1) Provide a carefully worded, qualified answer in writing that sets forth the limits of the lender’s investigation and the date thereof.
(2) Disclaim any duty to update the response.
(3) Caution the inquirer not to rely on the lender’s information when deciding whether or not to issue credit.
(4) Use a central group to process credit inquiries.
(5) Secure the borrower’s prior written consent to respond to credit inquiries.
(6) Seek advice of counsel before disclosing suspicious activity.
V. BREACH OF CONTRACT CLAIMS.
In the years since Farah in 1984, Texas courts have increasingly allowed recovery of consequential damages for breach of a contract to lend money. Documents, which may constitute a “contract” to lend money, include the loan application, financial statements, loan term sheet, commitment to lend, guaranties, promissory notes, and security documents. The loan application is considered primarily a source of information for the lender, while the loan commitment is the heart of the loan contract. In construction projects, a short-term loan commitment is usually replaced by a permanent loan commitment. Conditions precedent are an important part of loan commitments, but they must be clearly expressed in the contract. It is also common practice for a lender to require a loan commitment fee.
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Lender contractual liability is usually based on one of the following concepts: failure to fund a loan, anticipatory repudiation, promissory estoppel, condition precedent, acceleration, duty to inspect, and breach of statutory (UCC) duty of good faith.
A. Loan Commitments.
A commitment to lend is an agreement signed by both borrower and lender for a specific dollar amount and for a definite time period. The commitment is commonly in the form of a letter from a lender, a copy of which the borrower signs and returns. See, e.g., 410/West Ave. Ltd. v. Texas Trust Sav. Bank, F.S.B., 810 S.W.2d 422, 425 (Tex. App.- San Antonio 1991, no writ). However, oral commitments have been held to be equally valid subject to any applicable statute of frauds. See Riverside Nat’l Bank v. Lewis, 603 S.W.2d 169 (Tex. 1980). Loan commitments usually specify: (1) the parties, (2) the amount of the loan, (3) the expiration date, (4) conditions precedent; and (5) other basic terms of the loan.
See AMR Enters., Inc. v. United Postal Sav. Ass’n, 567 F.2d 1277 (5th Cir. 1978) (unless a specific time for the performance of the conditions is stipulated, the commitment must be held open for a reasonable time). The loan commitment is an enforceable contract and, accordingly, may not be canceled except under the conditions set forth in the agreement.
Whether the loan commitment is an enforceable contract is determined under the usual rules of contract law. The commitment must contain all the essential elements of a contract, be unambiguous, and must indicate an intention by the parties to be bound. See F. G. Farah v. Mafrige & Kormanik, P.C., 927 S.W.2d 663 (Tex. App.-Houston [1st Dist.] 1996, no writ); Venture Projects, Inc. v. Morrison, 1999 WL 125446 (Tex. App.-Austin 1999, no pet. h.) (material terms of contract to lend money are the amount of the principal, maturity date, interest rate and repayment terms; the alleged contract in this case was too indefinite to be enforced, as plaintiff only alleged the bank agreed to extend a line of credit for real estate loans if plaintiff maintained deposit balances at the bank). If the commitment is lacking in these respects, it is not an enforceable contract and the lender will not be obligated under it. See Clardy Manufacturing Co. v. Marine Midland Business Loans, Inc., 88 F.3d 347 (5th Cir. 1996), reh. denied, 96 F.3d 1447 (1996).
The lender is entitled to consideration in the form of a commitment fee for its agreement to keep the credit available. However, at least one circuit court has upheld a commitment to lend without consideration because the borrower had reasonably relied on the commitment before it was withdrawn. See Stanish v. Polish Roman Catholic Union for Am., 484 F.2d 713 (7th Cir. 1973).
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The lender’s receipt of fee for issuing the initial “term sheet” may be sufficient evidence to convince a court that the lender made a binding commitment to lend. Additionally, the receipt of a commitment fee may also be characterized as interest in a usury analysis. (See discussion of Usury below in this article).
There are two types of loan commitments: bilateral agreements and unilateral agreements. See Valdina Farms, Inc. v. Brown, Beasley & Ass’n, Inc., 733 S.W.2d 688, 693 (Tex. App.- San Antonio 1987, no writ); B. F. Saul Real Est. Inv. Trust v. McGovern, 683 S.W.2d 531, 534 (Tex. Civ. App.- El Paso 1985, no writ).
1. In bilateral agreements, the lender is obligated to lend, and the borrower is obligated to take the loan. See Morgan v. Young, 203 S.W.2d 837 (Tex. Civ. App.-Beaumont 1947, ref. n.r.e.).
2. In unilateral agreements, the lender commits to lend, often on stated conditions, but the borrower has the right to refuse the loan. See Valdina Farms, Inc. v. Brown, Beasley & Ass’n, Inc., 733 S.W.2d 688, 693 (Tex. App.- San Antonio 1987, no writ); B. F. Saul Real Est. Inv. Trust v. McGovern, 683 S.W.2d 531, 534 (Tex. Civ. App.-El Paso 1985, no writ); Morgan v. Young, 203 S.W.2d 837, 845 (Tex. Civ. App.-Beaumont 1947, ref. n.r.e.). Unilateral commitments may be treated as simple option contracts for purposes of determining the lender’s obligations. The majority of loan commitments are unilateral (option) contracts.
B. Written Loan Agreements - Statute of Frauds.
Obviously, most loan agreements are reduced to writing. However, TEX. BUS. & COM. CODE (Statute of Frauds) § 26.02 provides that any loan agreement in which the amount of the loan exceeds $50,000 is not enforceable unless it is in writing and signed by the party to be bound. T EX. BUS. & COM. CODE § 26.02(b).
The term “loan agreement” is defined to include promissory notes, agreements, undertakings, security agreements, deeds of trust, commitments, or any combination of the foregoing. TEX. BUS. & COM. CODE § 26.02(a)(2).
A loan agreement under Section 26.02(b) must also be accompanied by a separate, written, acknowledgment of no oral agreements which must state in bold-faced, capitalized, underlined, or other conspicuous manner:
“THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS
BETWEEN THE PARTIES.”
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TEX. BUS. & COM. CODE § 26.02(e).
In Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164, 168 (Tex. App.- Austin 1996, n.w.h.), the court held that “ . . . the penalty for failure to comply with § 26.02(e) is to allow the written contract to be controverted by parol evidence.” Quoted in Digby v. Texas Bank, 943 S.W.2d 914, 943 (Tex. App. -El Paso 1997, writ denied). Compare Burleson State Bank v. Plunkett, 27 S.W.3d 605 (Tex. App. –Waco 2000, pet. denied) (lender was found liable for bank fraud and negligent misrepresentation despite the fact that a “notice of final agreement” and § 26.02(e) was executed by the borrower).
C. Use of an Arbitration Clause.
Most loan agreements now contain a mandatory binding arbitration clause. Such clauses may be useful in limiting exposure to both litigation costs and exposure to punitive damage awards. Additionally, as the following recent cases demonstrate, some courts are even allowing a non-signatory to an arbitration agreement to compel a signatory to go to arbitration on claims relating to the arbitable claims:
In Bank One Arizona, N.A. v. Wilton Hurst G.P. Corp., 2001 U.S. Dist. LEXIS 3137 (N.D. Tex. March 19, 2001), the United States District Court for the Northern District of Texas, following an emerging trend in the Fifth Circuit, ruled that an arbitration clause in a loan agreement may be invoked by the debtor’s surety that was not itself a signatory to the loan agreement. This same equitable estoppel theory was also applied in Watkins Engineers & Constructors, Inc. v. Deutz, 2001 WL 1545738 (N.D. Tex. 2001); Grigson v. Creative Artists Agency, L.L.C., 210 F.3d 524, 527 (5th
Cir.), cert. denied, 531 U.S. 1013 (2000).
In Thompson-CSF, S.A. v. American Arbitration Ass’n. 64 F.3d 773 (2d. Cir. 1995), the Second Circuit recognized five “traditional theories,” based on ordinary contract and agency principles, for binding non-signatories to arbitration agreements: (1) incorporation by reference; (2) assumption; (3) agency; (4) veil-piercing / alter ego; and (5) estoppel. Id. at 776. However, the court did not find any of these theories to apply in that case and therefore overruled the district court’s order compelling the non-signatory to arbitration. Id. at 780.
In Ericcson, Inc. v. Comscape Holding, Inc., the District Court for the Northern District of Texas subsequently clarified that the theories of incorporation by reference and equitable estoppel operate only when a non-signatory to an arbitration agreement seeks to compel a signatory to arbitration. 2000 WL 708917 *4 (N.D. Tex. 2000).
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In Federal Insurance Company v. Broadmoor, LLC, however, the District Court for the Eastern District of Louisiana held that a non-signatory to a contract with an arbitration clause was partially bound by the arbitration clause because the non-signatory’s conduct indicated that it was assuming the contractual obligation to arbitrate some of its claims or defenses. 2003 WL 282324 (E.D. La. 2003).
