Moore v. Bank Midwest, N.A.
2001 WL 126415, 39 S.W.3d 395, 2001 Tex. App. LEXIS 1027 (2001)
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Rule of Law:
A contractual provision limiting a borrower's personal liability to a specified percentage of the outstanding principal balance is calculated based on the total amount due at the time the note matures or is accelerated, not on the final deficiency balance remaining after a foreclosure sale.
Facts:
- In 1980, Jerry and Jean H. Moore purchased property in Houston, financing it with a promissory note for $2,475,000 from Gibraltar Savings Association.
- The note and deed of trust contained a clause stating that upon maturity or acceleration, the Moores' personal liability would be limited to 'twenty percent (20%) of the outstanding principal balance' and accrued interest.
- In December 1981, the Moores sold the property to Houston State Associates (HSA), which assumed the note and the limited liability provision.
- In 1990, HSA sold the property to MGM Real Estate Management, Inc., but MGM did not assume the promissory note.
- Bank Midwest, N.A. acquired the note in 1995.
- On June 1, 1996, MGM failed to make its payment on the note and abandoned the property.
- On September 25, 1996, Bank Midwest accelerated the note, making the full balance due.
- On April 1, 1997, Bank Midwest foreclosed on the property and purchased it at the foreclosure sale.
Procedural Posture:
- Bank Midwest, N.A. sued Jerry and Jean H. Moore in a Texas trial court to recover the deficiency balance on a promissory note.
- The Moores filed a third-party complaint against Houston State Associates (HSA), seeking indemnification.
- The Moores and HSA requested a jury determination of the property's fair market value as of the foreclosure date, pursuant to Texas statute.
- The jury found the fair market value to be $1,450,000.
- The trial court entered a judgment awarding Bank Midwest $221,032.09 against the Moores, plus attorney's fees.
- The judgment also ordered HSA to reimburse the Moores for all sums for which they were liable to the bank.
- The Moores and HSA, as appellants, appealed the trial court's judgment to the Court of Appeals of Texas, First District.
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Issue:
Does a contractual provision limiting a borrower's personal liability to 'twenty percent (20%) of the outstanding principal balance' at the time of the note's maturity apply to the total outstanding debt at the moment of acceleration, or to the final deficiency balance remaining after a foreclosure sale?
Opinions:
Majority - Smith, Justice (Retired)
No. A contractual provision limiting liability to a percentage of the outstanding balance applies to the total debt at the moment of acceleration, not the deficiency balance after foreclosure. The promissory note is unambiguous, stating that liability is for 'twenty percent (20%) of the outstanding principal balance' 'upon the maturity of this note, whether by acceleration or otherwise.' The note matured upon acceleration, fixing the basis for the liability calculation at that point in time. The court rejected the Moores' argument that the 20% limit should apply to the final deficiency amount, noting the contract 'does not provide for payment of twenty percent (20%) of the deficiency remaining after foreclosure.' Because the total deficiency of $221,032.09 was less than the Moores' maximum potential liability (20% of the $1,661,065 balance at acceleration, which is $332,213), the Moores are liable for the full deficiency amount. The court also held that expert testimony on the property's value was admissible even though the appraisal was dated three months before the foreclosure, as the expert testified that nothing had changed to alter his opinion of the value.
Analysis:
This decision provides critical clarity on the interpretation of partial recourse or limited liability clauses in commercial loan agreements. The court's strict, plain-language reading of the contract establishes that the liability cap is calculated based on the larger debt figure at the time of default, not the smaller post-foreclosure deficiency. This precedent strengthens the position of lenders by ensuring their negotiated liability floor is based on the pre-foreclosure balance, providing greater certainty in underwriting and enforcement. For borrowers, it serves as a caution that a '20% liability' clause does not mean they are only responsible for 20% of the ultimate shortfall after collateral is sold.
