A loan is only as good as its documents. Over the next four weeks, this series will review the potential implications that may go unnoticed in boilerplate language and the importance of customizing standard language in loan documents from one transaction to the next.
if there’s anything we’ve learned from this Great Recession, it’s that better loans make better asset-backed securities. While lots of attention has been focused on loan quality in terms of underwriting, not much has been said about how the quality of loan documents themselves affect collectability and, by extension, value to the pool. But when the time comes to enforce a loan or guaranty, the devil is in the drafting—not just of the negotiated terms, but of those standard provisions often copied from one transaction to another. Over the next few weeks, we’ll look at several standard “boilerplate” provisions found in loan documents, and discuss why it just might be time to give your forms a second look.
The litigator’s silver bullet: summary judgment
But before we get into specific provisions . . . a little context. Whether securitized or unsecuritized, backed by a guaranty or limited recourse, loan transactions are, at the core, contractual arrangements. MBS servicers and investors believe that enforcing their loans should be a quick and easy proceeding—after all, the borrower signed a contract. You just file suit, show the judge the contract, and come home with an enforceable judgment. In my business, that’s called “summary judgment,” where the moving party demonstrates that there are no genuine issues of material fact, and the moving party is entitled to judgment as a matter of law. But defense lawyers with a little skill and savvy can capitalize on inartfully drafted loan documents to avoid summary judgment, generate fact issues for trial, and generally increase the expense of enforcement.
Time, as they say, is money. Even if a loan or guaranty is ultimately enforced after trial, lost time and energy are real costs that can turn even the most miraculous trial victory into a business loss. A little work on the front-end reviewing long-ignored standard provisions, however, can remove an arrow from the borrower’s quiver and increase the chance of quick, efficient loan enforcement.
What is a waiver?
Loan documents (generally the note, security instrument and guaranty) often contain waiver provisions. Some common waivers are indemnity provisions, waiver of the right to jury trial, waiver of defenses and waiver of notice. While parties seeking waivers might favor sneaking such provisions into the document, this can often backfire—and it is sure to for the waivers litigants care about most.
A “waiver” is the relinquishment of a right that is both (1) knowing and (2) voluntary. One way to help your lawyer show that a waiver in a contract is both knowing and voluntary is to make it conspicuous in the document.
How do I make a waiver conspicuous?
Simply put, a conspicuous waiver is one that jumps out at you. Use of ALL CAPS, contrasting type or color, for example, qualifies as conspicuous. Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 511 (Tex.1993). The most common, and probably best practice, is to make a provision conspicuous by setting it apart in bold, all-cap letters. E.g. In re Gen. Elec. Capital Corp., 203 S.W.3d 314, 316 (Tex. 2006) (orig. proceeding) (recognizing that contractual jury waiver provision that was “conspicuous”—because it was in bolded font and in all capital letters—met burden of party seeking to enforce provision to make prima facie showing that waiver was knowing and voluntary). Using a heading in addition that specifically states “waiver of jury trial” or “waiver of defenses” enhances conspicuousness and makes waiver provisions easier to defend.
Why is conspicuousness so important?
A conspicuous waiver is presumed to be knowing and voluntary, which shifts the burden to the other party to negate the presumption. Coupled with the general legal principle that persons are charged with knowledge of the contracts they sign and cannot use failure to read as a defense, In re Lyon Fin. Services, Inc., 257 S.W.3d 228, 232-33 (Tex. 2008), conspicuous waivers can be hard to beat.
More importantly, in the case of “extraordinary” risk-shifting waivers (you can read that as “waivers lenders should care about most”), conspicuousness is required. Examples of extraordinary waivers are indemnity agreements, agreements to release another in advance from liability for the other’s negligence, and waivers of jury trial. See Littlefield v. Schaefer, 955 S.W.2d 272, 273 (Tex.1997); Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 508 (Tex.1993); In re Bank of Am., 278 S.W.342 (Tex. 2009).
Extraordinary or not, every waiver could benefit from being conspicuous.
Another Thing about Waivers . . .
Just as many waivers must be conspicuous in order to qualify as an “intentional relinquishment” of a right, they should, in many circumstances, also be express. While the initial impulse may be to draft a general waiver clause that does not clue the other side into exactly what waivers are important to your client, the approach is not without risk. Better to start with specific waiver language and have it negotiated out, leaving the litigator with broad, general waiver language to fight about, than to forego the opportunity to be so clear that no fight can be had. This is certainly the case with respect to matters not yet resolved by the Texas Supreme Court, such as offset for fair market value of a foreclosed property in a deficiency suit.
Fair Market Value offset
Sections 51.003 and 51.005 of the Property Code allow the subject of a deficiency suit to seek a determination of fair market value of the property, and pay only the difference between the amount due and fair market value, rather than the difference between the amount due and the actual sale price. That means a lender selling at foreclosure or deciding on a credit bid cannot be sure that the recoverable deficiency will equal the actual deficiency.
Section 51.003 is an affirmative defense. Cabot Capital Corp. v. USDR, Inc., No. 08-07-00202-CV, 2009 WL 1164928, at *4 (Tex. App.—El Paso April 30, 2009, pet. denied). Because it is an affirmative defense, Fair Market Value (FMV) offset can be waived—but just what you need to accomplish a waiver remains unclear.
The first two cases to consider the issue, Segal v. Emmes Capital, L.L.C., 155 S.W.3d 267, 279 (Tex. App.—Houston [1st Dist.] 2004, pet. dism’d), and LaSalle Bank Nat’l Ass’n v. Sleutel, 289 F.3d 837, 842 (5th Cir. 2002), held that a guarantor can waive any right of offset he may have under § 51.003, but noted the particular language of the waivers. In Segal, the waiver referred expressly to the applicable sections of the Texas Property Code. In LaSalle, the waiver included waiver of the “right of offset.”
Reasoning from these two cases, trial courts have held that a generic statement that the guarantor or borrower “waives all defenses” is not sufficient to evidence an intent to waive the protections afforded by the deficiency statute. In a series of decisions late this summer, however, the Dallas Court of Appeals rejected this position, and held that a waiver of all defenses means just that—all defenses, including the statutory right to FMV offset, are waived. Interstate 35/Chisam Road, L.P. v. Moayedi, __ S.W.3d __, 2012 WL 3125148 (Tex. App.—Dallas Aug. 2, 2012, no pet. h.); Toor v. PNC Bank N.A., 2012 WL 3637284 (Tex.App.-Dallas Aug. 24, 2012, no pet. h.); King v. Park Cities Bank, 2012 WL 3144881 (Tex.App.—Dallas Aug. 3, 2012, no pet. h.).
While the Dallas cases can be reconciled with the earlier precedents, until the Texas Supreme Court rules on the issue, the state of the law is unclear. In some jurisdictions, a general waiver may suffice, and in others, use of the term “offset” or specific reference to Section 51.003 and 51.005 may be required. With the increase in foreclosures, this is an issue ripe for the Court’s consideration, so stay tuned . . .
If you want a waiver of defenses to include waiver of a right to a FMV determination and offset (and if you’re the lender, you do!), the safer practice—at least for now—is to state so explicitly. At a minimum, use the word “offset.” You may win without this language, but not without a fight. So why not include it? And while you are at it, go ahead and underline it. See Segal, 155 S.W.3d at 284 (noting that if conspicuousness were required, fact that property code provisions being waived was underlined met such requirement).
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