In a recent case on point, Brown v. Anderson, 102 S.W.3d 245 (Tex. App.-Beaumont 2003, n.w.h.), the Beaumont Court of Appeals applied the Fifth Circuit’s holding in Grigson to compel arbitration. None of the cases located, however, has applied these arguments by a signatory to an arbitration clause who seeks to compel a non-signatory to submit to arbitration.
D. Accord and Satisfaction.
An accord and satisfaction is often entered into as part of a “workout” plan with a troubled borrower. Accords must be supported by new consideration and must be entered into without duress. Accord and satisfaction rests upon a new contract, express or implied, in which the parties agree to discharge the existing obligation by a lesser payment tendered and accepted. See Boland v. Mundaca Investment Corp., 978 S.W.2d 146, 148-49 (Tex. App.-Austin 1998, no pet.); Advantage Group Investment, Inc. v. Pacific Southwest Bank, 972 S.W.2d 866, 869 (Tex. App.- Corpus Christi 1998, pet. denied); Christian v. University Savings Ass’n, 792 S.W.2d 533, 534 (Tex. App.-Houston [1st Dist.] 1990, no writ). There must be an unmistakable communication to the creditor that acceptance of the lesser sum will satisfy the underlying obligation. Such condition “must be plain, definite, certain, clear, full, explicit, not susceptible of any other interpretation, and accompanied by acts and declarations that the creditor is sure to understand.” Ostrow v. United Business Machines, Inc., 982 S.W.2d 103, 104 (Tex. App.- Houston [1st Dist.] 1998, no writ) (holding that valid accord and satisfaction barred a Deceptive Trade Practices Act (“DTPA”) claim despite DTPA §17.42 anti-waiver provision). See also Real Estate Law Report, Accord and Satisfaction: Deposited Check Released Borrowers, 29-Nov Real Est. L. Rep. 4 (1999) (explaining Boland).
E. Damages for Breach of Contract.
In general, damages in cases of breach of contract to lend money are the extra costs of obtaining funding elsewhere together with any differential in interest rate. Borrowers have the duty to mitigate damages by seeking alternative funding. For a good discussion of damages in this context, see Texas Commerce Bank v. Lebco Constructors, 865 S.W2d 68 (Tex. App.-Corpus Christi 1993, writ denied).
However, a major change has occurred on the damages side where consequential damages are now available. In that respect, lenders now face the same liability as
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other sellers of goods and services in many respects. Lenders can combat this liability by maintaining good records and using disclaimers of consequential damages clauses in loan agreements and other documents signed by borrowers. Many lenders are also using binding arbitration clauses in hopes of avoiding the punitive damage and treble damage claims that often accompany a lender liability lawsuit.
F. Advising the Client: Documenting the Loan to Avoid Future Problems.
See John C. Joyce, Lender Liability: The Problem is Still with Us, 115 Banking L.J. 477, 480 (1998). Here are some suggestions for reducing liability:
(a) Courts will generally enforce loan document terms; therefore, clear, unambiguous lender-favorable provisions are the best protection against borrower claims of lender misconduct.
(b) Be sure covenants are capable of being met.
(c) Verify the correct name of the borrower and the authority of signer of document.
(d) Review articles of incorporation and minutes of corporate meeting authorizing borrowing.
(e) Include waiver of jury trial or mandatory arbitration provision in the loan documents.
(f) Use printed forms when possible, but be sure forms reflect terms of transaction and are prepared or reviewed by experienced counsel.
(g) Give the lender discretion and approval authority in the loan documents where needed (e.g., advances of loan proceeds, form of third party agreements, environmental matters).
(h) Specify the dates when covenant compliance must be met and other significant deadlines.
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VI. STATUTORY DUTIES AND RELATED CAUSES OF ACTION.
A. UCC & Statutory “Good Faith”.
1. The Duty of Good Faith.
Almost every lender liability lawsuit contains the allegation that the lender had a fiduciary relationship, a “special relationship,” and/or that the lender has otherwise violated a “duty of good faith and with fair dealing.” However, most often, those allegations go beyond the duty that is actually owed in the fact situation.
(1) Statutory “Good Faith”.
Former TEX. BUS. & COM. CODE (UCC) § 1.203 provided that “Every contract or duty within this title imposes an obligation of good faith in its performance or enforcement.” Furthermore, the Code defined “Good Faith” as “honesty in fact in the conduct or transaction involved.” See former TEX. BUS. & COM. CODE (UCC) § 1.201(19). This “good faith” obligation was often the source of a borrower’s claims against his lender/creditor.
In Bank One, Texas, N.A. v. Stewart, 967 S.W.2d 419, 440-442 (Tex. App.-Houston [14th Dist.] 1998, no pet.), the court held that a lender owes a statutory duty of good faith and fair dealing in every contract pursuant to TEX. BUS. & COM. CODE (UCC) §1.203. However, the failure to act in good faith does not give rise to an independent tort action, but at most, an action for breach of contract. See id. (citing Hallmark v. Hand, 885 S.W.2d 471, 480 (Tex. App.-El Paso 1994, writ denied).
In Rabinowitz v. Cadle Company II, Inc., 1999 WL 289149 (Tex. App.-Dallas 1999, no pet. h.), the court held that a guarantor could not waive a creditor’s “good faith” requirement under TEX. BUS. & COM. CODE (UCC) § 1.102(c).
(2) The New Definition of Statutory “Good Faith”.
Under the most recent amendments to the TEXAS BUSINESS & COMMERCE CODE (UCC) effective September 1, 2003, Article 1.203 was been removed and the definition of “good faith” was expanded to apply beyond Article 2 and to also address “commercial reasonableness” in addition to “honesty in fact.”
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The newly amended TEX. BUS. & COM. CODE (UCC) §1.201(20) provides that “Good Faith, except as otherwise provided in Article 51, means honesty in fact and the observance of reasonable commercial standards of fair dealing.”
Additionally, since the amendments removed former Section 1.203, the other amended Articles each specifically adopt the new broader definition of “good faith.” See TEX. BUS. & COM. CODE (UCC) §3.103(a)(4), §4A.105(a)(6), §8.102(a)(10), and §9.102(a)(43). All of these definitions are comprised of two elements – honesty in fact and the observance of reasonable commercial standards of fair dealing. Only Article 5 retained the old definition of “good faith” which required only honesty in fact.
2. No “Implied” or Common Law “Duty of Good Faith and Fair Dealing” in a Lender/Borrower Relationship.
In Federal Deposit Ins. Corp. v. Coleman, 795 S.W.2d 706 (Tex. 1990) the Texas Supreme Court held that there is no general duty of good faith and fair dealing between a lender and a borrower. See id. at 709. See also English v. Fischer, 660 S.W.2d 521 (Tex. 1983). Another issue raised was whether or not the duty of good faith found in the former Section 1.203 of the TEXAS BUSINESS & COMMERCE
CODE was applicable in the guarantees existing in the case. The Court held that even assuming that § 1.203 applied, all that 1.203 required was “honesty in fact.” See id. Diligence or negligence was not an element of honesty in fact.
3. No Common Law “Duty of Good Faith” in Mortgagor/Mortgagee Relationship.
In Georgetown Associates, Ltd. v. Home Federal Sav. & Loan Ass’n, 795 S.W.2d 252 (Tex. App.-Houston [14th Dist.] 1990, writ dism’d w.o.j.) a debtor sought to recover damages for a foreclosure which it alleged took place and resulted in a grossly inadequate sales price. However, the borrower did not, by summary judgment evidence, show that there was any irregularity in the sale that caused or
1 TEX. BUS. & COM. CODE ARTICLE 5 applies to Letters of Credit. In that Article, Good Faith is still defined to mean “honesty in fact in the conduct or transaction concerned.” Section 1.102(a)(7).
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contributed to the grossly inadequate price. The Court held that in absence of such evidence, no complaint about the foreclosure could be heard. It specifically rejected that between a mortgagor and a mortgagee there was any obligation of good faith or “special relationship” which would give rise to any other similar duties beyond the terms of the written documents. Thereafter, citing Coleman, a number of other courts rejected any form of duty of good faith and fair dealing or requiring that a lender do more than follow the appropriate foreclosure statutes. See Federal Deposit Ins. Corp. v. Blanton, 918 F.2d 524 (5th Cir. 1990), Security Bank v. Dalton, 803 S.W.2d 443 (Tex. App.-Fort Worth 1991, writ denied); SEI Business Systems, Inc. v. Bank One Texas, N.A., 803 S.W.2d 838 (Tex. App.-Dallas 1991, no writ).
