This Article was originally published by Building Savvy Magazine (2014)
Most builders are all-too-familiar with the phrase, “Of course we will need a personal guarantor on this note.” Builders in Texas are often expected to ensure the debts of their companies, making them “personal guarantors” for those debts. This practice is not only common in the construction industry, it is expected. But, a bank would never pass up the deep pockets of a business to pursue the personal assets of the individual guarantor, right? Wrong. In Texas, when a personal guarantor waives certain rights under a note, without the same being waived by the guarantor’s company, the bank is left with only one option: sue the individual, not the company!
Texas is generous in protecting borrowers from the sometimes-shady acts of creditors. One of these generosities is Texas’s enactment of anti-deficiency laws. These laws, for example, prevent a bank from foreclosing on a $1-million note secured by property with a fair market value of $1 million, purchasing the property at its own foreclosure sale for $400,000, and then suing the borrower for the $600,000 “deficiency.” The rationale is that, through foreclosure, the bank has recaptured the full amount of the debt—$1 million worth of assets—regardless of the amount it received at foreclosure. A bank is therefore prevented from collecting the same debt twice (i.e., obtaining property at a discounted rate plus a deficiency judgment). Unfortunately however, Texas’s strong preference for “freedom of contract” has allowed banks to utilize language to waive this anti-deficiency protection.
This type of waiver is particularly dangerous for personal guarantors. For instance, imagine that in the situation above, the bank had allowed the original borrower to retain its anti-deficiency protection but had required the personal guarantor to waive the same protection. After foreclosure, the borrower would owe nothing due to the anti-deficiency laws because the bank has received $1 million worth of assets. Technically, however, a “deficiency” still exists on the note because the bank received only $400,000 at foreclosure, which is $600,000 less than the original debt. It is important to understand that nothing prevents the bank from collecting the $600,000 deficiency from the personal guarantor if the guarantor has waived his or her anti-deficiency protection.
So although a guarantor is usually liable only for the amount owed by the original borrower, which in this case is $0, without anti-deficiency protection, the guarantor remains on the hook for the full $600,000 deficiency. It is still unclear whether a court would allow the borrower—the guarantor’s company—to intervene in a suit against the guarantor and assert these anti-deficiency laws on the guarantor’s behalf. It is clear, though, that personal guarantors should seek to avoid this situation altogether. If the bank allows a company to retain its anti-deficiency protection, the personal guarantor should insist that he or she be allowed to do so as well.
Kyle B. Fonville is an associate with Decker, Jones, McMackin, McClane, Hall & Bates, P.C. in Fort Worth. His practice focuses primarily on civil and commercial litigation, including construction matters, and appellate law. He can be reached by phone at 817.336.2400 or by email at email@example.com.
Stephen L. Polozola is a partner with Decker, Jones, McMackin, McClane, Hall & Bates, P.C. in Fort Worth. His practice focuses primarily on construction law matters. He can be reached by phone at 817.336.2400 or by email firstname.lastname@example.org.
BUILDERS’ RADIO BLOG
by Matthew L. Motes
“Sticks and stones may break your bones, but words will never hurt you”. True, unless you sell homes then “words” become misrepresentations and deceptive acts in court. Nowhere is this more dangerous than in green building. Based upon an hour on the internet, buyers believe they are armed with expert knowledge in green building and they will immediately quiz you about it. This blog provides a few tips about when and how to protect you from potential liability.
The first five minutes with a potential buyer is the most dangerous. It is during this introductory time the buyer will ask: “Are you green builder?”, “Is this home certified?”, “Do you have an Energy Star rating?” Give a wrong or incomplete answer to any of these typical questions may result in a lawsuit. A buyer will later swear under oath that they only relied upon your initial answers to these simple questions and none other to buy a half-a-million dollar home.
Green liability lawsuits have increased rapidly over the past few years. They started with multi-million dollar commercial projects; however, are now common place against consumer products such as: appliances, light bulbs, and memory foam mattresses. Unfortunately, all too often home builders get caught in the middle of the consumer product case. One example is the current class action against Whirlpool where the consumers complained that the refrigerators they bought were represented as “Energy Star” when a check of the model numbers revealed they had been removed from the “Energy Star” program. A second example involves the CFB light bulbs. There are current articles warning of the cancer risk from these bulbs because they contain mercury. The moral of the story is to keep up with as much information as you can about green materials. In the past, home builders have been caught in the middle between consumers and manufacturers of Chinese dry wall, polybutylene pipe, EIFS (synthetic stucco) to name a few. It is not unreasonable to expect consumers to make claims against builders for green building materials and process.
To protect yourself and your builder, verify even the most basic of claims. For instance, confirm the appliances do all have an “Energy Star” rating, and if not all of them find out which ones do and do not. Collect, then handout written materials about green attributes to potential buyers when they ask the green questions. Instead of representing the air conditioning system will save them money, give them a brochure from the manufacturer explaining the benefits of their technology. Do not ever state something is “Free of”, or “100%” because it is rarely true. As a final tip, when the buyer asks the green questions, answer them with asking for additional information from the buyer to make sure you have as much detail as you can before providing an answer- or more preferably providing them written information.
Additional ways to protect the builder is to include no oral representation disclaimers in all contracts in the form and manner required by each state. Many builders and builders’ association contracts now also include a green building disclosure addendum which limits liability to some extent. Another way to provide protection is to know the local ordinances. Cities like Dallas, Texas have recently enacted green building ordinances that establish the type of testing and requirements necessary to qualify for and meet green standards. The more specific the testing and scoring used to establish certain standards the less reliance can be placed on your representations, whether they are ultimately found to be true or not.
Green is the most popular phrase going. However, if you make a false representation “green” could be the dollars collected by the buyer and their attorney making the “green” claim.
Matthew L. Motes is a Shareholder with DECKER, JONES, MCMACKIN, MCCLANE, HALL & BATES, P.C. in Fort Worth, and focuses his practice on residential and commercial construction matters. He can be reached by calling 817.336.2400 or by emailing email@example.com.
This article is provided for informational purposes only and is not a substitute for specific legal advice, and is not intended to create an attorney-client relationship between Mr. Motes, his firm, and the readers of this publication.