J.R. Hale Contracting Co. v. United New Mexico Bank
799 P.2d 581, 110 N.M. 712 (1990)
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Rule of Law:
A creditor may be estopped from accelerating a debt without prior notice and opportunity to cure if its prior course of dealing and post-default conduct reasonably lead the debtor to believe the default clause would not be strictly enforced. Additionally, the good faith requirement for an insecurity-based acceleration is a subjective standard of 'honesty in fact,' but objective evidence of reasonableness is relevant to determine the creditor's actual state of mind.
Facts:
- J.R. Hale Contracting Company (the company) had an eleven-year relationship with United New Mexico Bank (the bank), during which the company frequently made late payments on numerous notes, which the bank routinely accepted.
- In November 1982, the company executed a $400,000 promissory note with the bank, its largest to date.
- The first interest payment on this new note was due March 1, 1983, but the company failed to make the payment.
- Throughout March 1983, principals from the company and bank officers met several times to discuss additional financing for the company.
- During these meetings, the bank never mentioned the overdue interest payment, and a bank officer failed to remind a company principal of the payment when asked to do so.
- Privately, the bank had become concerned about the company's significant financial losses but intentionally concealed these concerns from the company to ensure its cooperation.
- On March 24, 1983, the bank formally notified the company that it was accelerating the entire note, demanding immediate payment, citing both the missed interest payment and its insecurity about being repaid.
Procedural Posture:
- J.R. Hale Contracting Company filed suit against United New Mexico Bank in the state district court (trial court) for wrongful acceleration of a promissory note.
- Following a trial on the merits, the bank moved for a directed verdict.
- The district court granted the bank's motion, finding that the missed interest payment justified the acceleration as a matter of law.
- The company appealed the district court's directed verdict to the New Mexico Supreme Court.
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Issue:
Is a lender estopped from exercising an express contractual right to accelerate a loan based on a late payment, without first providing notice, when the lender's prior course of dealing involved accepting late payments and its post-default conduct could have reasonably misled the borrower into believing the default was not significant?
Opinions:
Majority - Ransom, Justice
Yes. A lender is estopped from exercising an express contractual right to accelerate a loan for a late payment without notice where its conduct has reasonably misled the borrower. The court distinguished between actual waiver (which requires intent) and waiver by estoppel, which focuses on whether the borrower was misled to its prejudice by the lender's conduct. Here, the bank's long history of accepting late payments on prior notes, combined with its silence about the overdue payment during numerous meetings in March, could have created a reasonable belief for the company that the bank was not concerned and would not accelerate without warning. This created a question of fact for the jury as to whether the bank was estopped. The court also addressed the insecurity clause, holding that the 'good faith' standard under the UCC is subjective ('honesty in fact') but that objective evidence (what a reasonable person would do or believe) is relevant to determine the creditor's actual subjective state of mind.
Analysis:
This decision significantly impacts creditor-debtor relationships by reinforcing the doctrine of 'waiver by estoppel.' It serves as a caution to lenders that they cannot establish a course of dealing that tolerates late payments and then abruptly enforce strict contractual terms without notice, as such conduct can be deemed misleading. The ruling also provides a nuanced standard for 'good faith' in insecurity clauses, allowing courts to consider objective evidence of commercial reasonableness to challenge a creditor's purely subjective claim of insecurity. This framework gives debtors a more viable path to contest accelerations that may be pretextual or arbitrary.