Note: Be aware however, that the duty of good faith requiring honesty in fact under former § 1.203 (now §1.201(20)) does exist and can be a source of liability for lenders. See Schmueser v. Burkburnett Bank, 937 F.2d 1025 (5th Cir. 1991). Other cases holding that a lender has no common law duty of good faith and fair dealing absent some special relationship are Cockrell v. Republic Mortg. Ins. Co., 817 S.W.2d 106 (Tex. App.-Dallas 1991, no writ); Manufacturer’s Hanover Trust Co. v. Kingston Inv., 819 S.W.2d 607, 610 (Tex. App.-Houston [1st Dist.] 1991, no writ); Resolution Trust Corporation v. West Ridge Court Joint Venture, 815 S.W.2d 327 (Tex. App. -Houston [1st Dist.] 1991, writ denied).
(1) The “Special Relationship”.
In FDIC v. Perry Brothers, Inc., 854 F. Supp. 1248 (E.D. Tex. 1994), affirmed in part, 68 F.3d 466 (5th Cir. 1995), the plaintiff/borrower alleged a “special relationship of trust and confidence” with their lender and also brought claims for breach of contract, economic duress, promissory estoppel, fraud, wrongful setoff, conversion, and business disparagement. The lender, NCNB, asserted affirmative defenses including the statute of frauds, the parol evidence rule, and the “merger clause doctrine.” Finding for the borrower on almost every count, the Plaintiff recovered $6 million against the lender. The court held that:
[w]hile the relationship between debtor and creditor alone does not lend itself to a general imposition of the duty of good faith and fair dealing, Texas courts nonetheless recognize that a duty of good faith and
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fair dealing may arise: (a) by agreement; (b) in particular circumstances, between the parties as a result of a long-standing, special relationship of trust and confidence between them (although mere subjective intent alone cannot so create the duty of good faith and fair dealing) and (c) may arise when an imbalance of bargaining power exists, at least when the defendant is responsible for the imbalance. Id. at 1259.
The court found a breach of the duty where the defendant bank, NCNB and its predecessors, had a “hidden agenda” as to the borrowers, promising to renew loans at maturity, actively discouraging alternative financing, and otherwise acting dishonestly to maximize its year end collections. The bank’s records demonstrated its unique, unequal bargaining position and its knowledge that it’s financing was essential to the restructuring of Perry Brothers, Inc.
The FDIC v. Perry Brothers, Inc. case provides a very good outline of the various theories of lender liability law, and also provides guidelines for a lender on how not to get too involved or to close to its borrower/customer.
Other cases have identified the following factors that may give rise to a “special relationship” in certain rare instances:
(1) when one party is guided by the judgment or advice of the other party or is justified in believing that the other party will act in his interest;
(2) when one party has acquired influence over the other and has abused that influence;
(3) when the parties have worked together toward a mutual goal for a long period of time;
(4) when the lender knows or has reason to know that the customer is placing his or her trust and confidence in the lender and is relying on the lender to counsel and inform;
(5) when both parties understand that a special trust or confidence has been reposed; and
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(6) when there is an allegation of dependency by one party and a voluntary assumption of a duty by the other party to advise, counsel and protect the weaker party.
See O’Shea v. Coronado Transmission Co., 656 S.W.2d 557 (Tex. App.- Corpus Christi 1983, writ ref’d n.r.e.). See also the Perry Bros. case.
See also Glauser v. State Farm Life Ins. Co., 1994 WL 470355 (Tex. App.- Houston [1st Dist.] 1994, no writ) (a “first strike” case alleging contract theories, tort theories, special relationship, and statutory theories of recovery against a lender).
(2) Special Relationships Found.
In the years since English v. Fischer, 660 S.W.2d 521 (Tex. 1983), Texas courts found only a handful of cases where a special relationship required a duty of good faith and fair dealing: (1) Holders of executive rights to mineral interests; (2) First-party insurers’ duties to their insured; (3) Cable TV providers; (4) Debtor/Creditor; (5) HMO’s and dentists; (6) Insurance companies and recording agents. See Fred A. Simpson & Deborah J. Seldon, Texas Law on Special Relationships, 35 Houston Lawyer 10, 12 (1997).
(3) “Formal” and “Informal” Fiduciary Duty.
In a recent Texas case (not a borrower-lender case), the Court of Appeals in Dallas discussed and analyzed the difference between a “formal” fiduciary duty and an “informal” fiduciary duty. Exxon Corp. v. Breezevale, Ltd., 82 S.W.3d 429, 442-444 (Tex. App.-Dallas 2002, n.w.h.).
“Formal” fiduciary relationships arise as a matter of law and based upon a legal relationship such as attorney-client, principle-agent, and partner-partner. Id. at 443.
“Informal” fiduciary relationships (also known as “confidential relationships” and “special relationships”) arise from “a moral, social, domestic, or purely personal relationship of trust and confidence …”. Id. To impose such a relationship in a business transaction, the relationship must exist prior to, and apart from, the agreement made the basis of the suit. Id., citing Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 177 (Tex. 1997).
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Note: Because a confidential or special relationship “must exist prior to, and apart from, the agreement made the basis of the suit,” it has been successfully argued that an express contractual term reciting a special relationship does not necessarily give rise to such a relationship. [For example, some AIA construction contract documents contain this language as between the owner and the general contractor].
B. Statutory Fraud
1. TEX. BUS. & COM. CODE § 27.01 Fraud in Real Estate and Stock Transactions.
Section 27.01 applies to misrepresentations of material fact made to induce another to enter into a contract for the sale of land or stock. Burleson State Bank v. Plunkett, 27 S.W.3d 605, 611 (Tex. App. – Waco 2000, pet. denied). The elements of statutory fraud under Section 27.01 are essentially identical to the elements of common law fraud except that Section 27.01 does not require proof of “knowledge” or “recklessness” as a prerequisite to the recovery of actual damages. Id. citing Brush v. Reata Oil and Gas Corp., 984 S.W.2d 720, 726 (Tex. App.-Waco 1998, writ denied).
However, in Burleson, the court held that “[a] loan transaction, even if secured by land, is not considered to come under the statute.” State Bank v. Plunkett, 27 S.W.3d at 611; Cf. Greenway Bank and Trust v. Smith, 679 S.W.2d 592, 596 (Tex. App.–Houston [1st Dist.] 1984, writ ref’d n.r.e.)(holding that writ ref’d n.r.e.).
Note: Statutory fraud, where applicable, is more beneficial to the claimant in light of the lessened burden of proof on the element of “intent” and because a successful statutory fraud claimant, as opposed to common law fraud, may recovery “reasonable and necessary attorneys fees, expert witness fees, costs for copies of depositions, and costs of court.” TEX. BUS. & COM. CODE § 27.01(e). Accordingly, this area of law leaves room for expansion in factual circumstance in which a transaction with a financial institution is intertwined with a contract for the sale of land or stock
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C. DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT (“DTPA”), TEX. BUS. & COM. CODE § 17.41, et seq.
1. “Consumer” Status.
In Riverside Nat. Bank v. Lewis, 603 S.W.2d 169 (Tex. 1980) the Texas Supreme Court held that the mere lending of money was not a good or service for purposes of finding a consumer transaction under the DTPA. Riverside was distinguished by Flenniken v. Longview Bank & Trust Co., 662 S.W.2d 705 (Tex. 1984), in holding that the basis for the opinion in Riversidewas that the complaint was limited to the bank’s failure to lend money as promised. In Flenniken, the basis for the complaint was the fact that they sought to acquire a house, not borrow money from the bank.
See also Ford v. City State Bank of Palacios, 44 S.W.3d 121, 133, 134 (Tex. App. — Corpus Christi, 2001, n.w.h.); Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164, 166-167 (Tex. App.-Austin 1996, no writ) (where mere loan of money without financial advice was not subject to DTPA liability).
In Western Nat’l Bank v. Conover, No. 07-97-0187-CV, 1998 Tex. App. LEXIS 3208, at *9 (Tex. App.-Amarillo 1998, no pet.), the court stated that the teaching of the Flenniken and Riverside cases is that in deciding whether a plaintiff is a “consumer” under the DTPA, the court must ascertain the plaintiff’s primary objective of the transaction. If the plaintiff’s sole objective is to purchase an intangible, such a money or securities, he does not qualify as a consumer. However, if the plaintiff’s objective is to obtain other types of goods, real property, or services, he qualifies as a consumer, even if he financed the sale price and even if his complaint involves the financing aspect of the transaction. See id. (finding that the Conovers qualified as consumers under the DTPA by purchasing real estate because their ultimate objective was to build a house, not merely to borrow money). See also Megason v. Red River Employees Federal Credit Union, 868 S.W.2d 871 (Tex. App.-Texarkana 1993, writ denied) (adding that if the borrower’s objective in seeking the loan is the purchase or lease of a good or service, the borrower is a consumer as to all parties involved in the transaction).
(1) Financial Services.
In Herndon v. First Nat. Bank of Tulia, 802 S.W.2d 396 (Tex. App.-Amarillo 1991, writ denied), it was sufficient to allege insofar as consumer status that the financial services purchased from the bank included financial advice as to where and when to obtain financing or
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abstain from borrowing and how to structure the various financial arrangements of the plaintiffs farming operation. Id.
