Texas Supreme Court Enforces Broad-Form Waiver of Guaranty Defenses

On June 13, 2014, the Texas Supreme Court held that a broad-form, all-encompassing waiver of each and every defense results in the waiver of all possible defenses, including a guarantor’s right to offset any deficiency judgment under section 51.003 of the Texas Property Code.

In Moayedi v. Interstate 35/Chisam Rd, L.P., Merhad Moayedi guaranteed a loan in the amount of $696,000. The guaranty agreement contained the following general waiver of defenses:

Guarantor further agrees that this Guaranty shall not be discharged, impaired, or affected by…any defense (other than the full payment of the indebtedness hereby guaranteed in accordance with the terms hereof) that the Guarantor may or might have as to Guarantor’s respective undertakings, liabilities and obligations hereunder, each and every such defense being hereby waived by the undersigned Guarantor. (Emphasis added).

After the borrower defaulted on the loan, the lender conducted a non-judicial foreclosure sale where the lender, the sole bidder, purchased the secured property for $487,200. It was undisputed that the fair market value of the property at the time of the foreclosure sale was $840,000.

After applying all credits and proceeds from the sale, the lender sued Moayedi to recover the $266,748.84 balance remaining on the note. Moayedi moved the trial court for a fair market value hearing pursuant to Texas Property Code §51.003, whereby the court may reduce the deficiency by the difference between the judicially determined fair market value of the property and the foreclosure purchase price. Moayedi argued that because the difference between the fair market value and foreclosure price exceeded the amount owed, his liability should be extinguished.

The lender responded that Moayedi waived his right to a fair market hearing by generally waiving all defenses in the guaranty. The trial court disagreed with the lender and ruled in favor of Moayedi. The court of appeals, however, reversed, holding that Moayedi’s broad form waiver of “any,” “each,” and “every” defense waived all possible defenses, including those created by section 51.003.

The Texas Supreme Court affirmed the court of appeals’ decision, noting that “Texans have long embraced the principle of freedom of contract.” The Court reasoned that Moayedi could waive section 51.003 defenses, just as he could waive “statutory or even constitutional rights” in the absence of the Legislature expressly prohibiting such a waiver.

In determining whether the waiver language in the guaranty did, in fact, waive Moayedi’s statutory right to offset under section 51.003, the Court applied the rules of contract construction and found that the breadth of the waiver did not impair its unambiguous meaning:

“Just because the waiver is all encompassing does not mean that it is clear or vague. To waive all possible defenses seems to very clearly indicate what defenses are included: all of them. Indeed, a waiver provision such as this one may be more descriptive to a layperson than a waiver referencing Property Code section numbers.”

This opinion is favorable for the Texas lending industry, particularly because it reaffirms Texas courts’ “long-standing respect for the strong public policy of respecting parties’ freedom to design agreements according to their wishes.” It further indicates that sometimes broader is better. The lender was well-served by the broader waiver, rather than a long list of statutes, where something was certain to be left out.