The Great Recession saw an increase in the number of foreclosures, precipitating a corresponding rise in cases involving Texas’s “anti-deficiency” statute, Texas Property Code § 51.003.
For the uninitiated, section 51.003 allows a borrower whose property has been foreclosed to receive, in calculating any deficiency, an offset equal to the difference, if any, between property’s fair market value at the time of foreclosure and the actual foreclosure price. The Legislature enacted section 51.003 to protect borrowers and guarantors by limiting creditors’ ability to low bid foreclosed properties and still seek a deficiency. But unlike some other consumer-protection laws, section 51.003 is waivable.
Lenders, of course, began including section 51.003 waivers in loan documents. Courts differed on the level of specificity required to waive section 51.003. Some courts—in particular the Fifth District Court of Appeals in Dallas—found that an extremely broad waiver of “any and all defenses” included a section 51.003 defense, even if there was no reference to offset or deficiency. Other courts required at least a reference to “offset” or something similar.
Earlier this summer the Texas Supreme Court resolved this conflict in Moayedi v. Interstate 35/Chisam Road, L.P., No. 12–0937, 2014 Tex. LEXIS 470, 2014 WL 2619524, 57 Tex. Sup. J. 724 (Tex. 2014 (rehearing denied, Aug. 22, 2014), finding in favor of freedom of contract and broad waivers.
Moayedi was the guarantor on a $696,000 commercial real estate loan (and president of the principal). The principal defaulted, and the lender purchased the property at a nonjudicial foreclosure sale for $487,200. The borrower sought to recover from Moayedi the $267,000 deficiency between the outstanding loan amount and the foreclosure price. Both parties agreed that the property’s fair market value at the time of foreclosure was $840,000.
Moayedi defended under section 51.003, claiming that if he was credited with the property’s undisputed fair market value, there would be no deficiency. The borrower countered that Moayedi waived this defense by signing a guaranty that waived “any defense…that the Guarantor may or might have” and that “each and every such defense being hereby waived by the undersigned Guarantor.”
The trial court held that this waiver was not specific enough and applied section 51.003, letting Moayedi off the hook. But the court of appeals reversed, finding “each and every” defense included a defense under section 51.003.
The Texas Supreme Court—though recognizing section 51.003’s intent was to “ensure that debtors receive credit when their foreclosed property is sold at an unreasonably low price”—agreed, harking back to the fundamental principle of freedom of contract.
First, the supreme court held that the statutory right of offset created by section 51.003 was waivable.
Next, the court determined that waiver of “any”, “each” and “every” defense was not unclear or vague. As the court stated: “Just because the waiver is all encompassing does not mean that it is unclear or vague. To waive all possible defenses seems to very clearly indicate what defenses are included: all of them.”
The supreme court also rejected the argument that section 51.003 was not an affirmative defense.
Finally, the court rejected Moayedi’s argument that section 51.003 created two different methods for calculating a deficiency. Instead, the court followed the traditional definition of a deficiency, namely, “the amount by which the debt and foreclosure costs exceed the foreclosure sale price.”
The takeaway. Check your loan documents. If you’re on the lender’s side, you can breathe a little sigh of relief if you have a broad waiver of “any and all defenses.” This will protect you from a time-consuming fight over a foreclosed property’s fair market value if you seek a deficiency. But while such language is good for protecting future loans, it’s always safer to be more specific. If you’re on the borrower’s side, check your loan documents before you sign them for any of these broad waivers and try to have them limited. You hope your client will never get there, but when fighting over foreclosure, every little bit helps.