The decision in Herndon was extended by Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164 (Tex. App.-Austin 1996, no writ), in holding that any services provided by the bank were, as a matter of law, incidental to the contemplated mortgage loan; they were not an objective of the transaction. See also Burleson State Bank v. Plunkett, 27 S.W.3d 605 (Tex. App.- Waco 2000, pet. denied) (denying “consumer” status to a contractor on a construction loan).
Consumer Status Found. In Bohls v. Oakes, 75 S.W.3d 473 (Tex. App.-San Antonio 2002, n.w.h.), homeowners brought suit against their construction lender for DTPA, breach of contract, and fraud and were found to qualify as “consumers”. However, the key to this finding was that Bohls, the lender, made representations to the borrowers boosting the builder’s reputation and workmanship, which later turned out to be inaccurate. Id. at 478-479.
(2) Mere Loan of Money Still Not a “Good” or “Service”.
Where the allegation is that there was a loan of money, without any further purchase of service, there is still no standing as a consumer for purposes of bringing a claim under the DTPA. Maginn v. Norwest Mortgage, Inc., 919 S.W.2d 164, 166-167 (Tex. App.-Austin 1996, no writ); Waite v. BancTexas-Houston, N.A., 792 S.W.2d 538 (Tex. App.-Houston [1st Dist.] 1990, no writ).
(3) Safe Deposit Box is “Good” or “Service”.
In Eller v. NationsBank of Texas, N.A., 975 S.W.2d 803, 809-810 (Tex. App.-Amarillo 1998, no pet.), the court held that a safety deposit box rental might give rise to a DTPA claim.
(4) Financial Institution as a “Consumer”.
In NationsBank of Texas, N.A. v. Akin, Gump, Hauer & Feld, L.L.P.,979 S.W.2d 385 (Tex. App.-Corpus Christi 1998, n.w.h.), the issue was whether the bank could qualify as a statutory “consumer” while acting in its capacity as the representative of a deceased client’s estate and bringing a legal malpractice claim. The DTPA defines a “consumer” as “an individual, partnership, corporation, ... who seeks or acquires by purchase or lease, any goods or services, except that the term does not include a business consumer that has assets of $25
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million or more, or that is owned or controlled by a corporation or entity with assets of $25 million or more.” Tex. Bus. & Com. Code § 17.45(4) (West 1997). Holding that NationsBank qualified as a “consumer” in the transactions, the court held that in order to determine “consumer” status of an action brought by a trustee, executor, or other representative, the court should look to the party being represented. See id at 391.
The court in Essex Insurance Co., v. Blount, 72 F. Supp.2d 722, 724 (E.D. Tex. 1999), modified NationsBank in holding that an insurer may assume the consumer status of the insured only in cases where the insured rather than the insurer directly benefits. In Essex, the insurance company already paid the insured’s claim, after a heavy piece of timber equipment malfunctioned, causing a fire hazard. See id. at 723. The insurance company then sued the manufacturer under the DTPA. See id. The court held that because the insurance company had already paid the claim, and was now suing for its own benefit, it could not assume the consumer status of the insured. See id. at 724.
D. TEXAS PROPERTY CODE.
TEX. PROP. CODE § 51.002 requires twenty (20) days written notice of default and intent to accelerate a residential real estate note. Therefore, failure to provide such notice has been found to violate both the DTPA and TEXAS FAIR DEBT COLLECTION
PRACTICES ACT. See Rey v. Acosta, 860 S.W.2d 654, 657 (Tex. App.-El Paso 1993, no writ).
In Mills v. Haggard, 58 S.W.3d 164 (Tex. App. – Waco 2001), the court of appeals invalidated a foreclosure sale for failure to strictly provide both the notice of sale under §51.002(b) and the notice to cure letter under §51.002(d).
E. Texas State Law Usury.
Effective September 1, 1997, the general usury law of Texas, which regulates conventional interest, is now found in Title 4 Chapter 301 of the TEXAS FINANCE
CODE. Title 4 includes Subtitle A and B.
Subtitle A. governs usury actions for most commercial transactions, consumer loans secured by a lien on real estate (other than a secondary mortgage), and consumer loans with an annual rate of interest of 10% or less.
Subtitle B. governs usury actions for consumer loans with an annual rate of interest of more than 10%, retail installment transaction, and secondary mortgages.
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The elements of a usury claim or defense are: (1) a loan of money, (2) an absolute obligation to repay the principal, and (3) a contracting for, charging, or receiving interest that exceeds the legal limit. See Pentico v. Mad-Wayler, Inc., 964 S.W.2d 713 (Tex. App.-Corpus Christi 1998, no writ), citing TEX. FIN. CODE §301.001.
1. The Definition of “Interest”.
TEX. FIN. CODE §301.002 defines “interest” as “the compensation for the use or forbearance or detention of money.” Section 305.001 prohibits contracting for, charging, or receiving interest that exceeds the legal limit.
Legal Rate of Interest. The maximum legal rate is of interest is calculated based upon a formula and that rate fluctuates over time. The maximum legal rate of interest is currently eighteen percent (18%) per annum for consumer, agricultural, and commercial loans which are based upon a written agreement. The maximum legal rate of interest, as well as the post-judgment rate of interest, for any given time period is published in the Texas Credit Letter which is published by the Texas Office of Consumer Credit Commissioner. That same information is published on the Internet at www.occc.state.tx.us. (click on “Interest Rates”).
(1) Loan with no written agreement. Maximum rate of interest is 10%. TEX. FIN. CODE § 302.001(b).
(2) Loan with written agreement, but with no stated rate of interest. Maximum rate of interest is 6%. TEX. FIN. CODE § 302.002.
(3) Loan with written agreement, and stating a rate of interest. Maximum rate of interest is currently 18% (based upon Texas Credit Letter as of August 10, 2004). TEX. FIN. CODE § 303.001.
(4) Loan with written agreement for less than $250,000, stating a rate of interest, and for business, commercial, investment, or agricultural purposes. Maximum rate of interest is currently 18% (based upon Texas Credit Letter as of August 10, 2004). TEX. FIN. CODE § 306.002.
(5) Loan with written agreement for more than $250,000, stating a rate of interest, and for business, commercial, investment, or agricultural purposes. Maximum rate of interest is currently 18% (based upon Texas Credit Letter as of August 10, 2004). TEX. FIN. CODE § 303.009(b).
(6) Qualified commercial loan with written agreement for: (1) more than$3,000,000 if secured by real property, or (2) between $250,000 to $500,000 if not secured by real property. Stating a rate of interest. Maximum rate of
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interest is currently 18% (based upon Texas Credit Letter as of August 10, 2004). TEX. FIN. CODE §§ 303.009(c), 306.002(a), and 306.101(a).
(7) Post-Judgment Interest (where rate is not specified). Maximum rate of interest is currently 5% (based upon Texas Credit Letter as of July 20, 2004). TEX. FIN. CODE § 304.003.
(8) Post-Judgment Interest (on a contract that provides a rate of interest). Maximum rate of interest is currently 18%. TEX. FIN. CODE § 304.002.
(9) Legal Rate of Interest for a Corporate Debtor. TEX. MISC. CORP. LAW
ART. 1302-2.09. Authority of Domestic and Foreign Corporations to Borrow Money provides that “[n]otwithstanding any other provision of law, corporations, domestic or foreign, may agree to and stipulate for any rate of interest as such corporation may determine, not to exceed one and one-half percent (1-1/2%) per month, on any bond, note, debt, contract or other obligation of such corporation under which the original principal amount is Five Thousand Dollars ($5,000) or more, or on any series of advances of money pursuant thereto if the aggregate of sums advanced or originally proposed to be advanced shall exceed Five Thousand Dollars ($5,000), or on any extension or renewal thereof, and in such instances, the claim or defense of usury by such corporation, its successors, guarantors, assigns or anyone on its behalf is prohibited; however, nothing contained herein shall prevent any charitable or religious corporation, domestic or foreign, from asserting the claim or interposing the defense of usury in any action or proceeding.
TEX. MISC. CORP. LAW ART. 1302-2.09A. Alternative Rate provides: “Notwithstanding the provisions of Article 2.09 of this Act, any corporation, domestic or foreign, including but not limited to any charitable or religious corporation, may agree to and stipulate for any rate of interest that does not exceed a rate authorized by Chapter 303, Finance Code.”
2. Spreading and Savings Clauses.
TEX. FIN. CODE §302.101 provides that for purposes of determining usury under a secured loan, interest is spread over the full term of the loan. Texas courts have repeatedly upheld savings clauses which indicate an intent to “spread” interest and avoid usury. Robert Joseph Philips Living Trust v. Scurry, 988 S.W.2d 418 (Tex. App.-Eastland 1999, pet denied); Pentico v. Mad-Wayler, Inc., 964 S.W.2d 713, 714 (Tex. App.—Corpus Christi 1998, no pet.); Tanner Dev. Co. v. Ferguson, 561 S.W.2d 777 (Tex. 1977). “Usury is a matter of intention, and a savings clause is evidence of an intent not to charge usurious interest.” Scurry, 988 S.W.2d at 421.
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But see Armstrong v. Steppes Apartments, Ltd., 57 S.W.3d 37 (Tex. App. –Fort Worth 2001) (Refusing to apply a savings clause to purge usury from a note transaction with was “usurious by its explicit terms.” The court also rejected a spreading clause defense because after the loan was accelerated, the term of the loan was shortened to the acceleration date).
3. Bona Fide Error Defense.
The bona fide error defense to a usury claim, formerly located at TEX. REV. CIV. STAT. ARTICLE 5069-1.06(a) and now located at TEX. FIN. CODE § 305.101, allows creditors to establish that usury was the result of an “accidental and bona fide error” such as a clerical error. However, “[m]erely brushing the miscalculation aside as “erroneous” and presenting arguments based on the correct figure does not establish that the issue is settled as a matter of law. Pentico v. Mad-Wayler, Inc., 964 S.W.2d 708, 713 (Tex. App.-Corpus Christi 1998, no pet.); William C. Dear & Assoc., Inc. v. Plastronics, Inc., 913 S.W.2d 251, 254 (Tex. App.-Amarillo 1996, writ denied) (miscalculation or typographical mistake exemplifies bona fide error but must be supported by evidence of honest mistake); Karg v. Strickland, 919 S.W.2d 722, 725 (Tex. App.-Corpus Christi 1996, writ denied) (finding sufficient evidence that ignorance of material fact lead to miscalculations).
4. Curing A Usury Violation.
Under TEX. FIN. CODE §305.103, a party may avoid liability for a usury violation by curing the violation within sixty (60) days of actually discovering the violation. Zer-Ilan v. Frankford (In the Matter of CPDC, Inc., 2003 U.S. App. LEXIS 13413 (5th Cir. July 1, 2003) (“[a]ctual discovery occurs under the statute when the creditor subjectively discoversthat he has violated the prohibitions on usury”).
(1) Usury Liability of Attorneys and Other Third Parties.
(a) No “charging” of Interest in a Pleading.
In George A. Fuller Co. of Texas, Inc. v. Carpet Services, Inc., 823 S.W.2d 603, (Tex. 1992), the Texas Supreme Court held that a claim for interest in a pleading cannot give rise to a claim of usury. That holding resolved contrary and conflicting opinions of the issue. See, e.g., Moore v. White Motor Credit Corp., 708 S.W.2d 465,468 (Tex. App.-Dallas, 1985, writ ref’d n.r.e.); Nationwide Financial Corp. v. English, 604 S.W.2d 458,461 (Tex. Civ. App.- Tyler 1980, writ dism’d); Moore v. Sabine Nat’l Bank of Port Arthur, 527 S.W.2d 209,
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212 (Tex. Civ. App.- Austin 1975, writ ref’d n.r.e.); Sumrall v. Navistar Financial Corp., 818 S.W.2d 548 (Tex. App.-Beaumont 1991, writ denied). See also Varel Manufacturing Co., v. Acetylene Oxygen Co., 990 S.W.2d 486, 493 (Tex. App.-Corpus Christi 1998, no pet.) (stating that a pleading by itself, even if it contains a claim for usurious intent, does not constitute a “charge” of usurious interest for purposes of the Texas usury statute). Under the usury statute, interest may be “charged” by any act of the lender constituting a demand for payment from the debtor. Id. at 492. Accordingly, a usurious charge may be contained in an invoice, a letter, a ledger sheet or other book or document, and the vehicle for the claim or demand is immaterial except as an evidentiary fact. Id.
(b) Unfiled Petition Attached to a Demand Is a “Charge”.
In Hoxie Implement Co. v. Jim Baker, 65 S.W.3d 140,146 (Tex. App.–Amarillo 2001, pet. denied), the court was presented with the issue of whether an unfiled Petition attached to a demand letter could constitute a “charge” or “demand” of interest for purposes of a usury counterclaim. Distinguishing the holding in George A. Fuller Co. of Texas, Inc. v. Carpet Services, Inc., 823 S.W.2d 603, (Tex. 1992) where to Petition was filed with the court, the court of appeals held in Hoxie analogized the facts to the holding Moore v. Sabine Nat’l Bank, 527 S.W.2d 209 (Tex. Civ. App.–Austin 1975, writ ref’d n.r.e).
(c) Filing a Proof of Claim Is Not a “Charge.”
In Zer-Ilan v. Frankford (In the Matter of CPDC, Inc., 2003 U.S. App. LEXIS 13413 (5th Cir. July 1, 2003), the Fifth Circuit rejected an argument that the act of a creditor filing a Proof of Claim in the Debtor’s bankruptcy proceeding could constitute a “charge” of usury. (“[a]ctual discovery occurs under the statute when the creditor subjectively discovers that he has violated the prohibitions on usury”).
(d) Attorney Demand Letters Can Be a “Charge”.
A demand letter sent by a lender’s attorney may be a charge” of usury. Woodcrest Assoc. v. Commonwealth Mortgage, 775 S.W.2d 434, 437 (Tex. App.-Dallas 1989, writ denied); Coppedge v. Colonial Sav. & Loan Ass’n, 721 S.W.2d 933, 936 (Tex. App.-Dallas 1986, writ ref’d n.r.e.).
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(e) Practice Note for Collection Attorneys:
In Briones v. Solomon, 942 S.W.2d. 278 (Tex. 1992), a judgment creditor’s counsel made a demand for an amount of post-judgment interest which exceeded two times the stated 10% interest rate in the judgment. The Supreme Court upheld a judgment canceling the principal amount of the judgment and assessing penalties, holding that the usury statute encompasses debts created by judgment. Thus, where the demand for payment was sent directly to the debtor, usury liability was created.
(f) Debt Collector Can Commit Usury.
In Lupo v. Equity Collection Service, 808 S.W.2d 122 (Tex. App.-Houston [1st Dist.] 1991, no writ), the debtor sued not only the creditor who loan money to him, but also the debt collection service which sent him the letter demanding an excessive rate of interest. The Court rejected the argument that the Statute was limited to direct parties as evidenced by case law by denying guarantors the right to proceed under the usury statute. Instead, it held that there was a difference between who could recover as opposed to who had to pay damages for usury. The Court reasoned that the usury statute provided only that the obligor could recover usury penalties. However, as to the parties who had to pay penalties, the definition included “any person.” Id. at 124. The Court therefore reasoned that any person who made a usurious demand could be subjected to liability, whether they were an original party to the loan. See also Douglas Electronics v. Pinnacle Systems, 805 S.W.2d 852 (Tex. App.-Corpus Christi 1991, no writ); Augusta Dev. Co. v. Fish Oil Well Servicing Co., 761 S.W.2d 538, 542 (Tex. App.-Corpus Christi 1988, no writ).
(g) Usury in Lease Transaction.
In Kinerd v. Colonial Leasing Co., 800 S.W.2d 187 (Tex. 1990), the Supreme Court upheld a lower court finding of usury in a lease transaction. The plaintiff had sought to acquire some radiator repair equipment, which it obtained through a transaction wherein the defendant purchased the equipment from the manufacturer and then leased it to the plaintiff over a five-year period, after which the plaintiff could have purchased the equipment for one dollar and additional consideration. The Court held that such a transaction could be interpreted as a usurious transaction where it was found that
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the lease resulted in the payment of $16,909.20 for equipment that was worth $10,000.00. Of an even more interesting nature, the plaintiffs had sued for violations of the Deceptive Trade Practices Act arguing that the defendant engaged in unconscionable conduct, because the value of the goods received was much less than the cost which was paid for the goods. The Court held that awarding the plaintiff out-of-pocket expenses and the difference in value between the value as represented and the value received was not an overlap of damage with the usury transaction, and thereby greatly enhanced the recovery which the plaintiff might have otherwise had.
(h) Only a Debtor Can Assert Usury.
In Peoples State Bank of Clyde v. Andrews, 881 S.W.2d 520 (Tex. App.-Eastland, 1994), a defendant who was not the maker of a note received a demand letter and was sued based on the Bank’s mistaken allegation that he had assumed the debt. He alleged usury, since he owed no interest on the debt. The bank was not guilty of usury on the grounds that the usury statute is not available to strangers on the debt.
(i) Guarantors Still Cannot Sue For Usury.
Nautical Landings Marina, Inc. v. First National Bank in Port Lavaca, 791 S.W.2d 293 (Tex. App.- Corpus Christi 1990, no writ) held that a guarantor cannot assert a usury claim where usurious interest is charged to the primary obligor. See also El Paso Refining v. Scurlock Permian Corp., 77 S.W.3d 374, 383-385 (Tex. App.-El Paso 2002, n.w.h.); Ginsberg 1985 Real Estate Partnership v. Cade Company, 39 F.3d 528, 534 (5th Cir. 1994)(construing Texas law); Eubank v. First National Bank of Belville, 814 S.W.2d 130 (Tex. App.- Corpus Christi 1991, no writ); Arndt v. National Supply Co.,633 S.W.2d 919, 925 (Tex. App.- Houston [14th Dist.] 1982, writ ref’d n.r.e.).
(j) Usury Defense May Be Waived.
Usury is an affirmative defense which must be verified under TEX. R. CIV. P. 93. Where the defendant fails to verify its usury defense, the defense is waived. See Advantage Group Investments, Inc. v. Pacific Southwest Bank, 972 S.W.2d 866, 869 (Tex. App.- Corpus Christi 1998, pet. denied).
(k) Usury Counterclaim May Be Waived.
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Since usury is a compulsory counterclaim to a suit on a note or foreclosure, the usury claim may be waived if not brought as a counterclaim. Tex. R. Civ. P. 97; Lamar Sav. Ass’n v. White, 731 S.W.2d 715, 717-18 (Tex. App.- Houston [1st Dist.] 1987, orig. proceeding).
(l) Assuming Debt at Another Bank Not Usury.
In Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931 (Tex. 1991), it was held that a bank’s requirement that a potential borrower assume pre-existing debt of its partner at another institution was not usurious. The Court treated such a requirement as it would a bona fide fee paid to parties other than a lender. See also First USA Management, Inc. v. Esmond, 960 S.W.2d 625, 627 (Tex. 1997).
a. Alamo Lumber Cases.
In Alamo Lumber Co. v. Gold, 661 S.W.2d 926, 928 (Tex. 1983), the Texas Supreme Court held that a bank can be liable for usury when, as a condition of making a loan, assumption of third party debt is required, because the third party debt must be treated as interest. This case has largely been limited to its facts. Some innovative plaintiffs have tried to use the Alamo doctrine to establish liability where a requirement to guarantee another’s debt is a condition to a loan. These attempts have been rebuffed. See Moore v. Liddell, Sapp, Zively, Hill & LaBoon, 850 S.W.2d 291 (Tex. App.-Austin 1993, writ denied); Sterling Property Management Inc. v. Texas Commerce Bank N.A., 32 F.3d 964 (5th Cir. 1994).
Other cases have held Alamo strictly to its facts. See Wilgus v. Green, 882 S.W.2d 6 (Tex. App.- Tyler 1994, writ denied) (No Alamo liability unless the party claiming usury has a lender-borrower relationship with lender).
(m) Home Equity Lending Is Distinguished.
In Stringer v. Cendant Mortgage Corp., 199 F.3d 190 (5th Cir. 1999), the Fifth Circuit Court of Appeals certified the following question to the Texas Supreme Court: Under the Texas Constitution, may a home equity lender require the borrower to pay off third-party debt that is not secured by the homestead with the proceeds of the loan? In a unanimous decision filed June 8, 2000, the Texas Supreme Court
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answered the question affirmatively. See Spradlin v. Jim Walter Homes, Inc., 9 S.W.3d 473 (Tex. 2000).
(n) Loan Fees as “Disguised Interest.”
(1) NSF Charges. In First Bank v. Tony’s Tortilla Factory, 877 S.W.2d 285 (Tex. 1994) the Texas Supreme Court held that NSF charges constitute charges for processing and the additional work required in connection with handling bad checks, and are not interest for purposes of usury laws.
(2) Lender’s Attorneys’ Fees Actually Charged to Borrower Not “Interest”. See Texas Commerce Bank, Arlington v. Goldring, 665 S.W.2d 103, 104 (Tex. 1984).
(3) Lender’s In-House Attorneys Fees Were Disguised Interest. See Mims v. Fidelity Funding, Inc., 2002 LEXIS 19820 (N.D. Tex 2002) (holding that unlike lender’s outside counsel fees, in-house counsel fees were not supported by separate and additional consideration and were therefore included in the definition of “interest”).
(4) “Program fee” of 5% in a note could be interest in usury analysis. Financial Security Services, Inc. v. Phase I Electronics, Inc., 998 S.W.2d 674 (Tex. App. – Amarillo 1999, pet. denied).
In Mims v. Fidelity Funding, Inc., 2002 LEXIS 19820 (N.D. Tex 2002), the court provides a good analysis of several loan fees including a “facility fee,” “due diligence deposit,” and in-house attorneys fees, and whether each type of fee could qualify as disguised interest in the usury analysis).
(o) Common-Law Usury Survives.
In Duggan v. Marshall, 7 S.W.3d 888 (Tex. App. – Houston [1st Dist.] 1999, no pet.), the Executor of the Estate of J. Howard Marshall, II asserted a usury counter-claim to a jewelry designer who sought to recover $425,000 for jewelry purchases including 20% interest. The Estate pled usury as an affirmative defense and also filed usury counterclaim seeking statutory penalties under TEX. FIN. CODE §§ 305.001 and 205.002 (Vernon 1998). Relying on Childs v. Taylor Cotton Oil Co., 612 S.W.2d 245, 151 (Tex. Civ. App. – Tyler 1981, writ ref’d n.r.e.), the jewelry designer argued that a usury claim does not survive the death of the claimant. Holding: A common law usury claim survives the death and may give rise to forfeiture of
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usurious interest paid. Therefore, a common law usury is not a complete defense to an action on the debt (principal plus interest). Statutory usury, on the other hand, does not survive death, but could provide as a remedy a complete defense including forfeiture of principal and interest.
(p) Preemption: Federal Usury Laws Preempts State Laws.
Usury claims against national banks and federally insured state chartered banks are governed by THE NATIONAL BANKING ACT, 12 U.S.C. § 86 which preempts the TEX. FIN. CODE section which sets the maximum interest rate. Patten v. Maryland Bank, N.A., 126 S.W.3d 532 (Tex. App.-Houston [1st Dist.] 2003, _____).
Usury claims arising from federally related mortgage loans secured by a first lien on residential real estate are governed by the DEPOSITORY INSTITUTIONS DEREGULATION & MONETARY CONTROL
The Texas Act applies only to actions arising out of a "consumer debt" which means “an obligation, or an alleged obligation, primarily for personal, family, or household purposes and arising from a transaction or alleged transaction.” TEX. FIN. CODE § 392.001(2).
(2) Coverage And Applicability.
Unlike the Federal Act, the Texas Act applies to a creditor’s efforts to collect its own debt. The Texas Act adopts the definition of a “third party debt collector” under 15 U.S.C. § 1692(a)(6), with the exception that the Texas Act specifically excludes an attorney collecting a debt as an attorney on behalf of and in the name of a client unless the attorney has non-attorney employees who: (A) are regularly engaged to solicit debts for collection; or (B) regularly make contact with debtors for the purpose of collection or adjustment of debts. TEX. FIN. CODE § 392.001(7).
The Texas Act requires third party debt collectors to: (1) file a $10,000 bond with the Texas Secretary of State, and (2) they must provide the consumer with verification of the debt upon request. TEX. FIN. CODE § 392.201.
TEX. FIN. CODE § 392.301 prohibits a number of listed threats. Furthermore, the Texas Supreme Court has held that any threat of criminal prosecution violates the Texas Act. Brown v. Oaklawn Bank, 718 S.W.2d 678, 680 (Tex. 1986).
(3) Damages and Penalties.
The Texas Act provides for recovery of actual damages and attorneys fees. TEX. FIN. CODE § 392.403(a)(2) and (b). Furthermore, the Texas Act also provides for injunctive relief. TEX. FIN. CODE § 392.403(a)(1).
2. Federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq.
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(1) Scope of Federal Act. As a general rule, the Federal Act is less broad than the Texas Act, but provides consumers with more remedies than the Texas Act.
(2) Coverage And Applicability.
Unlike the Texas Act, the Federal Act does not apply to a creditor’s efforts to collect its own debt as long as the party uses its own name during collection activities. The Federal Act applies to “debt collectors” as defined in 15 U.S.C. § 1692a(6).
Although the Texas Act specifically exempts attorneys from coverage, the Federal Act applies to attorneys if they meet the definition of “debt collectors” as defined in 15 U.S.C. § 1692a(6). The Fifth Circuit has held that an attorney may meet this definition, and therefore become subject to the Federal Act: (1) by engaging in any business the principal purpose of which is the collection of any debts, or (2) by regularly collecting or attempting to collect debts owned to another. Garrett v. Derbes, 110 F.3d 317, 318 (5th Cir. 1997).
(3) Damages and Penalties.
The Federal Act provides for recovery of actual damages, statutory damages of up to $1,000 per violation, attorneys fees, and costs. 15 U.S.C. § 1692k(a). In light of the statutory damages provision, class actions against “debt collectors” are more feasible under the Federal Act than under the Texas Act. Keele v. Wexler, 149 F.3d 589 (7th Cir. 1998); Fuller v. Becker Poliakoff, P.A., 198 F.R.D. 697 (M.D. Fla. 2000).
Because the Federal Act contains a “bona fide error” defense, attorneys involved in collection activities should develop internal procedures “reasonably adapted to avoid” violations of the Federal Act. 15 U.S.C. § 1692k(c).
VII. ADDITIONAL TORT LIABILITY THEORIES.
The traditional distinctions between contract actions and tort actions have become somewhat blurred in recent years by the so-called “contort” claims which plead both contract and tort causes of action. Not surprisingly, the contort claims have found their way into lender liability actions.
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A. Negligence/Negligent Misrepresentation Claims. (See Section VI. above).
B. Fraud Claims.
A lender may become liable for fraud by misrepresenting a material fact or by making a promise with the intent not to perform that promise when a debtor reasonably relies on the representation to his or her detriment.
To establish a claim of fraud, a plaintiff must show that:
(1) the defendant made a material representation;
(2) the representation was false;
(3) when the defendant made the representation, he or she knew it was false or made the representation recklessly without any knowledge of the statement’s truth;
(4) the defendant intended that the plaintiff act upon the statement;
(5) the plaintiff acted in reliance upon the statement;
(6) the plaintiff thereby suffered injury.
Burleson State Bank v. Plunkett, 27 S.W.3d 605, 612-614 (Tex. App.–Waco 2000, pet. denied); Clardy Mfg. Co. v. Marine Midland Business Loans Inc., 88 F.3d 347, 349 (5th Cir. 1996), applying Texas law. The elements most often disputed in a claim of fraud are the element of intent, (involving affirmative misrepresentations, fraudulent concealment, and constructive fraud), and the element of reliance. See Bank of El Paso v. Stanley Boot Co., 847 S.W.2d 218 (Tex. 1992) (cited and discussed in Formosa Plastics Corp. USA v. Presidio Engineers and Contractors, Inc., 960 S.W.2d 41, 47 (Tex. 1998).
1. The Element of Intent.
An expression of an opinion as to the happening of a future event may constitute fraud where the speaker purports to have special knowledge of facts that will occur or exist in the future. See Trenholm v. Ratcliff, 646 S.W.2d 927, 930 (Tex. 1983). A promise of future performance constitutes actionable misrepresentation if it was made with the present intent not to perform. See Perez v. Servicios Especializados de Comedores Industriales, 969 F. Supp. 991, 1008 (N.D. Tex. 1997). Failure to perform, however, is not evidence of the promissor’s intent not to perform when the promise was made, but a circumstance to be considered with other facts to establish intent. See id. at 1009. Nonetheless, intent not to perform a promise at the time it
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was made may be shown by circumstantial evidence, including the subsequent conduct of the promissor; and, that slight circumstantial evidence of fraud, when considered with the breach of a promise to perform, is sufficient to support a finding of fraudulent intent. See id.
Texas Bank Held Liable for Fraudulently Inducing Borrower to Sign a Loan Agreement. In Burleson State Bank v. Plunkett, 27 S.W.3d 605 (Tex. App.–Waco 2000, pet. denied), the lender was found liable for bank fraud and negligent misrepresentation despite the fact that a “notice of final agreement” and § 26.02(e) was executed by the borrower.
Recent Case – No Evidence of “Intent to Deceive”: Beal Bank, S.S.B. v. Schleider, 2003 WL 124243, (Tex. App.-Houston [14th Dist.] January 16, 2003 (unpublished opinion).
2. Statute of Limitations For Fraud.
The statute of limitations for fraud claims is four years. See Procter & Gamble Co. v. Amway, 80 F. Supp.2d 639, 658 (S.D. Tex. 1999). If, however, the injured party is not aware of the fraud or the fraud is concealed, the statute of limitations begins to run from the time the fraud is discovered or could have been discovered by the defrauded party’s exercise of reasonable diligence. See id. Knowledge of facts that would lead a reasonable person to make inquiry which would lead to the discovery of the fraud is knowledge of the fraud itself. See id.
3. Advising the Client: “Consistency.”
The lender’s actions should be consistent with its words. See David L. Johnson & Terrence J. Gaffney, Lender Liability: Perspectives on Risk and Prevention, 105 Banking L.J. 325, 346 (1993). That means that promises made to a borrower should be kept, and agreements should be complied with. See id. This is particularly important when it appears that the borrower has relied in any way on what the lender said it would do. See id.
C. Tortious Interference Claims.
1. Tortious Interference with Contractual Relations.
Generally, a debtor must prove four elements to maintain an action for tortious interference with a contractual or business relationship. The elements of a cause of action for tortious interference are:
(1) existence of a contract subject to interference;
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(2) that the act of interference was willful and intentional;
(3) that such intentional act was a proximate cause of plaintiff’s damage; and
(4) actual damage or loss occurred.
Victoria Bank & Trust Co. v. Brady, 811 S.W.2d 931 (Tex. 1991).
Section 766 of the RESTATEMENT (SECOND) OF TORTS provides that one who intentionally interferes with the performance of a contract between another party and a third person by inducing the third person not to perform the contract may be liable to the other party for the pecuniary loss resulting to the other from the failure of the third person to perform the contract.
The tort of intentional interference with contract imposes liability only if a third person is induced not to perform the contract. The plaintiff need not prove ill will, spite, evil motive, or an intent to harm to recover for this tort. A general intent to interfere is sufficient. Interference is wrongful if the act does not rest on a legitimate interest or if based on sharp dealing or overreaching or other conduct below the behavior of fair men similarly situated. State Nat’l Bank v. Farah Mfg. Co., 678 S.W.2d 661 (Tex. Ct. App. 1984, writ dism’d by agr.).
2. Tortious Interference with Prospective Contractual Relations.
Section 766b of the RESTATEMENT (SECOND) OF TORTS concerns itself with intentional interference with prospective contractual relations not yet reduced to contract. It provides that one who intentionally interferes with another party’s prospective contractual relation is subject to liability for the pecuniary harm resulting from loss of the benefits of the relation. The elements of this tort are:
(1) a prospective contractual relation between the third party and the plaintiff;
(2) the purpose or intent to harm the plaintiff by preventing the relationship from occurring;
(3) the absence of privilege or justification on the part of the actor; and
(4) the occurrence of actual harm or damage to plaintiff as a result of the actor’s conduct.
In re Clemens, 197 B.R. 779, 791 (Bankr M.D. Pa 1996).
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3. Clarifying the Tort of Tortious Interference.
On March 8, 2001, the Texas Supreme Court issue its opinion in Wal-Mart Stores, Inc. v. Sturges, 52 S.W. 3d 711 (Tex. 2001), for the expressed purpose of “bring[ing] a measure of clarity to this body of law.” Beginning with the origins in ancient Roman law, the progression through19th century English law, and Texas law beginning in 1891 through the present; the Court conclude that conduct must be “independently tortious or unlawful” in order to provide a basis for a tortious interference claim. The Court contrasted such culpable conduct to conduct, which was “competitive, privileged, or justified.”
4. Affirmative Defenses, Damages, and Limitations.
In a successful tortious interference claim, the defendant will be liable for all reasonably foreseeable damages, that is, lost profits and other damages suffered by the plaintiff after the tort occurred.
(1) Justification Defense.
A defendant may prevail against a claim of tortious interference by negating these elements or by conclusively establishing the affirmative defense of justification. See Prudential Ins. Co. v. Financial Review Services, Inc., 29 S.W.3d 74 (Tex. 2000); Friendswood Dev. Co. v. McDade & Co., 926 S.W.2d 280, 282 (Tex. 1996) (holding exclusive agency agreement conclusively supported justification defense). Even if the plaintiff conclusively establishes that the defendant tortiously interfered with the contract, the defendant may escape liability by conclusively establishing that the intervention was justified. See id.
In Rodriguez v. NBC Bank, 5 S.W.2d 756, 759 (Tex. App.-San Antonio 1999, no pet.), plaintiff filed suit against her bank for, among other claims, tortious interference with a contract, when the bank decreased her account following allegations of a forged deposit check. The court, however, found there was no evidence the bank acted other than with regard to its own legal rights and responsibilities and held that the bank’s depository agreement conclusively established the justification defense. See id. at 766.
(2) Statute of Limitations For Tortious Interference.
An action for tortious interference with a contract is governed by a two-year statute of limitations. See Alpha Road v. NCNB Texas Nat’l
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Bank, 879 F.Supp. 655, 663 (N.D. Tex. 1995). For a suit to be timely under the statute, it must be brought within two years following thedate the cause of action accrued. See id. With respect to tort actions generally, the limitations period begins to run at the time the duty owed to one person is breached by a wrongful act of another. See id. Normally, the cause of action accrues when the plaintiff suffers injury. See id. (considering whether limitations period begins to run when bank required pay off of the principal and interest on a loan or when premature pay-off actually occurred).
D. Wrongful Acceleration Claims and Defenses.
In addition to being an affirmative defense available to borrowers, a wrongful acceleration may give rise to claims for breach of contract, tortious conduct, as well as violations of several Texas statutes.
1. Good Faith Acceleration in the Sale of Goods.
When accelerating notes arising from the sale of goods, TEX. BUS. & COM. CODE §1.208 provides that a lender may accelerate the indebtedness only when it believes in good faith that the prospect of payment or performance is impaired. However, several Texas courts have held that the good faith requirement of Section 1.208 do not apply to real estate transactions. See Gupta v. Ritter Homes, Inc., 663 S.W.2d 626, 627 (Tex. App.-Houston [14th
Dist.] 1982), modified on other grounds, 646 S.W.2d 168 (Tex. 1983). See also TEX. BUS. & COM. CODE §2.102.
2. Good Faith Acceleration in Real Estate Transactions.
The foregoing cases also recognize, however, that analysis of a lender’s good faith acceleration in a real estate transaction is confined to analysis of the language in the loan agreement. Depending upon the language in the loan documents, the lender’s “wrongful acceleration” of a note may constitute a breach of contract.
(1) Good Faith Acceleration in Residential Real Estate Transactions.
Several Texas courts have held that the wrongful acceleration of a residential real estate note violates the TEXAS DEBT COLLECTION
PRACTICES ACT and the DECEPTIVE TRADE PRACTICES ACT as a matter of law. See Rey v. Acosta, 860 S.W.2d 654 (Tex. App.-El Paso 1993, no writ); Dixon v. Brooks, 604 S.W.2d 330, 334 (Tex. Civ. App.-Houston [14th Dist.] 1980, writ ref’d n.r.e.). Additionally, TEX. PROP. CODE § 51.002(d) requires that a lender on a debtor’s
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residence provide at least twenty (20) days written notice of intent to accelerate by certified mail. That section applies regardless of any agreement to the contrary. See Rey v. Acosta, 860 S.W.2d 654, 657 (Tex. App.-El Paso 1993, no writ).
Practice Note: Although most written loan documents require the borrower to waive right to notice of intent to accelerate and notice of acceleration, that waived may be waived by a lender’s conduct. In Shumway v. Horizon, 801 S.W.2d 890 (Tex. 1991), held that a loan document must distinctly and separately waive notice of presentment (demand), notice of intent to accelerate, and notice of acceleration in order to be an effective waiver. However, in Dhanani Irest v. Second Master Belt Homes, 650 S.W.2d 220 (Tex. Civ. App. – Ft. Worth 1983, no writ) the court held that a lender’s acceptance of seven late payments constituted a waiver of the written waiver.
E. Duress & Economic Duress Claims and Defenses.
This claim may be asserted by a borrower as an affirmative defense, or as a claim/counterclaim against the lender. A lender may be liable under a claim of duress if the claimant can prove the requisite four elements. The elements for a finding of duress are:
(1) a threat or action taken without legal justification;
(2) the threat destroys the free agency of the party to whom it was directed and causes the party to do that which he or she would otherwise not do, and which he or she was not legally bound to do;
(3) the restraint caused by the threatening party must be imminent; and
(4) the person to whom the threat is directed has no present means of protection.
See The Chapman Children’s Trust v. Porter & Hedges, L.L.P., 32 S.W.3d (Tex. App.–Houston [14th Dist.] 2000, n.w.h.); Deer Creek, Ltd. v. North Am. Mortgage Co., 792 S.W.2d 198, 203 (Tex. App.-Dallas 1990, writ ref’d n.r.e.); Simpson v. Mbank Dallas, N.A., 724 S.W.2d 102 (Tex. App.-Dallas 1987, writ ref’d n.r.e.); State Nat’l Bank of El Paso v. Farah Mfg. Co., 678 S.W.2d 661, 684 (Tex. App.-El Paso 1984, writ dism’d by agr.).
1. Advising the Client: “Honesty.”
The lender should be honest with the borrower. See David L. Johnson & Terrence J. Gaffney, Lender Liability: Perspectives on Risk and Prevention,
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105 Banking L.J. 325, 346 (1993). The borrower should not be told that a particular action will be taken if a decision to take that action has not been made. See id. This is particularly true when the decision has actually been made not to take the action. In other words, make no idle threats. See id.
F. Wrongful Foreclosure and “Chilled Bidding” Claims and Defenses.
The trustee under a deed of trust must conduct a foreclosure sale fairly and may not discourage bidding by acts or statements made before or during the sale. However, the trustee has no duty to take affirmative actions beyond that required by statute or the deed of trust. See C.D. Peterson v. Black, 980 S.W.2d 818, 822 (Tex. App.-San Antonio 1998, n.w.h.); Sanders v. Shelton, 970 S.W.2d 721 (Tex. App.-Austin 1998, pet. filed); Pentad Joint Venture v. First Nat’l Bank of LaGrange, 797 S.W.2d 92, 96 (Tex. App.-Austin 1990, writ denied); First State Bank v. Keilman, 851 S.W.2d 914, 924 (Tex. App.-Austin 1993, writ denied).
1. Wrongful Foreclosure.
Elements of wrongful foreclosure are the mortgagee either (1) fails to comply with statutory or contractual terms, or (2) complies with such terms, yet takes affirmative action that detrimentally affects the fairness of the foreclosure process. First State Bank v. Keilman, 851 S.W.2d 914, 921-922 (Tex. App.-Austin 1993, writ denied)
(1) “Chilled the bidding.”
“Chilled bidding” occurs when a lender takes affirmative steps to adversely affect the sale price, at the foreclosure. First State Bank v. Keilman, 851 S.W.2d 914, 921 (Tex. App.-Austin 1993, writ denied).
Under Texas law, if a “defect” or “irregularity” occurs in the foreclosure process which deters third parties from bidding, then a debtor has a claim against the mortgagee for damages resulting from the “unfair” sale. Pentad Joint Venture v. First Nat’l Bank, 797 S.W.2d 92, 96 (Tex. App.- Austin 1990, writ denied).
Mere inadequacy of consideration alone, however, does not render a foreclosure sale void if the sale was otherwise conducted legally and fairly. Tarrant Sav. Ass’n v. Lucky Homes, Inc., 390 S.W.2d 473, 475 (Tex.1965).
See also Key v. Pierce, 8 S.W.3d 704 (Tex. App.–Fort Worth 1999, no writ) where the court of appeals held that the statute of frauds
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applies in the context of statements made in connection with a non-judicial foreclosure sale.
TEX. PROP. CODE §51.003 now provides that if the fair market value of the real property is greater that the price paid at the foreclosure sale, the debtor is entitled to an offset against the deficiency equal to the difference. See Moore v. Bank Midwest, NA, 39 S.W. 3d 395, 399 (Tex. App-Houston [1st Dist.] 2001, pet. denied).
G. Breach of Fiduciary Duty/Special Relationship Claims.
In Federal Deposit Ins. Corp. v. Coleman, 795 S.W.2d 706 (Tex. 1990) the Texas Supreme Court made it clear that there is no fiduciary duty and no general duty of good faith and fair dealing between a lender and a borrower. However, the Court left open the possibility that if a borrower/plaintiff could establish a “special relationship” with the lender, a breach of duty could be found. Factors which may give rise to a “special relationship” are discussed above and may be found in FDIC v. Perry Brothers, Inc., 854 F. Supp. 1248 (E.D. Tex. 1994), affirmed in part, 68 F.3d 466 (5th Cir. 1995), and in O’Shea v. Coronado Transmission Co., 656 S.W.2d 557 (Tex. App.-Corpus Christi 1983, writ ref’d n.r.e.). See also Burleson State Bank v. Plunkett, 27 S.W.3d 605, 611 (Tex. App. – Waco 2000, pet. denied).
VIII. DEVELOPING TRENDS.
1. Class Actions In Arbitration.
In Green Tree Fin. Co. v. Bazzle, 123 S.Ct. 2403, 2407 (2003), the United States Supreme Court held that, where parties agreed to submit all disputes to arbitration under the Federal Arbitration Act, issues of class certification are for the arbitrator to decide.
Eighteen days after Green Tree was issued, the American Arbitration Association (“AAA”) issued a policy statement that it would promulgate AAA rules for arbitration. The AAA has since developed the AMERICAN
ARBITRATION ASSOCIATION: SUPPLEMENTARY RULES FOR CLASS
ARBITRATION (Oct. 8, 2003). Those rules which are located at www.adr.org.
See also Pedcor Mngmt. Co. Welfare Benefit Plan v. Nations Personnel of Texas, Inc., 343 F.3d 355, 359 (5 th Cir. 2003).
In In re Martha Wood, Case No. 03-0754 (Tex. July 9, 2004)(orig. proceeding), the Texas Supreme Court followed Green Tree and held that
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when the contract at issue contains an arbitration clause, the arbitrator is empowered to rule on class certification issues under TEX. R. CIV. P. 42.
